Vol. 80 Monday, No. 220 November 16, 2015

Book 2 of 2 Books Pages 71387–71680

Part III

Securities and Exchange Commission

17 CFR Parts 200, 227, 232, et al. Crowdfunding; Final Rule

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SECURITIES AND EXCHANGE B. Issuer Requirements A. Need for the Rule COMMISSION 1. Disclosure Requirements B. Significant Issues Raised by Public 2. Ongoing Reporting Requirements Comments 17 CFR Parts 200, 227, 232, 239, 240, 3. Form C and Filing Requirements C. Small Entities Subject to the Rules 249, 269, and 274 4. Prohibition on Advertising Terms of the D. Projected Reporting, Recordkeeping and Offering Other Compliance Requirements [Release Nos. 33–9974; 34–76324; File No. 5. Compensation of Persons Promoting the E. Agency Action To Minimize Effect on S7–09–13] Offering Small Entities 6. Other Issuer Requirements 1. Issuers RIN 3235–AL37 C. Intermediary Requirements 2. Intermediaries 1. Definitions of Funding Portals and Crowdfunding VI. Statutory Authority Associated Persons Exhibit A 2. General Requirements for Intermediaries AGENCY: Securities and Exchange I. Introduction Commission. 3. Measures To Reduce Risk of Fraud 4. Account Opening A. Background ACTION: Final rule. 5. Requirements With Respect to Transactions Crowdfunding is a relatively new and SUMMARY: The Securities and Exchange 6. Completion of Offerings, Cancellations evolving method of using the Internet to Commission is adopting new Regulation and Reconfirmations raise capital to support a wide range of Crowdfunding under the Securities Act 7. Payments to Third Parties ideas and ventures. An entity or of 1933 and the Securities Exchange Act D. Additional Funding Portal individual raising funds through of 1934 to implement the requirements Requirements crowdfunding typically seeks small of Title III of the Jumpstart Our Business 1. Registration Requirement individual contributions from a large Startups Act. Regulation Crowdfunding 2. Exemption From Broker-Dealer prescribes rules governing the offer and Registration number of people. Individuals sale of securities under new Section 3. Safe Harbor for Certain Activities interested in the crowdfunding 4. Compliance campaign—members of the ‘‘crowd’’— 4(a)(6) of the Securities Act of 1933. 5. Records To Be Created and Maintained Regulation Crowdfunding also provides may share information about the project, by Funding Portals cause, idea or business with each other a framework for the regulation of E. Miscellaneous Provisions registered funding portals and broker- and use the information to decide 1. Insignificant Deviations From Regulation whether to fund the campaign based on dealers that issuers are required to use Crowdfunding as intermediaries in the offer and sale of 2. Restrictions on Resales the collective ‘‘wisdom of the crowd.’’ 3. Information Available to States The Jumpstart Our Business Startups securities in reliance on Section 4(a)(6). 1 In addition, Regulation Crowdfunding 4. Exemption From Section 12(g) Act (the ‘‘JOBS Act’’), enacted on April conditionally exempts securities sold 5. Scope of Statutory Liability 5, 2012, establishes a regulatory pursuant to Section 4(a)(6) from the 6. Disqualification Provisions structure for startups and small 7. Secondary Market Trading registration requirements of Section businesses to raise capital through III. Economic Analysis securities offerings using the Internet 12(g) of the Securities Exchange Act of A. Baseline 1934. through crowdfunding. The 1. Current Methods of Raising Up to $1 crowdfunding provisions of the JOBS DATES: The final rules and forms are Million of Capital Act were intended to help provide effective May 16, 2016, except that 2. Current Sources of Funding for Startups startups and small businesses with instruction 3 adding part 227 and and Small Businesses That Could Be instruction 15 amending Form ID are Substitutes or Complements To capital by making relatively low dollar effective January 29, 2016. Crowdfunding offerings of securities, featuring 3. Current Crowdfunding Practices relatively low dollar investments by the FOR FURTHER INFORMATION CONTACT: 4. Survival Rates for Startups and Small ‘‘crowd,’’ less costly.2 Congress With regard to requirements for issuers, Businesses included a number of provisions Eduardo Aleman, Julie Davis, or Amy 5. Market Participants intended to protect investors who Reischauer, Division of Corporation B. Analysis of Final Rules engage in these transactions,3 including Finance, at (202) 551–3460, and with 1. Broad Economic Considerations 2. Crowdfunding Exemption regard to requirements for 1 3. Issuer Requirements Pub. L. 112–106, 126 Stat. 306 (2012). intermediaries, Joseph Furey, Joanne 2 4. Intermediary Requirements See, e.g., congressional statements regarding Rutkowski, Timothy White, Devin Ryan, crowdfunding bills that were precursors to the JOBS or Erin Galipeau, Division of Trading 5. Additional Funding Portal Requirements Act: 157 Cong. Rec. S8458–02 (daily ed. Dec. 8, 6. Insignificant Deviations and Markets, at (202) 551–5550, 2011) (statement of Sen. Jeff Merkley) (‘‘Low-dollar 7. Relationship With State Law investments from ordinary Americans may help fill Securities and Exchange Commission, 8. Exemption From Section 12(g) the void, providing a new avenue of funding to the 100 F Street NE., Washington, DC 9. Disqualification small businesses that are the engine of job creation. 20549. IV. Paperwork Reduction Act The CROWDFUND Act would provide startup companies and other small businesses with a new SUPPLEMENTARY INFORMATION: A. Background B. Estimate of Issuers and Intermediaries way to raise capital from ordinary investors in a more transparent and regulated marketplace.’’); 157 Table of Contents 1. Issuers Cong. Rec. H7295–01 (daily ed. Nov. 3, 2011) I. Introduction 2. Intermediaries That Are Registered (statement of Rep. Patrick McHenry) (‘‘[H]igh net A. Background Brokers worth individuals can invest in businesses before B. Title III of the JOBS Act 3. Funding Portals the average family can. And that small business is II. Final Rules Implementing Regulation C. Estimate of Burdens limited on the amount of equity stakes they can Crowdfunding 1. Issuers provide investors and limited in the number of investors they can get. So, clearly, something has A. Crowdfunding Exemption 2. Brokers and Funding Portals D. Collections of Information Are to be done to open these capital markets to the 1. Limit on Capital Raised average investor[.]’’). Mandatory 2. Investment Limits 3 See, e.g., congressional statements regarding 3. Transaction Conducted Through an E. Confidentiality crowdfunding bills that were precursors to the JOBS Intermediary F. Retention Period of Recordkeeping Act: 158 Cong. Rec. S1781 (daily ed. Mar. 19, 2012) 4. Exclusion of Certain Issuers From Requirements (statement of Sen. Carl Levin) (‘‘Our bill creates Eligibility Under Section 4(a)(6) V. Final Regulatory Flexibility Act Analysis new opportunities for crowdfunding but establishes

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investment limits, required disclosures of securities for the account of others actions and provide notices and other by issuers, and a requirement to use generally would, under pre-existing information to the Commission; regulated intermediaries. The provisions regulations, be required to register with • adds Exchange Act Section 3(h),10 also permit Internet-based platforms to the Commission as a broker-dealer and which requires the Commission to adopt facilitate the offer and sale of securities comply with the laws and regulations rules to exempt, either conditionally or in crowdfunding transactions without applicable to broker-dealers.6 A person unconditionally, ‘‘funding portals’’ from having to register with the Commission that operates such a Web site only for having to register as a broker-dealer as brokers. the purchase of securities of startups pursuant to Exchange Act Section In the United States, crowdfunding and small businesses, however, may 15(a)(1); 11 generally has not involved the offer of find it impractical in view of the limited • mandates that the Commission a share in any financial returns or nature of that person’s activities and establish disqualification provisions profits that the fundraiser may expect to business to register as a broker-dealer under which an issuer would not be generate from business activities and operate under the full set of able to avail itself of the Section 4(a)(6) financed through crowdfunding. Such a regulatory obligations that apply to exemption if the issuer or an profit or revenue-sharing model— broker-dealers. intermediary was subject to a sometimes referred to as the ‘‘equity disqualifying event; and model’’ of crowdfunding—could trigger B. Title III of the JOBS Act • adds Exchange Act Section the application of the federal securities Title III of the JOBS Act (‘‘Title III’’) 12(g)(6),12 which requires the laws because it likely would involve the added new Securities Act Section Commission to adopt rules to exempt offer and sale of a security. Under the 4(a)(6),7 which provides an exemption from the registration requirements of Securities Act of 1933 (‘‘Securities from the registration requirements of Section 12(g),13 either conditionally or Act’’), the offer and sale of securities is Securities Act Section 5 8 for certain unconditionally, securities acquired required to be registered unless an crowdfunding transactions. To qualify pursuant to an offering made in reliance exemption is available. Some observers for the exemption under Section 4(a)(6), on Section 4(a)(6). have stated that registered offerings are crowdfunding transactions by an issuer On October 23, 2013, we proposed not feasible for raising smaller amounts (including all entities controlled by or new rules and forms to implement Title of capital, as is done in a typical under common control with the issuer) III of the JOBS Act.14 We received over crowdfunding transaction, because of must meet specified requirements, 485 comment letters on the Proposing the costs of conducting a registered including the following: Release, including from professional offering and the resulting ongoing • The amount raised must not exceed and trade associations, investor reporting obligations under the $1 million in a 12-month period; organizations, law firms, investment Securities Exchange Act of 1934 • individual investments in all companies and investment advisers, (‘‘Exchange Act’’) that may arise as a crowdfunding issuers in a 12-month broker-dealers, potential funding result of the offering. Limitations under period are limited to: portals, members of Congress, the existing regulations, including Æ The greater of $2,000 or 5 percent Commission’s Investor Advisory purchaser qualification requirements for of annual income or net worth, if annual Committee,15 state securities regulators, offering exemptions that permit general income or net worth of the investor is government agencies, potential issuers, solicitation and general advertising, less than $100,000; and accountants, individuals and other have made private placement Æ 10 percent of annual income or net interested parties. We have reviewed exemptions generally unavailable for worth (not to exceed an amount sold of and considered all of the comments that crowdfunding transactions, which are $100,000), if annual income or net we received on the Proposing Release intended to involve a large number of worth of the investor is $100,000 or and on Title III of the JOBS Act.16 In this investors 4 and not be limited to more; and investors that meet specific • transactions must be conducted 10 15 U.S.C. 78c(h). qualifications.5 through an intermediary that either is 11 15 U.S.C. 78o(a)(1). Moreover, someone who operates a registered as a broker-dealer or is 12 15 U.S.C. 78l(g)(6). Web site to effect the purchase and sale registered as a new type of entity called 13 15 U.S.C. 78l(g). 14 a ‘‘funding portal.’’ See Rel. No. 33–9470 (Oct. 23, 2013) [78 FR basic regulatory oversight, liability, and disclosure 66427 (Nov. 5, 2013)] (the ‘‘Proposing Release’’), In addition, Title III: available at: http://www.sec.gov/rules/proposed/ rules that will give investors the confidence to • 9 participate in this promising emerging source of Adds Securities Act Section 4A, 2013/33-9470.pdf. money for growing companies.’’). which requires, among other things, that 15 The SEC Investor Advisory Committee 4 In this release, ‘‘investors’’ includes investors issuers and intermediaries that facilitate (‘‘Investor Advisory Committee’’) was established in and potential investors, as the context requires. See April 2012 pursuant to Section 911 of the Dodd- transactions between issuers and Frank Wall Street Reform and Consumer Protection Rule 100(d) of Regulation Crowdfunding. investors in reliance on Section 4(a)(6) 5 See Eliminating the Prohibition Against General Act [Pub. L. 111–203, sec. 911, 124 Stat. 1376, 1822 Solicitation and General Advertising in Rule 506 provide certain information to investors (July 21, 2010)] (the ‘‘Dodd-Frank Act’’) to advise and Rule 144A Offerings, Release No. 33–9415 (July and potential investors, take other the Commission on regulatory priorities, the 10, 2013) [78 FR 44771 (July 24, 2013)] (adopting regulation of securities products, trading strategies, rules to implement Title II of the Jumpstart Our fee structures, the effectiveness of disclosure, 6 Exchange Act Section 15(a)(1) generally makes Business Startups Act) (‘‘Rule 506(c) Adopting initiatives to protect investor interests and to it unlawful for a broker or dealer to effect any Release’’). Title II of the JOBS Act directed the promote investor confidence and the integrity of the transactions in, or induce the purchase or sale of, Commission to amend Rule 506 of Regulation D to securities marketplace. The Dodd-Frank Act any security unless that broker or dealer is permit general solicitation or general advertising in authorizes the Investor Advisory Committee to registered with the Commission pursuant to offerings made under Rule 506, provided that all submit findings and recommendations for review Exchange Act Section 15(b). 15 U.S.C. 78o(a). See purchasers of the securities are accredited investors. and consideration by the Commission. discussion in Section II.D.2. Because brokers and Accredited investors include natural persons who 16 To facilitate public input on JOBS Act dealers both register as broker-dealers (i.e., there is meet certain income or net worth thresholds. rulemaking before the issuance of rule proposals, no separate ‘‘broker’’ or ‘‘dealer’’ registration under Although this rule facilitates the type of broad the Commission invited members of the public to solicitation emblematic of crowdfunding, Exchange Act Section 15(b)), we use the term make their views known on various JOBS Act crowdfunding is premised on permitting sales of ‘‘broker-dealer’’ in this release. initiatives in advance of any rulemaking by securities to any interested person, not just to 7 15 U.S.C. 77d(a)(6). submitting comment letters to the Commission’s investors who meet specific qualifications, such as 8 15 U.S.C. 77e. Web site at http://www.sec.gov/spotlight/ accredited investors. 9 15 U.S.C. 77a. Continued

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

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intermediary that complies with by the issuer in the current offering to supporting this approach,24 and others specified requirements.17 Title III also determine the aggregate amount sold in opposing it.25 provides limitations on who may rely reliance on Section 4(a)(6) during the c. Final Rules on the exemption and establishes preceding 12-month period. Under the specific liability provisions for material proposed rules, for purposes of We are adopting as proposed rules misstatements or omissions in determining whether an entity is that limit to $1 million the aggregate connection with Section 4(a)(6) exempt ‘‘controlled by or under common amount that may be sold to all investors transactions. As discussed below, the control with’’ the issuer, an issuer by the issuer in a 12-month period in rules we are adopting are designed to would be required to consider whether reliance on the new exemption.26 We aid issuers, investors and intermediaries it has ‘‘control’’ based on the definition continue to believe this approach is in complying with these various in Securities Act Rule 405.19 As consistent with the statute and will limitations and requirements. proposed, the amount of securities sold provide for a meaningful addition to the 1. Limit on Capital Raised in reliance on Section 4(a)(6) also would existing capital formation options for a. Proposed Rules include securities sold by any smaller companies while maintaining predecessor of the issuer in reliance on important investor protections. The exemption from registration Section 4(a)(6) during the preceding 12- Moreover, Regulation Crowdfunding is a provided by Section 4(a)(6) is available month period. novel method of raising capital for to a U.S. issuer provided that ‘‘the smaller companies, and we are aggregate amount sold to all investors by b. Comments on the Proposed Rules concerned about expanding the offering the issuer, including any amount sold in limit of the exemption beyond the level A few commenters supported a $1 reliance on the exemption provided specified in Section 4(a)(6) at the outset under [Section 4(a)(6)] during the 12- million limit on capital raised by an of the adoption of final rules. Some 20 month period preceding the date of such issuer in reliance on Section 4(a)(6), commenters suggested that the $1 transaction, is not more than while many other commenters believed million limit be net of fees charged by $1,000,000.’’ Under Securities Act that the proposed $1 million limit was the intermediary to host the offering on Section 4A(h), the Commission is too low and, in some instances, the intermediary’s platform,27 which required to adjust the dollar amounts in recommended higher limits.21 Several would be an indirect way of increasing Section 4(a)(6) ‘‘not less frequently than commenters urged that the $1 million the $1 million limit. We are concerned once every five years, by notice limit be net of fees charged by the that expanding the offering limit in this published in the Federal Register, to intermediary to host the offering on the way would provide less certainty and reflect any change in the Consumer intermediary’s platform,22 while other could raise interpretive questions, Price Index for All Urban Consumers commenters generally opposed this which would make the exemption more published by the Bureau of Labor idea.23 costly for issuers to comply with. If a Statistics.’’ Consistent with the statute, we Commenters were divided on the funding portal’s fees are not known in proposed in Rule 100(a) of Regulation proposed guidance that other exempt advance, for example, this may create Crowdfunding to limit the aggregate offerings should not be integrated when uncertainty for issuers about how much capital they would be able to raise. amount sold to all investors by the determining the amount sold during the Therefore, we are adopting as proposed issuer in reliance on the new exemption preceding 12-month period for purposes the limit on the aggregate amount sold. to $1 million during a 12-month period. of the $1 million limit, with some Capital raised through other exempt 24 See, e.g., AngelList Letter; Arctic Island Letter transactions would not be counted in 19 See 17 CFR 230.405 (‘‘The term control 4; Campbell R. Letter; CFA Institute Letter; CFIRA determining the aggregate amount sold (including the terms controlling, controlled by and Letter 11; EarlyShares Letter; EMKF Letter; Farnkoff in reliance on Section 4(a)(6). under common control with) means the possession, Letter; Feinstein Letter; Growthfountain Letter; We also provided guidance clarifying direct or indirect, of the power to direct or cause Hackers/Founders Letter; Heritage Letter; NSBA our view that offerings made in reliance the direction of the management and policies of a Letter; Parsont Letter; Perfect Circle Solutions on Section 4(a)(6) will not be person, whether through the ownership of voting Letter; Public Startup Letter 2; RoC Letter; securities, by contract, or otherwise.’’). Exchange 18 RocketHub Letter; Wales Capital Letter 1; Wefunder integrated with other exempt offerings Act Rule 12b–2 contains the same definition. See Letter; Whitaker Chalk Letter; Wilson Letter. made by the issuer, provided that each 17 CFR 240.12b–2. 25 See, e.g., AFL–CIO Letter (not integrating other offering complies with the requirements 20 See, e.g., Leverage PR Letter; StartEngine Letter exempt offerings will make crowdfunding available of the applicable exemption that is 1; StartEngine Letter 2; Wilson Letter. to larger companies and ‘‘crowd out’’ smaller being relied upon for the particular 21 See, e.g., Advanced Hydro Letter; Bushroe companies that lack other options for raising Letter; Cole D. Letter; Concerned Capital Letter; capital); AFR Letter; Brown J. Letter; Consumer offering. Federation Letter (not integrating other exempt Under Section 4(a)(6), the amount of Hamman Letter; Harrison Letter; Hillside Letter; Jazz Letter; Kickstarter Coaching Letter; McCulley offerings will allow issuers to evade regulatory securities sold in reliance on Section Letter; McGladrey Letter; Meling Letter; Miami requirements); Fund Democracy Letter (not integrating other exempt offerings will give issuers 4(a)(6) by entities controlled by or under Nation Enterprises Letter; Multistate Tax Service an incentive to engage in advertising in concurrent Letter; Peers Letter; Pioneer Realty Letter; Public common control with the issuer must be private offerings to indirectly publicly advertise Startup Letter 2; Qizilbash Letter; Rosenthal O. aggregated with the amount to be sold their crowdfunding offering); IAC Letter; Sarles Letter; SBM Letter; Taylor R. Letter; Recommendation; MCS Letter; NASAA Letter. Taylor T. Letter; Wales Capital Letter 1; Wales 17 26 See Rule 100(a)(1) of Regulation Crowdfunding. See Section II.C for a discussion of the Capital Letter 3; WealthForge Letter; Wear Letter; intermediary requirements. See also Section II.D for There is a technical change to the rule text (‘‘offer Wilhelm Letter; Winters Letter; Yudek Letter. a discussion of the additional funding portal and sell securities’’ is changed to ‘‘offer or sell 22 requirements. See, e.g., Benjamin Letter; FundHub Letter 1; securities’’) to clarify that an issuer does not have Hackers/Founders Letter; Joinvestor Letter; Odhner 18 The integration doctrine seeks to prevent an to complete a sale in order to rely on the Section issuer from improperly avoiding registration by Letter; Omara Letter; Public Startup Letter 2; RFPIA 4(a)(6) exemption for an offering. artificially dividing a single offering into multiple Letter; RoC Letter; RocketHub Letter; Seed&Spark 27 See, e.g., Benjamin Letter; FundHub Letter 1; offerings such that Securities Act exemptions Letter; Thomas Letter 1; Wales Capital Letter 1; Hackers/Founders Letter; Joinvestor Letter; Odhner would apply to multiple offerings that would not Whitaker Chalk Letter; Wilson Letter. Letter; Omara Letter; Public Startup Letter 2; RFPIA be available for the combined offering. See, e.g., 23 See, e.g., Arctic Island Letter 4; ASSOB Letter; Letter; RoC Letter; RocketHub Letter; Seed&Spark Final Rule: Nonpublic Offering Exemption, Release Commonwealth of Massachusetts Letter; MCS Letter; Thomas Letter 1; Wales Capital Letter 1; No. 33–4552 (Nov. 6, 1962). Letter; PeoplePowerFund Letter. Whitaker Chalk Letter; Wilson Letter.

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Title III provides that the $1 million Further, in light of Section 4A(g) and the definition of ‘‘control’’ in Securities limit applies to the ‘‘aggregate amount for the reasons discussed above, we Act Rule 405.30 sold to all investors by the issuer, continue to believe that an offering Under the final rules, the amount of including any amount sold in reliance made in reliance on Section 4(a)(6) securities sold in reliance on Section on the exemption provided under should not be integrated with another 4(a)(6) also includes securities sold by [Section 4(a)(6)].’’ Securities Act Section exempt offering made by the issuer, any predecessor of the issuer in reliance 4A(g), however, provides that ‘‘[n]othing provided that each offering complies on Section 4(a)(6) during the preceding in the exemption shall be construed as with the requirements of the applicable 12-month period.31 We believe this preventing an issuer from raising capital exemption that is being relied upon for approach is necessary to prevent an through means other than [S]ection the particular offering. For example, an issuer from exceeding the $1 million 4[(a)](6).’’ Considered together, these issuer conducting a concurrent exempt limit by reorganizing into a new entity two provisions create statutory offering for which general solicitation is that would otherwise not be limited by ambiguity because the first provision not permitted will need to be satisfied previous sales made by its predecessor. could be read to provide for the that purchasers in that offering were not 2. Investment Limits aggregation of amounts raised in all solicited by means of the offering made exempt transactions, even those that do in reliance on Section 4(a)(6).28 As a. Proposed Rules not involve crowdfunding, while the another example, an issuer conducting a Under the exemption from second provision could be read to concurrent exempt offering for which registration set forth in Securities Act provide that nothing in the Section general solicitation is permitted, for Section 4(a)(6)(B), the aggregate amount 4(a)(6) exemption should limit an example, under Securities Act Rule of securities sold to any investor by an issuer’s capital raising through other 506(c), could not include in any such issuer, including any amount sold in methods. We believe that the overall general solicitation an advertisement of reliance on the exemption during the intent of providing the exemption under the terms of an offering made in reliance 12-month period preceding the date of Section 4(a)(6) was to provide an on Section 4(a)(6), unless that such transaction, cannot exceed: ‘‘(i) the additional mechanism for capital raising advertisement otherwise complied with greater of $2,000 or 5 percent of the for startup and small businesses and not Section 4(a)(6) and the final rules. As annual income or net worth of such to affect the amount an issuer could such, a concurrent offering would be investor, as applicable, if either the raise outside of that exemption. Thus, bound by the more restrictive annual income or the net worth of the we believe that only the capital raised solicitation requirements of Regulation investor is less than $100,000; and (ii) in reliance on the exemption provided Crowdfunding, unless the issuer can 10 percent of the annual income or net by Section 4(a)(6) should be counted conclude that the purchasers in the worth of such investor, as applicable, toward the limit. Capital raised through Regulation Crowdfunding offering were not to exceed a maximum aggregate other means should not be counted in not solicited by means of the offering amount sold of $100,000, if either the determining the aggregate amount sold made in reliance on Rule 506(c). annual income or net worth of the in reliance on Section 4(a)(6). The investor is equal to or more than The amount of securities sold in opposite approach—requiring $100,000.’’ reliance on Section 4(a)(6) by entities aggregation of amounts raised in any In the Proposing Release, we noted controlled by or under common control exempt transaction—would be that this statutory language may present with the issuer must be aggregated with inconsistent with the goal of alleviating ambiguity in some cases about which of the amount to be sold by the issuer in the funding gap for startups and small the two investment limits governs, the current offering to determine the businesses because, by electing because paragraph (i) applies if ‘‘either’’ aggregate amount sold in reliance on crowdfunding, such issuers would be annual income or net worth is less than Section 4(a)(6) during the preceding 12- placing a cap on the amount of capital $100,000 and paragraph (ii) applies if they could raise. An issuer that already month period. The statute does not ‘‘either’’ annual income or net worth is sold $1 million in reliance on the define the term ‘‘controlled by or under equal to or more than $100,000. exemption provided under Section common control with’’ the issuer; Accordingly, in a situation in which 4(a)(6), for example, would be prevented however, the term ‘‘control’’ is defined 29 annual income is less than $100,000 and from raising capital through other in Securities Act Rule 405. Under the net worth is equal to or more than exempt methods and, conversely, an final rules, for purposes of determining $100,000 (or vice versa), the language of issuer that sold $1 million through other whether an entity is ‘‘controlled by or the statute may be read to cause both exempt methods would be prevented under common control with’’ the issuer, paragraphs to apply. Paragraph (i) also from raising capital under Section an issuer will be required to consider fixes the maximum annual investment 4(a)(6). whether it possesses, directly or by an investor at 5 percent of ‘‘the In determining the amount that may indirectly, the power to direct or cause annual income or net worth of such be sold in reliance on Section 4(a)(6), an the direction of the management and investor, as applicable’’ and paragraph issuer should aggregate amounts it sold policies of the entity, whether through (ii) fixes the maximum annual (including amounts sold by entities the ownership of voting securities, by investment by an investor at 10 percent controlled by, or under common control contract or otherwise, consistent with of ‘‘the annual income or net worth of with, the issuer, as well as any amounts such investor, as applicable,’’ but sold by any predecessor of the issuer) in 28 For a concurrent offering under Rule 506(b), an neither states when that percentage reliance on Section 4(a)(6) during the issuer will have to conclude that purchasers in the Rule 506(b) offering were not solicited by means of should be applied against the investor’s 12-month period preceding the expected the offering made in reliance on Section 4(a)(6). For date of sale and the amount the issuer example, the issuer may have had a preexisting 30 See Instruction to paragraph (c) of Rule 100 of intends to raise in reliance on the substantive relationship with such purchasers. Regulation Crowdfunding. exemption. An issuer should not Otherwise, the solicitation conducted in connection 31 See Rule 100(c) of Regulation Crowdfunding with the crowdfunding offering may preclude (defining issuer, in certain circumstances, to include amounts sold in other exempt reliance on Rule 506(b). See also Rel. No. 33–8828 include all entities controlled by or under common offerings during the preceding 12-month (Aug. 3, 2007) [72 FR 45116]. control with the issuer and any predecessor of the period. 29 See note 19. issuer).

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annual income and when it should be $100,000,35 some commenters also Several commenters supported the applied against the investor’s net worth. supported the lower investment limit proposal that an investor’s annual Under proposed Rule 100(a) of ($2,000 or 5 percent, as set forth in income and net worth be calculated Regulation Crowdfunding, the aggregate Section 4(a)(6)(B)(i)) unless both the jointly with that of the investor’s amount of securities sold to any investor annual income and net worth of the spouse,42 while other commenters by any issuer in reliance on Section investor are equal to or more than generally opposed that aspect of the 4(a)(6) during the 12-month period $100,000.36 proposal.43 Several commenters preceding the date of such transaction, A number of commenters supported recommended that if an investor’s including the securities sold to such the proposal that within each of the two annual income and net worth are to be investor in such transaction, could not levels of investment limits, the limits calculated jointly, the Commission exceed the greater of: (i) $2,000 or 5 would be calculated based on the should establish higher thresholds or an percent of the annual income or net ‘‘greater of’’ an investor’s annual income aggregate investment limit applicable to worth of the investor, whichever is or net worth,37 while a number of other both spouses.44 greater, if both annual income and net commenters preferred a ‘‘lesser of’’ A number of commenters favored worth are less than $100,000; or (ii) 10 approach.38 A few commenters different or no investment limits for percent of the annual income or net suggested a combination of the accredited and institutional investors. worth of the investor, whichever is approaches (e.g., if either annual income Many commenters supported exempting greater, not to exceed an amount sold of or net worth is below $100,000, the accredited and institutional investors $100,000, if either annual income or net lower investment limit level ($2,000 or from the investment limits,45 although a worth is equal to or more than $100,000. 5 percent) would apply, but within that number of other commenters opposed We did not propose to alter these level, the limit would be based on the such an exemption.46 A few investment limits for any particular type greater of annual income or net commenters recommended allowing of investor or create a different worth).39 higher investment limits for accredited exemption based on different Many commenters supported the and institutional investors.47 One investment limits. Under the proposal, proposal that an issuer may rely on the commenter stated that applying the the annual income and net worth of a efforts of an intermediary to determine investment limits to accredited and natural person would be calculated in that the aggregate amount of securities institutional investors would deter those accordance with the Commission’s rules purchased by an investor will not cause investors from participating, but noted for the calculation of annual income and the investor to exceed the investment that allowing concurrent offerings under net worth of an accredited investor, and limits, provided that the issuer does not Securities Act Rule 506(c) 48 may an investor’s annual income or net have knowledge that the investor had mitigate this problem.49 worth could be calculated jointly with exceeded, or would exceed, the the annual income or net worth of the investment limits as a result of c. Final Rules investor’s spouse. An issuer would be purchasing securities in the issuer’s Consistent with the statute, we are able to rely on the efforts of an offering.40 A few commenters adopting investment limits for intermediary to determine that the recommended that an issuer be required securities-based crowdfunding aggregate amount of securities to obtain a written representation from transactions, but with some purchased by an investor will not cause the investor that the investor has not modifications from the proposed rules. the investor to exceed the investment and will not exceed the limits by We have modified the final rules from limits, provided the issuer does not purchasing from the issuer.41 the proposal to clarify that the have knowledge to the contrary. Commenters were divided about the investment limit reflects the aggregate joint calculation of annual income and b. Comments on the Proposed Rules amount an investor may invest in all net worth with the investor’s spouse. offerings under Section 4(a)(6) in a 12- Commenters were divided on the month period across all issuers. In proposed investment limits. Many 35 See, e.g., ABA Letter; CFA Institute Letter; addition, as noted above, some commenters supported some type of CFIRA Letter 12; Craw Letter; Finkelstein Letter; commenters supported a ‘‘greater of’’ investment limit without necessarily RocketHub Letter; Wilson Letter. 36 approach to implementing the two expressing a specific opinion on the See, e.g., AFL–CIO Letter; BetterInvesting Letter; Consumer Federation Letter; Fund statutory investment limits, while others proposed investment limits,32 while Democracy Letter; IAC Recommendation; Jacobson supported a ‘‘lesser of’’ approach. After many others generally opposed any type Letter; NASAA Letter; Schwartz Letter. 33 37 See, e.g., ABA Letter; Anonymous Letter 6; of investment limit. A number of 42 CFIRA Letter 12; Craw Letter; EarlyShares Letter; See, e.g., Arctic Island Letter 4; Heritage Letter; commenters recommended changes to Joinvestor Letter; NSBA Letter; Omara Letter; the proposed limits.34 Jacobson Letter; Omara Letter; RocketHub Letter; Wilson Letter. RocketHub Letter; Wilson Letter. While some commenters supported 43 38 See, e.g., AFR Letter; BetterInvesting Letter; See, e.g., Brown J. Letter; Consumer Federation the proposal to apply the higher Consumer Federation Letter; Fund Democracy Letter; Fund Democracy Letter; Jacobson Letter; investment limit (10 percent, as set forth Letter; Fryer Letter; Growthfountain Letter; IAC Projectheureka Letter; Public Startup Letter 2. in Section 4(a)(6)(B)(ii)) if only one of Recommendation (stating that the ‘‘greater of’’ 44 See, e.g., Brown, J. Letter; Consumer Federation Letter; Fund Democracy Letter; Jacobson Letter. the annual income or net worth of the approach would be appropriate for accredited investors); Merkley Letter; NASAA Letter; Schwartz 45 See, e.g., ASSOB Letter; Crowdstockz Letter; investor is equal to or more than Letter; Zhang Letter (recommending that net worth Crowley Letter; EMKF Letter; FundHub Letter 1; not be used to calculate the investment limit). Gibb Letter; Heritage Letter; Joinvestor Letter; 32 See, e.g., Accredify Letter; Ahmad Letter; 39 See, e.g., Consumer Federation Letter; Fund Public Startup Letter 2; RoC Letter; RocketHub Crowley Letter; Farnkoff Letter; Merkley Letter; Democracy Letter; Jacobson Letter. Letter; Vann Letter; Wales Capital Letter 1; Milken Institute Letter; Patel Letter; Saunders 40 See, e.g., Arctic Island Letter 4; CFA Institute WealthForge Letter; Wefunder Letter. Letter; StartEngine Letter 1; Wales Capital Letter 1. Letter; Consumer Federation Letter; CrowdBouncer 46 See, e.g., CFA Institute Letter; FundDemocracy 33 See, e.g., ASSOB Letter; Crowdstockz Letter; Letter; EarlyShares Letter; EMKF Letter; Finkelstein Letter; Hackers/Founders Letter; Jacobson Letter; Hamman Letter; Holland Letter; McCulley Letter; Letter; Fund Democracy Letter; Heritage Letter; PeoplePowerFund Letter; Projectheureka Letter; Meling Letter; Qizilbash Letter; Ramsey Letter; SBM Joinvestor Letter; Public Startup Letter 2; RoC Whitaker Chalk Letter; Wilson Letter. Letter; Taylor R Letter. Letter; RocketHub Letter; Vann Letter; Wefunder 47 See, e.g., Growthfountain Letter; RFPIA Letter; 34 See, e.g., Crowdstockz Letter; Gill Letter; Letter; Whitaker Chalk Letter. WealthForge Letter. Johnston Letter; Morse Letter; Qizilbash Letter; 41 See, e.g., FundHub Letter 1; Public Startup 48 17 CFR 230.506. Vossberg Letter; Winters Letter. Letter 2; RocketHub Letter. 49 See Arctic Island Letter 4.

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considering the comments received, we $100,000, if both annual income and net place constraints on capital formation. have decided to adopt a ‘‘lesser of’’ worth are $100,000 or more.50 Nevertheless, we believe that the approach. Thus, under the final rules, Under this approach, an investor with investment limits in the final rules an investor will be limited to investing: annual income of $50,000 a year and appropriately take into consideration (1) The greater of: $2,000 or 5 percent $105,000 in net worth would be subject the need to give issuers access to capital of the lesser of the investor’s annual to an investment limit of $2,500, in while minimizing an investor’s income or net worth if either annual contrast to the proposed rules in which exposure to risk in a crowdfunding income or net worth is less than that same investor would have been transaction. $100,000; or (2) 10 percent of the lesser eligible for an investment limit of of the investor’s annual income or net $10,500.51 We recognize that this The chart below illustrates a few worth, not to exceed an amount sold of change from the proposed rules could examples:

Investor annual Investor Calculation Investment 52 income net worth limit

$30,000 ...... $105,000 Greater of $2,000 or 5% of $30,000 ($1,500) ...... $2,000 150,000 ...... 80,000 Greater of $2,000 or 5% of $80,000 ($4,000) ...... 4,000 150,000 ...... 100,000 10% of $100,000 ($10,000) ...... 10,000 200,000 ...... 900,000 10% of $200,000 ($20,000) ...... 20,000 1,200,000 .... 2,000,000 10% of $1,200,000 ($120,000), subject to $100,000 cap ...... 100,000

A number of commenters expressed the aggregate amount of securities with this recommendation, the final concerns about investors potentially purchased by an investor does not cause rules add an instruction to explain that incurring unaffordable losses under the the investor to exceed the investment when such a joint calculation is used, proposed rule,53 and we find these limits, provided that the issuer does not the aggregate investment of the spouses comments persuasive given the risks have knowledge that the investor had may not exceed the limit that would involved. The startups and small exceeded, or would exceed, the apply to an individual investor at that businesses that we expect will rely on investment limits as a result of income and net worth level.59 We the crowdfunding exemption are likely purchasing securities in the issuer’s believe this approach is necessary to to experience a higher failure rate than offering.55 preserve the intended protections of the more seasoned companies.54 Applying We are adopting, as proposed, final investment limits. the lower limit ($2,000 or 5%, rather rules that allow an investor’s annual While a number of commenters than 10%) for investors whose annual income and net worth to be calculated supported the creation of a different income or net worth is below $100,000 as those values are calculated for investment limit for accredited or and applying that formula to the lesser purposes of determining accredited institutional investors, or exempting of annual income or net worth will investor status.56 Securities Act Rule them altogether, we are not making such potentially limit investment losses in 501 specifies the manner in which a change. As noted above, crowdfunding crowdfunding offerings for investors annual income and net worth are is an innovative approach to raising who may be less able to bear the risk of calculated for purposes of determining capital in which the entity or individual loss. We are concerned about the accredited investor status.57 As in the raising capital typically seeks small number of households where there is a proposal, the final rules allow spouses individual contributions from a large sizeable gap between net worth and to calculate their net worth or annual number of people. As such, we believe annual income, and the ability of these income jointly. Although some that crowdfunding transactions were households to withstand the risk of loss. commenters opposed permitting net intended under Section 4(a)(6) to be According to Commission staff analysis worth or annual income to be calculated available equally to all types of of the data in the 2013 Survey of jointly, we believe this approach is investors.60 The statute provides Consumer Finances, approximately 20% appropriate in light of the stricter specific investment limits, and the only of U.S. households with net worth over investment limits being adopted in the reference in the statute to changing $100,000 have annual income under final rules. Several commenters those investment limits is the $50,000. recommended that, if the final rules requirement that we update the Consistent with the proposed rules, permit net worth and annual income to investment limits not less frequently the final rules allow an issuer to rely on be calculated jointly, we should than every five years based on the efforts that an intermediary is required establish an aggregate investment limit Consumer Price Index. Further, issuers to undertake in order to determine that applicable to both spouses.58 Consistent can rely on other exemptions to offer

50 See paragraph (a)(2) of Rule 100 of Regulation 55 See Instruction 3 to paragraph (a)(2) of Rule 100 up to an aggregate of 10% of their joint income of Crowdfunding. of Regulation Crowdfunding. $150,000, the same investment limit that would 51 See Instruction 2 to paragraph (a)(2) of Rule 100 56 See Instruction 1 to paragraph (a)(2) of Rule 100 apply for an individual investor with income of of Regulation Crowdfunding. of Regulation Crowdfunding. $150,000. See Instruction 2 to paragraph (a)(2) of 52 This ‘‘Investment Limit’’ column reflects the 57 17 CFR 230.501. Thus, for example, a natural Rule 100 of Regulation Crowdfunding. aggregate investment limit across all offerings under person’s primary residence shall not be included as 60 See 158 CONG. REC. S1689 (daily ed. Mar. 15, Section 4(a)(6) within a 12-month period. an asset in the calculation of net worth. 17 CFR 2012) (statement of Sen. Mark Warner (‘‘There is 53 See, e.g., AFL–CIO Letter; BetterInvesting 230.501(a)(5)(i)(A). now the ability to use the Internet as a way for Letter; Consumer Federation Letter; Fund 58 See Brown J. Letter; Consumer Federation Democracy Letter; IAC Recommendation; Jacobson Letter; Fund Democracy Letter; Jacobs Letter. small investors to get the same kind of deals that Letter; Merkley Letter; NASAA Letter; Schwartz 59 For example, if each spouse’s annual income is up to this point only select investors have gotten Letter. $30,000, the spouses jointly may invest up to an that have been customers of some of the best known 54 For a more detailed discussion of survival rates aggregate of 5% of their joint income of $60,000. If investment banking firms, where we can now use for startups and small businesses see Section III.A, one spouse’s annual income is $120,000 and the the power of the Internet, through a term called below. other’s is $30,000, the spouses jointly may invest crowdfunding.’’).

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and sell securities to accredited noted that increasing the number of One commenter suggested deleting the investors and institutional investors. As platforms used per transaction would phrase ‘‘an Internet Web site or other discussed above, concurrent offerings to both increase the likelihood of investors similar electronic medium’’ and these types of investors are possible if becoming informed that a transaction is replacing the phrase with ‘‘a software the conditions of each applicable taking place, as well as elicit program accessible via TCP/IP enabled exemption are met.61 Therefore, we are information from a more diverse applications’’ or to more commonly not altering the investment limits for crowd.65 define ‘‘platform’’ as ‘‘a software any particular type of investor or to Commenters were generally divided program accessible via the Internet.’’ 75 create a different exemption based on about the proposed requirement that different investment limits. Thus, as transactions made in reliance on Section c. Final Rules proposed, the investment limits will 4(a)(6) be conducted exclusively After considering the comments, we apply equally to all investors, including through the intermediary’s platform. are adopting as proposed Rule 100(a)(3). retail, institutional and accredited Commenters who supported 66 the We also are adopting the definition of investors. proposed requirement cited concerns ‘‘platform’’ with one clarifying that allowing the transactions to be amendment and with a change in 3. Transaction Conducted Through an effected through means other than the Intermediary location to Rule 300(c). intermediary’s platform could increase As stated in the Proposing Release, we a. Proposed Rules the potential for fraudulent activity 67 believe that requiring an issuer to use Section 4(a)(6)(C) requires that a and prevent the leveraging of only one intermediary to conduct an transaction in reliance on Section 4(a)(6) information sharing and crowdsourced offering or concurrent offerings in be conducted through a broker or review that are intended through reliance on Section 4(a)(6) would help funding portal that complies with the crowdfunding.68 Commenters who foster the creation of a ‘‘crowd’’ and requirements of Securities Act Section opposed 69 the proposed requirement better accomplish the purpose of the 4A(a). To implement this provision, we expressed their view that permitting statute. In order for a crowd to proposed in Rule 100(a)(3) of Regulation other means would allow persons who effectively share information, we believe Crowdfunding that for any transaction lack Internet access to invest through it would be most beneficial to have one conducted in reliance on Section 4(a)(6), crowdfunding,70 and also would foster meeting place for the crowd to obtain an issuer use only one intermediary different types of in-person and share information, thus avoiding (that complies with the requirements of communication that are not possible to dilution or dispersement of the Section 4A(a) and the related achieve online.71 One commenter ‘‘crowd.’’ We also believe that limiting requirements in Regulation expressed a preference for issuers to be a crowdfunding transaction to a single Crowdfunding) and that the transaction able to host their own offerings subject intermediary’s online platform helps to be conducted exclusively on the to certain conditions.72 One commenter minimize the risk that issuers and intermediary’s platform. We also also suggested that intermediaries intermediaries would circumvent the proposed to permit the intermediary to should be able to engage in certain requirements of Regulation engage in back office 62 or other activities other than on their platforms, Crowdfunding. For example, allowing administrative functions other than on such as physically meeting with an issuer to conduct an offering using the intermediary’s platform, and to representatives of issuers and investors, more than one intermediary would 73 define ‘‘platform’’ as ‘‘an Internet Web and hosting launch parties. make it more difficult for intermediaries site or other similar electronic medium A few commenters supported, but to determine whether an issuer is through which a registered broker or a suggested technical revisions to, our 74 exceeding the $1 million aggregate registered funding portal acts as an proposed definition of ‘‘platform.’’ offering limit. intermediary in a transaction involving 65 We continue to believe that the offer or sale of securities in reliance See, e.g., Graves Letter. 66 See, e.g., Joinvestor Letter; RoC Letter; crowdfunding transactions made in on Section 4(a)(6).’’ RocketHub Letter; Wilson Letter. reliance on Section 4(a)(6) and activities b. Comments on the Proposed Rules 67 See, e.g., StartupValley Letter. associated with these transactions 68 See, e.g., RocketHub Letter. should occur over the Internet or other Commenters were divided about the 69 See, e.g., Benjamin Letter; Omara Letter; Public similar electronic medium that is proposed prohibition on an issuer using Startup Letter 2. accessible to the public. Such an 70 more than one intermediary for any See, e.g., Projecteureka Letter. ‘‘online-only’’ requirement enables the transaction conducted pursuant to 71 See, e.g., Benjamin Letter (‘‘Without doubt, the web fosters a crowd and a convenient forum to public to access offering information Section 4(a)(6). Supporters of the express ideas and learn about the Issuer. However, and share information publicly in a way proposed prohibition expressed the small community gatherings provide similar that will allow members of the crowd to view that the prohibition would benefit feedback loops and often times serve the community and some investors better by fostering share their views on whether to communication between issuers and participate in the offering and fund the 63 nuanced forms of communication that can never be investors. One commenter stated that achieved. Further, some SEC concerns can be business or idea. While we the prohibition also would assist in assuaged regarding the loss of creating a ‘crowd’ acknowledge, as one commenter assessing whether investors are within online because some investors that may rely on the observed, that there are forms of their investment limits.64 Commenters Web site to educate themselves may not be inclined to contribute to the ‘crowd intelligence’ online, yet communication that cannot be achieved who opposed the proposed prohibition would be vocal in a community gathering.’’). 72 See Public Startup Letter 2. We note that programmable interfaces (APIs) and other electronic 61 For a discussion of integration, see Section Section 4(a)(6) of the Securities Act requires that, media are generally only the means to access a II.A.1.c. as a condition of the exemption, the transaction be platform, which itself is an Internet-accessible 62 Back office personnel typically perform ‘‘conducted through a broker or funding portal that software program). functions such as, but not limited to, recordkeeping, complies with the requirements of section 4A(b).’’ 75 See Arctic Island Letter 1; Arctic Island Letter trade confirmations, internal accounting, and 15 U.S.C. 77d(a)(6). 4 (noting that a ‘‘platform’’ is actually a software account maintenance. 73 See Wilson Letter. program that is accessible via the Internet and that 63 See, e.g., CFA Institute Letter; Rockethub 74 See, e.g., Arctic Island Letter 1, Arctic Island a ‘‘Web site or other electronic medium’’ is merely Letter. Letter 3; Arctic Island Letter 4; and Startup Valley a way to access the platform, not the platform 64 See CFA Institute Letter. Letter (explaining that Web sites, application itself).

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online,76 we nevertheless believe that organized under the laws of a state or Act.83 Some commenters recommended the requirement that the transaction be territory of the United States or the that, despite the exclusion of investment conducted exclusively through the District of Columbia; (2) issuers that are companies, the Commission allow a intermediary’s platform will help to subject to Exchange Act reporting single purpose fund, including LLCs ensure transparency, provide for ready requirements; 79 (3) investment and LPs, to conduct an offering in availability of information in one place companies as defined in the Investment reliance on Section 4(a)(6) if such fund to all investors, and promote greater Company Act of 1940 (the ‘‘Investment were organized to invest in, or lend uniformity in the distribution of Company Act’’) 80 or companies that are money to, a single company.84 information among investors. We also excluded from the definition of Delinquent in Ongoing Reporting. A do not believe that funding portals investment company under Section 3(b) number of commenters supported the should be permitted to physically meet or 3(c) of the Investment Company exclusion of issuers that are delinquent with investors to solicit investments and Act; 81 and (4) any other issuer that the in their reporting obligations,85 offerings on its platform, or host launch Commission, by rule or regulation, although others opposed the exclusion parties, as one commenter determines appropriate. of delinquent issuers.86 Some recommended, because these activities commenters suggested options such as likely violate the statutory prohibition a. Proposed Rules disclosure of the issuer’s reporting on funding portals soliciting and Rule 100(b) of Regulation delinquency in its offering documents providing investment advice and Crowdfunding, as proposed, would or on its Web site or a cure provision.87 recommendations. However, we exclude the categories of issuers We also received comments about continue to believe that intermediaries specifically identified in Section 4A(f). whether the exclusion should extend to should be able to engage in back office In addition, the proposed rules would issuers that are delinquent in other and other administrative functions other exclude: (1) Issuers that are disqualified reporting requirements (e.g., updates on than on their platforms. from relying on Section 4(a)(6) pursuant the progress of the issuer in meeting the In a change from the proposed rules, to the disqualification provision in Rule target offering amount, issuers whose and consistent with the suggestions of 503(a) of Regulation Crowdfunding; (2) affiliates have failed to comply with the commenters, the final rules define issuers that have sold securities in ongoing reporting requirements, and ‘‘platform’’ as ‘‘a program or application reliance on Section 4(a)(6) if they have issuers with an officer, director, or accessible via the Internet or other not filed with the Commission and controlling shareholder who served in a similar electronic communication provided to investors, to the extent similar capacity with another issuer that medium through which a registered required, the ongoing annual reports failed to file its ongoing reports). broker or a registered funding portal acts required by Regulation Crowdfunding Commenters generally opposed as an intermediary in a transaction during the two years immediately extending the exclusion beyond issuers delinquent in their ongoing annual involving the offer or sale of securities preceding the filing of the required new reports during the two years in reliance on Section 4(a)(6) of the offering statement; and (3) issuers that immediately preceding the filing of the Securities Act (15 U.S.C. 77d(a)(6))’’ have no specific business plan or that required new offering statement.88 [emphasis added].77 We believe that this have indicated that their business plan definition is more technically accurate is to engage in a merger or acquisition 83 See, e.g., Commonwealth of Massachusetts and also will accommodate innovation with an unidentified company or Letter; PeoplePowerFund Letter. in the event of technological companies. 84 See, e.g., EMKF Letter (stating that having advancements. We are moving the hundreds of direct shareholders can give startups definition of ‘‘platform’’ from Rule 100 b. Comments on the Proposed Rules ‘‘messy cap tables’’ that deter follow-on financing to Rule 300(c) so that it will be located and alternatively recommending the Commission Foreign Issuers, Exchange Act permit an intermediary, including a funding portal, alongside the other Regulation Reporting Companies, and Investment to act as a holder of record); Fryer Letter; Crowdfunding definitions related to Companies. Several commenters Growthfountain Letter; Martin Letter intermediaries. Also, in a change from opposed the exclusion of foreign (recommending that crowdfunding be operated through a trust fund mechanism that would own the proposed rule, we are moving to the issuers, Exchange Act reporting shares of the entity seeking capital); Propellr Letter definition of platform an instruction companies, and investment 2; Ritter Letter; Wefunder Letter. stating that an intermediary through companies.82 Other commenters, 85 See, e.g., ASSOB Letter; Commonwealth of which a crowdfunding transaction is however, supported the exclusion of Massachusetts Letter; Consumer Federation Letter; conducted may engage in back office or Fund Democracy Letter; Grassi Letter; Joinvestor investment companies or companies Letter; NASAA Letter; Wefunder Letter. other administrative functions other that are excluded from the definition of 86 See, e.g., ABA Letter; Parsont Letter; than on the intermediary’s platform.78 investment company under Section 3(b) Projectheureka Letter; Public Startup Letter 2; or 3(c) of the Investment Company RocketHub Letter. 4. Exclusion of Certain Issuers From 87 See, e.g., ABA Letter (suggesting a reasonable Eligibility Under Section 4(a)(6) cure period and limiting the ‘‘look-back’’ period to 79 These are issuers who are required to file Securities Act Section 4A(f) excludes one year); Grassi Letter (recommending that a reports with the Commission pursuant to Exchange delinquent issuer be required to file a form with the certain categories of issuers from Act Sections 13(a) (15 U.S.C. 78m(a)) or 15(d) (15 Commission and publish on its Web site and the eligibility to rely on Section 4(a)(6) to U.S.C. 78o(d)). relevant intermediary’s platform a notice to engage in crowdfunding transactions. 80 15 U.S.C 80a–1 et seq. potential investors that it has not met its reporting These are: (1) Issuers that are not 81 15 U.S.C. 80a–3(b) or (c). obligations); Parsont Letter (recommending the 82 See, e.g., M.A.V. Letter (opposing the exclusion Commission treat the ongoing reporting of public companies from eligibility to rely on requirements as a condition to the Section 4(a)(6) 76 See Benjamin Letter (in-person gatherings may Section 4(a)(6)); Ritter Letter (asking for clarification exemption and create a notice and cure provision foster more ‘‘nuanced forms of communication’’). regarding companies that are excluded from the in the proposed insignificant deviation safe harbor); 77 Rule 300(c) of Regulation Crowdfunding. definition of investment company pursuant to 3(b) RocketHub Letter (suggesting delinquent issuers be 78 In the final rule, this is an instruction to Rule of the Investment Company Act); TAN Letter required to disclose their delinquent status in their 300(c)(4). The instruction was proposed under (opposing the exclusion of foreign issuers over offering documents); Vann Letter (recommending a proposed Rule 100(a)(3), but we believe it is more concerns that investors would not have Title III grace period for curing the deficiency). appropriate under the definition of platform protections when investing in foreign issuers and 88 See, e.g., Grassi Letter (stating that further because the instruction explains that back office that investors’ ability to invest in early exclusions would impose a more onerous burden activities can happen off the platform. opportunities would be reduced). on issuers under Section 4(a)(6) than that placed on

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Further, two commenters opposed the general matter, we do not believe that statement.98 As discussed further in idea of excluding an issuer whose Exchange Act reporting companies, Section II.B.2 below, we believe that the officer, director, or controlling investment companies and foreign annual ongoing reporting requirement shareholder served in a similar capacity issuers accessing the U.S. capital will benefit investors by enabling them with another issuer that failed to file its markets constitute the types of issuers to consider updated information about annual reports.89 that Section 4(a)(6) and Regulation the issuer, thereby allowing them to Business Plans. Commenters were Crowdfunding are intended to benefit. make more informed investment divided on excluding issuers that have Moreover, we believe that certain of decisions. If issuers fail to comply with no specific business plan from these issuers, such as foreign issuers or this requirement, we do not believe that eligibility to rely on Section 4(a)(6).90 investment companies, may present they should have the benefit of relying Commenters, however, supported the unique risks that would make them on the exemption under Section 4(a)(6) exclusion of issuers that have business unsuitable for the scaled regulatory again until they file, to the extent plans to engage in a merger or regime associated with securities-based required, the two most recent annual acquisition with an unidentified crowdfunding transactions. reports.99 In addition, as discussed company.91 Accordingly, the final rules exclude further in Section II.B.1 below, in a modification to the proposed rules, the c. Final Rules these categories of issuers from Regulation Crowdfunding.93 final rules require an issuer to disclose We are adopting the issuer eligibility We are not creating, as suggested by in its offering statement and annual requirements as proposed, with the some commenters,94 an exception to report if it, or any of its predecessors, addition of two clarifications. As noted this exclusion for a single purpose fund previously failed to comply with the above, Section 4A(f) expressly excludes organized to invest in, or lend money to, ongoing reporting requirements of foreign issuers, Exchange Act reporting a single company. The statute Regulation Crowdfunding. companies and companies that are specifically excludes investment funds We note that some commenters read investment companies as defined in the from eligibility to rely on Section 4(a)(6) the provision requiring issuers to have Investment Company Act or companies and investment fund issuers present filed their two most recent annual that are excluded from the definition of considerations different from those for reports to mean that the disqualification investment company under Section 3(b) non-fund issuers. would be triggered only after the issuer or 3(c) of the Investment Company Act In addition to these statutorily was delinquent for two consecutive from the exemption for crowdfunding excluded categories of issuers, the final years or that an issuer would be transactions provided by Section 4(a)(6). rules also exclude, as proposed, several disqualified for two years.100 Instead, Although some commenters expressed additional categories of issuers. Below the final rule requires that any ongoing concerns about these statutory we discuss each of these additional annual report that was due during the exclusions, including that such categories: two years immediately preceding the exclusions could limit the investment Disqualification Provisions. As currently contemplated offering must be choices of crowdfunding investors, we discussed further in Section II.E.6 filed before an issuer may rely on the are not creating additional exemptions below, the final rules also exclude Section 4(a)(6) exemption. For example, for these categories of issuers. In issuers that are disqualified from relying if more than 120 days have passed since reaching this determination, we have on Section 4(a)(6).95 the issuer’s fiscal year end and the considered that the primary purpose of Delinquent in Ongoing Reporting. issuer has not filed the required annual Section 4(a)(6), as we understand it, is Consistent with the proposed rules and report for that most recently ended to facilitate capital formation by early the views of a number of commenters,96 fiscal year, the issuer will not be able to stage companies that might not the final rules exclude an issuer that has conduct a new offering of securities in otherwise have access to capital.92 As a sold securities in reliance on Section reliance on the Section 4(a)(6) 4(a)(6) if the issuer has not filed with exemption until the delinquent annual current registrants filing under Exchange Act the Commission and provided to report has been filed. Similarly, if an Sections 13(a) or 15(d) or emerging growth investors, to the extent required, the issuer did file an annual report for the companies); Projectheureka Letter. most recently ended fiscal year but did 89 See Grassi Letter (stating that these persons ongoing annual reports required by may not have the authority or responsibility to file Regulation Crowdfunding 97 during the not file an annual report for the fiscal an annual report); Whitaker Chalk Letter. two years immediately preceding the year prior to that, the issuer will not be 90 For commenters who expressed support, see, filing of the required new offering able to rely on the Section 4(a)(6) e.g., Anonymous Letter 2; CFA Institute Letter; exemption until the missing report has CFIRA Letter 7; Commonwealth of Massachusetts Letter; Consumer Federation Letter; Hackers/ Cong. Rec. H1581 (daily ed. Mar. 27, 2012) been filed. In both cases, as soon as the Founders Letter; NASAA Letter; ODS Letter; (statement of Rep. Patrick McHenry issuer has filed with the Commission Traklight Letter; Whitaker Chalk Letter. For (‘‘Crowdfunding is the best of microfinancing and and provided to investors both of the crowdsourcing. You use a wide network of commenters who expressed opposition, see, e.g., annual reports required during the two ABA Letter (expressing concern that a particular individuals and you can raise capital for your new business idea disclosed by a crowdfunding issuer business, your start-up, or your small business.’’). years immediately preceding the filing might be deemed after-the-fact to be too non- 93 See Rule 100(b) of Regulation Crowdfunding. specific to have permitted reliance on Section 94 See, e.g., EMKF Letter; Fryer Letter; 98 See Rule 100(b)(5) of Regulation 4(a)(6), thus exposing that issuer to a potential Growthfountain Letter; Martin Letter; Propellr Crowdfunding. Section 5 violation); FundHub Letter 1; Letter 2; Wefunder Letter. 99 We note that even if an issuer has regained Projectheureka Letter; Public Startup Letter 2; RoC 95 See Rule 100(b)(4) of Regulation eligibility to rely on Regulation Crowdfunding, the Letter; RocketHub Letter; SBM Letter; Wilson Letter. Crowdfunding. See also Rule 503 of Regulation Commission could still bring an enforcement action 91 See, e.g., ABA Letter; CFA Institute Letter; Crowdfunding and Section II.E.6 for a discussion of under the federal securities laws based on the Commonwealth of Massachusetts Letter; Consumer the disqualification provisions. issuer’s failure to make the required filings. In Federation Letter; Grassi Letter; ODS Letter; RFPIA 96 See, e.g., ASSOB Letter; Commonwealth of addition, as discussed in Section II.E.4., new Rule Letter. Massachusetts Letter; Consumer Federation Letter; 12g–6 provides an exemption from Section 12(g) 92 See, e.g., 158 Cong. Rec. S1765 (daily ed. Mar. Fund Democracy Letter; Grassi Letter; Joinvestor conditioned, among other things, on the issuer’s 29, 2012) (statement of Sen. Jack Reed) Letter; NASAA Letter; Wefunder Letter. compliance with the annual reporting requirements (‘‘[Crowdfunding] is the place where we envision 97 See Rules 202 and 203(b) of Regulation of Rule 202 of Regulation Crowdfunding. the smallest entrepreneurs could obtain much Crowdfunding and Section II.B.2 for a discussion of 100 See, e.g., Consumer Federation Letter; Fund needed seed capital for their good ideas.’’); 158 the ongoing reporting requirements. Democracy Letter; NASAA Letter.

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of the required offering statement, the we continue to believe that the rules • a description of the ownership and issuer will be able to rely on the Section should exclude issuers that have no capital structure of the issuer.114 4(a)(6) exemption. The final rule text specific business plan or whose In addition, Section 4A(b)(1)(I) includes an instruction to clarify this business plan is to engage in a merger specifies that the Commission may requirement.101 or acquisition with an unidentified require additional disclosures for the Consistent with the proposal and the company or companies. We understand protection of investors and in the public recommendations of commenters,102 we that issuers engaging in crowdfunding interest. are not extending the exclusion to transactions may have businesses at As discussed further in Section II.B.3 issuers that are delinquent in the various stages of development in below, we are requiring issuers to file progress update or termination of differing industries, and therefore, we these disclosures with the Commission reporting requirements, nor are we believe that a specific ‘‘business plan’’ on Form C.115 Unless otherwise excluding issuers whose officer, for such issuers could encompass a indicated in the form, Form C must be director, or controlling shareholder wide range of project descriptions, filed in the standard format of served in a similar capacity with articulated ideas, and business models. eXtensible Markup Language (XML). another issuer that failed to file its Overall, we believe that the The XML-based fillable portion of Form annual reports. Extending the exclusion exclusions in the final rules C will enable issuers to provide to those issuers would impose more appropriately consider the need to limit information in a convenient medium stringent requirements than those faced the potential risks to investors that without requiring the issuer to purchase by current reporting companies and could result from extending issuer or maintain additional software or issuers under Regulation A. eligibility to certain types of entities technology. This will provide the Business Plans. The final rules also without unduly limiting the benefits of Commission and the public with readily exclude an issuer that has no specific the exemption as a tool for capital available data about offerings made in business plan or has indicated that its formation. reliance on Section 4(a)(6). Other business plan is to engage in a merger required disclosure that is not required or acquisition with an unidentified B. Issuer Requirements to be provided in the XML-based text company or companies.103 We believe 1. Disclosure Requirements boxes will be filed as attachments to that the exemption under Section 4(a)(6) Form C. We are not mandating a specific is intended to provide an issuer with an Securities Act Section 4A(b)(1) sets presentation format for the attachments early stage project, idea or business an forth specific disclosures that an issuer to Form C; however, the final Form C opportunity to share it publicly with a offering or selling securities in reliance does include an optional Q&A format wider range of investors. Those on Section 4(a)(6) must ‘‘file with the that crowdfunding issuers may use to investors may then share information Commission and provide to investors provide disclosures that are not required with each other about the opportunity and the relevant broker or funding to be filed in XML format.116 We believe and use that information to decide portal, and make available to potential that this optional format should help whether or not to invest. Thus, we investors’’. These disclosures include: reduce the burden on crowdfunding • believe that an issuer engaging in The name, legal status, physical issuers of preparing disclosures. crowdfunding under the exemption address and Web site address of the By filing Form C with the 107 should give the public sufficient issuer; Commission and providing it to the • information about a particular proposed the names of the directors and relevant intermediary, issuers will project or business to allow investors to officers (and any persons occupying a satisfy the requirement of Securities Act make an informed investment similar status or performing a similar Section 4A(b) that issuers relying on decision.104 function), and each person holding Section 4(a)(6) must ‘‘file with the As discussed in the proposal, we are more than 20 percent of the shares of Commission and provide to investors cognizant of the challenges noted by the issuer; 108 and the relevant broker of funding some commenters 105 in distinguishing • a description of the business of the portal, and make available to potential between early-stage proposals that have issuer and the anticipated business plan investors’’ certain information. In a information sufficient to support the of the issuer; 109 clarifying change from the proposal, we crowdfunding mechanism and those • a description of the financial have moved the definition of ‘‘investor’’ that cannot by their terms do so. After condition of the issuer; 110 from proposed Rule 300(c)(4) to Rule considering the comments received,106 • a description of the stated purpose and intended use of the proceeds of the 114 Section 4A(b)(1)(H). Specifically, Section 4A(b)(1)(H) requires a description of: ‘‘(i) terms of 101 See instruction to paragraph (b)(5) of Rule 100 offering sought by the issuer with the securities of the issuer being offered and each 111 of Regulation Crowdfunding. respect to the target offering amount; other class of security of the issuer . . .; (ii) a 102 See, e.g., Grassi Letter; Projectheureka Letter; • the target offering amount, the description of how the exercise of the rights held Whitaker Chalk Letter. deadline to reach the target offering by the principal shareholders of the issuer could 103 See Rule 101(b)(6) of Regulation negatively impact the purchasers of the securities Crowdfunding. amount and regular updates about the being offered; (iii) the name and ownership level of 104 See, e.g., Section 4A(b)(1)(C) (requiring a progress of the issuer in meeting the each existing shareholder who owns more than 20 description of the business of the issuer and the target offering amount; 112 percent of any class of the securities of the issuer; anticipated business plan of the issuer). • the price to the public of the (iv) how the securities being offered are being 105 See, e.g., ABA Letter; FundHub Letter 1; valued . . .; and (v) the risks to purchasers of the Projectheureka Letter; Public Startup Letter 2; RoC securities or the method for determining securities relating to minority ownership in the 113 Letter; RocketHub Letter; SBM Letter; Wilson Letter. the price; and issuer, the risks associated with corporate actions, 106 See, e.g., ABA Letter; Anonymous Letter 2; including additional issuances of shares, a sale of the issuer or of assets of the issuer, or transactions CFA Institute Letter; CFIRA Letter 7; 107 Section 4A(b)(1)(A). with related parties.’’ Commonwealth of Massachusetts Letter; Consumer 108 Section 4A(b)(1)(B). Federation Letter; FundHub Letter 1; Grassi Letter; 115 Issuers will use Form C to provide the 109 Section 4A(b)(1)(C). Hackers/Founders Letter; NASAA Letter; ODS required disclosures about the crowdfunding 110 Letter; Projectheureka Letter; Public Startup Letter Section 4A(b)(1)(D). transaction and the information required to be filed 2; RFPIA Letter; RoC Letter; RocketHub Letter; SBM 111 Section 4A(b)(1)(E). annually. See Section II.B.3. Letter; Traklight Letter; Whitaker Chalk Letter; 112 Section 4A(b)(1)(F). 116 See Item 1 of General Instruction III to Form Wilson Letter. 113 Section 4A(b)(1)(G). C of Regulation Crowdfunding.

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100(d) to clarify that for purposes of all the shares of the issuer.’’ In contrast, similar status or performing a similar of Regulation Crowdfunding, ‘‘investor’’ Section 4A(b)(1)(H)(iii) requires function.126 includes any investor or any potential disclosure of the ‘‘name and ownership A few commenters commented on the investor, as the context requires.117 In level of each existing shareholder who proposed 20 Percent Beneficial Owner connection with this clarifying move we owns more than 20 percent of any class rules. One commenter supported the have deleted the phrase ‘‘and make of the securities of the issuer’’ (emphasis requirement to disclose the names of available to potential investors’’ each added). We proposed in Rule 201(c) to persons who are the 20 Percent time it appeared in the proposed Rules require disclosure of the names of Beneficial Owners,127 while one 201 and 203 to avoid redundancy.118 persons, as of the most recent commenter opposed the requirement.128 Additionally, as we clarify in the final practicable date, who are the beneficial One commenter recommended that, to rules, to the extent that some of the owners of 20 percent or more of the provide greater certainty for investors required disclosures overlap, issuers are issuer’s outstanding voting equity and more guidance for issuers, the not required to duplicate disclosures. securities, calculated on the basis of beneficial ownership be calculated as of voting power (‘‘20 Percent Beneficial a specific date, rather than the most a. Offering Statement Disclosure Owners’’). Neither Section 4A(b)(1)(B) recent practicable date, and that the Requirements nor Section 4A(b)(1)(H)(iii) states as of disclosure be updated when there are (1) Information About the Issuer and the what date the beneficial ownership significant changes in beneficial Offering should be calculated. We proposed in ownership.129 Finally, one commenter recommended that the Commission (a) General Information About the Rule 201(c) to require issuers to keep the requirement as simple as Issuer, Officers and Directors, and calculate beneficial ownership as of the possible.130 Certain Shareholders most recent practicable date. (i) Proposed Rules (ii) Comments on the Proposed Rules (iii) Final Rules To implement Sections 4A(b)(1)(A) Of the commenters that addressed the We are adopting the issuer, officer and (B), we proposed in Rule 201 of proposed issuer, officer and director and director, and 20 Percent Beneficial Owners disclosure requirements largely Regulation Crowdfunding to require an disclosure rules, some generally 119 as proposed.131 An issuer will be issuer to disclose information about its supported them, while others required to disclose information about legal status, directors, officers and opposed specific disclosure its president, vice president, secretary, certain shareholders and how interested requirements. For example, one treasurer or principal financial officer, parties may contact the issuer. commenter opposed requiring issuers to 120 comptroller or principal accounting Specifically, we proposed to require that disclose a Web site address. Other officer and any person routinely an issuer disclose: commenters opposed requiring issuers performing similar functions. As noted • Its name and legal status, including to disclose the business experience of 121 by at least one commenter,132 an issuer its form of organization, jurisdiction in their officers and directors, while one may not have officers serving in each of which it is organized and date of commenter suggested narrowing the 122 these roles. Accordingly, the final rules organization; definition of the term ‘‘officer.’’ • its physical address and its Web site Some commenters expressed opposition require the disclosure only to the extent address; and to any revision to the proposed rules an issuer has individuals serving in • the names of the directors and that would require disclosure of any these capacities or performing similar 133 officers, including any persons court orders, judgments or civil functions. The required information occupying a similar status or performing litigation involving any directors and includes all positions and offices held 123 a similar function, all positions and officers. with the issuer, the period of time in offices with the issuer held by such Some commenters supported the which such persons served in the proposed three-year time period to be persons, the period of time in which position or office and their prior covered by the officer and director 134 such persons served in the positions or business experience. Contrary to the disclosure rules,124 while others 135 offices and their business experience views of some commenters, we recommended that officer and director during the past three years, including: Æ disclosure cover the previous five 126 See, e.g., Angel Letter 1 (qualifications of Each person’s principal occupation 125 candidates for the board of directors); Denlinger and employment, including whether years. Some commenters recommended we require additional Letter 1(educational background of the officers and any officer is employed by another directors); Mollick Letter (online identities of the disclosures about an issuer’s officers, employer; and officers and directors); ODS Letter (educational Æ the name and principal business of directors and persons occupying a background of the officers and directors); Wilson Letter (technical and business skills of the officers any corporation or other organization in 119 See, e.g., Angel Letter 1; CCI Letter; Denlinger and directors); Zeman Letter (any officer and which such occupation and Letter 1; Mollick Letter; Wefunder Letter; Wilson director positions held by the officers and directors employment took place. Letter. or their family members, as well as any 10 percent beneficial holdings they may have with other SEC We proposed to define ‘‘officer’’ 120 See Vann Letter (recommending that the registrants; and disputes the officers and directors disclosure requirement be optional or only required consistent with the definition in had with other employers). for businesses that have a Web site). Securities Act Rule 405 and in Exchange 127 See RocketHub Letter. 121 See, e.g., Public Startup Letter 2; RocketHub 128 Act Rule 3b–2. We further proposed to Letter; Schwartz Letter; Zhang Letter. See Public Startup Letter 2. 129 require disclosure of the business 122 See RocketHub Letter (stating that only See NASAA Letter. experience of directors and officers of relevant officers for most companies using 130 See RocketHub Letter. the issuer during the past three years. Regulation Crowdfunding would be the principal 131 See Rule 201(a)–(c) of Regulation Section 4A(b)(1)(B) requires executive officer and the principal financial officer, Crowdfunding. 132 disclosure of ‘‘the names of . . . each which may be the same person.) See RocketHub Letter. 123 See, e.g., FundHub Letter 1; RocketHub Letter; 133 See Instruction to paragraph (b) of Rule 201 of person holding more than 20 percent of Wefunder Letter. Regulation Crowdfunding. 124 See, e.g., Denlinger Letter 1; Joinvestor Letter; 134 See Rule 201(b) of Regulation Crowdfunding. 117 See Rule 100(d) of Regulation Crowdfunding. Wefunder Letter. 135 See, e.g., Denlinger 1 Letter (educational 118 See Rules 201 and 203(a) of Regulation 125 See, e.g., Commonwealth of Massachusetts background of officers); ODS Letter (educational Crowdfunding. Letter; NASAA Letter. Continued

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believe that additional disclosures about a Web site or be able to create one at a disclose a description of its business an issuer’s officers, directors and minimal cost. and business plan,146 most commenters persons occupying a similar status or We also are adopting the 20 Percent supported this proposed requirement.147 performing a similar function would be Beneficial Owner disclosure Some commenters recommended that unduly burdensome and generally not requirement as proposed with one the disclosure include specific items, necessary for investors to be in a modification.142 Instead of requiring such as disclosure of any material position to make an informed issuers to disclose the name of each 20 contracts of the issuer, any material investment decision. Given the diverse Percent Beneficial Owner as of the most litigation or any outstanding court order nature of the startups and small recent practicable date, we are requiring or judgment affecting the issuer or its businesses that we anticipate will seek such disclosure as of the most recent property; 148 the issuer’s business value to raise capital in reliance on Section practicable date, but no earlier than 120 proposition, revenue model, team, 4(a)(6), additional disclosures such as days prior to the date the offering regulatory issues and executive those recommended by some statement or report is filed. We believe compensation; 149 how the issuer will commenters may not be relevant in all that this change should address build value for the shareholders; 150 and instances. commenter concerns 143 about the plans for implementation, concrete next discretion afforded by the proposed steps, outside recommendations about The required disclosure about the ‘‘most recent practicable date.’’ While the validity of the business, business experience of the directors and we are not adding to Rule 201(c) a backgrounds of the individuals involved officers (and any persons occupying a specific requirement that the disclosure and prototypes or concept drawings.151 similar status or performing a similar be updated when there are significant One commenter recommended that the function) must cover the past three changes in beneficial ownership, as disclosure requirement be scaled to years,136 which, as some commenters requested by one commenter,144 to the match the size of the offering.152 noted,137 is shorter than the five-year extent a material change in beneficial Some commenters recommended that period that applies to issuers ownership takes place during the the Commission provide a non- conducting registered offerings 138 or offering, an issuer would be required to exclusive list of the types of information exempt offerings pursuant to Regulation file an amended offering statement on 139 an issuer should consider disclosing, A. We believe that startups and small Form C/A: Amendment. templates, examples or other guidance businesses that may seek to raise capital As stated in the Proposing Release, we to assist the issuer in complying with in reliance on Section 4(a)(6) generally believe that the universe of 20 Percent this disclosure requirement.153 One will be smaller than the issuers Beneficial Owners should be the same commenter recommended that the conducting registered offerings or for the disclosure requirements and the Commission not specify the information exempt offerings pursuant to Regulation disqualification provisions 145 because to be included in the description of the A, and generally are likely to have a this would ease the burden on issuers 154 140 business or the business plan. more limited operating history. by requiring them to identify only one Commenters also opposed revising the Therefore, in comparison to registered set of persons who would be the subject proposed business description offerings and Regulation A, we believe of these rules. We continue to believe requirement to require the description the three-year period is more relevant that assessing beneficial ownership to include the information requirements given the stage of development of these based on total outstanding voting of Items 101(a)(2) and 101(h) 155 of issuers and should help to reduce securities is consistent with Section Regulation S–K.156 compliance costs for issuers conducting 4A(b)(1)(B). Section 4A(b)(1)(B) is not offerings pursuant to Section 4(a)(6) limited to voting equity securities, but (iii) Final Rules while still providing investors with we believe the limitation is necessary to Consistent with the proposal, Rule sufficient information about the clarify how beneficial ownership should 201(d) requires an issuer to disclose business experience of directors and be calculated since issuers could information about its business and officers of the issuer to make an potentially have multiple classes of business plan. We are not modifying the informed investment decision. securities with different voting powers. proposed rule, as some commenters Notwithstanding the suggestion of one (b) Description of the Business commenter, and consistent with the 146 See, e.g., ABA Letter; ASSOB Letter; Public statute, the final rules require disclosure (i) Proposed Rules Startup Letter 2; Traklight Letter. of an issuer’s Web site.141 Given the 147 See, e.g., Anonymous Letter 2; Arctic Island Consistent with Section 4A(b)(1)(C), Letter 5; Benjamin Letter; CFIRA Letter 7; Consumer Internet-based nature of Crowdfunding, we proposed in Rule 201(d) of Federation Letter; EMKF Letter; Hackers/Founders we anticipate that every issuer will have Regulation Crowdfunding to require an Letter; Mollick Letter; NFIB Letter; RocketHub issuer to disclose information about its Letter; Saunders Letter; Wefunder Letter. background of officers, directors and similar business and business plan. The 148 See, e.g., Arctic Island Letter 4 (referencing only pending litigation); Arctic Island Letter 5 persons); Zeman Letter (proposing that officers and proposed rules did not specify the directors of an issuer be required to disclose their (referencing only threatened or pending litigation); (or family members) officer and director positions disclosures that an issuer would need to FundHub Letter 1; Wilson Letter. with other SEC registrants, and disclose material include in the description of the 149 See, e.g., Arctic Island Letter 5. holdings of more than 10% with other SEC business and the business plan. 150 See, e.g., Hackers/Founders Letter. registrants). 151 See, e.g., Mollick Letter. 136 See Rule 201(b) of Regulation Crowdfunding. (ii) Comments on the Proposed Rules 152 See Consumer Federation Letter. 137 See, e.g., Commonwealth of Massachusetts While several commenters expressed 153 See, e.g., ABA Letter; Benjamin Letter; CFIRA Letter; NASAA Letter. Letter 7; Commonwealth of Massachusetts Letter; 138 See Item 401(e) of Regulation S–K [17 CFR concerns about requiring an issuer to FundHub Letter 1 (recommending a safe harbor list 229.401(e)]. of requirements); Traklight Letter; Wilson Letter 139 See Item 8(c) of Form 1–A [17 CFR 239.90]. 142 See Rule 201(c) of Regulation Crowdfunding. (recommending a checklist or prescribed list of 140 There is no limit on the amount of proceeds 143 See NASAA Letter. questions). that may be raised in a registered offering, and 144 Id. 154 See RocketHub Letter. Regulation A permits offerings of up to $50 million 145 See Rule 503 of Regulation Crowdfunding and 155 17 CFR 229.101. of securities annually. Section II.E.6 for a discussion of the disqualification 156 See, e.g., Hamilton Letter; Public Startup 141 See Rule 201(a) of Regulation Crowdfunding. provisions. Letter 2; RocketHub Letter.

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recommended,157 to specify the intended use of the offering proceeds.160 applicable. If the issuer will repurchase disclosures that an issuer must include One commenter recommended that we outstanding issuer securities, it should in the description of the business and prescribe the use of proceeds disclosure consider disclosing its plans, terms and the business plan or to provide a non- or provide a list of examples that issuers purpose for repurchasing the securities. exclusive list of the types of information should consider when providing such An issuer also should consider an issuer should consider disclosing. disclosures.161 Others recommended a disclosing how long the proceeds will We anticipate that issuers engaging in variety of circumstances under which satisfy the operational needs of the crowdfunding transactions may have an issuer should be required to update business. If an issuer does not have businesses at various stages of the use of proceeds disclosure.162 definitive plans for the proceeds, but development in different industries, and (iii) Final Rules instead has identified a range of therefore, we believe that the rules possible uses, then the issuer should should provide flexibility for these We are adopting the use of proceeds identify and describe each probable use issuers regarding what information they disclosure requirement substantially as and the factors the issuer may consider disclose about their businesses. This proposed in Rule 201(i). An issuer will in allocating proceeds among the flexible approach is consistent with the be required to provide a reasonably potential uses.165 If an issuer indicates suggestion of one commenter that the detailed description of the purpose of that it will accept proceeds in excess of business plan requirements be scaled to the offering, such that investors are the target offering amount, the issuer match the size of the offering.158 We provided with enough information to must provide a reasonably detailed also are concerned that a non-exclusive understand how the offering proceeds description of the purpose, method for will be used.163 While one list of the types of information an issuer allocating oversubscriptions, and commenter 164 recommended that we should consider providing would be intended use of any excess proceeds prescribe this disclosure or provide a 166 viewed as a de facto disclosure with similar specificity. list of examples, we believe a more requirement that all issuers would feel prescriptive rule would not best (d) Target Offering Amount and compelled to meet and would, therefore, accommodate a diverse range of issuers. Deadline undermine the intended flexibility of Instead, below we provide several the final rules. (i) Proposed Rules examples of the disclosures issuers Consistent with Section 4A(b)(1)(F), should consider making with respect to (c) Use of Proceeds we proposed in Rule 201(g) of various uses of proceeds. (i) Proposed Rules The disclosure requirement is Regulation Crowdfunding to require designed to provide investors with issuers to disclose the target offering Consistent with Section 4A(b)(1)(E), amount and the deadline to reach the we proposed in Rule 201(i) of sufficient information to evaluate the investment. For example, an issuer may target offering amount. In addition, we Regulation Crowdfunding to require an proposed in Rule 201(h) to require an issuer to provide a description of the intend to use the proceeds of an offering to acquire assets or businesses, issuer to disclose whether it would purpose of the offering and intended use accept investments in excess of the of the offering proceeds. We expected compensate the intermediary or its own employees or repurchase outstanding target offering amount, and, if it would, that such disclosure would provide a we proposed to require the issuer to sufficiently detailed description of the securities of the issuer. In providing its description, an issuer would need to disclose, at the commencement of the intended use of proceeds to permit consider the appropriate level of detail offering, the maximum amount it would investors to evaluate the investment. to provide investors about the assets or accept. The issuer also, under proposed Under the proposed rules, if an issuer businesses that the issuer anticipates Rule 201(h), would be required to did not have definitive plans for the acquiring, based on its particular facts disclose, at the commencement of the proceeds, but instead had identified a and circumstances, so that the investors offering, how shares in oversubscribed range of possible uses, then the issuer could make informed decisions. If the offerings would be allocated. We further would be required to identify and proceeds will be used to compensate proposed in Rule 201(j) to require describe each probable use and factors existing employees or to hire new issuers to describe the process to cancel affecting the selection of each particular employees, the issuer should consider an investment commitment or to use. In addition, if an issuer indicated disclosing whether the proceeds will be complete the transaction once the target that it would accept proceeds in excess used for salaries or bonuses and how amount is met, including a statement of the target offering amount,159 the many employees it plans to hire, as that: issuer would be required to provide a • Investors may cancel an investment commitment until 48 hours prior to the separate, reasonably detailed 160 See, e.g., ABA Letter; ASSOB Letter; description of the purpose and intended Consumer Federation Letter; Joinvestor Letter; deadline identified in the issuer’s use of any excess proceeds with similar Saunders Letter; Traklight Letter; Whitaker Chalk offering materials; 167 specificity. Letter; Wilson Letter. But see, Public Startup Letter • the intermediary will notify 2. investors when the target offering (ii) Comments on the Proposed Rules 161 See Commonwealth of Massachusetts Letter. 162 amount has been met; See, e.g., ASSOB Letter (five percent change); • if an issuer reaches the target Most commenters supported the CFIRA Letter 7 (material deviations in the offering offering amount prior to the deadline requirement that issuers disclose the statement and any deviations in the annual report); Commonwealth of Massachusetts Letter (material identified in its offering materials, it change); Joinvestor Letter (substantial change); may close the offering early if it 157 See, e.g., ABA Letter; Arctic Island Letter 4; RocketHub Letter (significant change); Traklight Arctic Island Letter 5; Benjamin Letter; CFIRA Letter (material deviations); Whitaker Chalk Letter provides at least five business days’ Letter 7; Commonwealth of Massachusetts Letter; (material change); Wilson Letter (any deviation). FundHub Letter 1; Hackers/Founders Letter; See also Section II.B.3 for discussion of when an 165 See Instruction to paragraph (i) of Rule 201 of Mollick Letter; Traklight Letter; Wilson Letter. amendment to the offering statement may be Regulation Crowdfunding. 158 See Consumer Federation Letter. required. 166 See Instruction to paragraph (i) of Rule 201 of 159 See Section II.B(1)(d) below for a description 163 See Instruction to paragraph (i) of Rule 201 of Regulation Crowdfunding. of the final rule’s disclosure requirements with Regulation Crowdfunding. 167 Section II.C.6 further discusses the respect to target amounts. 164 See Commonwealth of Massachusetts Letter. cancellation provisions.

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notice prior to that new deadline (absent deadline would not require an extension (f) Ownership and Capital Structure a material change that would require an of the offering and reconfirmation of the (i) Proposed Rules extension of the offering and investment commitment; however, reconfirmation of the investment issuers would need to consider whether Consistent with Section 4A(b)(1)(H), 168 we proposed in Rule 201(m) of commitment); and any material change occurred that • Regulation Crowdfunding to require an if an investor does not cancel an would require an extension and issuer to provide a description of its investment commitment before the 48- reconfirmation from investors.172 hour period prior to the offering ownership and capital structure. This deadline, the funds will be released to We do not believe it is necessary for disclosure would include: • the issuer upon closing of the offering us to prescribe how oversubscribed The terms of the securities being and the investor will receive securities offerings must be allocated if the issuer offered and each other class of security in exchange for his or her investment. is required to disclose, at the of the issuer, including the number of In addition, proposed Rule 201(k) commencement of the offering, how securities being offered and those would require issuers to disclose that if shares in oversubscribed offerings will outstanding, whether or not such an investor does not reconfirm his or be allocated. Commenters were securities have voting rights, any her investment commitment after a supportive of this approach,173 and we limitations on such voting rights, how material change is made to the offering, believe this disclosure should provide the terms of the securities being offered the investor’s investment commitment investors with important information may be modified and a summary of the differences between such securities and will be cancelled and committed funds while maintaining flexibility for issuers each other class of security of the issuer, will be returned. Proposed Rule 201(g) to structure the offering as they believe and how the rights of the securities also would require issuers to disclose appropriate. that if the sum of the investment being offered may be materially limited, commitments does not equal or exceed We believe that investors in a diluted or qualified by the rights of any the target offering amount at the time of crowdfunding transaction will benefit other class of security of the issuer; • the offering deadline, no securities will from clear disclosure about their right to a description of how the exercise of be sold in the offering, investment cancel, the circumstances under which the rights held by the principal commitments will be cancelled and an issuer may close an offering early shareholders of the issuer could affect 169 and the need to reconfirm the the purchasers of the securities; committed funds will be returned. • investment commitment under certain the name and ownership level of (ii) Final Rules circumstances, as they will be more persons who are 20 Percent Beneficial Commenters were supportive of the Owners; aware of their rights to rescind an • proposed rules, and we are adopting the how the securities being offered are investment commitment. Therefore, we being valued, and examples of methods target offering amount and deadline are adopting disclosure requirements 170 for how such securities may be valued disclosure rules as proposed. As an covering these points, as proposed. example of how the final rules will by the issuer in the future, including apply, if an issuer sets a target offering during subsequent corporate actions; (e) Offering Price • amount of $80,000 but is willing to the risks to purchasers of the accept up to $650,000, the issuer will be Consistent with Section 4A(b)(1)(G), securities relating to minority required to disclose both the $80,000 we proposed in Rule 201(l) of ownership in the issuer and the risks target offering amount and the $650,000 Regulation Crowdfunding to require an associated with corporate actions maximum offering amount that it will issuer to disclose the offering price of including additional issuances of accept.171 In an instance where an the securities or, in the alternative, the securities, issuer repurchases of issuer reaches the target offering amount method for determining the price, so securities, a sale of the issuer or of prior to the deadline identified in its long as before the sale each investor is assets of the issuer or transactions with offering materials, it may close the provided in writing the final price and related parties; and • a description of the restrictions on offering early if it provides at least five all required disclosures. business days’ notice about the new the transfer of the securities. Commenters were supportive of the As proposed, the rules would require offering deadline as set forth in Rules 174 201(j) and 302(d) of Regulation proposed disclosure and we are disclosure of the number of securities Crowdfunding. Accelerating the adopting the offering price disclosure being offered and those outstanding, rules as proposed.175 We believe that whether or not such securities have 168 Id. disclosure of the price or the methods voting rights, any limitations on such 169 See Section 4A(a)(7) (requiring intermediaries used for determining the price, coupled voting rights and a description of the to ‘‘ensure that all offering proceeds are only with investors’ rights to cancel their restrictions on the transfer of the provided to the issuer when the aggregate capital securities. raised from all investors is equal to or greater than investment upon determination of the a target offering amount. . . .’’) and discussion in final price, provide sufficient (ii) Comments on the Proposed Rules Section II.C.6. opportunity for investors to evaluate the A number of commenters supported 170 See Rules 201(g), 201(h), 201(j) and 201(k) of price. Regulation Crowdfunding. the proposed ownership and capital 171 The issuer in this case also will need to structure disclosure rules,176 while two disclose the intended use of the additional 172 Section II.B.1.c discusses the amendment and commenters opposed them as proceeds. See Instruction to paragraph (i) of Rule reconfirmation requirements. burdensome.177 One of these 201 of Regulation Crowdfunding. See also Section 173 See, e.g., CFA Institute Letter; RoC Letter; II.B.1.a.i(c) above. In addition, the issuer in this RocketHub Letter; Wilson Letter. 176 See, e.g., CFA Institute Letter; Commonwealth case will be required to provide financial 174 See, e.g., CFA Institute Letter; Wilson Letter. statements reviewed by an independent public of Massachusetts Letter; Hackers/Founders Letter; As discussed below, however, a few commenters accountant (rather than certain tax return Joinvestor Letter; NASAA Letter; RocketHub information for the most recently completed fiscal recommended that the Commission require a fixed (supporting only to the extent that such disclosures year and financial statements certified by the price at the commencement of an offering. See, e.g., do not require additional form submission or principal executive officer). See Section II.B.1.a.ii Joinvestor Letter; RocketHub Letter. We address accountant or legal work); Saunders Letter; Wilson for a discussion of the financial statement those comments in Section II.B.6. Letter. requirements. 175 See Rule 201(l) of Regulation Crowdfunding. 177 See Campbell R. Letter; Schatz Letter.

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commenters suggested that issuers the amount of any referral or other fees Legends. Comments were mixed as to should only be required to disclose the associated with the offering; the proposed requirement that issuers price of a share and the percentage • certain legends in the offering include specified legends in the offering ownership represented by a share, and statement; statement about the risks of investing in noted that the principals of an issuer • disclosure of the current number of a crowdfunding transaction and the conducting a crowdfunding offering employees of the issuer; required ongoing reports. Some may not consider the issuer’s capital • a discussion of the material factors commenters supported such a structure or whether its shareholders that make an investment in the issuer requirement,190 while others opposed will have voting rights.178 speculative or risky; the requirement.191 • a description of the material terms Current Number of Employees. While (iii) Final Rules of any indebtedness of the issuer, several commenters supported the We are adopting the ownership and including the amount, interest rate, proposed requirement that issuers capital structure disclosure rules as maturity date and any other material disclose their current number of proposed, with the addition of language terms; employees,192 two commenters opposed specifying that beneficial ownership • disclosure of any exempt offerings such a requirement.193 One commenter must be calculated no earlier than 120 conducted within the past three years; opposed this requirement, noting that days prior to the date of the filing of the and the number of employees is not useful offering statement or report,179 • disclosure of related-party for investors in evaluating early-stage consistent with the treatment of transactions since the beginning of the startups, and is likely to increase during beneficial ownership elsewhere in the issuer’s last fiscal year in excess of five the course of a crowdfunding offering rule.180 Investors in crowdfunding percent of the aggregate amount of conducted concurrently with an offering transactions will benefit from clear capital raised by the issuer in reliance pursuant to Rule 506(c).194 This disclosure about the terms of the on Section 4(a)(6) during the preceding commenter also noted that many early- securities being offered and each other 12-month period, inclusive of the stage startups spend the majority of class of security of the issuer. The final amount the issuer seeks to raise in the their initial funds on consultants.195 rules require disclosure of the number current offering. Another commenter noted that it may be of securities being offered and those (ii) Comments on the Proposed Rules unreasonably costly, relative to the outstanding, whether or not such benefit gained, to accurately count the securities have voting rights, any Identity of the Intermediary. Several number of employees in instances limitations on such voting rights 181 and commenters supported the proposed where businesses engage many contract a description of the restrictions on the requirement that issuers identify the workers, or have workers on transfer of securities.182 Although intermediary through which the offering arrangements such as ‘‘flex-time’’ or Section 4A(b)(1)(H) does not specifically is being conducted.185 Two commenters ‘‘half-time.’’ 196 call for all aspects of this disclosure, we opposed such a requirement as Risk Factors. Commenters were believe that such disclosure is necessary unnecessary.186 divided as to the proposed requirement to provide investors with a more Compensation Paid to the that issuers discuss the material factors complete picture of the issuer’s capital Intermediary. Some commenters that make an investment in the issuer structure than would be obtained solely supported the proposed requirement speculative or risky. A number of pursuant to the statutory requirements. that issuers disclose the amount of commenters supported this proposed This should help investors better compensation paid to the intermediary requirement,197 while a number of evaluate the terms of the offer before for conducting the offering, including others opposed it.198 Some commenters making an investment decision. the amount of any referral or other fees 187 (g) Additional Disclosure Requirements associated with the offering. One 190 See, e.g., ABA Letter; CFA Institute Letter; commenter noted that to the extent Commonwealth of Massachusetts Letter; Jacobson (i) Proposed Rules components of the intermediary’s fee Letter; Schwartz Letter; Wilson Letter. are percentage based, the exact amount 191 See, e.g., Grassi Letter (recommending that We also proposed to require the general risks be disclosed on the intermediaries’ following additional disclosures: 183 of the compensation may not be platforms rather than in each issuer’s offering • Disclosure of the name, SEC file calculable at the onset of an offering.188 statement); Hackers/Founders Letter (noting that number and Central Registration A few commenters recommended that crowdfunding issuers will tend to be smaller and Depository number (‘‘CRD number’’) (as issuers also should disclose all lack the resources of large companies, and intermediaries should be required to provide 184 applicable) of the intermediary payments and fees, if any, they make to examples of risks associated with crowdfunding through which the offering is being the intermediary.189 offerings); Public Startup Letter 2; Startup Valley conducted; Letter (stating that a legend by the issuer about the • disclosure of the amount of 185 See, e.g., Commonwealth of Massachusetts risks of investing in a crowdfunding transaction is Letter; Joinvestor Letter; Schwartz Letter; Wilson not needed because it is the responsibility of the compensation paid to the intermediary intermediary to educate the public about this for conducting the offering, including Letter (recommending that issuers also disclose whether the intermediary specializes in offerings information). based on criteria such as industry size or type). 192 See, e.g., NASAA Letter; Wilson Letter; Zhang 178 Schatz Letter. 186 See Public Startup Letter 2; RocketHub. Letter. 193 179 See Rule 201(m) of Regulation Crowdfunding. 187 See, e.g., ASSOB Letter; Commonwealth of See Schwartz Letter; Wefunder Letter. 180 See Rule 201(c) of Regulation Crowdfunding. Massachusetts Letter; RocketHub Letter; Startup 194 See Wefunder Letter. 181 Id. Valley Letter; Wilson Letter. But see, e.g., Grassi 195 Id. 182 See Rule 501 of Regulation Crowdfunding and Letter (opposing the requirement unless offering 196 See Schwartz Letter. Section II.E.2 for a discussion of restrictions on proceeds will be used to compensate the 197 See, e.g., ASSOB Letter; CFA Institute Letter; resales. intermediary); Public Startup Letter 2; Schwartz Commonwealth of Massachusetts Letter; Consumer 183 Section 4A(b)(1)(I) provides us with discretion Letter. Federation Letter; EMKF Letter; Jacobson Letter; to require crowdfunding issuers to provide 188 See RocketHub Letter. McGladrey Letter; STA Letter; StartupValley Letter; additional information for the protection of 189 See, e.g., ASSOB Letter (recommending Wilson Letter. investors and in the public interest. disclosure of all payments); RocketHub Letter 198 See, e.g., ABA Letter; Campbell R. Letter; Cole 184 The Financial Industry Regulatory Authority, (recommending disclosure of fees paid for A. Letter; Grassi Letter; Hackers/Founders Letter; Inc. (‘‘FINRA’’) issues CRD numbers to registered compliance and overhead to enhance transparency RocketHub Letter (recommending that a generic broker-dealers. for investors). Continued

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recommended that we provide examples the definition of ‘‘immediate family issues with the Environmental of, or develop standard disclosures for, member’’ contained in Item 404 of Protection Agency or Food and Drug issuer risk factor discussions.199 Regulation S–K,207 one commenter Administration; 217 a copy of their Indebtedness. Commenters supported recommended that we use a common articles of incorporation; 218 the extent the proposed requirement that issuers definition for ‘‘immediate family to which they are affected by market describe the material terms of any member’’ in the related-party risk, material contracts, business indebtedness of the issuer.200 Two transactions context and ‘‘member of the backlogs and the names of, and number commenters recommended that we family of the purchaser or the of shares being sold by, existing clarify that this disclosure requirement equivalent’’ in the resale restrictions shareholders; 219 and the credit history could be satisfied if the issuer includes context.208 of the business and the business such disclosure in its financial One commenter supported the owners.220 statements.201 Another recommended proposal to limit the disclosure of As discussed in Section II.B.2 below that we require issuers to disclose the related-party transactions to in connection with ongoing annual identities of their creditors.202 transactions since the beginning of the reports, a number of commenters Prior Exempt Offerings. Commenters issuer’s last fiscal year.209 Other recommended ways to make it easier for supported the proposed requirement commenters recommended that the investors to locate an issuer’s annual that issuers disclose their prior exempt related-party transaction disclosure reports.221 offerings.203 One commenter cover the period for which financial (iii) Final Rules recommended that we require statements are required.210 In addition, additional disclosure to help non- one commenter supported the proposal We are adopting the additional accredited investors understand how to limit disclosure of related-party disclosure requirements as proposed in well aligned their interests are with transactions based on the size of the Rule 201 with several modifications. As earlier accredited investors,204 while offering,211 while a few commenters discussed below, we have added a other commenters suggested scaling suggested alternatives to such requirement to disclose any material back this disclosure in order to contain proposal.212 information necessary in order to make costs.205 Other Disclosures. Several the statements made, in light of the Related-Party Transactions. commenters specifically recommended circumstances under which they were Commenters generally supported our that we not require any additional made, not misleading.222 We also have proposal to require disclosure of certain disclosures.213 One commenter pointed modified the rule to require disclosure related-party transactions between the out that there was no ‘‘catch-all’’ clause of the compensation to be paid to the issuer and any director or officer of the requiring any other material information intermediary so that it could be issuer, any person who is a 20 Percent not specifically enumerated in Rule 201 disclosed either as a dollar amount or Beneficial Owner, any promoter of the of Regulation Crowdfunding.214 percentage of the offering amount or as issuer (if the issuer was incorporated or Other commenters recommended that a good faith estimate if the exact amount organized within the past three years) or we require issuers to disclose general is not available at the time of the immediate family members of the information; 215 executive filing.223 We also have added a foregoing persons.206 Rather than using compensation; 216 zoning issues and requirement to disclose the location on the issuer’s Web site where investors 500-word statement suffice); Schwartz Letter; percent beneficial owners); Commonwealth of will be able to find the issuer’s annual Scruggs Letter. Massachusetts Letter; Grassi Letter (also report and the date by which such 199 See, e.g., Commonwealth of Massachusetts recommending disclosure of transactions between report will be available on the issuer’s the issuer and employees or affiliated entities with Letter; EMKF Letter; Heritage Letter (recommending 224 also that the Commission define ‘‘material’’); common ownership or control); NASAA Letter; Web site. In addition, we have added Jacobson Letter; SBA Office of Advocacy Letter. But RocketHub Letter; Wilson Letter. But see, Public a requirement to disclose whether the see, StartupValley Letter (opposing such a Startup Letter 2; Schwartz Letter. issuer or any of its predecessors recommendation). 207 17 CFR 229.404. previously has failed to comply with the 200 See, e.g., Consumer Federation Letter; ODS 208 See Brown J. Letter. See also, Section II.E.2 for Letter; Schwartz Letter; Wilson Letter. ongoing reporting requirements of a discussion of the restrictions on resales. 225 201 See Grassi Letter; EY Letter. 209 See RocketHub Letter. Regulation Crowdfunding. 202 See ODS Letter. 210 See AICPA Letter; Grassi Letter. We agree with the suggestion by some 203 See, e.g., CFA Institute Letter (recommending 211 See AICPA Letter. commenters that issuers should not be a brief statement about prior capital raising 212 See, e.g., Grassi Letter (recommending required to disclose in multiple places transactions); Commonwealth of Massachusetts disclosure of all related-party transactions not Letter; Grassi Letter; Joinvestor Letter; ODS Letter; the information required to be provided deemed de minimis); NASAA Letter Parsont Letter; RoC Letter (supporting the disclosure covering the past three years); (recommending a lower percentage threshold); contingent payments for services, shareholder and RocketHub Letter (recommending disclosure of RocketHub Letter (recommending a fixed other related-party loans and contingent liabilities); successful prior offerings only); Whitaker Chalk threshold). Grassi Letter (recommending separate amounts for Letter (recommending that the disclosure exclude 213 See, e.g., ABA Letter; Public Startup Letter 2; base salary, bonus and an ‘‘other’’ category for the the target amount of any offerings made in reliance RocketHub Letter; Schwartz Letter. three highest paid individuals and the number and on Section 4(a)(6) and whether such target was 214 See CrowdCheck Letter 1. type of equity instruments granted); NASAA Letter; reached); Wilson Letter. But see, e.g., Heritage 215 See, e.g., ODS Letter; STA Letter; Tiny Cat RFPIA Letter (recommending inclusion of owners’ Letter; Public Startup Letter 2; Schwartz Letter; Letter. Such general information may include the compensation). Wefunder Letter. issuer’s contact information; agent for service; 217 See, e.g., Arctic Island Letter 4. 204 See Parsont Letter. information about the manner in which ownership 218 See, e.g., Hackers/Founders Letter. 205 See, e.g., Grassi Letter (recommending interests will be evidenced; who will be providing 219 See, e.g., CFA Institute Letter. record keeping services; where records of disclosure of only the date, amount raised, type of 220 See, e.g., SBM Letter. securities sold and a link to a Web site where more ownership will be maintained; and/or statements 221 See, e.g., Arctic Island Letter 5; CFA Institute information on such prior offerings can be found); that the issuer may not provide account statements Letter (recommending advance notice as to when Wefunder Letter (recommending disclosure of only and that investors will have the responsibility of and where annual reports will be available); the aggregate capital raised in all prior exempt monitoring their investments, communicating with transactions, as well as the date, terms, valuation the record keeper and updating their information RocketHub Letter. 222 of and types of securities issued in the most recent with the record keeper. See Rule 201(y) of Regulation Crowdfunding. exempt offering). 216 See, e.g., Arctic Island Letter 4; Denlinger 223 See Rule 201(o) of Regulation Crowdfunding. 206 See, e.g., AICPA Letter (recommending Letter 1 (recommending disclosure of deferred 224 See Rule 201(w) of Regulation Crowdfunding. disclosure of transactions between the issuer and 10 compensation, stock options or warrants, 225 See Rule 201(x) of Regulation Crowdfunding.

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to investors.226 As a result, to avoid or to be paid is not available at the time evaluating a crowdfunding transaction duplicative disclosure, an issuer will of the filing, issuers are permitted to because it will give investors a sense of not be required to repeat what is already provide a good faith estimate.233 the size of the issuers using the provided elsewhere in the issuer’s In addition, we are modifying the rule exemption. We expect that the early- disclosure, including the financial text from the proposal to require issuers stage issuers who are likely to use statements.227 Issuers may cross- to disclose any other direct or indirect securities-based crowdfunding will not reference within the offering statement interest in the issuer held by the have many employees, so we do not or report, including to the location of intermediary, or any arrangement for the believe this requirement will be the information in the financial intermediary to acquire such an unreasonably burdensome. statements.228 interest.234 The proposed rules would Risk Factors. We are adopting this Identity of the Intermediary. Despite have prohibited an intermediary from disclosure requirement as proposed.239 the suggestion of one commenter that holding any financial interest in the While some commenters expressed this disclosure is unnecessary,229 we issuers conducting offerings on its concerns about potential expenses or believe requiring an issuer to identify platforms. However, as discussed in confusion associated with risk the name, SEC file number and CRD Section II.C.2.b below, the final rules disclosure,240 we agree with those number (as applicable) of the permit intermediaries to hold such commenters who indicated that intermediary through which the offering interests. We believe that, similar to the disclosure of the material factors that is being conducted should assist amount of compensation paid to the make an investment in the issuer investors and regulators in obtaining intermediary, an intermediary’s speculative or risky is important to help information about the offering and use interests in an issuer and the issuer’s investors understand the risks of of the exemption.230 It also could help transaction could be material to an investing in a specific issuer’s investors obtain background investment decision in the issuer. offering.241 To help investors to better information on the intermediary, for Therefore, we believe that issuers understand these risks, we believe that instance, through filings made by the should disclose such interests to risk factor disclosure should be tailored intermediary with the Commission, as investors. to the issuer’s business and the offering well as through the Financial Industry Legends. We are adopting this and should not repeat the factors 235 Regulatory Authority’s (‘‘FINRA’’) requirement as proposed. The addressed in the required legends.242 BrokerCheck system for broker- requirement for an issuer to include in For similar reasons, we are not dealers 231 or a similar system, if the offering statement specified legends providing examples of, or developing created, for funding portals. about the risks of investing in a standard disclosure for, issuer risk Compensation Paid to the crowdfunding transaction is intended to factor discussions, as we believe issuers Intermediary. Requiring an issuer to help investors understand the general will be in the best positions to articulate disclose the amount of compensation risks of investing in a crowdfunding the risks associated with their business paid to the intermediary for conducting transaction. We continue to believe, and offerings in light of their particular the offering, including the amount of despite the suggestions of some facts and circumstances. 236 any referral or other fees associated with commenters, that requiring legends Indebtedness. Consistent with the the offering, will permit investors and in each issuer’s offering statement, proposal, we are adopting the regulators to determine how much of regardless of any general warnings requirement to provide a description of the proceeds of the offering is used to available on an intermediary’s platform, the material terms of any indebtedness compensate the intermediary. Based on will provide additional investor 243 232 of the issuer. We believe disclosure of a comment received, we understand protection with minimal costs. For the material terms of any indebtedness that in some instances the exact amount example, the requirement that an issuer of the issuer, including, among other of compensation and fees to be paid to include in the offering statement certain items, the amount, interest rate and the intermediary will not be known at legends about the required ongoing maturity date of the indebtedness, is the time the Form C is filed, and we reports, including how those reports important to investors because servicing have modified the rule from the will be made available to investors and debt could place additional pressures on proposal to address this issue. how an issuer may terminate its ongoing an issuer in the early stages of Consistent with this understanding, and reporting obligations, will help development. We expect that for many to avoid suggesting that only amounts investors understand an issuer’s issuers this information will be certain and paid to date must be ongoing reporting obligations and how included in the financial statements, disclosed, the final rules require they will be able to access those reports. which will satisfy this reporting Current Number of Employees. disclosure of all compensation paid or requirement.244 to be paid to the intermediary for Consistent with the proposal and the conducting the offering, which may be recommendation of several While one commenter recommended disclosed as a dollar amount or as a commenters,237 the final rules require that we require issuers to disclose the percentage of the offering amount. If the disclosure of the current number of exact amount of the compensation paid employees.238 We believe this 239 See Rule 201(f) of Regulation Crowdfunding. disclosure is important to investors in 240 See, e.g., Campbell R. Letter; Cole A. Letter; Grassi Letter; Hackers/Founders Letter; RocketHub 226 See, e.g., EY Letter (noting that certain Letter; Schwartz Letter; Scruggs Letter. required disclosure would be included in an 233 See Rule 201(o)(1) of Regulation 241 See, e.g., ASSOB Letter; CFA Institute Letter; issuer’s financial statements); Grassi Letter (same). Crowdfunding. Commonwealth of Massachusetts Letter; Consumer 227 See Instruction to Item 201 of Regulation 234 See Rule 201(o)(2) of Regulation Federation Letter; EMKF Letter; Jacobson Letter; Crowdfunding. Crowdfunding. McGladrey Letter; STA Letter; StartupValley Letter; 228 Id. 235 See Item 2 of General Instruction III to Form Wilson Letter. 229 See RocketHub Letter. C. 242 See Item 2 of General Instruction III to Form 230 See Rule 201(n) of Regulation Crowdfunding. 236 See, e.g., Grassi Letter; Hackers/Founders C. 231 See FINRA, FINRA BrokerCheck, available at Letter; Public Startup Letter 2; Startup Valley Letter. 243 See Rule 201(p) of Regulation Crowdfunding. http://www.finra.org/Investors/ToolsCalculators/ 237 See, e.g., NASAA Letter; Wilson Letter; Zhang 244 See Instruction to Rule 201 of Regulation BrokerCheck/P015175. Letter. Crowdfunding; Items 1 and 3 of General Instruction 232 See RocketHub Letter. 238 See Rule 201(e) of Regulation Crowdfunding. III to Form C.

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identities of their creditors,245 we do not of Rule 201(r), a transaction includes, percent, we believe this threshold believe, as a general matter, that such but is not limited to, any financial appropriately takes into consideration disclosure would provide meaningful transaction, arrangement or relationship the need to provide investors with information to investors. Accordingly, (including any indebtedness or relevant information about the issuer’s under the final rules, such disclosure is guarantee of indebtedness) or any series activities involving related parties required only to the extent the creditor’s of similar transactions, arrangements or during this crucial early stage of identity is a material aspect of the relationships.251 This instruction is development. indebtedness.246 consistent with Item 404 of Regulation As suggested by one commenter,257 in Prior Exempt Offerings. Consistent S–K.252 a change from the proposal, we are with the proposal and with commenters’ Given the early stage of development adopting a definition for ‘‘member of the recommendations, we are requiring of the small businesses and startups that family’’ in the related-party transactions issuers to provide disclosure about the we expect will seek to raise capital context that is consistent with the exempt offerings that they conducted pursuant to Section 4(a)(6), as well as definition of ‘‘member of the family of within the past three years.247 For each the investment limits prescribed by the the purchaser or the equivalent’’ in the exempt offering within the past three rules, we believe that limiting the resale restrictions context.258 The final years, issuers must describe the date of disclosure of related-party transactions rule defines ‘‘member of the family’’ as the offering, the offering exemption to transactions occurring since the a ‘‘child, stepchild, grandchild, parent, relied upon, the type of securities beginning of the issuer’s last fiscal year, stepparent, grandparent, spouse or offered and the amount of securities as proposed, will help to limit spousal equivalent, sibling, mother-in- sold and the use of proceeds.248 We compliance costs for issuers while still law, father-in-law, son-in-law, daughter- believe that information about prior providing investors with sufficient in-law, brother-in-law, or sister-in-law, offerings will better inform investors information to evaluate the relationship [including] adoptive relationships’’ of about the capital structure of the issuer between related parties and the any of the persons identified in Rules and will provide information about how issuer.253 In addition, we are requiring 201(r)(1), (r)(2) or (r)(3).259 This prior offerings were valued. issuers to disclose only related-party definition tracks the definition of Related-Party Transactions. We are transactions that, in the aggregate, are in ‘‘immediate family’’ in Exchange Act adopting this disclosure requirement excess of five percent of the aggregate Rule 16a–1(e),260 but with the addition 249 substantially as proposed. Related- amount of capital raised by the issuer in of ‘‘spousal equivalent,’’ which the final party transactions create potential reliance on Section 4(a)(6) during the rule defines to mean ‘‘a cohabitant conflicts of interest that may result in preceding 12-month period, inclusive of occupying a relationship generally actions that benefit the related parties at the amount the issuer seeks to raise in equivalent to that of a spouse.’’ 261 We the expense of the issuer or the the current offering under Section believe a common definition of investors. After considering the 4(a)(6). We also have added an ‘‘member of the family’’ that is comments received, we continue to instruction to clarify that any series of consistent with our disclosure rules in believe the related-party transactions similar transactions, arrangements or other contexts 262 will provide certainty disclosure will assist investors in relationships should be aggregated for for issuers in identifying the persons obtaining a more complete picture of the purposes of determining whether covered by the rule. financial relationships between certain related-party transactions should be Other Disclosures. We are adopting 254 related parties and the issuer and disclosed. For example, an issuer this provision as proposed but with the provide additional insight as to seeking to raise $1 million will be addition of three issuer disclosure potential uses of the issuer’s resources, required to disclose related-party requirements in response to comments including the proceeds of the offering. transactions that, in the aggregate, are in received. The final rule differs from the proposal excess of $50,000, which is the same The first is a requirement that an in that an issuer is required to disclose dollar threshold required in Form 1– issuer disclose the location on its Web 255 transactions with any person who is, as A for offerings of any size made site where investors will be able to find 256 of the most recent practicable date but pursuant to Tier 1 of Regulation A, the issuer’s annual report and the date no earlier than 120 days prior to the and an issuer that raises $250,000 will by which such report will be available date the offering statement or report is be required to disclose such transactions on its Web site.263 We believe this filed, the beneficial owner of 20 percent in excess of $12,500. We believe that, in requirement addresses the concern or more of the issuer’s outstanding light of the sizes and varieties of issuers expressed by commenters that investors voting equity securities. Limiting the that may make offerings in reliance on may not know where to find an issuer’s relevant period to 120 days prior to the Section 4(a)(6), this approach could annual report. We do not believe date of the offering statement or report mitigate the potential for the physical delivery of the annual report is is consistent with the treatment of requirement to be disproportionate to necessary due to the electronic nature of beneficial ownership elsewhere in the size of certain offerings and issuers. the crowdfunding marketplace, nor do Regulation Crowdfunding.250 We also While one commenter suggested we use we believe that email delivery of the believe this limitation and the a percentage threshold less than five consistency it provides will help limit annual report is practical because the 251 See Instruction 2 to Rule 201(r) of Regulation compliance costs for issuers. 257 The final rule also includes an Crowdfunding. See Brown J. Letter. 258 See Rule 501(a) of Regulation Crowdfunding; instruction to clarify that, for purposes 252 See Instruction 2 to Item 404(a) of Regulation S–K [17 CFR 229.404(a)]. 259 See Rule 201(r)(4) of Regulation 253 We note, however, that financial statements Crowdfunding. 245 See ODS Letter. covering the two most recently completed fiscal 260 17 CFR 240.16a–1(e). 246 See Rule 201(y) of Regulation Crowdfunding. years will include disclosure of related-party 261 See Rule 201(r)(4) of Regulation 247 See Rule 201(q) of Regulation Crowdfunding. transactions, as required by U.S. GAAP, for each of Crowdfunding. 248 See Instruction to paragraph (q) of Rule 201 of the years presented. 262 See, e.g., Exchange Act Rule 16a–1(e). Regulation Crowdfunding. 254 See Instruction 1 to Rule 201(r) of Regulation 263 See Rule 201(w) of Regulation Crowdfunding. 249 See Rule 201(r) of Regulation Crowdfunding. Crowdfunding. See also, Section II.B.2 for a discussion of the 250 See, e.g., Rules 201(c) and 201(m) of 255 17 CFR 239.900 requirement on issuers to post their annual reports Regulation Crowdfunding. 256 17 CFR 230.251 through 230.263 on their Web sites.

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issuer may not have access to email requirements based on aggregate target financial condition. In addition, another addresses of its investors. Instead, we offering amounts of the offering and all instruction clarifies that references to are requiring issuers to disclose this other offerings made in reliance on the issuer in Rule 201(s) refer to the information in the offering statement, Section 4(a)(6) within the preceding 12- issuer and its predecessors, if any.273 which will assist investors in locating month period. We expect that the discussion required by the final rule and the information while limiting the (a) Financial Condition Discussion compliance costs for issuers. instructions will inform investors about The second additional disclosure (i) Proposed Rules the financial condition and results of requirement, as suggested by a Consistent with Section 4A(b)(1)(D), operations of the issuer by providing commenter,264 is a requirement that the we proposed in Rule 201(s) of management’s perspective on the disclosure include any material Regulation Crowdfunding to require an issuer’s operations and financial results, information necessary in order to make issuer to provide a narrative discussion including information about the issuer’s the statements made, in light of the of its financial condition. liquidity and capital resources and any circumstances under which they were known trends or uncertainties that made, not misleading.265 This provision (ii) Comments on the Proposed Rules could materially affect the company’s should help ensure that investors have Commenters generally supported the results. Because issuers seeking to all of the material information they need proposed requirement that issuers engage in crowdfunding transactions on which to base their investment provide a narrative discussion of their will likely be smaller, less complex and decisions. financial condition.268 One commenter at an earlier stage of development than The third additional requirement, expressed concern that the requirement issuers conducting registered offerings similar to suggestions from some could be challenging for issuers at an or Exchange Act reporting companies, commenters,266 requires the issuer to early stage of development and result in we expect that the discussion generally disclose whether it or any of its duplicative disclosure.269 The same will not, contrary to the concern of at predecessors previously failed to commenter suggested that issuers be least one commenter,274 need to be as comply with the ongoing reporting encouraged, rather than mandated, to lengthy or detailed as the management’s requirements of Regulation discuss material historical operating discussion and analysis of financial Crowdfunding.267 While we continue to results.270 condition and results of operations of believe, and the final rules provide, that those issuers. Accordingly, we are not (iii) Final Rules only those issuers that have failed to file prescribing a specific content or format their two most recent annual reports We are adopting this requirement as for this information, but instead set should be prohibited from relying on proposed, with a few technical forth general principles for making this the exemption available under Section modifications.271 Rule 201(s) clarifies disclosure.275 The discussion should 4A(6), we also believe that any history that the description must include, to the address, to the extent material, the of non-compliance with ongoing extent material, a discussion of issuer’s historical results of operations reporting obligations would provide liquidity, capital resources and in addition to its liquidity and capital important information to investors historical results of operations. Rule resources. If an issuer does not have a about the issuer. 201(s) also includes an instruction prior operating history, the discussion Although we appreciate that noting that issuers will be required to should focus on financial milestones commenters made various suggestions include a discussion of each period for and operational, liquidity and other for additional issuer disclosure which financial statements are provided challenges. If an issuer has a prior requirements, such as those relating to and a discussion of any material operating history, the discussion should executive compensation, market risk changes or trends known to focus on whether historical earnings and material contracts, we are not management in the financial condition and cash flows are representative of mandating further disclosures. In and results of operations of the issuer what investors should expect in the adopting issuer requirements for subsequent to the period for which future. An issuer’s discussion of its Regulation Crowdfunding, we have been financial statements are provided.272 In financial condition should take into mindful of the limited resources and connection with this instruction, an account the proceeds of the offering and start-up operations of issuers likely to issuer will need to consider whether any other known or pending sources of use security-based crowdfunding and more recent financial information is capital. Issuers also should discuss how have sought to consider the need to necessary to make the disclosure in the the proceeds from the offering will provide investors with relevant offering document not misleading. The affect their liquidity, whether these information to make an informed instruction in final Rule 201(s) was funds and any other additional funds investment decision while limiting the included in proposed Rule 201(t) as an are necessary to the viability of the compliance costs for issuers. We believe instruction to the financial statement business and how quickly the issuer the issuer disclosure requirements we requirements, but we have moved this anticipates using its available cash. In are adopting along with other instruction to Rule 201(s) because it addition, issuers should describe the protections, such as investment limits, elicits narrative disclosure that we other available sources of capital to the achieve this goal. believe is more appropriately presented business, such as lines of credit or as part of the discussion of the issuer’s (2) Financial Disclosure required contributions by principal shareholders. To the extent these items Section 4A(b)(1)(D) requires ‘‘a 268 See, e.g., ABA Letter; CFA Institute Letter; of disclosure overlap with the issuer’s description of the financial condition of CFIRA Letter 5; Commonwealth of Massachusetts discussion of its business or business the issuer.’’ It also establishes a Letter; Grassi Letter; Jacobson Letter; Joinvestor Letter; Saunders Letter. But see, e.g., EY Letter; plan, issuers are not required to make framework of tiered financial disclosure Public Startup Letter 2; RocketHub Letter. 269 See EY Letter. 273 See Instruction 4 to Rule 201(s) of Regulation 264 See CrowdCheck Letter 1. 270 Id. Crowdfunding. 265 See Rule 201(y) of Regulation Crowdfunding. 271 See Rule 201(s) of Regulation Crowdfunding. 274 See EY Letter. 266 See Grassi Letter; RocketHub Letter. 272 See Instruction 1 to Rule 201(s) of Regulation 275 See Instructions 1 and 2 to Rule 201(s) of 267 See Rule 201(x) of Regulation Crowdfunding. Crowdfunding. Regulation Crowdfunding.

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duplicate disclosures.276 While we are independence rules, which are set forth generally supported allowing issuers to not mandating a specific presentation, in Rule 2–01 of Regulation S–X.277 voluntarily provide financial statements we expect issuers to present the • Periods Covered in the Financial that meet the requirements for a higher required disclosures, including any Statements. The financial statements aggregate target offering amount.279 other information that is material to an would be required to cover the shorter Offerings of $100,000 or less. In investor, in a clear and understandable of the two most recently completed general, commenters supported manner. fiscal years or the period since inception requiring issuers to provide financial of the business. statements certified by the principal (b) Financial Disclosures • Age of Financial Statements. executive officer to be true and (i) Proposed Rules During the first 120 days of the issuer’s complete in all material respects.280 fiscal year, an issuer would be able to Further, several recommended that all Proposed Rule 201(t) of Regulation conduct an offering in reliance on issuers relying on the Section 4(a)(6) Crowdfunding would have established Section 4(a)(6) and the related rules exemption be required to provide such financial statement disclosure using financial statements for the fiscal certification.281 requirements that are based on aggregate year prior to the most recently Commenters were divided on the target offering amounts within the completed fiscal year if the financial requirement that issuers offering preceding 12-month period: $100,000 or less file and provide to • statements for the most recently Issuers offering $100,000 or less completed fiscal year are not otherwise investors their federal income tax would be required to file with the available or required to be filed. returns. Supporters of the tax return Commission and provide to investors • Review and Audit Standards. requirement noted that income tax and the relevant intermediary income Reviewed financial statements would be returns would be a source of credible tax returns filed by the issuer for the required to be reviewed in accordance information for investors that should be most recently completed year (if any) with the Statements on Standards for readily available without requiring and financial statements that are Accounting and Review Services issuers to bear significant additional certified by the principal executive (‘‘SSARS’’) issued by the American preparation expenses.282 On the other officer to be true and complete in all Institute of Certified Public Accountants hand, opponents of the tax return material respects; (‘‘AICPA’’). Audited financial requirement raised concerns about 283 • issuers offering more than $100,000, statements would be required to be privacy, identity theft and tax 284 but not more than $500,000, would be audited in accordance with the auditing fraud. One commenter expressed required to file with the Commission standards issued by either the AICPA or concern that small issuers may not be and provide to investors and the the Public Company Accounting adequately prepared to consider the relevant intermediary financial Oversight Board (‘‘PCAOB’’). patchwork of state and federal privacy statements reviewed by a public • Review and Audit Reports. Issuers laws that might apply to the disclosure 285 accountant that is independent of the would be required to file with the of tax returns. issuer; and Commission and provide to investors Several commenters suggested • issuers offering more than $500,000 and the relevant intermediary a copy of approaches to allow access by investors to the information available from a tax would be required to file with the the public accountant’s review or audit 286 Commission and provide to investors report. An issuer that received an return, including permitting issuers and the relevant intermediary financial adverse opinion or disclaimer of to digitally submit the data from their statements audited by a public opinion in its audit report would not be a limited review engagement on the use of proceeds accountant that is independent of the in compliance with the audited after the raise); Zhang Letter. issuer. financial statement requirements. 279 See, e.g., AICPA Letter; Denlinger Letter 1; Under proposed Rule 201(t), issuers • Exemptions from the Financial Grassi Letter; Heritage Letter; RocketHub Letter; would be permitted to voluntarily Statement Requirements. The proposed Wilson Letter. But see Public Startup Letter 2. 280 provide financial statements that meet rules would not exempt any issuers See, e.g., AICPA Letter; Zeman Letter. 281 See, e.g., AICPA Letter; Denlinger Letter 1; the requirements for a higher aggregate from the financial statement Grassi Letter; Jacobson Letter. But see Public target offering amount. requirements. Startup Letter 2. The proposed rules also would have 282 See, e.g., Angel Letter 1 (‘‘tax returns are even (ii) Comments on the Proposed Rules more credible than audited financial statements, as set forth the following requirements for companies are highly unlikely to exaggerate the financial statements: Commenters were divided on the proposed financial statement profitability to the IRS.’’); Fund Democracy Letter; • Basis of Accounting. All issuers NPCM Letter; Zeman Letter (‘‘the small risk for requirements,278 although commenters would be required to file with the these investors does not meet the consideration of audited financial statements.’’). Commission and provide to investors 277 17 CFR 210.2–01. 283 See, e.g., AICPA Letter (disclosing an issuer’s and the relevant intermediary a 278 For an example of those who generally tax return ‘‘. . . has the potential to cause serious complete set of their financial supported the proposed financial disclosure problems. Tax returns are intended to be statements (balance sheets, income requirements, see, e.g., ABA Letter (recommending confidential and should remain so.’’); Public statements, statements of cash flows and some modifications); CFA Institute Letter; Startup Letter 2; RocketHub Letter; SBM Letter; Commonwealth of Massachusetts Letter; Consumer Wilson Letter (personal income tax information statements of changes in owners’ Federation Letter (the financial information is should be on a voluntary basis only); Zhang Letter. equity), prepared in accordance with critical to an informed evaluation of the investment 284 See AICPA Letter. U.S. generally accepted accounting opportunity); Denlinger Letter 1; Funderbuddies 285 See AICPA Letter. principles (‘‘U.S. GAAP’’). Letter; NASAA Letter. 286 See, e.g., Arctic Island Letter 5 (recommending • For an example of those who generally opposed, that only the two primary pages and not the Public Accountant Requirements. see, e.g., AEO Letter; Joinvestor Letter schedules be made public); CrowdBouncer Letter To qualify as independent of the issuer, (recommending that only issuer-generated (recommending the Commission allow issuers to a public accountant would be required documents produced in good faith be required); disclose electronic transcripts of filed tax returns to to comply with the Commission’s Marsala Letter; RocketHub (stating that investors through the intermediary platforms); ‘‘requirements are excessive in cost and misguided NPCM (expressing concern that unless tax returns in intent’’); Traklight Letter (recommending that are filed as a PDF stamped by the IRS, there is no 276 See Instruction to Rule 201 of Regulation instead of pre-raise and ongoing financial statement way to know if the posted document is a true Crowdfunding. reviews or audits, issuers only be required to have reflection of the tax return); RocketHub Letter.

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tax return in a standardized format.287 offering amount for issuers that provide and others recommended that we Supporters of digital submission this level of financial information.297 consider additional criteria for suggested that approach would provide Offerings of more than $100,000 but determining when an issuer would be a standardized format and protect not more than $500,000. Some required to provide audited financial issuers from accidental disclosure of commenters supported the requirement statements.304 A number of commenters confidential information. Commenters in the proposed rules that offerings of opposed the proposed $500,000 generally supported the proposal to more than $100,000 but not more than threshold as being too low,305 and a require issuers to redact personally $500,000 include financial statements number recommended alternative identifiable information from their tax reviewed by an independent public thresholds.306 A number of commenters returns,288 although some requested accountant,298 while other commenters stated that funding the upfront cost of clarifications.289 opposed such requirement.299 A number an audit would be particularly difficult Two commenters recommended that of commenters recommended a different for issuers raising capital for the first the timing of financial statement range of offering amounts or methods time.307 disclosures correspond to any extended for determining when an issuer is tax filing deadlines,290 while two other required to file and provide reviewed Letter (for issuers less than two years old); Woods financial statements.300 Letter. commenters opposed such 304 291 See, e.g., Angel Letter 1 (only if such financial application. Further, a few Offerings of more than $500,000. We statements are available); Arctic Island Letter 5 commenters supported the proposal to received extensive comments on our (only apply to issuers that have greater than $15 permit an issuer that has not yet filed its proposal that issuers offering more than million in revenue); EY Letter (only if issuer has tax return for the most recently $500,000 be required to file with the raised $5 million in equity securities in crowdfunding transactions unless audited financial completed fiscal year to use the tax Commission and provide to investors statements are otherwise available); McGladrey return filed for the prior year and and the relevant intermediary financial Letter (eliminate the audit requirements until the update the information after filing the statements audited by an independent issuer meets certain revenue and operational tax return for the most recently public accountant. A significant number thresholds); Reed Letter (if an audit is required, the requirement only apply to issuers that reach a 292 completed fiscal year. One of those commenters opposed the certain size in investment or investors); RocketHub commenter recommended that at least proposed requirement,301 although Letter ($5 million offering amount and the issuer one tax return be available,293 and some commenters expressed support.302 has been in operation for more than two years). But another recommended that the Some commenters recommended the see AICPA Letter (additional criteria would add 303 complexity without any additional benefit). Commission provide guidance for elimination of the audit requirement, 305 See, e.g., ABA Letter; CCA Letter; CFIRA issuers who have not filed a U.S. tax Letter 5; CfPA Letter; CrowdFundConnect Letter; return.294 One commenter supported 297 See, e.g., Hackers/Founders Letter ($500,000); EarlyShares Letter; EMKF Letter; EY Letter; requiring issuers to describe any Kickstarter Coaching Letter ($250,000); RocketHub FundHub Letter 1; Generation Enterprise Letter; Letter ($500,000); Zeman Letter (recommending that Grassi Letter; Graves Letter; Guzik Letter 1; material changes that are expected in offerings under $500,000 require two years of tax Kickstarter Coaching Letter; Milken Institute Letter; the tax returns for the most recently returns and unaudited balance sheets). NFIB Letter; PBA Letter; RocketHub Letter; SBA completed fiscal year,295 while another 298 See, e.g., Denlinger Letter 1; Leverage PR Office of Advocacy Letter; SBM Letter; Seyfarth Letter (stating that the industry will evolve to Letter; WealthForge Letter; Wefunder Letter; Woods recommended that such disclosure be Letter. But see AICPA Letter; Denlinger Letter 1; 296 provide lower cost reviews); StartEngine Letter 1 permitted, but not required. (stating that the industry will evolve to provide Fund Democracy Letter; Zeman Letter. A number of commenters lower cost reviews, such as in the $1,500–$10,000 306 See, e.g., ABA Letter ($750,000); EarlyShares recommended raising the maximum range for smaller, newer companies). Letter ($1 million); EMKF Letter ($800,000); EY 299 See, e.g., Angel Letter 1 (recommending Letter ($5 million, unless audited financial statements are otherwise available); Grassi Letter 287 requiring audited financial statements if they are See, e.g., RocketHub Letter (suggesting digital ($700,000); Graves Letter ($900,000); Guzik Letter 1 submission ‘‘will protect the issuers from accidental available and tax returns if they are not); Arctic Island Letter 5 (recommending only for issuers that ($700,000); Kickstarter Coaching Letter ($1 million); disclosure of confidential information, and will PBA Letter ($1 million); RocketHub Letter ($5 allow investors to view the information in a have greater than $15 million in annual revenue); Johnston Letter; McGladrey Letter (recommending million and the issuer has been in operation for structured and consistent manner. For example, if more than two years); Seyfarth Letter ($1 million); each issuer were to upload their version of a only after the issuer meets certain revenue and operational thresholds); NACVA Letter; Public WealthForge Letter ($1 million). financial statement, the responsibility of learning to 307 See, e.g., AEO Letter (expressing concern that understand each format would fall to the investor. Startup Letter 2; Zeman Letter. 300 See, e.g., ABA Letter; CIFRA Letter 5 (noting start-up businesses with no revenue to date, and Standardized formats for financial projections, raising capital for the first time, would find it financial statements, and business plans will allow the financial disclosure standards of the SBA’s Section 8(a) program require reviewed financial difficult or impossible to fund the cost of an audit); investors to quickly compare issuances and more AWBC Letter; CFIRA Letter 5 (stating that the readily evaluate investment opportunities.’’); Zhang statements for companies with gross annual receipts for $2 million to $10 million); Grassi Letter proposed level of financial disclosure for capital Letter. raises over $500,000 would be an impediment for 288 See, e.g., ABA Letter; AICPA Letter; Fund ($300,000 to $700,000); Kickstarter Coaching Letter ($250,000 to $1 million). small business when many will have limited Democracy Letter; Whitaker Chalk Letter. financial resources to absorb the expense prior to 301 See, e.g., AEO Letter; Angel Letter 1; AWBC 289 See, e.g., ABA Letter (recommending the raising capital using crowdfunding); CfPA Letter Commission provide a non-exhaustive list of the Letter; CFIRA Letter 5; CfPA Letter; (suggesting the Commission determine an alternate specific types of information that may be redacted); CrowdFundConnect Letter; EarlyShares Letter; audit threshold because ‘‘the costs of an audit must AICPA Letter (recommending that if the tax return EMKF Letter; EY Letter; Finkelstein Letter; necessarily be incurred prior to an offering, and in requirement is adopted, the Commission define FundHub Letter 1; Generation Enterprise Letter; the numerous expected cases of unsuccessful ‘‘personally identifiable information’’ and clarify Fryer Letter; Grassi Letter; Graves Letter; Guzik offerings, would lead to substantial net losses to the that the redaction includes third-party information). Letter 1; Hakanson Letter; Holland Letter; Johnston businesses that Crowdfunding is supposed to Letter; Kickstarter Coaching Letter; McGladrey 290 See EY Letter; Grassi Letter. help’’); EMKF Letter (stating that many of the Letter; Milken Institute Letter; NACVA Letter; NFIB 291 issuers looking to raise capital through See, e.g., ASSOB Letter (recommending that Letter; NPCM Letter; NSBA Letter; PBA Letter; Reed issuers should provide their tax accounts within crowdfunding will be startups with little or no Letter; RocketHub Letter; Saunders Letter; SBA revenue to afford audited financial statements); three months of the end of the reporting period); Office of Advocacy Letter; SBEC Letter; SBM Letter; Fund Democracy Letter. Generation Enterprise Letter; Grassi Letter; Graves Seyfarth Letter; WealthForge Letter; Wefunder Letter; Holland Letter; McGladrey Letter; NSBA 292 See, e.g., Grassi Letter; RocketHub Letter. Letter; Woods Letter; Zeman Letter. Letter; Reed Letter (noting that few start-ups could 293 See Fund Democracy Letter. 302 See, e.g., AICPA Letter; Consumer Federation afford auditing fees); RocketHub Letter (stating that 294 See AICPA Letter. Letter; CSTTC Letter; Denlinger Letter 2; the filing and audit requirements establish an 295 See Grassi Letter. FundDemocracy Letter; Leverage PR; NASAA upfront cost that is too high for small businesses to 296 See RocketHub Letter (also recommending that Letter; StartEngine Letter 1. accept); SBM Letter (noting that many startups do the Commission define what qualifies as a material 303 See, e.g., CrowdFundConnect Letter; FundHub not have the resources to obtain audited financials); change). Letter 1; Johnston Letter; SBEC Letter; StartupValley Continued

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We received a number of comments requiring U.S. GAAP noted the benefit A few commenters recommended that expressing concern about the to investors of having a single standard issuers relying on Section 4(a)(6) be anticipated costs associated with to facilitate comparison of different permitted to take advantage of the audited financial statements.308 Other issuers,311 and also that U.S. GAAP extended transition period applicable to commenters noted that costs would be would be more likely to provide private companies for complying with lower than those estimated in the investors with a fair representation of an new or revised accounting standards.315 Proposing Release or in other comment issuer’s financial position and results of A few commenters expressed concern letters.309 operations than financial statements that Section 4(a)(6) issuers may be Basis of Accounting. Commenters using a comprehensive basis of viewed as ‘‘public business entities’’ by generally were divided on whether accounting other than U.S. GAAP.312 FASB.316 One commenter issuers relying on Section 4(a)(6) should A number of commenters recommended that the Commission be required to prepare financial recommended that, as a less expensive provide an exemption from this statements in accordance with U.S. alternative to requiring U.S. GAAP, the definition for such issuers.317 GAAP.310 Commenters in support of Commission allow financial statements Periods Covered in the Financial prepared in accordance with a Statements. While two commenters Seyfarth Letter (stating that the audit requirement comprehensive basis of accounting generally supported requiring two years will deny access to issuers who do not have the other than U.S. GAAP.313 Other 318 necessary upfront capital); WealthForge Letter; of financial statements, a number of Wefunder Letter. commenters recommended that if commenters generally opposed the 308 See, e.g., AEO Letter; CfPA Letter; CFIRA financial statements prepared in proposal, recommending one year of Letter 5; CrowdCheck Letter 4; ErrandRunner Letter; accordance with U.S. GAAP are financial statements instead.319 Many Finkelstein Letter; FundHub Letter 1 (stating that required, they only be required in commenters opposed requiring interim the difference in cost for reviewed versus audited 314 financial statements could easily run into tens of certain circumstances. financial statements,320 while several thousands of dollars); Graves Letter (stating that a supported such a requirement.321 partner from a leading accounting firm predicted financial statements do not outweigh the burdens Several commenters recommended that the cost to small businesses of providing audited that mandatory application of GAAP would financial statements could be upwards of $18,000 impose); CrowdCheck Letter 4; EarlyShares Letter; if interim financial statements are to $25,000); Grassi Letter (stating that audits take Graves Letter (recommending that U.S. GAAP only required, they not be subject to audit or more time than companies seeking capital may be required for issuers with $5 million in revenue); review,322 while another commenter have); NFIB Letter; RocketHub Letter; SBA Office of Milken Institute Letter (recommending that U.S. recommended that they not be filed Advocacy Letter; SBEC Letter; SBM Letter; Seyfarth GAAP only be required for issuers with $5 million Letter; StartupValley Letter (stating that audits for in revenue, the threshold at which the IRS requires with the Commission, but only be small startups with no financials can cost $10,000 a switch to accrual accounting); Public Startup provided to investors.323 and that GAAP audits typically cost 25–50% more Letter 2; SBEC Letter (noting the AICPA’s release of Age of Financial Statements. Several than other comprehensive basis of accounting new guidelines in June 2013 for small and mid-size commenters opposed our proposal that audits); Stephenson Letter; Traklight Letter (stating businesses); Tiny Cat Letter; U.S. Chamber of that audit costs have been cited as low as $5,000 Commerce Letter; Wilson Letter (recommending financial statements be dated within 120 and as high as $20,000 for a startup; also stating that that the Commission consider the stage of the days of the start of the offering,324 while review costs are estimated at about 60% of the cost business in determining whether to require one commenter supported it.325 Some of an audit); WealthForge Letter. compliance with U.S. GAAP); Zhang Letter. 309 commenters opposed our proposal to See, e.g., CCA Letter (analyzing regulatory 311 See, e.g., NASAA Letter. costs borne by Title II issuers); CrowdFranchise permit an issuer, during the first 120 312 See, e.g., EY Letter. Letter 1; CrowdFunding Network (stating that 313 See, e.g., ABA Letter (for offerings of $100,000 days of the issuer’s fiscal year, to projected costs are already decreasing through conduct an offering in reliance on market forces); D’Amore Letter; ddbmckennon or less, but stating that the Commission could Letter (noting that the majority of issuers will be require providing U.S. GAAP financial statements Section 4(a)(6) using financial newly formed with limited historical operations if available); AICPA Letter; CFIRA Letter 5; CFIRA statements for the fiscal year prior to the and that an audit for such companies may range Letter 7; CrowdCheck Letter 4; EarlyShares Letter; from $4,000–$9,000 in year one); Denlinger Letter EY Letter (for offerings of $100,000 or less, unless 315 1 (citing a study that found that about half of the U.S. GAAP financial statements are available); See, e.g., EY Letter; U.S. Chamber of cost of an audit is made up for in interest rate Grassi Letter; Graves Letter (for issuers with less Commerce Letter. savings on bank loans); Denlinger Letter 2 (the than $5 million in revenue); Mahurin Letter (stating 316 See, e.g., ABA Letter; EY Letter (noting also market will evolve for small issuers such that audit that simple Excel spreadsheets accompanied by the definition of ‘‘public entity’’ under the costs may be in the range of $2,000–$4,000); bank records should meet the financial statement Accounting Standards Codification). FundHub Letter 2 (noting the emergence of CPA requirements); Milken Institute Letter (for early- 317 See EY Letter. firms willing to do a complete audit for a startup stage issuers); NFIB Letter; SBEC Letter; 318 See ASSOB Letter; Zeman Letter. business for $2,500 or less); Holm Letter (stating StartupValley Letter; Tiny Cat Letter (for offerings 319 See, e.g., Denlinger Letter 1; EY Letter; Grassi that new providers are offering compliance services of less than $500,000); Whitaker Chalk Letter (for Letter; Joinvestor Letter; Public Startup Letter 2; at much lower costs than anticipated); JumperCard offerings of less than $500,000 if the issuer has an RFPIA Letter (as it relates to audited financial Letter; Kemp Letter; Leverage PR Letter; asset or income level below a certain level). statements); RocketHub Letter; Verrill Dana Letter. 314 Sfinarolakis Letter; StartEngine Letter 1 (noting that See, e.g., ABA Letter (suggesting that: (i) In 320 See, e.g., CFIRA Letter 7; EMKF Letter; EY reviews and audits will be in the range of $1,500– offerings of $100,000 or less, the certifying principal Letter; FundHub Letter 1; Grassi Letter; Public $10,000 for smaller, newer companies); StartEngine executive officer could be required to represent that Startup Letter 2; RocketHub Letter; Traklight Letter; Letter 2 (noting the emergence of third-party service the issuer is unable to prepare financial statements Wefunder Letter; Whitaker Chalk Letter. providers); tempCFO Letter; Upchurch Letter in accordance with U.S. GAAP without 321 See, e.g., AICPA Letter; Consumer Federation (stating that the market will adjust for costs). unreasonable effort or expense; (ii) in offerings of Letter (recommending supplementing the proposed 310 For supporters, see, e.g., AICPA Letter (for more than $100,000, but not more than $500,000, financial statement requirements with unaudited offerings over $100,000); CFA Institute Letter; EY the exception could also require the principal CEO-certified financial statements through the end Letter (for offerings over $100,000 for only the most executive officer representation and be limited to of the month ending no more than two months recent year); Hackers/Founders Letter; Heritage issuers that have not prepared U.S. GAAP- before the offering begins); Denlinger Letter 1 Letter (recommending for issuers with assets over compliant financial statements for any other (recommending quarterly basic financial reporting, $100,000, that if financial statements are not purpose and who have no operating history, no including a balance sheet, income statement and prepared in accordance with U.S. GAAP, the issuer revenues and/or a minimal amount of assets (e.g., statement of cash flows); Fund Democracy Letter. be required to note any variance from U.S. GAAP $500,000); and (iii) in offerings of more than 322 and state the reason for such variance); NASAA $500,000, the exception could require the principal See, e.g., CFIRA Letter 7; Consumer Federation Letter; RocketHub Letter; Whitaker Chalk Letter (for executive officer representation, including a Letter; Denlinger Letter 1; Fund Democracy Letter; offerings over $500,000 until such time as the representation that the other comprehensive basis Traklight Letter. Commission accepts IFRS for U.S. domestic of accounting methodology selected is acceptable 323 See, RocketHub Letter. issuers). under AICPA standards, and be limited to issuers 324 See, e.g., Grassi Letter; Public Startup Letter 2; For opponents, see, e.g., ABA Letter (noting that with no operating history or revenue and minimal RocketHub Letter. the benefits associated with GAAP-compliant assets). 325 See Denlinger Letter 1.

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most recently completed fiscal year,326 and early-stage small businesses require requirement,342 while one commenter while two others supported such assistance in the preparation of financial opposed it.343 With respect to audit accommodation.327 One commenter statements, and that complying with the reports, commenters supported our recommended that, to provide ‘‘truly independence standards of Regulation proposal that a qualified audit opinion current financials’’ for large offerings, S–X would require such issuers to would satisfy the audited financial the Commission could require engage two external accountants—one statement requirements,344 although one unaudited financial statements through to assist in preparing the financial commenter opposed it.345 One the end of the month that ends no more statements and another to audit or commenter requested clarification as to than two months before the month in review them.333 One commenter asked the requirements that may be applicable which the offering begins (e.g., an the Commission not to create new to the issuer and the public accountant offering any day in March would require independence standards.334 when an issuer intends to include a financials up to January 31); for smaller Review and Audit Standards. With previously issued audit or review report offerings, the commenter indicated a respect to review standards, in an offering statement.346 modified standard for providing current commenters supported requiring Exemptions from Financial Statement information might be appropriate.328 reviewed financial statements to be Requirements. While the proposed rules Public Accountant Requirements. We reviewed in accordance with the SSARS did not exempt any issuers from the received several comments on standards issued by the AICPA.335 Commenters financial statement requirements, a for audit firms.329 Commenters also opposed creating a new set of number of commenters recommended supported not requiring audits to be review standards.336 exempting issuers with no operating conducted by a PCAOB-registered With respect to audit standards, history or issuers that have been in firm.330 Some commenters supported several commenters supported our existence for fewer than 12 months from our proposal to require the public proposal to require that financial the requirement to provide financial accountant reviewing or auditing an statements be audited in accordance statements,347 although a few issuer’s financial statements to comply with the auditing standards issued by commenters opposed such a concept.348 with the independence requirements set either the AICPA or the PCAOB,337 A number of commenters recommended forth in Rule 2–01 of Regulation S–X,331 while several others opposed it.338 Two that if an exemption for such issuers is while other commenters recommended commenters recommended that audits allowed, the exempted issuers should allowing the public accountant to be required to be conducted in provide certain basic disclosures,349 and comply by meeting the independence accordance with the auditing standards two commenters specifically requirements of the AICPA.332 Some issued by the PCAOB.339 Commenters recommended that if an exemption for commenters noted that many startups generally opposed creating a new set of such issuers is allowed, the exempted audit standards,340 although one issuers should still provide a balance 326 See, e.g., Consumer Federation Letter (stating commenter recommended that if the sheet.350 that the proposal allows for the provision of stale Commission were to create a new set of and limited financial information because it ‘‘would audit standards, it ‘‘should be designed (iii) Final Rules allow issuers to submit financial statements that are 341 more than a year out of date and that cover only as an ultra-low-cost procedure.’’ We are adopting financial disclosure a very limited portion of the issuer’s existence.’’); Review and Audit Reports. With requirements for Title III issuers in Rule EY Letter (recommending this time period be respect to review reports, two extended to 180 days if an issuer presents interim commenters supported our proposal 342 See AICPA Letter; Heritage Letter (for going financial statements certified by the principal that a review report that includes concern opinions). executive officer that cover the first six months of 343 See Grassi Letter. the issuer’s most recently completed fiscal year); modifications would satisfy the 344 See, e.g., AICPA Letter; Arctic Island Letter 5 Fund Democracy Letter (noting that financial reviewed financial statement (noting that most small business audit opinions are statements could be 16-months stale); Merkley likely to include a going concern clause); Denlinger Letter (recommending that the Commission not 333 Letter 1 (noting, however, that a going concern permit financial statements ‘‘to be so thoroughly out See, e.g., AICPA Letter; EY Letter; Grassi opinion is not a qualified opinion); EY Letter; of date’’); Public Startup Letter 2. Letter. Heritage Letter (noting that a majority of 327 See, e.g., Grassi Letter (noting that the material 334 See AICPA Letter (recommending that the Commission not create new independence, review, crowdfunding issuers should receive going concern change disclosure requirements should be sufficient opinions but should not be disqualified); or auditing standards or that the definition of ‘‘a to keep investors updated); RocketHub Letter. RocketHub Letter; Traklight Letter (recommending complete set of financial statements’’ be different 328 See Fund Democracy Letter. that going concern opinions and noncompliance than under U.S. GAAP because doing so would 329 See, e.g., Grassi Letter (recommending no with U.S. GAAP should be allowed); Whitaker result in confusion, further complexity and audit be accepted that has been performed by a firm Chalk Letter. increased costs). that is not subject to, or that has received a fail 345 See Grassi Letter. 335 See, e.g., ABA Letter; AICPA Letter; Denlinger report under, the AICPA peer review standards); 346 See EY Letter. Letter 1; EY Letter; Fund Democracy Letter; Grassi ASSOB Letter (recommending the rules not place 347 Letter. But see Public Startup Letter 2. See, e.g., Arctic Island Letter 5 (supporting restrictions on the type of accountant an issuer is only an exemption from the audit requirement); 336 See, e.g., AICPA Letter; Denlinger Letter 1; required to use to review or audit its financial CFIRA Letter 5; CFIRA Letter 7; Grassi Letter; Traklight Letter. statements); Multistate Tax Letter (an issuer should CrowdFundConnect Letter; Crowdpassage Letter 2; 337 not be required to obtain accounting services). See, e.g. AICPA Letter; Denlinger Letter 1; EY EY Letter; Grassi Letter; Hackers/Founders Letter; 330 See, e.g., AICPA Letter; ASSOB Letter Letter; Grassi Letter. Joinvestor Letter; McGladrey Letter; PBA Letter; (recommending the rules not place restrictions on 338 See, e.g., Consumer Federation Letter; Fund PeoplePowerFund Letter; RocketHub Letter the type of accountant an issuer is required to use Democracy Letter; Public Startup Letter 2; (recommending that the audit requirements should to review or audit its financial statements); RocketHub Letter; Rucker Letter (stating that GAAS only apply to issuers that have been in operation Denlinger Letter 1; Funderbuddies Letter; EY Letter; fit poorly with the kinds of businesses Title III is for more than two years and are raising more than Grassi Letter; Heritage Letter; Multistate Tax Letter intended to accommodate). $5 million); StartupValley Letter (supporting an (an issuer should not be required to obtain 339 See Consumer Federation Letter; Fund exemption from the audit requirements); Wefunder accounting services); Public Startup Letter 2; Democracy Letter. Letter; Whitaker Chalk Letter. RocketHub Letter; Traklight Letter. See also RFPIA 340 See, e.g., AICPA Letter; Grassi Letter 348 See, e.g., AICPA Letter; Denlinger Letter 1; Letter (recommending the public accountants (recommending that the Commission require issuers Wilson Letter. conducting an audit be required to be members of to use the same standards used in the offering or 349 See, e.g., ASSOB Letter; CFIRA Letter 5; the AICPA or the PCAOB for one year.). higher standards, with the PCAOB standards Denlinger Letter 1; Grassi Letter; McGladrey Letter; 331 See, e.g., ABA Letter; Commonwealth of deemed to be the higher standard, when complying PBA Letter; PeoplePowerFund Letter; RocketHub Massachusetts Letter; RocketHub Letter. with the ongoing reporting requirements); Heritage Letter; Wefunder Letter; Whitaker Chalk Letter; 332 See, e.g., AICPA Letter; Denlinger Letter 1; EY Letter; Traklight Letter. Zhang Letter. Letter; Grassi Letter; McGladrey Letter. 341 RocketHub Letter. 350 See EY Letter; PBA Letter.

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201(t) with a number of changes from the requirement that all issuers file with statements have not been reviewed or the proposal. As described in more the Commission and provide to audited by an independent public detail below, the final requirements are investors and the relevant intermediary accountant, there has been senior based on the amount offered and sold in a complete set of their financial executive attention paid to the financial reliance on Section 4(a)(6) within the statements, which includes balance statements. We are not requiring this preceding 12-month period, as follows: sheets, statements of comprehensive certification for reviewed or audited • For issuers offering $100,000 or income, statements of cash flows, financial statements, as some less: Disclosure of the amount of total statements of changes in stockholders’ commenters suggested, because we income, taxable income and total tax as equity and notes to the financial believe the certification is intended as reflected in the issuer’s federal income statements.354 In order to avoid an added measure of assurance that is tax returns certified by the principal potential confusion as to the not needed in offerings of this size when executive officer to reflect accurately the presentation of financial statements, and an independent accountant reviews or information in the issuer’s federal consistent with Tier 1 offerings under audits the financial statements. We also income tax returns (in lieu of filing a Regulation A,355 the final rule adds an are adopting the form of the certification copy of the tax returns), and financial instruction that financial statements that that must be provided by the issuer’s statements certified by the principal are not audited must be labeled as principal executive officer as proposed executive officer to be true and unaudited.356 Consistent with the with one change relating to the complete in all material respects.351 If, proposal, the final rules do not exempt information from the issuer’s tax however, financial statements of the any issuers from the financial statement return.359 issuer are available that have either been requirements. Although some Instead of mandating that issuers reviewed or audited by a public commenters expressed concerns about offering $100,000 or less provide copies accountant that is independent of the the costs of the financial statement of their federal income tax returns as issuer, the issuer must provide those requirements for issuers with no proposed, the final rules require an financial statements instead and need operating history or issuers that have issuer to disclose the amount of total not include the information reported on been in existence for fewer than 12 income, taxable income and total tax, or the federal income tax returns or the months,357 we believe that financial the equivalent line items from the certification of the principal executive statements are important information for applicable form, exactly as reflected in officer. investors and that the changes from the its filed federal income tax returns, and • Issuers offering more than $100,000 proposed rules described below will to have the principal executive officer but not more than $500,000: Financial help reduce the costs associated with certify that those amounts reflect statements reviewed by a public preparing financial statements for many accurately the information in the accountant that is independent of the of those issuers. issuer’s federal income tax returns.360 issuer.352 If, however, financial The final rule also includes an As noted by commenters,361 requiring statements of the issuer are available instruction to clarify that references to that issuers provide tax returns may that have been audited by a public the issuer in Rule 201(t) refer to the present a significant risk of disclosure of accountant that is independent of the issuer and its predecessors, if any. private information. While the proposed issuer, the issuer must provide those Offerings of $100,000 or less. rule would require personally financial statements instead and need Consistent with Securities Act Section identifiable information to be redacted, not include the reviewed financial 4A(b)(1)(D)(i), we are adopting as we are persuaded by commenters that statements. proposed the requirement in Rule such a requirement might not provide • Issuers offering more than $500,000: 201(t)(1) that an issuer offering $100,000 an adequate safeguard against Æ For issuers offering more than or less provide financial statements of inadvertent disclosure of this type of $500,000 but not more than $1 million the issuer that are certified by the information in some instances. The of securities in reliance on Regulation principal executive officer of the issuer consequences for an issuer and an Crowdfunding for the first time: to be true and complete in all material intermediary of such disclosure, Financial statements reviewed by a respects.358 While we believe it will be including the potential violation of public accountant that is independent of beneficial for investors to have an applicable privacy laws, could be the issuer. If, however, financial independent accountant review severe. Specifying the information from statements of the issuer are available financial statements in offerings over the tax return that is required without that have been audited by a public $100,000, we believe that for offerings of requiring submission of the tax return accountant that is independent of the $100,000 or less this certification is itself will provide standardized issuer, the issuer must provide those sufficient and will contribute to the disclosure for investors and help protect financial statements instead and need integrity of the issuer’s financial against the accidental disclosure of not include the reviewed financial reporting process. It will affirm for personally identifiable or confidential statements. investors that, although the financial information. Requiring that these Æ For issuers that have previously amounts be certified by the principal sold securities in reliance on Regulation 354 See Instruction 3 to paragraph (t) of Rule 201 executive officer will provide investors Crowdfunding: Financial statements of Regulation Crowdfunding. additional assurance of the accuracy of audited by a public accountant that is 355 See Paragraph (b) of Part F/S of Form 1–A. those amounts in lieu of providing the 356 independent of the issuer.353 See Instruction 3 to paragraph (t) of Rule 201 underlying tax returns.362 At the same Content of Financial Statements. We of Regulation Crowdfunding. 357 See, e.g., Arctic Island Letter 5; CFIRA Letter are adopting substantially as proposed 359 5; CFIRA Letter 7; CrowdFundConnect Letter; See Instruction 7 to paragraph (t) of Rule 201 Crowdpassage Letter 2; EY Letter; Grassi Letter; of Regulation Crowdfunding. 351 See Rule 201(t)(1) of Regulation Hackers/Founders Letter; Joinvestor Letter; 360 See Rule 201(t)(1) of Regulation Crowdfunding. McGladrey Letter; PBA Letter; PeoplePowerFund Crowdfunding. 352 See Rule 201(t)(2) of Regulation Letter; RocketHub Letter; StartupValley Letter; 361 See, e.g., AICPA Letter; Public Startup Letter Crowdfunding. Wefunder Letter; Whitaker Chalk Letter. But see 2; RocketHub Letter; SBM Letter; Wilson Letter; 353 See Rule 201(t)(3) of Regulation AICPA Letter; Denlinger Letter 1; Wilson Letter. Zhang Letter. Crowdfunding. See also discussion below under 358 See Rule 201(t)(1) of Regulation 362 We note that any intentional misstatements or ‘‘Offerings of more than $500,000.’’ Crowdfunding. omissions of facts may constitute federal criminal

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time, because the principal executive of the issuer are available that have issuers offering more than $500,000 are officer will be certifying only that the either been reviewed or audited by a required to provide audited financial amounts are as reported on the public accountant that is independent of statements. In a change from the applicable income tax return, we do not the issuer, the issuer must provide those proposal, the final rule includes an expect this requirement to impose any financial statements instead, and need accommodation for issuers offering significant new burdens on principal not include the information reported on more than $500,000 but not more than executive officers, who will already be the federal income tax returns or the $1 million that have not previously sold certifying as to the truth and certification of the principal executive securities in reliance on Section completeness of the financial statements officer.365 This approach was suggested 4(a)(6).372 Under Rule 201(t)(3), those themselves. We believe the alternative by two commenters,366 and we believe first-time issuers are permitted to approach we are adopting provides a it will benefit investors by providing provide reviewed rather than audited similar benefit to investors as the access to audited or reviewed financial financial statements, unless audited proposal while addressing the privacy statements that were already prepared financial statements are otherwise concerns raised by commenters. for other purposes. Unlike audit reports available. As we stated in the Proposing Release, in a registered offering,367 we are not We are adding this accommodation it remains unclear to us to what extent requiring that review or audit reports be for first-time issuers in response to all of the information presented in a tax accompanied by a formal consent or commenters’ concerns about the return would be useful for an investor acknowledgment letter. Rather, the final expense of obtaining audited financial evaluating whether to purchase rules clarify that review and audit statements. While some commenters securities from the issuer. We believe, reports must be signed and that the expressed support for the proposed however, that certain information such issuers must notify the public audit requirement,373 many others noted as total income, taxable income and accountants of their intended use in an that the proposed audit requirement total tax could be informative and offering in reliance on Section 4(a)(6).368 would be too costly and burdensome for would likely be available to the issuer Offerings of more than $100,000 but issuers in comparison to the size of the in tax documentation. The final rules, not more than $500,000. Consistent offering proceeds.374 A number of therefore, provide that an issuer must with Section 4A(b)(1)(D)(iii) and the commenters expressed particular disclose its total income, taxable income proposed rules, issuers must file and concern that issuers would need to and total tax, or the equivalent line provide reviewed financial statements incur the expense of an audit before items from its federal income tax when offering more than $100,000 but having proceeds or even an assurance of documentation and have the principal not more than $500,000.369 Similar to proceeds from the offering.375 After executive officer certify that those the addition to Rule 201(t)(1) discussed considering the comments, we are amounts reflect accurately the above, we have added to Rule 201(t)(2) persuaded that for issuers undertaking a information in the issuer’s federal a requirement that if financial first-time crowdfunding offering of more income tax returns.363 statements of the issuer are available than $500,000 but not more than $1 Under the final rules, an issuer that that have been audited by a public million, the benefits of requiring offers securities in reliance on Section accountant that is independent of the audited financial statements are not 4(a)(6) before filing its tax return for the issuer, the issuer must provide those likely to justify the costs. Accordingly, most recently completed fiscal year will financial statements instead.370 The consistent with applicable standards,376 be allowed to use information from the approach of providing audited financial for these first-time issuers, we are tax return filed for the prior year. An statements that are otherwise available adopting instead a requirement that issuer that uses information from the is consistent with what the Commission those selling securities in reliance on prior year’s tax return will be required adopted for issuers undertaking Tier 1 Section 4(a)(6) in these circumstances to provide tax return information for the offerings under Regulation A.371 We most recently completed fiscal year believe the benefits to investors of 372 For purposes of determining whether an issuer when filed with the U.S. Internal having access to these audited financial has previously sold securities in reliance on Section 4(a)(6), ‘‘issuer’’ includes all entities controlled by Revenue Service (if the tax return is statements justify any additional burden or under common control with the issuer and any filed during the offering period). An imposed on issuers to provide these predecessors of the issuer. See Rule 100(c) of issuer that has requested an extension statements, which were already Regulation Crowdfunding. from the U.S. Internal Revenue Service prepared for other purposes. 373 See, e.g., AICPA Letter; Consumer Federation would not be required to provide the Letter; CSTTC Letter; Denlinger Letter 2; Offerings of more than $500,000. As FundDemocracy Letter; Leverage PR; NASAA information until the date when the proposed, Rule 201(t)(3) provides that Letter; StartEngine Letter 1. return is filed, which is consistent with 374 See, e.g., AEO Letter; Angel Letter 1; AWBC the concept of not requiring tax 365 See Rule 201(t)(1) of Regulation Letter; CFIRA Letter 5; CfPA Letter; information until that information has Crowdfunding. CrowdFundConnect Letter; EarlyShares Letter; 366 See Angel Letter 1; EY letter. EMKF Letter; EY Letter; Finkelstein Letter; been filed with the U.S. Internal FundHub Letter 1; Generation Enterprise Letter; 367 See Securities Act Rule 436; Item 601 of Revenue Service. If an issuer has not yet Grassi Letter; Graves Letter; Guzik Letter 1; Regulation S–K. Hakanson Letter; Holland Letter; Johnston Letter; filed a tax return and is not required to 368 See Instructions 8 and 9 to paragraph (t) of file a tax return before the end of the Kickstarter Coaching Letter; McGladrey Letter; Rule 201 of Regulation Crowdfunding. Milken Institute Letter; NACVA Letter; NFIB Letter; offering period, then the tax return 369 See Rule 201(t)(2) of Regulation NPCM Letter; NSBA Letter; PBA Letter; Reed Letter; information does not need to be Crowdfunding. RocketHub Letter; Saunders Letter; SBA Office of provided.364 370 Id. Advocacy Letter; SBEC Letter; SBM Letter; Seyfarth We are adding to Rule 201(t)(1) a 371 See Paragraph (b) of Part F/S of Form 1–A. Letter; Verrill Dana Letter; WealthForge Letter; requirement that if financial statements While Regulation Crowdfunding incorporates a Wefunder Letter; Woods Letter; Zeman Letter. number of requirements that are consistent with 375 See, e.g., AEO Letter; AWBC Letter; CFIRA Regulation A, it is important to note that Regulation Letter 5; CfPA Letter; EMKF Letter; Generation violations by the certifying principal executive Crowdfunding and Regulation A are different Enterprise Letter; Grassi Letter; Graves Letter; officer. See 18 U.S.C. 1001. exemptions with distinct requirements. For Holland Letter; McGladrey Letter; NSBA Letter; 363 See Rule 201(t)(1) of Regulation example, unlike offerings under Regulation Reed Letter; RocketHub Letter; SBM Letter; Seyfarth Crowdfunding. Crowdfunding, Tier 1 offerings under Regulation A Letter; WealthForge Letter; Wefunder Letter. 364 See Instruction 6 to paragraph (t) of Rule 201 are subject to state registration requirements and are 376 See Securities Act Section 28 [15 U.S.C. 77z– of Regulation Crowdfunding. required to be ‘‘qualified’’ by Commission staff. 3].

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provide reviewed financial statements. provide for delayed implementation by ineligible to rely on any alternative Commenters stated that reviewed non-public business entities.384 In this accounting or reporting standards for financial statements would cost less regard, if the issuer chooses to take non-public business entities.390 Even than audited financial statements,377 advantage of this extended transition though issuers of securities in a and one commenter noted that the cost period, the issuer: Regulation Crowdfunding offering fit of an accounting review is • Must disclose such choice at the within the definition of ‘‘public approximately 60% of the cost of an time the issuer files the offering business entity,’’ the Commission audit.378 statement; and retains the authority to determine Basis of Accounting. We are adopting • May not take advantage of the whether or not such issuers would be as proposed the requirement that all extended transition period for some permitted to rely on the developing non- issuers provide financial statements standards and not others, but must public business entity standards.391 prepared in accordance with U.S. apply the same choice to all standards. Commenters generally expressed GAAP.379 As discussed in the Proposing However, consistent with the concern about the costs associated with Release, financial statements prepared treatment of emerging growth requiring issuers relying on Section in accordance with U.S. GAAP are companies and offerings relying on 4(a)(6) to follow public company U.S. generally self-scaling to the size and Regulation A,385 issuers electing not to GAAP accounting standards.392 complexity of the issuer, which we use this accommodation must forgo this The final rules do not allow believe can reduce the costs of accommodation for all financial Regulation Crowdfunding issuers to use preparing financial statements for many accounting standards and may not elect the alternatives available to non-public early stage issuers. We would not expect to rely on this accommodation in any business entities under U.S. GAAP in that the required financial statements future filings.386 the preparation of their financial would be long or complicated for On December 23, 2013, after we statements. One of the significant factors issuers that are recently formed and proposed rules for Regulation considered by the FASB in developing have limited operating histories. Crowdfunding, the Financial its definition of ‘‘public business entity’’ Although we acknowledge, as some Accounting Standards Board (FASB) was the number of primary users of the commenters observed, that other bases and Private Company Council (PCC) financial statements and their access to of accounting may be less expensive issued a guide for evaluating financial management.393 As the FASB noted, than U.S. GAAP, we believe the benefit accounting and reporting for non-public ‘‘users of private company financial of a single standard that will facilitate business entities.387 The PCC was statements have continuous access to comparison among issuers relying on created in 2012 by the FASB and the management and the ability to obtain Section 4(a)(6) justifies any incremental Financial Accounting Foundation to financial information throughout the expenses associated with U.S. GAAP. In improve the standard-setting process, year.’’ 394 As the number of investors addition, we are concerned that it may and provide for accounting and increases and their ability individually be difficult for investors to determine reporting alternatives, for non-public to influence management decreases, it is whether the issuer complied with business entities under U.S. GAAP.388 important that all investors receive or another comprehensive basis of As the standards for non-public have timely access to comprehensive accounting. For these reasons, we business entities are new, there are financial information. As a result, continue to believe that financial currently very few distinctions between although commenters generally statements prepared in accordance with U.S. GAAP for public and non-public expressed concern about the costs U.S. GAAP will be the most useful for business entities. Over time, however, associated with requiring issuers relying investors in securities-based more distinctions between non-public on Section 4(a)(6) to follow public crowdfunding transactions, particularly business entity and public company company U.S. GAAP accounting when presented along with the required accounting standards could develop. standards,395 because crowdfunding description of the issuer’s financial Issuers that offer securities pursuant investors will likely not have the access condition.380 to Regulation Crowdfunding will be to management that the FASB envisions, Additionally, as suggested by one considered ‘‘public business entities’’ as the Commission believes that investor commenter,381 in order to be consistent defined by the FASB 389 and, therefore, protection will be enhanced by with the treatment of emerging growth requiring Regulation Crowdfunding companies 382 and offerings relying on 384 See Instruction 5 to paragraph (t) of Rule 201 issuers to provide financial statements of Regulation Crowdfunding. 383 prepared in the same manner as other Regulation A, Rule 201(t) permits 385 See paragraph (a)(3) of Part F/S of Form 1–A. issuers, where applicable, to delay the See also JOBS Act, Section 107(b)(1) and (3). entities meeting the FASB’s definition implementation of new accounting 386 See Instruction 5 to paragraph (t) of Rule 201 of ‘‘public business entity.’’ standards to the extent such standards of Regulation Crowdfunding. Periods Covered in the Financial 387 The Private Company Decision-Making Statements. We are adopting Framework: A Guide for Evaluating Financial 377 See, e.g., Crowdcheck Letter 4; CfPA Letter substantially as proposed the Accounting and Reporting for Private Companies (noting that many offerings made in reliance on (the ‘‘PCC Guide’’), available at: http://www.fasb. requirement that financial statements Rule 506 that involve companies further along in org/cs/ContentServer?c=Document_C&pagename= cover the shorter of the two most their business development include reviewed but FASB%2FDocument_C%2FDocumentPage& not audited financial statements); Graves Letter recently completed fiscal years or the cid=1176163703583. (discussing the ‘‘thorough’’ nature of a CPA review 388 and the cost differential between reviewed and For a brief history behind the creation of the required to be or are included in a filing)’’ is a audited financial statements); NFIB Letter; Traklight PCC, see: http://www.fasb.org/cs/ContentServer?c= Public Business Entity. Page&pagename=FASB%2FPage%2FSectionPage& Letter. 390 See numbered paragraph 12 of the PCC Guide, cid=1351027243391. 378 See Traklight Letter. p. 3. 389 Criterion (a) of FASB’s Accounting Standards 379 See Instruction 3 to paragraph (t) of Rule 201 391 Id. Update 2013–12, Definition of a Public Business of Regulation Crowdfunding. 392 Entity, states that an entity that ‘‘is required by the See, e.g., ABA Letter; CFIRA Letter 5; Grassi; 380 See Rule 201(s) of Regulation Crowdfunding. U.S. Securities and Exchange Commission (SEC) to EY Letter; U.S. Chamber of Commerce Letter. 381 See EY Letter. file or furnish financial statements, or does file or 393 See PCC Guide, p. 6. 382 See Securities Act of 1933 Section 7(a)(2)(B) furnish financial statements (including voluntary 394 Id. [15 U.S.C. 77g(a)(2)(B)]. filers), with the SEC (including other entities whose 395 See, e.g., ABA Letter; CFIRA Letter 5; Grassi; 383 See paragraph (a)(3) of Part F/S of Form 1–A. financial statements or financial information are EY Letter; U.S. Chamber of Commerce Letter.

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period since the issuer’s inception.396 the narrative discussion of its financial comply with the independence While a number of commenters condition a discussion of any material standards of the AICPA.408 Allowing the recommended only one year of financial changes or trends known to AICPA independence standards as an statements,397 we believe that requiring management in the financial condition alternative to the Commission’s a second year will provide investors and results of operations of the issuer independence standards is consistent with a basis for comparison against the during any time period subsequent to with the recommendations of a number most recently completed period, the period for which financial of commenters 409 and the treatment of without substantially increasing the statements are provided to inform Tier 1 issuers under Regulation A.410 costs for the issuer. investors of more recent We believe that providing issuers with In addition, consistent with the developments.402 this flexibility is appropriate in light of proposal and with the views of many While some commenters expressed the potential costs to issuers that would 398 commenters, the final rules do not concern that this accommodation would otherwise be required to engage an require interim financial statements. not provide investors with sufficiently accountant who was independent under 403 While we recognize the needs of current financial information, we Rule 2–01 of Regulation S–X. investors for current financial believe that this risk will be mitigated information, we are also cognizant of by the requirement that the issuer Consistent with the recommendation 411 the anticipated costs of obtaining include a narrative discussion of any of one commenter, in addition to interim financial statements. We believe material changes or trends known to meeting the independence standards of that the required discussion of any management in the financial condition Rule 2–01 of Regulation S–X or the material changes or trends known to and results of operations during any AICPA, we are requiring that a public management in the financial condition time period subsequent to the period for accountant that audits or reviews the and results of operations of the issuer which financial statements are financial statements provided by an since the period for which financial provided.404 Further, we believe this issuer must meet the standards for statements are provided will help accommodation is needed because public accountants of Rule 2–01(a) of provide investors with the necessary otherwise issuers would not be able to Regulation S–X. The Commission will information.399 conduct offerings for a period of time not recognize as a public accountant any Age of Financial Statements. We are between the end of their fiscal year and person who: (1) Is not duly registered adopting substantially as proposed rules the date when the financial statements and in good standing as a certified providing that during the first 120 days for that period are available. public accountant under the laws of the of the issuer’s fiscal year, an issuer may We are not adopting the alternative place of his residence or principal conduct an offering in reliance on proposed by one commenter to require office; or (2) is not in good standing and Section 4(a)(6) using financial unaudited financial statements through entitled to practice as a public statements for the fiscal year prior to the the end of the month that ends no more accountant under the laws of the place most recently completed fiscal year if than two months before the month in of his residence or principal office.412 the financial statements for the most which the offering began.405 Such a We believe these standards will promote recently completed fiscal year are not requirement would require an issuer to the use of qualified accountants that are 400 otherwise available. For example, if prepare a set of financial statements at in compliance with the requirements for an issuer that has a calendar fiscal year a time when it would not otherwise be their profession for the review or audit end conducts an offering in April 2016, doing so and would be a more onerous of the financial statements with respect it would be permitted to include requirement than applies to registered to all offerings, including offerings in financial statements for the fiscal year or Regulation A offerings.406 reliance on Section 4(a)(6). ended December 31, 2014 if the Public Accountant Requirements. In a Consistent with the proposal and financial statements for the fiscal year change from proposed Rule 201(t), in ended December 31, 2015 are not yet recommendations in response to our response to commenters’ suggestions, request for comments, we are not available. Once more than 120 days the final rules provide that to qualify as have passed since the end of the issuer’s requiring audits to be conducted by a independent of the issuer, a public PCAOB-registered firm. We believe the most recently completed fiscal year, the accountant would be required to either: issuer would be required to include final rules will result in a greater (1) Comply with the Commission’s number of public accountants being financial statements for its most recently independence rules, which are set forth 401 eligible to audit the issuers’ financial completed fiscal year. Regardless of in Rule 2–01 of Regulation S–X,407 or (2) the age of the financial statements, an statements, which may reduce issuers’ costs. issuer would be required to include in 402 See Rule 201(s) of Regulation Crowdfunding and Instruction 1 to paragraph (s) of Rule 201. Review and Audit Standards. In line 396 See Instruction 3 to paragraph (t) of Rule 201 403 See, e.g., Consumer Federation Letter; Fund with the general support received from of Regulation Crowdfunding. Democracy Letter; Merkley Letter. commenters,413 we are adopting as 397 See, e.g., Denlinger Letter 1; EY Letter; Fryer 404 See Rule 201(s) of Regulation Crowdfunding Letter; Grassi Letter; Joinvestor Letter; Public and instruction 1 to paragraph(s) of Rule 201. proposed the requirement that reviewed Startup Letter 2; RFPIA Letter; RocketHub Letter. 405 See Fund Democracy Letter. financial statements be reviewed in But see, e.g., ASSOB Letter; Zeman Letter. 406 See Rule 3–12(a) of Regulation S–X [17 CFR accordance with the SSARS issued by 398 See, e.g., CFIRA Letter 7; EMKF Letter; EY 210.3–12(a)] (requires that the latest balance sheet Letter; FundHub Letter 1; Grassi Letter; Public be as of a date no more than 134 days for non- 408 See Instruction 9 to paragraph (t) of Rule 201 Startup Letter 2; RocketHub Letter; Traklight Letter; accelerated filers (or 129 days for accelerated and of Regulation Crowdfunding. Wefunder Letter; Whitaker Chalk Letter. large accelerated filers) before the effective date of 409 399 See Instruction 1 to paragraph (s) of Rule 201 a registration statement (or date a proxy statement See, e.g., AICPA Letter; Denlinger Letter 1; EY of Regulation Crowdfunding. is mailed)); Paragraph (b) of Part F/S of Form 1–A Letter; Grassi Letter; McGladrey Letter. 400 See Instruction 4 to paragraph (t) of Rule 201 (Tier 1 and Tier 2 issuers are required to include 410 See Paragraph (b)(2) of Part F/S of Form 1–A. of Regulation Crowdfunding. The final rule financial statements in Form 1–A that are dated not See also, supra, note 371. incorporates instructions consistent with other SEC more than nine months before the date of non- 411 See AICPA Letter. rules explaining that if the 120th day falls on a public submission, filing, or qualification, with the 412 See 17 CFR 210.2–01(a). Saturday, Sunday, or holiday, the next business day most recent annual or interim balance sheet not 413 See, e.g., ABA Letter; AICPA Letter; Denlinger shall be considered the 120th day. older than nine months). Letter 1; EY Letter; Fund Democracy Letter; Grassi 401 Id. 407 17 CFR 210.2–01. Letter.

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the AICPA.414 We also are adopting as auditing standards for situations when report with modifications should be proposed the requirement that audited the auditor plans to refer to the sufficient to satisfy the reviewed financial statements, to the extent they standards of the PCAOB in addition to financial statement requirement,424 one are otherwise available, be audited in U.S. GAAS in the auditor’s report. To commenter opposed permitting accordance with either the auditing comply with the reporting requirements modifications to review reports, noting standards of the AICPA (referred to as of both sets of standards in those that it considers certain departures from U.S. Generally Accepted Auditing situations, the proposed amendment U.S. GAAP to be ‘‘unacceptable’’ and Standards or GAAS) or the standards of would require the auditor to use the that it would not be feasible to develop the PCAOB.415 We expect that this report layout and wording specified by a model of all allowable and provision will provide issuers with the auditing standards of the PCAOB, disallowable modifications.425 After more flexibility to file audited financial amended to indicate that the audit was considering the comments, we are statements that may have been prepared also conducted in accordance with U.S. persuaded that permitting modifications for other purposes. GAAS. could result in financial statements that We believe that audits conducted in Review and Audit Reports. We are depart materially from U.S. GAAP, and, accordance with U.S. GAAS will adopting, with changes from the therefore, are not permitting provide sufficient protection for proposal, the requirement that issuers modifications to review reports under investors in these offerings, especially file with the Commission and provide to the final rules. In response to concerns in light of the requirement that auditors investors and the relevant intermediary expressed by some commenters, must be independent under Rule 2–01 a signed review or audit report on the however, we note that a review report of Regulation S–X or AICPA issuer’s financial statements by an or audit opinion that includes independence standards. Moreover, we independent public accountant.418 The explanatory language pertaining to the believe that the flexibility adopted in issuer must notify the public accountant entity’s ability to continue as a going the final rules is appropriately tailored of the issuer’s intended use of the report concern is not, under current auditing for the different types of issuers that are in the offering.419 standards, a modified report or a likely to conduct offerings under We are adopting as proposed the qualified opinion.426 Regulation Crowdfunding. provision that an audit report that Exemptions from Financial Statement Because issuers under Regulation includes an adverse opinion or Requirements. Consistent with the Crowdfunding are not ‘‘issuers’’ as disclaimer of opinion will not be in proposal, the final rules do not exempt defined by Section 2(a)(7) of the compliance with the audited financial any issuers from the financial statement Sarbanes-Oxley Act of 2002 nor broker- statement requirements.420 In a change requirements. While we appreciate the dealers registered with the Commission from the proposal, as suggested by one concerns identified by commenters under Section 15(b) of the Securities commenter,421 the final rules do not about the costs of the financial Exchange Act of 1934, AICPA rules permit a qualified audit report.422 As statement requirements for issuers with would require the audit to be compliant noted above, under the final rules an no operating history or issuers that have with U.S. GAAS even if the auditor has issuer is not required to provide audited been in existence for fewer than 12 conducted the audit in accordance with financial statements for first-time months,427 we believe that financial PCAOB standards. Staff of the crowdfunding offerings of more than statements are important information for Commission consulted with the AICPA $500,000 but not more than $1 million all issuers and that other changes from on this issue and has been advised that unless otherwise available. We believe the proposed rules such as raising the an audit performed by its members of an that this change reduces the cost and threshold at which audited financial issuer conducting an offering under burden for issuers generally of statements are required will help reduce Regulation Crowdfunding would be providing audited financial statements, those costs. required to comply with U.S. GAAS in and that an accommodation to permit accordance with the AICPA’s Code of qualified audit reports is not necessary. b. Progress Updates Professional Conduct.416 As a result, an The final rules also provide that a (1) Proposed Rules review report that includes auditor for such an issuer who is Consistent with Securities Act Section modifications will not satisfy the conducting its audit in accordance with 4A(b)(1)(F), proposed Rule 201(v) and requirement for reviewed financial PCAOB standards also will be required Rule 203(a)(3) of Regulation statements.423 Although two to comply with U.S. GAAS, and the Crowdfunding would require an issuer commenters expressed that a review auditor will be required to comply with to file with the Commission and provide the reporting requirements of both the investors and the relevant intermediary AICPA standards and the PCAOB Clarification and Recodification, section 700, Forming an Opinion and Reporting on Financial regular updates on the issuer’s progress standards. Commission staff also Statements. The proposed amendment would be in meeting the target offering amount no consulted with the AICPA on whether effective for audits of financial statements for later than five business days after each an auditor can currently comply with periods ending on or after December 15, 2015. of the dates that the issuer reaches 418 both sets of standards when issuing its See Instructions 8 and 9 to paragraph (t) of particular intervals—i.e., 50 percent and auditor’s report. In August 2015, the Rule 201 of Regulation Crowdfunding. 419 Id. 100 percent—of the target offering Auditing Standards Board of the AICPA 420 417 See Instruction 9 to paragraph (t) of Rule 201 proposed an amendment to its of Regulation Crowdfunding. 424 See AICPA Letter; Heritage Letter. 421 See Grassi Letter. 425 See Grassi Letter. 414 See Instruction 8 to paragraph (t) of Rule 201 422 See Instruction 9 to paragraph (t) of Rule 201 426 See, e.g., Public Company Accounting of Regulation Crowdfunding. of Regulation Crowdfunding. Accordingly, a Oversight Board AU sec. 508, Reports on Audited 415 See Instruction 9 to paragraph (t) of Rule 201 qualified audit opinion would not be considered an Financial Statements. of Regulation Crowdfunding. audit opinion that is ‘‘available’’ for purposes of 427 See, e.g., Arctic Island Letter 5; CFIRA Letter 416 The AICPA Code of Professional Conduct is Rule 201(t) and 202(a). 5; CFIRA Letter 7; CrowdFundConnect Letter; available at: http://pub.aicpa.org/codeofconduct/ 423 See Instruction 8 to paragraph (t) of Rule 201 Crowdpassage Letter 2; EY Letter; Grassi Letter; ethicsresources/et-cod.pdf. of Regulation Crowdfunding. Accordingly, a Hackers/Founders Letter; Joinvestor Letter; 417 Proposed Statement on Auditing Standards, modified review report would not be considered an McGladrey Letter; PBA Letter; PeoplePowerFund Amendment to Statement on Auditing Standards audit opinion that is ‘‘available’’ for purposes of Letter; RocketHub Letter; StartupValley Letter; No. 122, Statement on Auditing Standards: Rule 201(t) and 202(a). Wefunder Letter; Whitaker Chalk Letter.

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amount. If the issuer will accept platform frequent updates about the c. Amendments to the Offering proceeds in excess of the target offering issuer’s progress toward meeting the Statement 430 amount, the issuer also would be target offering amount. However, if (1) Proposed Rules required to file with the Commission the intermediary does not provide such and provide investors and the relevant an update, the issuer would be required Proposed Rule 203(a)(2) of Regulation intermediary a final progress update, no to file the interim progress updates. In Crowdfunding would require that an later than five business days after the addition, as described in more detail issuer amend its disclosure for any offering deadline, disclosing the total below, an issuer relying on the material change in the offer terms or amount of securities sold in the offering. intermediary’s reports of progress must disclosure previously provided to If, however, multiple progress updates still file a Form C–U at the end of the investors. The amended disclosure are triggered within the same five offering to disclose the total amount of would be filed with the Commission on business-day period (e.g., the issuer securities sold in the offering.431 Form C–A: Amendment and provided to investors and the relevant intermediary. reaches 50 percent of the target offering As stated in the proposal, we continue Material changes would require amount on November 5, 100 percent of to believe that the information available reconfirmation by investors of their the target offering amount on November in progress updates will be important to investment commitments within five 7, and the maximum amount of investors by allowing them to gauge business days. In addition, an issuer proceeds it will accept in excess of the whether interest in the offer has target offering amount on November 9), would be permitted, but not required, to increased gradually or whether it was file amendments for changes that are not the issuer could consolidate such concentrated at the beginning or at the material. progress updates into one Form C–U, so end of the offering period. We believe long as the Form C–U discloses the most that these same benefits can be achieved (2) Comments Received on Proposed recent threshold that was met and the through information available on the Rules Form C–U is filed with the Commission intermediary’s platform about the Commenters were mixed on the and provided to investors and the progress toward the target offering proposed rules relating to amendments relevant intermediary by the day on amount. Whether an issuer provides the to the offering statement, with those which the first progress update would required progress update report or relies opposed citing the burden on issuers.434 be due. The proposed rules also would on the intermediary’s reporting, we Some commenters recommended that require the intermediary to make these believe investors will benefit by being the Commission specify a filing updates available to investors through able to stay informed during the offering deadline for amendments reflecting a the intermediary’s platform. of an issuer’s progress. material change,435 and some (2) Comments on the Proposed Rules Under the final rules, all issuers must recommended we require that investors file a Form C–U to report the total be notified of the amendment.436 Two Commenters were generally opposed amount of securities sold in the offering. commenters supported our view that the to the progress update requirements, For issuers that are offering only up to establishment of the final price should noting that progress updates filed with a certain target offering amount, this be considered a material change that the Commission would be duplicative of requirement will be triggered five would always require an amendment to what is available from the business days from the date they reach Form C,437 while one commenter intermediary’s Web site and generate the target offering amount.432 For opposed such an approach.438 One 428 unnecessary costs. Based on that issuers accepting proceeds in excess of commenter recommended that the same rationale, a number of commenters the target offering amount, this Commission define ‘‘material change’’ supported the concept of exempting requirement will be triggered five days in this context.439 issuers from the requirement to file 433 after the offering deadline. We (3) Final Rules progress updates with the Commission believe that requiring a report of the so long as the intermediary publicly total amount of securities sold in the We are adopting requirements for the displays the progress of the issuer in offering is necessary to inform investors amendment to the offering statement as 429 meeting the target offering amount. about the ultimate size of the offering, especially in cases where an issuer may 434 For commenters generally in support, see, e.g., (3) Final Rules CFA Institute Letter; CrowdCheck Letter 1 have sold more than the target offering The final rules maintain the proposed (recommending that only a final amendment prior amount. Further, this requirement will to the offering deadline be required, provided there progress update requirements, with a result in a central repository of this is a five day reconfirmation period between filing significant modification. Based on information at the Commission— and the sale of securities); EMKF Letter; Wefunder Letter. concerns expressed by commenters, the information that otherwise might no final rules permit issuers to satisfy the For commenters generally opposed, see, e.g., longer be available on the ASSOB Letter (suggesting a supplement could progress update requirement by relying intermediary’s platform after the suffice in certain instances); Public Startup Letter on the relevant intermediary to make offering terminated. Finally, we note 2; RocketHub Letter (suggesting that not all publicly available on the intermediary’s amendments be filed with the Commission so long that requiring a final report will make as the information was made available through the data available to the Commission and intermediary). 428 See, e.g., ASSOB Letter; EarlyShares Letter; 435 Public Startup Letter 2; RFPIA Letter; RocketHub the general public that could be used to See, e.g., Commonwealth of Massachusetts Letter. But see CFIRA Letter 7. evaluate the effects of the Section 4(a)(6) Letter; Grassi Letter; Hackers/Founders Letter; RocketHub Letter. 429 See, e.g., Arctic Island Letter 5 (stating that exemption on capital formation. 436 intermediaries can display both text (e.g. ‘‘$125,000 See, e.g., Arctic Island Letter 5; CFA Institute of $500,000 raised thus far’’) and graphics (e.g. a Letter; Grassi Letter; Joinvestor Letter; RoC Letter; 430 status bar graph) of the offering progress); ASSOB See Rules 201(v) and 203(a)(3) of Regulation RocketHub Letter. But see Public Startup Letter 2. Letter; PeoplePowerFund Letter; RFPIA Letter; Crowdfunding. 437 See Grassi Letter (recommending that RocketHub Letter (noting that portals already list 431 See Rule 203(a)(3)(iii) of Regulation reconfirmation not be required if the initial price is progress for perks-based crowdfunding); Wefunder Crowdfunding. established in the offering documents and does not Letter. But see CFIRA Letter 7 (stating that the 432 See Rule 203(a)(3)(i) of Regulation vary more than within a reasonable range issuer should file progress updates with the Crowdfunding. established in such documents); Joinvestor Letter. Commission on a regular basis to allow for 433 See Rule 203(a)(3)(ii) of Regulation 438 See Public Startup Letter 2. consistency across all issuers and intermediaries.). Crowdfunding. 439 See ODS Letter.

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proposed. The final rules require that an In addition, as discussed further in report to investors, we proposed in Rule issuer amend its disclosure for any Section II.C.6 below, if any change, 202(a) to require issuers to post the material change in the offer terms or addition or update constitutes a material annual report on their Web sites. Under disclosure previously provided to change to information previously proposed Rule 202(a), the issuer would investors.440 While we recognize disclosed, the issuer must check the box be required to disclose information commenters’ concerns about the costs on the cover of Form C indicating that similar to that required in the offering that requiring one or more additional investors must reconfirm their statement, including disclosure about its filings may impose on issuers, we note investment commitments. financial condition that meets the that an amendment will be required A number of commenters highest financial statement only in instances in which there was a recommended that we specify a filing requirements that were applicable to its material change. In such circumstances, deadline for amendments reflecting a offering statement. material change,444 and that we require we believe the additional efforts We also proposed in Rule 202(b) to investors be notified in some manner of required of an issuer to file an require issuers to file the annual report the amendment.445 We are not, amendment will be justified in order to until one of the following events occurs: however, amending the requirement as provide investors with the information (1) The issuer becomes a reporting suggested by those commenters. We they need to make an informed company required to file reports under appreciate the need for investors to investment decision. Exchange Act Sections 13(a) or 15(d); (2) know this information in a timely The amended disclosure must be filed the issuer or another party purchases or fashion, but we believe that with the with the Commission on Form C and requirement that investors reconfirm repurchases all of the securities issued provided to investors and the relevant their commitments, it will be in an pursuant to Section 4(a)(6), including intermediary. Under the final rules, the issuer’s interest to file an amendment as any payment in full of debt securities or issuer is required to check the box for soon as practicable and to notify any complete redemption of redeemable ‘‘Form C/A: Amendment’’ on the cover investors so that it will be in a position securities; or (3) the issuer liquidates or of the Form C and explain, in summary to close the offering. Therefore, we do dissolves in accordance with state law. manner, the nature of the changes, not believe further procedural b. Comments on the Proposed Rules additions or updates in the space requirements are necessary. provided.441 Issuers will be permitted, but not Commenters expressed a range of With respect to what constitutes a required, to amend the Form C to views on the proposed ongoing ‘‘material change,’’ as we stated in the provide information with respect to reporting requirements.447 Proposing Release, information is other changes that are made to the Frequency. With respect to frequency, material if there is a substantial information presented on the a number of commenters supported the likelihood that a reasonable investor intermediary’s platform and provided to proposed requirement of annual would consider it important in deciding investors.446 If an issuer amends the reporting,448 while a few recommended whether or not to purchase the Form C to provide such information, it quarterly reporting.449 Some securities.442 For example, we believe is not required to check the box commenters supported requiring issuers that a material change in the financial indicating that investors must reconfirm to file reports to disclose the occurrence condition or the intended use of their investment commitments. of material events on an ongoing proceeds requires an amendment to an 2. Ongoing Reporting Requirements basis,450 and several recommended that issuer’s disclosure. Also, in those the Commission provide a list of events a. Proposed Rules instances in which an issuer has that would trigger such disclosure.451 previously disclosed only the method Securities Act Section 4A(b)(4) for determining the price, and not the requires, ‘‘not less than annually, [the 447 For commenters generally supporting the final price, of the securities offered, we issuer to] file with the Commission and proposed ongoing reporting requirements, see, e.g., believe that determination of the final provide to investors reports of the CfPA Letter; Commonwealth of Massachusetts price is a material change to the terms results of operations and financial Letter; Grassi Letter; Jacobson Letter; Leverage PR Letter; StartEngine Letter 1. of the offer and must be disclosed. statements of the issuer, as the For commenters generally opposing the proposed These are not, however, the only Commission shall, by rule, determine ongoing reporting requirements, see, e.g., ABA possible material changes that require appropriate, subject to such exceptions Letter; Campbell R. Letter; EMKF Letter; Guzik amended disclosure. We are not and termination dates as the Letter 1; NFIB Letter; Public Startup Letter 2; Commission may establish, by rule.’’ RocketHub Letter; SeedInvest Letter 1; Stephenson, providing additional guidance on what et al. Letter.; Traklight Letter; WealthForge Letter; constitutes a ‘‘material change,’’ as To implement the ongoing reporting Winters Letter. requested by one commenter,443 requirement in Section 4A(b)(4), we 448 See, e.g., AICPA Letter; CFIRA Letter 7; EY because, consistent with our historical proposed in Rules 202 and 203 of Letter; Grassi Letter; RoC Letter; RocketHub Letter; approach to materiality determinations, Regulation Crowdfunding to require an Traklight Letter. issuer that sold securities in reliance on 449 See, e.g., ASSOB Letter; CCI Letter; Denlinger we believe that an issuer should Letter 1 (recommending quarterly reporting to determine whether changes in the offer Section 4(a)(6) to file a report annually, provide investors and the secondary market timely terms or disclosure are material based no later than 120 days after the end of information). on the facts and circumstances. the most recently completed fiscal year 450 See, e.g., ABA Letter (recommending covered by the report. To implement the amending Form C–AR within 15 calendar days of the material event); Angel Letter 1 (recommending 440 requirement that issuers provide the See Rule 203(a)(2) of Regulation prompt disclosure through postings on the issuer’s Crowdfunding. See also Section II.C.6 for Web site or social media); Denlinger Letter 1; EY discussion of the requirement that investors 444 See, e.g., Commonwealth of Massachusetts Letter (recommending disclosure within 30 days of reconfirm their investment commitments following Letter; Grassi Letter; Hackers/Founders Letter; the end of the month in which the material event a material change. RocketHub Letter. occurred, with such disclosure scaled for different 441 See Form C. 445 See, e.g., Arctic Island Letter 5; CFA Institute tiers of issuers); Hackers/Founders Letter 442 See Basic Inc. v. Levinson, 485 U.S. 224 (1988) Letter; Grassi Letter; Joinvestor Letter; RoC Letter; (recommending quarterly updates); RocketHub (quoting TSC Indus., Inc. v. Northway, Inc., 426 RocketHub Letter. But see Public Startup Letter 2. Letter (recommending quarterly updates). U.S. 438 (1976)). 446 See Instruction to paragraph (a)(2) of Rule 203 451 See, e.g., Denlinger Letter 1; EY Letter; Grassi 443 See ODS Letter. of Regulation Crowdfunding. Letter; RocketHub Letter.

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Two other commenters opposed such a used to determine the level of exemption 469 while several others requirement.452 involvement of the accountant in the generally opposed such concept.470 Provision of Reports. Generally, offering.462 commenters supported requiring issuers Other Content. A number of c. Final Rules to post the annual report on their Web commenters recommended that the After considering the comments sites,453 although some commenters ongoing annual reports require a more received, we are adopting the ongoing favored a more limited distribution.454 limited set of disclosure than the reporting requirements generally as Similarly, a number of commenters information required in the offering proposed, with a substantial supported requiring issuers to file the statement.463 modification to the level of public annual report on EDGAR,455 while two Exceptions/Termination of Ongoing accountant involvement required and commenters opposed such Reporting Requirement. A number of another modification to provide for requirement.456 In addition, most commenters recommended that there be termination of the ongoing reporting commenters opposed requiring physical exceptions to the ongoing reporting obligation in two additional delivery of the report directly to requirements for certain issuers,464 circumstances. investors,457 although some commenters expressing concern that the ongoing Frequency. The final rules require an supported requiring direct delivery in reporting obligations were too costly issuer that sold securities in reliance on some form458 or directly notifying and could potentially extend Section 4(a)(6) to file an annual report investors of the availability of the indefinitely.465 Others were opposed to with the Commission, no later than 120 annual report.459 such exceptions.466 days after the end of the fiscal year Financial Statements. Commenters We also received a range of comments covered by the report.471 We believe expressed differing views about the about when the ongoing reporting that this ongoing reporting requirement proposed ongoing financial statements requirements should terminate, with should benefit investors by enabling requirements, particularly the level of two supporting requiring issuers to file them to consider updated information public accountant involvement an annual report until one of the about the issuer, thereby allowing them required. While a few supported enumerated events occurs,467 and others to make more informed investment requiring certain issuers to provide suggesting alternatives to such decisions. audited or reviewed financial requirement.468 We recognize the view of some statements on an ongoing basis,460 a Some commenters recommended that commenters 472 that there may be major substantial number opposed an ongoing the ongoing reporting requirements be a events that occur between annual audit or review requirement.461 Further, condition to the Section 4(a)(6) reports about which investors would a number of commenters recommended want to be updated, and we note that that if ongoing financial statements are 462 See, e.g., Arctic Island Letter 5; CrowdCheck some commenters also recommended to be required for some issuers, the level Letter 4; EarlyShares Letter; EY Letter; Grassi Letter; quarterly reporting.473 However, we of review be based on a higher offering Graves Letter; iCrowd Letter; Milken Institute agree with those commenters 474 who Letter; PBA Letter; Seyfarth Letter; Traklight Letter. said an annual requirement is sufficient. amount threshold than the threshold 463 See, e.g., EarlyShares Letter; EMKF Letter; McGladrey Letter; Milken Institute Letter; PBA We believe a more frequent filing 452 See Heritage Letter; Public Startup Letter 2. Letter; RocketHub Letter. requirement would require an allocation 453 See, e.g., ABA Letter; Angel Letter 1; CFA 464 See, e.g., Heritage Letter (issuers raising of resources to the reporting function of Institute Letter; Commonwealth of Massachusetts $100,000 or less); RocketHub Letter (issuers raising Regulation Crowdfunding issuers that Letter; Grassi Letter; Jacobson Letter; Joinvestor $250,000 or less, although recommending that we do not believe is justified in light of Letter; RFPIA Letter; Traklight Letter. intermediaries be permitted to require ongoing 454 See, e.g., Crowdpassage Letter 3 (opposing the reports on their platform even if exempted by the the smaller amounts that will be raised public availability of ongoing financial statements Commission); SeedInvest Letter 1 (recommending pursuant to the exemption. We note that and recommending they be distributed through a excepting issuers from ongoing reporting when: (1) under Tier 1 of Regulation A, issuers password protected Web site accessible to Raising less than $350,000; (2) securities are can raise significantly more money—up investors); Frutkin Letter (recommending the structured such that there can be no investment annual report be provided to investors via email, on decisions; (3) an institutional investor, venture to $20 million—without any ongoing a password-protected Web site accessible to capitalist, or angel investor is leading the deal for reporting requirement other than to file investors or by mailing the report first-class to investors; or (4) all investors have contractually a Form 1–Z exit report upon completion investors); Public Startup Letter 2. waived the right to receive ongoing reports with or termination of the offering. While not 455 See, e.g., Commonwealth of Massachusetts informed consent); SeedInvest Letter 4. See also Letter; Frutkin Letter; Grassi Letter; RocketHub form letters designated as Type A (supporting required, nothing in the rules prevents Letter; Traklight Letter. SeedInvest Letter 1). an issuer from updating investors when 456 See Crowdpassage Letter 3 (opposing public 465 See SeedInvest Letter 1 (noting that the availability of ongoing financial statements); Public ongoing reporting obligations were an ‘‘obstacle to 469 See, e.g., Parsont Letter (with a notice and cure Startup Letter 2. making crowdfunding a viable option for startups provision); RocketHub Letter (recommending the 457 See, e.g., CFIRA Letter 7; CFIRA Letter 8; CfPA and small businesses’’ as the cost structure would ongoing reporting requirements be a condition for Letter; Crowdpassage Letter 3; Grassi Letter; be ‘‘out of proportion with the amounts proposed a minimum of three years). Jacobson Letter; Public Startup Letter 2; Traklight to be raised.’’) 470 See, e.g., Public Startup Letter 2; Wefunder Letter. 466 See, e.g., Commonwealth of Massachusetts Letter; Whitaker Chalk Letter (recommending that 458 See, e.g., Arctic Island Letter 5; CCI Letter; Letter; Denlinger Letter 1; Grassi Letter; Public (i) a condition, if any, apply only to the first annual RocketHub Letter. Startup Letter 2. report; (ii) that the failure to file the annual report 459 See, e.g., Arctic Island Letter 5; CFA Institute 467 See, e.g., Grassi Letter; Whitaker Chalk Letter. restrict an issuer’s ability to raise capital in the Letter (recommending advance notice as to when 468 See, e.g., ABA Letter; EY Letter future; or (iii) issuers, certain officers, directors and and where annual reports will be available); (recommending the ongoing reporting obligations shareholders have the option to escrow their shares RocketHub Letter. terminate after a certain amount of time if the issuer for up to 24 months, with certain penalties for 460 See, e.g., ABA Letter; Denlinger Letter 1; has 300 or fewer security holders); Grassi Letter; failure to file the annual report). Grassi Letter. PBA Letter (recommending the reporting 471 See Rule 202(a) of Regulation Crowdfunding. 461 See, e.g., AEO Letter; Arctic Island Letter 5; obligations terminate after three consecutive annual 472 See, e.g., ABA Letter; Angel Letter 1; Denlinger AWBC Letter; CrowdCheck Letter 4; EarlyShares reports or after an issuer repurchases two-thirds of Letter 1; EY Letter; Grassi Letter; Hackers/Founders Letter; EMKF Letter; Frutkin Letter; Graves Letter; the outstanding securities issued in reliance on Letter; RocketHub Letter. Guzik Letter 1; iCrowd Letter; McGladrey Letter; Section 4(a)(6), so long as the issuer made a bona 473 See, e.g., ASSOB Letter; CCI Letter; Denlinger Milken Institute Letter; NFIB Letter; PBA Letter; fide offer to repurchase all of such securities); Letter 1. Peers Letter; RocketHub Letter; SeedInvest Letter 1; Public Startup Letter 2; RocketHub Letter 474 See, e.g., AICPA Letter; CFIRA Letter 7; EY Seyfarth Letter; StartupValley Letter; Stephenson, et (recommending the reporting obligations terminate Letter; Grassi Letter; RoC Letter; RocketHub Letter; al. Letter; Traklight Letter; WealthForge Letter. after three annual reports). Traklight Letter.

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major events occur. Nor do our rules opposed requiring that an audit or financial information about the issuer prevent intermediaries from requiring review of the financial statements be under the final rules. more frequent reporting. However, we included in the annual report.479 Other Content. With the exception of do not believe that it is necessary in the Therefore, instead of requiring financial the financial statement requirement final rules to require reporting on a statements in the annual report that described above, the final rule adopts as more frequent basis than the annual meet the highest standard previously proposed the requirement that the ongoing reporting directly contemplated provided, the final rules require annual report include the information by the statute. financial statements of the issuer required in the offering statement. Although an issuer will not be required Provision of Reports. We also are certified by the principal executive to provide the offering-specific adopting as proposed the requirement officer of the issuer to be true and information that it filed at the time of that an issuer post the annual report on complete in all material respects.480 475 the offering (because the issuer will not its Web site. Consistent with the However, issuers that have available proposal, the final rules do not require be offering or selling securities),484 it financial statements that have been delivery of a physical copy of the will be required to disclose information reviewed or audited by an independent annual report. As discussed in the about the company and its financial certified public accountant because they Proposing Release and as supported by condition, as required in connection a number of commenters, we believe prepare them for other purposes must with the offer and sale of the that investors in this type of Internet- provide them and will not be required securities.485 While we appreciate the based offering will be familiar with to have the principal executive officer recommendations of commenters for a 481 obtaining information on the Internet certification. more limited set of disclosure in the and that providing information in this Many commenters expressed annual report, we believe that the manner will be cost efficient. While concerns with the costs associated with disclosure costs of ongoing reporting for some commenters 476 suggested that preparing reviewed and audited issuers will be less than in the initial limiting distribution of the annual financial statements on an ongoing offering statement, because they will be report to investors through use of a basis. Commenters also noted the able to use the offering materials as a password-protected Web site would absence of comparable ongoing basis to prepare the annual reports. We believe investors will benefit from the help protect an issuer’s commercially- reporting requirements under Tier 1 of availability of annual updates to the sensitive information, we believe such a Regulation A and other offering information they received when making requirement would add complexity for 482 exemptions. While we recognize that the decision to invest in the issuer’s issuers and investors without providing Regulation Crowdfunding is different in significant protection of commercially- securities, since these updates will many respects from Regulation A, we allow them to be informed about issuer sensitive information since the reports believe that crowdfunding issuers could still be accessed by the public on developments as they decide whether to should not have more onerous ongoing continue to hold or sell, or how to vote, EDGAR. reporting compliance costs than issuers Consistent with the proposal, the final the securities. Under the statute and the that use another public offering final rules, the securities will be freely rule does not require an issuer to exemption that permits higher provide direct notification via email or tradable after one year. Therefore, this maximum offering amounts. The otherwise of the posting of the report, as information also will benefit potential changes to the ongoing reporting future holders of the issuer’s securities was suggested by some commenters.477 requirements in the rules we are and help them to make more informed As discussed above in Section adopting today will alleviate some of investment decisions. II.B.1.a.(i)(g), however, we are revising Exceptions/Termination of Ongoing the final rules to require an issuer to the costs on crowdfunding issuers. At the same time, we also believe, Reporting Requirement. After disclose in the offering statement where considering the comments, we are on the issuer’s Web site investors will consistent with the views of at least one commenter,483 that investors still will providing for termination of the ongoing be able to find the issuer’s annual report reporting obligation in the three and the date by which the annual report be provided with sufficient ongoing will be available on the issuer’s Web 484 See Rule 202(a) of Regulation Crowdfunding. 478 479 See, e.g., AEO Letter; Arctic Island Letter 5; site. We believe these changes will An issuer will not be required to provide AWBC Letter; CrowdCheck Letter 4 (‘‘ongoing audit information about: (1) The stated purpose and help investors to locate the annual requirement will create an unpredictable on-going report. As discussed in the Proposing intended use of the proceeds of the offering; (2) the burden’’); EarlyShares Letter; EMKF Letter target offering amount and the deadline to reach the Release, we believe that many issuers (‘‘audited financial statements, particularly for target offering amount; (3) whether the issuer will may not have email addresses for ongoing reporting requirements, are so cost- accept investments in excess of the target offering prohibitive for startups that they make absolutely amount; (4) whether, in the event that the offer is investors, especially after the shares no sense as an appropriate use of funds.’’); Frutkin issued pursuant to Section 4(a)(6) are oversubscribed, shares will be allocated on a pro- Letter; Graves Letter; Guzik Letter 1; iCrowd Letter; rata basis, first come-first served basis, or other traded by the original purchasers. McGladrey Letter; Milken Institute Letter; NFIB basis; (5) the process to complete the transaction or Nonetheless, to the extent email Letter; PBA Letter; Peers Letter; RocketHub Letter; cancel an investment commitment once the target SeedInvest Letter 1; Seyfarth Letter; StartupValley amount is met; (6) the price to the public of the addresses for investors are available, an Letter; Stephenson, et al. Letter; Traklight Letter; issuer could refer investors to the posted securities being offered; (7) the terms of the WealthForge Letter. securities being offered; (8) the name, SEC file report via email. 480 See Rule 202(a) of Regulation Crowdfunding. number and CRD number (as applicable) of the Financial Statements. After 481 Id. intermediary through which the offering is being considering the comments, we are 482 See, e.g., CrowdCheck Letter 4; EMKF Letter; conducted; and (9) the amount of compensation persuaded by the commenters that EY Letter. paid to the intermediary. 483 See CrowdCheck Letter 4 (‘‘While the on-going 485 See Rule 202(a) of Regulation Crowdfunding. audit requirement is designed to provide investors Issuers will be required to provide disclosure about 475 See Rule 202(a) of Regulation Crowdfunding. and potential secondary purchasers of the its directors and officers, business, current number 476 See, e.g., Crowdpassage Letter 3; Frutkin company’s securities with updated information of employees, financial condition (including Letter. about the company, it is unnecessary given the financial statements), capital structure, significant 477 See, e.g., Arctic Island Letter 5 (intermediary other, less burdensome, on-going disclosure factors that make an investment in the issuer should notify); Frutkin Letter; RocketHub Letter. requirements contained in the statute and proposed speculative or risky, material indebtedness and 478 See Rule 201(w) of Regulation Crowdfunding. regulation.’’). certain related-party transactions.

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circumstances that we proposed as well number of persons must register that to ‘‘file with the Commission and as the following two additional class of securities with the Commission. provide to investors and the relevant circumstances: (1) When the issuer has As proposed, Rule 203(b)(3) provides broker or funding portal, and make filed at least one annual report and has that any issuer terminating its annual available to potential investors’’ certain fewer than 300 holders of record; and reporting obligations will be required to disclosures. The statute does not specify (2) when the issuer has filed at least file with the Commission, within five a format that issuers must use to present three annual reports and has total assets business days from the date on which the required disclosures and file these that do not exceed $10 million. the issuer becomes eligible to terminate disclosures with the Commission. We Accordingly, under Rule 202(b), issuers its reporting obligation, a notice that it proposed in Rule 203 of Regulation will be required to file the annual report will no longer file and provide annual Crowdfunding to require issuers to file until the earliest of the following events reports pursuant to the requirements of the mandated disclosure using new occurs: Regulation Crowdfunding. The issuer Form C, which would require certain (1) The issuer is required to file also must check the box for ‘‘Form C– disclosures to be presented in a reports under Exchange Act Sections TR: Termination of Reporting’’ on the specified format, while allowing the 13(a) or 15(d); cover of Form C.490 issuer to customize the presentation of (2) the issuer has filed at least one We are not persuaded by the other disclosures required by Section annual report and has fewer than 300 suggestion of one commenter 491 that 4A(b)(1) and the related rules. holders of record; ongoing reports should be a condition to We proposed to require issuers to use (3) the issuer has filed at least three the Section 4(a)(6) exemption. As two an XML-based fillable form to input annual reports and has total assets that commenters noted at the pre-proposal certain information. Information not do not exceed $10 million; stage, under such an approach, required to be provided in text boxes in (4) the issuer or another party compliance with the exemption would the XML-based fillable form would be purchases or repurchases all of the not be known at the time of the filed as attachments to Form C. securities issued pursuant to Section transaction.492 This, in turn, would Under the proposed rules, Form C 4(a)(6), including any payment in full of create substantial uncertainty for issuers would be used for all of an issuer’s debt securities or any complete because there would be an indefinite filings with the Commission related to redemption of redeemable securities; or possibility of a potential future violation the offering made in reliance on Section (5) the issuer liquidates or dissolves of the exemption. We have modified the 4(a)(6). The issuer would check one of in accordance with state law. final rules from the proposal to clarify the following boxes on the cover of the We believe the addition of the two that the availability of the crowdfunding Form C to indicate the purpose of the termination events, which are generally exemption is not conditioned on Form C filing: consistent with the suggestions of compliance with the annual reporting, • ‘‘Form C: Offering Statement’’ for 486 commenters, should help alleviate progress update or termination of issuers filing the initial disclosures commenters’ concerns about related reporting obligations.493 Nevertheless, required for an offering made in reliance costs for certain issuers that may not issuers offering and selling securities in on Section 4(a)(6); have achieved a level of financial reliance on Section 4(a)(6) remain • ‘‘Form C–A: Amendment’’ for success that would sustain an ongoing obligated to comply with these reporting issuers seeking to amend a previously- reporting obligation. The 300 requirements. Moreover, as discussed in filed Form C for an offering; shareholder threshold reflected in Rule Section II.A.4 above, the final rules • ‘‘Form C–U: Progress Update’’ for 202(b)(2) is consistent with the deny issuers the benefit of relying on issuers filing a progress update required threshold used to determine whether an the exemption under Section 4(a)(6) for by Section 4A(b)(1)(H) and the related Exchange Act reporting company is future offerings until they file, to the rules; eligible to suspend its Section 15(d) 487 extent required, the two most recently • ‘‘Form C–AR: Annual Report’’ for or terminate its Section 13 488 reporting required annual reports.494 In addition, issuers filing the annual report required obligations. The option for an issuer to the final rules require the issuer to by Section 4A(b)(4) and the related conclude ongoing reporting after three disclose in its offering statement and rules; and annual reports as reflected in Rule annual report if it, or any of its • ‘‘Form C–TR: Termination of 202(b)(3) should help address concerns predecessors, previously failed to Reporting’’ for issuers terminating their raised by some commenters that the comply with the ongoing reporting reporting obligations pursuant to reporting obligation could potentially requirements of Regulation Section 4A(b)(4) and the related rules. extend indefinitely, while still requiring Crowdfunding. EDGAR would automatically provide larger issuers with more than $10 each filing with an appropriate tag million in total assets to continue 3. Form C and Filing Requirements depending on which box the issuer reporting. We chose the $10 million a. Proposed Rules checks so that investors could threshold in order to be consistent with Securities Act Section 4A(b)(1) distinguish among the different the total asset threshold in Section 495 requires issuers who offer or sell filings. 12(g)(1) of the Exchange Act.489 Under securities in reliance on Section 4(a)(6) Section 4A(b)(1) requires issuers to that provision, a company that has total file the offering information with the assets exceeding $10 million and a class 490 See cover page of Form C. Commission, provide it to investors and of securities held of record by a certain 491 See Parsont Letter. the relevant intermediary and make it 496 492 See Letter from Andrea L. Seidt, Comm’r, Ohio available to potential investors. 486 See, e.g., ABA Letter; EY Letter Div. of Sec. available at http://www.sec.gov/ (recommending the reporting obligations terminate comments/jobs-title-iii/jobstitleiii-199.pdf; Letter 495 EDGAR would tag the offering statement as after a certain amount of time if the issuer has 300 from John R. Fahy, Partner, Whitaker Chalk ‘‘Form C,’’ any amendments to the offering or fewer security holders); PBA Letter; RocketHub Swindle Schwartz, available at http://www.sec.gov/ statement as ‘‘Form C–A,’’ progress updates as Letter (recommending the reporting obligations comments/jobs-title-iii/jobstitleiii-175.htm. ‘‘Form C–U,’’ annual reports as ‘‘Form C–AR’’ and terminate after three consecutive annual reports). 493 See Rule 100(b)(4) of Regulation termination reports as ‘‘Form C–TR.’’ 487 See 17 CFR 240.12h–3. Crowdfunding. 496 Section 4A(b)(4) requires issuers to file with 488 15 U.S.C. 78m. 494 See Rule 100(b)(5) of Regulation the Commission and provide to investors, not less 489 15 U.S.C. 78l(g)(1). Crowdfunding. Continued

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Under the proposed rules, issuers would generally opposed the filing to information on the intermediary’s satisfy the requirement to file the requirements or opposed specific platform.507 With respect to the information with the Commission by aspects of the requirements.502 proposed methods (Web site posting or filing the Form C: Offering Statement, A few commenters requested email), one commenter stated that including any amendments and progress clarification whether all offering issuers would not have investors’ email updates, on EDGAR. To satisfy the material made available on the addresses,508 and another commenter requirement to provide the disclosures intermediary’s platform must be filed on noted that maintaining investors’ email to the relevant intermediary, we Form C.503 Two commenters addresses would require significant proposed that issuers provide to the recommended that not all materials be resources.509 relevant intermediary a copy of the required to be filed as exhibits.504 A c. Final Rules disclosures filed with the Commission. number of commenters noted that To satisfy the requirement to provide issuers would likely use various types of We are adopting Form C and the the disclosures, or make them available, media for their offerings, some of which related filing requirements 510 with a as applicable, to investors, we proposed cannot be filed on EDGAR.505 A number few modifications from the proposed that issuers provide the information to of commenters recommended that the rules.511 investors electronically by referring Commission adopt other disclosure First, the final rules will amend investors, such as through a posting on formats, such as a question-and-answer Regulation S–T to permit an issuer to the issuer’s Web site or by email, to the format.506 submit exhibits to Form C in Portable information on the intermediary’s A number of commenters generally Document Format (‘‘PDF’’) as official platform. The proposed rules would not supported the proposal to refer investors filings.512 We appreciate the views of require issuers to provide physical commenters that issuers would likely copies of the information to investors. 502 See, e.g., Angel Letter 1; CFIRA Letter 1; use various types of media for their CrowdCheck Letter 1; Mollick Letter; Public Startup offerings,513 and believe that permitting b. Comments on the Proposed Rules Letter 2; RocketHub Letter; WealthForge Letter (recommending that the Commission require the these materials to be filed in PDF format Commenters generally supported the filing of a Form C within 15 days of the offering will allow for more diverse proposed Form C requirement.497 Two first receiving an investment and at the completion presentations of information to be commenters supported the proposal to of the offering). reasonably available to investors 503 See, e.g., CrowdCheck Letter 1; Grassi Letter; use one form with different EDGAR tags Stephenson Letter. through a standardized, commonly 498 for each type of filing, while another 504 See, e.g., CFIRA Letter 1 (recommending that available media. Under the final rules, commenter recommended creating only ‘‘those documents most suited to police issuers may customize the presentation multiple forms in order to minimize the against fraud’’ be filed with the Commission because the intermediary serves as the primary length of the form.499 Two commenters 507 See, e.g., Grassi Letter; Joinvestor Letter; repository of the offering materials); CrowdCheck recommended that the Commission Letter 1 (recommending the Commission permit PeoplePowerFund Letter; Public Startup Letter 2; modify Form C and its variants to issuers to use ‘‘free writing’’ disclosure materials in Wefunder Letter; Wilson Letter. certain circumstances without having to file them 508 See Wefunder Letter. require an issuer to indicate the 509 jurisdictions in which the securities will with the Commission). See Grassi Letter. 505 See, e.g., CFIRA Letter 6; CFIRA Letter 7; 510 An issuer that does not already have EDGAR be or are sold, with one of those CrowdCheck Letter 1; Grassi Letter; Hackers/ filing codes, and to which the Commission has not commenters recommending ongoing Founders Letter; RocketHub Letter; Wefunder previously assigned a user identification number, disclosure of the amount sold in each Letter; Wilson Letter. which we call a ‘‘Central Index Key (CIK)’’ code, state.500 506 See, e.g., Guzik Letter 1; Guzik Letter 2; Guzik will need to obtain the codes by filing electronically Letter 3 (encouraging the Commission to provide an a Form ID [17 CFR 239.63; 249.446; 269.7 and Commenters were divided on the optional simplified disclosure format, perhaps in a 274.402] at https://www.filermanagement. EDGAR filing requirement. Some question and answer format); Hackers/Founders edgarfiling.sec.gov. The applicant also will be commenters supported the filing Letter (encouraging the Commission to require a required to submit a notarized authenticating requirement, with a few of those standard format and to allow issuers to provide document as a Portable Document Format (PDF) additional information); Hamilton Letter (suggesting attachment to the electronic filing. The specifically supporting the proposal that the Commission provide prototypes of Form C and authenticating document will need to be manually issuers file the Form C in electronic sample disclosures); RocketHub (seeking a simple, signed by the applicant over the applicant’s typed format only.501 Some commenters standardized general form other than U–7 or A–1 signature, to include the information contained in to provide legal certainty); Saunders Letter the Form ID and to confirm the authenticity of the (proposing that Form C be completed by selecting Form ID. See 17 CFR 232.10(b)(2). than annually, reports of the results of operations from a database of stock responses); SBA Office of and financial statements of the issuer. As discussed 511 See Rule 203 of Regulation Crowdfunding. We Advocacy Letter (describing recommendations from have made some technical changes in the final rules above in Section II.B.2, to satisfy this requirement, its roundtable attendees to adopt a simple question the rules require an issuer to post the annual report that do not affect their substantive requirements. To and answer format similar to that previously used maintain consistency with other Commission rules on its Web site and file it with the Commission. in Regulation A or to provide ‘‘standard boilerplate 497 and to keep electronic filing requirements See, e.g., Angel Letter 1 (specifically disclosures for some of the more complicated consolidated in Regulation S–T, we have deleted supporting the XML requirements); CFIRA Letter 7; nonfinancial disclosures, such as risk factors,’’ that from proposed Rules 201, 202 and 203 the phrase Consumer Federation Letter; Grassi Letter; Hackers/ are not required by the JOBS Act). ‘‘on EDGAR’’ where it appeared after ‘‘file with the Founders Letter; Traklight Letter; RocketHub Letter. We also received several comments prior to the 498 See Grassi Letter; RocketHub Letter. Commission.’’ We also have deleted the instruction Proposing Release on whether the Commission to proposed Rule 203(a)(1) as the list of information 499 See CFIRA Letter 7. should require a specific format for the required set forth in that instruction was duplicative of the 500 See, Commonwealth of Massachusetts Letter disclosure. Several commenters recommended that XML-based portion of Form C itself. (recommending Form C require an issuer to check the Commission require the disclosure on a form 512 boxes indicating the jurisdictions in which modeled after, or require the use of NASAA’s Small See Rule 101(a)(1)(xvii) of Regulation S–T. securities will be sold); NASAA Letter Company Offering Registration Form (U–7). See, Regulation S–T generally allows PDF documents to (recommending Form C–U (offering update form) e.g., Coan Letter; Liles Letter 1; Vim Funding Letter; be filed only as unofficial copies. See Rule 104 of and Form C–AR (annual report form) require NASAA Letter. One commenter suggested modeling Regulation S–T. However, Rule 101 provides for disclosure of the states where interests in the the required disclosure format after then-current certain exceptions to this restriction. See, e.g., Rule offering have been sold and the amount sold in each Form 1–A, which is used for securities offerings 101(ix) (allowing a PDF attachment to Form ID); state). made pursuant to Regulation A, but which has Rule 101(a)(xiv) (requiring the filing of Form 501 For commenters supporting the EDGAR filings since been modified as a result of recently adopted NRSRO and related exhibits in PDF as official requirement generally, see, e.g., CFIRA Letter 7; amendments to Regulation A. See 17 CFR 230.251 filings). Traklight Letter. For those specifically supporting et seq.; Amendments to Regulation A, Release No. 513 See, e.g., CFIRA Letter 6; CFIRA Letter 7; the electronic filing proposal, see, e.g., Arctic Island 33–9741 (March 25, 2015) [80 FR 21805 (April 20, CrowdCheck Letter 1; Grassi Letter; Hackers/ Letter 5; CFIRA Letter 7; RocketHub Letter; Wilson 2015)] Regulation A Adopting Release’’); Founders Letter; RocketHub Letter; Wefunder Letter. Commonwealth of Massachusetts Letter. Letter; Wilson Letter.

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of their non-XML disclosures and file certain other field names and the forms, will not result in unduly lengthy those disclosures as exhibits to the Form General Instructions to Form C to clarify forms, and will simplify the filing C. For example, an issuer may provide them or to reflect applicable changes to process for issuers and their preparers. the required disclosures by uploading to the disclosure requirements discussed EDGAR will automatically provide each EDGAR, as an exhibit to Form C, a PDF above. filing with an appropriate tag depending version of the relevant information We believe that requiring certain on which box the issuer checks so that presented on the intermediary’s information to be submitted in XML investors can distinguish among the platform, including charts, graphs, and format will support the assembly and different filings. a transcript or description of any video transmission of those required We also are adopting, largely as presentation or any other media not 516 disclosures to EDGAR on Form C. It proposed, the requirements to provide reflected in the PDF. This approach also will make certain key information the offering information to investors and should provide key offering information about each offering available to the relevant intermediary and make it in a standardized format and give investors and market observers in issuers flexibility in the presentation of available to potential investors under electronic format and allow the Section 4A(b)(1).520 In addition, as other required disclosures. We believe Commission to observe the discussed above in Section II.B., we this flexibility is important given that implementation of the crowdfunding moved the definition of ‘‘investor’’ from we expect that issuers engaged in exemption under Section 4(a)(6). proposed Rule 300(c)(4) to Rule 100(d) offerings in reliance on Section 4(a)(6) Information will be available about the to clarify that for purposes of all of would encompass a wide variety of types of issuers using the exemption, Regulation Crowdfunding, ‘‘investor’’ industries at different stages of business including the issuers’ size, location, includes any investor or any potential development. securities offered and offering amounts investor, as the context requires.521 In We are adopting the XML-based and the intermediaries through which connection with this clarifying change, fillable form as proposed with a few the offerings are taking place. We 514 we have deleted the phrase ‘‘and make modifications. As suggested by some believe the addition of the requirement 515 available to potential investors’’ each commenters, the XML-based portion to indicate the jurisdictions in which time it appeared in the rule text to avoid of Form C will require issuers to the issuer intends to offer the securities, redundancy.522 indicate by checkbox the jurisdictions as suggested by several commenters, in which securities are intended to be will facilitate oversight by state The final rules provide that issuers offered. We also are changing the name regulators, who retain antifraud will satisfy the requirement to file the of proposed Form C–A to Form C/A to authority over crowdfunding offering information with the be consistent with the naming transactions, while imposing only Commission and provide it to the convention of our other amendment minimal costs on issuers. relevant intermediary by filing the Form forms and adding Form C–AR/A to In addition, in a change from the C: Offering Statement and any allow, and facilitate identification of, proposed rules, the final Form C amendments and progress updates and the amendment of an issuer’s Form C– includes an optional Question and providing to the relevant intermediary a AR annual report. In addition, we are Answer (‘‘Q&A’’) format that issuers copy of the disclosures filed with the adding an instruction to clarify that the may elect to use to provide the Commission.523 The initial offering issuer should mark the appropriate box disclosures that are not required to be statement should include all of the on the cover of Form C to indicate filed in XML format.517 Issuers opting to information that is provided on the which form it is filing. We also are use this format would prepare their intermediary’s Web site.524 We also are splitting the ‘‘Form, jurisdiction and disclosures by answering the questions adopting as proposed the requirements date of organization’’ field into three provided and filing that disclosure as an to file with the Commission and fields to facilitate more accurate exhibit to the Form C. A number of provide, or make available, as tracking of this data. We also inserted commenters noted that an optional applicable, to investors and the relevant the statement required by paragraph (g) format such as this would be less intermediary an amendment to the of Rule 201 immediately following the burdensome for small issuers while still offering statement to disclose any data required by that paragraph, so that providing the Commission and investors material changes, additions or updates statement appears together with the with the required information.518 We to information provided to investors relevant data. Finally, we are modifying 525 believe that this option may help to through the intermediary’s platform. facilitate compliance and ease burdens Issuers may, but are not required to, file 514 As discussed in Section II.B.1, issuers will an amendment to reflect other changes, input in the proposed XML-based filing the on by providing a mechanism by which following information: Name, legal status and issuers can easily confirm that they have additions or updates to information contact information of the issuer; name, SEC file provided all required information. provided to investors through the number and CRD number (as applicable) of the Consistent with the proposal, we are intermediary through which the offering will be 520 See Rule 203(a) of Regulation Crowdfunding. conducted; the amount of compensation paid to the adopting a single Form C for all filings 521 intermediary to conduct the offering, including the under Regulation Crowdfunding.519 We See Rule 100(d) of Regulation Crowdfunding. amount of referral and other fees associated with believe that the use of one form will be 522 See Rule 203(a) of Regulation Crowdfunding. 523 the offering; any other direct or indirect interest in more efficient than requiring multiple See Instructions 1 and 2 to paragraph (a) of the issuer held by the intermediary, or any Rule 203 of Regulation Crowdfunding. We arrangement for the intermediary to acquire such an anticipate that issuers seeking to engage in an interest; number of securities offered; offering price; 516 The Commission will make the information offering in reliance on Section 4(a)(6) may likely target offering amount; whether oversubscriptions available via EDGAR both in a traditional text-based work with an intermediary to prepare the disclosure will be accepted and, if so, how they will be format for reading and as downloadable XML- that would be provided on the intermediary’s allocated; maximum offering amount (if different tagged data for analysis. platform and filed with the Commission. In some from the target offering amount); deadline to reach 517 See Item 1 of General Instruction III to Form cases, intermediaries may offer, as part of their the target offering amount; current number of C of Regulation Crowdfunding. service, to file the disclosure with the Commission employees of the issuer; selected financial data for 518 See, e.g., Guzik Letter 1; Guzik Letter 2; Guzik on behalf of the issuer. the prior two fiscal years; and the jurisdictions in Letter 3; Hackers/Founders Letter; Hamilton Letter; 524 See Rule 203(a)(1) of Regulation which the issuer intends to offer the securities. RocketHub Letter; Saunders Letter; SBA Office of Crowdfunding. 515 See, e.g., Commonwealth of Massachusetts Advocacy Letter. 525 See Rule 203(a)(2) of Regulation Letter; NASAA Letter. 519 See Rule 203 of Regulation Crowdfunding. Crowdfunding.

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intermediary’s platform that it considers and the offering may be found. The notices,533 with some pointing to the not material. proposal did not impose limitations on changing nature of social media and To satisfy the requirement to provide how the issuer distributes the notices. potential new user interfaces.534 Two the disclosures, or make them available, As proposed, the notice could include commenters, however, stated that as applicable, to investors, the final no more than: (1) A statement that the communications about the offering rules allow issuers to provide the issuer is conducting an offering, the should always be conducted through the information to investors electronically name of the intermediary through which intermediary.535 A number of by referring investors to the information the offering is being conducted and a commenters also supported allowing an on the intermediary’s platform through link directing the investor to the issuer to communicate with investors a posting on the issuer’s Web site or by intermediary’s platform; (2) the terms of about the terms of the offering through email.526 As discussed in the proposal the offering; and (3) factual information communication channels provided by and noted by commenters, many issuers about the legal identity and business the intermediary on the intermediary’s may not have email addresses for location of the issuer, limited to the platform, so long as the issuer identifies investors. Accordingly, the final rules name of the issuer of the security, the itself in all communications.536 permit issuers to provide this address, phone number and Web site of Some commenters opposed the information to investors through a Web the issuer, the email address of a proposed advertising rules, with some site posting.527 However, to the extent representative of the issuer and a brief stating that the advertising restrictions email addresses for investors are description of the business of the issuer. are unnecessary because sales must available to issuers, issuers may contact Under the proposed rules, ‘‘terms of the occur through an intermediary’s investors via email to direct them to the offering’’ would include: (1) The platform, which would contain all of the posted information. We continue to amount of securities offered; (2) the relevant disclosures and investor believe that investors in this type of nature of the securities; (3) the price of acknowledgments.537 One commenter Internet-based offering will be familiar the securities; and (4) the closing date asked that an issuer be given broader with obtaining information on the of the offering period. The proposed leeway to publicize its business or Internet and that providing the rules would not, however, restrict an offering on its own Web site or social information in this manner will be cost- issuer’s ability to communicate other media platform so long as the specific effective for issuers. As discussed in the information that does not refer to the terms of the offering can be found only Proposing Release, we believe Congress terms of the offering. through the intermediary’s platform.538 contemplated that crowdfunding would, The proposed rules also would allow One commenter recommended allowing by its very nature, occur over the an issuer to communicate with investors advertising notices to have a section for Internet or other similar electronic about the terms of the offering through supplemental information highlighting 528 media that is accessible to the public. communication channels provided by certain intangible purposes such as a Therefore, consistent with the proposed the intermediary on the intermediary’s particular social cause.539 rules, the final rules do not require platform, so long as the issuer identifies Two other commenters recommended issuers to provide physical copies of the itself as the issuer in all that any advertising notices be filed information to investors. communications. with the Commission and/or the 540 4. Prohibition on Advertising Terms of b. Comments Received relevant intermediary. Several other the Offering commenters supported the proposed Commenters were mostly supportive a. Proposed Rules approach of not having advertising of these provisions. Several commenters notices filed with the Commission or Securities Act Section 4A(b)(2) expressed support for the proposed the intermediary, citing concerns about provides that an issuer shall ‘‘not content of advertising notices 529 and various formats of the communications, advertise the terms of the offering, the definition of ‘‘terms of the inability to capture all third-party except for notices which direct investors offering.’’ 530 A number of commenters communications, and the costs to the funding portal or broker.’’ also supported the proposal’s absence of Consistent with the statute, proposed a restriction on an issuer’s ability to 533 See, e.g., Arctic Island Letter 5; Joinvestor Rule 204 of Regulation Crowdfunding communicate information that does not Letter; Public Startup Letter 2; RoC Letter; would allow an issuer to publish a refer to the terms of the offering.531 RocketHub Letter. 534 notice advertising the terms of an Several commenters requested See, e.g., Arctic Island Letter 5; Public Startup offering in reliance on Section 4(a)(6) so Letter 2; RocketHub Letter. clarification on various aspects of the 535 See Hackers/Founders Letter (supporting the long as the notice includes the address proposal.532 issuer being able to repost the communications of the intermediary’s platform on which Several commenters recommended elsewhere so long as it first appeared through the additional information about the issuer that, consistent with the proposal, the intermediary); Joinvestor Letter. Commission not restrict the media or 536 See, e.g., ASSOB Letter; CFIRA Letter 6; Commonwealth of Massachusetts Letter; Consumer 526 See Instruction 2 to Rule 203(a) of Regulation format that may be used for advertising Federation Letter; Hackers/Founders Letter; Odhner Crowdfunding. Letter; Public Startup Letter 2; RoC Letter; 527 See, e.g., Grassi Letter; Wefunder Letter. 529 See, e.g., CFIRA Letter 6; Commonwealth of RocketHub Letter; Wefunder Letter. Some of these 528 We note that Section 301 of the JOBS Act Massachusetts Letter; RocketHub Letter. commenters also recommended that all interested states that ‘‘[Title III] may be cited as the ‘Capital 530 See, e.g., Arctic Island Letter 5; CFIRA Letter persons, such as officers, directors and other agents, Raising Online While Deterring Fraud and should identify themselves in all communications Unethical Non-Disclosure Act of 2012’.’’ See 6; Heritage Letter; Joinvestor Letter; RocketHub Letter. on the intermediary’s platform. See CIFRA Letter 6; Section 301 of the JOBS Act. See also 158 Cong. Hackers/Founders Letter. Rec. S1689 (daily ed. March 15, 2012) (statement of 531 See, e.g., ABA Letter; CFIRA Letter 6; 537 See, e.g., FundHub Letter 1; Seed&Spark Letter Sen. Mark Warner) (‘‘There is now the ability to use Consumer Federation Letter; Hackers/Founders (noting the proposed advertising restrictions will the Internet as a way for small investors to get the Letter; Public Startup Letter 2; RocketHub Letter. restrict the ability of filmmakers to market and raise same kind of deals that up to this point only select 532 See, e.g., ABA Letter (recommending the rule money for their films); Arctic Island Letter 5; investors have gotten ..., where we can now use text include a safe harbor for regularly released the power of the Internet, through a term called factual business information so long as it does not PeoplePowerFund Letter. 538 crowdfunding.’’); id. at S–1717 (Statement of Sen. refer to the terms of the offering); CIFRA Letter 6 See Fryer Letter. Mary Landrieu) (‘‘this crowdfunding bill—which is, (requesting more guidance on advertising formats 539 See RocketHub Letter. in essence, a way for the Internet to be used to raise and content and the definition of ‘‘terms of the 540 See, e.g., Commonwealth of Massachusetts capital . . .’’). offering’’). Letter; CFIRA Letter 6.

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associated with trying to capture the communications. For example, an issuer the offering or even challenge or refute data.541 would be able to note on its own Web statements made through the c. Final Rules site or on social media that it is communication channels provided by We are adopting the prohibition on conducting an offering and direct the intermediary. Therefore, the final advertising terms of the offering readers to the materials on the rules do not restrict issuers from substantially as proposed, with minor intermediary’s platform. There is no participating in those communications changes to the rule text for clarity.542 requirement for legends on these notices so long as the issuer identifies itself as Under the final rules, an advertising because the issuer will be directing the issuer in all communications. notice that includes the terms of the investors to the materials on the Based on the suggestion of a few offering can include no more than: (1) intermediary’s platform that will commenters,550 we are clarifying in the A statement that the issuer is include those required legends. final rules that the prohibition on conducting an offering, the name of the We believe that this approach will advertising the terms of the offering and intermediary through which the offering provide flexibility for issuers while related requirements apply to persons is being conducted and a link directing protecting investors by limiting the acting on behalf of the issuer.551 For the investor to the intermediary’s advertising of the terms of the offering example, persons acting on behalf of the platform; (2) the terms of the offering; to the information permitted in the issuer are required under Rule 204(c) to and (3) factual information about the notice and directing them to the identify their affiliation with the issuer legal identity and business location of intermediary’s platform where they can in all communications on the the issuer, limited to the name of the access the disclosures necessary for intermediary’s platform.552 issuer of the security, the address, them to make informed investment In addition, the final rules do not phone number and Web site of the decisions. restrict an issuer’s ability to issuer, the email address of a Consistent with the recommendation communicate other information that representative of the issuer and a brief of several commenters,547 the final rules might occur in the ordinary course of its description of the business of the issuer. do not impose limitations on how the operations and that does not refer to the Consistent with the proposal, the final issuer distributes the notices. For terms of the offering. As stated in the rules define ‘‘terms of the offering’’ to example, an issuer could place notices Proposing Release, we believe that this include: (1) The amount of securities in newspapers or post notices on social is consistent with the statute because offered; (2) the nature of the securities; media sites or the issuer’s own Web site. Section 4A(b)(2) restricts the advertising (3) the price of the securities; and (4) the We believe the final rules will allow of the terms of the offer. The closing date of the offering period.543 issuers to leverage social media to Commission has interpreted the term The permitted notices will be similar attract investors, while at the same time ‘‘offer’’ broadly, however, and has to ‘‘tombstone ads’’ under Securities Act protecting investors by limiting the explained that ‘‘the publication of Rule 134,544 except that the notices will ability of issuers to advertise the terms information and publicity efforts, made be required to direct an investor to the of the offering without directing them to in advance of a proposed financing intermediary’s platform through which the required disclosure. We are not which have the effect of conditioning the offering is being conducted, such as adopting a requirement that all notices the public mind or arousing public through a link directing the investor to be filed with the Commission or interest in the issuer or in its securities 553 the platform. relevant intermediary, as requested by constitutes an offer. . .’’ In this 548 Although at least one commenter some commenters. Other commenters regard, we also note that Securities Act 554 recommended allowing advertising expressed concerns about the costs that Rule 169 permits non-Exchange Act notices to have a section for would be associated with such a reporting issuers engaged in an initial supplemental information highlighting requirement, and given that investors public offering to continue to publish, certain intangible purposes such as a will be directed to the required subject to certain exclusions and particular social cause,545 we do not disclosure on the intermediary’s conditions, regularly released factual believe a separate section is necessary. platform, we believe the final rules business information that is intended appropriately take these factors into for use by persons other than in their Instead, this type of information may be 549 included as part of the ‘‘brief account. capacity as investors. Further, the final rules allow an issuer While one commenter requested a description of the business.’’ Two commenters 546 expressed to communicate with investors about safe harbor for regularly released factual the terms of the offering through business information so long as it does concern that the proposed rule would communication channels provided by not refer to the terms of the offering,555 not allow enough flexibility for brief, the intermediary on the intermediary’s we do not believe that a safe harbor is informal social media communications, platform, so long as the issuer identifies necessary. Ultimately, whether or not a but we disagree. A notice cannot itself as the issuer in all communication is limited to factual include more than the enumerated communications. We believe that one of business information depends on the matters, but an issuer has the flexibility the central tenets of the concept of facts and circumstances of that not to include each of the enumerated crowdfunding is that the members of the particular communication. However, matters in the notice, which may crowd decide whether or not to fund an facilitate certain types of social media idea or business after sharing 550 See, e.g., CIFRA Letter 6; Hackers/Founders information with each other. As part of Letter. 541 See, e.g., Arctic Island Letter 5; ASSOB Letter; 551 those communications, we believe it is See Rule 204 of Regulation Crowdfunding. Public Startup Letter 2; RocketHub Letter. 552 See also Section II.B.5 for disclosures required 542 See Rule 204 of Regulation Crowdfunding. important for the issuer to be able to by persons promoting the offering. 543 See Instruction to Rule 204 of Regulation respond to questions about the terms of 553 Securities Offering Reform, Release No. 33– Crowdfunding. 8591 (July 19, 2005) [70 FR 44722 (Aug. 3, 2005)] 544 17 CFR 230.134. 547 See, e.g., Arctic Island Letter 5; Joinvestor at 44731. The term ‘‘offer’’ has been interpreted 545 See RocketHub Letter. Letter; Public Startup Letter 2; RoC Letter; broadly and goes beyond the common law concept 546 See FundHub Letter 1; Fryer Letter (‘‘a rigid RocketHub Letter. of an offer. See, e.g., Diskin v. Lomasney & Co., 452 tombstone approach is inconsistent with the 548 See, e.g., Hackers/Founders Letter; Joinvestor F.2d 871 (2d. Cir. 1971). structure and informality of modern social media Letter. 554 17 CFR 230.169. communication tools.’’) 549 See, e.g., ASSOB Letter; RocketHub Letter. 555 See ABA Letter.

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issuers may generally look to the channels provided by the intermediary, the objectives of this provision without provisions of Rule 169 for guidance in unless the promotion is limited to being overly prescriptive. There are a making this determination in the notices that comply with the proposed number of reasonable steps the issuer Regulation Crowdfunding context. advertising rules.559 can take to ensure compliance. An issuer could, for example, contractually 5. Compensation of Persons Promoting c. Final Rules require any promoter to include the the Offering We are adopting, as proposed, final required statement about receipt of a. Proposed Rules rules about the compensation of persons compensation, confirm that the promoting the offering, with one promoter is adhering to the Consistent with Securities Act Section 560 4A(b)(3), proposed Rule 205 of clarifying change. We anticipate that intermediary’s terms of use that require Regulation Crowdfunding would communication channels provided by promoters to affirm whether or not they prohibit an issuer from compensating, the intermediary will provide a forum are compensated by the issuer, monitor or committing to compensate, directly through which investors could share communications made by such persons or indirectly, any person to promote the information to help the members of the and take the necessary steps to have any issuer’s offering through communication crowd decide whether or not to fund the communications that do not have the channels provided by the intermediary, issuer. We believe that it will be required statement removed promptly unless the issuer takes reasonable steps important for investors to know whether from the communication channels, or to ensure that the person clearly persons using those communication retain a person specifically identified by discloses the receipt (both past and channels are persons acting on behalf of the intermediary to promote all issuers prospective) of compensation each time the issuer or persons receiving on its platform. the person makes a promotional compensation from the issuer (or from As proposed, the final rules also communication. Further, a founder or persons acting on behalf of the issuer), specify that the issuer shall not an employee of the issuer that engages to promote the issuer’s offering because compensate or commit to compensate, in promotional activities on behalf of of the potential for self-interest or bias directly or indirectly, any person to the issuer through the communication in communications by these persons. promote its offerings outside of the channels provided by the intermediary A number of commenters supported communication channels provided by would be required to disclose, with each the broad applicability of the proposed the intermediary, unless the promotion rules to persons acting on behalf of the is limited to notices that comply with posting, that he or she is engaging in 561 those activities on behalf of the issuer. issuer. The text of the proposed rule the advertising rules discussed above in Under the proposed rules, an issuer included a sentence stating that the Section II.B.4.562 This prohibition would not be able to compensate or disclosure obligation would apply to ‘‘a should prevent issuers from commit to compensate, directly or founder or an employee of the issuer circumventing the restrictions on indirectly, any person to promote its that engages in promotional activities on advertising by compensating a third offerings outside of the communication behalf of the issuer through the party to do what the issuer cannot do channels provided by the intermediary, communication channels.’’ Based on directly. unless the promotion is limited to comments received, we are removing 6. Other Issuer Requirements notices that comply with the proposed that sentence and adding an instruction advertising rules. to clarify that the requirement applies a. Oversubscriptions broadly to all persons acting on behalf The proposed rules would not limit b. Comments Received of the issuer, regardless of whether or an issuer’s ability to accept investments not the compensation they receive is Commenters were generally in excess of the target offering amount, specifically for the promotional supportive of promoter disclosure and subject to the $1 million annual limit.563 556 activities. The change is intended to the proposed rule. A number of Issuers would be required to disclose clarify that the disclosure requirement commenters supported the broad how much they would be willing to applies to persons hired specifically to applicability of the proposed rules to accept in oversubscriptions, how the 557 promote the offering as well as to persons acting on behalf of the issuer. oversubscriptions would be allocated, persons (including, but not limited to, Some commenters recommended that and the intended purpose of those founders, employees and directors) who the issuer or intermediary bear more additional funds. responsibility for ensuring that the are otherwise employed by the issuer or Commenters were generally identity of the promoters be who undertake promotional activities supportive of this approach to 558 prominently disclosed. on behalf of the issuer. oversubscriptions.564 Some commenters A number of commenters also While we appreciate the views of supported the proposed flexibility to supported the requirement in the commenters who suggested that we allow issuers to determine how to proposal that an issuer not compensate impose additional requirements on allocate oversubscribed offerings,565 or commit to compensate, directly or issuers or intermediaries to ensure that while other commenters recommended indirectly, any person to promote its the identity of promoters is prominently that the Commission require issuers to offerings outside of the communication disclosed, we believe the requirement allocate oversubscriptions using a that the issuer take reasonable steps to prescribed method.566 Two commenters 556 See, e.g., CFA Institute Letter; Consumer ensure that promoters clearly disclose Federation Letter (supporting proposal but the receipt of compensation for generally questioning the wisdom of allowing paid 562 See Rule 205(b) of Regulation Crowdfunding. promoters to participate in the communication communications is sufficient to achieve 563 See proposed Rule 201(h) and Instruction to channels at all); NASAA Letter; NFIB Letter; Public paragraph (i) of Rule 201 of Regulation Startup Letter 2. 559 See, e.g., ASSOB Letter; Consumer Federation Crowdfunding, and cover page of Form C. 557 See, e.g., CFA Institute Letter; CFIRA Letter 6; Letter; Joinvestor Letter; Public Startup Letter 2; 564 See, e.g., CFA Institute letter; EMKF letter; Commonwealth of Massachusetts Letter; Consumer RoC Letter; RocketHub Letter. Jacobson letter; Wefunder letter. Federation Letter; Hackers/Founders Letter; 560 See Rule 205 of Regulation Crowdfunding. 565 See, e.g., ASSOB Letter; CFA Institute Letter; Joinvestor Letter; RocketHub Letter; MCS Letter. 561 See, e.g., CFA Institute Letter; CFIRA Letter 6; EMKF Letter; Public Startup Letter 2; RocketHub 558 See, e.g., ASSOB Letter; Commonwealth of Commonwealth of Massachusetts Letter; Consumer Letter; Wefunder letter. Massachusetts Letter; Joinvestor Letter; MCS Letter; Federation Letter; Hackers/Founders Letter; 566 See, e.g., Fund Democracy Letter (pro-rata); RoC Letter; RocketHub Letter. Joinvestor Letter; RocketHub Letter; MCS Letter. Consumer Federation Letter (same as Fund

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recommended that the Commission suggested the Commission require fairly valued and that approaches to limit the maximum oversubscription issuers to set a fixed price.573 valuation that put investors at a amount to a certain percentage of the We are adopting the final rules as disadvantage be prohibited.581 One target offering amount,567 while two proposed.574 While we appreciate the commenter generally supported other commenters opposed such a view of at least one commenter 575 that requiring issuers to describe how limit.568 One commenter recommended a fixed price may be simpler for securities being offered are being that the Commission revise the investors to understand, we believe that valued,582 while another commenter proposed rules to clarify that issuers the statute contemplated flexible pricing generally opposed such requirement.583 would be required to disclose the by providing that issuers may disclose We are adopting, as proposed, final ‘‘other’’ basis upon which the method for determining the price, rules that neither limit the type of oversubscriptions would be provided that the final price and securities that may be offered in reliance allocated.569 required disclosures are provided to on Section 4(a)(6) nor prescribe a each investor prior to any sales. We also method for valuing the securities.584 We We are adopting the rule relating to believe the cancellation rights in the noted in the proposal that the statute oversubscriptions as proposed, with one final rules 576 will provide investors a refers to ‘‘securities’’ and does not limit 570 clarifying change. We do not believe, reasonable opportunity to cancel their the type of securities that could be as some commenters suggested, that it is investment commitment if they wish to offered pursuant to the exemption. necessary to limit the maximum do so after the price is fixed. Issuers are required to describe the oversubscription amount. Nor do we terms of the securities and the valuation c. Types of Securities Offered and believe it is necessary to prescribe how method in their offering materials.585 Valuation to allocate oversubscribed offerings so We believe this approach is consistent long as the issuer discloses, at the The proposed rules would not limit with the statute and will provide commencement of the offering, how the type of securities that may be offered flexibility to issuers to determine the securities in such offerings will be in reliance on Section 4(a)(6) nor types of securities that they offer to allocated, and the intended purpose of prescribe a method for valuing the investors and how those securities are those additional funds. This disclosure securities. Issuers would be required to valued, while providing investors with should provide investors with describe the terms of the securities and the information they need to make an information they need to make informed the valuation method in their offering informed investment decision. investment decisions while providing materials. While some commenters suggested issuers flexibility to structure the A number of commenters generally that the Commission should provide offering as they believe appropriate. In supported not limiting the types of specific valuation methods or standards response to a comment received,571 we securities that may be offered and sold for securities-based crowdfunding are clarifying in the final rules that, in reliance of Section 4(a)(6).577 transactions, we are not persuaded that regardless of the structure, the issuer Comments were more varied on there would be sufficient benefits to must describe how securities in valuation methodology. Some being prescriptive in this regard. oversubscribed offerings will be commenters recommended that the Methods and valuations of early stage allocated. Commission neither require nor prohibit companies vary significantly, and any a specific valuation methodology,578 attempt to choose a particular valuation b. Offering Price while others recommended that the methodology could limit flexibility and As discussed above in Section Commission prescribe a set of valuation have the result of endorsing one standards that have universal approach over another without II.B.1.a.i.(e), proposed Rule 201(l) would 579 require an issuer to disclose the offering application for startups. Two necessarily having a sound basis for price of the securities or, in the commenters recommended that the doing so. We believe the requirement alternative, the method for determining Commission require issuers to base the that issuers describe the methods they the price, provided that prior to any sale valuation of their securities on the price use to value their securities in their at which the issuer previously sold offering materials, including the of securities, each investor is provided 580 in writing the final price and all securities, and another commenter requirement that they describe examples required disclosure. The proposed rules recommended that the Commission of methods for how such securities may would not require issuers to set a fixed consider whether additional standards be valued by the issuer in the future, price or prohibit dynamic pricing. are needed to ensure that securities are will provide investors with the information they need to make an We received a few comments 573 See RocketHub Letter. informed investment decision. supporting the proposed approach or 574 See Rule 201(l) of Regulation Crowdfunding. The final rules do not limit the types expressing opposition to requiring a See also Section II.C.6 for a discussion of of securities that may be offered in fixed price,572 while another commenter cancellation provisions. 575 See RocketHub Letter. reliance on Section 4(a)(6), and thus 576 See Rules 201(j) and 201(k) of Regulation debt securities may be offered and sold Democracy); Joinvestor letter (first-come, first- Crowdfunding. in crowdfunding transactions. As we served or algorithmic random selection); 577 See, e.g., CFA Institute Letter; Concerned stated in the Proposing Release, in PeoplePowerFund Letter (first-come, first-served). Capital Letter; Crowdstockz Letter; Hackers/ 567 general, the issuance of a debt security See Joinvestor Letter (10%); RFPIA Letter Founders Letter; Joinvestor Letter; Public Startup (20%). Letter 2; RocketHub Letter; Tiny Cat Letter; Wilson 568 See Jacobson Letter; Public Startup Letter 2. Letter. 581 See Consumer Federation Letter. 569 See Fund Democracy Letter. 578 See, e.g., Hackers/Founders Letter; Heritage 582 See CFIRA Letter 7. 570 See Rule 201(h) to Regulation Crowdfunding. Letter; PeoplePowerFund Letter; Public Startup 583 See Thomas Letter 2 (recommending that if 571 See Fund Democracy Letter. Letter 2; RocketHub Letter; Wilson Letter. issuers are required to describe the valuation 572 See, e.g., CFA Institute Letter (stating that 579 See, e.g., 11 Wells Letter; Active Agenda method in their offering materials, the rule should disclosure of changes and methods used to Letter; Borrell Letter; Ellenbogen Letter; Greer provide ‘‘safe harbor’’ language that issuers can use determine share prices, along with investors’ rights Letter; Mountain Hardwear Letter; Moyer Letter; in providing such description.) to cancel their investment commitments, provide NaviGantt Letter; Vidal Letter. 584 See Rule 201(m) of Regulation Crowdfunding. reasonable safeguards); Wilson Letter; Public 580 See, e.g., Public Startup Letter 3; Wefunder 585 See Rule 201(m)(1) and (4) of Regulation Startup Letter 2. Letter. Crowdfunding.

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raises questions about the applicability would be engaged in the business of b. Comments on the Proposed Rules of the Trust Indenture Act of 1939 effecting securities transactions for the The Proposing Release requested 586 (‘‘Trust Indenture Act’’). Although accounts of others through comments on whether there were the Trust Indenture Act applies to any crowdfunding, it would be a ‘‘broker’’ funding portal activities, other than debt security sold through the use of the within the meaning of Section 3(a)(4) of those in Exchange Act Section 3(a)(80), mails or interstate commerce, including the Exchange Act.590 Accordingly, that we should prohibit, and whether debt securities sold in transactions that proposed Rule 300(c)(2) of Regulation any prohibitions should be modified or are exempt from Securities Act Crowdfunding would define ‘‘funding removed. We also requested comments registration, Trust Indenture Act Section portal’’ consistent with the statutory about whether further guidance was 304(b) provides an exemption for any definition of ‘‘funding portal,’’ with the necessary on the provisions of the transaction that is exempted by substitution of the word ‘‘broker’’ for the Exchange Act and the rules and Securities Act Section 4 from the word ‘‘person.’’ regulations thereunder that would apply provisions of Section 5 of the Act.587 An We also stated in the Proposing to funding portals. issuer offering debt securities in reliance Some commenters stated that the Release that the proposed rules would on Section 4(a)(6), therefore, would be Commission should not provide any 588 apply not only to funding portals, but able to rely on this exemption. Based further guidance or prohibitions on also to their associated persons in many on the availability of this exemption, we funding portal activity in addition to are not adopting a specific exemption instances. The terms ‘‘person associated those required by statute.594 One of from the requirements of the Trust with a broker or dealer’’ and ‘‘associated these commenters stated that the Indenture Act for offerings of debt person of a broker or dealer’’ are defined proposed regulations for funding portal 591 securities made in reliance on Section in Exchange Act Section 3(a)(18). activities are ‘‘sufficient for investor 4(a)(6). Proposed Rule 300(c)(1) of Regulation protection and proper regulatory Crowdfunding would similarly define 595 C. Intermediary Requirements oversight.’’ Another commenter the term ‘‘person associated with a opposed removing or modifying the 1. Definitions of Funding Portals and funding portal or associated person of a statutory limitations on funding portal Associated Persons funding portal’’ to mean any partner, activities, stating that if funding portals a. Proposed Rules officer, director or manager of a funding wish to engage in the prohibited portal (or any person occupying a activities, they could do so by Securities Act Section 4(a)(6)(C) similar status or performing similar requires a crowdfunding transaction to registering, and being appropriately functions), any person directly or 596 be conducted through a broker or regulated as, broker-dealers. indirectly controlling or controlled by a funding portal that complies with the c. Final Rules funding portal, or any employee of a requirements of Securities Act Section funding portal, other than persons After considering the comments, we 4A(a). The term ‘‘broker’’ is generally are adopting, as proposed, the defined in Exchange Act Section 3(a)(4) whose functions are solely clerical or ministerial. The proposed rules would definitions of ‘‘associated person of a as any person that effects transactions in funding portal or person associated with securities for the account of others. provide, however, that persons who are excluded from the definition of a funding portal’’ and ‘‘funding portal’’ Exchange Act Section 3(a)(80) defines in Rules 300(c)(1) and(2), respectively. the term ‘‘funding portal’’ as any person associated person of a funding portal because their functions are solely In particular, we believe that, at the acting as an intermediary in a present time, the statutory prohibitions transaction involving the offer or sale of clerical or ministerial would remain subject to our sanctioning authority on a funding portal in Exchange Act securities for the account of others, Section 3(a)(80), as reflected in the final under Exchange Act Sections 15(b)(4) solely pursuant to Securities Act rule definition of a funding portal, and 15(b)(6).592 This definition is Section 4(a)(6), that does not: (1) Offer provide appropriate investor consistent with, and modeled on, the investment advice or recommendations; protections. (2) solicit purchases, sales or offers to language of Exchange Act Section We also are adopting the definition of 593 buy the securities offered or displayed 3(a)(18). ‘‘investor’’ from the proposed rules but on its Web site or portal; (3) compensate In proposed Rule 300(c)(4), we also have moved the definition to Rule employees, agents or other persons for defined ‘‘investor’’ as any investor or 100(d), and made a modification to such solicitation or based on the sale of any potential investor, as the context clarify that the definition applies to all securities displayed or referenced on its requires. of Regulation Crowdfunding.597 Web site or portal; (4) hold, manage, Although commenters did not address possess or otherwise handle investor 590 See Proposing Release at 78 FR 66458. See funds or securities; or (5) engage in such also discussion in Section II.D.2. 594 See, e.g., RocketHub Letter; Tiny Cat Letter other activities as the Commission, by 591 15 U.S.C. 78c(a)(18). (stating that the proposed regulations provide a rule, determines appropriate.589 592 Section 15(b)(4) (15 U.S.C. 78o(b)(4)) ‘‘healthy level of investor protection, but are not In the Proposing Release, we authorizes the Commission to bring administrative overly burdensome and we wholeheartedly explained that because a funding portal proceedings for the imposition of sanctions, up to appreciate the [C]ommission’s general attitude of and including the revocation of a broker’s restraint’’). Another commenter also opposed registration, when the broker violates the federal additional prohibitions, stating that ‘‘to add 586 15 U.S.C. 77aaa et seq. securities laws (and for other misconduct). Section prohibitions would be an illegal Rule not 587 15 U.S.C. 77ddd(b). 15(b)(6) (15 U.S.C. 78o(b)(6)) provides similar authorized by the JOBS Act legislation.’’ See Public 588 Trust Indenture Act Section 304(a)(8) [15 sanctioning authority with respect to persons Startup Letter 2. This commenter made a similar U.S.C. 77ddd(a)(8)] and Rule 4a–1 [17 CFR 260.4a– associated with a broker, including the ability to bar argument with respect to various aspects of the rule. 1] also provide an exemption to issue up to $5 such persons from associating with any We note, however, that the JOBS Act provides the million of debt securities without an indenture in Commission registrant. Commission the authority to provide other any 12-month period. 593 We note, however, that the definition in requirements for the protection of investors and in 589 Congress in the JOBS Act inadvertently proposed Rule 300(c)(1) does not include persons the public interest. See, e.g., Securities Act Section created two Sections 3(a)(80) in the Exchange Act, under common control with the funding portal, 4A(a)(12); 4A(b)(5). the other being the definition of ‘‘emerging growth unlike the definition in Exchange Act Section 595 See Tiny Cat Letter. company’’ (added by Section 101(b) of Title I of the 3(a)(18) which includes such persons as associated 596 See Consumer Federation Letter. JOBS Act). persons of broker-dealers. 597 See Section II.B.1.

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the definition of ‘‘investor,’’ we are the only registered national securities minimum qualification, testing and making this change to address any association. licensure requirements for funding potential confusion about whether the We also proposed definitions for the portals and their associated persons.606 definition is applicable to all of terms ‘‘intermediary’’ and ‘‘SRO’’ in (3) Final Rules Regulation Crowdfunding. proposed Rules 300(c)(3) and 300(c)(5) of Regulation Crowdfunding, After considering the comments, we 2. General Requirements for respectively. As proposed, intermediary are adopting Rule 300(a) generally as Intermediaries would mean a broker registered under proposed but deleting specific a. Registration and SRO Membership Section 15(b) of the Exchange Act or a references to FINRA in the final rule, as (1) Proposed Rules funding portal registered under well as the rest of Regulation proposed Rule 400 of Regulation Crowdfunding and Form Funding Securities Act Section 4A(a)(1) Crowdfunding and would include, Portal, when referring to a registered requires that a person acting as an where relevant, an associated person of national securities association. intermediary in a crowdfunding the registered broker or registered Although we recognize that FINRA is transaction register with the funding portal. SRO was proposed to currently the only registered national Commission as a broker or as a funding have the same meaning as in Section securities, we believe it is redundant to 598 portal. Proposed Rule 300(a)(1) of 3(a)(26) of the Exchange Act. specifically include its name when Regulation Crowdfunding would referring to registered national securities implement this requirement by (2) Comments on the Proposed Rules associations in the rule text and Form providing that a person acting as an Commenters generally supported Funding Portal. intermediary in a transaction involving FINRA being the appropriate SRO and We are cognizant of the fact that the offer or sale of securities made in national securities association for funding portals must register with the reliance on Section 4(a)(6) must be intermediaries.601 In the Proposing Commission and become compliant registered with the Commission as a Release, we asked if we were to approve with an entirely new set of rules. The broker under Exchange Act Section the registration of another national effective date for the final rules (which 15(b), or as a funding portal pursuant to securities association under Exchange is 180 days after publication in the Section 4A(a)(1) and proposed Rule 400 Act Section 15A in the future, in Federal Register, except for § 227.400, of Regulation Crowdfunding. As addition to FINRA, whether it would it Form Funding Portal, and the discussed below, we also proposed to be appropriate for us to require amendments to Form ID, which are make the information that a funding membership in both the existing and effective January 29, 2016) is designed portal provides on the proposed new association. Commenters urged that to provide a sufficient amount of time registration form (i.e., Form Funding intermediaries be required to register for funding portals to register and Portal), other than personally with only one such national securities establish the necessary infrastructure to identifiable information or other association.602 comply with other requirements being information with a significant potential Certain commenters expressed imposed in Regulation Crowdfunding for misuse, accessible to the public.599 concern about potential competitive before any intermediaries—either Securities Act Section 4A(a)(2) advantages of registered broker-dealers broker-dealers or funding portals—may requires an intermediary to register with over funding portals, suggesting that the engage in crowdfunding activities. We any applicable self-regulatory Commission should prohibit brokers believe this should address commenters’ organization (‘‘SRO’’), as defined in from engaging in transactions conducted concerns that broker-dealers otherwise Exchange Act Section 3(a)(26).600 pursuant to Section 4(a)(6) until funding may gain a competitive advantage if Exchange Act Section 3(h)(1)(B) portals can become registered,603 or they were able to engage in separately requires, as a condition of the provide funding portals a grace period crowdfunding activities before funding exemption from broker registration, that so they may be able to operate before portals are able to comply with the a funding portal be a member of a their registration becomes effective.604 requirements needed to begin national securities association that is Another commenter, however, operation.607 registered with the Commission under suggested that licensed broker-dealers While FINRA is the only registered Exchange Act Section 15A. Proposed should be immediately authorized to national securities association at Rule 300(a)(2) would implement these provide services associated with a present, we recognize that a new provisions by requiring an intermediary ‘‘registered crowdfunding portal’’ to any national securities association or in a transaction involving the offer or issuer looking to self-host or to an issuer associations could register with us in sale of securities made in reliance on that has ‘‘an offline mechanism the future. At that time, a funding portal Section 4(a)(6) to be a member of FINRA available for crowdfunding.’’ 605 could choose to become a member of the or any other national securities In response to our requests for new association(s) instead of, or in association registered under Exchange comment in the Proposing Release, Act Section 15A. Currently, FINRA is commenters were also divided on 606 Comments in support included Hakanson whether the Commission should require Letter; Reichman Letter; RocketHub Letter. See also 598 As we noted in the Proposing Release, CrowdCorp Letter (stating that the Commission should establish a separate licensing scheme for facilitating crowdfunded transactions (which 601 involve the offer or sale of securities by an issuer See, e.g., Joinvestor Letter; RocketHub Letter. persons who help prepare issuer disclosure and not secondary market activity) alone would not One commenter stated that funding portals should documents and advise issuers, but who are not require an intermediary to register as an exchange not be required to register with the Commission or brokers or funding portals). Comments opposed or as an alternative trading system (i.e., registration become FINRA members because, unlike brokers, included Public Startup Letter 2; Startup Valley as a broker-dealer subject to Regulation ATS). See they serve only as an ‘‘information delivery Letter. service.’’ See Perfect Circle Letter. We note, Proposing Release at 78 FR 66459 (discussing 607 We note that broker-dealers may nonetheless however, that registration is a statutory requirement secondary market activity and exchange or ATS have a competitive advantage to the extent that they under Securities Act Section 4A(a)(1). registration). are able to provide a wider range of services than 602 599 See Section II.D.1 (discussing registration See, e.g., Joinvestor Letter; Public Startup those permitted funding portals under the statute. requirements). Letter 2; RocketHub Letter; Vann Letter. However, we believe this competitive advantage is 600 15 U.S.C. 78c(a)(26). Exchange Act Section 603 See, e.g., RocketHub Letter. balanced to a significant degree by a strong 3(a)(26) defines an ‘‘SRO’’ to include, among other 604 See, e.g., Joinvestor Letter. regulatory regime tailored to that wider range of things, a ‘‘registered securities association.’’ Id. 605 Public Startup Letter 2. services.

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addition to, its FINRA membership. As officers or partners (or any person Several commenters who opposed the we noted above, we requested comment occupying a similar status or performing prohibition on an intermediary having a on whether we should require a similar function), from having: (1) A financial interest in the issuer suggested membership in both the existing financial interest in an issuer using its that the prohibition would reduce the national securities association (FINRA) services; and (2) from receiving a number and types of intermediaries that and a new national securities financial interest in the issuer as might otherwise participate in association, if we were to approve compensation for services provided to, crowdfunding activities.615 These another national securities association or for the benefit of, the issuer, in commenters asserted that allowing an in the future. We have considered connection with the offer and sale of its intermediary to take this financial commenters’ views and have securities. Proposed Rule 300(b) defined interest would provide an option determined not to require that funding ‘‘a financial interest in an issuer’’ to through which issuers could provide portals be members of multiple mean a direct or indirect ownership of, payment to the intermediary for its securities associations (should new or economic interest in, any class of the services, and also permit co- associations be registered in the future). issuer’s securities. investments, which would ultimately Because all registered national securities benefit investors.616 These commenters (2) Comments on the Proposed Rules associations must satisfy the same also asserted that such a financial statutory standards set forth in In general, commenters supported the interest could align the interests of Exchange Act Section 15A, we do not Commission’s proposed financial intermediaries with those of believe at this time that requiring interest prohibition as it applies to an investors.617 One commenter suggested membership in additional associations intermediary’s directors, officers or that ‘‘by removing an upfront cost and would add significant investor partners (or any person occupying a incentivizing an ongoing relationship protections. similar status or performing a similar between the intermediary and the After considering comments, we have function),609 as well as the proposed issuer, equity compensation for determined not to impose any licensing, definition of financial interest.610 In intermediaries fulfils the Commission’s testing or qualification requirements for contrast, however, many commenters twin aims of efficient capital markets associated persons of funding portals. opposed the Commission’s proposed and investor protection.’’ 618 Another We believe that a registered national prohibition on an intermediary itself commenter noted that permitting the securities association is well-positioned, having or receiving a financial interest intermediary to take a financial interest given the requirements for registration in the issuer,611 while some supported in the issuer would encourage the as a national securities association, as this proposed prohibition.612 development of funding portals that are well as the statutory and regulatory sponsored by or affiliated with requirements that apply to such a Commenters who supported our proposal to extend the prohibition on Community Development Financial registered entity, to determine whether Institutions (‘‘CDFIs’’).619 Yet another to propose additional requirements such financial interests to the intermediary as licensing, testing or qualification suggested that such prohibitions may help to mitigate conflicts of interests.613 615 See, e.g., Hackers/Founders Letter requirements for associated persons of (‘‘Furthermore, rules that preclude the funding portals.608 One commenter stated that an [i]ntermediary from holding any financial interest We also are adopting as proposed the intermediary having a financial interest would overly restrict the [i]ntermediary definitions for the terms ‘‘intermediary’’ in the issuer would skew the incentives environment; for example, such restrictions might of the intermediary toward its own prevent a diverse set of platforms from developing in Rule 300(c)(3). However, we are that serve the specific needs of different removing the definition of ‘‘self- interests rather than the integrity of the communities. The impact of which might regulatory organization’’ and ‘‘SRO’’ transaction, and also stated its view that disproportionately impact certain communities, from the final rules because the term is disclosure of this interest could not cure such as the not-for-profit community.’’). this problem.614 616 See, e.g., EMKF Letter (‘‘The current proposed already defined in Exchange Act Section rules with a fee-based system is a recipe for 3(a)(26). disaster. No credible startups that have viable 609 See, e.g., CFA Institute Letter; Consumer alternatives would choose to pay 5–15% of their b. Financial Interests Federation Letter; Jacobson Letter. fundraising round in cash to an intermediary.’’). (1) Proposed Rules 610 See, e.g., Hackers/Founders Letter; Joinvestor 617 See, e.g., AngelList Letter (‘‘So long as the Letter; Tiny Cat Letter. See also Consumer program was consistently applied without judgment Securities Act Section 4A(a)(11) Federation Letter (stating that the Commission by the intermediary, the net effect would purely be requires an intermediary to prohibit its should ‘‘monitor practices in this area once rules to align the interests of the intermediary with the directors, officers or partners (or any are adopted to ensure that the intended limits investor.’’). See also EMKF Letter; Hackers/ appropriate to intermediaries’ gatekeeper functions Founders Letter; Heritage Letter; Milken Institute person occupying a similar status or are not being circumvented through the use of other Letter; RoC Letter; Thomas Letter 1. performing a similar function) from types of payments or financial arrangements’’). 618 Seyfarth Letter. having any financial interest in an 611 See, e.g., AngelList Letter; Anonymous Letter 619 See Concerned Capital Letter (suggesting the issuer using its services. In the 3; Arctic Island Letter 6; EMKF Letter; Commission broaden the definition of Growthfountain Letter; Guzik Letter 1; Hackers/ Proposing Release, we proposed to use intermediaries to encourage portals sponsored by Founders Letter; Heritage Letter; Milken Institute and/or affiliated with U.S. Treasury-recognized our discretion to extend the prohibition Letter; Propellr Letter 1; Public Startup Letter 2; CDFIs and exempt such portals from the to the intermediary itself. Thus, RoC Letter; RocketHub Letter; Seyfarth Letter; prohibitions against having a financial interest in proposed Rule 300(b) of Regulation Thomas Letter 1. issuers). See also City First Letter (suggesting that 612 Crowdfunding would prohibit the See, e.g., CFA Institute Letter; Clapman Letter; the Commission allow CDFIs to act as co-lenders). Consumer Federation Letter; Jacobson Letter; The Community Development Financial intermediary, as well as its directors, Joinvestor Letter. Institutions Fund, which was established by the 613 See, e.g., CFA Institute Letter; Consumer Riegle Community Development and Regulatory 608 All SROs are required to file proposed rules Federation Letter (‘‘An intermediary that is Improvement Act of 1994, is a government program and rule changes with us under Exchange Act compensated through receipt of a financial interest that promoted access to capital and local economic Section 19(b) and Rule 19b–4. In general, the in an issuer may have an incentive to take steps to growth by, among other things, investing in, Commission reviews proposed SRO rules and rule ensure that the issuer reaches its funding target so supporting and training CDFIs that provide loans, changes and publishes them for comment. The that the offering can move forward or engage in investments, financial services and technical Commission then approves or disapproves them, or other practices designed to artificially inflate the assistance to underserved populations and the rules become effective immediately or by value of its securities.’’); Jacobson Letter. communities. See generally http://www.cdfifund. operation of law. 614 See Jacobson Letter. gov/what_we_do/programs_id.asp?programID=9. A

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commenter suggested that permitting We are not adopting, however, the at this time the interest of promoting the intermediary to take a financial proposed complete prohibition on the capital formation for small businesses, interest in the issuer would incentivize intermediary itself having or receiving a and developing a workable framework intermediaries to screen potential financial interest in an issuer using its for securities-based crowdfunding, issuers for possible fraud or services. Although intermediaries are counsels against extending the wrongdoing.620 Other commenters generally prohibited under the rule as prohibition on financial interests to the supported permitting the intermediary adopted from having such a financial intermediary itself. to take a financial interest in the issuer interest, as discussed below, in response so long as the terms of the financial to comments, we have amended the rule However, we are cognizant of the interests taken by the intermediary are to permit an intermediary to have a potential conflicts of interest that may the same as or not more favorable than financial interest in an issuer that is arise, and therefore we are placing those taken by investors in the offering or selling securities in reliance certain conditions on the ability of offering.621 Commenters suggested on Section 4(a)(6) through the intermediaries to have a financial additional measures, such as adequate intermediary’s platform, provided that: interest in an issuer that is offering or disclosure,622 a five percent interest (1) The intermediary receives the selling securities in reliance on Section limitation,623 and restrictions on the financial interest from the issuer as 4(a)(6) through the intermediary’s ability of an intermediary to transfer its compensation for the services provided platform.627 First, the intermediary must interests in the issuer, could help to to, or for the benefit of, the issuer in receive the financial interest from the address any conflicts of interest connection with the offer or sale of such issuer as compensation for the services concerns.624 securities being offered or sold in provided to, or for the benefit of, the reliance on Section 4(a)(6) through the issuer in connection with the offer or (3) Final Rules intermediary’s platform; and (2) the sale of such securities being offered or After considering the comments, we financial interest consists of securities sold in reliance on Section 4(a)(6).628 are adopting Rule 300(b), as proposed, of the same class and having the same We believe that this limitation, which with respect to an intermediary’s terms, conditions and rights as the will allow intermediaries to receive directors, officers or partners (or any securities being offered or sold in securities as payment for services but person occupying a similar status or reliance on Section 4(a)(6) through the not otherwise permit them to invest in performing a similar function). Rule intermediary’s platform. the offering, addresses commenters’ 300(b), as adopted, prohibits an We are mindful of concerns raised by concerns that a prohibition could have intermediary’s directors, officers or commenters that a prohibition could a ‘‘chilling effect’’ on the ability of small partners (or any person occupying a have a chilling effect on the ability of issuers to use the crowdfunding similar status or performing a similar small issuers to use the crowdfunding exemption, while serving to mitigate function) from having any financial exemption. These issuers may be small concerns relating to intermediaries interest in an issuer using its services. businesses or neighborhood taking steps to ‘‘artificially inflate’’ the Rule 300(b) also specifically prohibits establishments that may not have the value of securities in the offerings.629 these persons from receiving a financial liquid capital to compensate interest in the issuer as compensation intermediaries for services. As Second, we have considered the for services provided to, or for the commenters noted, allowing an comments in support of limiting an benefit of, the issuer, in connection with intermediary to have or receive a intermediary’s financial interest by the offer and sale of its securities. financial interest in the issuer could requiring that such interest be the same Consistent with the proposal, Rule provide a method for the issuer to pay as or not more favorable than those 630 300(b), as adopted, defines ‘‘a financial an intermediary for its services, which taken by investors in the offering, and interest in an issuer’’ to mean a direct may facilitate capital formation. This have determined to prohibit or indirect ownership of, or economic may, in turn, encourage the intermediaries from receiving a interest in, any class of the issuer’s development of funding portals that are, financial interest unless it is in securities.625 for example, affiliated with CDFIs, as securities that are of the same class, and one commenter suggested.626 As that have the same terms, conditions certified Community Development Financial commenters further noted, permitting and rights as the securities in the Institution (‘‘CDFI’’) is a specialized financial such a financial interest may also help offering. We believe that this limitation institution that works in market niches that are will further serve to mitigate any underserved by traditional financial institutions. to align the interests of intermediaries CDFIs provide a unique range of financial products and investors, and provide an additional potential conflicts by helping to align and services in economically distressed target incentive to screen for fraud. We believe markets, such as mortgage financing for low-income 627 See notes 613–614 and accompanying text. and first-time homebuyers and not-for-profit 628 As noted above in Section II.C.2, an developers, flexible underwriting and risk capital conflicts of interest that may arise when the persons intermediary must be either a registered funding for needed community facilities, and technical facilitating a crowdfunding transaction have a portal or a registered broker-dealer, and must be a assistance, commercial loans and investments to financial stake in the outcome. 78 FR at 66461. The member of a registered national securities small start-up or expanding businesses in low- prohibition extends to ‘‘any person occupying a association. FINRA rules currently require that its income areas. CDFIs include regulated institutions similar status or performing a similar function,’’ broker-dealer members charge reasonable fees for such as community development banks and credit and applies with respect to both direct or indirect their services and observe just and equitable unions, and non-regulated institutions such as loan ownership of, or economic interest in, any class of principles of trade in the conduct of their business. and venture capital funds. the issuer’s securities. In addition, we note that Section 15(b) of the Securities Act creates liability FINRA has also filed a proposed rule change with 620 See Anonymous Letter 3. for persons who aid and abet violations of the the Commission to apply certain rules to funding 621 See, e.g., Hackers/Founders Letter; Propellr 1 Securities Act or the rules and regulations portals, including requiring them to observe high Letter; Public Startup Letter 2; RocketHub Letter. thereunder, such as would occur if a third person standards of commercial honor and just and 622 See, e.g., Growthfountain Letter; Hackers/ knowingly or recklessly provided substantial equitable principles of trade in the conduct of their Founders Letter; Propellr Letter 1; RoC Letter; assistance to a director, officer or partner (or any businesses. See Proposed Rule Change to Adopt the RocketHub Letter. person occupying a similar status or position), for Funding Portal Rules and Related Forms and 623 See RocketHub Letter. example, by accepting and holding, on the officer’s FINRA Rule 4518, SR–FINRA–2015–040 (Oct. 9, 624 See Hackers/Founders Letter. behalf, a financial interest in the issuer in 2015). 625 As we explained in the Proposing Release, the circumvention of the prohibition. 629 See Consumer Federation Letter. prohibition is intended to protect investors from the 626 See Concerned Capital Letter. 630 See note 621.

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the interests of the intermediary with Commission staff expects to review higher.635 Others commenters supported those of the investors in the offering.631 the compensation structure of the standard.636 We are persuaded that the disclosures intermediaries during the study of the A number of commenters expressed otherwise required by Regulation federal crowdfunding exemption it concern about the proposed reliance on Crowdfunding also will help to address plans to undertake no later than three issuer representations.637 Some any potential conflicts of interest arising years following the effective date of commenters suggested an intermediary from an intermediary having or Regulation Crowdfunding.634 should be required to conduct some receiving a financial interest in an type of due diligence on the issuer, as issuer. Among other things, Rule 302(d) 3. Measures To Reduce Risk of Fraud opposed to relying on issuer requires an intermediary to clearly representations.638 Another commenter disclose the manner in which it will be Securities Act Section 4A(a)(5) went further by suggesting that an compensated in connection with requires an intermediary to ‘‘take such intermediary should also have an offerings and sales of securities made in measures to reduce the risk of fraud ongoing obligation to monitor reliance on Section 4(a)(6) at account with respect to [transactions made in communications by issuers during the opening and Rule 303(f) requires reliance on Section 4(a)(6)], as course of the offering to detect and disclosure of remuneration received by established by the Commission, by rule, prevent violations of the securities laws an intermediary (including securities including obtaining a background and and the regulations thereunder.639 received as remuneration) on securities enforcement regulatory Another commenter stated that an confirmations.632 We believe that these history check on each officer, director, issuer’s representation should not disclosures will provide investors with and person holding more than 20 suffice unless it is detailed enough to relevant information concerning any percent of the outstanding equity of evidence a reasonable awareness by the intermediary’s financial interests every issuer whose securities are offered issuer of its key obligations and the (including whether such interest was by such person.’’ As discussed below, ability to comply with those acquired on the same terms that are after considering the comments, we are obligations.640 available to investors), which, in turn, adopting Rule 301 of Regulation One commenter argued that the will help investors to make better Crowdfunding substantially as language of the proposed rule was informed investment decisions. In proposed, with a few changes to Rule contradictory because relying on addition, the intermediary must comply 301(c)(2). representations made by the issuer is with all other applicable requirements not the same as establishing a of Regulation Crowdfunding, including a. Issuer Compliance reasonable basis for believing the issuer the statutory limitations on a funding is in compliance.641 (1) Proposed Rule portal’s activities.633 One commenter recommended that We proposed in Rule 301(a) of the Commission ‘‘consider a tiered 631 The rule does not preclude an intermediary Regulation Crowdfunding to require that approach to compliance obligations’’ from receiving securities as compensation for where, as the size of the offering or services from the same issuer for a subsequent an intermediary have a reasonable basis offering conducted by the issuer in reliance on for believing that an issuer seeking to other risk factors increased, Section 4(a)(6) as long as the securities received are offer or sell securities though the intermediaries would be required to compensation for services provided during the conduct more rigorous compliance intermediary’s platform complies with subsequent offering and are of the same class and reviews.642 Under such an approach, have the same terms, conditions and rights as the the requirements of Section 4(a)(6) and this commenter stated that for small securities being offered in the subsequent offering. the related requirements of Regulation 632 offerings that cap investments at a low See Sections II.C.4.d and II.C.5.f. See also Rule Crowdfunding. For this requirement, we 302(c) of Regulation Crowdfunding (requiring level, $500 for example, and where intermediaries to inform investors, at the time of proposed that an intermediary may there is no participation by individuals account opening, that promoters must clearly reasonably rely on an issuer’s with a history of security law violations, disclose in all communications on the platform the representations about compliance receipt of compensation and the fact that he or she the intermediary would be permitted to is engaging in promotional activities on behalf of unless the intermediary has reason to the issuer). question the reliability of those 635 See, e.g., AFR Letter; ASTTC Letter; 633 See Exchange Act Section 3(a)(80) (defining representations. Computershare Letter; Consumer Federation Letter; ‘‘funding portal’’ and establishing certain CSTTC Letter; Grassi Letter; Merkley Letter; limitations on their activities consistent with the (2) Comments on Proposed Rule NYSSCPA Letter. statute, such as prohibiting a funding portal from 636 See, e.g., RocketHub Letter; STA Letter. offering investment advice or recommendation; Commenters generally agreed that 637 See, e.g., AFR Letter; Computershare Letter; soliciting purchases, sales or offers to buy securities Consumer Federation Letter; Merkley Letter. offered or displayed on its Web site or portal; or intermediaries play a significant role in 638 See, e.g., CSTTC Letter; Grassi Letter; holding, managing, possessing, or otherwise preventing and detecting fraud and NYSSCPA Letter; Consumer Federation Letter handling investor funds or securities). In this should take measures to reduce (stating that an intermediary’s responsibility is regard, compliance with disclosures required by rendered meaningless without establishing specific Regulation Crowdfunding generally would not potential fraud. Some commenters, standards that require due diligence in order to cause a funding portal to provide investment advice however, expressed concerns about the reasonably conclude the issuer is in compliance). or recommendations. Nonetheless, a funding portal proposed ‘‘reasonable basis’’ standard 639 See AFR Letter (‘‘[T]he Commission’s proposal should seek to ensure that disclosure of its financial for an intermediary’s belief about an interest(s) in an issuer is not inconsistent with the to allow intermediaries to rely on self-certification statutory prohibition on providing investment issuer’s compliance with applicable by issuers makes a mockery of its proposed advice or recommendations. For example, a funding laws stating that the standard should be requirement that intermediaries have ‘a reasonable portal must not present its financial interest in an basis for believing that an issuer seeking to offer issuer as a recommendation or endorsement of that and sell securities in reliance on Section 4(a)(6), issuer. See Section II.D.3. We also note that if a under Section 3(a)(1)(C) of the Investment Company through the intermediary’s platform, complies with funding portal holds, owns or proposes to acquire Act. We generally would expect, however, that such the requirements in Securities Act Section 4A(b) securities issued by an issuer, or multiple issuers, funding portal would seek to rely on the exclusion and the related requirements in Regulation that individually or in aggregate exceed more than from the definition of investment company in Crowdfunding.’ ’’). 40% of the value of the funding portal’s total assets Section 3(c)(2) of the Investment Company Act for 640 See STA Letter. (excluding government securities and cash items) (among other things) a person primarily engaged in 641 See ABA Letter. on an unconsolidated basis, the funding portal may the business of acting as a broker. 642 See IAC Recommendation; see also fall within the definition of investment company 634 See Section II. BetterInvesting Letter.

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rely on representations by issuers to determine whether it can rely on an between those who supported 649 and satisfy its obligation to ensure issuer representation may vary, but those who opposed 650 any requirement compliance. As the size of the offering, should be influenced by and tailored mandating the use of a registered the size of permitted investments, or according to the intermediary’s transfer agent. Commenters supporting other risk factors increase, the knowledge and comfort with each the required use of registered transfer commenter stated that the Commission particular issuer. We believe this agents cited potential benefits, should consider requiring approach is generally consistent with including reducing internal costs and intermediaries to conduct more rigorous the view of one commenter that providing corporate transparency; 651 compliance reviews. suggested a tiered approach to having the transfer agent serve as the (3) Final Rule compliance obligations where issuer’s paying agent, proxy agent, intermediaries should conduct more exchange agent, tender agent and Rule 301(a), as adopted, requires that rigorous compliance reviews and mailing agent for ongoing reports; 652 an intermediary have a reasonable basis background checks as risk factors providing a back-up and recovery for believing that an issuer seeking to increase.644 system for records; 653 and conducting offer and sell securities in reliance on internal audits to protect against b. Records of Securities Holders Section 4(a)(6) through the theft.654 Some commenters also intermediary’s platform complies with (1) Proposed Rule highlighted potential problems when the requirements in Securities Act non-registered transfer agents or the We proposed in Rule 301(b) of Section 4A(b) and the related issuer maintains records, including Regulation Crowdfunding a requirement requirements in Regulation improper registration of multiple that an intermediary have a reasonable Crowdfunding. While some commenters owners, duplicate records, missing basis for believing that an issuer has argued for higher or different standards, certificate numbers, inability to trace established means to keep accurate such as requiring intermediaries to ownership, and inability to maintain records of the holders of the securities conduct due diligence on issuers or records; 655 it would offer and sell through the and incorrect handling of monitor communications by issuers corporate actions, failure to observe during the course of the offering, we intermediary’s platform. We proposed that an intermediary may reasonably restrictions on transfers, and failure to believe that a reasonable basis standard follow abandoned property reporting is appropriate, particularly in view of rely on an issuer’s representations about 656 compliance unless the intermediary has requirements. One commenter the issuer’s own obligation to comply suggested that the Commission should with the requirements in Section 4A(b) reason to question the reliability of identify specific areas for an and the related requirements in those representations. We did not intermediary to consider about an Regulation Crowdfunding. We are propose a particular form or method of issuer’s recordkeeping capabilities when mindful as well of the associated costs recordkeeping of securities, nor did we determining whether or not to provide of a potentially higher standard. propose to require that an issuer use a access to that issuer.657 This commenter Consistent with the proposal, Rule transfer agent or other third party.645 We also urged the Commission to create a 301(a) also permits intermediaries to noted, however, that requiring a safe harbor whereby an intermediary reasonably rely on representations of the registered transfer agent to be involved would be deemed to have met the issuer, unless the intermediary has after the offering could introduce a recordkeeping requirement if the issuer reason to question the reliability of regulated entity with experience in those representations. maintaining accurate shareholder has retained a registered transfer agent or registered broker-dealer.658 In satisfying the requirements of Rule records,646 and we asked in the 301(a), we emphasize that an Proposing Release whether we should Commenters that opposed the intermediary has a responsibility to require an issuer to use a regulated mandatory use of a registered transfer assess whether it may reasonably rely transfer agent to keep such records and on an issuer’s representation of whether there were less costly means by 649 See, e.g., ASTTC Letter; ClearTrust Letter; CST Letter; CSTTC Letter; Empire Stock Letter; Equity compliance through the course of its which an issuer could rely on a third Stock Letter; FAST Letter; Sharewave Letter; Stalt 643 interactions with potential issuers. party to assist with the Letter. We agree with comments that an recordkeeping.647 650 See, e.g., Arctic Island Letter 5; CapSchedule intermediary seeking to rely on an Letter; CFIRA Letter 8; Computershare Letter; Grassi issuer representation should consider (2) Comments on Proposed Rule Letter; Joinvestor Letter; NYSSCPA Letter; Public whether the representation is detailed Startup Letter 2; RocketHub Letter; Tiny Cat Letter. Commenters agreed that an 651 See CST Letter. enough to evidence a reasonable intermediary should have a basis for 652 See Empire Stock Letter. awareness by the issuer of its believing that an issuer has established 653 See FAST Letter. obligations and its ability to comply a means to keep accurate records.648 654 Id. with those obligations. The specific Commenters were divided, however, 655 See, e.g., ClearTrust Letter; STA Letter; Stalt steps an intermediary should take to Letter. 656 See STA Letter. 644 We also emphasize that when an intermediary 657 643 Id. In addition, an intermediary’s potential seeks to rely on the representations of others to 658 Id. The commenter also stated that such a safe liability under Securities Act Section 4A(c), as form a reasonable basis, the intermediary should harbor would encourage third-party recordkeepers added by the JOBS Act, may encourage have policies and procedures regarding under what to register as transfer agents and thereby enhance intermediaries to develop adequate procedures to circumstances it can reasonably rely on such protection to investors. The commenter further fully assess whether reliance on an issuer’s representations and when additional investigative stated that the safe harbor should not apply if a representation is reasonable. We also note that steps may be appropriate. See Section II.D.4. Congress provided a defense to any such liability community bank is utilized because it would not 645 Proposing Release, 78 FR at 66462. if an intermediary did not know, and in the exercise have similar recordkeeping experience. See also 646 of reasonable care could not have known, of the Id. Computershare Letter (stating that a safe harbor untruth or omission. Therefore, and as identified in 647 Id. at 66464. should apply if another regulated entity, such as a the Proposing Release, we continue to believe that 648 See, e.g., Arctic Island Letter 5; ASTTC Letter; broker-dealer or a bank, is engaged to perform the there are appropriate steps that intermediaries CFIRA Letter 8; Computershare Letter; CST Letter; services, which in turn may encourage the use of might take in exercising reasonable care in light of CSTTC Letter; FAST Letter; Grassi Letter; Joinvestor professional regulated recordkeepers, thus this liability provision. See Section II.E.5 Letter; Public Startup Letter 2; RocketHub Letter; enhancing overall protection in the crowdfunding (discussing scope of statutory liability). STA Letter; Tiny Cat Letter. market).

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agent pointed to cost concerns.659 Some a transfer journal or other such log 503.666 In satisfying this requirement, of these commenters stated that recording any transfer of ownership, (4) we proposed to require an intermediary alternatives to transfer agents will effect the exchange or conversion of any to, at a minimum, conduct a background develop, including CPA firms,660 applicable securities, (5) maintain a and securities enforcement regulatory registered broker-dealers 661 and control book demonstrating the history check on each issuer whose software applications or other potential historical registration of those securities, securities are to be offered by the 662 low-cost alternatives. Some and (6) countersign or legend physical intermediary and on each officer, commenters stated that intermediaries certificates of those securities. While the director or 20 Percent Beneficial Owner. We further proposed in Rule 301(c)(2) should be permitted to provide the use of a registered transfer agent could relevant recording services to issuers.663 to require an intermediary to deny introduce a regulated entity with One commenter suggested funding access to its platform if the intermediary experience in maintaining accurate portals should only be permitted to do believes the issuer or offering presents so with respect to securities purchased shareholder records, as noted in the the potential for fraud or otherwise on their platform or transferred among Proposing Release, we believe the issuer raises concerns about investor platforms, such that they would not be should have flexibility in establishing protection. In satisfying this permitted to act as ‘‘full-fledged such means, and that such flexibility requirement, the proposed rule would [b]rokerage firms or transfer agents.’’ 664 may allow for competition among require that an intermediary deny access service providers that could reduce if it believes that it is unable to (3) Final Rules operating costs for funding portals. We adequately or effectively assess the risk After considering the comments, we continue to believe that accurate of fraud of the issuer or its potential are adopting Rule 301(b), as proposed, recordkeeping can be accomplished by offering. In addition, we proposed in with one modification. Rule 301(b) as diligent issuers or through a variety of Rule 301(c)(2) that if an intermediary adopted requires an intermediary to third parties. We note also that, for becomes aware of information after it have a reasonable basis for believing investors to have confidence in has granted access that causes it to that an issuer has established means to crowdfunding, issuers and believe the issuer or the offering keep accurate records of the holders of intermediaries must have a shared presents the potential for fraud or the securities it would offer and sell interest in ensuring stability and otherwise raises concerns about investor through the intermediary’s platform, accuracy of records. Therefore, protection, the intermediary would be and provides that in satisfying this intermediaries should consider the required to promptly remove the requirement, an intermediary may rely numerous obligations required of a offering from its platform, cancel the on the representations of the issuer record holder when determining offering, and return (or, for funding concerning its means of recordkeeping whether an issuer has established a portals, direct the return of) any funds unless the intermediary has reason to reasonable means to keep accurate that have been committed by investors question the reliability of those in the offering. representations. We also are adding a records of the security holders being provision to Rule 301(b) as adopted offered and sold securities through the (2) Comments on Proposed Rule stating that an intermediary will be intermediary’s platform. Commenters generally supported deemed to have satisfied this At the same time, mindful of the role proposed Rule 301(c).667 Commenters requirement if the issuer has engaged that may be played by registered transfer noted with approval the discretion the the services of a transfer agent that is agents in maintaining accurate proposed rules would provide registered under Section 17A of the shareholder records, we are providing a intermediaries.668 The ‘‘reasonable Exchange Act.665 As we noted in the safe harbor for compliance with Rule basis’’ standard in proposed Rule Proposing Release, we believe that the 301(b) for those issuers that use a 301(c)(1) also garnered comments. One recordkeeping function may be registered transfer agent. While we do commenter suggested that the provided by the issuer, a broker, a not intend to provide regulated entities reasonable basis standard was not strong 669 transfer agent or some other (registered with a competitive advantage over other enough. One commenter stated that or unregistered) person. We recognize recordkeeping options that comply with having a reasonable basis standard in that, as a commenter explained, the rule’s requirements, we believe it is the disqualification determination would be ‘‘difficult to imagine’’ unless recordkeeping functions can be appropriate to provide certainty as to extensive and could include, for the Commission maintains a database Rule 301(b) compliance in instances in example, the ability to (1) monitor the for intermediaries to search.670 which an issuer has engaged the issuance of the securities the issuer Commenters had varied views on the offers and sells through the services of a transfer agent that is proposed requirement in Rule 301(c)(1) intermediary’s platform, (2) maintain a registered under Section 17A of the for an intermediary to perform a master security holder list reflecting the Exchange Act. background check on the issuer and owners of those securities, (3) maintain c. Denial of Platform Access certain of its affiliated persons. Several commenters supported the requirement, 659 See, e.g., AICPA Letter; Arctic Island Letter 5; (1) Proposed Rule CapSchedule Letter; CFIRA Letter 8; Computershare 666 See Section II.E.6 (discussing Rule 503 of Letter; Grassi Letter; Joinvestor Letter; RocketHub We also proposed in Rule 301(c)(1) of Regulation Crowdfunding, which describes Letter; STA Letter; Tiny Cat Letter. Regulation Crowdfunding a requirement disqualification). 660 See, e.g., Grassi Letter; NYSSCPA Letter. that an intermediary deny access by an 667 See, e.g., CFA Institute Letter; StartupValley 661 See Public Startup Letter 2. issuer to its platform if it has a Letter. 662 See Arctic Island Letter 5. 668 reasonable basis for believing that an Id. 663 See, e.g., Joinvestor Letter; RocketHub Letter. 669 See NYSSCPA Letter (opposing the use of two 664 See RocketHub Letter. issuer, or any of its officers, directors or different standards within Rule 301(c) as it could 665 15 U.S.C. 78q–1(c). We also note that an any person occupying a similar status or lead to confusion and presents vulnerability for issuer’s exemption from Section 12(g) is performing a similar function, or any 20 fraud to occur through the ‘‘weakest link,’’ and conditioned on, among other things, that issuer Percent Beneficial Owner is subject to a suggesting instead that a ‘‘prudent care’’ standard engaging a registered transfer agent. See Section should be used for both requirements). II.E.4. disqualification under proposed Rule 670 See Public Startup Letter 2.

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but a few commenters suggested ways to it.681 Another commenter stated its view would not only help prevent fraud but decrease costs.671 One commenter stated that the results should not be made also assist other intermediaries in that only low-cost, minimum public unless a regulator called them excluding issuers already discovered to requirements should be into question.682 Another commenter be disqualified.690 Other commenters implemented,672 while another explained that issuers should be able to disagreed with this suggestion,691 while commenter suggested that the publish the results if they choose, but one commenter stated that reporting background checks be required only no such requirement should be placed should be required only if the after an issuer has met its target offering on intermediaries.683 One commenter Commission or another agency created a amount so as to prevent unnecessary urged us to ‘‘require that a summary of database for such information.692 One of expense to the intermediary.673 the sources consulted as part of the these commenters suggested that Representing a different view, one background check be posted on the intermediaries should be required to 684 commenter opposed a requirement for [portal’s] Web site.’’ notify a potential issuer when the background checks to be conducted on As to proposed Rule 301(c)(2) intermediary uses information from a requiring a funding portal to deny 693 all persons related to an issuer.674 third party to deny the issuer. access if the intermediary believes the Another commenter noted that the issuer or offering presents the potential (3) Final Rules checks would be appropriate, but did for fraud or otherwise raises concerns After considering the comments, we not support the requirement.675 regarding investor protection, one are adopting Rule 301(c)(1) as proposed. Commenters were divided as to commenter stated that the proposed Rule 301(c)(1) requires an intermediary whether we should set specific requirement conflicts with the to deny access to its platform if the requirements for background checks. restrictions on a funding portal’s ability intermediary has a reasonable basis for One commenter stated that the proposal to limit the offerings on its platform in believing that an issuer, or any of its ‘‘fails to set even the most general of proposed Rule 402(b)(1).685 officers, directors (or any person standards for these checks’’ and Regarding the standard for denial occupying a similar status or performing ‘‘instead relies on intermediaries to use based on potential fraud or investor a similar function), or any 20 Percent their experience and judgment to reduce protection concerns in the proposed Beneficial Owner is subject to a the risk of fraud.’’ 676 The same rule, one commenter suggested a disqualification under Rule 503 of commenter stated that the proposed stronger standard,686 while another Regulation Crowdfunding. We believe approach is flawed and as such the suggested a weaker standard.687 Other that a ‘‘reasonable basis’’ standard for checks are likely to be ineffective, commenters suggested that the standard denying access is an appropriate especially because many intermediaries for an intermediary to deny access to its standard for Rule 301(c)(1), in part are likely to be inexperienced.677 platform is unclear.688 One commenter because this requirement on an Several commenters requested further urged the Commission to require that a intermediary is buttressed by the fact clarification and specification about funding portal post on its Web site a that an issuer independently is subject required checks.678 However, other description of its standards for to the disqualification provisions under commenters stated that the Commission determining which offerings present a Rule 503, as discussed below.694 In 689 should not specify steps for an risk of fraud.’’ addition, Rule 301(c)(1) implements the intermediary to take in conducting One commenter stated the requirement of Section 4A(a)(5) that an checks.679 intermediaries should be required to intermediary conduct a background and report denied issuers, noting that it securities enforcement regulatory With respect to our request for history check on each issuer whose comment on whether intermediaries 681 See, e.g., AFR Letter; Consumer Federation securities are to be offered by the should be required to make the results Letter. intermediary, as well as on each of its 682 See Joinvestor Letter. of background checks public, several officers, directors (or any person commenters opposed the 683 See Public Startup Letter 2. 684 occupying a similar status or performing 680 IAC Recommendation (suggesting that requirement, while some supported ‘‘[r]equiring posting of information about the a similar function) and 20 Percent sources consulted in compiling the reports would Beneficial Owners. 671 See, e.g., AFR Letter; CFA Institute Letter; better enable investors to evaluate the thoroughness While we understand commenters’ of the background check, thus creating an incentive Grassi Letter; Joinvestor Letter; NYSSCPA Letter. concerns about the cost of the 672 See RocketHub Letter. for intermediaries to conduct thorough reviews in the absence of clear Commission guidelines’’); see requirement that intermediaries conduct 673 See Anonymous Letter 4. also BetterInvesting Letter. 674 See Zhang Letter. background checks on issuers and 685 See Guzik Letter 1 (noting that under the 675 certain affiliated persons, we are not See Public Startup Letter 2. proposed rules, an intermediary which is not a 676 See Consumer Federation Letter. broker-dealer is prohibited from, at least in that eliminating or limiting the requirement 677 Id. commenter’s view, ‘‘curating,’’ that is, ‘‘excluding as suggested by commenters because we 678 See, e.g., BetterInvesting Letter; Heritage companies from its platform based upon qualitative believe the requirement is an important Letter; IAC Recommendation; Jacobson Letter; factors, such as quality of management, valuation of tool for intermediaries to employ when NSBA Letter. See also RocketHub Letter (stating the company, market size, need for additional that intermediaries ‘‘should be allowed to satisfy capital, pending litigation, or other qualitative determining whether or not they have a their obligations by checking commonly used factors which increase the risk to an investor’’). reasonable basis to allow issuers on databases for criminal background, bankruptcy 686 See note 669 (discussing the NYSSCPA Letter, their platforms. Even though a number filings, and tax liens, as well as cross check against which suggested a ‘‘prudent care’’ standard for of commenters requested that the the Office of Foreign Assets Control (OFAC) denying issuers under Rule 301(c)). sanctions lists, and Specially Designated Nationals 687 See Grassi Letter (stating that an intermediary 690 (SDN) and Blocked Persons lists’’); Bullock Letter ‘‘should not be required to vet issuers for potential See Joinvestor Letter. See also ASSOB Letter (recommending fingerprinting for key issuer fraud other than would be done through the normal and Vann Letter. personnel and noting that most sheriff’s course of assessing whether they wish to do 691 See, e.g., Public Startup Letter 2 (opposing the departments in most U.S. counties can take business with a particular issuer’’). requirement but suggesting that the Commission fingerprints for a small fee). 688 See, e.g., BetterInvesting Letter; Heritage maintain a database of known bad actors). 679 See, e.g., StartupValley Letter; Vann Letter. Letter; IAC Recommendation; Jacobson Letter; 692 See StartupValley Letter. 680 See, e.g., Grassi Letter; Joinvestor Letter; NSBA Letter. 693 See Vann Letter. NYSSCPA Letter; Public Startup Letter 2; 689 See IAC Recommendation; see also 694 See Section II.E.6 (discussing issuer StartupValley Letter. BetterInvesting Letter. disqualification).

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Commission provide specific could expose the individuals at the measures likely will promote requirements for background and issuer that are subject to a background compliance and help to reduce the risk securities enforcement regulatory check to harm, for example, if there of fraud with respect to crowdfunding history checks, we are not establishing were errors in the information made transactions, as required by Section specific procedures in the final rules. As publicly available. 4A(a)(5). This standard also will provide we indicated in the Proposing Release, We are adopting Rule 301(c)(2) the Commission with a clear basis to we believe that the better approach is to substantially as proposed, but with review whether an intermediary’s allow an intermediary to be guided by certain revisions. As adopted, Rule decision not to deny access to its its experience and judgment to design 301(c)(2) now contains a ‘‘reasonable platform or cancel an offering was systems and processes to help reduce basis’’ standard as opposed to the reasonable given the facts and the risk of fraud in securities-based initially proposed ‘‘believes’’ standard. circumstances. crowdfunding.695 We also believe that Rule 301(c)(2) requires denial of access such flexibility could mitigate cost to its platform when the intermediary We are not requiring that an concerns related to conducting the has a reasonable basis for believing that intermediary report the issuers that have background and securities enforcement the issuer or offering presents the been denied access to its platforms, as regulatory history checks. potential for fraud or otherwise raises some commenters suggested, or that the We are not developing a database of concerns about investor protection.696 intermediary post a summary of the denied issuers as suggested by some In a conforming change, Rule 301(c)(2) sources consulted as part of the commenters because we do not believe also requires (i) an intermediary deny background check on its platform along it would significantly increase investor access to an issuer if it reasonably with a description of the intermediary’s protection. The requirement to deny an believes that it is unable to adequately standards for determining which issuer access to a crowdfunding or effectively assess the risk of fraud of offerings present a risk of fraud. We also platform under the final rules based on the issuer or its potential offering, and are not adopting a requirement, as fraud or other investor protection (ii) if the intermediary becomes aware of suggested by a commenter, that an concerns is important to the viability of information after it has granted the intermediary notify a potential issuer crowdfunding, and the legitimacy of the issuer access to its platform that causes when the intermediary utilizes third- intermediary. This obligation is the it to reasonably believe that the issuer party information to deny access to the responsibility of each intermediary, or the offering presents the potential for issuer. As with background checks, which must make a determination about fraud or otherwise raises concerns discussed above, we believe that the whether to deny access to an issuer. regarding investor protection, the investor protection goal is sufficiently While a third party may decide to create intermediary must promptly remove the served by the exclusion of an issuer a database of denied issuers at some offering from its platform, cancel the from the intermediary’s platform. In point and an intermediary could use offering and return to investors any addition, we are concerned that such such a database to help make its funds they may have committed. requirements could add to the cost of determination as to whether it was We believe that a ‘‘reasonable basis’’ administration and could expose the required to deny access to an issuer, standard is appropriate for Rule issuers in question to harm, for such a database could not be used as a 301(c)(2) because it is a more objective example, if there were errors in the 697 substitute for an intermediary making standard. Under this standard, an information made publicly available. its own determination. intermediary may not ignore facts about Likewise, we do not believe that We also are not requiring an an issuer that indicate fraud or investor intermediary to make publicly available requiring an intermediary to post to its protection concerns such that a Web site a summary of the sources the results of the background checks or reasonable person would have denied the sources consulted. We believe that consulted as part of the background access to the platform or cancelled the check and a description of the the goal of the background check is offering. Rule 301(c)(2) is intended to sufficiently served by the exclusion of intermediary’s standards for give an intermediary an objective determining which offerings present a an issuer from the intermediary’s standard regarding the circumstances in platform. We do not believe that making risk of fraud would sufficiently increase which it must act to protect its investors investor protection to justify the the results or sources publicly available from potentially fraudulent issuers or burdens, such as those outlined above, adds a significant degree of investor ones that otherwise present red flags that would be associated with imposing protection under these circumstances, concerning investor protection. This such requirements. We also note that given the potential problems that could objective standard also will make it providing this information on an arise from such public disclosure of the easier for an intermediary to assess intermediary’s Web site may give results, such as the risk of disclosing whether it would be compliant with potentially fraudulent issuers or those personally identifiable information or Rule 301(c)(2) when deciding if it that otherwise present investor other information with significant should deny an issuer access or cancel protection concerns a roadmap to an potential for misuse. In addition, we are its offering.698 Thus, we believe these concerned that such requirements could intermediary’s proprietary procedures add to the cost of administration and 696 See Section II.D.2. (discussing modified Rule for screening for fraud that could assist 402(b)(1), which relates to a funding portal’s ability such issuers with impeding or 695 We disagree with the commenter that to deny access to an issuer). obstructing intermediaries from suggested that this method is ineffective because 697 Adding the reasonable basis standard to Rule detecting offerings that present a risk of intermediaries lack experience. See Consumer 301(c)(2) also provides a consistent standard across fraud. Federation Letter. Crowdfunding is a new form of Rule 301, including Rules 301(a), (b) and (c)(1). capital formation. We believe broker-dealers and 698 Aside from the requirement to deny access to funding portals will gain the relevant experience issuers under Rule 302(c)(2), it is important to note 301(c)(2) also helps to clarify that a funding portal that will appropriately position them to develop that intermediaries are permitted to determine would not be providing investment advice or requirements for conducting background checks whether and under what terms to allow an issuer recommendations, if it denies access to or cancels required by the rule. In addition, we believe that an to offer and sell securities in reliance on Section an offering because it has a reasonable basis for intermediary’s interest in developing a successful 4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6)) believing that there is a potential for fraud or other platform will motivate it to conduct rigorous through their platforms. See Rule 402(b)(1) and investor protection concerns. See Rule 402(b)(10) of background checks. Section II.D.3. The objective standard under Rule Regulation Crowdfunding and Section II.D.3.i.

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4. Account Opening obtain particular information from digitally and that there should be no investors.702 exemption to allow paper delivery as a a. Accounts and Electronic Delivery With respect to electronic delivery, substitute.710 Another commenter stated (1) Proposed Rule some commenters urged that it should that investors should be allowed to be sufficient for the intermediary simply waive these delivery requirements Proposed Rule 302(a)(1) of Regulation to make Subpart C materials, such as entirely.711 Crowdfunding would prohibit an educational materials, notices and (3) Final Rules intermediary or its associated persons confirmations, available on the from accepting an investment intermediary’s platform for investors to After considering the comments, we commitment in a transaction involving access.703 Other commenters broadly are adopting as proposed the account the offer or sale of securities in reliance opposed permitting intermediaries to opening and electronic delivery on Section 4(a)(6) unless the investor satisfy their information delivery requirements in Rule 302(a). We are not has opened an account with the requirement by providing an electronic prescribing particular requirements for intermediary, and the intermediary has message that informs an investor that account opening. Rather, we believe that obtained from the investor consent to information can be found on the the final rule provides flexibility to electronic delivery of materials. intermediary’s platform or an issuer’s intermediaries given that intermediaries Proposed Rule 302(a)(2) would require Web site.704 One commenter suggested are better positioned than the an intermediary to provide all that investors may not actually receive Commission to determine what information required by Subpart C of required disclosures because they will information and processes it will Regulation Crowdfunding, including, not spend the time to find the require, both as a business decision and but not limited to, educational information.705 Another commenter to ensure compliance with all materials, notices and confirmations, suggested that the Commission should applicable regulatory requirements. through electronic means. ‘‘continue to rely instead on the strong Therefore, for example, an intermediary and effective policy for electronic can decide whether or not to open a Proposed Rule 302(a)(2) also would new account for an existing customer. require an intermediary to provide such delivery of disclosure adopted by the Commission in the mid-1990s.’’ 706 The We also are not prescribing under the information through an electronic final rule, as a commenter suggested, message that either contains the same commenter noted that it would be ‘‘a simple matter to require that any that an intermediary be required to information, includes a specific link to collect identifying information that the information as posted on the electronic message through which disclosures are delivered include, at a could help prevent duplicative or intermediary’s platform, or provides fraudulent accounts. We believe that notice of what the information is and minimum, the specific URL where the required disclosures can be found.’’ 707 even without prescribing particular that it is located on the intermediary’s account opening requirements platform or the issuer’s Web site. As One commenter stated it was concerned that earlier Commission intermediaries should be able to proposed, Rule 302(a)(2) stated that identify, by collecting basic account electronic messages would include, but policies on electronic delivery might be read as implying that paper delivery opening information, those accounts not be limited to, messages sent via might be permitted in certain that appear to be duplicative or present email. circumstances.708 This commenter did red flags of potential fraud. However, the final rules do not permit (2) Comments on the Proposed Rule agree, however, that any electronic investors to waive the electronic message through which disclosures are delivery requirements entirely, as one One commenter suggested that delivered include, at a minimum, the commenter suggested.712 We believe intermediaries who are brokers should specific URL where the required that electronic delivery of materials in not be required to open new accounts disclosures can be found.709 for persons who are existing customers In response to our request for connection with crowdfunding offerings of the broker.699 In response to our comments on whether exceptions to the serves an important and basic investor request for comments on whether an consent to electronic delivery should be protection function by conveying intermediary should be required to allowed, one commenter stated that information, such as offering materials, that will help investors to make better obtain specific information from account creation and delivery of informed investment decisions and by a investors, and if so what type of communication should be completed information should be required, some method that is appropriately suited to the electronic and Internet-based nature commenters generally supported 702 See Public Startup Letter 3. requiring an intermediary to gather 703 See, e.g., ASSOB Letter; CrowdCheck Letter 1; of crowdfunding transactions. As explained in Section II.A.3, Rule specific information from investors, RocketHub Letter; Wefunder Letter; Vann Letter. 704 100(a)(3) of Regulation Crowdfunding particularly identifying information that See, e.g., BetterInvesting Letter; AFR Letter; IAC Recommendation; Consumer Federation Letter requires that crowdfunding transactions could help prevent duplicate or (‘‘The definition of electronic delivery must be be conducted exclusively through an fraudulent accounts and information revised to ensure the disclosures themselves, and intermediary’s platform. Rule 302(a) about other intermediary accounts and not just notices of the availability of disclosures, are implements this requirement by investments.700 A few of these delivered to investors.’’). 705 See Consumer Federation Letter. See also requiring that investors consent to commenters supported the Commission Clapman Letter (suggesting that all issuers and their electronic delivery of materials in requiring intermediaries to collect materials must be ‘‘publicly accessible for all connection with crowdfunding investors’ social security numbers.701 investors to have the same opportunity to invest’’ offerings.713 This requirement applies to One commenter opposed the and stating that ‘‘no clubs, or paid to view investment style platforms would therefore be Commission requiring intermediaries to allowed’’). 710 See RocketHub Letter. 706 IAC Recommendation; see also BetterInvesting 711 See Public Startup Letter 3. 699 See Arctic Island Letter 2. Letter. 712 Id. 700 See, e.g., Consumer Federation Letter; 707 IAC Recommendation; see also BetterInvesting 713 Certain requirements of Regulation Jacobson Letter; RocketHub Letter. Letter. Crowdfunding that require timely actions by issuers 701 See, e.g., Consumer Federation Letter; 708 See CFIRA Letter 12. and investors will be facilitated by requiring RocketHub Letter. 709 Id. Continued

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all investors, including an existing specifically text, instant messages, and effecting any further transactions in customer of a registered broker that has messages sent using social media. securities offered and sold in reliance not already consented to electronic on Section 4(a)(6). b. Educational Materials delivery of materials. Therefore, this (2) Comments on Proposed Rules requirement will prohibit intermediaries (1) Proposed Rules Commenters generally supported from accepting an investment Securities Act Section 4A(a)(3) states distribution of educational materials commitment in a Section 4(a)(6) offering that an intermediary must ‘‘provide through intermediaries.717 Some stated from any investor that has not such disclosures, including disclosures that intermediaries should be required consented to electronic delivery. related to risks and other investor to submit educational materials to the We are adopting substantially as education materials, as the Commission Commission or to FINRA because proposed Rule 302(a)(2), which requires shall, by rule, determine appropriate,’’ oversight and review is needed for that all information required to be but it does not elaborate on the scope of materials that will be used by provided by an intermediary under this requirement. As described in unsophisticated investors,718 while Subpart C be provided through further detail below, proposed Rule others stated that intermediaries should electronic means. We have considered 302(b)(1) of Regulation Crowdfunding not be required to submit educational the comments but do not believe that it would require intermediaries to deliver materials to the Commission or to would be sufficient—or consistent with to investors, at account opening, FINRA because it would be cumbersome our previous statements about electronic educational materials that are in plain and expensive.719 One commenter media—for the intermediary simply to language and otherwise designed to stated that the proposed requirements make Subpart C materials, such as communicate effectively and accurately should be modified to state that educational materials, notices and certain specified information. Proposed education must be done prior to an confirmations, available on the Rules 302(b)(1)(i)–(viii) would require investor’s first investment in a Section intermediary’s platform for investors to the materials to include: 4(a)(6) offering, not at account • The process for the offer, purchase 720 access.714 Rather, unless otherwise opening. and issuance of securities through the indicated in the relevant rules of Some commenters suggested that intermediary; Subpart C,715 the intermediary must additions be made to the scope of • the risks associated with investing information proposed to be required in provide the information either through in securities offered and sold in reliance (1) an electronic message that contains an intermediary’s educational on Section 4(a)(6); 721 the information, (2) an electronic materials, to include information • the types of securities that may be about exit strategies; 722 principles of message that includes a specific link to offered on the intermediary’s platform the information as posted on the investing in crowdfunding and how to and the risks associated with each type evaluate investment opportunities in intermediary’s platform, or (3) an of security, including the risk of having privately held companies; 723 the risks electronic message that provides notice limited voting power as a result of associated with crowdfunding of what the information is and notifies dilution; investments; 724 and reasons for investors that this information is located • the restrictions on the resale of investors to maintain their own personal on the intermediary’s platform or on the securities offered and sold in reliance 716 records concerning crowdfunding issuer’s Web site. We have added to on Section 4(a)(6); investments.725 One commenter the rule text other examples of • the types of information that an electronic messages that are permissible issuer is required to provide in annual 717 See, e.g., Arctic Island Letter 6; CFA Institute in addition to email messages— reports, the frequency of the delivery of Letter; Cole Letter; Consumer Federation Letter; that information, and the possibility that Gimpelson Letter 2; Heritage Letter; Jacobson Letter; NSBA Letter; Patel Letter; RocketHub Letter; STA consent to electronic delivery of documents. See, the issuer’s obligation to file annual Letter; StartupValley Letter; Wefunder Letter. e.g., Section II.C.6 (discussing the five-day periods reports may terminate in the future; 718 See, e.g., Consumer Federation Letter; for investor reconfirmations based on material • changes and issuer cancellation notices). the limits on the amounts investors Gimpelson Letter 2; Jacobson Letter. See also RocketHub Letter (stating that ‘‘if educational 714 See Use of Electronic Media, Release No. 34– may invest, as set forth in Section materials are submitted to the Commission for 42728 (Apr. 28, 2000) [65 FR 25843, 25853 (May 4, 4(a)(6)(B); approval, such approval should act to limit liability 2000)] (discussing the ‘‘access equals delivery’’ • the circumstances in which the of the Portal under the Act’’). concept and citing Use of Electronic Media for 719 See, e.g., Arctic Island Letter 6; Joinvestor Delivery Purposes, Release No. 34–36345 (Oct. 6, issuer may cancel an investment Letter; StartupValley Letter; Wefunder Letter. 1995) [60 FR 53548, 53454 (Oct. 13, 1995)]). commitment; 720 See Arctic Island Letter 6. The commenter also 715 For example, Rule 303(a) separately requires • the limitations on an investor’s stated that the educational material requirements that an intermediary must make issuer information right to cancel an investment should only apply to unaccredited investors, but we publicly available on its platform, and so we do not commitment; note that the requirement under Section 4A(a)(4) believe that it is necessary to further require • runs to ‘‘each investor.’’ As discussed above, we intermediaries to send an electronic message the need for the investor to consider believe that Congress intended for crowdfunding regarding the posting of issuer materials. whether investing in a security offered transactions under Section 4(a)(6) to be available 716 As noted above, this electronic message could and sold in reliance on Section 4(a)(6) equally to all types of investors. Consistent with include a specific link to the information as posted is appropriate for him or her; and that approach, we do not believe at this time it on the intermediary’s platform. However, we are • would be appropriate to tailor the educational not requiring intermediaries to provide a link to that following completion of an offering, there may or may not be any requirements for any particular type of investor or direct investors to the intermediary’s platform or to create an exemption for accredited investors. the issuer’s Web site where the information is ongoing relationship between the issuer Further, issuers can rely on other exemptions to located. We believe that the final rule provides and intermediary. offer and sell securities to accredited investors or some flexibility to intermediaries when providing institutional investors. required information through electronic messages Proposed Rule 302(b)(2) would 721 See, e.g., Anonymous Letter 1; Gimpelson given that intermediaries are well-positioned to further require intermediaries to make Letter 2; RocketHub Letter; STA Letter; Angel Letter determine how best to ensure compliance with all the current version of the educational 1. applicable regulatory requirements. We also believe materials available on their platforms, 722 that, because of the widespread use of the Internet, See Anonymous Letter 1. as well as advances in technology that allow and to make revised materials available 723 See Gimpelson Letter 2. funding portals to send various electronic messages, to all investors before accepting any 724 See RocketHub Letter. our final rule requires sufficient notice to investors. additional investment commitments or 725 See STA Letter.

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suggested that educational materials commenter also stated that regulators and issuer reporting.736 The ‘‘should include an industry standard should test the materials with investors circumstances in which an investor can disclosure document on the benefits and to ensure their effectiveness.733 cancel an investment commitment and risks of crowdfunding investments.’’ 726 One commenter stated that we should obtain a return of his or her funds are This commenter indicated that ‘‘having not limit or specify the type of particularly important to an investor’s these generic risk factors in the industry electronic media being used to understanding of the investment process standard educational materials will help communicate educational material.734 and may affect an investor’s decision to focus the company specific disclosure Finally, one commenter opposed all the consider any offerings made pursuant to on the factors that are most educational requirements for Section 4(a)(6). The items required to be important.’’ 727 intermediaries, and suggested instead included, pursuant to Rule 302(b)(1)(i) Some commenters suggested that that the Commission itself, rather than through (viii), in the educational intermediaries should be required to intermediaries, should provide investor materials are basic terms, relevant to design questionnaires to increase educational materials to both investors transactions conducted in reliance on investor knowledge and to monitor and issuers with funding portals linking Section 4(a)(6), of which all investors whether investors actually access to, for example, the SEC Web page or an should be aware before making an materials.728 One commenter suggested open source Web site containing any investment commitment. Furthermore, that in addition to an ‘‘interactive Commission drafted educational information on the various types of questionnaire,’’ the Commission should materials.735 securities that can be available for also ‘‘require that investors reaffirm purchase on the intermediary’s each time they invest that they (3) Final Rules platform, any applicable resale understand the risks associated with After considering the comments, we restrictions, and the risks associated crowdfunding, can afford to lose their are adopting Rule 302(b) relating to with each type of security, including the entire investment, and do not expect to educational materials substantially as risk of having limited voting power as need the funds being invested in the proposed, but adding one further a result of dilution can affect an near term.’’ 729 requirement as to the content of the investor’s decision to consider any Some commenters stated that we materials. We believe that, consistent offerings made pursuant to Section should develop model educational with Section 4A(a)(3) it is appropriate 4(a)(6). In addition, we are adding Rule materials for investors or specify the that intermediaries, rather than the 302(b)(1)(ix) to require the educational content for intermediaries.730 One Commission (as a commenter materials to indicate that under certain commenter suggested that the suggested), be required to provide such circumstances an issuer may cease to Commission, state securities regulators, disclosures, including disclosures publish annual reports and, therefore, and FINRA, together, should develop ‘‘a related to risks and other investor an investor may not continually have sample guide’’ designed to alert education materials as the Commission current financial information about the investors to the risks of crowdfunding determines to be appropriate. We issuer. We are adding this requirement including, among other things, ‘‘the believe that intermediaries are better because we believe that it is important high failure rate of small startup equipped and positioned, as compared for investors to be able to consider the companies, the fact that shares will not to the Commission, to provide ongoing availability of information be set based on market data and may educational materials to investors that about an issuer’s financial condition therefore be mispriced, the lack of are reasonably tailored to an when they assess whether to invest in liquidity, and the risk that, absent intermediary’s offerings and investors, that issuer. The final rule provides each appropriate protections, the value of particularly in light of their access to intermediary with sufficient flexibility their shares could be diluted.’’ 731 This and interactions with investors. commenter also suggested that the guide to determine: (1) The content of the We further believe that the scope of educational materials, outside of the ‘‘should include explicit warnings that information that we are requiring to be investors should not invest in minimum specified information included in an intermediary’s required to be included under Rule crowdfunding unless they can afford to educational materials is appropriate. In lose the entire amount of their 302(b)(1)(i)–(viii), and (2) the overall the Proposing Release we discussed our format and manner of presentation of investment or if they expect to have an rationales for requiring the different immediate need for the funds.’’ 732 This the materials. We believe this flexibility types of disclosures in the educational will allow the intermediary to prepare materials. As we noted in the Proposing and present educational materials in a 726 See Angel Letter 1. Release, we generally drew upon the 727 Id. (suggesting an issuer-specific disclosure manner reasonably tailored to the types document). statutory provisions when including of offerings on the intermediary’s 728 See, e.g., AFR Letter; BetterInvesting Letter; disclosures required in the educational platform and the types of investors Consumer Federation Letter; IAC Recommendation. materials relating to the risks of accessing its platform. While we have One commenter also suggested requiring investing in securities offered and sold determined not to provide model intermediaries to post a list of previous offerings on in reliance on Section 4(a)(6), investors’ their Web sites with information about the educational materials, impose offerings. See Angel Letter 1. cancellation rights, resale restrictions additional content (beyond those 729 IAC Recommendation; see also BetterInvesting proposed) or format requirements, Letter. 733 Id. (suggesting that the Commission should mandate particular language or manner 730 See, e.g., CFA Institute Letter; Guzik Letter 1; take additional steps ‘‘to strengthen requirements Heritage Letter; Jacobson Letter; Joinvestor Letter; with regard to content and delivery of educational of presentation, or require that an NSBA Letter; STA Letter. See also CfPA Letter materials in order to increase the likelihood both intermediary design an investor (stating that guidance on the requirements for that they will be read and that they will clearly questionnaire, as suggested by educational materials and certification of convey the essential information’’); see also CFIRA commenters, the final rules do not compliance should be created and administered by Letter 12 (agreeing with IAC’s suggestion that the an industry-related body with approval and Commission ‘‘could establish a set of standard prohibit an intermediary from providing oversight by the Commission). educational requirements for the industry that additional educational materials if they 731 IAC Recommendation; see also BetterInvesting could be adopted by intermediaries’’). Letter. 734 See Gimpelson Letter 2. 736 See Securities Act Sections 4A(a)(4), 4A(a)(7), 732 Id. 735 See Public Startup Letter 3. 4A(e), and 4A(b)(4).

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choose. For example, because the final Rule 302(b)(2) requires an investors, at the account opening stage, rules do not require an intermediary to intermediary to keep its educational that any person who promotes an design a questionnaire, intermediaries materials accurate. Accordingly, an issuer’s offering for compensation, maintain the flexibility in meeting the intermediary must update the materials whether past or prospective, or who is rule’s requirements to determine as needed to keep them current. In a founder or an employee of an issuer whether such a disclosure format would addition, if an intermediary makes a that engages in promotional activities on be cost effective and appropriate material revision to its educational behalf of the issuer on the particularly in light of that materials, the rule requires that the intermediary’s platform, must clearly intermediary’s particular business intermediary make the revised disclose in all communications on the model. We further note the suggestion educational materials available to all platform the receipt of the by some commenters that we require investors before accepting any compensation and the fact that he or she additional information in the additional investment commitments or is engaging in promotional activities on educational materials, including, for effecting any further crowdfunding behalf of the issuer. transactions. An intermediary will also example, requiring an intermediary to (2) Comments on Proposed Rules discuss exit strategies, how to evaluate be required to obtain a representation investment opportunities in privately that an investor has reviewed the Some commenters suggested that the held companies, and the reasons for intermediary’s most recent educational promoter disclosures should not be materials before accepting an made at account opening where they investors to maintain their own personal 741 records concerning crowdfunding investment commitment from the may be ignored. One commenter investments. Although these suggestions investor.739 proposed that the disclosures should be may provide investors with some useful We believe that these requirements made ‘‘prior to any participant on the platform being able to post comments, information, we are not persuaded that will benefit investors by helping to reviews, ratings, or other promotional imposing such additional requirements ensure that they receive information activities.’’ 742 in the final rule is necessary at this time about key aspects of investing through as it is unclear that those suggestions the intermediary’s platform, including (3) Final Rules would significantly strengthen the aspects that may have changed since the last time they received the materials, We are adopting, as proposed, Rule investor protections that will result from 302(c) requiring intermediaries to Rule 302(b) as adopted. We also believe prior to making investment commitments, as that information can inform investors, at the time of account that adding such requirements may opening, that promoters must clearly overly complicate these educational influence their investment decisions. We also believe that requiring disclose in all communications on the materials and increase the costs platform the receipt of the associated with preparing them. intermediaries to update materials on an ongoing basis, rather than at certain compensation and the fact that he or she Therefore, we have determined to allow is engaging in promotional activities on intermediaries the flexibility to prepare specified intervals, will help to ensure that those materials are updated as behalf of the issuer. As noted in the educational materials reasonably Proposing Release, in addition to the tailored to their offerings and investors, circumstances warrant, which, in turn, will provide investors with more information required under Rule 302(c), provided the materials meet the promoters will also be required to standards and include the information current information and increase investor protection. comply with Section 17(b) of the required to be provided under Rule Securities Act, which requires 302(b).737 c. Promoters promoters to fully disclose to investors We also recognize that FINRA or any (1) Proposed Rule the receipt, whether past or prospective, other registered national securities of consideration and the amount of that Securities Act Section 4A(b)(3) compensation.743 We believe that the association may implement additional provides that an issuer shall ‘‘not educational materials requirements. We disclosures required by Rule 302(c) will compensate or commit to compensate, help alert investors at the outset, rather are not, however, as one commenter directly or indirectly, any person to suggested,738 requiring at this time that than after the account is opened, of the promote its offerings through fact that information about the intermediaries submit their educational communication channels provided by a materials to the Commission or to a promotional activities of issuers or broker or funding portal, without taking representatives of issuers will be registered national securities association such steps as the Commission shall, by for review and approval. We note, disclosed at a later time on the platform, rule, require to ensure that such person pursuant to Rule 303(c)(4). We believe however, that a registered national clearly discloses the receipt, past or securities association could propose that the account opening is the prospective, of such compensation, appropriate time for this disclosure such a requirement as its oversight of upon each instance of such promotional intermediaries in this new market because it gives investors notice of communication.’’ Under Rule 205 of potential promotional activities by evolves. Any such proposed Regulation Crowdfunding, as discussed requirement would be considered by the issuers and their representatives prior to above, an issuer can compensate making investment commitments. As Commission, and subject to public persons to promote its offerings through notice and opportunity for comment, discussed below, Rule 303(c)(4) communications channels provided by separately mandates that intermediaries pursuant to Exchange Act Section 19(b) the intermediary on its platform, where and Rule 19b–4. require any person, when posting a certain conditions are met.740 comment in the communication We separately proposed in Rule channels, to clearly disclose with each 737 We note that educational materials may be 302(c) of Regulation Crowdfunding to subject to examination and inspection. See Section II.D.5. (describing the recordkeeping obligations of require the intermediary to inform 741 See, e.g., Arctic Island Letter 6; Wefunder funding portals). Letter. 738 See RocketHub Letter (stating that ‘‘if 739 See Rule 303(b)(2)(i) of Regulation 742 See Arctic Island Letter 6. educational materials are submitted to the Crowdfunding. 743 See Proposing Release at 78 FR 66467–68. See Commission for approval, such approval should act 740 See Rule 205 of Regulation Crowdfunding and also Section 17(b) of the Securities Act (15 U.S.C. to limit liability of the Portal under the Act’’). the discussion in Section II.B.5. 77q(b)).

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posting whether he or she is a founder (3) Final Rules implement this provision by requiring or an employee of an issuer engaging in We are adopting Rule 302(d) as each intermediary in a transaction promotional activities on behalf of the proposed. We believe that requiring involving the offer or sale of securities issuer, or receives compensation, intermediaries to provide information to in reliance on Section 4(a)(6) to make whether in the past or prospectively, to investors about the manner in which available to the Commission and to promote an issuer’s offering. We believe they will be compensated at account investors any information required to be that the disclosure requirements of Rule opening, rather than at a subsequent provided by the issuer under Rules 201 302(c), when coupled with the time, will provide investors with notice and 203(a) of proposed Regulation additional disclosure requirements in of how the intermediary is being Crowdfunding. As proposed, Rule Rule 303(c)(4), will promote a compensated at a threshold stage in the 303(a) would require that this transparent information sharing process relationship (i.e., account opening), information: (1) Be publicly available on whereby investors are able to discern which, in turn, will help investors make the intermediary’s platform, in a manner the sources of information that they are better-informed decisions. We note that that reasonably permits a person receiving and any potential conflicts of the final rules—unlike the proposed accessing the platform to save, download or otherwise store the interest by those sources. rules—allow intermediaries to receive a information; (2) be made publicly financial interest in the issuer as d. Compensation Disclosure available on the intermediary’s platform compensation, subject to certain for a minimum of 21 days before any (1) Proposed Rule limitations.748 Therefore, an securities are sold in the offering, during Proposed Rule 302(d) of Regulation intermediary that receives or may which time the intermediary may accept Crowdfunding would require that receive a financial interest in an issuer investment commitments; and (3) intermediaries, when establishing an in the future as compensation for its remain publicly available on the account for an investor, clearly disclose services is required to disclose that intermediary’s platform until the offer the manner in which they will be compensation at account opening. We and sale of securities is completed or compensated in connection with also note that Rule 201(o), which is cancelled (including any additional offerings and sales of securities made in discussed in Section II.B.1 and information provided by the issuer). In reliance on Section 4(a)(6). This separately requires an issuer to disclose addition, under Proposed Rule requirement would help to ensure in its offering materials a description of 303(a)(4), an intermediary would be investors are aware of any potential the intermediary’s interests in the prohibited from requiring any person to conflicts of interest that may arise from issuer’s transaction, including the establish an account with the the manner in which the intermediary is amount of compensation paid or to be intermediary in order to access this compensated. Rule 201(o) of Regulation paid to the intermediary for conducting information. Crowdfunding, which is discussed in a particular offering, the amount of Section II.B.1, separately requires an referral and any other fees associated (2) Comments on the Proposed Rule issuer to disclose in its offering with the offering. We are not defining Several commenters suggested that so materials, among other things, the compensation as one commenter long as issuer information is made amount of compensation paid to the suggested, as we believe the final rule’s available on the intermediary’s intermediary for conducting a particular requirement to clearly disclose the platform, the rules should not mandate offering, including the amount of manner in which an intermediary will the delivery of this information, in referral and any other fees associated be compensated in connection with addition to or in lieu of, making the with the offering. offerings and sales of securities made in information available on the reliance on Section 4(a)(6) is sufficiently 750 (2) Comments on Proposed Rule intermediary’s platform. clear, and because we are also One commenter stated that having Several commenters supported the concerned that a definition of information about a deal publicly disclosure of intermediary compensation could be both under- and available on the intermediary’s Web site compensation.744 One commenter stated over-inclusive in a new and evolving will increase the potential for fraud— that the account opening is not an crowdfunding market. specifically, potential fraud involving appropriate time to mention ‘‘data scraping’’ from Web sites (i.e., 5. Requirements With Respect to compensation, asserting that the copying data from these Web sites in Transactions account opening stage should be order to use that data for fraudulent dedicated to discussing the risk of a. Issuer Information purposes).751 This same commenter 745 startup investing. One commenter (1) Proposed Rule suggested that that there should be two suggested that the best way for an levels of disclosure: The first, would be intermediary to disclose compensation Securities Act Section 4A(a)(6) available to all and would contain is through a ‘‘Costs and Fees’’ page on requires each intermediary to make certain general information about the its Web site.746 Another commenter available to the Commission and requested that the Commission define investors, not later than 21 days prior to 750 See, e.g., Arctic Island Letter 6 (suggesting that compensation as any fees or the first day on which securities are sold an electronic copy of the signed subscription to any investor (or such other period as agreement and risk disclosures should be sent to the compensation collected by the investor via email, and that ‘‘[e]verything else can intermediary in connection with a the Commission may establish), any be referenced by the investor online at any time’’); Section 4(a)(6) transaction, subject to information provided by the issuer ASSOB Letter; CrowdCheck Letter (suggesting that Commission and FINRA rules.747 pursuant to Section 4A(b).749 the Commission remove the requirement in the Accordingly, we proposed Rule 303(a) proposed rules that would effectively limit the presentation of information to only formats that can 744 See, e.g., Arctic Island Letter 6; ASSOB Letter; of Regulation Crowdfunding to be saved and downloaded by prospective investors); CFA Institute Letter; Commonwealth of RocketHub Letter; Wefunder Letter; Vann Letter Massachusetts Letter; Joinvestor Letter; 748 See Section II.C.2.b. (stating that no particular means of delivery to StartupValley Letter; Wefunder Letter. 749 As discussed in Section II.B, Securities Act investors should be required because ‘‘technologies 745 See Wefunder Letter. Section 4A(b) establishes the requirements for an may change’’ and intermediaries should be allowed 746 See StartupValley Letter. issuer that offers or sells securities in reliance on to use whatever means ‘‘appropriate’’). 747 See CFIRA Letter 4. Section 4(a)(6). 751 See StartupValley Letter.

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issuer and the terms of deal, and the reviewed all relevant issuer potentially stale issuer information second would be made available only information.’’ 759 particularly given the nature of the after investors proceed through a crowdfunding market (i.e., we assume (3) Final Rules membership registration process and that each issuer generally will conduct would contain disclosure documents, After considering the comments, we only one offering per year).761 We note financial information, legal disclosures are adopting, as proposed, Rule 303(a). that intermediaries nonetheless are and further information.752 As stated in the Proposing Release, we required to retain the information in As to the amount of time that an believe that the requirement in Rule accordance with their obligation to intermediary should display issuer 303(a) that the information must be make and preserve for a period of time materials prior to the first day on which made publicly available on the records with respect to any written securities are sold to any investor, some intermediary’s Web site satisfies the materials that are used as part of an commenters supported the 21-day time requirement under Section 4A(d) for the intermediary’s business, including frame as a sufficient minimum period Commission to ‘‘make [available to the issuer materials made available on their that offering information should be states], or . . . cause to be made platforms.762 made available through the [available] by the relevant broker or While the intermediary plays an intermediary’s platform.753 funding portal, the information’’ issuers important gatekeeper function, the are required to provide under Section Although one commenter objected to investor has responsibility for his or her 4A(b) and the rules thereunder. intermediaries displaying any issuer actions as well. To that end, we are not Moreover, this approach should help requiring that an intermediary ensure materials,754 several commenters investors, the Commission, FINRA (and that an investor has actually reviewed supported requiring intermediaries to any other applicable registered national the relevant issuer information. We continue to display issuer materials for securities association) and other believe that the requirements of Rule some period of time after completion of interested parties, such as state 303(a) provide an investor with the the offering.755 One commenter, regulators, to access information relevant issuer information and an however, stated that intermediaries without impediment. Therefore, we adequate period of time in which to should not be required to display issuer believe that this rule is not only evaluate the investment opportunity materials for closed offerings.756 consistent with the statute but that it before investing. We are not at this time Another commenter stated that ‘‘[o]nce also enhances investor protection by imposing additional requirements on an offering is complete, an issuer should having issuer information about a the intermediary in this regard. have the right to limit publicly available crowdfunding security publicly 757 information.’’ available on the intermediary’s Web b. Investor Qualification We also requested comments as to site. While we considered the concern (1) Compliance With Investment Limits whether an intermediary should make expressed by one commenter that (a) Proposed Rule efforts to ensure that an investor has having such information available on actually reviewed the relevant issuer the intermediary’s Web site would Securities Act Section 4(a)(6)(B) limits information. A few commenters increase the potential for ‘‘data the aggregate amount of securities that expressed concern with requiring scraping,’’ 760 we believe the expected can be sold by an issuer to an investor intermediaries to ensure that an investor benefits of the requirement to investors in reliance on Section 4(a)(6) during a has reviewed the relevant issuer and other interested persons, as 12-month period. Securities Act Section information.758 Another commenter discussed above, justifies the risk of 4A(a)(8) requires that intermediaries suggested that an investor ‘‘should potential harm from such potential ‘‘make such efforts as the Commission demonstrate, through a representation of activities. determines appropriate, by rule’’ to acknowledgment, that they have We note that commenters who ensure that no investor has made addressed the issue generally supported purchases in the aggregate, from all 752 Id. See also Early Shares Letter (suggesting a a 21-day time frame as the minimum issuers, that exceed the limits in Section permission-based system for the disclosure of period that offering information should 4(a)(6). certain ‘‘sensitive’’ information about the offering). be made available through the Proposed Rule 303(b)(1) of Regulation 753 See, e.g., ASSOB Letter; RocketHub Letter. intermediary’s platform prior to the first Crowdfunding would implement this 754 See Public Startup Letter 3. latter provision by requiring that, each 755 See, e.g., Arctic Island Letter 6 (stating that an day on which securities are sold to any issuer’s offering materials should be permanently investor. Under the final rules, the time before accepting an investment displayed so it can easily be referenced in the information must remain available on commitment on its platform (including future); ASSOB Letter (suggesting a period of at the platform until the offering is any additional investment commitment least two years after receiving funding from the from the same person), an intermediary offering); Jacobson Letter (suggesting a period of at completed or canceled. While some least six years after an offering closes); RocketHub commenters suggested that the rule must have a reasonable basis for Letter (recommending that issuer materials should should require intermediaries to believing that the investor satisfies the remain displayed for an additional 30 days after continue to display issuer materials for investment limits established by Section completion of the offering and further suggesting 4(a)(6)(B). The proposed rule would that ‘‘[i]ntermediaries should have the right, at their some period of time after completion of own discretion, to continue to display the entire the offering, we are not prescribing such allow an intermediary to rely on an offering, or parts of it, for as long as they see fit’’). a requirement nor are we prohibiting investor’s representations concerning 756 See Whitaker Chalk Letter (stating that intermediaries from doing so if they so removing such materials from the intermediary’s choose. Although we appreciate that 761 As discussed in Section IV.B.1, we assume, for platform would prevent the public from relying on purposes of the Paperwork Reduction Act, that each ‘‘stale’’ information and opposing the requirement historical issuer information may issuer will conduct one offering per year. that intermediaries keep public any such ‘‘stale’’ provide helpful background for 762 Registered brokers would have to maintain information so long as the information remain investors generally, we are concerned records pursuant to Exchange Act Section 17 and subject to the intermediary’s recordkeeping that imposing such a requirement could the rules thereunder. See e.g., 15 U.S.C. 78q and 17 requirements). potentially result in persons relying on CFR 240a–3 and 17a–4. Funding portals would be 757 See RocketHub Letter. subject to the recordkeeping requirements of 758 See, e.g., Arctic Island Letter 6 (stating that proposed Rule 404 of Regulation Crowdfunding. such a requirement ‘‘could make things incredibly 759 RocketHub Letter. See Section II.D.5 (discussing the recordkeeping messy and expensive’’); Wefunder Letter. 760 See StartupValley Letter. requirements we are adopting for funding portals).

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annual income, net worth and the However, another commenter disagreed commenter suggested that the amount of the investor’s other with this suggestion.771 One commenter Commission create penalties for investments in securities sold in suggested intermediaries’ platforms be intermediaries who fail to meet their reliance on Section 4(a)(6) through other required to provide to investors prior to duties regarding investment limits.779 intermediaries unless the intermediary accepting an investment commitment a One commenter suggested the has a reasonable basis to question the detailed statement of the investment Commission should require reliability of the representation. limits that are applicable to investors crowdfunding portals to collect enough that also includes a penalty of perjury (b) Comments on the Proposed Rule data from investors to avoid the most certification by the investor.772 A few likely errors in calculating the A number of commenters supported commenters emphasized a need to warn investment limit and to prevent evasion the proposed requirements for enforcing investors that the value of their primary of those limits. This commenter also investment limits and intermediary residence should be excluded for suggested that the Commission should responsibility for investor purposes of the net worth require portals to collect social security compliance,763 while a few commenters 773 calculation. Commenters also numbers to help prevent individuals opposed the requirements.764 Several suggested that the Commission adopt an from evading limits by opening multiple commenters suggested ways to approach similar to that under the accounts under false names.780 strengthen the requirements, such as by: capital gains tax rules that would limit Requiring that an intermediary conduct benefits and loss recovery for investors Other commenters supported the more stringent checks,765 having the who invest outside of their limits.774 proposal to allow an intermediary to Commission maintain a registry of those Several commenters opposed the rely on the representations of an who have purchased crowdfunding proposal to allow an intermediary to investor.781 Some of these commenters securities,766 requiring that investors rely on the representations of an warned against costly compliance electronically upload financial investor.775 Some urged the requirements such as, for example, documents for verification of income or Commission to provide for verification requiring verification of investment net worth,767 requiring notices detailing through either a third-party service or limits by both the issuer and the investment limits and highlighting their through the intermediaries themselves intermediary,782 or burdening a broker- importance,768 and precluding an in lieu of reliance on investor dealer with a vetting requirement for investor who violates the investment representations.776 Other commenters someone who may only want to invest limits from bringing a cause of action suggested that intermediaries should be a small amount, such as $25.783 769 required to take certain affirmative steps against an issuer. Some commenters Several commenters supported to verify investor representations.777 suggested that the Commission require requiring an intermediary to confirm intermediaries to create a tool for One commenter stated that the strongest possible approach to a verification investment limits compliance using a investors to use, such as a centralized database, should one questionnaire, to assemble the requirement should be imposed for 784 investments beyond $2,000.778 Another become established. A number of underlying data on which investment these commenters suggested the limits are calculated and to perform database be created and managed by the those calculations electronically.770 and exclude the value of principle residence). See also BetterInvesting Letter. Commission with mandatory 771 See CFIRA Letter 12 (disagreeing with IAC’s intermediary participation 785 to allow 763 See, e.g., BetterInvesting Letter; CFA Institute suggestion ‘‘that portals create a ‘tool’ to walk intermediaries to check an investor’s Letter; CFIRA Letter 12; Finkelstein Letter; IAC investors through the creation of what is essentially Recommendation; Milken Institute Letter. See also a personal balance sheet’’). total year to date purchases across all NAAC Letter (stating that unsophisticated investors 786 772 See Milken Institute Letter (‘‘This would platforms. One commenter stated that might not comply with the investment limits or be underscore the importance of the investor caps . . . the statute ‘‘contemplates’’ the targets for fraudulent schemes, and recommending and properly place the burden of compliance on the ‘‘verified and stringent determinations as to the development of a central data repository actor who can verify income or wealth at the lowest income and net worth qualifications of any cost—the investor.’’). and suggested that it could be potential investors.’’). 773 established at the relevant national 764 See, e.g., Brown J. Letter; CFA Institute Letter; See, e.g., Moskowitz Letter (stating that select Consumer Federation Letter. investors on the secondary market could purchase 774 See, e.g., Milken Institute Letter (supporting shares in excess of the investment limit and years of the final rules being in effect, and stating the proposed investment caps, but agreeing with suggesting that the limits be removed altogether); that ‘‘it would be incredible if the verification precluding loss recovery); Phillips Letter. Phillips Letter. requirements for ordinary investors in 775 See, e.g., Accredify Letter (stating that self- 765 See, e.g., Moskowitz Letter; NAAC Letter. crowdfunding were permitted to be less than for certifications are not an effective way to implement accredited investors under Rule 506(c)’’). 766 See Clapman Letter. See also CFA Institute the investment limit requirements and suggesting 779 See Commonwealth of Massachusetts Letter. Letter (suggesting that the Commission require that intermediaries be required to use existing intermediaries to ‘‘cross check each investor’s 780 See AFR Letter. services to check individuals’ investment limits); 781 information against other files on record with the AFL–CIO Letter; AFR Letter; Brown J. Letter; See, e.g., Arctic Island Letter 6; ASSOB Letter; Commission to ensure compliance with the law’s Commonwealth of Massachusetts Letter; Consumer CFA Institute Letter; Greenfield Letter; Heritage limitations’’). Federation Letter; Farnkoff Letter; Letter Finkelstein Letter; Joinvestor Letter; Patel Letter; Public Startup 767 See, e.g., Consumer Federation Letter; Letter; Jacobson Letter; Merkley Letter (noting that Letter 3; RocketHub Letter. Finkelstein Letter. permitting self-certification would expose investors 782 See Heritage Letter. 768 See Milken Institute Letter. to precisely the risks that the statute aimed to 783 See Arctic Island Letter 6. 769 Id. prevent, and should not be permitted for 784 See, e.g., BetterInvesting Letter; Arctic Island 770 See, e.g., CFA Institute Letter (suggesting that investments over $2,000); Saunders Letter; Letter 6; Consumer Federation Letter; Finkelstein ‘‘investors be required to complete online Verinvest Letter. Letter; IAC Recommendation; Merkley Letter; questionnaires denoting the different classes of 776 See, e.g., Accredify Letter; Commonwealth of Verinvest Letter. See also CFA Institute Letter asset holdings permitted by the law, with a specific Massachusetts Letter; Farnkoff Letter (‘‘A third- (suggesting that ‘‘the Commission require such and prominent notification that the value of one’s party verification regime overseen by the SEC or intermediaries to cross check each investor’s primary residence is excluded’’); IAC FINRA would provide the safest protection from information against other files on record with the Recommendation (stating that the tool, such as an fraudsters and reduce risks of liability for funding Commission to ensure compliance with the law’s electronic work sheet, would assist investors in portals.’’); Saunders Letter; Verinvest Letter. limitations’’). identifying categories of assets and liabilities such 777 See, e.g., AFL–CIO Letter; Jacobson Letter. 785 See, e.g., Arctic Island Letter 6; Consumer as bank accounts, investment accounts, and house 778 See Merkley Letter (suggesting that the Federation Letter; Finkelstein Letter. See also CFA value, for purposes of the net worth calculation, Commission could reconsider possible options to Institute Letter. and prompt them to deduct outstanding liabilities relax any strict initial approach after the first few 786 See Finkelstein Letter.

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securities association.787 Another compliance with investment limits. running.796 We note, in response to one commenter suggested, in connection Although we appreciate some of the commenter,797 that it is the with its support for the use of a additional suggestions provided by Commission’s normal practice to review centralized database, imposing a three- commenters, as outlined above, we the effectiveness of all of its rules, to-five year time limit, after which believe the approach in Rule 303(b)(1) particularly in light of market intermediaries would no longer be for establishing compliance with developments, and consider changes as permitted to rely on investor investment limits is an appropriate the Commission deems appropriate. representations about their investments means of implementing the provisions Commission staff expects to review the 788 on other platforms. One commenter of Section 4A(a)(8), which is designed to need for a centralized database during suggested the Commission incentivize help ensure that an investor has not the study of the federal crowdfunding the private creation of a centralized exemption that it plans to undertake no 789 made purchases, in the aggregate from database. Another opposed the all issuers, that exceed those limits later than three years following the Commission imposing any obligation on during a 12-month period. We note, effective date of Regulation intermediaries until after such a 798 however, that intermediaries can, in Crowdfunding. centralized database is established.790 their discretion, take additional Another commenter, supporting the (2) Acknowledgment of Risk creation of a single, centralized measures for evaluating investors’ (a) Proposed Rule compliance with investment limits, database, warned that ‘‘competing Securities Act Section 4A(a)(4) databases’’ would be incomplete.791 including those suggested by commenters, such as: Using a requires an intermediary to ensure that Others commenters expressed each investor: (1) Reviews educational concern that the proposed rule included centralized data repository, to the extent that one is created; requiring materials; (2) positively affirms that the no mechanism to prevent investors from investor understands that he or she is registering with multiple platforms and verification of income or net worth electronically by uploading financial risking the loss of the entire investment investing far in excess of the statutory and that the investor could bear such a limits.792 Commenters who addressed documents; or creating a tool for loss; and (3) answer questions the issue supported requiring investors to use, such as a demonstrating an understanding of the intermediaries to request information questionnaire, to assemble the level of risk generally applicable to about any other intermediary accounts underlying data. investments in startups, emerging prior to accepting an investment While several commenters opposed businesses and small issuers, the risk of commitment.793 One of these permitting an intermediary to rely on illiquidity and such other matters as the commenters suggested requiring the representations of an investor about Commission determines appropriate. As intermediaries to add a text box to their investment limits and some suggested discussed above, Rule 302(b) of site that requires the investor to input requiring intermediaries to take certain Regulation Crowdfunding requires an the total dollar amount invested on affirmative steps to verify compliance, other platforms.794 The other intermediary to provide to investors we believe that it would be difficult for commenter stated that an intermediary certain educational materials in intermediaries to monitor or should only be required to request connection with the opening of an independently verify whether each additional information if there are account. In addition, proposed Rule doubts about the investor’s self- investor remains within his or her 303(b)(2) of Regulation Crowdfunding certification.795 investment limits where the investor would require an intermediary, each may be participating in offerings on time before accepting an investment (c) Final Rules multiple platforms. We note, however, commitment, to obtain from the investor After considering the comments, we that reliance on investor representations a representation that the investor has are adopting Rule 303(b)(1) as proposed. must be reasonable. At a minimum, it reviewed the intermediary’s educational As a threshold matter, we note that a would not be reasonable, and therefore materials, understands that the entire number of commenters supported the would be a violation of the rule and amount of his or her investment may be proposed approach for establishing potentially subject to an enforcement lost and is in a financial condition to action by the Commission, for an bear the loss of the investment.799 The 787 See Merkley Letter (noting that the proposal intermediary to ignore investments proposed rule would also require that ‘‘does not establish such a repository or set forth made by an investor in other offerings an intermediary obtain from the investor any path towards its establishment and thus fails to implement the plain meaning of the statutory on the intermediary’s platform, to not 796 language’’ and suggesting that ‘‘[t]esting, obtain information and take into We do not believe that the statute requires the supervisory oversight, and other mechanisms to account investments made by an establishment of a centralized database or ensure investors are protected . . . be more fully repository of investor information as one considered’’). investor in other offerings (made in commenter suggested. See Merkley Letter. Instead, the statute calls for intermediaries to ‘‘make such 788 See Consumer Federation Letter. reliance on Section 4(a)(6)) on platforms efforts as the Commission determines appropriate, 789 that are controlled by or under common See IAC Recommendation (suggesting the by rule’’ to ensure that no investor exceeds the Commission create such an incentive by monitoring control with the intermediary, or to investment limits set forth in Section 4(a)(6). the effectiveness of the proposed reasonable ignore other information or facts about 797 See IAC Recommendation; see also reliance approach and to end that approach if a BetterInvesting Letter. cost-effective and suitable cross-portal monitoring an investor within its possession. 798 See Section II. Further, we anticipate that, system is developed); see also BetterInvesting Under the final rules, an intermediary Letter. because of the electronic nature of crowdfunding, will be permitted to reasonably rely on many of the books and records maintained by 790 See Wefunder Letter. intermediaries will be in electronic format. We 791 a centralized data repository of investor See CFIRA Letter 12. expect this will enable the Commission to analyze 792 information, should one be created in See, e.g., Finkelstein Letter; Vann Letter data across the crowdfunding industry as part of its (stating that intermediaries should be required to the future. We are not mandating the ongoing oversight. We note that Commission staff ‘‘make it clear that the aggregate limits apply across creation of such a database at this time, also expects to review the books and records all such platforms, not just their own’’). in part to help to minimize the obstacles practices of intermediaries as part of its planned 793 See, e.g., ASSOB Letter; Wefunder Letter. that intermediaries may face in getting three-year review. 794 See Wefunder Letter. 799 See Section II.C.4.b. (discussing Rule 302(b)(2) 795 See ASSOB Letter. this newly formed marketplace up and of Regulation Crowdfunding).

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answers to questions demonstrating the (c) Final Rules from, investors. As explained in the investor’s understanding that there are After considering the comments, we Proposing Release, the requirements of restrictions on the investor’s ability to are adopting Rule 302(b)(2) as proposed. the rule would not be satisfied if, for cancel an investment commitment and As noted in the Proposing Release, this example, an intermediary were to pre- obtain a return of his or her investment, rule is intended to help ensure that select answers for an investor. that it may be difficult for the investor investors engaging in transactions made Further, an intermediary in its to resell the securities, and that the in reliance on Section 4(a)(6) are fully discretion may require additional investor should not invest any funds in informed and reminded of the risks information, such as information a crowdfunding offering unless he or associated with their particular concerning the investor’s level of she can afford to lose the entire amount investment before making any investment experience, the identity of of his or her investment. investment commitment. While an any person from whom the investor acquired any information about the (b) Comments on the Proposed Rule intermediary cannot ensure that all investors understand the risks involved, investment and the percentage of the Several commenters supported the the rule requires intermediaries to investor’s liquid net worth represented requirement that intermediaries obtain confirm that an investor: (1) Has by the proposed investment, or impose investor acknowledgments.800 Some of reviewed the intermediary’s educational additional requirements on prospective these commenters, however, opposed materials delivered pursuant to Rule investors, such as imposing express requiring investors to re-acknowledge or 302(b); (2) understands that the entire acknowledgments of the investor’s to re-certify for each investment amount of his or her investment may be responsibilities with respect to commitment.801 lost, and is in a financial condition to compliance. Finally, although several commenters bear the loss of the investment; and (3) One commenter stated that investors suggested that once an account has been has completed a questionnaire should be required to complete and sign created on an intermediary’s platform, demonstrating an understanding of the ‘‘subscription forms’’ that set forth, in an investor should be able to invest in risks of any potential investment and addition to what the proposed rules multiple offerings on the same other required statutory elements. In would require, additional information intermediary platform without having to addition, the questionnaire required concerning the investor’s level of re-certify and review the educational under the rule may help to address, at investment experience, the identity of material, we continue to believe that, in least in part, the concerns expressed by any person from whom the investor order to realize the statute’s investor some commenters that Section 4A(a)(4) acquired any information about the protection goals, it is prudent to require requires more than a mere self- investment and the percentage of the an intermediary to obtain an investor certification.806 We note, however, that investor’s liquid net worth represented representation and completed 802 the plain language of Section 4A(a)(4)(B) by the proposed investment. questionnaire each time an investor seemingly requires only that the One commenter supported the seeks to make an investment investor positively affirms his or her Commission providing recommended commitment. Accordingly, under Rule forms of questions and representations, understanding of the risk of loss. Our final rule does not provide a 303(b), an intermediary will be required noting that ‘‘any material examples model form of acknowledgment or to obtain these items each time an provided by the Commission will be questionnaire. Rather, the rule permits investor seeks to make an investment helpful to both the investor and the an intermediary to develop the commitment. intermediary.’’ 803 However, another representation and questionnaire in any commenter stated that it would be c. Communication Channels format that is reasonably designed to opposed to the Commission providing (1) Proposed Rule demonstrate the investor’s receipt of the recommended forms of questions as a information and compliance with the Proposed Rule 303(c) of Regulation ‘‘starting point’’ because such other requirements under the final rules. Crowdfunding would require an recommended forms could be seen as a As with the educational material intermediary to provide, on its platform, safe harbor and constrain channels through which investors can 804 requirements, we continue to believe effectiveness. In contrast, a different that rather than providing sample communicate with one another and commenter stated that Commission- content or a model form of with representatives of the issuer about provided questions and representations acknowledgment or questionnaire, offerings made available on the should serve as a safe harbor so there is intermediaries should be provided with intermediary’s platform. An 805 an incentive for issuers to use them. sufficient flexibility to choose both the intermediary that is a funding portal content, within the requirements of Rule would be prohibited from participating 800 See, e.g., Arctic Island Letter 6; CFA Institute 302(b), and the format used to present in communications in these Letter; Greenfield Letter; Joinvestor Letter; the required materials. Likewise, we channels.807 Proposed Rule 303(c) also RocketHub Letter; STA Letter; Wefunder Letter. would require the intermediary to: (1) 801 See Wefunder Letter; RocketHub Letter also believe that an intermediary’s (suggesting that once an account has been created familiarity with its business and likely Make the communications channels on an intermediary platform, an investor should be investor base make it best able to publicly available; (2) permit only those able to invest in multiple offerings on the same determine the format in which to persons who have opened accounts to intermediary platform without having to re-certify and review the educational materials). present the required materials. We note 807 See Rule 303(c)(1) (an intermediary that is a 802 See Greenfield Letter. See also STA Letter that any format used must be reasonably funding portal cannot ‘‘participate in these (stating that investors should be required to designed to demonstrate receipt and communications, other than to establish guidelines acknowledge that they are aware that ‘‘they may understanding of the information. There for communication and remove abusive or need to be diligent in notifying the issuer, or its are many ways, especially on a Web- potentially fraudulent communications’’). See also designee, of any changes that would affect their based system, to convey information to, Exchange Act Section 3(a)(80) (defining the term ability to receive communications from the issuer’’). ‘‘funding portal’’ as any person acting as an We note, however, that issuers are not obligated to and obtain effective acknowledgment intermediary in a transaction involving the offer or contact investors directly. sale of securities for the account of others, solely 803 See Joinvestor Letter. 806 See, e.g., Accredify Letter; Commonwealth of pursuant to Securities Act Section 4(a)(6), that does 804 See Wefunder Letter. Massachusetts Letter; Farnkoff Letter; Saunders not, among other things, ‘‘offer investment advice 805 See Public Startup Letter 3. Letter; Verinvest Letter. or recommendations’’).

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post comments; and (3) require any provide notice on their platforms of how that the issuer’s Web site is a better person posting a comment in the to access this hotline.’’ 813 place for communication between communication channels to disclose Several commenters generally investors and issuers and that ongoing whether he or she is a founder or an supported the disclosure requirement communication between issuers and employee of an issuer engaging in on communications by issuers or investors should be an obligation of promotional activities on behalf of the intermediaries and agreed that these issuers alone. We believe, however, that issuer, or is otherwise compensated, communications should be made communication channels on the 814 whether in the past or prospectively, to transparent to investors. intermediary’s platform will provide a One commenter generally supported promote the issuer’s offering. centralized and transparent means for the proposed rule requiring each members of the public that have opened (2) Comments on the Proposed Rule promotional communication to be an account with an intermediary to We received comments both accompanied by disclosure of the receipt of past or prospective share their views about investment supporting 808 and opposing the compensation.815 Another commenter opportunities and to communicate with proposed rules on communications suggested that the proposed rules representatives of the issuer to better channels.809 Several commenters agreed should be amended to require that assess the issuer and investment that posting in communication channels 821 intermediaries prominently post the opportunity. While the JOBS Act should be limited to registered investors online identities of the issuer’s paid does not impose this requirement, we on an intermediary’s platform.810 promoters in the communication believe it is consistent with the Some commenters stated there should channels.816 One commenter, however, legislative intent that such a mechanism be more privacy or control in the stated that the Commission should not be in place for offerings made in manner in which comments are posted mandate the exact methods by which an reliance on Section 4(a)(6).822 Also, to the communications channels, such intermediary achieves compliance with though communications among as submitting comments to the requirement for promoters to investors may occur outside of the intermediaries to review prior to posting disclose their relationship with an intermediary’s platform, or restricting the publicly viewable issuer.817 communications by an investor with a comments.811 One commenter stated In response to our request for crowdfunding issuer or its that he interprets the proposed rule to comments, several commenters representatives about the terms of the permit issuers to post videos and other supported requiring intermediaries to offering are required to occur through promotional content (similar to keep the communication channels these channels 823 on the single platform 818 marketing content used on non- available to investors post-offering. through which the offering is securities-based crowdfunding sites like Another commenter, however, stated conducted.824 This requirement is Kickstarter), and that he supported this that the communication channels expected to provide transparency and approach as it would permit the issuer should be closed after stock certificates accountability, and thereby further the are issued and received by investors.819 to ‘‘communicate freely and creatively protection of investors. . . . while giving the crowd a forum to This commenter further noted that the ask questions or offer criticism.’’ 812 continued maintenance of a Although one commenter stated that Another commenter encouraged the communication channel after the end of it interpreted the proposed rule to Commission ‘‘to provide an investor a campaign would be an unnecessary permit issuers to post videos and other ‘hotline’, where investors can report cost. The same commenter suggested promotional content, aside from Rule concerns relating to crowdfunding that the issuer’s Web site is a better 303(c)(4) and its requirements for communications or transactions, and place for communication between promotional activity, Rule 303(c) itself that intermediaries be required to investors and issuers.820 does not address the content or form used by issuers when communicating (3) Final Rule 808 See, e.g., PeoplePowerFund Letter; RocketHub with investors through the channels Letter; Vann Letter (stating that intermediaries After considering the comments, we provided on an intermediary’s platform. should be allowed to decide who may post on the are adopting Rule 303(c) as proposed. Rather, Rule 204 of Regulation channels). We considered commenters’ suggestions Crowdfunding sets forth the advertising 809 See, e.g., Cromwell Letter (claiming that ‘‘[a]s [a] venture investor, you cannot judge the abilities requirements for issuers and, as 813 See CFA Institute Letter. of the management team over the Internet. Real explained above, Rule 204 allows an 814 See, e.g., CFA Institute Letter; RocketHub venture capitalists do not make their investments issuer to communicate with investors over the Internet—they spend hours and hours Letter (suggesting that intermediaries should be able interviewing the founders/management team, in to assist posters in disclosing their relationship to about the terms of the offering through person. Small investors cannot successfully invest issuer). communication channels provided by over the Internet, either.’’); Public Startup Letter 3; 815 See CFA Institute Letter. the intermediary on the intermediary’s 816 Moskowitz Letter (stating that the proposed rules do See MCS Letter. platform, so long as the issuer identifies not prevent an accredited investor from, for 817 See Wefunder Letter (suggesting that the example, posting a solicitation within the disclosures at the account opening stage are better communication channels for more securities than devoted to the discussion of the risk of startup 821 See also discussion in Section II.B.5. he or she could purchase in the offering within his investing). 822 See 158 Cong. Rec. S2231 (daily ed. Mar. 29, or her investment limits). 818 See, e.g., PeoplePowerFund Letter (suggesting 2012) (statement of Sen. Scott Brown) (‘‘In addition 810 See, e.g., PeoplePowerFund Letter; RocketHub that the posting forum should be live and accessible to facilitating communication between issuers and Letter; Wefunder Letter. to all Web site members not less than 30 days after investors, intermediaries should allow fellow 811 See, e.g., ASSOB Letter (stating that ‘‘random the issue has been completed); RocketHub Letter; investors to endorse or provide feedback about unmoderated comments’’ in communication StartupValley Letter (suggesting that intermediaries issuers and offerings, provided that these investors channels should not be permitted, because it would should open a private channel of communication are not employees of the intermediary. Investors’ allow for unacceptable solicitations or claims of between investors and issuers for the post offering credentials should be included with their return on investment); RocketHub Letter period and not use the same public channel that comments to aid the collective wisdom of the (expressing concern that certain confidential was used for the pre-offering and funding periods). crowd.’’). information may be disclosed between registered 819 See RFPIA Letter. 823 See Rule 204 of Regulation Crowdfunding and investors and the issuer, which would not be 820 Id. See also CfPA Letter (stating that ongoing discussion in Section II.B.4. suitable for a public forum). communication between issuers and investors 824 See Rule 100(a)(3) of Regulation 812 See Odhner Letter. should be an obligation of issuers alone). Crowdfunding and discussion in Section II.A.3.

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itself as the issuer in all as adopted will prohibit an intermediary proposed Rule 302(a)(2) of Regulation communications.825 that is a funding portal from Crowdfunding, this notification would We are requiring intermediaries to participating in any communications in be provided by email or other electronic make the communications on the these channels, apart from establishing media, and would be documented in channels publicly available for viewing. guidelines for communication and accordance with applicable We believe that this requirement is removing abusive or potentially recordkeeping rules.830 consistent with the concept of fraudulent communications. A funding crowdfunding, as it provides for portal can, for example, establish (2) Comments on the Proposed Rule transparent crowd discussions about a guidelines pertaining to the length or Commenters generally supported the potential investment opportunity. We size of individual postings in the requirement that intermediaries send also are requiring in Rule 303(c)(3) that communication channels and can these notifications to investors.831 One intermediaries limit the posting in remove postings that include offensive of these commenters stated that, in its communication channels to those or incendiary language. Also, although view, the notice should be submitted individuals who have opened an we understand the reasons for twice: first, when an investor has made account with the intermediary on its commenters’ suggestions that there a commitment, and again when the platform. As stated in the Proposing should be more privacy or control in the cancellation period is over.832 One Release, while we recognize that this manner in which comments are posted, commenter stated that, in its view, requirement could narrow the range of we believe that aside from investors also should be notified of views represented by excluding posts by intermediaries removing abusive or whether a campaign has been successful anyone who has not opened an account potentially fraudulent communications, or not, both when the campaign is near with the intermediary, we believe that it investor protection is better served by completion and when the campaign has will help to establish accountability for providing the opportunity for been closed.833 However, one comments made in the communication uncensored and transparent crowd channels. We continue to believe that, commenter opposed all notice discussions about a potential requirements.834 without this measure, there would be investment opportunity. greater risk of the communications Finally, under the rule as adopted an (3) Final Rules including unfounded, potentially intermediary must require any person abusive or biased statements intended to posting on the communication channel After considering the comments, we promote or discredit the issuer and to clearly and prominently disclose with are adopting Rule 303(d) as proposed. improperly influence the investment each posting whether he or she is a As stated in the Proposing Release, the decisions of members of the crowd. founder or an employee of an issuer notification is intended, among other With respect to one commenter’s engaging in promotional activities on things, to provide the investor with a suggestion that the Commission provide behalf of the issuer, or is otherwise written record of the basic terms of the an investor ‘‘hotline’’ where investors compensated, whether in the past or transaction, as well as a reminder of his can report concerns relating to prospectively, to promote the issuer’s or her ability to cancel the investment crowdfunding communications or offering. This disclosure will apply to commitment. We believe that the transactions, we note that the officers, directors and other adopted notification requirements will Commission has an existing ‘‘Tips, representatives of the issuer, and also be useful to investors and provide Complaints and Referrals Portal’’ transparency. We also believe that 826 will be required of an intermediary that available on its Web site, where the is a broker and its associated persons. requiring that this notification be sent public may provide the Commission We continue to believe that once—promptly upon receipt of an with information about potential fraud intermediaries, as the hosts of the investment commitment from an or wrongdoing involving alleged communication channels, are well investor—rather than multiple times as violations of the securities laws. placed to take measures to ensure that commenters suggested—will help to We are mindful of the cost associated promoters clearly identify themselves in minimize the costs associated with with the communications channel, and, their communication channels, in providing additional notification, while therefore, we are not requiring that accordance with Securities Act Section still providing the investor with, among intermediaries keep the communication 4A(b)(3). other things, an important reminder channels available to investors post- about the ability to cancel the offering, as suggested by some d. Notice of Investment Commitment investment commitment. Although an 827 commenters. However, an (1) Proposed Rule intermediary can decide, in its intermediary in its discretion can discretion, to provide additional Proposed Rule 303(d) of Regulation choose to maintain the communication notifications to its customers as a Crowdfunding would require an channels post-offering.828 business decision, we believe at this intermediary, upon receipt of an Consistent with the prohibition on a time that adopting additional investment commitment from an funding portal offering investment notification requirements could hamper 829 investor, to promptly give or send to the advice or recommendations, the rule flexibility in the evolving crowdfunding investor a notification disclosing: (1) market and potentially impair the 825 The dollar amount of the investment See Section II.B.4 (discussing Rule 204). development of best practices that are 826 See Enforcement Tips and Complaints, commitment; (2) the price of the available at https://www.sec.gov/complaint/tips securities, if known; (3) the name of the 830 complaint.shtml. issuer; and (4) the date and time by See Section II.C.4 (discussing Rule 100(a)(3)) 827 See, e.g., PeoplePowerFund Letter; RocketHub and Section II.D.5 (discussing the recordkeeping Letter; StartupValley Letter. which the investor may cancel the rules applicable to funding portals). See also note 828 It is important to note that an intermediary investment commitment. Pursuant to 1114 (discussing the recordkeeping rules applicable would still have to maintain records of such to brokers and intermediaries). 831 communications to satisfy the books and records person acting as an intermediary in a transaction See, e.g., CFA Institute Letter; Joinvestor requirements of the crowdfunding rules. See Rule involving the offer or sale of securities for the Letter; RocketHub Letter. 404(a)(3). account of others, solely pursuant to Securities Act 832 See RocketHub Letter. 829 See Rule 300(c)(2)(i). Exchange Act Section Section 4(a)(6), that does not, among other things, 833 See Joinvestor Letter. 3(a)(80) defines the term ‘‘funding portal’’ as any ‘‘offer investment advice or recommendations.’’ 834 See Public Startup Letter 3.

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tailored to this unique form of raising to be provided by the issuer under Rules As to whether other types of custody capital. 201 and 203(a) of proposed Regulation arrangements should be permitted, one Crowdfunding. commenter requested clarification that a e. Maintenance and Transmission of carrying broker would not be deemed to Funds (2) Comments on the Proposed Rule accept any part of the sale price of any (1) Proposed Rule Several commenters generally security for purposes of Exchange Act Securities Act Section 4A(a)(7) supported the proposed fund Rule 15c2–4 under specific maintenance and transmission circumstances.844 requires that an intermediary ‘‘ensure 837 that all offering proceeds are only requirements. One commenter As to whether there should be a fixed provided to the issuer when the suggested that intermediaries be deadline for transmission of funds (such aggregate capital raised from all allowed to reject an investor’s as three business days), one commenter investors is equal to or greater than a investment commitment if that investor stated that ‘‘fixed deadlines should be does not have a correlating balance in set to protect investor and issuer target offering amount, . . . as the 838 Commission shall, by rule, determine an account with the intermediary. interests.’’ This commenter suggested appropriate.’’ Proposed Rule 303(e)(1) of Another commenter suggested that the that ‘‘one week (7 days) should be Regulation Crowdfunding would Commission require that such accounts sufficient to disburse collected implement this provision and address be interest bearing and that either (1) the funds.’’ 845 Another commenter the maintenance and protection of investors’ funds be returned to them suggested a three-day deadline.846 investor funds, pending completion of a with their pro rata portion of the interest As to whether SRO and staff guidance transaction made in reliance on Section in the event the offering is canceled, or on Exchange Act Rule 15c2–4 should be 4(a)(6), by requiring an intermediary (2) the funds and the accrued interest be expressly incorporated into the rules, dispersed to the issuer upon the one commenter suggested that there was that is a registered broker to comply 839 with established requirements in offering’s successful closing. Another no need for incorporation of prior Exchange Act Rule 15c2–4 835 for the commenter suggested that qualified guidance about Rule 15c2–4 into the 847 maintenance and transmission of third parties should be registered and proposed rules. investor funds. verified for ‘‘reputations [of] integrity’’; As to whether the definition of Proposed Rule 303(e)(2) would complaints against those entities should ‘‘qualified third party’’ should be establish separate requirements for an be made public; and ‘‘drawdown’’ expanded to include entities other than intermediary that is a funding portal. schedules should be submitted at the a bank, one commenter stated that the Because a funding portal cannot receive onset of projects and subsequently Commission should ‘‘consider any funds, it would be required to direct control issuer access to ‘‘project [permitting] non-bank custodians, such 840 investors to transmit money or other funds.’’ as internet services that specialize in consideration directly to a ‘‘qualified In the Proposing Release, we escrow and payment transfer.’’ 848 third party’’ that has agreed in writing requested comment on various Another commenter suggested that to hold the funds for the benefit of the alternatives to the proposed rules. As to ‘‘qualified third parties’’ should include investors and the issuer and to promptly whether the proposed rules should credit unions, savings and loans and transmit or return the funds to the prohibit any variations of a contingency other institutions that offer similar persons entitled to such funds. offering, such as minimum-maximum, protections to banks.849 Similarly, Proposed Rule 303(e)(2) would define offerings, one commenter stated that the another commenter suggested that credit ‘‘qualified third party’’ to mean a target amount of a crowdfunding unions should be included.850 One bank 836 that has agreed in writing to campaign ‘‘should represent the commenter suggested that banks should either: (i) Hold the funds in escrow for minimum to avoid investor confusion’’ not be a qualified third party.851 One and that ‘‘oversubscription should be the persons who have the beneficial 841 interests in the funds and to transmit or allowed.’’ This commenter noted that 844 See FOLIOfn Letter. Although this commenter these conditions would allow stated its belief that the proposed procedure is return the funds directly to the persons consistent with Rule 15c2–4 on the basis that the entitled to them when the appropriate companies to ‘‘choose to set their own minimum and maximum range.’’ 842 carrying broker would not be ‘‘accept[ing] any part event or contingency has occurred; or of the sale price’’ until closing, at which time funds (ii) establish a bank account (or Another commenter suggested that we would be promptly transferred to the issuer, it accounts) for the exclusive benefit of permit contingency offers based on a stated that additional clarity would be helpful to ensure that the Proposing Release does not investors and the issuer. maximum amount of funds being raised or other benchmarks if the maximum is introduce confusion if read by some as containing Proposed Rule 303(e)(3) would an implication to the contrary. require an intermediary that is a funding not met or, alternatively, permit ‘‘all-or- 845 See Joinvestor Letter. 843 portal to promptly direct transmission none’’ offerings. 846 See Public Startup Letter 3. of funds from the qualified third party 847 See Arctic Island Letter 6. to the issuer when the aggregate amount 837 See, e.g., Arctic Island Letter 6; ASTTC Letter; 848 See Joinvestor Letter. CSTTC Letter; Greenfield Letter (suggesting that the 849 See Growthfountain Letter. of investment commitments from all issuer should be required to certify in writing under 850 See Vann Letter. investors is equal to or greater than the penalty of perjury to the escrow bank that the 851 See Public Startup Letter 3 (claiming that target amount of the offering and the offering has been completed pursuant to the terms in the offering statement and that there have been ‘‘[b]anks are unable to serve as the ‘qualified third cancellation period for each investor has no material changes of circumstances that would party’ ’’ and that no entities other than registered expired, provided that in no event may render the representations in the offering statement broker-dealers should serve this function in the funding portal direct this false or misleading); Joinvestor Letter; STA Letter. connection with Regulation Crowdfunding sales.). But see Computershare Letter (supporting the transmission of funds earlier than 21 838 See Zhang Letter. 839 ‘‘inclusion of a requirement that Funding Portals days after the date on which the See MCS Letter. use a qualified third party, which is a bank, to hold 840 intermediary makes publicly available See Otherworld Letter. investor funds as escrow agent and transmit the 841 See Joinvestor Letter. on its platform the information required funds to the issuer once the offering requirements 842 Id. are met’’); ASTTC Letter (stating that it ‘‘strongly 843 See PeoplePowerFund Letter (suggesting also supports the Proposed Rule’s requirement that 835 17 CFR 240.15c2–4. that any oversubscribed issues be allocated on a Funding Portals be required to utilize qualified 836 See Exchange Act Section 3(a)(6) [15 U.S.C. ‘‘first come first served’’ basis in connection with escrow agents to hold the investor assets prior to 78c(a)(6)] (defining ‘‘bank’’). ‘‘all-or-none’’ offerings). transmittal to issuers and that ‘‘[q]ualified escrow

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commenter suggested that the definition (3) Final Rule writing 861 to hold the funds for the of ‘‘qualified third party’’ be expanded benefit of the investors and the issuer to include certain broker-dealers that After considering the comments, we and to promptly transmit or return the ‘‘hold funds and securities on behalf of are adopting Rule 303(e) substantially as funds to the persons entitled to such customer accounts pursuant to proposed, but with certain revisions in funds.862 [Exchange Act] Rule 15c3–3 and response to comments. Rule 303(e)(1), We are revising the definition of a maintain net capital pursuant to as adopted, requires an intermediary ‘‘qualified third party’’ to include for [Exchange Act] Rule 15c3–1(a)(2)(i)’’.852 that is a registered broker-dealer to purposes of the final rule: a registered comply with established requirements The commenter also suggested that broker or dealer that carries customer or in Exchange Act Rule 15c2–4 for the funding portals and other brokers broker or dealer accounts and holds maintenance and transmission of 863 should be able to utilize these brokers funds or securities for those persons, investor funds. Rule 15c2–4 requires, in ‘‘to the identical degree they would be a bank, or a credit union insured by the relevant part, that in connection with a able to utilize banks under Rule 15c2– National Credit Union Administration contingency offering of a security, any (‘‘NCUA’’).864 We had proposed to 4.’’ 853 money or other consideration received define ‘‘qualified third party’’ to mean a Commenters generally agreed with by a broker-dealer participating in the bank 865 because investors, as well as our proposed approach not to require distribution must be promptly deposited intermediaries and issuers, would then funding portals to maintain net capital, in a separate bank account, as agent or be afforded the protections of existing noting among other things that imposing trustee for the persons who have the regulations that apply to banks, in ‘‘net capital requirements would beneficial interest therein, until the particular those pertaining to the increase the cost of starting a new appropriate event or contingency has safeguarding of customer funds.866 funding portal and reduce the potential occurred, and thereafter promptly However, after considering the number of intermediaries, while transmitted or returned to the persons comments, we agree with those providing little additional protection to entitled thereto; 857 or alternatively, that commenters who suggested that the investors and issuers.’’854 all such funds must be promptly definition of ‘‘qualified third party’’ As to whether certain methods of transmitted to a bank that has agreed in should be expanded to include entities payment for the purchase of securities writing to hold such funds in escrow for other than a bank and should include, should either be required or prohibited, the persons who have the beneficial as one commenter suggested, credit interests therein and to transmit or unions provided that these entities offer one commenter suggested that the types 867 of payment methods not be limited in return such funds directly to the similar protections to banks. We also persons entitled thereto when the any way.855 However, some commenters appropriate event or contingency has 861 This written agreement is required to be stated, generally, that credit cards occurred.858 When the Commission maintained by the funding portal pursuant to should be prohibited as a form of proposed Rule 404 of Regulation Crowdfunding. adopted Rule 15c2–4, the Commission payment for securities in connection See Section II.D.5. explained that the rule was designed to 862 with crowdfunding.856 In the crowdfunding context, we expect that prevent fraud by a broker-dealer ‘‘either the intermediary will make the determination as to upon the person on whose behalf the whether the contingency (i.e., the target offering agents are generally regulated banks’’); STA Letter amount) has been met. See Securities Act Section (stating that ‘‘[it] is pleased that the Proposed Rules distribution is being made or upon the 4A(a)(7) (requiring that an intermediary ‘‘ensure contain a requirement that Funding Portals transmit customer to whom the payment is to be that all offering proceeds are only provided to the investor assets to qualified escrow agents, which are returned if the distribution is not issuer when the aggregate capital raised from all banks, prior to their release to the issuer.’’). completed.’’ 859 As such, consistent with investors is equal to or greater than a target offering 852 See FOLIOfn Letter. See also Arctic Island Securities Act Section 4A(a)(7), the amount, . . . as the Commission shall, by rule, Letter 8 (suggesting that the rules permit a $250,000 determine appropriate.’’). net capital broker-dealer to act as trustee for an intermediary may transmit the proceeds 863 Broker-dealers that may serve as qualified omnibus escrow account at an FDIC insured bank); to the issuer only if the target offering third parties under Rule 303(e) include only those Ex 24 Letter. amount is met or exceeded. broker-dealers that are required to maintain 853 See FOLIOfn Letter (stating also its belief that minimum net capital of $250,000 or a higher the brokers ‘‘should be distinguished from other Rule 303(e)(2) as adopted establishes minimum amount depending on their status under broker-dealers in the context of Regulation separate requirements for an Appendix E of Rule 15c3–1 under the Exchange Crowdfunding and not be subject to the intermediary that is a funding portal (as Act. See Exchange Act Rules 15c3–1(a)(2)(i) and requirements of SEC Rule 15c2–4(b)’’). compared to an intermediary that is a 15c3–1(a)(7)(i). 854 See Tiny Cat Letter (stating that ‘‘[f]unding 864 The NCUA was established by the Federal portals are already prohibited from handling funds broker-dealer) because a funding portal Credit Union Act of 1934. See Federal Credit Union and securities, and are also subject to a fidelity cannot, by statute, hold, manage, Act of 1934, as amended, 12 U.S.C. 1752 et seq. The bond in the proposed regulations’’). See also possess, or otherwise handle investor NCUA administers the National Credit Union Share Joinvestor Letter (suggesting that since funding funds or securities.860 Therefore, Rule Insurance Fund (‘‘NCUSIF’’), which is backed by portals will not be monetary custodians, there the full faith and credit of the U.S. government. should be no net capital requirement instituted); 303(e)(2) requires a funding portal to NCUSIF protection covers the deposits in federal Vann Letter (stating that a ‘‘capital requirement direct investors to transmit money or credit unions, as well as a majority of state- would unnecessarily restrict competition’’). other consideration directly to a chartered credit unions. See NCUA Share Insurance 855 See Public Startup Letter 3. qualified third party that has agreed in Fund Information, Reports, and Statements, 856 See, e.g., Arctic Island Letter 6 (suggesting Frequently Asked Questions, National Credit Union that, given the chargeback periods for credit cards, Administration, http://www.ncua.gov/DataApps/ 857 broker-dealers should only be permitted to accept See Exchange Act Rule 15c2–4(b)(1). We note, Pages/SI–FAQs.aspx. credit card payments from investors if the broker- however, that any broker-dealer seeking to hold 865 See Proposing Release, at 182–83 [78 FR dealer ‘‘directly and unconditionally guarantees the such investor funds in a separate bank account as 66427, at 66473]. See also Exchange Act Section amounts obtained thereby to both the issuer and the agent or trustee for the persons who have a 3(a)(6) [15 U.S.C. 78c(a)(6)] (defining ‘‘bank’’). escrow agent’’); Consumer Federation Letter beneficial interest therein are still subject to net 866 For example, bank deposit accounts at FDIC- (suggesting that allowing payment via credit card capital requirements pursuant to Exchange Act Rule insured banks are protected by FDIC deposit increases the risk that investors will make 15c3–1. insurance. See Federal Deposit Insurance Corp., crowdfunding investments that they cannot afford); 858 See Exchange Act Rule 15c2–4(b)(2). Deposit Insurance FAQs, available at http:// Joinvestor Letter; RocketHub Letter (stating that 859 Adoption of Rule 15c2–4 under the Securities www.fdic.gov/deposit/deposits/faq.html. ‘‘[p]ermitting debt-based payment vehicles, such as Exchange Act of 1934, Release No. 34–6737 (Feb. 867 We do not believe that the definition of credit cards, which have their own rescission 21, 1962) [27 FR 2089 (Mar. 3, 1962)]. qualified third party should be extended to include policies, (i.e., charge backs) is problematic’’). 860 See Exchange Act Section 3(a)(80)(D). Continued

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made a corresponding change to the provide reasonable flexibility regarding the investor is purchasing; (3) the language of the rule text to indicate that the payment mechanisms intermediaries identity, price and number of securities a qualified third party arrangement may employ. We believe that restrictions on purchased by the investor, as well as the involve either a bank or credit union particular payment mechanisms would number of securities sold by the issuer account (or accounts) established for the not serve to significantly increase in the transaction and the price(s) at exclusive benefit of investors and the investor protection, particularly in light which the securities were sold; (4) issuer. of the established investment limits. We certain specified terms of the security, if After considering the comments, we note, however that an intermediary can, it is a debt or callable security; and (5) further believe that the definition of in its discretion, decline to accept the source and amount of any ‘‘qualified third party’’ should be certain payment methods, such as credit remuneration received or to be received expanded to include certain types of cards, or accept them only in certain by the intermediary in connection with registered broker-dealers. We are circumstances.870 the transaction, whether from the issuer expanding the definition to include We also are not adopting additional or from other persons. This notification registered broker-dealers that carry requirements that would, for example, would be required to be provided by customer or broker or dealer accounts (1) prohibit variations of a contingency email or other electronic media,872 and and holds funds or securities for those offering, such as minimum-maximum to be documented in accordance with persons. We believe such brokers- offerings; (2) establish a fixed deadline applicable recordkeeping rules.873 dealers are appropriate entities to serve for transmission of funds as compared Pursuant to proposed Rule 303(f)(2), an as qualified third parties as they are to the proposed requirement to transmit intermediary that gives or sends to each subject to various regulatory obligations, funds ‘‘promptly’’; or (3) require investor the notification described which are designed to provide enhanced funding portals to maintain a certain above would be exempt from the protection of investor funds through the amount of net capital. We believe that requirements of Exchange Act Rule 10b– imposition of capital and other additional restrictions, such as 10 874 for the subject transaction. requirements.868 We note that we are prohibiting variations of a contingency not amending the requirements of Rule offering or establishing a fixed deadline (2) Comments on the Proposed Rule 15c2–4 through this release and not for the transmission of funds could Commenters generally supported the distinguishing broker-dealers that hamper flexibility in the nascent proposed confirmation requirements.875 participate in offerings made in reliance crowdfunding market and prohibit the One commenter, however, stated its on Securities Act Section 4(a)(6), either development of best practices view that permitting intermediaries to as a qualified third party or an specifically tailored to this unique form satisfy the delivery requirement for intermediary, from broker-dealers in any of capital raising. Finally, we are not transaction confirmations through other contingency offerings. As such, requiring in the final rule net capital delivery of a message that contains a broker-dealers participating in offerings standards for funding portals. As noted notice that the information is available made in reliance on Section 4(a)(6), above, funding portals are prohibited on the intermediary’s Web site would either as an intermediary or as a from handling, managing or possessing not be sufficient.876 qualified third party, are still subject to investor funds or securities.871 We Rule 15c2–4.869 Further, we believe that continue to believe that the (3) Final Rule existing Commission and staff guidance requirements relating, in particular, to After considering the comments, we on Rule 15c2–4 is extensive and clear transmission of proceeds under the final are adopting Rule 303(f), as proposed, and does not warrant incorporation into rules will help ensure that investor but with one clarifying change. As the final rule or clarification. funds are protected, without requiring proposed, Rule 303(f)(1)(vi) would have The statute does not limit or require funding portals to maintain net capital. required an intermediary to give or send a particular payment mechanism, and f. Confirmation of Transactions to each investor a notification we are not imposing such a restriction disclosing: ‘‘[t]he source and amount of because we believe that the rules should (1) Proposed Rule any remuneration received or to be As proposed, Rule 303(f)(1) of received by the intermediary in Internet service providers that specialize in escrow Regulation Crowdfunding would require connection with the transaction, and payment transfer, as suggested by one commenter, because we do not believe that such that an intermediary, at or before the including the amount and form of any entities are governed by a regulatory scheme completion of a transaction made remuneration that is received, or will be designed to provide similar protections as the other pursuant to Section 4(a)(6), give or send received, by the intermediary from entities that we are defining as qualified third to each investor a notification persons other than the issuer. We are parties under Rule 303(e). We note that another commenter suggested the addition of savings and disclosing: (1) The date of the loan associations. We believe that certain savings transaction; (2) the type of security that 872 See proposed Rule 302(a)(2) (requiring an and loan associations are covered by the definition intermediary to provide all information electronically). See also Section II.C.4.a (discussing of ‘‘bank’’ under Exchange Act Section 3(a)(6), and 870 We note, for example, that an intermediary electronic delivery requirements). as such, are qualified third parties under Rule can, in its discretion, decline to accept credit cards 873 303(e). We note that the Federal Deposit Insurance given that, as at least one commenter suggested, an Intermediaries that are brokers are subject to Corp. extended its authority to cover savings and investor’s use of his or her right to dispute credit the recordkeeping requirements of Exchange Act loan associations in 1989. See Financial Institutions card charges can inhibit the ability of an issuer to Rules 17a–3 and 17a–4, and intermediaries that are Reform, Recovery, and Enforcement Act of 1989 meet its target or to provide accurate disclosures to funding portals are subject to recordkeeping (FIRREA) (creating the Savings Association investors and the Commission regarding the requirements under Rule 404 of Regulation Insurance Fund (SAIF)). progress it has made toward, and whether it has, Crowdfunding. See note 1114 (discussing the 868 See, e.g., Exchange Act Rule 15c3–1 and Rule reached the target offering amount. This potential recordkeeping rules applicable to brokers and 15c2–4. impact will affect offerings conducted through intermediaries). See also Section II.D.5. 869 Under existing Rule 15c2–4, the qualified brokers and funding portals alike. We also note that 874 See note 882 (discussing Exchange Act Rule third party broker-dealer will be required to pursuant to Exchange Act Section 3(a)(80)(D) (15 10b–10 (17 CFR 240.10b–10) generally). promptly deposit the funds in a separate bank U.S.C. 78c(a)(80)(D)), a funding portal is statutorily 875 See, e.g., CFA Institute Letter; Joinvestor account, as agent or trustee for the persons who prohibited from extending credit or margin to Letter. have the beneficial interest therein, until the customers. 876 See Consumer Federation Letter (stating that appropriate event or contingency has occurred, and 871 See Exchange Act Section 3(a)(80)(D) [15 ‘‘[w]hile most if not all intermediaries would be thereafter promptly transmit or return the funds to U.S.C. 78c(a)(80)(D)] and discussion in Section likely to deliver the actual confirmation to the persons entitled thereto. See Rule 15c2–4(b)(1). II.C.1. investors, the rule would not guarantee this’’).

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revising Rule 303(f)(1)(vi) to require We believe that this delivery crowdfunding securities transactions or disclosure as well of the form of any requirement is appropriate for an intermediary’s participation in such remuneration received or to be received crowdfunding transactions and satisfies transactions, and their inclusion in a by the intermediary in connection with our obligation that requirements under crowdfunding securities confirmation the transaction, including any Securities Act Section 4A(a)(12) be for may be confusing to investors. remuneration received or to be received the protection of investors and in the Therefore, we believe that if an by the intermediary from persons other public interest. As to the same intermediary satisfies the notification than the issuer. This edit is intended to commenter’s view that the rule would requirements of the final rules, the clarify the rule by placing ‘‘source, form not guarantee delivery of a confirmation intermediary will have provided and amount’’ together, rather than to investors,881 although we investors with sufficient relevant having ‘‘form’’ listed out separately as acknowledge that statutes and rules information about the crowdfunding proposed. cannot guarantee compliance, there is a security, and so should not be required As explained in the Proposing robust regulatory scheme in place that is to meet the additional requirements of Release, we believe that transaction designed to promote compliance and Rule 10b–10. confirmations serve an important and that is coupled with supervision and basic investor protection function by, enforcement by both the Commission 6. Completion of Offerings, among other things, conveying and the registered national securities Cancellations and Reconfirmations information and providing a reference association. a. Proposed Rule document that allows investors to verify In addition, under Rule 303(f)(2) as the terms of their transactions, acting as adopted, an intermediary that gives or Under Securities Act Section 4A(a)(7), a safeguard against fraud and providing sends to each investor the notification an intermediary is required to allow investors a means by which to evaluate described above is exempt from the investors to cancel their commitments the costs of their transactions.877 Each of requirements of Exchange Act Rule 10b– to invest as the Commission shall, by the required items of information is 10 for the subject transaction.882 The rule, determine appropriate. Securities intended to assist investors in confirmation terms under Rule 303(f)(2) Act Section 4A(b)(1)(G) requires an memorializing and assessing their are similar to, but not as extensive as, issuer, prior to sale, to provide investors transactions. Furthermore, the those broker-dealers are subject to under ‘‘a reasonable opportunity to rescind the requirement that an intermediary Rule 10b–10. We believe that this commitment to purchase the securities.’’ disclose to an investor the source, form difference is appropriate given the more We proposed, therefore, in Rule 304(a) and amount of any remuneration limited scope of an intermediary’s role of Regulation Crowdfunding, to give received or to be received is designed to in crowdfunding transactions. Rule investors an unconditional right to help to highlight potential conflicts of 10b–10, for example, requires disclosure cancel an investment commitment for interest if, for example, an intermediary about such matters as payment for order any reason until 48 hours prior to the has a financial interest in an issuer flow, riskless principal transactions, deadline identified in the issuer’s using its services.878 payment of odd-lot differentials and offering materials. Under this approach, As for the concern raised by one asset-backed securities. These items an investor could reconsider his or her commenter about the delivery generally would not be relevant to investment decision with the benefit of requirements for transaction the views of the crowd and other confirmations,879 we note, as we did in 881 See Consumer Federation Letter. information, until the final 48 hours of the Proposing Release, that the 882 Exchange Act Rule 10b–10 (17 CFR 240.10b– the offering. Thereafter, an investor confirmation is required to be provided 10) generally requires a broker-dealer effecting a would not be able to cancel any customer transaction in securities (other than U.S. by email or other electronic media, savings bonds or municipal securities) to provide a investment commitments made within consistent with the Commission’s long- notification to its customer, at or before completion the final 48 hours of the offering (except standing policies on the use of of a securities transaction, that discloses certain in the event of a material change to the electronic media for delivery information specific to the transaction. Specifically, offering, as discussed below).883 Rule 10b–10 requires the disclosure of the date, 880 purposes. This is also consistent with time, identity, prices and number of securities We also proposed in Rule 304(b) that the requirement for an intermediary to bought or sold; the capacity in which the broker- if an issuer reached the target offering provide all information electronically. dealer acted (e.g., as agent or principal); yields on debt securities; and under specified circumstances, amount prior to the deadline identified the amount of remuneration the broker-dealer will in its offering materials, it could close 877 See Proposing Release at 78 FR 66475. See receive from the customer and any other parties. the offering once the target offering also Confirmation of Transactions, Release No. 34– With regard to the specified circumstances amount was reached, provided that: (1) 34962 (Nov. 10, 1994) [59 FR 59612, 59613 (Nov. mentioned above, the remuneration disclosures of 17, 1994)]. Rule 10b–10 generally are required, but certain The offering had been open for a 878 Although Securities Act Section 4A(a)(11) exclusions apply. For example, the remuneration minimum of 21 days; (2) the requires an intermediary to prohibit its directors, disclosures are generally required where a broker or intermediary provided notice about the officers or partners (or any person occupying a dealer is acting as agent for a customer or some new offering deadline at least five similar status or performing a similar function) from other person. In the case where remuneration is having any financial interest in an issuer using its received or to be received by the broker from such business days prior to the new offering services, the final rules do not include a complete customer in connection with the transaction, the deadline; (3) investors would be given prohibition on the intermediary, itself, having a disclosures are not required where the the opportunity to reconsider their financial interest in an issuer using its services. The remuneration paid by such customer is determined investment decision and to cancel their intermediary may have a financial interest in an pursuant to written agreement with such customer, issuer using its services, subject to certain otherwise than on a transaction basis. 17 CFR investment commitment until 48 hours limitations. See Rule 300(b). See also Section 240.10b–10(a)(2)(i)(B). In contrast, the remuneration prior to the new offering deadline; and II.C.2.b. disclosure requirements of Rule 303(f)(2)(vi) are (4) at the time of the new offering 879 See Consumer Federation Letter. required across all crowdfunding transactions deadline, the issuer continued to meet 880 See Proposing Release, at 189 [78 FR 66427, where remunerations are received or are to be at 66475]. See also Use of Electronic Media, note received. Given the limits on the dollar amount of or exceed the target offering amount. 714 at 25853 (discussing the ‘‘access equals securities that can be offered, as well as the limits In addition, we proposed in Rule delivery’’ concept and citing Use of Electronic on individual investment amounts, in transactions 304(c) that if there was a material Media for Delivery Purposes, Release No. 34–36345 relying on Section 4(a)(6), we do not expect (Oct. 6, 1995) [60 FR 53548, 53454 (Oct. 13, investors to negotiate individualized compensation 1995)])). agreements. 883 See proposed Rule 304(c).

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change 884 to the terms of an offering or reason for the cancelation, and the offering remaining open,894 while one to the information provided by the refund amount that the investor should commenter also suggested that no issuer about the offering, the expect to receive; (2) direct the refund changes should be allowed within 21 intermediary would be required to give of investor funds; and (3) prevent days of the close date.895 Several or send to any investors who have made investors from making investment commenters generally agreed that an investment commitments notice of the commitments with respect to that investor should have to reconfirm the material change, stating that the offering on its platform. This commitment to invest when a material investor’s investment commitment will notification, like other notifications change occurs.896 One commenter stated be cancelled unless the investor from an intermediary, would be that many investors would prefer not to reconfirms his or her commitment required to be provided by email or have to re-confirm their investments within five business days of receipt of other electronic media, and to be and recommended allowing investors to the notice.885 As proposed, if the documented in accordance with decide how to handle material investor failed to reconfirm his or her applicable recordkeeping rules.888 changes.897 Another commenter investment within those five business opposed any reconfirmation days, the intermediary would be b. Comments on the Proposed Rule requirement because it believed there required, within five business days One commenter supported the should be a presumption that any thereafter, to: (1) Provide or send the unconditional right of investors to changes made would be in the best investor a notification disclosing that cancel an investment commitment for interest of the issuer and all of its the investment commitment was any reason until 48 hours prior to the stakeholders.898 cancelled, the reason for the close of an offering.889 Other Some commenters supported the cancellation and the refund amount that commenters, however, expressed proposed five-day reconfirmation period the investor should expect to receive; concern over the potential for for investors.899 Some commenters, and (2) direct the refund of investor misconduct regarding cancellations,890 however, stated that five business days funds.886 This notification, like other such as scenarios where investors is not enough time for an investor to notifications from an intermediary, commit and then withdraw at the last decide whether to reconfirm an would be required to be provided by minute.891 investment commitment after a material email or other electronic media, and to One commenter stated that the rule on change is made by the issuer.900 One be documented in accordance with early closure of an offering should be commenter suggested a shorter applicable recordkeeping rules.887 more narrowly defined.892 This reconfirmation time period.901 Another Finally, we proposed in Rule 304(d) commenter requested that the commenter recommended that the that if an issuer did not complete an Commission clarify whether, under Commission clarify when the five-day offering, for example, because the target such circumstances, an offering should reconfirmation period begins.902 One was not reached or the issuer decided to be closed from accepting more funds or commenter suggested material revisions terminate the offering, the intermediary keep accepting commitments until the made to the offering should restart the would be required, within five business end of the five business day period, 21-day minimum period for the days, to: (1) Give or send to each even if this puts an offering over set campaign, though generally agreed that investor who had made an investment limits.893 a five-business day notification is commitment a notification disclosing Some commenters supported the sufficient in the event that an offering is 903 the cancellation of the offering, the proposal that existing disclosure cancelled. materials can be modified in the event c. Final Rules 884 In the Proposing Release, we noted that in of a material change, with the original those instances where an issuer had previously We are adopting Rule 304 as disclosed in its offering materials only the method proposed, with a technical change to 888 for determining the price of the securities offered See note 1114 (discussing the recordkeeping correct a cross-cite in the rule text. We and not the final price of those securities, setting rules applicable to brokers and intermediaries). of the final price would be considered a material 889 See CFA Institute Letter. believe that the final rule appropriately change. We also noted that if the change involved 890 See, e.g., Joinvestor Letter (suggesting the lock- takes into consideration the needs of closing the offering once the target offering amount in-date should be fourteen days prior to the closing investors to be able to consider material is reached, which would be prior to the deadline date to prevent any misconduct surrounding the approach of a target, or the limit of identified in the offering materials, then the 894 See, e.g., Arctic Island Letter 6; Joinvestor procedures required under proposed Rule 304(b), oversubscription, near to the close of the round); Letter; Wales Capital Letter 2. and not those in Rule 304(c), would apply. Consumer Federation Letter; RocketHub Letter. 895 See Joinvestor Letter. 885 The proposed rules also required that an 891 See, e.g., RocketHub Letter (recommending a 896 See, e.g., CFA Institute Letter; Wales Capital issuer extend an offering to allow for a five business 24-hour cancellation period in order to protect 2 Letter. day period in instances where material changes to investors from ‘‘ ‘pump & rescind’ schemes’’ and 897 the offering or to the information provided by the minimize an issuer’s exposure to the risk of ‘‘ ‘short See Wefunder Letter. issuer occurred within five business days of the fall’ situations’’); Consumer Federation Letter 898 See Public Startup Letter 3. maximum number of days that an offering was to (noting the risk that ‘‘individuals associated with 899 See, e.g., CFA Institute Letter; Wales Capital remain open. See proposed Rule 304(c)(2) of the issuer will commit money to the offering early 2 Letter. Regulation Crowdfunding. See also Rule 302(a)(2) in the process in order to stimulate interest and 900 See, e.g., Arctic Island Letter 6 (advocating (requiring that notification be provided by email or create a sense of urgency about investing, only to that the time period be ‘‘indefinite’’ so as to give through other electronic media). withdraw at the last minute’’). The same commenter investors more time to consider the changes and to 886 See proposed Rule 304(c)(1) of Regulation suggested that potential gamesmanship by investors give issuers more time to answer questions of Crowdfunding. associated with the issuer has the potential to individual investors and provide clarifications or 887 Intermediaries that are brokers would be discredit crowdfunding and recommended that the make subsequent changes as needed); CfPA Letter subject to the recordkeeping requirements of Commission consider more meaningful restrictions (recommending that any change in offering Exchange Act Rules 17a–3 and 17a–4, and on issuer participation. documents on a Web site after initial posting restart intermediaries that are funding portals would be 892 See RFPIA Letter (stating that ‘‘[i]f the issuer the 21-day period (or at least half of that) during subject to recordkeeping requirements under reaches the target offering amount prior to the which offerings cannot close and prospective or proposed Rule 404 of Regulation Crowdfunding. deadline the current proposed regulation require[s] pledged investors can reconsider and rescind their See note 1114 (discussing the recordkeeping rules a funding portal to give a 5 day notice to investors commitments). applicable to brokers and intermediaries). See also of the new closing date. Since funding portals have 901 See RFPIA Letter (suggesting eliminating the Section II.D.5; Section II.C.4. (discussing an no crystal balls, this process needs to be more requirement or reducing it to 72 hours). intermediary’s electronic delivery requirements and narrowly defined’’). 902 See ODS Letter. Rule 302(a)(2)). 893 Id. 903 See Wales Capital Letter 2.

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changes to the terms of the offering and should have a reasonable period during issuers or investors to the intermediary’s new views expressed by the crowd, which to review the new information platform if: (1) The person does not while allowing issuers to have certainty and to decide whether to invest by provide the intermediary with the about their ability to close an offering at reconfirming the investment personally identifiable information of the end of the offering period. We have commitment. Despite some commenters’ any investor, and (2) the compensation, considered the comments outlined concerns outlined above, we continue to unless it is paid to a registered broker above about concerns with cancellation believe that a five business day period or dealer, is not based, directly or generally and those suggesting other is appropriate because it reasonably indirectly, on the purchase or sale of a types of cancellation or lock-in periods. reflects the need to allow an investor security offered in reliance on Securities However, we continue to believe that sufficient time to consider material Act Section 4(a)(6) on or through the allowing investors to cancel any changes to the terms of the offering intermediary’s platform.907 investment commitments for any reason while giving issuers certainty about b. Comments on the Proposed Rule until 48 hours prior to the deadline their ability to close an offering. For the identified in the issuer’s offering same reasons noted above, we also Some commenters generally materials is an appropriate cancellation believe that five business days is a supported the portion of the proposed period because it is consistent with the sufficient amount of time for rule that allows intermediaries to requirement of Section 4A(b)(1)(G) that intermediaries to notify investors about compensate third parties for directing 908 investors have a ‘‘reasonable offerings that are not completed or investors to the platform. Some of opportunity’’ to rescind investment terminated. Finally, we believe that these comments also agreed that commitments, while also providing requiring an investor to reconfirm his or intermediaries should be permitted to issuers with certainty within a her investment commitment within five compensate third parties for general reasonable amount of time about business days of receipt of the notice of business advertising including, for whether they have indeed received a material change is sufficiently clear as example, web search engine direction or investment commitments. Although we other standard Internet marketing to when the reconfirmation period 909 acknowledge commenters’ concerns begins and provides additional investor techniques. In response to our about potential misconduct in protection and is therefore an request for comment as to whether connection with cancellations of appropriate requirement for the final disclosures should be required when an investment commitments, we note that rule. intermediary compensates third parties issuers and investors, including for directing investors to its platform, investors associated with the issuer, are 7. Payments to Third Parties one commenter suggested the subject to the antifraud provisions of the a. Proposed Rule Commission should not require securities laws. We also note that, as we disclosure of ‘‘standard Internet Securities Act Section 4A(a)(10) discussed above, an intermediary is marketing [practices]’’ that ‘‘inform provides that an intermediary in a required to promptly remove an offering investors of companies they may be transaction made in reliance on Section 910 from its platform if it becomes aware of interested in.’’ Another commenter 4(a)(6) shall not compensate information that causes it to believe that stated that compensation should only be ‘‘promoters, finders, or lead generators the issuer or the offering presents the allowed under limited circumstances, for providing the broker or funding potential for fraud or otherwise raises albeit without providing examples of portal with the personal identifying 911 concerns about investor protection.904 those limited circumstances. We did In regards to one commenter’s request information of any potential investor.’’ not receive comments related to the We proposed in Rule 305(a) of for clarification as to whether an definition of the term ‘‘personally Regulation Crowdfunding to prohibit an intermediary may continue to receive identifiable information’’ as proposed in intermediary from compensating any investment commitments during the Rule 305(c). person for providing it with the five business day period prior to an ‘‘personally identifiable c. Final Rules early closure of an offering (even if the information’’ 906 of any investor. As commitment may be oversubscribed), We are adopting Rule 305 with explained in the Proposing Release, we we note that intermediaries are modifications. Rule 305(a), like the believe that any person compensated for permitted to continue to receive proposed rule, states that an providing the personally identifiable investment commitments during that intermediary may not compensate any information of investors would be acting person for providing the intermediary time period, provided that the as a promoter, finder or lead generator with the personally identifiable intermediary informs investors about within the meaning of Securities Act information of any investor in securities the continuation of such acceptance in 905 Section 4A(a)(10). offered and sold in reliance on Section accordance with Rule 304(b). Proposed Rule 305(b), however, In addition, we believe that when 4(a)(6) of the Securities Act. However, would permit an intermediary to material changes arise during the course we are not including in the final rule compensate a person for directing of an offering, an investor who had 907 made a prior investment commitment We note that the receipt of direct or indirect 906 As proposed, the term ‘‘personally identifiable transaction-based compensation would strongly information’’ would mean any information that can indicate that the recipient is acting as a broker. As 904 See Section II.C.3. be used to distinguish or trace an individual’s such, the party receiving the compensation in the 905 However, the issuer will still have to comply identity, either alone or when combined with other scenario described needs to consider whether it with the rules regarding oversubscriptions. See personal or identifying information that is linked or would be required to register as a broker. Section II.B.6.a. This same commenter expressed linkable to a specific individual. See proposed Rule 908 See, e.g., RoC Letter; RocketHub Letter; uncertainty about how an issuer will communicate 305(c) of Regulation Crowdfunding. As explained in Wefunder Letter. early closure to a funding portal so that the funding the Proposing Release, personally identifiable 909 See, e.g., RocketHub Letter; Wefunder Letter. portal can provide appropriate notice to investors information could include any information that can See also ABA Letter (discussing the practice of so- about the new offering deadline. The final rules do be used to identify an individual, such as name, called ‘‘passive bulletin boards’’). not prescribe the mechanics for how funding social security number, date or place of birth, 910 Wefunder Letter. portals must communicate with issuers as we mother’s maiden name or biometric records, as well 911 See Joinvestor Letter (‘‘We believe such believe the better course is to provide for flexibility as any other information that is linked directly to compensation should be allowed under extremely in this regard so that intermediaries and issuers can an individual, such as financial, employment, limited circumstances, as promotion will be a arrive at efficient working arrangements. educational or medical information. central issue to these campaigns.’’).

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what was proposed in paragraph (b), intermediary, however, cannot pay to association; and the funding portal’s which stated that an intermediary may receive personally identifiable Web site address(es) or other means of compensate a person for directing information in under any circumstances access.918 Proposed Rule 400(a) also issuers to the intermediary’s platform, pursuant to the prohibition in Rule would require a funding portal to provided that unless the compensation 305(a). become a member of FINRA or another is made to a registered broker or dealer, Finally, we are adopting as proposed applicable national securities the compensation is not based, directly the definition of personally identifiable association registered under Exchange or indirectly, on the purchase or sale of information, which will be renumbered Act Section 15A. As proposed in Rule a security offered in reliance on Section as Rule 305(b). 400(a), the funding portal’s registration 4(a)(6) of the Securities Act on or would become effective the later of: (1) D. Additional Funding Portal through the intermediary’s platform. 30 calendar days after the date that the Requirements Upon further consideration, we believe registration is received by the this provision would be duplicative of 1. Registration Requirement Commission; or (2) the date the funding Rule 402(b)(6), which addresses referral a. Generally portal is approved for membership in payments that funding portals are FINRA or any other registered national permitted to pay to third parties.912 In (1) Proposed Rules securities association. addition, registered broker-dealers are Securities Act Section 4A(a)(1) Proposed Rule 400(b) would require a already subject to limitations on the requires that an intermediary facilitating funding portal to file an amendment to types of compensation that they may a transaction made in reliance on Form Funding Portal within 30 days of pay to third parties, and as we Securities Act Section 4(a)(6) register any of the information previously explained in the Proposing Release, are with the Commission as a broker or a submitted on the form becoming subject to an established regulatory and funding portal. The statute does not, inaccurate for any reason. oversight regime that provides however, prescribe the manner in which In addition, proposed Rule 400(c)(1) important safeguards for investors. a funding portal would register with the would permit a funding portal that We agree with those commenters who Commission.916 Securities Act Section succeeds to and continues the business believe intermediaries should be 4A(a)(12) requires intermediaries to of a registered funding portal to also permitted to compensate third parties comply with requirements as the succeed to the registration of the for general business advertising Commission may, by rule, prescribe for predecessor on Form Funding Portal. As including, for example, web search the protection of investors and in the proposed in Rule 400(c)(1), the engine direction or other standard public interest. Exchange Act Section registration would remain effective as Internet marketing techniques so long as 3(h)(1)(C) also permits the Commission the registration of the successor if the that compensation is not based, directly to impose, as part of its authority to successor, within 30 days after such or indirectly, on the purchase or sale of exempt funding portals from broker succession, files a registration on Form a security offered in reliance on registration, ‘‘such other requirements Funding Portal and the predecessor files Securities Act Section 4(a)(6).913 We under [the Exchange Act] as the a withdrawal on Form Funding believe permitting compensation for Commission determines appropriate.’’ Portal.919 Proposed Rule 400(c)(1), these types of general business We proposed to establish a therefore, would not apply where the advertising does not raise the same streamlined registration process under predecessor funding portal intends to privacy concerns as those implicated by which a funding portal would register continue to engage in funding portal the provision of personally identifiable with the Commission by filing a form activities. information and is generally consistent with information consistent with, but In certain circumstances, proposed with the statutory scheme for less extensive than, the information Rule 400(c)(2) would allow the crowdfunding promotional activities. required for broker-dealers on the successor to file an amendment to the Therefore, under the rules, an Uniform Application for Broker-Dealer predecessor’s Form Funding Portal intermediary may pay a person a flat Registration (‘‘Form BD’’).917 Under rather than requiring the successor and fixed fee 914 to direct persons to the proposed Rule 400(a), a funding portal predecessor, respectively, to follow the intermediary’s platform through, for would register by completing a Form registration filing and withdrawal example, hyperlinks or search term Funding Portal, which would include process under Rule 400(c)(1) described results or make payments to a person to information concerning the funding above. Specifically, proposed Rule advertise its existence.915 The portal’s principal place of business, its 400(c)(2) provides that, if the succession legal status and its disciplinary history, is based solely on a change of the 912 See Section II.D.3. if any; business activities, including the predecessor’s date or state of 913 See, e.g., 158 Cong. Rec. S5474–03 (daily ed. types of compensation the funding incorporation, form of organization or July 26, 2012) (statement of Sen. Jeff Merkley) portal would receive; control affiliates composition of a partnership, the (‘‘[T]he limitation on off-platform advertising is successor may, within 30 days after the intended to prohibit issuers—including officers, of the funding portal and disclosure of directors, and 20 percent shareholders—from their disciplinary history, if any; FINRA succession, amend the notice promoting or paying promoters to express opinions membership or membership with any registration of the predecessor on Form outside the platform that would go beyond pointing other registered national securities Funding Portal to reflect these changes. the public to the funding portal.’’). Successions by amendment would be 914 A flat fixed fee is one that is not based on the success of the offering, and so would not be funding portal may engage under the Regulation’s limited to those successions that transaction-based compensation. We note that the safe harbor). receipt of direct or indirect transaction-based 916 Compare Exchange Act Section 15(b) [15 918 We discuss in Section II.D.1.b the information compensation would strongly indicate that the U.S.C. 78o(b)] (prescribing the manner of required to be included in Form Funding Portal. recipient is acting as a broker. As such, the party registration of broker-dealers). 919 Under the proposed rules, the registration of receiving this kind of compensation needs to 917 Brokers currently register with the the predecessor funding portal would be deemed consider whether it would be required to register Commission using Form BD. Information on that withdrawn 45 days after the notice registration on as a broker. form regarding the broker’s credentials, including Form Funding Portal was filed by the successor. See 915 See also Rule 402 of Regulation Crowdfunding current registrations or licenses and employment proposed Rule 400(c)(1). A similar process exists for and discussion in Section II.D.3 (discussing and disciplinary history, is publicly available on registered broker-dealers under Exchange Act Rule advertising and marketing activities in which a FINRA’s BrokerCheck. 15b1–3 (17 CFR 240.15b1–3).

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resulted from a formal change in the In the Proposing Release, we promote investor confidence in this new structure or legal status of the funding requested comments on whether we and emerging market, while providing portal but did not result in a change in should impose other restrictions or us and FINRA (and any other applicable control. prohibitions on affiliations of the national securities association registered The instructions to the proposed funding portal, such as affiliation with pursuant to Exchange Act Section 15A) Form Funding Portal would limit the a registered broker-dealer or registered with information integral to effective term ‘‘successor’’ to an entity that transfer agent. Some commenters oversight. assumed or acquired substantially all of opposed the imposition of other Finally, consistent with the proposal, the assets and liabilities of the restrictions or prohibitions on we are not imposing additional predecessor funding portal’s business. affiliations of the funding portal.924 One restrictions or prohibitions on We also proposed in Rule 400(d) to of these commenters stated that affiliations of the funding portal in the require a funding portal to promptly file affiliations and partnerships with final rules. We note, however, that Form a withdrawal of registration on Form brokers or transfer agents should be Funding Portal, which will be publicly Funding Portal upon ceasing to operate optional.925 available, requires a funding portal to as a funding portal. The withdrawal disclose information about its control would be effective on the later of 30 (3) Final Rules relationships and the disciplinary days after receipt by the Commission, We are adopting Rule 400(a)–(e) history of associated persons.926 after the funding portal was no longer generally as proposed with one change. b. Form Funding Portal operational, or within a longer period of We are deleting from Rule 400(e) as time consented to by the funding portal proposed the language stating that Form (1) Proposed Rules or that the Commission, by order, Funding Portal may be filed with a As noted above, proposed Rule 400(a) determined as necessary or appropriate Commission designee, as we have requires a funding portal seeking to in the public interest or for the determined not to designate this register with the Commission, through protection of investors.920 function. Rather, these filings will be an initial application, to file a Proposed Rule 400(e) would provide made through the EDGAR system as completed Form Funding Portal with that each application for registration, explained in more detail below. the Commission. As proposed, Rule amendment thereto, successor Rule 400 establishes a streamlined 400(b)–(d) would have also required registration or withdrawal would be registration process for a funding portal funding portals to use proposed Form considered filed when a complete Form to register with the Commission. We Funding Portal to amend any part of the Funding Portal was submitted with the have considered the general comment funding portal’s most recent Form Commission or its designee. Proposed suggesting that the registration Funding Portal, including certain Rule 400(e) also would require requirement for funding portals is too successor registrations, or to withdraw duplicate originals of the application to stringent and creates financial overhead. from registration as a funding portal be filed with surveillance personnel We believe, however, that the rules as with the Commission.927 We proposed designated by the registered national adopted provide a reasonable approach to make a blank Form Funding Portal securities association of which the to funding portal registration—they are available through the Commission’s funding portal is a member. based on broker-dealer registration Web site or such other electronic requirements, which we believe have (2) Comments on the Proposed Rule database, as determined by the been effective in providing investor Commission in the future. We received some comments protection and allowing the As proposed, Form Funding Portal generally supporting the proposed Commission to perform its oversight appropriately considered the need to 921 registration method, while one function. At the same time, the provide efficiency in completing the commenter generally opposed the registration requirement takes into proposed registration method, stating account the more limited activities of 926 See Item 4—Control Relationship of Form the Commission is requiring too funding portals as compared to broker- Funding Portal and Item 5—Disclosure Information stringent a registration process and dealers. As such, the registration of Form Funding Portal. ‘‘Control’’ is defined for the financial overhead for funding requirements we are imposing on purposes of Form Funding Portal as ‘‘[t]he power, 922 directly or indirectly, to direct the management or portals. One commenter encouraged funding portals are generally consistent policies of the funding portal, whether through the Commission to require broker- with those imposed on broker-dealers, contract, or otherwise. A person is presumed to dealers to register on the same form as while not as extensive in every aspect. control a funding portal if that person: (1) IS A funding portals.923 director, general partner or officer exercising As we note in Section III.B.5, we have executive responsibility (or has a similar status or considered the costs of funding portal functions); (2) directly or indirectly has the right to 920 A similar process exists for registered broker- registration and believe that the vote 25 percent or more of a class of a voting dealers under Exchange Act Section 15(b)(5) (15 anticipated costs to funding portals are security or has the power to sell or direct the sale U.S.C. 78o(b)(5)) and Rule 15b6–1 (17 CFR of 25 percent or more of a class of voting securities 240.15b6–1) thereunder. justified in light of the expected benefits of the funding portal; or (3) in the case of a 921 See, e.g., Joinvestor Letter; DreamFunded investors will receive from utilizing partnership, has contributed, or has a right to Letter (favoring the proposed rules which provide funding portals that are subject to receive, 25 percent or more of the capital of the a ‘‘high barrier to entry’’ to funding portals, as it registration requirements, which funding portal.’’ See Instructions to Form Funding will ‘‘stop anyone from potentially creating a include public disclosure of registration Portal. funding portal over a weekend’’). 927 As noted in Section II.D.1.a., a successor 922 See PeoplePowerFund Letter (suggesting that information on Form Funding Portal in funding portal may amend the registration of its the Commission should consider, ‘‘a simple EDGAR, as described in more detail in predecessor on Form Funding Portal, within 30 registration detailing the owners and operators of a Section II.D.1.b below. We believe that days after succession, if the succession is based web portal, the legal domicile and registration having such a registration system will solely on a change of the predecessor’s date of contact information etc. and the portals [sic] incorporation, state of incorporation, form of commitment to adherence of the rules of the organization, or composition of a partnership. [C]ommission’’). Commission as well as FINRA. Therefore, they may Otherwise, a successor must file a registration 923 See RocketHub Letter. The commenter also be able to service the market well ahead of statement on Form Funding portal within 30 days stated that it has ‘‘a serious concern with [broker- [funding] [p]ortals.’’ after succession and a predecessor must file a dealers] having an unfair advantage in the market, 924 See, e.g., Joinvestor Letter; Tiny Cat Letter. withdrawal on Form Funding Portal. See Rule by already being regulated and registered with the 925 See Tiny Cat Letter. 400(c).

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form while requesting sufficient the ability of the applicant to provide Web sites. This commenter suggested information from funding portals to the Commission and the national the Commission ‘‘clearly address Portals allow for effective regulatory oversight. securities association of which it is a that register with the Commission, and The proposed form would have member with prompt access to its books then subsequently license out or sell consisted of eight sections, including and records and to submit to onsite their registration.’’ 935 The same items related to: Identifying inspection and examination by the commenter stated that ‘‘[s]ome information, form of organization, Commission and the national securities entrepreneurs have indicated that they successions, control persons, disclosure association. intend to operate a ‘parent’ funding information, non-securities related We also proposed that a person duly [p]ortal, which allows other sites to business, escrow, compensation authorized to bind the funding portal be operate under its umbrella, (leveraging arrangements, and withdrawal. These required to sign Form Funding Portal in the parent’s systems, architecture, items would require an applicant to order to execute the documents.930 As design, infrastructure, etc.).’’ 936 provide certain basic identifying and proposed, the funding portal also would contact information concerning its have been required to consent to service (3) Final Rules business; list its direct owners and of process to its contact person on the We are adopting Form Funding Portal executives; identify persons that form.931 generally as proposed,937 with the directly or indirectly control the Finally, we proposed to make all following changes: funding portal, control the management current Forms Funding Portal, including • The final rules amend Regulation or policies of the funding portal and amendments and registration S–T to permit a funding portal to file persons the funding portal controls; and withdrawal requests, immediately PDF exhibits and attachments to Form supply information about its litigation accessible and searchable by the public, Funding Portal on EDGAR as ‘‘official and disciplinary history and the with the exception of certain personally filings.’’ 938 litigation and disciplinary history of its identifiable information or other • The following has been added to associated persons.928 Under proposed information with significant potential the title of the form: ‘‘Application or Form Funding Portal, a funding portal for misuse (including the contact Amendment to Application for would be able to operate multiple Web employee’s direct phone number and Registration or Withdrawal from site addresses under a single funding email address and any IRS Employer Registration as Funding Portal’’ to portal registration, provided the funding Identification Number, social security clarify that the form will be used for all portal disclosed on Form Funding Portal number, date of birth, or any other funding portal registration applications, all the Web sites and names under similar information).932 amendments and withdrawals; • which it did business.929 In addition, (2) Comments on Proposed Rules Amendments to Form Funding the proposed form would have required Portal will require a narrative We received one comment in support an applicant to describe any non- explaining the amendment, which we of using EDGAR for all funding portal securities related business activities and believe will clarify to investors and filing and registration requirements.933 supply information about its escrow potential investors the particular Some commenters also generally arrangements, compensation information being amended by the supported allowing a funding portal to arrangements with issuers and fidelity funding portal in its filing; file one registration application to • Form Funding Portal will not bond. 934 Upon a filing to withdraw from operate multiple Web sites. One require information about fidelity bonds registration, a funding portal would be commenter, however, expressed since we are not adopting the fidelity concern about allowing funding portals required to provide certain books and bond requirement in the proposed to file one registration form for multiple records information. In addition, as rules; 939 discussed in detail in Section II.D.1.d. • Item 1 also will require information 930 See execution statement of proposed Form about Web site URL changes on the below, applicants that are incorporated Funding Portal. We proposed requiring a person in or organized under the laws of a executing Form Funding Portal and Schedule C (if most recent Form Funding Portal, title jurisdiction outside of the United States applicable) to represent that the person has of the contact employee and the month or its territories, or whose principal executed the form on behalf of, and is duly the applicant funding portal’s fiscal year authorized to bind, the funding portal; the place of business is not in the United ends; information and statements contained in the form • States or its territories, would have been and other information filed are current, true and The title of Item 4 is changed from required to complete Schedule C to complete; and if the person is filing an amendment, ‘‘Control Persons,’’ as proposed, to Form Funding Portal, which would to the extent that any information previously ‘‘Control Relationships,’’ as adopted, to submitted is not amended, such information is clarify that Item 4 may capture require information about the currently accurate and complete. applicant’s arrangements to have an 931 See execution statement of proposed Form information not being captured in agent for service of process in the Funding Portal. Specifically, we proposed requiring Schedules A and B; • United States, as well as a certification the funding portal to consent that service of any The language in Item 5 ‘‘to civil action brought by, or notice of any proceeding determine whether to approve an and an opinion of counsel addressing before, the Commission or any national securities association of which it is a member, in connection 935 928 This information would be used to determine with the funding portal’s investment-related RocketHub Letter. whether to approve an application for registration, business, may be given by registered or certified 936 Id. to decide whether to revoke registration, to place mail to the funding portal’s contact person at the 937 We also made minor non-substantive technical limitations on the applicant’s activities as a funding main address, or mailing address, on the form. changes and changes to increase the clarity of the portal and to identify potential problem areas on 932 See proposed Instructions to Form Funding information being requested in the form. which to focus during examinations. If an applicant Portal. 938 See Rule 101(a)(1)(xviii) of Regulation S–T. As or its associated person has a disciplinary history, 933 See Public Startup Letter 3. we noted in Section II.B.3, Regulation S–T generally then the applicant could be required to complete 934 See, e.g., Joinvestor Letter; Tiny Cat Letter allows PDF documents to be filed only as unofficial the appropriate Disclosure Reporting Page (‘‘DRP’’), (stating that requiring new applications for each copies. See Rule 104 of Regulation S–T. However, either Criminal, Regulatory, Civil Judicial, Web site would be unnecessary as it ‘‘would not Rule 101 provides for certain exceptions to this Bankruptcy, Bond or Judgment on proposed Form provide any new information for either the restriction. The PDF documents must be in the Funding Portal. commission or the public’’ so long as the expansion format required by the EDGAR Filer Manual, as 929 See proposed Form Funding Portal, Item 1; 17 involves no material changes to information in the defined in Rule 11 of Regulation S–T. CFR 249.2000. initial application). 939 See Section II.D.1.c.

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application for registration’’ has been questions to the activities of funding definition of ‘‘funding portal’’ (as deleted;940 portals. For example, Form Funding defined by Rule 300(c)(2)). Once the • Item 7, as adopted, references Portal, in contrast to Form BD, does not application has been accepted by the ‘‘qualified third party arrangements’’ include any questions about holding Commission, the funding portal will rather than ‘‘escrow arrangements,’’ as customer funds and securities because receive an email with a CIK, which it proposed, to indicate that, in addition to funding portals are statutorily can use (along with a passphrase that it holding the funds in escrow, a qualified prohibited from holding or maintaining has previously created) to generate third party may also hold investor funds customer funds or securities. We also EDGAR access codes, and access the in an account for the benefit of investors included questions in Form Funding system and Form Funding Portal. and the issuer;941 Portal to address specific restrictions As proposed, a funding portal will be • ‘‘G—Other (general partner, trustee, that are imposed upon funding portals required to check a box indicating the or elected member)’’ has been added as but not upon broker-dealers. For purpose for which the funding portal an ownership code in Schedule A; example, Form Funding Portal requires was filing the form: • Schedules A and B have been specific information about a funding • To register as a funding portal with changed from the proposal to clarify portal’s qualified third party the Commission, through an initial that the Schedules are collecting arrangements because a funding portal application; information about whether direct is prohibited from holding and • to amend any part of the funding owners and executive officers are maintaining customer funds. portal’s most recent Form Funding ‘‘control’’ persons; In developing these requirements, we Portal, including a successor • The language to Schedule C of Form have taken into account that funding registration; or Funding Portal has been changed to portals are limited purpose brokers that • to withdraw from registration as a track more closely the requirements of are conditionally exempt from funding portal with the Commission. Rule 400(f) for nonresident funding registration as broker-dealers, and The funding portal will receive an portals and to add an execution section accordingly have sought to require SEC file number after it files its Form for these entities; and appropriate information from these Funding Portal initial application, and • Withdrawal information for funding entities, while, at the same time, not thereafter must provide us that file portals proposed to be collected under making the process of completing and number when submitting an Item 8 will instead be collected in a new filing the required form inappropriately amendment or withdrawal from ‘‘Schedule D’’.942 burdensome for funding portals. registration on Form Funding Portal. We We continue to believe that the As noted above, we proposed to make will use this number to cross-reference information required by Form Funding a blank Form Funding Portal available amendments and withdrawals to the Portal is important for our oversight of through our Web site or another original registration. funding portals and to allow us to assess electronic database. At the time of the When a funding portal’s registration a funding portal’s application for Proposing Release, we had not yet becomes effective, the information on registration and perform examinations determined the appropriate database Form Funding Portal will be made of funding portals. We also note that the through which to access and available to the public through EDGAR, information required by the Form will electronically file Form Funding Portal. with the exception of certain personally be available to investors and potential We requested comments in the identifiable information or other investors and will provide transparency Proposing Release on the type of web- information with significant potential regarding intermediaries. Although we based registration that funding portals for misuse (including the contact generally modeled Form Funding Portal should use for accessing and filing Form employee’s direct phone number, fax on Form BD, we have tailored the Funding Portal, and as noted above, number and email address and any IRS received one comment in support of Employer Identification Number, IRS 940 We note, however, that failure to answer a using EDGAR for funding portal filing Tax Identification Number, social question in Item 5 will result in an incomplete and registration requirements.943 We security number, date of birth or any application for registration. other similar information). In addition 941 See Section II.C.5.e. have determined to require funding 942 There have been no substantive changes to the portals to access and file Form Funding to current versions of Form Funding withdrawal information to be collected on Schedule Portal through the Commission’s Portal, investors and potential investors D. The instructions to Form Funding Portal have EDGAR system. Before a funding portal also will be able to access historical been modified from the proposal to (1) include IRS will be able to access EDGAR and versions of a funding portal’s filings on Tax Identification Number and the contact employee’s fax number as information that will be electronically file Form Funding Portal, EDGAR. We believe that making these redacted on Form Funding Portal by the it will have to obtain EDGAR access documents publicly available and Commission and, therefore, not disseminated to the codes and a central index key (‘‘CIK’’) searchable will provide the public with public by the form; and (2) inform funding portals by creating and submitting a Form ID information about the registration that they should manually redact certain personally identifiable information or other information with with the Commission for authorization process and the funding portal industry, significant potential for misuse (including the to access EDGAR. The applicant will be thereby increasing transparency into contact employee’s direct phone number, fax required to fill out general user this developing market. number and email address and any IRS Employer information fields on Form ID, The final rule permits a funding Identification Number, IRS Tax Identification Number, social security number, or any other including filer type name, address, portal to operate multiple Web site similar information) from any PDF attachments they phone number, email address, addresses under a single funding portal file as part of their Form Funding Portal submission organization name and employer registration. As we noted in the due to privacy concerns. The instructions have also identification number and file a signed, Proposing Release, we believe that been modified to amend the definition of SRO to delete the reference to Section 3 of the Exchange notarized version of the document. To allowing a funding portal to utilize more Act and clarify that the phrase ‘‘any national facilitate this process, we are amending than one Web site address, if it chooses securities association registered with the Form ID to add ‘‘Funding Portal’’ as a to do so, may allow the portal to Commission’’ in the definition encompasses any filer type and are also revising the minimize its regulatory costs while national securities association registered under Section 15A of the Exchange Act, in order to instructions to the form to include the having the flexibility to customize each alleviate any confusion by funding portals when Web site to fit its specific needs, such completing the form. 943 See Public Startup Letter 3. as appealing to certain industries or

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investors. We have considered one a surety bond more appropriate in the benefits that could be derived from commenter’s concern about funding crowdfunding context than a fidelity requiring that a funding portal obtain portals licensing or selling their bond because investors would be able to such a bond. In particular, we are registrations, and note that registrations make a direct claim under it for losses concerned that a fidelity bond are not transferrable among entities; due to a funding portal’s violation of the requirement could create a potential rather, each funding portal is required to rules, and the insurer would be able to barrier to entry for some funding portals register with the Commission, pursuant seek indemnity for that amount from the that could be detrimental to our mission to Rule 400(a). As explained above, an funding portal.949 One commenter of capital formation, as well as the entity may succeed to and continue the stated that it is not appropriate to feasibility of crowdfunding. At the same business of a registered funding portal, require that the fidelity bond cover time, we are mindful of the potentially but the successor must file a registration associated persons, and that the limited benefits of requiring such bonds on Form Funding Portal within 30 days requirement is a ‘‘hangover from a non- to be obtained by funding portals, when after any succession resulting in a transparent financial services sector,’’ taking into account the statutory change of control.944 unlike the transparent crowdfunding restrictions on funding portals’ model.950 Another commenter noted permissible activities. Instead, we c. Fidelity Bond that a fidelity bond would protect a believe at this time that the prohibition (1) Proposed Rule funding portal from employee theft or on a funding portal from handling Proposed Rule 400(f) would have embezzlement, and suggested that there customer funds and securities as well as required that funding portals, as a is a low risk of this occurring since a the general anti-fraud provisions of our funding portal not does hold cash or statutes and rules provide significant condition of registration, have in place, 951 and thereafter maintain for the duration customer funds. The commenter investor protections that do not need to of such registration, a fidelity bond that: further stated that ‘‘[o]btaining a bond is be supplemented by a fidelity bond (1) Has a minimum coverage of simply one more expense that the portal requirement. This decision is consistent must incur and it is necessary to control with our approach generally to the $100,000; (2) covers any associated compliance costs if crowdfunding is to regulation of funding portals in which person of the funding portal unless be a success.’’ 952 we have sought to structure rules otherwise excepted in the rules set forth tailored to the business of funding by FINRA or any other registered (3) Final Rules portals that address the risks posed by national securities association of which After taking into account the such activities while considering the it is a member; and (3) meets any other comments and upon further impact that our rules may have on this applicable requirements set forth by consideration, we have determined not emerging market. FINRA or any other registered national to adopt a fidelity bond requirement for securities association of which it is a funding portals. We have been d. Requirements for Nonresident member. While fidelity bond coverage persuaded by the comments that such a Funding Portals was not mandated by statute, the requirement may not be appropriate. We (1) Proposed Rules proposed requirement was intended to believe that the statutory protections help insure against the loss of investor Under proposed Rule 400(g), and prohibitions set forth in Exchange registration pursuant to Rule 400 of funds that might occur if a funding Act Section 3(a)(80) on holding, portal were to violate the express Regulation Crowdfunding by a managing, possessing or otherwise ‘‘nonresident funding portal’’ 954 would prohibition set forth in Exchange Act handling investor funds or securities Section 3(a)(80) on holding, managing, be first conditioned upon there being an provide substantial protections to information sharing arrangement in possessing or otherwise handling investors. We recognize, as some investor funds or securities. place between the Commission and the commenters observed, that there may be competent regulator in the jurisdiction (2) Comments on Proposed Rule potential risks to investors if a funding under the laws of which the nonresident portal were to violate the prohibitions in funding portal is organized or where it We received comments both in Regulation Crowdfunding, including the support of,945 and opposition to,946 the has its principal place of business that potential loss of investor funds. As we is applicable to the nonresident funding proposed requirement for funding discussed in the Proposing Release, portals to maintain fidelity bonds. One portal. The proposed rule would further funding portals will not be members of require a nonresident funding portal commenter stated its view that a fidelity the Securities Investor Protection bond may be necessary as a preventative registered or applying for registration to: Corporation (‘‘SIPC’’) and their (1) Obtain a written consent and power measure to protect the interests of customers, therefore, will not receive 947 of attorney appointing an agent for investors and issuers. Another SIPC protection.953 Furthermore, commenter noted that although fidelity service of process in the United States consistent with the proposed rules, the (other than the Commission or a bond coverage may be ‘‘indirect’’ to final rules also do not subject funding Commission member, official or customers, they are protected under portals to minimum net capital employee), upon whom may be served such coverage because the insured requirements. Despite these any process, pleadings, or other papers entity may recover its losses due to theft vulnerabilities, we note that the in any action; 955 (2) furnish the or embezzlement by its employees and potential burden associated with the 948 Commission with the name and address meet the obligations of its customers. requirement of a fidelity bond (or any of its agent for services of process on The same commenter, however, bond) may not be justified by the suggested that the Commission may find 954 See proposed Rule 400(g)(1) of Regulation 949 See id. Crowdfunding (defining ‘‘nonresident funding 944 See Section II.D.1.a. 950 See ASSOB Letter. portal’’ as ‘‘a funding portal incorporated in or 945 See, e.g., Joinvestor Letter; Public Startup 3 951 See Heritage Letter organized under the laws of any jurisdiction outside Letter; RocketHub Letter; SFAA Letter. 952 Id. of the United States or its territories, or having its 946 See, e.g., ASSOB Letter; Heritage Letter; 953 See Proposing Release at 78 FR at 66482. principal place of business in any place not in the PeoplePowerFund Letter; RoC Letter. Membership in SIPC applies only to persons United States or its territories’’). 947 See Joinvestor Letter. registered as brokers or dealers under Section 15(b) 955 See proposed Rule 400(g)(2)(i) of Regulation 948 See SFAA Letter. of the Exchange Act. See 15 U.S.C. 78ccc(a)(2). Crowdfunding.

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Schedule C of Form Funding Portal; 956 advantage for foreign intermediary (3) Final Rules and (3) certify on Schedule C of Form platforms.959 Another commenter stated We are adopting Rule 400(g) as Funding Portal and provide an opinion its view that nonresident funding proposed with certain minor changes, of counsel that it can, as a matter of law, portals should be subject to the same and renumbering it as Rule 400(f) due provide the Commission and any rules as domestic funding portals.960 to the elimination of the fidelity bond national securities association of which In the Proposing Release, we requirement proposed as subparagraph it is a member with prompt access to its 965 requested comments about other actions (f). We are changing the language of books and records and can, as a matter the rule as adopted applicable to a of law, submit to onsite inspection and or requirements that could address our concern that the Commission and the nonresident funding portal to: examination by the Commission and • Add the term ‘‘registered’’ to any applicable national securities such national securities association.957 references to national securities association be able to have direct access Proposed Rule 400(g)(2)(iv) would association in the Rule to be more require a registered nonresident funding to books and records and be able to consistent with the terminology in the portal to promptly appoint a successor adequately examine and inspect a Exchange Act; and agent if it discharges its identified agent nonresident funding portal, if it would • Require the nonresident funding for service of process or if its agent for be impossible or impractical for such portal also to certify that it ‘‘will’’ service of process is unwilling or unable funding portal to obtain the required provide the Commission and any to accept service on its behalf. In opinion of counsel. In response, a national securities association of which addition, proposed Rule 400(g)(2)(iii) commenter suggested an arrangement it ‘‘becomes’’ (rather than ‘‘is’’) a would require a registered funding between a nonresident funding portal member with prompt access to the portal to promptly amend Schedule C to and a domestic funding portal in which books and records and ‘‘will’’ submit to its Form Funding Portal if its agent, or the nonresident funding portal would be onsite inspection and examination by the agent’s name or address, changes. required to make and keep current the Commission and such national Finally, proposed Rule 400(g)(2)(v) books and records, but the domestic securities association.966 would require the registered funding portal would have the ability to As we noted in the Proposing Release, nonresident funding portal to maintain, obtain and be responsible for the the rule aims to help ensure that we and as part of its books and records, the accuracy of such books and records.961 any applicable registered national agreement with the agent for service of securities association can access the process for at least three years after One commenter suggested that books and records of, conduct termination of the agreement. nonresident funding portals be required examinations and inspections of, and In addition, we proposed in Rule to clearly indicate on their Web sites enforce U.S. laws and regulations with 400(g)(3)(ii) to require a registered that they are organized and operating respect to, funding portals that are not nonresident funding portal to re-certify, outside of the U.S. and indicate whether based in the United States, or that are on Schedule C to Form Funding Portal, a U.S. or non-U.S. bank will be used to subject to laws other than those of the within 90 days after any changes in the process investors’ funds.962 One United States. We believe that these legal or regulatory framework that commenter suggested that a nonresident rules will further our goal of promoting would affect: (1) Its ability to provide (or funding portal should be required to the ability of the Commission and any the manner in which it provides) the appoint a U.S. agent for all potential applicable national securities Commission, or the national securities proceedings,963 while another association to conduct effective association of which it is a member, commenter suggested that a nonresident regulatory oversight of funding portals. with prompt access to its books and funding portal should be required to We have considered the comments records; or (2) the ability of the have a resident legal representative to and believe that the final rule Commission or the national securities handle any matters between issuers or appropriately takes into consideration association to inspect and examine the investors and the portal.964 the need to provide more choices for nonresident funding portal. The re- U.S. issuers seeking to use certification would be accompanied by 959 See Public Startup Letter 3 (stating its view intermediaries or access investors a revised opinion of counsel describing that the definition of nonresident funding portal is outside of the United States, while how, as a matter of law, the entity can ‘‘flawed’’ because it believes these foreign entities meeting the challenges associated with could choose to act as intermediaries for U.S. supervising, examining, and enforcing continue to meet its obligations to issuers and U.S. investors in crowdfunding provide the Commission and the transactions without relying on Section 4(a)(6) and, rules regarding activities of national securities association with therefore, gain a competitive advantage by not intermediaries based outside the United prompt access to its books and records having to comply with the requirements of the rules States. For example, as we noted in the under Regulation Crowdfunding in the same Proposing Release, the requirement for and to be subject to inspection and manner as domestic funding portals). But see examination.958 Joinvestor Letter (stating its belief that ‘‘nonresident an information sharing arrangement is funding portal is properly defined’’). designed to provide us with greater (2) Comments on the Proposed Rule 960 See Wales Capital Letter 3. The commenter assurance that we will be able to obtain One commenter stated its view that also recommended using the term ‘‘ ‘foreign’ information about a nonresident funding portal’’ to be consistent with the treatment funding portal necessary for our the definition of a nonresident funding of corporations incorporated in another jurisdiction portal will create a competitive under various state laws. According to the oversight of the funding portal. The commenter, a foreign corporation must file a notice ability to obtain information and secure 956 See proposed Rule 400(g)(2)(ii) of Regulation of doing business in any state or nation in which Crowdfunding. it does substantial regular business, and must name 965 We also added ‘‘Inspections and 957 See proposed Rule 400(g)(3)(i) of Regulation an ‘‘ ‘agent for acceptance of service’ ’’ in that nation Examinations’’ to the heading of Rule 400(f)(3); this Crowdfunding. Exchange Act Section 3(h)(1)(C) (or the Secretary of State as agent) to allow people modification does not change the requirements permits us to impose, as part of our authority to doing business with a foreign corporation to be able from those proposed. In addition, we changed a exempt funding portals from broker registration, bring legal actions locally. cross-cite in the rule text to reflect the renumbering. 961 ‘‘such other requirements under [the Exchange Act] Id. 966 The language in the proposed rule required a as the Commission determines appropriate.’’ 962 See Zhang Letter. certification that the funding portal ‘‘can’’ meet 958 See proposed Rule 400(g)(3)(ii) of Regulation 963 Wales Capital Letter 3. such obligations but did not require a certification Crowdfunding. 964 See Joinvestor Letter. that it ‘‘will’’ meet them.

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the cooperation of the home country We have also considered the comment disclose the name and address of its regulator according to established suggesting that a nonresident funding U.S. agent in Schedule C to its Form practices and protocols is expected to portal be required to clearly indicate on Funding Portal, and amend the help to address the increased challenges its Web site that it is organized and Schedule promptly upon any change to that may arise from oversight of entities operating outside of the United States the agent, agent’s name or agent’s located outside of the United States. We and whether it will use a U.S. or non- address. We are not, however, requiring note that nonresident funding portals U.S. bank to process investors’ funds.971 that nonresident funding portals have a are subject to the same registration However, in light of the other disclosure resident legal representative to handle requirements as other funding portals requirements we are adopting, we are any matters between the portal and under Rule 400.967 not persuaded that such a requirement issuers or investors, which is consistent We have also considered the comment is necessary. We note that the with our approach to other nonresident submitted in response to our question information required to be filed on Form registered entities.975 about the use of books and records Funding Portal (and that will be 2. Exemption From Broker-Dealer arrangements in situations where it publicly disclosed) will include Registration would be impossible or impractical for information about the qualified third a nonresident funding portal to obtain party for the maintenance and a. Proposed Rule 968 the required opinion of counsel. We transmission of investors’ funds under Exchange Act Section 3(h)(1), which have determined not to adopt an Rule 303(e), including the name and was added by Section 304(a) of the JOBS 972 alternative to the opinion of counsel address of the qualified third party. Act, directs the Commission by rule to requirement for nonresident funding In addition, a nonresident funding exempt, conditionally or portals in Regulation Crowdfunding. portal will be required to publicly unconditionally, a registered funding The opinion of counsel requirement is disclose information on Schedule C to portal from the requirement to register consistent with our approach to other Form Funding Portal. Since Schedule C as a broker or dealer under Exchange nonresident registered entities and we is required to be completed by Act Section 15(a), provided that the believe it is an appropriate mechanism nonresident funding portals only, funding portal: (1) Remains subject to 969 to use here, as well. As we stated in investors will be able to discern easily the examination, enforcement and other the Proposing Release, we believe that whether or not the entity is a rulemaking authority of the the certification and supporting opinion nonresident funding portal and, among Commission; (2) is a member of a of counsel requirements are important other things, has certified (and provided registered national securities to confirm that each nonresident an attached opinion of counsel association; and (3) is subject to other funding portal is in a position to indicating) that it is able to provide the requirements that the Commission provide the Commission and FINRA (or Commission and any national securities determines appropriate. the applicable national securities association prompt access to its books As explained earlier, the role association registered under Exchange and records and will submit to onsite contemplated by Title III of the JOBS Act Section 15A) with information that inspection and examination by the Act for an entity acting as an is necessary for us and the national same. intermediary in a crowdfunding securities association to effectively Finally, we have considered the transaction would bring that entity fulfill regulatory oversight comments suggesting that a nonresident within the definition of ‘‘broker’’ under 970 responsibilities. We do not believe funding portal should be required to Exchange Act Section 3(a)(4).976 A that the books and records arrangement have a U.S. agent for potential funding portal would be ‘‘effecting 973 suggested by the commenter would proceedings, or a resident legal transactions in securities for the account provide assurance that we or FINRA representative to handle any matters of others’’ by, among other things, would be able to consistently obtain between issuers or investors, and the ensuring that investors comply with the 974 such information, which could hinder portal. We note that, as discussed conditions of Securities Act Section our ability to fulfill our regulatory above, we are requiring funding portals 4A(a)(4) and (8), making the securities oversight responsibilities. to execute a written consent and power available for purchase through the of attorney appointing an agent in the funding portal, and ensuring the proper 967 We have considered the commenter’s view United States. The agent will be the transfer of funds and securities as that there would be a potential competitive representative of the funding portal for advantage for foreign intermediaries choosing to required by Securities Act Section operate outside of the Section 4(a)(6) exemption. service of any process, pleadings or See Public Startup Letter 3. However, we note that other papers in any action to enforce the 975 For example, we note that requiring a U.S. any entities (foreign or domestic) intermediating Exchange Act, Securities Act or any rule agent for service of process but not requiring a U.S. offerings of securities between U.S. issuers and or regulation promulgated thereunder. legal representative to handle any matters between investors generally will be broker-dealers, either As we noted above, we have limited the a funding portal and issuers or investors is required to register under the Exchange Act or to generally consistent with the requirements for be exempt from registration. See 15 U.S.C. 78o(a). types of actions for which a nonresident nonresident security-based swap dealers and major We also note that the offer and sale of securities in funding portal will be required to have security-based swap participants, as well as those the United States or to U.S. persons must be an agent for service of process, for nonresident municipal advisors. See Exchange registered unless an exemption is available. pleadings, or other papers in order to Act Rule 15Fb2–4 and Rule 15Ba1–6. 968 See Wales Capital Letter 3. 976 See Exchange Act Section 3(a)(4)(A) [15 U.S.C. 969 We note that the opinion of counsel remain generally consistent with recent 78c(a)(4)(A)] (defining ‘‘broker’’ as ‘‘any person requirement is generally consistent with the requirements that we have imposed on engaged in the business of effecting transactions in requirement for nonresident security-based swap other types of nonresident entities. The securities for the account of others’’). An entity dealers and major security-based swap participants, funding portal will be required to acting as an intermediary in the offer and sale of as well as those for nonresident municipal advisors. securities pursuant to Section 4(a)(6), as See Exchange Act Rule 15Fb2–4 and Rule 15Ba1– contemplated in Title III of the JOBS Act, would not 971 6. See Zhang Letter. come within the meaning of ‘‘dealer,’’ which is 970 See Exchange Act Section 3(h)(1)(A). Failure 972 See Form Funding Portal, Item 7—Qualified defined in Exchange Act Section 3(a)(5)(A) (15 to make this certification or re-certification or to Third Party Arrangements; Compensation U.S.C. 78c(a)(4)(A)), because it would not be provide an opinion of counsel or revised opinion Arrangements. engaging in the business of buying and selling of counsel will result in an incomplete application 973 See Wales Capital Letter 3. securities for its own account. See also Exchange for registration. 974 See Joinvestor Letter. Act Section 15(a) [15 U.S.C. 15o(a)].

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4A(a)(7).977 In addition, a funding b. Comments on the Proposed Rule 15A, the term ‘‘broker or dealer’’ portal’s receipt of compensation linked Commenters generally agreed with the includes a funding portal and the term to the successful completion of the funding portal exemption from ‘‘registered broker or dealer’’ includes a offering also would be indicative of registration as a broker-dealer.982 One registered funding portal. Therefore, acting as a broker in connection with commenter stated that funding portals funding portals are explicitly permitted these transactions. Thus, absent an that provide no advice, make no by statute to become members of exemption or exception, a funding warranties as to the suitability of an FINRA. portal would be required to register as investment and do not handle share We are not, however, adopting a broker under the Exchange Act. transfers or money, should not be proposed Rule 401(b). As described in We proposed Rule 401(a) to provide required to register as a broker-dealer more detail in Section II.D.4.b. below, an exemption for registered funding and requiring them to do so would we have determined that the imposition portals from the broker registration provide no benefit to the public.983 of AML requirements on funding portals requirements of Exchange Act Section One commenter stated that the should be addressed outside of the rules 15(a)(1) in connection with its activities exemption from broker-dealer that we are adopting in this release. as a funding portal. Consistent with the registration actually precludes funding 3. Safe Harbor for Certain Activities JOBS Act, the funding portal would portals from becoming members of remain subject to the full range of our FINRA,984 and asserted that funding Under Exchange Act Section 3(a)(80), examination and enforcement authority, portals should not have to comply with which was added by Section 304(b) of even though it is not registered as a the same requirements as broker-dealers the JOBS Act, a funding portal is 978 broker. In this regard, proposed Rule for purposes of Chapter X of Title 31 of defined as an intermediary that does 403 would require that a funding portal the CFR.985 Another commenter, not: (i) Offer investment advice or make permit the examination and inspection however, stated that it ‘‘supports the recommendations; (ii) solicit purchases, of all of its business and business Commission’s interpretation of the sales or offers to buy the securities operations that related to its activities as exemption, and believes that AML offered or displayed on its platform or a funding portal, such as its premises, compliance is necessary.’’ 986 portal; (iii) compensate employees, systems, platforms and records, by c. Final Rules agents or other persons for such representatives of the Commission and solicitation or based on the sale of of the national securities association of We are adopting, as proposed, 979 securities displayed or referenced on its which it is a member. Proposed Rule paragraph (a) under Rule 401, but platform or portal; (iv) hold, manage, 404 also would impose certain renumbering it as Rule 401 as we not possess or otherwise handle investor recordkeeping requirements on funding adopting proposed Rule 401(b). We funds or securities; or (v) engage in such portals.980 note, however, that the exemption from other activities as the Commission, by We had further proposed in Rule broker registration is applicable only to 401(b) that, notwithstanding the rule, determines appropriate. As noted funding portals that are registered under in the Proposing Release, commenters exemption from broker registration, for Rule 400. Therefore, a funding portal purposes of Chapter X of Title 31 of the have raised questions about the scope of that ceases to be registered under Rule permissible activities for funding portals Code of Federal Regulations, a funding 400 will no longer be exempt from 987 portal would be a broker or dealer consistent with these prohibitions. broker registration under Rule 401. In To provide regulatory clarity, we ‘‘required to be registered’’ with the response to the comment that this Commission under the Exchange Act, proposed Rule 402, which would exemption precludes funding portals provide a non-exclusive conditional safe thereby requiring funding portals to from becoming members of FINRA, as comply with Chapter X, including harbor for funding portals under which we noted above, because a funding certain limited activities would be certain anti-money laundering (‘‘AML’’) portal will be engaged in the business of provisions thereunder.981 deemed consistent with the statutory effecting securities transactions for the prohibitions on funding portals. The accounts of others through 977 permissible activities in the proposed At the same time, there are statutory crowdfunding, it will be a ‘‘broker’’ restrictions on the scope of services that a funding safe harbor involved: (i) Limiting portal could provide. See Section II.C.1 (discussing within the meaning of Section 3(a)(4) of offerings on the platform; (ii) Exchange Act Section 3(a)(80)). the Exchange Act. We also note that highlighting and displaying offerings on 978 See Exchange Act Section 3(h)(1)(C). See also Exchange Act Section 3(h)(2) states that the platform; (iii) providing Securities Act Section 20 [15 U.S.C. 77t] and for purposes of sections 15(b)(8) and Exchange Act Sections 21 and 21C [15 U.S.C. 78u communication channels; (iv) providing and 78u–3]. In addition, we highlighted in the search functions; (v) advising issuers; Proposing Release that Exchange Act Sections (commonly referred to as the Bank Secrecy Act (vi) compensating others for referring 15(b)(4) and 15(b)(6) (15 U.S.C. 78o(b)(4) and (‘‘BSA’’)) [12. U.S.C. 1829b, 12 U.S.C. 1951–1959, 78o(b)(6)) apply to brokers (including funding 31 U.S.C. 5311–5330]. persons to the funding portal; (vii) portals) regardless of whether or not they are 982 See, e.g., Heritage Letter; Joinvestor Letter; paying or offering to pay compensation registered with the Commission as brokers. PeoplePowerFund Letter; RocketHub Letter. to registered brokers or dealers; (viii) Exchange Act Section 15(b)(4) authorizes the 983 See, e.g., PeoplePowerFund Letter (stating that receiving compensation from a Commission to bring administrative proceedings requiring funding portals ‘‘to register as broker against a broker when the broker violates the federal dealers thus crushing the very idea of crowd registered broker or dealer; (ix) securities laws (and for other misconduct) and sourced funding as a people driven force for the advertising the funding portal and provides for the imposition of sanctions, up to and good of the ‘everyman’ ’’). offering; (x) denying access to, or including the revocation of a broker’s registration. 984 See Vann Letter (reasoning that, because a cancelling, offerings due to fraud or Exchange Act Section 15(b)(6) provides similar funding portal is ‘‘not registered as a ‘broker investor protection concerns; (xi) enforcement authority against the persons dealer,’ ’’ and because ‘‘the Securities Exchange Act associated with a broker, including barring persons of 1934 states ‘A registered securities association accepting investment commitments on from associating with any Commission registrant. shall deny membership to any person who is not behalf of the issuer; (xii) directing the 979 See Section II.D.4. a registered broker or dealer,’ ’’ then funding portals transmission of investor funds; and 980 See Section II.D.5. cannot become members of FINRA). (xiii) directing a qualified third party’s 985 981 See 31 CFR 1010.100(h) and 1023.100(b) Id. (arguing that such requirements would be transmission of investor funds. (defining broker or dealer for purposes of the ‘‘overly burdensome’’ because funding portals ‘‘do applicability of AML requirements). See Currency not, by law, handle any money’’). and Foreign Transactions Reporting Act of 1970 986 See RocketHub Letter. 987 See Proposing Release, 78 FR 66484–66485.

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Proposed Rule 402(a) also stated that portals at a competitive disadvantage to would mitigate regulatory concerns. no presumption shall arise that a registered brokers because it did not Some commenters also suggested that funding portal has violated the provide funding portals with the the criteria used to limit offerings prohibitions under Section 3(a)(80) of flexibility to limit the offerings on their should be clearly displayed on a the Exchange Act or Regulation platforms,989 even if they have funding portal’s platform.998 Crowdfunding by reason of the funding legitimate concerns about offerings In addition, some commenters portal or its associated persons engaging aside from fraud or investor pointed to a tension in the statute under in activities in connection with the offer protection.990 For example, commenters which a funding portal is potentially or sale of securities in reliance on suggested that a funding portal should subject to liability for material Section 4(a)(6) of the Securities Act that be permitted to reject offerings based on misstatements and omissions in the do not meet the conditions specified in whatever factors the portal deems issuer’s offering materials but, at the the safe harbor, and that the antifraud appropriate without automatically same time, may be limited in its ability provisions and all other applicable triggering regulation as a broker- to deny access to its platform.999 These provisions of the federal securities laws dealer,991 especially if it deems the commenters argued that it was not continue to apply to the activities offering to have tangible shortcomings equitable for a funding portal to have described in the safe harbor. that could be detrimental to investors or such liability if it cannot determine Commenters strongly supported the overly risky.992 whether and under what circumstances idea of a safe harbor for funding Commenters asserted that a funding to permit an issuer or offering access to portals,988 but they also suggested portal’s ability to limit the offerings on its platform. additional examples for the safe harbor. its platform is important for investor We are adopting the safe harbor in Rule protection. They stated that funding (3) Final Rules 402 with certain changes as discussed portals should be permitted to screen In view of the comments, and upon further below. Each activity of the safe out clearly unprepared or ill-conceived further consideration, we are modifying harbor is addressed below. offerings,993 and should be permitted to Rule 402(b)(1) to expressly provide that limit offerings on their platforms to a. Limiting Offerings a funding portal may, consistent with issuers that are ‘‘crowdfund-ready.’’994 the prohibitions under Exchange Act (1) Proposed Rule Commenters drew a distinction between Section 3(a)(80) (including the Proposed Rule 402(b)(1) would permit the permissibility of applying internal prohibition against offering investment a funding portal to apply objective screening standards to limited offerings advice or recommendations in Section criteria to limit the securities offered in on the platform versus the prohibition 3(a)(80)(A)), determine whether and reliance on Section 4(a)(6) of the on providing investment advice or under what terms to allow an issuer to Securities Act through the funding recommendations.995 Some commenters offer and sell securities in reliance on portal’s platform where: (i) The criteria suggested that having a disclaimer that Securities Act Section 4(a)(6) through its are reasonably designed to result in a ‘‘curation’’ (or limiting offerings on a platform.1000 broad selection of issuers offering platform) does not constitute a We agree with commenters that the securities through the funding portal’s recommendation on the advisability of ability of a funding portal to determine platform, are applied consistently to all any investment displayed on the which issuers may use its platform is 996 potential issuers and offerings and are platform; or that the funding portal important for the protection of clearly displayed on the funding portal’s does not advertise or make statements investors, as well as to the viability of platform; and (ii) the criteria could that the offerings listed on its platform the funding portal industry, and thus include, among other things, the type of are safer or better investments than the crowdfunding market. We 997 securities being offered (for example, those listed on other platforms, acknowledge the concerns raised by common stock, preferred stock or debt commenters that the proposed rules 989 securities), the geographic location of See, e.g., EMKF Letter; SBA Office of could otherwise have unduly restricted the issuer and the industry or business Advocacy Letter. 990 See, e.g., ABA Letter; CfPA Letter; a funding portal’s ability to limit segment of the issuer, provided that a CrowdCheck 2 Letter; Graves Letter; Seyfarth Letter offerings conducted on its platform, and funding portal may not deny access to (stating that ‘‘even with a lower liability threshold, we are modifying the safe harbor an issuer based on the advisability of curation is an essential tool for investor contained in Rule 402(b)(1) to address investing in the issuer or its offering, protection’’). 991 See, e.g., IAC Recommendation (suggesting these concerns. Specifically, we are except to the extent described in that ‘‘[o]ne of the most cost-effective ways to reduce revising Rule 402(b)(1) to read that a proposed Rule 402(b)(10) for fraud and the risk of serious compliance violations is to give funding portal may ‘‘[d]etermine investor protection concerns. crowdfunding intermediaries a free hand to reject whether and under what terms to allow any offering they believe could pose an undue (2) Comments on Proposed Rule compliance or fraud risk’’); see also CFIRA Letter an issuer to offer and sell securities in reliance on Section 4(a)(6) of the We received a significant number of 12 (agreeing with IAC’s suggestion ‘‘that all intermediaries . . . should have greater latitude in Securities Act (15 U.S.C. 77d(a)(6)) comments on the ability of a funding their ability to curate offerings. . . . All through its platform, provided that the portal to limit the offerings on its intermediaries (including non-BD portals) should be allowed to use their discretion as to whether or funding portal otherwise complies with platform. Many of these comments Regulation Crowdfunding (§§ 227.100 et suggested a broader standard than the not any particular offering is suitable for their service’’). See also BetterInvesting Letter. se.).’’ The new language is designed to standard that we proposed. Several 992 See Graves Letter. commenters expressed concern that the 993 See EMKF Letter. 998 See, e.g., ABA Letter; CFIRA Letter 1. proposed safe harbor placed funding 994 See SBEC Letter. 999 See, e.g., CrowdCheck 2 Letter; Milken 995 See, e.g., Angel 1 Letter (‘‘Forcing portals to Institute Letter; RocketHub Letter. 988 See, e.g., CFIRA Letter 1; Joinvestor Letter; become the equivalent of common carriers that have 1000 See also Rule 402(b) (limiting permissible Merkley Letter (stating that the proposed safe to take every offering, no matter how foolish, will activities to those consistent with the prohibitions harbor ‘‘strikes the right balance’’). But see Public make crowdfunding more likely to fail.’’); under Exchange Act Section 3(a)(80)). The Startup 3 Letter (stating that the safe harbor should Consumer Federation Letter; Saunders Letter. discretion a funding portal has to limit offerings on cover any activity by a funding portal not directly 996 See, e.g., EarlyShares Letter; EMKF Letter; its platform is in addition to the requirement under related to the sale of securities for the account of SBA Office of Advocacy Letter. Rule 301 to deny access, and cancel offerings, based others). 997 See Milken Institute Letter. on fraud and investor protection concerns.

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make it clear that a funding portal may and are clearly displayed on the funding implicitly recommending securities.1012 exercise its discretion, subject to the portal’s platform; (ii) the criteria may This commenter suggested that the prohibition in the statute on providing include, among other things, the type of Commission should create a specific list investment advice or recommendations, securities being offered (for example, of acceptable objective criteria that a to limit the offerings and issuers that it common stock, preferred stock or debt funding portal may apply.1013 allows on its platform under the safe securities); the geographic location of Several commenters stated that the harbor, as long as it complies with all the issuer; the industry or business criteria used to highlight offerings other provisions of Regulation segment of the issuer; the number or should be clearly displayed on the Crowdfunding. amount of investment commitments platform.1014 However, one commenter In making this change, we recognize made, progress in meeting the issuer’s stated that algorithms should not be that the activities in which a funding target offering amount or, if applicable, required to be disclosed on the portal may engage are, by definition, far the maximum offering amount; and the platform.1015 more limited than the activities in minimum or maximum investment Several commenters suggested that which a registered broker-dealer may amount; provided that a funding portal the safe harbor should include the engage. At the same time, we believe may not highlight an issuer or offering ability of a funding portal to provide that the JOBS Act established an based on the advisability of investing in mechanisms by which investors can rate important role for intermediaries, both the issuer or its offering; and (iii) the an issuer or an offering, which then broker-dealers and funding portals, to funding portal does not receive special could be highlighted on the play in crowdfunding offerings. While or additional compensations for platform.1016 However, one of these we are providing funding portals with highlighting one or more issuers or commenters stated that any such rating broad discretion to determine whether offerings on its platform. must be mathematical rather than value- and under what circumstances to allow driven or it would amount to (2) Comments on Proposed Rule 1017 an issuer to offer and sell securities ‘‘enticement.’’ Several commenters suggested through its platform in reliance on (3) Final Rules Section 4(a)(6) of the Securities Act (15 additional criteria for the safe harbor, After considering the comments, we U.S.C. 77d(a)(6)), a funding portal must including for example: (i) How long the are adopting Rule 402(b)(2) as proposed. comply with all applicable provisions of issuer has been operational or 1001 Specifically, Rule 402(b)(2) allows a Regulation Crowdfunding, including the profitable; (ii) historical and funding portal to highlight particular prohibition on providing investment projected revenue and earnings before issuers or offerings of securities made in advice or recommendations. In this interest, taxes, depreciation and 1002 reliance on Section 4(a)(6) on its regard and as more fully discussed amortization (EBITDA); (iii) the size 1003 platform based on objective criteria below, among other things, a funding of the issuer’s management team; (iv) relevant experience and length of where the criteria are reasonably portal cannot advertise, make designed to highlight a broad selection statements or otherwise represent that experience of the issuer’s management;1004 (v) the type of of issuers offering securities through the the offerings listed on its platform are corporate structure of the issuer;1005 (vi) funding portal’s platform, are applied safer or better investments than those the stage and operating history of the consistently to all issuers and offerings listed on other platforms. Given this issuer; 1006 (vii) valuation and are clearly displayed on the funding statutory restriction, we are not, as some methodology; 1007 (viii) results of portal’s platform. Consistent with the commenters suggested, requiring a securities and background checks;1008 proposal, the final rule specifies in funding portal to provide a disclaimer (ix) ‘‘trending’’; 1009 and (x) most money subparagraph (b)(2)(ii) that objective stating that limiting the offerings on its raised, soonest offering to close, most criteria may include, for example: The platform does not constitute investment money invested, least money invested, type of securities being offered (e.g., advice or a recommendation, nor are we or on a purely random basis (so long as common stock, preferred stock or debt requiring that its criteria for limiting none of the bases are value-driven—that securities); the geographic location of offerings on its platform be publicly is, which investment is a safer or better the issuer; the industry or business displayed. We do not believe that investment).1010 Another commenter segment of the issuer; the number or requiring a funding portal to display its questioned whether, under the safe amount of investment commitments criteria for limiting offerings on its harbor, funding portals would be made; the progress in meeting the target platform will add significant investor permitted to highlight offerings based offering amount or, if applicable, the protection. While a funding portal may on their discretion or the use of metrics, maximum offering amount; and the decide to make such criteria public, we such as topic, media coverage, or minimum or maximum investment caution that a funding portal must avoid momentum.1011 However, another amount. any appearance that it is giving commenter suggested that a funding It is important to note that the criteria investment advice or recommendations portal should not have discretion must be reasonably designed to or that the funding portal believes its regarding which objective criteria it can highlight a broad selection of issuers offerings are investment worthy. use to highlight issuers or offerings and offerings, so as not to recommend b. Highlighting Issuers and Offerings because it may result in the portal 1012 See Commonwealth of Massachusetts Letter; (1) Proposed Rule 1001 See, e.g., CFIRA Letter 1; CFIRA Letter 2. c.f. ABA Letter (requesting Commission guidance that a portal engaging in activities covered by the 1002 Id. Proposed Rule 402(b)(2) would permit safe harbor will not trigger the application of the 1003 a funding portal to apply objective Id. Investment Advisers Act). 1004 criteria to highlight offerings on the See, e.g., CFIRA Letter 2. 1013 See Commonwealth of Massachusetts Letter. 1005 funding portal’s platform where: (i) The See RocketHub Letter. See also ABA Letter (requesting explicit 1006 Id. criteria are reasonably designed to Commission guidance as to permissible criteria). 1007 Id. 1014 See, e.g., ABA Letter; CFIRA Letter 1. highlight a broad selection of issuers 1008 Id. 1015 See Joinvestor Letter. offering securities through the funding 1009 See Seyfarth Letter. 1016 See, e.g., ASSOB Letter; CFIRA Letter 1; portal’s platform, are applied 1010 See ASSOB Letter. Joinvestor Letter. consistently to all issuers and offerings 1011 See RocketHub Letter. 1017 See ASSOB Letter.

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or implicitly endorse one issuer or money being raised or size of the that the use of the word ‘‘assessment’’ offering over another, and must be offering; soonest offering to close; most in the proposed safe harbor 1024 is applied consistently to all potential or least money invested; how long the inappropriately vague when applied to issuers and offerings.1018 This issuer has been operational or technology, as it could effectively highlighting of issuers or offerings that profitable; the size of the management prohibit the use of any computational have been admitted to a funding portal’s team of the issuer; the stage and sorting algorithm using objective platform can, depending on relevant operating history of the issuer; valuation searching and sorting criteria. This facts and circumstances, involve methodology; ‘‘trending’’; earnings commenter suggested that the word providing investment advice that before interest, taxes, depreciation and ‘‘assessment’’ be substituted with the violates the prohibition on a funding amortization (EBITDA); and word ‘‘opinion,’’ and also that the term portal providing such advice. To that highlighting on a purely random basis. ‘‘objective criteria’’ be removed so that end, the rule provides a safe harbor only However, we caution that a funding the safe harbor would prohibit the use when a funding portal is using objective portal must be cognizant not to present of subjective criteria—such as the criteria and such criteria are clearly highlighted issuers in a manner that, advisability of investing or an opinion displayed on its platform to inform directly or implicitly, results in the of any characteristic of the issuer, its investors why certain issuers or provision of investment advice or business plan, its key management or offerings are being highlighted.1019 To recommendations.1021 risks associated with an investment— reiterate, a funding portal may not ‘‘generated exclusively by the portal,’’ highlight an issuer or offering based on c. Providing Search Functions excepting instances of peer review and the advisability of investing in the (1) Proposed Rule feedback generated by users.1025 issuer or offering or give the impression Proposed Rule 402(b)(3) would permit (3) Final Rules that the funding portal is providing an a funding portal to provide search After considering comments, we are implicit (or explicit) recommendation functions or other tools that investors on whether to invest in the issuer or adopting Rule 402(b)(3) substantially as can use to search, sort, or categorize the offering. proposed. The final rule permits a offerings available through the funding To help prevent conflicts of interest funding portal to provide search and incentives for funding portals to portal’s platform according to objective functions or other tools on its platform favor certain issuers over others, the criteria where: (i) The objective criteria that users could use to search, sort or final rule also prohibits a funding portal may include, among other things, the categorize available offerings according from receiving any special or additional type of securities being offered (for to objective criteria.1026 The final rule compensation for highlighting (or example, common stock, preferred stock also permits search functions that, for offering to highlight) one or more or debt securities); the geographic example, will allow an investor to sort issuers or offerings on its platform.1020 location of the issuer; the industry or through offerings based on a Although some commenters suggested business segment of the issuer; the combination of different criteria, such as that we include additional criteria in number or amount of investment by the percentage of the target offering subparagraph (b)(2)(ii), we emphasize commitments made, progress in meeting amount that has been met, geographic that the rule does not establish an the issuer’s target offering amount or, if proximity to the investor and number of exclusive list. The listed criteria are applicable, the maximum offering days remaining before the closing date intended as examples, and the safe amount; and the minimum or maximum of an offering.1027 However, the final harbor is non-exclusive. Crowdfunding investment amount; and (ii) the rule makes clear that the search criteria is a new and evolving market, and we objective criteria may not include, may not include the advisability of believe that providing principles in the among other things, the advisability of investing in the issuer or its offering, or safe harbor by which a funding portal investing in the issuer or its offering, or an assessment of any characteristic of can highlight offerings on its platform an assessment of any characteristic of the issuer, its business plan, its will provide it with the flexibility to the issuer, its business plan, its key management or risks associated with an adapt to the crowdfunding market as it management or risks associated with an investment. In this regard, we are develops while maintaining investor investment. 1024 protection. In this regard, the examples (2) Comments on Proposed Rule Rule 402(b)(3)(ii) states in part that the listed in Rule 402(b)(2)(ii) are intended ‘‘objective criteria may not include . . . an to provide guidance to funding portals Several commenters suggested that assessment of any characteristic of the issuer, its the safe harbor be broadened to include business plan, its key management or risks . . . ’’ as they develop their platform and 1025 1022 See EquityNet Letter (noting that ‘‘[a]llowing related tools. additional criteria. One commenter investors the ability to sort through each other’s Although we are not including suggested that funding portals should be comments or opinions becomes an integral part of additional criteria in Rule 402(b)(2)(ii) permitted to sort offerings based on an any site where commenting is allowed on products’’ algorithmic score that takes into account and that ‘‘[b]ecause sorting comments would at this time, we note that certain of the require a technological assessment of subjective suggested highlighting criteria are any objective numerical data that is data, we believe an explicit carve out in the safe covered by the criteria listed in the rule, reasonably likely to correlate to harbor provisions is necessary’’). such as the issuer’s industry; the type of successful investments, such as numeric 1026 See Rule 402(b)(3) Regulation Crowdfunding. ratings by accredited and unaccredited See also 158 CONG. REC. 2231 (daily ed. Mar. 29, securities being offered; and the 2012) (statement of Sen. Scott Brown) (‘‘Funding geographic location of the issuer’s investors, number of investment portals should be allowed to organize and sort business. Others, while not listed in the commitments weighted by investor information based on certain criteria. This will final rule, we believe are based on portfolio valuation, and number of page make it easier for individuals to find the types of views.1023 Another commenter stated companies in which they can potentially invest. objective criteria, such as the amount of This type of capability—commonly referred to as curation—should not constitute investment 1018 See Rule 402(b)(2) and (b)(2)(i). 1021 For example, a funding portal may provide advice.’’). 1019 Id. the EBITDA of an issuer but it cannot insinuate or 1027 See Rule 402(b)(3) of Regulation 1020 See Rule 402(b)(2)(iii) of Regulation state on its platform that the EBITDA corresponds Crowdfunding. Rule 402(b)(3)(i) provides examples Crowdfunding. This rule prohibits paid placements to the advisability of investing in an issuer. of search criteria that are consistent with those of the kind suggested by one commenter. See 1022 See, e.g., EMKF Letter; EquityNet Letter. listed in the Rule 402(b)(2)(ii) safe harbor for Earlyshares Letter. 1023 See EMKF Letter. highlighting issuers and offerings.

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making minor changes from proposed remove abusive or potentially communication and to remove abusive Rule 402(b)(3)(i) and (ii) by deleting the fraudulent communications; (ii) permits or potentially fraudulent word ‘‘objective’’ in the final rules public access to view the discussions communications. Under Rule 402(b)(4), because the term is redundant to the made in the communication channels; a funding portal must make requirement in Rule 402(b)(3) that the (iii) restricts posting of comments in the communication channels available to criteria be ‘‘objective.’’ Further, we are communication channels to those the general public and restrict the persuaded by one commenter’s persons who have opened an account on posting of comments on those channels observation that the use of the word its platform; and (iv) requires that any to those who have accounts on the objective in the subparts could be person posting a comment in the funding portal’s platform. In addition, misleading.1028 The new sentence communication channels clearly the funding portal must require each structure also makes Rule 402(b)(3) disclose with each posting whether he person posting comments to disclose consistent with Rule 402(b)(2), which or she is a founder or an employee of clearly with each posting in the channel we believe provides additional clarity an issuer engaging in promotional whether he or she is a founder or an and consistency for funding portals activities on behalf of the issuer, or is employee of an issuer engaging in when complying with the rules. otherwise compensated, whether in the promotional activities on behalf of the Rule 402(b)(3) does not preclude the past or prospectively, to promote an issuer, or is otherwise compensated or use of computational sorting algorithms issuer’s offering. will receive any compensation for using objective searching and sorting 1036 (2) Comments on Proposed Rule promoting an issuer. criteria.1029 However, a funding portal We agree with commenters that must take care not to indicate that the Several commenters supported investors should be permitted to platform’s search results or tools, permitting a funding portal to provide communicate with one other, and with directly or indirectly, correlate to communication channels on its platform representatives of the issuer, over successful investments. Likewise, we through which investors can make communication channels on the believe that the more particular, biased comments, rate issuers and provide platform provided by the funding or weighted a funding portal’s algorithm other feedback, and through which portal.1037 The communication channel or assessment is, the less likely the issuers can respond to investor 1031 is meant to strengthen and foster the criteria as a whole will be objective. comments. One of these commenters ability of the crowd to communicate. However, this does not preclude a stated that these capabilities could We believe that the capabilities within funding portal from permitting investors enable a funding portal to share with the communication channel will investors information related to issuers, with access to its communication develop and evolve over time. For capital raised by an issuer, crowd channels from rating issuers or offerings example, as noted above, a investing, or the crowd-based rating of (e.g., a star rating) on its platform or communication channel may permit specific issuers.1032 Another commenter searching such ratings, as long as a investors to rate or comment on an suggested that funding portals allow funding portal (including its associated issuer or offering, or to assign investors to assign a quantifiable persons, such as its employees) does not quantifiable indicators to one other’s 1030 indicator to each other’s comments, so participate in the rating process. comments. Also, a funding portal must that users can search out the best and make communication channels d. Providing Communication Channels worst of the comments and issuers have available for viewing by the general (1) Proposed Rule a chance to respond to investor 1033 public, and permit anyone who has Proposed Rule 402(b)(4) would comments in an open forum. One commenter recommended that opened an account on its platform to address the terms under which a post comments on the channel.1038 As funding portal could provide permission to rate issuers or offerings should only be given to investors who we stated in the Proposing Release, communication channels by which requiring investors to have accounts investors can communicate with one actually invested in or committed to invest in the offering.1034 with the funding portal before posting a another and with representatives of the comment should provide a measure of issuer through the funding portal’s (3) Final Rules control over these communications that platform about offerings conducted We are adopting, as proposed, Rule could aid in promoting accountability through the platform, as required by 402(b)(4) to address the terms under for comments made and help ensure Rule 303(c). Under the terms of Rule which a funding portal can provide that interested persons, such as those 402(b)(4) as proposed, the safe harbor communication channels by which associated with the issuer or receiving would apply so long as the funding investors can communicate with one compensation to promote the issuer, are portal (and its associated persons): (i) another and with representatives of the properly identified. Does not participate in these issuer through the funding portal’s We reiterate that while a funding communications, other than to establish platform about offerings conducted portal must provide for a guidelines for communication and through the platform, as required by communication channel and may Rule 303(c).1035 The safe harbor develop certain features or tools as a 1028 See EquityNet Letter. However, we do not specifies that a funding portal part of that channel (such as a crowd- agree with the commenter’s assertion that using the word ‘‘assessment’’ in Rule 402(b)(3) equates to a (including its associated persons, such based rating system), a funding portal prohibition on the use of computational sorting as its employees) may not participate in (including its associated persons, such algorithms using objective searching and sorting these communications, other than to as its employees) may not engage or criteria because, in this context, assessment is used establish guidelines about participate in such communications.1039 to refer to subjective criteria. 1029 In response to one commenter’s suggestion 1031 that a funding portal should be permitted to use See, e.g., CFIRA Letter 1; EquityNet Letter; 1036 See Rule 402(b)(4)(iv). algorithmic scores, the final rule does not preclude Milken Institute Letter. 1037 As discussed in Section II.C.5, an issuer, its the use of algorithms as long as the criteria used by 1032 See Milken Institute Letter. agents and promoters must identify themselves in the algorithm are objective. See EMKF Letter. Thus, 1033 See EquityNet Letter. all communications through the communication a ‘‘score’’ based on an algorithm may be used as 1034 See CFIRA Letter 1. channel. long as it does not involve subjective criteria. 1035 See Section II.C.5.b(3) for a discussion of 1038 See Rule 402(b)(4)(i) and (ii). 1030 See Rule 402(b)(4)(i). Rule 303(c). 1039 See Rule 402(b)(4)(i). See also Rule 303(c).

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In addition, a funding portal should obligations. Other examples of One commenter requested additional consider whether the tools or features of permissible assistance can include guidance as to what types of the communication channels it develops advice about the types of securities the compensation would equate to and the guidelines it establishes for the issuer can offer, the terms of those compensation based on the offer or sale channel would constitute the funding securities and the procedures and of a security.1042 The Commission and portal providing impermissible regulations associated with courts have interpreted the definition of investment advice or recommendations. crowdfunding. transaction-based compensation For example, the funding portal may not 1043 f. Paying for Referrals broadly, and whether compensation establish a guideline that permits a is transaction-based is a facts and (1) Proposed Rule person to rate an offering only if the circumstances determination. Thus, we person provides a positive rating, or Proposed Rule 402(b)(6) would permit do not believe that additional guidance otherwise incentivizes persons to give a funding portal to compensate a third is necessary or appropriate in this positive ratings. However, contrary to party for referring a person to the context. what one commenter suggested, we do funding portal, so long as the third party not believe a funding portal may limit does not provide the funding portal In response to a commenter’s inquiry, the rating capability to those account with personally identifiable information a funding portal may not pay a holders who have made investment of any investor and the compensation, registered broker-dealer a referral fee commitments to the relevant other than that paid to a registered without a written agreement under the offering.1040 We believe that limiting broker or dealer, is not based, directly safe harbor. Such an arrangement would ratings capability to persons that invest or indirectly, on the purchase or sale of be covered by Rule 402(b)(7), which is in an offering is likely to skew the a security in reliance on Section 4(a)(6) discussed below. ratings, and therefore, we would view of the Securities Act offered on or g. Compensation Arrangements With such a limitation as inappropriate. through the funding portal’s platform. Further, such a limitation could prevent Registered Broker-Dealers persons with relevant and important (2) Comment on Proposed Rule (1) Proposed Rule information about the investment from One commenter requested contributing their views to the crowd. clarification as to: (i) Whether and when Proposed Rule 402(b)(7) would permit a funding portal to pay or offer to pay e. Advising Issuers compensation paid to a non-broker- dealer will be deemed improperly based any compensation to a registered broker (1) Proposed Rule on the purchase or sale of a security; (ii) or dealer for services in connection with Proposed Rule 402(b)(5) would permit whether a funding portal may pay a the offer or sale of securities by the a funding portal to advise an issuer registered broker-dealer a referral fee funding portal in reliance on Section about the structure or content of the without a formal agreement; and (iii) 4(a)(6) of the Act, provided that: (i) Such issuer’s offering, including assisting the whether a funding portal may charge services are provided pursuant to a issuer in preparing offering issuers fees based on the success of the written agreement between the funding documentation. offering.1041 portal and the registered broker or (3) Final Rules dealer; (ii) such services and (2) Final Rules compensation are permitted under We did not receive any comments that We are adopting Rule 402(b)(6) as Regulation Crowdfunding and are not specifically addressed the ability of a proposed. Rule 402(b)(6) permits a otherwise prohibited under Rule 305; funding portal to advise issuers and are funding portal to compensate a third and (iii) such compensation complies adopting Rule 402(b)(5) as proposed. party for referring a person to the with and is not prohibited by the rules The rule permits a funding portal to funding portal if the third party does not of any registered national securities provide the funding portal with advise an issuer about the structure or association of which the funding portal personally identifiable information content of the issuer’s offering, is required to be a member. including preparing offering about any investor and the documentation. We believe funding compensation, other than that paid to a Proposed Rule 402(b)(8) would permit portals will be in a position to provide registered broker or dealer, is not based, a funding portal to receive any experience and assistance to issuers directly or indirectly, on the purchase or compensation from a registered broker relatively efficiently, and should be able sale of a security in reliance on Section or dealer for services provided by the to leverage their expertise to increase 4(a)(6) of the Securities Act offered on funding portal in connection with the the viability of crowdfunding. or through the funding portal’s platform. offer or sale of securities by the funding We believe that funding portals, as We believe the safe harbor in this regard portal in reliance on Section 4(a)(6) of well as broker-dealers, should be addresses the prohibition in Rule 305 the Act, provided that: (i) Such services permitted to provide certain services to against an intermediary compensating are provided pursuant to a written issuers to facilitate the offer and sale of any person for providing the agreement between the funding portal securities in reliance on Section 4(a)(6). intermediary with the personally and the registered broker or dealer; (ii) Without these services, crowdfunding as identifiable information of any investor such compensation is permitted under a method to raise capital might not be in securities offered and sold in reliance Regulation Crowdfunding; and (iii) such viable. Rule 404(b)(5) permits funding on Section 4(a)(6). We also believe that compensation complies with and is not portals to advise an issuer about the Rule 402(b)(6)’s prohibition on funding prohibited by the rules of any registered structure and content of the issuer’s portals paying transaction-based national securities association of which offering in a number of ways. A funding compensation to third parties, other the funding portal is required to be a portal can, for example, provide pre- than that paid to a registered broker or member. drafted templates or forms for an issuer dealer, will help to minimize the incentive for high-pressure sales tactics to use in its offering that will help it 1042 Id. comply with its proposed disclosure and other abusive practices in this area. 1043 See, e.g., Applicability of Broker-Dealer Registration to Banks, Exchange Act Rel. No. 20,357 1040 See CFIRA Letter 1. 1041 See ABA Letter. at n.14 (Nov. 8, 1983).

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(2) Comments on Proposed Rule otherwise prohibited under § 227.305’’; permit a funding portal to receive Several commenters expressed and subparagraph (b)(7)(iii) stated ‘‘such transaction-based compensation for concerns about the permitted compensation complies with and is not referrals of investors in other types of relationships between funding portals prohibited by-the rules of any registered offerings, such as Rule 506 offerings, and broker-dealers.1044 One of these national securities association of which that are effected by a registered broker- the funding portal is required to be a 1047 commenters stated that the proposed dealer. Further, these arrangements member.’’ We are deleting the phrases safe harbor is ‘‘overly broad’’ and must be compliant with Rule 305, ‘‘and is not otherwise prohibited under creates ‘‘unmanageable conflicts which prohibits, with certain § 227.305’’ and ‘‘and is not prohibited between funding portals and broker exceptions, an intermediary from by’’ to make the language in Rule dealers,’’ and suggested the Commission compensating any person for providing 402(b)(7) and Rule 402(b)(8) consistent, prevent these conflicts by prohibiting the intermediary with the personally and because the phrases are redundant. funding portals from paying broker- identifiable information of any Also, we are deleting the phrase 1048 dealers any type of compensation in investor. As we stated in the ‘‘required to be a member’’ and connection with the offer or sale of Proposing Release, the safe harbor is replacing it with ‘‘is a member’’ in securities under the crowdfunding intended to facilitate intermediaries’ 1045 recognition of the fact that additional cooperation with each other and exemption. Another of these national securities associations may commenters suggested that the promote the use of the Section 4(a)(6) exist in the future and that a funding exemption to raise capital, while Commission require relationships portal would only have to be a member between funding portals and brokers to maintaining a written record of of one such association. compensation payments. be arms-length and, if they are not, Consistent with Rule 402(b)(7), a require that the funding portal activity We disagree with the commenter who funding portal may, for example, pay a suggested that Rules 402(b)(7) and (8) be operated by the broker-dealer broker-dealer for certain services, such entity.1046 create an unmanageable conflict as information technology services, between funding portals and broker- (3) Final Rules qualified third party services or referral dealers.1049 We believe that any services, pursuant to a written We are adopting Rule 402(b)(7) potential conflict of interest between agreement. Each party to this type of broker-dealers and funding portals as a generally as proposed, but with minor arrangement will need to comply with modifications for clarity and result of compensation arrangements is all applicable regulations, including the mitigated due to the fact that both consistency. Rule 402(b)(7) specifies rules of the registered national securities that a funding portal may pay or offer entities are registered with the association of which it is a member. Commission and members of FINRA to pay compensation to a registered Similarly, we are adopting Rule and because permissible activities under broker or dealer for services, including 402(b)(8) as proposed with minor Rule 402(b)(7) and (8) are limited by for referring a person to the funding modifications. Rule 402(b)(8) permits a Regulation Crowdfunding. We also are portal, in connection with the offer or funding portal to provide services to, not prohibiting a registered broker- sale of securities by the funding portal and receive compensation from, a dealer and a registered funding portal in reliance on Section 4(a)(6) of the registered broker-dealer in connection from being affiliated, nor are we Securities Act, provided that (i) such with the funding portal’s offer or sale of requiring that any crowdfunding services are provided pursuant to a securities in reliance on Section 4(a)(6), operation be performed by the registered written agreement between the funding provided that: (i) Such services are broker-dealer in such an affiliation.1050 portal and the registered broker or provided pursuant to a written dealer; (ii) such compensation is agreement between the funding portal Because funding portals and broker- permitted under Regulation and the registered broker or dealer; (ii) dealers are each registered with the Crowdfunding; and (iii) such such compensation is permitted under Commission and required to be compensation complies with the rules Regulation Crowdfunding; and (iii) such members of a registered national of any registered national securities compensation complies with the rules securities association with the attendant association of which the funding portal of any registered national securities rules and oversight, we believe concerns is a member. As discussed above, association of which the funding portal about conflicts of interests among proposed Rule 402(b)(7) did not contain is a member. The proposed rules had affiliated funding portals and broker- a reference to ‘‘referrals,’’ while stated that ‘‘such compensation dealers are sufficiently mitigated by this proposed Rule 402(b)(6) included the complies with and is not prohibited by regulatory framework. language ‘‘for referring a person to the the rules of any registered national While a commenter questioned funding portal.’’ We have added a securities association of which the whether a funding portal may pay reference to ‘‘referrals pursuant to [Rule funding portal is required to be a introducing brokers a fee for referring 402](b)(7)’’ to make clear that all member.’’ For the reasons discussed persons to the funding portal without a 1051 payment arrangements with a broker- above with regard to Rule 402(b)(7)(ii), formal written arrangement, we dealer, including paying a broker-dealer we are deleting the phrase ‘‘and is not emphasize that Rule 402(b)(7) requires for referrals as permitted under prohibited’’ because it is redundant and all such arrangements to be in writing. subparagraph (b)(6), must be in writing. deleting the phrase ‘‘required to be a Proposed Rule 402(b)(7)(ii) had also member’’ and replacing it with ‘‘is a 1047 Receipt of transaction-based compensation in connection with such referrals can cause a funding stated that ‘‘such compensation is member.’’ portal to be a broker required to register with us permitted under this part and is not Pursuant to Rule 402(b)(8), a funding under Exchange Act Section 15(a)(1) (15 U.S.C. portal may receive compensation, 78o(a)(1)). 1044 See, e.g., Commonwealth of Massachusetts including transaction-based 1048 See Section II.C.7 (discussing Rule 305). Letter; RocketHub Letter. compensation, from a broker-dealer for 1049 See Commonwealth of Massachusetts Letter. 1045 See Commonwealth of Massachusetts Letter. providing referrals to that broker-dealer 1050 See RocketHub Letter (expressing concern 1046 See RocketHub Letter (expressing concern over broker-dealers creating entities that would over broker-dealers creating entities that would relating to an offering made pursuant to register as funding portals, so as to evade FINRA register as funding portals so as to evade FINRA Section 4(a)(6). It is important to oversight as a broker-dealer). oversight as a broker-dealer). emphasize that the safe harbor does not 1051 See ABA Letter.

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h. Advertising offerings,’’ stating that such a limitation interest by investors, as measured by ‘‘would be overly restrictive.’’ 1056 number or amount of investment (1) Proposed Rule In contrast, one commenter stated commitments made, progress in meeting Proposed Rule 402(b)(9) would permit that, while funding portals should be the issuer’s target offering amount or, if a funding portal to advertise the allowed to advertise, funding portals applicable, the maximum offering existence of the funding portal and should not be able to display specific amount; and the minimum or maximum identify one or more issuers or offerings issuers in their advertising investment amount; and (iii) the available on the portal on the basis of materials.1057 This commenter stated funding portal does not receive special objective criteria, as long as: (i) The that ‘‘[t]he concern with displaying or additional compensation for criteria are reasonably designed to individual issuers is that investors will identifying the issuer or offering in this identify a broad selection of issuers interpret this as a recommendation and manner. However, a funding portal may offering securities through the funding endorsement of the issuer.’’ 1058 The not base its decision as to which issuers portal’s platform and are applied commenter noted that the prohibition to include in its advertisements on consistently to all potential issuers and on providing recommendations can be whether it has a financial interest in the offerings; (ii) the criteria may include, easily circumvented by manipulating issuer,, and any advertising may not among other things, the type of otherwise seemingly objective criteria, directly or indirectly favor issuers in securities being offered (for example, and that funding portals could advertise which the funding portal has invested common stock, preferred stock or debt offerings based on certain criteria, such or will invest. securities); the geographic location of as high target offerings, that may After considering the comment letters, the issuer; the industry or business generate more money for the funding we believe that the requirements of the segment of the issuer; the expressed portal (i.e., a funding portal can mask safe harbor, including the requirement interest by investors, as measured by self-interest by using objective for objective criteria designed to result 1059 number or amount of investment criteria). This same commenter in a broad selection of highlighted commitments made, progress in meeting suggested that the Commission could issuers or offerings, will result in the issuer’s target offering amount or, if allow descriptions of the portals advertisements that are focused on the applicable, the maximum offering themselves and the specific business funding portal itself, as opposed to amount; and the minimum or maximum segments featured on their Web sites, recommending a particular offering or 1063 investment amount; and (iii) the without mentioning specific issuers offerings. Funding portals continue 1060 funding portal does not receive special currently registered with the portal. to be subject to the statutory prohibition or additional compensation for One commenter suggested the on providing investment advice and 1064 identifying the issuer or offering in this Commission clarify that it would be recommendations. An advertisement manner. inappropriate for a funding portal to by a funding portal must not be an send out soliciting emails implicit (or explicit) recommendation as (2) Comments on Proposed Rule recommending investment in particular to whether to invest in the issuer or companies to investors who have signed offering or advice on the advisability of Several commenters supported the up with that portal.1061 Another investing in the issuer or offering. proposed safe harbor on funding portal 1052 commenter stated that a funding portal Therefore, consistent with the views of advertising. However, commenters should not be permitted to advertise or one commenter, a funding portal may were divided on whether funding otherwise make statements that not advertise in such a way that portals should be permitted to advertise offerings listed are somehow safer or expresses the funding portal’s view that, current offerings and issuers in their better than other platforms.1062 for example, certain offerings on its advertisements. One commenter was platform are of a higher quality, safer or (3) Final Rules supportive of allowing funding portals more worthy than others, or that to ‘‘advertise more generally, as well as We are adopting Rule 402(b)(9) as otherwise gives a recommendation.1065 highlight ongoing offerings through proposed. Rule 402(b)(9) permits a 1053 We recognize that advertisements can various communication channels.’’ funding portal to advertise its existence take many varied forms, including non- The same commenter stated that a and identify one or more issuers or traditional means, such as blogs, emails portal’s decision to feature or highlight offerings available on the portal on the through social media or other methods. issues available should not be viewed basis of objective criteria, as long as: (i) We believe that these types of by the Commission as investment The criteria are reasonably designed to communications, when made by a advice, a recommendation, or a identify a broad selection of issuers 1054 funding portal to investors can be a solicitation. This commenter offering securities through the funding permissible means of advertising within nonetheless cautioned that ‘‘[p]ortals portal’s platform and are applied the scope of Rule 402(b)(9). We agree, should be barred from language that consistently to all potential issuers and however, with a commenter’s statement implicates the level of risk involved in offerings; (ii) the criteria may include, that it would be inconsistent with the the investment or the overall quality of among other things, the type of statutory prohibition on providing the investment opportunity’’ as well as securities being offered (for example, investment advice or recommendations ‘‘from soliciting investments for any common stock, preferred stock or debt for a funding portal to send out specific campaign by providing offering securities); the geographic location of 1055 soliciting emails recommending details outside of the Portal itself.’’ the issuer; the industry or business investments in particular companies as Another commentator expressed segment of the issuer; the expressed part of its advertising.1066 opposition to ‘‘a limitation on the funding portal to only advertise its past 1056 See CFIRA Letter 1. 1063 The safe harbor is limited to identifying one 1057 See Commonwealth of Massachusetts Letter. or more issuers. More detailed information about an 1052 See, e.g., CFIRA Letter 1; Commonwealth of 1058 Id. issuer should be provided on the funding portal’s Massachusetts Letter; ABA Letter. 1059 Id. platform. 1053 See RocketHub Letter. 1060 Id. 1064 See Exchange Act Section 3(a)(80)(A). 1054 Id. 1061 See ABA Letter. 1065 See Milken Institute Letter. 1055 Id. 1062 See Milken Institute Letter. 1066 See ABA Letter.

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i. Deny Access to Platform 402(b)(10) is consistent with the not broadening the safe harbor to permit (1) Proposed Rule modifications that we made to the funding portals to handle customer standard in Rule 301(c)(2).1069 We funds, as suggested by one commenter. Proposed Rule 402(b)(10) would believe this change also should help to Although we recognize that the permit a funding portal to deny access address commenters’ concerns about the requirement to use a third party entity to its platform to, or cancel an offering perceived lack of specificity in the to handle customer funds imposes an of, an issuer that the funding portal proposed safe harbor by providing an additional expense on a funding portal, believes may present the potential for objective ‘‘reasonable belief’’ standard Exchange Act Section 3(a)(80)(D) fraud or otherwise raises investor for the required determinations. Under explicitly prohibits funding portals from protection concerns. this standard a funding portal may not handling customer funds and securities. (2) Comments on Proposed Rule ignore facts about an issuer that indicate Similarly, we believe it would be fraud or investor protection concerns inconsistent with the statute for a Some commenters asserted that the such that a reasonable person would funding portal to facilitate a securities proposed rules are ambiguous, and that have denied access to the platform. At registration system for issuers and the lack of specificity exposes funding the same time, a funding portal can also investors because such activity portals to potential liability. The feel assured in its decision to deny an implicitly requires funding portals to commenters were concerned that the issuer access or cancel an offering if it handle customer funds and securities, perceived lack of specificity may also has a reasonable basis for such a which is prohibited by the statute. In lead funding portals to unintentionally determination. We also believe that this regard, we note that the activities violate the ban on providing investment including a ‘‘reasonable basis’’ standard that a funding portal is permitted to advice with their attempts to mitigate adds objectivity to a funding portal’s engage in are limited in scope, and as liability.1067 determinations regarding which issuers such are subject to a more limited (3) Final Rules must be denied access to (or removed regulatory scheme as compared to We are adopting Rule 402(b)(10) from) its platform, which is expected to registered broker-dealers. substantially as proposed with help to address concerns regarding the k. Directing Transmission of Funds modifications to make it consistent with clarity of the standard under the (1) Proposed Rule Rule 301(c)(2), which requires an proposed rule. intermediary to deny access if it has a j. Accepting Investor Commitments Proposed Rule 402(b)(12) would reasonable basis for believing that the permit a funding portal to direct issuer or the offering presents the (1) Proposed Rule investors where to transmit funds or potential for fraud or otherwise raises Proposed Rule 402(b)(11) would remit payment in connection with the concerns about investor protection.1068 permit a funding portal to accept, on purchase of securities offered and sold In satisfying this requirement, an behalf of an issuer, an investment in reliance on Section 4(a)(6) of the intermediary must deny access if it commitment for securities offered in Securities Act. reasonably believes that it is unable to reliance on Section 4(a)(6) of the Proposed Rule 402(b)(13) would adequately or effectively assess the risk Securities Act by that issuer on the permit a funding portal to direct a of fraud of the issuer or its potential funding portal’s platform. qualified third party, as required by offering. In addition, if an intermediary Rule 303(e), to release proceeds to an (2) Comments on Proposed Rule becomes aware of information after it issuer upon completion of a has granted access that causes it to One commenter noted that the statute crowdfunding offering or to return reasonably believe that the issuer or the prohibits funding portals from handling proceeds to investors in the event an offering presents the potential for fraud investor funds or securities, and that the investment commitment or an offering or otherwise raises concerns about proposed rule requiring the use of third- is cancelled. investor protection, the intermediary party entities would create additional (2) Final Rules must promptly remove the offering from transaction costs for funding portals.1070 We did not receive comments on the its platform, cancel the offering, and Another commenter stated that the safe ability of a funding portal to direct return (or, for funding portals, direct the harbor for accepting investor investment funds and are adopting return of) any funds that have been commitments should permit a funding Rules 402(b)(12) and (13) as proposed. committed by investors in the offering. portal to assist issuers in handling a Rules 402(b)(12) and (13) provide that a Rule 402(b)(10) requires a funding direct registration system (DRS) between issuers and investors.1071 funding portal can fulfill its obligations portal to deny access to its platform to, with respect to the maintenance and or cancel an offering of an issuer, (3) Final Rules transmission of funds and securities, as pursuant to Rule 301(c)(2), if the set forth in Rule 303, without violating funding portal has a reasonable basis for We are adopting Rule 402(b)(11) as proposed. Rule 402(b)(11) permits a the prohibition in Exchange Act Section believing that the issuer or the offering 3(a)(80)(D). Specifically, a funding presents the potential for fraud or funding portal, on behalf of an issuer, to accept investment commitments from portal can direct investors where to otherwise raises concerns. transmit funds or remit payment in We changed the standard in Rule investors for securities offered in connection with the purchase of 402(b)(10) to a ‘‘reasonable basis for reliance on Section 4(a)(6) by that issuer securities offered and sold in reliance believing’’—rather than ‘‘believes’’—to on the funding portal’s platform. We are on Section 4(a)(6),1072 and as required conform the safe harbor to the 1069 by Rule 303(e), a funding portal can requirements of Rule 301(c)(2) as See Section II.C.3. 1070 See Stephenson, et al., Letter. direct a qualified third party to release adopted. Thus, the standard in Rule 1071 See RocketHub (suggesting that a portal the proceeds of an offering to the issuer should be permitted to provide DRS support to upon completion of the offering or to 1067 See, e.g., RocketHub Letter and Seyfarth issuers and investors). A DRS allows investors to Letter. transfer a security that is registered in the investor’s return investor proceeds when an 1068 See Section II.C.3 discussing the change to name on the issuer’s books, and either the company Rule 301(c) to include a ‘‘reasonable basis’’ or its transfer agent holds the security for the 1072 See Rule 402(b)(12) of Regulation standard. investor in book-entry form. Crowdfunding.

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investment commitment or offering is continue to apply to the activities a funding portal’s policies and cancelled.1073 described in the safe harbor. procedures should be disclosed within 30 days and publicly announced.1081 l. Posting News (2) Final Rules Yet another commenter suggested In the Proposing Release, we asked We did not receive any comments on requiring the SRO to mandate that whether we should adopt a safe harbor the proposed ‘‘no presumption’’ and broker-dealers and funding portals that permits a funding portal to post anti-fraud provisions and are adopting follow the same policies.1082 news, such as market news and news Rule 402(a) as proposed. We also (3) Final Rules about a particular issuer or industry, on reiterate that Rule 402(b) is a non- its platform. In response to our request exclusive safe harbor. Rule 402(a) We are adopting Rule 403(a) as for comment, some commenters stated expressly provides that the failure of a proposed. We believe that the that the safe harbor should permit funding portal to meet the conditions of requirement to implement written funding portals to post third party news the safe harbor does not give rise to a policies and procedures will provide related to issuers or offerings on their presumption that the funding portal is important investor protections as it will platform.1074 One commenter cautioned in violation of the statutory prohibitions necessitate that funding portals remain that objective criteria should be used to of Exchange Act Section 3(a)(80) or aware of the various regulatory ensure, for example, that funding Regulation Crowdfunding.1077 requirements to which they are subject portals are not picking out the most Further, the safe harbor under Rule and take appropriate steps for flattering or positive news.1075 Another 402 does not prohibit funding portals complying with such requirements. We commenter suggested that funding from engaging third party service recognize, however, that funding portals portals should be aware of the content providers to assist the funding portal in may have various business models and, of materials posted on their portal and operating its platform, such as providers therefore, consistent with the views of held responsible for inappropriate of software, Web site maintenance and one commenter, we are not imposing information that is posted.1076 development, communication channel specific requirements for a funding While we believe it is possible for applications, recordkeeping systems, portal’s policies and procedures, funding portals to post news on their and other technology.1078 However, the provided the policies and procedures platforms in a manner that would not funding portal remains responsible for are reasonably designed to achieve violate the prohibitions in Exchange Act its activities and the operation of its compliance with the federal securities Section 3(a)(80), we are not including platform and for compliance with laws and the rules relating to their such activities within the safe harbor Regulation Crowdfunding and other business as funding portals. Rather, we because we believe the permissibility of applicable federal securities laws. are providing a funding portal with discretion to establish, implement, posting news should be a facts and 4. Compliance circumstances determination. When maintain and enforce its policies and posting news, funding portals will need a. Policies and Procedures procedures based on its relevant facts to ensure that they do not violate the (1) Proposed Rule and circumstances. We note, however, that a funding prohibition on giving investment advice As proposed, Rule 403(a) would and recommendations. For example, if a portal may rely on the representations of require a funding portal to implement others when meeting certain funding portal selectively determines written policies and procedures which news articles to post or posts requirements under Regulation reasonably designed to achieve Crowdfunding, unless the funding only flattering or positive news, then the compliance with the federal securities funding portal is more likely to be portal has reason to question the laws and the rules and regulations reliability of those representations. For giving impermissible investment advice thereunder, relating to its business as a or recommendations. example, a funding portal may rely on funding portal.1079 an issuer’s representation to establish a m. No Presumption and Anti-Fraud (2) Comments on the Proposed Rules reasonable basis for believing that an Provisions issuer seeking to offer and sell securities One commenter agreed that the (1) Proposed Rule in reliance on Section 4(a)(6) through its Commission should not specify platform complies with the Proposed Rule 402(a) also stated that requirements for a funding portal’s requirements in Securities Act Section no presumption shall arise that a policies and procedures, while another 4A(b) and the related requirements in funding portal has violated the commenter thought the Commission Regulation Crowdfunding, unless the prohibitions under Section 3(a)(80) of should provide guidance concerning the 1080 funding portal has reason to question the Exchange Act or Regulation policies and procedures. Another the reliability of that representation.1083 Crowdfunding by reason of the funding commenter suggested that all changes to A funding portal may also rely on an portal or its associated persons engaging investor’s representation to establish a 1077 in activities in connection with the offer See Rule 402(a) of Regulation Crowdfunding. reasonable basis for believing that an or sale of securities in reliance on 1078 One commenter asked whether funding portals could engage third party service providers investor satisfies the investment limits Section 4(a)(6) of the Securities Act that consistent with Regulation Crowdfunding. See established by Section 4(a)(6)(B), unless do not meet the conditions specified in CFIRA Letter 1. the funding portal has reason to the safe harbor and that the antifraud 1079 As a condition to exempting funding portals question the reliability of that provisions and all other applicable from the requirement to register as a broker or a representation.1084 We believe that provisions of the federal securities laws dealer under Exchange Act Section 15(a)(1) (15 U.S.C. 78o(a)(1)), Exchange Act Section 3(h)(1)(C) when a funding portal relies on the provides that registered funding portals must representations of others to form a 1073 See Rule 402(b)(13) of Regulation comply with such other requirements as the reasonable basis, the funding portal Crowdfunding. Commission determines appropriate. 1074 See, e.g., CFIRA Letter 1; RoC Letter; 1080 See ASSOB Letter; Consumer Federation of 1081 StartupValley Letter. But see Joinvestor Letter; America (‘‘[The Commission] fails to address at all See Joinvestor Letter. Wefunder Letter. the areas that should be covered by such policies 1082 See Rockethub Letter. 1075 See CFIRA Letter 1. and procedures, or what a funding portal’s 1083 See Rule 301(a). 1076 See RoC Letter. responsibilities to monitor compliance would be.’’). 1084 See Rule 303(b)(1).

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should have policies and procedures Chapter X of Title 31 of the Code of (2) Comments on the Proposed Rule regarding under what circumstances it Federal Regulations. The BSA and its A few commenters generally can reasonably rely on such implementing regulations establish the suggested that since funding portals are representations and when additional basic framework for AML obligations prohibited from handling customer investigative steps may be appropriate. imposed on financial institutions.1089 funds and securities they should not be We further believe that a funding The BSA is intended to facilitate the required to comply with AML portal’s policies and procedures should prevention, detection and prosecution provisions.1095 Some commenters, cover not only permitted activities, but of money laundering, terrorist financing however, generally supported requiring also address prohibited activities. For and other financial crimes. funding portals to comply with AML example, a funding portal should have Among other things, the BSA and its provisions.1096 One commenter, noting policies and procedures on the criteria that non-U.S. investors may participate used to limit, highlight and advertise implementing regulations require a ‘‘broker or dealer in securities’’ in crowdfunding and use U.S.-based issuers and offerings. funding portals, requested that the We note one commenter’s suggestion (sometimes referred to in the regulations Commission provide advice and that we require funding portals to as a ‘‘broker-dealer’’) to: (1) Establish suggestions on ‘‘how to prevent anti- update their policies and procedures to and maintain an effective AML money laundering.’’ 1097 reflect changes in applicable rules and program;1090 (2) establish and maintain regulations within a specified time a Customer Identification Program; 1091 (3) Final Rules period after the change occurs. (3) monitor for and file reports of Upon further consideration, we have 1092 However, as explained in the Proposing suspicious activity (SARs); and (4) determined not to adopt proposed Rule Release, we believe that the requirement comply with requests for information 403(b). The BSA requirements play a for reasonably designed policies and from the Financial Crimes Enforcement critical role in detecting, preventing, procedures includes an ongoing Network (‘‘FinCEN’’).1093 For purposes and reporting money laundering and obligation for a funding portal to of the BSA obligations, a ‘‘broker or other illicit financing, such as market promptly update its policies and dealer in securities’’ is defined as a manipulation and fraud. However, after procedures if necessary to reflect ‘‘broker or dealer in securities, careful consideration, we believe that changes in applicable rules and registered or required to be registered AML obligations for funding portals are regulations, a funding portal’s business with the Securities and Exchange better addressed outside of the rules that practices, and/or the marketplace.1085 Commission under the Securities we are currently adopting in this Finally, in response to one commenter’s Exchange Act of 1934, except persons release, and that it would be more suggestion that we require SROs to who register pursuant to [S]ection appropriate to work with other mandate that broker-dealers and 15(b)(11) of the Securities Exchange Act regulators to develop consistent and funding portals follow the same 1094 effective AML obligations for funding policies, as noted above, we believe that of 1934.’’ As explained above, portals.1098 We note, however, that funding portals should have flexibility Exchange Act Section 3(h) expressly broker-dealers continue to have their to implement policies and procedures directs the Commission, conditionally own AML obligations, as do certain suited to their own facts and or unconditionally, to exempt funding other parties involved in transactions circumstances. Moreover, we note that portals from the requirement to register any proposed SRO rules relating to as a broker or dealer under Section 15(a). As such, a funding portal is not 1095 See PeoplePowerFund Letter; Public Startup policies and procedures of either broker- 3 Letter; RFPIA Letter; Vann Letter. dealers or funding portals will be a broker ‘‘registered or required to be 1096 See RocketHub Letter (stating that it subject to the Exchange Act Section registered’’ if it registers as a funding ‘‘supports the Commissions [sic] interpretation of 19(b) SRO rule filing process.1086 portal with the Commission. We the exemption, and believes that AML compliance Commission staff expects to review proposed that, notwithstanding this is necessary’’); Berlingeri Letter (supporting funding portal ‘‘compliance with existing anti-money intermediaries’ compliance policies and exemption from broker registration, laundering provisions and the requirement to report procedures relating to their activities in under Rule 401(b) a funding portal suspicious activity’’). connection with the offer or sale of would be ‘‘required to be registered’’ as 1097 See Zhang Letter. securities in reliance on Section 4(a)(6) a broker or dealer with the Commission 1098 FinCEN within the Department of Treasury during the study of the federal has primary regulatory responsibility for under the Exchange Act solely for administering the BSA. We note that FinCEN has crowdfunding exemption that it plans to purposes of Chapter X of Title 31 of the included in the Unified Agenda and Regulatory undertake no later than three years Code of Federal Regulations, thus Plan an item that states: ‘‘FinCEN . . . is proposing following the effective date of subjecting funding portals to the AML amendments to the regulatory definitions of ‘broker Regulation Crowdfunding.1087 or dealer in securities’ under the regulations requirements of Chapter X of Title 31. implementing the Bank Secrecy Act. The proposed b. Anti-Money Laundering changes are intended to expand the current scope 1089 See BSA, note 981; 31 CFR Chapter X. of the definitions to include funding portals. In addition, these amendments would require funding (1) Proposed Rule 1090 See 31 U.S.C. 5318(h). See also 31 CFR portals to implement policies and procedures 1023.210; FINRA Rule 3310. Proposed Rule 403(b) would require reasonably designed to achieve compliance with all 1091 that funding portals comply with certain See 31 CFR 1023.220. of the Bank Secrecy Act requirements that are AML provisions,1088 as set forth in 1092 See 31 CFR 1023.320. See also FINRA Rule currently applicable to brokers or dealers in 3310. securities.’’ See Office of Mgmt. & Budget, Exec. 1093 See 31 CFR 1010.520. Office of the President, Office of Info. & Regulatory 1085 Consistent with our requirements for broker- 1094 See 31 CFR 1010.100(h). As noted above, Affairs, Amendments of the Definition of Broker or dealers, we are not requiring that a funding portal’s certain FinCEN regulations apply to a ‘‘broker- Dealer in Securities, RIN 1506–AB29, available at policies and procedures be made public, as dealer,’’ which is defined as a ‘‘person registered or http://www.reginfo.gov/public/do/eAgendaView suggested by a commenter. required to be registered as a broker or dealer with Rule?pubId=201504&RIN=1506-AB29. In addition, 1086 Pursuant to Exchange Act Section 19(b) and the Commission under the Securities Exchange Act the Commission has adopted its own rules that Rule 19b–4, SROs are required to file proposed new of 1934 (15 U.S.C. 77a et seq.), except persons who require broker-dealers to comply with certain rules and rule changes with the Commission. register pursuant to 15 U.S.C. 78o(b)(11).’’ 31 CFR requirements of the BSA’s implementing 1087 See Section II. 1023.100(b). Such broker-dealers also would meet regulations, such as books and records 1088 See also Section II.D.2. (discussing proposed the definition of ‘‘broker or dealers in securities’’ requirements. See Exchange Act Rule 17a–8. See Rule 401(b)). above. also Section II.D.5.

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conducted pursuant to Section 4(a)(6), prevent and mitigate identity theft in aspect of our oversight function of such as a bank acting as a qualified third connection with certain existing funding portals as they will assist us in party to hold investor funds. accounts or the opening of new monitoring the activities of funding accounts.1105 portals in light of applicable statutory c. Privacy and regulatory requirements. Therefore, (2) Comments and Final Rules (1) Proposed Rule we are adopting Rule 403(c) to Section 4A(a)(9) of the Securities Act We are adopting Rule 403(c) as implement the statute and retain proposed, but renumbering it as Rule requires intermediaries to take such examination authority over funding 403(b).1106 One commenter opposed steps to protect the privacy of portals. Proposed Rule 403(c), which would information collected from investors as impose the Privacy Rules on funding 5. Records To Be Created and the Commission shall, by rule, portals, stating that in its view, funding Maintained by Funding Portals determine appropriate. Proposed Rule portals do not raise privacy a. Proposed Rule 403(c) would implement the concerns.1107 We disagree. We believe requirements of Section 4A(a)(9) by As proposed, Rule 404(a) would that privacy is a concern as it relates to subjecting funding portals to the same require funding portals to make and funding portals given that funding privacy rules as those applicable to preserve certain records for five years, portals will collect and maintain brokers. Proposed Rule 403(c), therefore, with the records retained in a readily sensitive personal information about the would have required funding portals to accessible place for at least the first two investors using their platforms. comply with Regulation S–P (Privacy of years. The required records would Consumer Financial Information and d. Inspections and Examinations include the following: 1099 • All records relating to investors Safeguarding Personal Information), (1) Proposed Rule Regulation S–AM (Limitations on who purchase or attempt to purchase Affiliate Marketing),1100 and Regulation Exchange Act Section 3(h)(1)(A) securities through the funding 1110 1101 specifies that funding portals must portal; S–ID (Identity Theft Red Flags) • (collectively, the ‘‘Privacy Rules’’).1102 remain subject to our examination All records relating to issuers that Regulation S–P governs the treatment authority to, among other things, rely on offer and sell, or attempt to offer and of nonpublic personal information by any exemptions from broker-dealer sell, securities through the funding brokers, among others.1103 It generally registration that we impose. Under portal and to persons having control proposed Rule 403(d) of Regulation with respect to those issuers; requires a broker to provide notice to • investors about its privacy policies and Crowdfunding, a funding portal would Records of all communications that practices; describes the conditions be required to permit the examination occur on or through its platform; • All records related to persons that under which a broker may disclose and inspection of all of its business and use communication services provided nonpublic personal information about business operations that relate to its by a funding portal to promote an investors to nonaffiliated third parties; activities as a funding portal, such as its premises, systems, platforms and issuer’s securities or to communicate and provides a method for investors to with potential investors; prevent a broker from disclosing that records, by our representatives and by • representatives of the registered national All records demonstrating a funding information to most nonaffiliated third portal’s compliance with requirements parties by ‘‘opting out’’ of that securities association of which it is a member. of Subparts C (intermediary obligations) disclosure, subject to certain exceptions. and D (additional funding portal Regulation S–AM allows a consumer, in (2) Comment and Final Rules requirements); 1111 certain limited situations, to block • We are adopting Rule 403(d) as All notices provided by the funding affiliates of covered persons (i.e., proposed, but renumbering it as portals to issuers and investors brokers, dealers, investment companies 403(c).1108 One commenter opposed the generally through the funding portal’s and both investment advisers and 1112 Commission’s proposed inspections and platform or otherwise; transfer agents registered with the • examinations rules as unnecessary.1109 All written agreements (or copies Commission) from soliciting the As a condition to exempting funding thereof) entered into by a funding consumer based on eligibility portals from the requirement to register portal, relating to its business as such; information (i.e., certain financial • All daily, monthly and quarterly as broker-dealers under Exchange Act information, such as information about summaries of transactions effected Section 15(a)(1), Exchange Act Section the consumer’s transactions or through the funding portal; 1113 and 3(h)(1)(A) requires that registered experiences with the covered person) funding portals remain subject to, received from the covered person.1104 1110 This would include information relating to among other things, our examination Regulation S–ID generally requires educational materials provided to investors, authority. We believe that inspections account openings and transactions, including brokers to develop and implement a and examinations are an important notices of investment commitments and written identity theft prevention reconfirmations. 1111 program that is designed to detect, 1105 This requirement alone would not, however, See 17 CFR part 248, subpart C. require the creation of any records or proscribe the 1106 The rule is being renumbered to account for format or manner of any records. However, without 1099 See Privacy of Consumer Financial the elimination of the proposed AML provision in records, it would be difficult for a funding portal Information (Regulation S–P), Release No. 34–42974 proposed Rule 403(b), which is discussed in to demonstrate compliance with Subparts C and D (June 22, 2000) [65 FR 40334 (June 29, 2000)]. Section II.D.4.b above. to examiners. 1100 See Regulation S–AM: Limitations on 1107 See Public Startup Letter 3. 1112 These would include, but not be limited to: Affiliate Marketing, Release No. 34–60423 (Aug. 4, 1108 The Rule is being renumbered to account for (1) Notices addressing hours of funding portal 2011) [74 FR 40398 (Aug. 11, 2009)]. the elimination of the proposed anti-money operations (if any); (2) funding portal malfunctions; 1101 See Identity Theft Red Flags Rules, Release laundering provision in proposed Rule 403(b), (3) changes to funding portal procedures; (4) No. 34–69359 (Apr. 10, 2013) [78 FR 23637 (Apr. which is described in more detail in Section maintenance of hardware and software; (5) 19, 2013)] (adopted jointly with the Commodity II.D.4.b. We are also adding the word ‘‘registered’’ instructions pertaining to access to the funding Futures Trading Commission). to ‘‘national securities association’’ to be consistent portal; and (6) denials of, or limitations on, access 1102 See 17 CFR part 248. with the rest of the rule text and with Exchange Act to the funding portal. 1103 See 17 CFR part 248, subpart A. Section 3(h)(1)(B). 1113 These would include: (1) Issuers for which 1104 See 17 CFR part 248, subpart B. 1109 See Public Startup Letter 3. the target offering amount has been reached and

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• A log reflecting the progress of each responsibility to prepare and maintain the national securities association of issuer who offers and sells securities records, as required under Rule 404 of which the funding portal is a through the funding portal toward Regulation Crowdfunding. member,1119 and a minor modification meeting the target offering amount. As proposed, Rule 404(e) would to subparagraph (f) related to anti- As proposed, Rule 404(b) would require all records of a funding portal to money laundering related records.1120 require that a funding portal make and be subject at any time, or from time to We also made a modification to state preserve its organizational documents time, to such reasonable periodic, that, in addition to being furnished to during its operation as a funding portal special or other examination by our representatives of the Commission, and also those of any successor funding representatives and representatives of books and records would have to be portal. These would include, but not be the registered national securities furnished to the Commission itself. We limited to: (1) Partnership agreements; association of which the funding portal are also adding the word ‘‘registered’’ to (2) articles of incorporation or charter; is a member. ‘‘national securities association’’ to be (3) minute books; and (4) stock Finally, we proposed in Rule 404(f) consistent with the rest of the rule text certificate books (or other similar type that funding portals would be required and with Exchange Act Section documents). to comply with the reporting, 3(h)(1)(B).1121 We also proposed in Rule 404(c) that recordkeeping and record retention We believe that it is important for the records required to be maintained requirements of Chapter X of Title 31 of funding portals to be subject to the and preserved pursuant to Rule 404(a) the Code of Federal Regulations. Where recordkeeping requirements in order to be produced, reproduced, and Chapter X of Title 31 and proposed create a meaningful record of maintained in the original, non-alterable rules 404(a) and 404(b) would require crowdfunding transactions and format in which they were created or as the same records or reports to be communications. For example, we are permitted under Section 17a–4(f) of the preserved for different periods of time, requiring records of all notices provided Exchange Act. We proposed in Rule we proposed requiring the records or by the funding portals to issuers and 404(d) to allow third parties to prepare reports to be preserved for the longer investors generally through the funding or maintain the required records on period of time. portal’s platform or otherwise. We behalf of the funding portal, provided believe that, in addition to the list of that there is a written undertaking in b. Comments on Proposed Rule examples provided in the rule, this place between the funding portal and Commenters generally did not object encompasses any notices relating to the the third party stating that the required to the proposed recordkeeping funding portal’s business as such, records are the property of the funding requirements. Some commenters including communications in electronic portal and will be surrendered suggested that the cost for a funding form sent from an associated person of promptly, on request by the funding portal to maintain the proposed books a funding portal to issuers or investors portal, to the Commission or the and records would not be (including potential investors). Every national securities association of which significant.1115 A few commenters funding portal is required under Rule 1114 the funding portal is a member. The suggested that funding portals should 404 to furnish promptly to the funding portal also would have been maintain required records for a longer Commission and its representatives, and required to file, with the registered period of time. One of these commenters the registered national securities national securities association of which recommended a retention period of 10 association of which the funding portal it is a member, this written undertaking, years,1116 while the other suggested that is a member, legible, true, complete and signed by a duly authorized issuer data should be kept permanently current copies of such records of the representative of the third party. As accessible by the funding portal.1117 funding portal that are requested by the proposed, an agreement between a Another commenter suggested that the representatives of the Commission and funding portal and a third party would Commission should require the national securities association.1122 not relieve the funding portal of its intermediaries, rather than the issuers, to maintain records (or arrange for third- 1119 We are making this change to remain funds distributed; and (2) transaction volume, consistent with the prompt production standard expressed in number of transactions, number of party recordkeeping) of the offering that is required for third party recordkeeping securities involved in a transaction and total materials used by the issuers, thereby undertakings pursuant to Rule 404(d). amounts raised by and distributed to issuers, as reducing the burden on issuers by no 1120 In the Proposing Release and as noted in this well as total dollar amounts raised across all longer requiring them to transcribe section, we have provided examples of the types of issuers, expressed in U.S. dollars. information that would be required to be 1114 offering materials into something that The written undertaking would be required to 1118 maintained under each of the specified records. The include the following provision: can be filed with EDGAR. same guidance applies with respect to application With respect to any books and records c. Final Rules of the final rules. maintained or preserved on behalf of [name of 1121 Conforming changes were made to both Rules funding portal], the undersigned hereby We are adopting Rule 404 as 404(d) and (e). acknowledges that the books and records are the proposed, with a modification to 1122 The Commission generally interprets the term property of [name of funding portal], and hereby ‘‘promptly’’ or ‘‘prompt’’ to mean making undertakes to permit examination of such books subparagraph (e) to require that books reasonable efforts to produce records that are and records at any time, or from time to time, and records subject to review under the requested by the staff during an examination during business hours by representatives of the subsection be produced promptly to without delay. The Commission believes that in Securities and Exchange Commission, and the representatives of the Commission and many cases a funding portal could, and therefore national securities association of which the funding will be required to, furnish records immediately or portal is a member, and to promptly furnish to the within a few hours of a request. The Commission 1115 Commission and national securities association of See, e.g., CFIRA Letter 1, Joinvestor Letter. expects that only in unusual circumstances would which the funding portal is a member, a true, 1116 See Joinvestor Letter. a funding portal be permitted to delay furnishing correct, complete and current hard copy of any, all, 1117 Mollick, et al Letter. See also Public Startup records for more than 24 hours. Accord Security- or any part of, such books and records. Letter 5 (suggesting that the Commission should Based Swap Data Repository Registration, Duties, This provision is consistent with the improve ‘‘forensic record-keeping obligations of a and Core Principles, Exchange Act Release No. recordkeeping provisions applicable to brokers funding portal’’ by requiring portals to ‘‘maintain 74246 (Feb. 11, 2015), 80 FR 14438, 14500 n. 846 under Exchange Act Rules 17a–4(f) (17 CFR 17a– the URLs and Web site content in perpetuity for all (Mar. 19, 2015) (similarly interpreting the term 4(f)) and 17a–4(j) (17 CFR 240.17a–4(j)), but has issuers who use the portal to raise capital from the ‘‘promptly’’ in the context of Exchange Act Rule been scaled to be more appropriate for funding public.’’). 13n–7(b)(3)); Registration of Municipal Advisors, portals. 1118 CFIRA Letter 1. Continued

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The requirements will enable subject to regulation before (rather than comply, where the failure to comply regulators to more effectively gather broker-dealers switching their business with a term, condition or requirement information about the activities in models to become funding portals) and, was the result of the failure of the which a funding portal has been therefore, may not have formal intermediary to comply with the engaged, as well as about the other recordkeeping practices in place, the requirements of Section 4A(a) and the parties involved in crowdfunding (e.g., recordkeeping requirements for funding related rules, or such failure by the issuers, promoters, and associated portals are relatively streamlined intermediary occurred solely in persons), to discern whether the funding compared to those for broker-dealers. offerings other than the issuer’s offering. portals and the other parties are in Funding portals are intended to be As proposed in Rule 502(b), compliance with the requirements of subject to less regulation than broker- notwithstanding this safe harbor, any Regulation Crowdfunding and any other dealers, and recordkeeping failure to comply with Regulation applicable federal securities laws. We requirements adopted in the final rules Crowdfunding would nonetheless be believe the requirements will assist are consistent with this intent. actionable by the Commission. regulators’ compliance examinations Finally, as described above, we are b. Comments on the Proposed Rules because, without these records, the not adopting the proposed requirement Commission and any registered national that a funding portal comply with the Commenters were generally in favor securities association of which the BSA.1125 Nevertheless, we are revising of the proposed safe harbor.1128 funding portal is a member may have the final recordkeeping rule to require a However, some commenters difficulty examining a funding portal for funding portal to maintain books and representing state securities regulators compliance with the requirements of records related to BSA requirements, suggested that the safe harbor is Regulation Crowdfunding and the should funding portals become subject unnecessary, would be detrimental to federal securities laws.1123 Therefore, to the requirements of the BSA.1126 state enforcement efforts and would be we believe the record retention Commission staff expects to review a burden on regulators when issuers requirements should be mandatory the books and records practices of assert the safe harbor, whether or not 1129 rather than voluntary as suggested by intermediaries during the study of the they were operating in good faith. one commenter. Although we are not federal crowdfunding exemption that it These commenters also recommended requiring that funding portals utilize the plans to undertake no later than three that the proposed safe harbor, if record retention services of broker- years following the effective date of adopted, should not be a defense to an 1130 dealers, as suggested by one commenter, Regulation Crowdfunding.1127 enforcement action by the states. we note that a funding portal may find c. Final Rules it cost-effective or otherwise appropriate E. Miscellaneous Provisions We are adopting the Rule 502(a) safe to use the recordkeeping services of a 1. Insignificant Deviations From harbor as proposed.1131 The first two third party, and the final rules provide Regulation Crowdfunding the necessary flexibility to allow prongs of the safe harbor provision in funding portals to utilize these options. a. Proposed Rules Rule 502(a) are modeled after a similar While some commenters suggest a We proposed Rule 502 of Regulation provision in Rule 508 of Regulation 1132 longer record retention period, we Crowdfunding to provide issuers a safe D, and we believe a similar safe believe the requirement that funding harbor for insignificant deviations from harbor is appropriate for offerings made portals preserve their records for five a term, condition or requirement of in reliance on Section 4(a)(6). We years, with the records retained in a Regulation Crowdfunding. As proposed believe that provisions for insignificant readily accessible place for at least the in Rule 502(a), to qualify for the safe deviations serve an important function first two years, provides sufficient harbor, the issuer relying on the by allowing for certain errors that can investor protection, while not imposing exemption would have to show that: (1) occur in the offering process without overly burdensome recordkeeping The failure to comply with a term, causing the issuer to lose the exemption costs.1124 We are not adopting, as condition or requirement was and incur certain consequences, commenters recommended, a insignificant with respect to the offering including potential private rights of requirement that funding portals be as a whole; and (2) the issuer made a action for rescission for violations of 1133 required to keep issuer data good faith and reasonable attempt to Section 5 of the Securities Act, and permanently accessible or maintain comply with all applicable terms, loss of preemption for state securities URLs and Web site content in conditions and requirements of law registration requirements. The perpetuity for all issuers, as we believe Regulation Crowdfunding; and (3) the offering exemption in Section 4(a)(6) the permanent storage of such issuer did not know of the failure to was designed to help alleviate the information could be unduly funding gap and the accompanying burdensome and is unnecessary. 1125 See Section II.D.4.b. regulatory challenges faced by startups Because permissible funding portal 1126 15 U.S.C. 5311 et seq. To the extent that and small businesses, many of which activity is far more limited than that of funding portals become subject to the requirements may not be familiar with the federal broker-dealers and a relatively high of the BSA and are required to comply with BSA securities laws. We continue to believe proportion of funding portals will be recordkeeping requirements, we believe that this recordkeeping requirement will be valuable to our that issuers should not lose the Section new market entrants that have not been regulatory oversight function of funding portals’ 4(a)(6) exemption because of compliance with such BSA requirements. See insignificant deviations from a term, Exchange Act Release No. 70462 (Sept. 20, 2013), generally Recordkeeping by Brokers and Dealers, Release No. 34–18321 (Dec. 10, 1981) [46 FR 61454 78 FR 67468, 67578–67579 n. 1347 (Nov. 12, 2013) 1128 See, e.g., Arctic Island Letter 7; CFIRA Letter (Dec. 17, 1981)] (noting the effectiveness of on-site (similarly interpreting the term ‘‘prompt’’ in the 1; Heritage Letter; Joinvestor Letter; Parsont Letter; context of Exchange Act Rule 15Ba1–8(d)). examinations of broker-dealers by the Commission Schwartz Letter. 1123 See, supra, note 798. and SROs in enforcing compliance with reporting 1129 See Commonwealth of Massachusetts Letter; 1124 and recordkeeping requirements when adopting We note that the record retention period NASAA Letter. requirement continues for a funding portal after it Exchange Act Rule 17a–8). Rule 17a–8 (17 CFR 1130 Id. withdraws its registration. Schedule D of Form 240.17a–8) requires broker-dealers to comply with 1131 Funding Portal requests information about the the reporting, recordkeeping and record retention See Rule 502 of Regulation Crowdfunding. location(s) of where a funding portal will keep its rules adopted under the BSA. 1132 17 CFR 230.508. books and records after withdrawal. 1127 See Section II. 1133 See Securities Act Section 12(a)

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condition or requirement of Regulation we recognize the concerns of certain b. Comments on the Proposed Rules Crowdfunding, so long as the issuer, in state securities regulators that the safe Two commenters supported the good faith, attempted to comply with harbor could be detrimental to state proposed restrictions on resales,1138 the rules. We note that whether a enforcement efforts, we believe that a while several other commenters deviation from the requirements would state’s review as to whether there is an opposed any resale restrictions.1139 Two be significant to the offering as a whole insignificant deviation from our rules commenters expressed support for the will depend on the facts and would create undue uncertainty for proposal that to sell securities circumstances of the offering and the issuers seeking to rely on the Section purchased in a transaction made in deviation. While such determinations 4(a)(6) exemption.1135 We note that, reliance on Section 4(a)(6) to an will be based on the particular facts and irrespective of the scope of the safe accredited investor during the restricted circumstances, we believe that a harbor, states retain antifraud authority period, the seller of such securities deviation from certain fundamental in all cases. would need to have a reasonable belief requirements in the rules, such as a that the purchaser is an accredited failure to adhere to the aggregate 2. Restrictions on Resales investor.1140 offering limit under Rule 100(a)(1), a. Proposed Rules One commenter noted that the presumptively would not be an investors who are eligible to purchase insignificant deviation that would allow Section 4A(e) provides that securities securities from the initial purchasers in reliance on this safe harbor. issued in reliance on Section 4(a)(6) the first year would be able to We are adopting the third prong of the circumvent the investment limits of the safe harbor in Rule 502(a) because, may not be transferred by the purchaser for one year after the date of purchase, proposed rules by purchasing securities under the statute, an issuer could lose from the initial purchasers in an amount the exemption and potentially violate except when transferred: (1) To the issuer of the securities; (2) to an greater than they would be able to Section 5 because of the failure of the purchase through intermediaries.1141 intermediary to comply with the accredited investor; (3) as part of an offering registered with the Another commenter noted that the requirements of Section 4A(a). We restrictions on resale appear only to Commission; or (4) to a family member believe that an issuer should not lose cover the sale by the initial purchaser, of the purchaser or the equivalent, or in the offering exemption due to a failure thus creating the possibility that by the intermediary, which likely will connection with certain events, securities of a particular issuer could be out of the issuer’s control, if the including death or divorce of the become widely traded within the first issuer did not know of such failure or purchaser, or other similar year if the initial purchaser sells the such failure related to offerings other circumstances, in the discretion of the securities to an eligible purchaser who than the issuer’s offering. Absent this Commission. Section 4A(e) further then resells them to the public within safe harbor, we believe that issuers may provides that the Commission may the first year.1142 be hesitant to participate in offerings in establish additional limitations on reliance on Section 4(a)(6) due to securities issued in reliance on Section c. Final Rules uncertainty about their ability to rely 4(a)(6). We are adopting the restrictions on on, and to control their ongoing Proposed Rule 501 largely tracked the resales in Rule 501 as proposed, with eligibility for, the exemption, which 1143 provisions of Section 4A(e). We also certain revisions as described below. could undermine the facilitation of We are concerned that, as noted by proposed definitions of ‘‘accredited capital raising for startups and small several commenters, the restrictions on investor’’ and a ‘‘member of the family businesses. resales would cover only the sale by the We believe that the potential harm to of the purchaser or the equivalent.’’ initial purchaser, which creates the investors that might result from the Under the proposed rules, the term possibility that securities of a particular applicability of this safe harbor would ‘‘accredited investor’’ would have the issuer could become widely traded be minimal because the deviations must same definition in Rule 501 of within the first year if the initial be insignificant to the offering as a Regulation D.1136 purchaser sells the securities to an whole for the safe harbor to apply. We The statute does not define ‘‘member eligible purchaser who subsequently also believe the safe harbor of the family of the purchaser or the resells them to the public within the appropriately protects an issuer who equivalent.’’ We proposed to define the made a diligent attempt to comply with phrase to include a ‘‘child, stepchild, 1138 See Arctic Island Letter 7; Joinvestor Letter. the rules from losing the exemption as grandchild, parent, stepparent, 1139 See, e.g., Amram Letter 2 (stating resale a result of insignificant deviations from restrictions prevent trading liquidity and impede grandparent, spouse or spousal price discovery); Crowdstockz Letter; Hamman Regulation Crowdfunding. equivalent, sibling, mother-in-law, Letter; Kickstarter Coaching Letter; Public Startup We also are adopting Rule 502(b) father-in-law, son-in-law, daughter-in- Letter 2 (recommending a six-month holding period largely as proposed to set forth clearly so long as the issuer is current in its filing law, brother-in-law, or sister-in-law of that the safe harbor for insignificant requirements, except that purchasers who self- the purchaser, and shall include certify that they are low-income investors would deviations in Rule 502(a) does not adoptive relationships.’’ This definition not be subject to a holding period); Public Startup preclude the Commission from bringing Letter 3 (also opposing accredited investors having an enforcement action seeking tracks the definition of ‘‘immediate an advantage over other buyers). appropriate relief for an issuer’s failure family’’ in Exchange Act Rule 16a– 1140 See Joinvestor Letter; Public Startup Letter 3. 1137 to comply with all applicable terms, 1(e), but with the addition of 1141 See Moskowitz Letter. ‘‘spousal equivalent.’’ 1142 CrowdCheck Letter 3 (recommending several conditions, and requirements of alternatives: (1) Designate the securities as Regulation Crowdfunding. Despite the ‘‘restricted’’ within the meaning of Rule 144; (2) suggestion of two commenters,1134 we 1135 Securities Act Section 18(b)(4)(C), as mirror some or all of the issuer’s resale restrictions; are not extending Rule 502(b) to amended by the JOBS Act, preempts state securities (3) impose a one-year obligation on the issuer not laws’ registration and qualification requirements for to register the transfer of securities by any person, enforcement actions by the states. While offerings made pursuant to Section 4(a)(6). 15 except in the four permitted types of transfers; or U.S.C. 77r(b)(4)(C). (4) remove the words ‘‘by the purchaser’’ from the 1134 See Commonwealth of Massachusetts Letter; 1136 17 CFR 230.501(a). first sentence of proposed Rule 501(a)). NASAA Letter. 1137 17 CFR 240.16a–1(e). 1143 See Rule 501 of Regulation Crowdfunding.

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first year. Further, the proposed rule state, territory and the District of pursuant to an offering made under could allow, as one commenter Columbia. As we stated in the Proposing Section 4(a)(6) would be permanently noted,1144 investors to circumvent the Release, we believe this approach will exempted from the record holder count investment limits in the first year by satisfy the statutory requirement to under Section 12(g). An issuer seeking purchasing securities from the initial make the information available to each to exclude a person from the record purchasers. In response to these state and territory of the United States, holder count would have the concerns, we have modified Rule 501 and the District of Columbia. responsibility for demonstrating that the from the proposal so that the one-year Commenters who addressed this issue securities held by the person were resale restriction will apply to any agreed with our proposed approach,1145 initially issued in an offering made purchaser during the one-year period and we are adopting this provision as under Section 4(a)(6). beginning when the securities were first proposed. b. Comments on the Proposed Rules issued, not just the initial purchaser. In addition, we have modified the 4. Exemption From Section 12(g) Commenters generally supported the definition to track more closely the a. Proposed Rule permanent exemption from the record holder count under Section 12(g).1147 language in Securities Act Rule 501(a) to Section 303 of the JOBS Act amended clarify that the person reselling the One commenter recommended that the Exchange Act Section 12(g) to provide exemption from the record holder count securities must have a reasonable belief that ‘‘the Commission shall, by rule, that the purchaser qualifies as an under Section 12(g) apply to different exempt, conditionally or securities issued in a subsequent accredited investor. unconditionally, securities acquired As adopted, the rule provides that restructuring, recapitalization or similar pursuant to an offering made under securities issued in a transaction transaction that is exempt from, or [S]ection 4[(a)](6) of the Securities Act pursuant to Section 4(a)(6) may not be otherwise not subject to, the registration of 1933 from the provisions of this transferred by any purchaser of such requirements of Section 5, if the parties subsection.’’ As amended by the JOBS securities during that one-year period to the transaction are affiliates of the Act, Section 12(g) requires, among other unless such securities are transferred: original issuer.1148 A few commenters things, that an issuer with total assets (1) To the issuer of the securities; (2) to recommended conditioning the exceeding $10,000,000 and a class of an accredited investor; (3) as part of an exemption from the record holder count offering registered with the securities held of record by either 2,000 under Section 12(g) on the issuer’s asset Commission; or (4) to a member of the persons, or 500 persons who are not value,1149 while a few others opposed accredited investors, register such class such concept.1150 Another commenter family of the purchaser or the 1146 equivalent, to a trust controlled by the of securities with the Commission. recommended that issuers that fail to purchaser, to a trust created for the Crowdfunding contemplates the comply with Regulation benefit of a member of the family of the issuance of securities to a large number Crowdfunding’s ongoing reporting purchaser or the equivalent, or in of holders, which could increase the requirements be disqualified from connection with the death or divorce of likelihood that Section 4(a)(6) issuers relying on the exemption from the the purchaser or other similar would exceed the thresholds for record holder count under Section circumstance. We recognize that several triggering reporting obligations under 12(g),1151 while two commenters commenters expressed concerns about Section 12(g). As discussed in the opposed such concept.1152 Proposing Release, Section 303 could be the exception for resales to accredited c. Final Rules investors and the potential unfair read to mean that securities acquired in advantage this could provide to such a crowdfunding transaction would be In response to comments received, we investors. While we appreciate these excluded from the record holder count are adopting Rule 12g–6 with certain concerns, we note that this treatment permanently, regardless of whether the modifications.1153 The rule provides will provide some measure of liquidity securities continue to be held by a that securities issued pursuant to an for holders of these securities within the person who purchased in the offering made under Section 4(a)(6) are first year of the offering without crowdfunding transaction. An exempted from the record holder count undermining the investor protections alternative reading could provide that under Section 12(g), provided that the otherwise provided by the statute and securities acquired in a crowdfunding issuer is current in its ongoing annual our rules. transaction would be excluded from the reports required pursuant to Rule 202 of record holder count only while held by Regulation Crowdfunding, has total 3. Information Available to States the original purchaser in the Section assets as of the end of its last fiscal year Under Section 4A(d), the Commission 4(a)(6) transaction, as a subsequent not in excess of $25 million, and has shall make available, or shall cause to be purchaser of the securities would not be engaged the services of a transfer agent made available by the relevant considered to have ‘‘acquired [the intermediary, the information required securities] pursuant to an offering made 1147 See, e.g., ABA Letter; Arctic Island Letter 7; under Section 4A(b) and such other under [S]ection 4[(a)](6).’’ Craw Letter; Heritage Letter; Joinvestor Letter; PeoplePowerFund Letter; Public Startup Letter 3; information as the Commission, by rule, Consistent with the statute, the Wefunder Letter. determines appropriate to the securities Commission’s proposed Rule 12g–6 1148 See Arctic Island Letter 7. See also ABA commission (or any agency or office would provide that securities issued Letter (recommending that the Commission, at a performing like functions) of each state minimum, exempt from the Section 12(g) record holder count securities issued in a statutory merger 1145 See, e.g., CFIRA Letter 9; Public Startup and territory of the United States and to change the domicile of the issuer, in reliance on Letter 3. the District of Columbia. We proposed Securities Act Rule 145(a)(2)). 1146 See Section 501 of the JOBS Act. In the case 1149 See, e.g., ABA Letter ($25 million); to require issuers to file on EDGAR the of an issuer that is a bank or a bank holding PeoplePowerFund Letter. information required by Section 4A(b) company, Exchange Act Section 12(g)(1)(B) (15 1150 and the related rules. Information filed U.S.C. 78l(g)(1)(B)) requires, among other things, See, e.g., Arctic Island Letter 7; Public Startup Letter 3. on EDGAR is publicly available and that the issuer, if it has total assets exceeding $10,000,000 and a class of securities held of record 1151 See Joinvestor Letter. would, therefore, be available to each by 2,000 persons, register such class of securities 1152 See Arctic Island Letter 7; Public Startup with the Commission. See Section 601 of the JOBS Letter 3. 1144 See Moskowitz Letter. Act. 1153 17 CFR 240.12g–6.

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registered with the Commission conditionally exempting securities registered transfer agent is a regulated pursuant to Section 17A of the issued in reliance on Section 4(a)(6) entity with experience in maintaining Exchange Act.1154 from the record holder count under accurate shareholder records, and its An issuer that exceeds the $25 million Section 12(g), and thereby from the use will help to ensure that security total asset threshold, in addition to more extensive reporting obligations holder records and secondary trades exceeding the thresholds in Section under the Exchange Act, is appropriate will be handled accurately. Third, we 12(g), will be granted a two-year in light of the existence of the believe that the condition of total assets transition period before it will be alternative ongoing reporting not exceeding $25 million will result in required to register its class of securities requirements that are tailored to the phasing out the Section 12(g) exemption pursuant to Section 12(g), provided it types of issuers and offerings we once companies grow and expand their timely files all its ongoing reports anticipate under Regulation shareholder base and is consistent with pursuant to Rule 202 of Regulation Crowdfunding. the intent behind Title III of the JOBS Crowdfunding during such period.1155 In determining to provide a Act, which was enacted to facilitate Section 12(g) registration will be conditional exemption from the smaller company capital formation. required only if, on the last day of the provisions of Section 12(g), we have Rule 12g–6 does not extend the fiscal year the company has total assets considered a number of factors. First, exclusion from the Section 12(g) record in excess of the $25 million total asset we believe that conditioning the holder count to different securities threshold, the class of equity securities exemption on the issuer being current in issued in exchange for Section 4(a)(6)- is held by more than 2,000 persons or its ongoing reporting requirements is issued securities in a subsequent 500 persons who are not accredited consistent with the intent behind the restructuring, recapitalization or similar investors.1156 In such circumstances, an original enactment of Section 12(g) transaction. While some commenters issuer that exceeds the thresholds in because this condition requires that requested such an extension in Section 12(g) and has total assets of $25 relevant, current information about instances where the parties to the million or more will be required to issuers will be made routinely available transaction are affiliates of the original begin reporting under the Exchange Act to investors and the marketplace.1161 issuer, or in certain restructuring the fiscal year immediately following Second, we believe that conditioning transactions, we do not believe that the end of the two-year transition the 12(g) exemption on crowdfunding such an expansion in the context of period.1157 An issuer entering Exchange issuers using a registered transfer agent shares initially issued using Regulation Act reporting will be considered an will provide an important investor Crowdfunding would be appropriate ‘‘emerging growth company’’ to the protection in this context. As discussed because certain restructuring and extent the issuer otherwise qualifies for in Section II.C.3 above, regarding the recapitalization transactions could such status.1158 need for an issuer to establish means to change the pool of holders of the An issuer seeking to exclude a person keep accurate records of its securities securities beyond those who initially from the record holder count has the holders, we received a number of acquired the securities in a responsibility for demonstrating that the comments about the benefits of using a crowdfunding transaction, denying securities held by the person were registered transfer agent. As noted those holders the protections of Section initially issued in an offering made above, we are not mandating the use of 12(g) registration. under Section 4(a)(6). As noted in the a transfer agent for all crowdfunding 5. Scope of Statutory Liability proposal, we believe that allowing offerings, for both flexibility and cost Securities Act Section 4A(c) provides issuers to sell securities pursuant to reasons. However, we believe that that an issuer will be liable to a Section 4(a)(6) without becoming requiring the use of a transfer agent is purchaser of its securities in a Exchange Act reporting issuers is appropriate for those issuers that are transaction exempted by Section 4(a)(6) consistent with the intent of Title III.1159 seeking to have their crowdfunding if the issuer, in the offer or sale of the In this regard, we note that Title III securities exempted from the record securities, makes an untrue statement of provides for an alternative reporting holder count under Section 12(g). We a material fact or omits to state a expect that issuers at a stage at which system under which issuers using the material fact required to be stated or they are seeking to rely on the Section crowdfunding exemption are required to necessary in order to make the 12(g) exemption are likely to be larger file annual reports with the statements, in light of the circumstances 1160 and thus better able to incur the costs Commission. We believe that under which they were made, not of a transfer agent. In the absence of a misleading, provided that the purchaser 1154 Id. conditional exemption from the did not know of the untruth or 1155 Id. provisions of Section 12(g), the use of a omission, and the issuer does not 1156 15 U.S.C. 78l(g). transfer agent registered under the 1157 sustain the burden of proof that such 17 CFR 240.12g–6. Exchange Act would be required of 1158 Under Section 2(a)(19) of the Securities Act, issuer did not know, and in the exercise an ‘‘emerging growth company’’ is defined as, issuers when they register under the 1162 among other things, an issuer that had total annual Exchange Act. We note that a itself as an issuer of securities in: (A) gross revenues of less than $1 billion during its Countersigning such securities upon issuance; (B) most recently completed fiscal year. 15 U.S.C. 1161 Section 12(g) was enacted by Congress as a monitoring the issuance of such securities with a 77b(a)(19). See also Section 3(a)(80) of the Exchange way to ensure that investors in over-the-counter view to preventing unauthorized issuance (i.e., a Act (which repeats the same definition). 15 U.S.C. securities about which there was little or no registrar); (C) registering the transfer of such 78c(a)(80). information, but which had a significant securities; (D) exchanging or converting such 1159 See 158 CONG. REC. S1829 (daily ed. Mar. shareholder base, were provided with ongoing securities; or (E) transferring record ownership of 20, 2012) (statement of Sen. Jeff Merkley) (‘‘It also information about their investment. See, generally, securities by bookkeeping entry without the provides a very important provision so the small Report of the Special Study of Securities Markets physical issuance of securities certificates. 15 investors do not count against the shareholder of the Securities and Exchange Commission. House U.S.C. 78c(a)(25). Section 17A(c)(1) of the Exchange number that drives companies to have to become Document No. 95, House Committee on Interstate Act generally requires any person performing any a fully public company. That is critical and and Foreign Commerce, 88th Cong., 1st Sess. of these functions with respect to any security interrelates with other parts of the [crowdfunding] (1963), at 60–62. registered pursuant to Section 12 of the Exchange bill before us.’’). 1162 Section 3(a)(25) of the Exchange Act provides Act to register with the Commission or other 1160 See Section II.B.2 for a discussion of the that a ‘‘transfer agent’’ is any person who engages appropriate regulatory agency. 15 U.S.C. 78q– requirement to file annual reports. on behalf of an issuer of securities or on behalf of 1(c)(1).

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of reasonable care could not have portals, while precluding their ability to We have considered the comments known, of the untruth or omission. limit the offerings that they facilitate, is both in support of and against funding Section 4A(c)(3) defines, for purposes of an ‘‘untenable’’ framework.1170 Some portals being considered issuers for the liability provisions of Section 4A, an commenters stated that the statutory purposes of Section 4A(c) liability. issuer as including ‘‘any person who construct could unnecessarily lead to Specifically, we acknowledge offers or sells the security in such lawsuits against funding portals,1171 commenters’ concerns that statutory offering.’’ with one of these commenters asserting liability may adversely affect funding In describing the statutory liability that such suits would arise ‘‘for any deal portals, and suggestions that, under the provision in the Proposing Release, the that loses money’’ because the burden of statutory scheme, funding portals and Commission noted that it appears likely proof is on the funding portal to prove broker-dealers engage in different that intermediaries would be considered it could not have known of material activities that do not warrant a funding issuers for purposes of the provision. misstatements.’’ 1172 One commenter portal being subject to statutory liability. Several commenters agreed that Section stated that risk disclosures should One difference commenters highlighted 4A(c) liability should apply to require an explanation to investors that was the inability of a funding portal to intermediaries noting that it ‘‘may serve lawsuits by investors are only limit the offerings on its platform under as a meaningful backstop against potentially viable if based on claims the proposed rules, and the untenable 1163 fraud’’ and would create a ‘‘true sounding in fraud or negligence and that position of imposing statutory liability financial incentive’’ for intermediaries ‘‘lawsuits cannot be filed just because while precluding funding portals’ to conduct checks on issuers and their the retail investor loses their risk ability to limit the offerings on their 1164 1173 key personnel. capital.’’ platforms. In response to this comment, However, a large number of other One commenter suggested that the as described above, we have modified commenters disagreed that Section Commission retract its statement in the the language of the Rule 402 safe harbor 4A(c) liability should apply to Proposing Release that ‘‘it appears likely from the proposal to permit funding intermediaries.1165 Some of these that intermediaries, including funding portals to exercise discretion to limit the commenters stated their views that portals, would be considered issuers for offerings and issuers that they allow on applying statutory liability to purposes of this liability provision.’’ 1174 their platforms.1179 intermediaries would have a chilling Other commenters suggested that the We believe this will effect on intermediaries’ willingness to Commission should take action, such as: avoid the ‘‘untenable’’ framework that facilitate crowdfunding offerings.1166 (i) Exempting funding portals from commenters described. We are Others cited the cost of being subject to liability, provided conditions are met specifically declining to exempt funding this liability as overly burdensome on such as compliance with Regulation portals (or any intermediaries) from the funding portals, to the extent that they Crowdfunding 1175 or disclosure of the statutory liability provision of Section may not be able to conduct business.1167 specific steps the funding portal has 4A(c) or to interpret this provision as Several commenters also explained that taken in its due diligence; 1176 (ii) categorically excluding such the nature of funding portals, as providing a safe harbor for activities intermediaries. We do not believe that intended by Congress, is distinct from funding portals can undertake in we should preclude the ability of that of registered broker-dealers.1168 posting issuer materials on their investors to bring private rights of action According to these commenters, a platforms,1177 and (iii) providing a list against funding portals (or any funding portal’s role is not to offer and of reasonable steps funding portals can intermediaries). Such a categorical sell securities, but rather to provide a take in reviewing an offering in order to exemption or exclusion could pose platform through which issuers may rely on the reasonable care defense.1178 undue risks to investors by providing offer and sell securities. As such, these insufficient incentives for commenters asserted that it would not 1170 AngelList Letter. See also, e.g., Graves Letter intermediaries to take steps to prevent be appropriate to hold them liable for (stating that ‘‘to achieve the appropriate balance of their platforms from becoming vehicles statements made by issuers.1169 In creating a usable crowdfunding model for small for fraud. businesses while providing adequate protections for addition, one commenter suggested that investors, the Commission should remove the Accordingly, we believe that the applying statutory liability to funding liability placed on funding portals in the proposed determination of ‘‘issuer’’ liability for an rules or permit them to curate offerings.... intermediary under Section 4A(c) will 1163 See, e.g., Farnkoff Letter. Otherwise it is highly improbable that any rational business would establish a web portal in a heads- turn on the facts and circumstances of 1164 See, e.g., BackTrack Letter. See also Patel the particular matter in question. While Letter. you-win, tails-I-lose environment’’); Milken Institute Letter (noting also that funding portals 1165 See, e.g., ABA Letter; AngelList Letter; we acknowledge the concerns of should be permitted to make subjective judgments BetterInvesting Letter; CFIRA Letter 10; City First commenters about the potential in deciding which offerings to list, including based Letter; EarlyShares Letter; EMKF Letter; FSI Letter; on an assessment of the merits or shortcomings of application of Section 4A(c) liability, we Graves Letter; Guzik Letter 1; IAC an offering); Wefunder Letter. See also Section note that Congress provided a defense to Recommendation; Inkshares Letter; Milken Institute II.D.3.a (discussing Rule 402(b)(1)). Letter; PPA Letter; RocketHub Letter; SBA Office of any such liability if an intermediary did 1171 Advocacy Letter; SBEC Letter; SeedInvest Letter 3; See, e.g., Inkshares Letter; SeedInvest Letter3. not know, and in the exercise of Seyfarth Letter; StartupValley Letter; Wefunder 1172 See SeedInvest Letter 3. reasonable care could not have known, Letter; Winters Letter. 1173 See CarbonTech Letter. of the untruth or omission. We continue 1174 1166 See, e.g., Guzik Letter 1; Inkshares Letter; See SeedInvest Letter 3. to believe, as we identified in the RocketHub Letter; StartupValley Letter. 1175 CFIRA Letter 10; SeedInvest Letter 3 (stating 1167 See, e.g., City First Letter; Guzik Letter 1; also that directors and officers of funding portals Proposing Release, that there are SeedInvest Letter 3; Wefunder Letter; Winters should be excluded from the definition of ‘‘issuer’’ appropriate steps that intermediaries Letter. for purposes of the statutory provision); might take in exercising reasonable care 1168 See, e.g., Inkshares Letter (likening funding StartupValley Letter. in light of this liability provision. These 1176 portals to ‘‘impartial engineers of transactions’’ EarlyShares Letter. steps may include establishing policies similar to online service providers under the Digital 1177 CFIRA Letter 10; StartupValley Letter. Millennium Copyright Act, that exist ‘‘for the 1178 CFIRA Letter 10; Milken Institute Letter transmission of information, and with it securities, (stating that funding portals ‘‘should not be rule’s steps for ensuring that an offering does not between third parties’’); RocketHub Letter; required to ‘look behind’ every material statement invoke concerns of fraud or investor protection’’); SeedInvest Letter 3; Seyfarth Letter. in an offering, but rather should be held to a StartupValley Letter. 1169 Id. standard of satisfying the statute’s and proposed 1179 See Rule 402(b)(1); Section II.D.3.a.

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and procedures 1180 that are reasonably occurring after effectiveness of the rules of the issuer; beneficial owners of 20% designed to achieve compliance with and disqualified persons may seek a or more of the issuer’s outstanding the requirements of Regulation waiver from the Commission from voting equity securities (which we Crowdfunding, and conducting a review application of the disqualification believe should be calculated based on of the issuer’s offering documents, provisions. the present right to vote for the election before posting them to the platform, to of directors, irrespective of the existence (2) Comments on Proposed Rules evaluate whether they contain of control or significant influence); any materially false or misleading Commenters were generally promoter connected with the issuer in information. supportive of the proposed any capacity at the time of such sale; disqualification rules.1184 A few compensated solicitors of investors; and 6. Disqualification Provisions commenters recommended that pre- general partners, directors, officers or Section 302(d) of the JOBS Act existing events should be subject to the managing members of any such requires the Commission to establish disqualification rules,1185 although solicitor.1189 We have not expanded the disqualification provisions under which another supported the proposed list of covered persons, as suggested by an issuer would not be eligible to offer approach of imposing disqualification a commenter, because we believe that securities pursuant to Section 4(a)(6) only for events after effectiveness.1186 the limited additional investor and an intermediary would not be One commenter recommended that the protection that such an expansion may eligible to effect or participate in Commission expand the list of covered provide would not justify the costs that transactions pursuant to Section 4(a)(6). persons to include transfer agents and would result from inconsistent bad actor Section 302(d)(2) specifies that the lawyers who are subject to certain disqualification rules. disqualification provisions must be disqualifications.1187 The disqualifying events include: ‘‘substantially similar’’ to the ‘‘bad • (3) Final Rules Felony and misdemeanor actor’’ disqualification provisions convictions within the last five years in contained in Rule 262 of Regulation We are adopting bad actor the case of issuers, their predecessors A 1181 and they also must cover certain disqualification provisions for and affiliated issuers, and 10 years in actions by state regulators enumerated Regulation Crowdfunding 1188 the case of other covered persons in in Section 302(d)(2). substantially as proposed with the connection with the purchase or sale of The disqualification provisions exception of several modifications to a security, involving the making of a included in Section 302(d) of the JOBS further align the final rules with similar false filing with the Commission; or Act are modeled on the disqualification provisions in Rules 262 and 506. We arising out of the conduct of the provisions included in Section 926 of believe that the final rules are business of an underwriter, broker, the Dodd-Frank Act, which also appropriate in light of the JOBS Act dealer, municipal securities dealer, required the Commission to adopt rules Section 302(d) mandate. We further investment adviser, funding portal or ‘‘substantially similar’’ to Rule 262 of believe that creating a uniform set of paid solicitor of purchasers of Regulation A that disqualify securities bad actor standards for all exemptions securities; 1190 offerings involving certain ‘‘felons and that include bad actor disqualification is • injunctions and court orders within other ‘bad actors’ ’’ from reliance on likely to simplify due diligence, the last five years against engaging in or Rule 506 of Regulation D. On July 10, particularly for issuers that may engage continuing conduct or practices in 2013, we adopted rules to implement in different types of exempt offerings. connection with the purchase or sale of Section 926 of the Dodd-Frank Act to Under the final disqualification rules, securities; involving the making of any disqualify certain securities offerings covered persons include the issuer and false filing with the Commission; or from reliance on Rule 506 of Regulation any predecessor of the issuer or arising out of the conduct of the D.1182 On March 25, 2015, we adopted affiliated issuer; directors, officers, business of an underwriter, broker, amendments to Rule 262 of Regulation general partners or managing members dealer, municipal securities dealer, A 1183 that made those provisions investment adviser, funding portal or substantially similar to those adopted 1184 See, e.g., ABA Letter (expressing general paid solicitor of purchasers of support and recommending the Commission under Rule 506 of Regulation D. securities; 1191 provide guidance on the term ‘‘voting securities’’ • a. Issuers and Certain Other Associated and regarding the waiver process); Commonwealth certain final orders and bars of Persons of Massachusetts Letter; Consumer Federation certain state and other federal Letter (expressing an understanding of why the regulators; 1192 (1) Proposed Rules proposed disqualification rules are consistent with • Commission cease-and-desist orders those under Regulation D, but noting their belief As described in more detail below, that those rules were weak when adopted); relating to violations of scienter-based the proposed disqualification rules as FundHub Letter 1 (stating that the proposed anti-fraud provisions of the federal they relate to issuers and certain other disqualification rules ‘‘are, to a certain degree, securities laws or Section 5 of the overkill’’ and too costly, but that disqualifying bad associated persons would have been Securities Act; 1193 actors is good for the future of equity • substantially similar to the crowdfunding); Joinvestor (supporting the proposed filing, or being named as an disqualification rules in Rules 262 and look-back periods and waiver rules). But see Public underwriter in, a registration statement 506. Under those rules, disqualification Startup Letter 3 (stating the proposed rules are or Regulation A offering statement that unconstitutional without explaining its reasoning); is the subject of a proceeding to arises only with respect to events Public Startup Letter 5 (recommending the Commission establish an ‘‘offender registry’’ that determine whether a stop order or 1180 With respect to intermediaries that are requires issuers to maintain a ‘‘public profile’’ funding portals, see Rule 403(a) of Regulation containing information about potential issuers in a 1189 See Rule 503(a) of Regulation Crowdfunding. Crowdfunding and the discussion in Section II.D.4. standardized format, similar to FINRA’s 1190 See Rule 503(a)(1) of Regulation 1181 17 CFR 230.262. BrokerCheck). Crowdfunding. 1182 See Disqualification of Felons and Other 1185 See, e.g., Guzik Letter 1; NASAA Letter. 1191 See Rule 503(a)(2) of Regulation ‘‘Bad Actors’’ from Rule 506 Offerings, Release No. 1186 See Joinvestor Letter. Crowdfunding. 33–9414 (July 10, 2013) [78 FR 44729 (July 24, 1187 See Brown J. Letter (also recommending the 1192 See Rule 503(a)(3) of Regulation 2013)] (‘‘Disqualification Adopting Release’’). Commission adopt similar bad actor provisions Crowdfunding. 1183 See Rule 506(c) Adopting Release, supra, under Rule 504). 1193 See Rule 503(a)(5) of Regulation note 5. 1188 See Rule 503 of Regulation Crowdfunding. Crowdfunding.

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suspension should be issued, or as to proposal, Rule 201(u) does not include conducted pursuant to Securities Act which a stop order or suspension was the word ‘‘timely’’ as is included in Section 4(a)(6). Section 302(d)(2) issued within the last five years; 1194 Rule 506(e) of Regulation D, because requires that the disqualification • United States Postal Service false unlike the disclosure associated with provisions be substantially similar to representation orders within the last Rule 506(e), the disclosure required by the provisions of Securities Act Rule five years; 1195 and Rule 201(u) must be included in an 262, which applies to issuers. Exchange • for covered persons other than the issuer’s offering statement and thus is Act Section 3(a)(39) 1205 currently issuer: required to be timely to the offering. Æ defines the circumstances in which a Being subject to a Commission We believe this disclosure will put broker would be subject to a ‘‘statutory order: investors on notice of events that would, disqualification’’ with respect to D revoking or suspending their but for the timing of such events, have membership or participation in a self- registration as a broker, dealer, disqualified the issuer from relying on regulatory organization such as FINRA municipal securities dealer, investment Section 4(a)(6). We also believe that this adviser or funding portal; disclosure is particularly important or any other registered national D placing limitations on their because, as a result of the securities association. We believe that activities as such; implementation of Section 302(d), the definition of ‘‘statutory D barring them from association with investors may have the impression that disqualification’’ under Section 3(a)(39) any entity; or all bad actors are disqualified from is substantially similar to, while D barring them from participating in participating in offerings under Section somewhat broader than, the provisions an offering of penny stock; 1196 or 4(a)(6). If disclosure of a pre-existing, of Rule 262.1206 Æ being suspended or expelled from otherwise disqualifying event is As proposed, Rule 503(d) would have membership in, or suspended or barred required and not provided to an prohibited any person subject to a from association with a member of, a investor, we would not view this as an statutory disqualification as defined in registered national securities exchange insignificant deviation from Regulation Exchange Act Section 3(a)(39) from or national securities association for Crowdfunding under Rule 502. acting as, or being an associated person conduct inconsistent with just and Consistent with the proposal and with of, an intermediary unless permitted to 1197 equitable principles of trade. Rule 506, the final disqualification rules do so by Commission rule or order. The Consistent with Rules 262 and 506 provide that events relating to certain term ‘‘subject to a statutory and the proposal, we also are adopting affiliated issuers are not disqualifying if disqualification’’ has an established provisions allowing for a waiver from the events pre-date the affiliate meaning under Exchange Act Section and a reasonable care exception to the relationship. Specifically, Rule 503(c) 3(a)(39) and defines circumstances that disqualification provisions.1198 Under provides that events relating to any subject a person to a statutory the final rules, an issuer will not lose affiliated issuer that occurred before the the benefit of the Section 4(a)(6) disqualification with respect to affiliation arose will be not considered membership or participation in, or exemption if it is able to show that it did disqualifying if the affiliated entity is association with a member of, a self- not know, and in the exercise of not (1) in control of the issuer or (2) regulatory organization.1207 Because reasonable care could not have known, under common control with the issuer funding portals, like broker-dealers, are of the existence of a disqualification.1199 by a third party that was in control of required to be members of FINRA or any Further, persons that are disqualified the affiliated entity at the time of such other applicable registered national from relying on the exemption may events.1203 request a waiver of disqualification from We also have modified the final rules securities association, we anticipate that the Commission.1200 to expressly include funding portals in funding portals will take appropriate The final rules also specify that the list of entities that could be subject steps to check the background of any triggering events that pre-date to felony and misdemeanor convictions, person seeking to become associated effectiveness of the final rules will not injunctions and court orders that would with them, including whether such cause disqualification, but instead must constitute disqualifying events.1204 As be disclosed on a basis consistent with proposed, funding portals would have 1205 15 U.S.C. 78c(39). Rules 262 and 506(e).1201 Specifically, been included because they meet the 1206 See the Proposing Release at note 812 for a issuers will be required to disclose in discussion of differences between Exchange Act definition of broker; however, for Section 3(a)(39) and Rule 262. Despite the their offering materials matters that clarity, the final rule expressly includes differences, we believe that Section 3(a)(39) and would have triggered disqualification them. Rule 262 are substantially similar, in particular had they occurred after the effective with regard to the persons and events they cover, date of proposed Regulation b. Intermediaries and Certain Other their scope and their purpose. 1207 1202 Associated Persons Events that could result in a statutory Crowdfunding. In a change from the disqualification for an associated person under (1) Proposed Rules Section 3(a)(39) include, but are not limited to: 1194 See Rule 503(a)(7) of Regulation Section 302(d)(1)(B) requires the Certain misdemeanor and all felony criminal Crowdfunding. convictions; temporary and permanent injunctions 1195 See Rule 503(a)(8) of Regulation Commission to establish issued by a court of competent jurisdiction Crowdfunding. disqualification provisions under which involving a broad range of unlawful investment 1196 See Rule 503(a)(4) of Regulation an intermediary would not be eligible to activities; expulsions (and current suspensions) Crowdfunding. effect or participate in transactions from membership or participation in an SRO; bars 1197 See Rule 503(a)(6) of Regulation (and current suspensions) ordered by the Crowdfunding. Commission or an SRO; denials or revocations of 1203 See Rule 503(c) of Regulation Crowdfunding. registration by the CFTC; and findings by the 1198 See Rule 503(b) of Regulation Crowdfunding. 1204 See Rules 503(a)(1)(iii) and 503(a)(2)(iii) of Commission, CFTC or an SRO that a person: (1) 1199 See Rule 503(b)(4) of Regulation Regulation Crowdfunding. Because funding portals ‘‘willfully’’ violated the federal securities or Crowdfunding. are brokers within the meaning of Exchange Act commodities laws, or the Municipal Securities 1200 See Rule 503(b)(2) of Regulation Section (3)(a)(4) (albeit exempt from registration as Rulemaking Board (MSRB) rules; (2) ‘‘willfully’’ Crowdfunding. such), we believe that they would be covered by the aided, abetted, counseled, commanded, induced or 1201 See Rules 201(u) and 503(b)(1) of Regulation term ‘‘broker’’ in the final rule. Nevertheless, for procured such violations; or (3) failed to supervise Crowdfunding. clarity, we are adding funding portals to the final another who commits violations of such laws or 1202 See Rule 201(u) of Regulation Crowdfunding. rule text to avoid any confusion in this regard. rules. 15 U.S.C. 78c(a)(39).

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person is subject to a statutory associated with a member (‘‘notice of broker-dealers’ publication of quotations disqualification. admission or continuance for certain over-the-counter securities in In addition, we proposed to clarify notwithstanding a statutory a quotation medium other than a that associated persons of disqualification,’’ as described in Rule national securities exchange.1214 The intermediaries engaging in transactions 19h–1(a)). Among other things, Rule Commission adopted Rule 15c2–11 to in reliance on Section 4(a)(6) must 19h–1 provides for Commission review prevent fraudulent and manipulative comply with Exchange Act Rule 17f– of notices filed by SROs proposing to trading schemes that had arisen in 2,1208 relating to the fingerprinting of admit any person to, or continue any connection with the distribution and securities industry personnel. Under the person in, membership or association trading of certain unregistered proposal, Exchange Act Rule 17f–2 with a member notwithstanding a securities.1215 The rule prohibits broker- would have applied to all brokers, statutory disqualification as defined in dealers from publishing quotations (or including registered funding portals. Section 3(a)(39). Because intermediaries submitting quotations for publication) The proposed instruction to Rule 503(d) are required to be members of a in a ‘‘quotation medium’’ 1216 for would have clarified that Rule 17f–2 registered national securities association covered over-the-counter securities generally requires the fingerprinting of (which is an SRO), actions taken by the without first reviewing basic every person who is a partner, director, SRO with respect to a proposed information about the issuer, subject to officer or employee of a broker, subject admission or continuance with respect certain exceptions.1217 A broker-dealer to certain exceptions. to an intermediary or its associated also must have a reasonable basis for (2) Final Rules persons will be subject to Rule 19h–1. believing that the issuer information is Thus, the ‘‘pursuant to Commission accurate in all material respects and that We are adopting Rule 503(d) as rule’’ provision in Rule 503(d) will be it was obtained from a reliable proposed. We received two comments satisfied if the admission or continuance source.1218 on the proposed rule. One commenter request was subject to the requirements To be clear, the rules adopted today was in favor,1209 while another and process of Exchange Act Rule 19h– do not affect the obligations of a broker- commenter was opposed.1210 The 1. We also are adopting, as proposed, dealer under Exchange Rule 15c2–11 to Section 3(a)(39) standard is an the instruction to Rule 503(d) clarifying have a reasonable basis under the established one among financial that the Rule 17f–2 fingerprinting circumstances for believing that the intermediaries and their regulators. For requirements are applicable to all information required by Rule 15c2–11 is this reason, we believe the Section associated persons of intermediaries accurate in all material respects, and 3(a)(39) standard is more appropriate for engaging in transactions in reliance on that the sources of the information are intermediaries than Rule 262 or the Section 4(a)(6). reliable, prior to publishing any issuer disqualification rules under quotation, absent an exception,1219 for a 7. Secondary Market Trading Regulation Crowdfunding. We are covered security in any quotation concerned that if we imposed a new or In addition to the actions the medium.1220 The staff is directed to different statutory disqualification Commission is taking today to permit standard only for those intermediaries the offer and sale of securities in 1214 17 CFR 240.15c2–11. that engage in transactions in reliance reliance on Section 4(a)(6), the 1215 See generally Initiation or Resumption of on Section 4(a)(6), we may create Commission also recently adopted rules Quotations by a Broker or Dealer Who Lacks Certain confusion and unnecessary burdens on that exempt from the registration Information, Exchange Act Release No. 9310 (Sept. 13, 1971), 36 FR 18641 (Sept. 18, 1971). See also market participants. We note that such requirements of the Securities Act Publication or Submission of Quotations Without a divergence in standards would cause certain offerings of up to $50 million of Specified Information, Exchange Act Release No. brokers that act as intermediaries in securities annually,1211 and rules to 39670 (Feb. 17, 1998), 63 FR 9661, 9662 (Feb. 25, reliance on Section 4(a)(6) (and their eliminate the prohibition against general 1998). 1216 17 CFR 240.15c2–11(e)(1) (defining quotation associated persons) to become subject to solicitation in certain offerings pursuant medium as ‘‘any ‘interdealer quotation system’ or two distinct standards for to Regulation D under the Securities any publication or electronic communications disqualification. Instead, we believe that Act.1212 The Commission is mindful of network or other device which is used by brokers intermediaries should be subject to the the need for market participants to have or dealers to make known to others their interest in updated information in connection with transactions in any security, including offers to buy same statutory disqualification standard or sell at a stated price or otherwise, or invitations regardless of whether or not they are the secondary market trading of of offers to buy or sell’’). engaging in transactions involving the securities issued pursuant to these 1217 17 CFR 240.15c2–11(a). See Publication or offer or sale of securities in reliance on rules.1213 Submission of Quotations Without Specified Section 4(a)(6), and note that applying The anti-fraud provisions of the Information, Exchange Act Release No. 34–39670 federal securities laws, and rules (Feb. 17, 1998), 63 FR 9661 (Feb. 25, 1998). consistent standards for all brokers and 1218 adopted thereunder, apply to the Id. funding portals will also assist FINRA 1219 See 17 CFR 240.15c2–11(f). For example, the or any other registered national secondary market trading of securities, rule includes an exception for unsolicited orders. securities association in its oversight of including securities offered and sold in 17 CFR 240.15c2–11(f)(2). We remind broker- its members. Further, Exchange Act reliance on Section 4(a)(6). For example, dealers that such unsolicited orders must be made Exchange Act Rule 15c2–11 governs by a customer (other than a person acting as or for Rule 19h–1 prescribes the form and a dealer) and that broker-dealers should be prepared content of, and establishes the to demonstrate that a customer initiated the order. mechanism by which the Commission 1211 See Regulation A Adopting Release, supra, 17 CFR 240.15c2–11(b)(1). reviews, proposals submitted by SROs note 506. 1220 Rule 15c2–11(c) further requires that broker- 1212 See Rule 506(c) Adopting Release, supra, dealers keep the documents that they reviewed to (such as FINRA) for its members, to note 5. establish this reasonable basis for believing that the allow a member or associated person 1213 As discussed in Section II.E.2, Rule 501 required information is accurate in all material subject to a statutory disqualification to imposes a one-year restriction on the transfer of respects for a period of not less than three years. become or remain a member or be securities issued in a transaction exempt from 17 CFR 240.15c2–11(c). The lack of documents used registration pursuant to Section 4(a)(6) of the at the time the broker-dealer established the Securities Act, other than to the issuer, an reasonable basis for its belief or presentation of 1208 17 CFR 240.17f–2. accredited investors, or to a family member of the incomplete or non-responsive documents, 1209 See NASAA Letter. purchaser or the equivalent in connection with including later-dated filings, would not be 1210 See Public Startup Letter 3. certain specified events. Continued

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begin promptly an evaluation of the rules to exempt from Section 12(g), A. Baseline operation of Rule 15c2–11, both either conditionally or unconditionally, The baseline for our economic historically and in light of recent market securities acquired pursuant to an analysis of Regulation Crowdfunding, developments, including Regulation offering made in reliance on Section including the baseline for our Crowdfunding and earlier proposals for 4(a)(6). consideration of the effects of the final 1221 amendments to Rule 15c2–11, to As discussed in detail above, we are rules on efficiency, competition and assess how the rule is meeting adopting Regulation Crowdfunding to capital formation, is the situation in regulatory objectives and to recommend implement the requirements of Title III. existence today, in which startups and any appropriate changes. In addition, The final rules implement the new small businesses seeking to raise capital and not withstanding any changes exemption for the offer and sale of through securities offerings must which may be made to Rule 15c2–11 in securities pursuant to the requirements register the offer and sale of securities the interim, the staff is also directed to of Section 4(a)(6) and provide a under the Securities Act unless they can review the development of secondary framework for the regulation of issuers rely on an existing exemption from market trading in these securities during and intermediaries, which include registration under the federal securities the study it plans to undertake within broker-dealers and funding portals laws. Moreover, under existing three years following the effective date engaging in such transactions. The final requirements, intermediaries intending of Regulation Crowdfunding, and to rules also permanently exempt to facilitate such transactions generally recommend to the Commission such securities offered and sold in reliance are required to register with the additional actions with respect to Rule on Section 4(a)(6) from the record Commission as broker-dealers under 15c2–11, as may be warranted.1222 holder count under Exchange Act Exchange Act Section 15(a). Section 12(g). III. Economic Analysis 1. Current Methods of Raising Up to $1 We are mindful of the costs imposed Million of Capital Title III sets forth a comprehensive by, and the benefits to be obtained from, regulatory structure for startups and our rules. Securities Act Section 2(a) The potential economic impact of the small businesses to raise capital through and Exchange Act Section 3(f) require final rules, including their effects on securities-based crowdfunding us, when engaging in rulemaking that efficiency, competition and capital transactions using the Internet. In requires us to consider or determine formation, will depend on how the particular, Title III provides an whether an action is necessary or crowdfunding method of raising capital exemption from registration for certain appropriate in the public interest, to compares to existing methods that offerings of securities by adding consider, in addition to the protection of startups and small businesses currently Securities Act Section 4(a)(6). In investors, whether the action will use for raising capital. Startups and addition, Title III: promote efficiency, competition and small businesses can potentially access • Adds Securities Act Section 4A, capital formation. Exchange Act Section a variety of external financing sources in which requires, among other things, that 23(a)(2) requires us, when adopting the capital markets through registered or issuers and intermediaries that facilitate rules under the Exchange Act, to unregistered offerings of debt, equity transactions between issuers and consider the impact that any new rule and hybrid securities and bank loans. investors provide certain information to Issuers seeking to raise capital must would have on competition and to not investors, take certain actions and register the offer and sale of securities adopt any rule that would impose a provide notices and other information to under the Securities Act or qualify for burden on competition that is not the Commission; an exemption from registration. necessary or appropriate in furtherance • adds Exchange Act Section 3(h), Registered offerings, however, are of the purposes of the Exchange Act. which requires the Commission to adopt generally too costly to be viable The discussion below addresses the rules to exempt, either conditionally or alternatives for startups and small economic effects of the final rules, unconditionally, funding portals from businesses. Issuers conducting including the likely costs and benefits of having to register as broker-dealers or registered offerings incur Commission Regulation Crowdfunding, as well as the dealers pursuant to Exchange Act registration fees, legal and accounting likely effect of the final rules on Section 15(a)(1); fees and expenses, transfer agent and efficiency, competition and capital • mandates that the Commission registrar fees, costs associated with formation. Given the specific language adopt disqualification provisions under periodic reporting requirements and of the statute and our understanding of which an issuer would not be able to other regulatory requirements and Congress’s objectives, we believe that it avail itself of the exemption for various other fees. Two surveys is appropriate for the final rules crowdfunding if the issuer or other concluded that the average initial generally to follow the statutory related parties, including an compliance cost associated with provisions. We nonetheless also rely on intermediary, were subject to a conducting an initial public offering is our discretionary authority to adopt disqualifying event; and $2.5 million, followed by an ongoing • certain additional provisions and make adds Exchange Act Section 12(g)(6), compliance cost for issuers, once public, certain other adjustments to the final which requires the Commission to adopt of $1.5 million per year.1223 Hence, for rules. While the costs and benefits of the final rules in large part stem from the sufficient to demonstrate that the broker-dealer had 1223 See IPO Task Force, Rebuilding the IPO On- satisfied its obligations in this regard. See Initiation statutory mandate of Title III, certain Ramp, at 9 (Oct. 20, 2011) for the two surveys, or Resumption of Quotations Without Specified costs and benefits are affected by the available at http://www.sec.gov/info/smallbus/ Information, Exchange Act Release No 27247 (Sept. discretion we exercise in connection acsec/rebuilding_the_ipo_on-ramp.pdf (‘‘IPO Task 14, 1989), 54 FR 39194, 39196 (Sept. 25, 1989) with implementing this mandate. For Force’’). These estimates should be interpreted with (‘‘Subject to certain exceptions, the Rule prohibits the caveat that most firms in the IPO Task Force a broker or dealer from submitting a quotation for purposes of this economic analysis, we surveys likely raised more than $1 million. The IPO a security in a quotation medium unless it has in address the costs and benefits resulting Task Force surveys do not provide a breakdown of its records specified information concerning the from the mandatory statutory provisions costs by offering size. However, compliance related security and the issuer . . .’’). and our exercise of discretion together costs of an initial public offering and subsequent 1221 See Exchange Act Release No. 41110 (Feb. 25, compliance related costs of being a reporting 1999), 64 FR 11124 (Mar. 8, 1999). because the two types of benefits and company likely have a fixed cost component that 1222 See Section II. costs are not separable. would disproportionately affect small offerings.

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an issuer seeking to raise less than $1 could rely on current exemptions from even though their offering size would million, a registered offering may not be registration under the Securities Act, qualify for an exemption under Rule 504 economically feasible.1224 Moreover, such as Section 3(a)(11),1226 Section or Rule 505.1231 The 2013 amendment issuers conducting registered offerings 4(a)(2),1227 Regulation D,1228 and to Rule 506 of Regulation D permits an also usually pay underwriter fees, Regulation A.1229 While we do not have issuer to engage in general solicitation which are, on average, approximately complete data on offerings relying on an and general advertising in offering and 7% of the proceeds for initial public exemption under Section 3(a)(11) or selling securities pursuant to Rule offerings, approximately 5% for follow- Section 4(a)(2), certain data available 506(c), subject to certain conditions,1232 on equity offerings and approximately from Regulation D and Regulation A which can enable issuers to reach a 1–1.5% for issuers raising capital filings allow us to gauge how frequently potentially broader base of accredited through public bond issuances.1225 issuers seeking to raise up to $1 million investors. As shown in the table below, An alternative to raising capital use these exemptions. through registered offerings is to offer Based on Regulation D filings by although issuers can raise unlimited and sell securities by relying on an issuers that are not pooled investment amounts of capital relying on the Rule existing exemption from registration vehicles from 2009 to 2014,1230 a 506(c) exemption, most of the issuers under the federal securities laws. For substantial number of issuers chose to made offers for amounts of up to $1 example, startups and small businesses raise capital by relying on Rule 506, million.

Offering size Regulation D exemption ≤$1 $1–5 $5–50 >$50 Million Million Million Million

Rule 504 ...... 3,643 Rule 505 ...... 501 774 Rule 506(b) ...... 27,106 25,746 18,670 2,733 Rule 506(c) ...... 588 531 419 89

Total ...... 31,838 27,051 19,089 2,822

Regulation A ...... 5 33 Note: Data based on Form D, excluding issuers that are pooled investment vehicles, and Form 1–A filings from 2009 to 2014. We consider only new offerings and exclude offerings with amounts sold reported as $0 on Form D. Data on Rule 506(c) offerings covers the period from September 23, 2013 (the day the rule became effective) to December 31, 2014. We also use the maximum amount indicated in Form 1–A to de- termine offering size for Regulation A offerings.1233

Based on the table above, from 2009 exempt certain Regulation A offerings Each of these exemptions, however, to 2014, almost no issuers in offerings (Tier 2 offerings) from state registration includes restrictions that may limit its of up to $1 million relied on Regulation requirements. Because these changes are suitability for startups and small A. This data does not reflect the recent so recent, more time is needed to businesses. The table below lists the changes to Regulation A adopted by the observe how the amendments to main requirements of these exemptions. Commission on March 25, 2015. Those Regulation A will affect capital raising For example, the exemption under changes allow issuers to raise up to $50 by small issuers.1234 Securities Act Section 3(a)(11) is limited million over a 12-month period and

Title I of the JOBS Act provided certain and Hedge Funds as Distributors of Equity 1231 This tendency could, in part, be attributed to accommodations to issuers that qualify as emerging Exposure, 25 Rev. Fin. Stud. 3077–3112 (2012). two features of Rule 506: preemption from state growth companies (EGCs). According to a recent 1226 Securities Act Section 3(a)(11), generally registration (‘‘blue sky’’) requirements and an working paper, the underwriting, legal and known as the ‘‘intrastate offering exemption,’’ unlimited offering amount. See also U.S. accounting fees of EGC and non-EGC initial public provides an exemption from registration for issuers Government Accountability Office, Factors That offerings were similar (based on a time period from doing business within a particular state or territory. May Affect Trends in Regulation A Offerings, GAO– April 5, 2012 to April 30, 2014). For a median EGC To qualify for this exemption, the offering must be 12–839 (Jul. 3, 2012), available at http:// initial public offering, gross spread comprised 7% ‘‘part of an issue offered and sold only to persons www.gao.gov/products/GAO-12-839 (‘‘GAO of proceeds and accounting and legal fees resident within a single State or Territory, where Report’’). the issuer of such security is a person resident and comprised 2.4% of proceeds. See Susan 1232 In particular, all purchasers of securities sold doing business within, or, if a corporation, Chaplinsky, Kathleen W. Hanley, and S. Katie in any offering under the exemption must be Moon, The JOBS Act and the Costs of Going Public, incorporated by and doing business within, such accredited investors, and the issuer must take Working Paper (2014), available at http://ssrn.com/ State or Territory.’’ reasonable steps to verify that purchasers of abstract_id=2492241. 1227 Securities Act Section 4(a)(2) provides that securities sold in any offering are accredited 1224 Id. the registration provisions of the Securities Act investors (17 CFR 230.506). See Rule 506(c) 1225 shall not apply to ‘‘transactions by an issuer not See, e.g., Hsuan-Chi Chen and Jay R. Ritter, Adopting Release, supra, note 5. The Seven Percent Solution, 55 J. Fin. 1105–1131 involving a public offering.’’ 1233 We only consider Regulation A offerings that (2000); Mark Abrahamson, Tim Jenkinson, and 1228 Regulation D provides exemptions and a have been qualified by the Commission. For Howard Jones, Why Don’t U.S. Issuers Demand nonexclusive safe harbor from registration for European Fees for IPOs? 66 J. Fin. 2055–2082 certain types of securities offerings. purposes of counting filings, we exclude (2011); Shane A. Corwin, The Determinants of 1229 Regulation A provides a conditional amendments or multiple Form 1–A filings by the Underpricing for Seasoned Equity Offers, 58 J. Fin. exemption from registration for certain small same issuer in a given year. For purposes of 2249–2279 (2003); Lily Hua Fang, Investment Bank issuances. determining the offering size for Regulation A Reputation and the Price and Quality of 1230 See Scott Bauguess, Rachita Gullapalli, and offerings, we use the maximum amount indicated Underwriting Services, 60 J. Fin. 2729–2761 (2005); Vladimir Ivanov, Capital Raising in the U.S.: An on the latest pre-qualification Form 1–A or Rongbing Huang and Donghang Zhang, Managing Analysis of the Market for Unregistered Securities amended Form 1–A. We reclassify two offerings Underwriters and the Marketing of Seasoned Equity Offerings, 2009–2014 (October 2015) (‘‘Unregistered that are dividend reinvestment plans with unclear Offerings, 46 J. Fin. Quant. Analysis 141–170 Offerings White Paper’’), available at: http:// offering amounts as having the maximum permitted (2011); Stephen J. Brown, Bruce D. Grundy, Craig www.sec.gov/dera/staff-papers/white-papers/ offering amount. M. Lewis and Patrick Verwijmeren, Convertibles unregistered-offering10-2015.pdf. 1234 See Regulation A Adopting Release.

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to intrastate offerings.1235 Issuers Form 1–A. Such compliance related small businesses. While Rule 506 under conducting a Regulation A offering may costs may be a more significant Regulation D preempts the applicability be required to register their offerings constraint on issuers in offerings of up of state registration requirements and with states or meet additional regulatory to $1 million.1236 Issuers of securities new Rule 506(c) permits general requirements, such as investment pursuant to Securities Act Section solicitation and general advertising, an limitations (if the investor is not an 4(a)(2) and Rules 504, 505 and 506(b) issuer seeking to rely on Rule 506(c) is accredited investor), audited financial under Regulation D generally may not limited to selling securities only to statements and ongoing reporting. In engage in general solicitation and accredited investors.1237 addition, issuers in all Regulation A general advertising to reach investors, offerings are required to file with the which also can place a significant The table below summarizes the main Commission an offering document on limitation on offerings by startups and features of each exemption.

1238 Resale re- Blue sky law Type of offering Offering limit Solicitation Issuer and investor requirements Filing requirement strictions preemption

Section 3(a)(11) ...... None ...... All offerees must be All issuers and investors must be resi- None ...... No 1239 ...... No resident in state. dent in state. Section 4(a)(2) ...... None ...... No general solicita- Transactions by an issuer not involving None ...... Restricted se- No tion. any public offering 1240. curities. Regulation A ...... Tier 1: $20 million Testing the waters U.S. or Canadian issuers, excluding in- File testing the No ...... Tier 1: No with $6 million permitted both vestment companies, blank-check waters materials Tier 2: Yes limit on sec- before and after companies, reporting companies, and and Form 1–A for ondary sales by filing the offering issuers of fractional undivided inter- Tiers 1 and 2; file affiliates of the statement. ests in oil or gas rights, or similar in- annual, semi-an- issuer; terests in other mineral rights 1241. nual, and current Tier 2: $50 million reports for Tier 2; with $15 million file exit report for limit on sec- Tier 1 and to sus- ondary sales by pend or terminate affiliates of the reporting for Tier issuer. 2. Rule 504 Regulation $1 million ...... General solicitation Excludes investment companies, blank- File Form D 1243 ..... Restricted in No D. permitted in some check companies, and Exchange Act some cases 1242. reporting companies. cases 1244. Rule 505 Regulation $5 million ...... No general solicita- Unlimited accredited investors and up to File Form D 1245 ..... Restricted se- No D. tion. 35 non-accredited investors. curities. Rule 506(b) Regula- None ...... No general solicita- Unlimited accredited investors and up to File Form D 1246 ..... Restricted se- Yes tion D. tion. 35 non-accredited investors. curities. Rule 506(c) Regula- None ...... General solicitation Unlimited accredited investors; no non- File Form D 1248 ..... Restricted se- Yes tion D. is permitted sub- accredited investors. curities. ject to certain conditions 1247.

2. Current Sources of Funding for securities offerings, involves lending by and more formal funding channels.1249 Startups and Small Businesses That financial institutions or derives from Among other things, family and friends Could Be Substitutes or Complements to family and friends. may donate funds, loan funds or acquire Crowdfunding an equity stake in the business. A recent a. Family and Friends At present, startups and small study of the financing choices of businesses can raise capital from several Family and friends are sources startups finds that most of the capital sources that could be close substitutes through which startups and small supplied by friends and family is in the for or complements to crowdfunding businesses can raise capital. This source form of loans.1250 In contrast to a transactions that rely on Section 4(a)(6). of capital is usually available early in commercial lender that, for example, This capital raising generally is the lifecycle of a small business, before would need to assess factors such as the conducted through unregistered the business engages in arm’s-length willingness and ability of a borrower to

1235 See note 1226. 1240 Section 4(a)(2) of the Securities Act provides 1244 Restricted unless the offering is registered in 1236 See Rutheford B. Campbell, Jr., Regulation A: a statutory exemption for ‘‘transactions by an issuer a state requiring the use of a substantive disclosure Small Businesses’ Search for ‘‘A Moderate Capital’’, not involving any public offering.’’ See SEC v. document or sold under a state exemption for sale 31 Del. J. Corp. L. 77, 106 (2006). See also GAO Ralston Purina Co. 346 U.S. 119 (1953) (holding to accredited investors. Report, note 1231. that an offering to those who are shown to be able 1245 Filing is not a condition of the exemption, to fend for themselves is a transaction ‘‘not 1237 See Rule 506(c) Adopting Release, note 5. but it is required under Rule 503. involving any public offering.’’) 1238 1246 Filing is not a condition of the exemption, Aggregate offering limit on securities sold 1241 The Regulation A exemption also is not but it is required under Rule 503. within a twelve-month period. available to companies that have been subject to 1239 1247 General solicitation and general advertising Although Section 3(a)(11) does not have any order of the Commission under Exchange Act explicit resale restrictions, the Commission has Section 12(j) entered within the past five years; are permitted under Rule 506(c), provided that all explained that ‘‘to give effect to the fundamental have not filed ongoing reports required by the purchasers are accredited investors and the issuer purpose of the exemption, it is necessary that the regulation during the preceding two years, or are takes reasonable steps to verify accredited investor entire issue of securities shall be offered and sold disqualified under the regulation’s ‘‘bad actor’’ status. to, and come to rest only in the hands of residents disqualification rules. 1248 Filing is not a condition of the exemption, within the state.’’ See SEC Rel. No. 33–4434 (Dec. 1242 No general solicitation or advertising is but it is required under Rule 503. 6, 1961) [26 FR 11896 (Dec. 13, 1961)]. State permitted unless the offering is registered in a state 1249 See Paul Gompers and Josh Lerner, The securities laws, however, may have specific resale requiring the use of a substantive disclosure Venture Capital Cycle (MIT Press 2006) restrictions. Securities Act Rule 147, a safe harbor document or sold under a state exemption for sales (‘‘Gompers’’); Alicia M. Robb and David T. under Section 3(a)(11), limits resales to persons to accredited investors with general solicitation. Robinson, The Capital Structure Decisions of New residing in-state for a period of nine months after 1243 Filing is not a condition of the exemption, Firms, 27 Rev. Fin. Stud. 153–179 (2014) (‘‘Robb’’). the last sale by the issuer. [17 CFR 230.147]. but it is required under Rule 503. 1250 See Robb, note 1249.

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repay the loan and the viability of its sources that allow us to quantify their bank loans, business credit cards and business, family and friends may be magnitude and compare them to other credit lines. Another recent report, willing to provide capital based current sources of capital. however, suggests that bank lending to primarily or solely on personal b. Commercial Loans, Peer-to-Peer small businesses fell by $100 billion relationships. Family and friends, Loans and Microfinance from 2008 to 2011 and that, by 2012, however, may be able to provide only a less than one-third of small businesses Startups and small businesses also limited amount of capital compared to reported having a business bank may seek loans from financial other sources. In addition, financial loan.1253 Trends in small business institutions.1251 A 2014 study of the arrangements with family and friends financing choices of startups suggests lending by FDIC-insured depository may not be an optimal source of funding that they resort to bank financing early institutions are illustrated in the figure if any of the parties is not in their lifecycle.1252 The study finds below. As of June 2014, business loans knowledgeable about the structuring of that businesses rely heavily in the first of up to $1 million amounted to loan agreements, equity investments or year after being formed on external debt approximately $590 billion, related areas of accounting. We do not sources such as bank financing, mostly approximately 17% lower than the 2008 have data available on these financing in the form of personal and commercial level.1254

Additionally, although covering the institutions—depositary and non- Various loan guarantee programs of pre-recessionary period, a Federal depositary institutions (e.g., finance the Small Business Administration Reserve Board staff study analyzing data companies, factors or leasing (‘‘SBA’’) make credit more accessible to from the 2003 Survey of Small Business companies).1256 Lines of credit were the small businesses by either lowering the Finance suggests that 60 percent of most widely used type of credit.1257 interest rate of the loan or enabling a small businesses have outstanding Other types included mortgage loans, market-based loan that a lender would credit in the form of a credit line, a loan equipment loans and motor vehicle not be willing to provide absent a 1255 or a capital lease. These loans were loans.1258 guarantee.1259 Although the SBA does borrowed from two types of financial

1251 Using data from the 1993 Survey of Small Surveys (2012), available at http://papers.ssrn.com/ 1255 See Federal Reserve Board, Financial Business Finance, one study indicates that financial sol3/papers.cfm?abstract_id=2028176. Services Used by Small Businesses: Evidence from institutions account for approximately 27% of small 1252 See Robb, note 1249. the 2003 Survey of Small Business Finances firms’ borrowings. See Allen N. Berger and Gregory 1253 See The Kauffman Foundation, 2013 State of (October 2006), available at http:// F. Udell, The Economics of Small Business Finance: Entrepreneurship Address (Feb. 5, 2013), available www.federalreserve.gov/pubs/bulletin/2006/ smallbusiness/smallbusiness.pdf (‘‘2003 Survey’’). The Roles of Private Equity and Debt Markets in the at http://www.kauffman.org/uploadedFiles/Down _ 1256 See Rebel Cole, What Do We Know About the Financial Growth Cycle, 22 J. Banking & Fin. 613 LoadableResources/SOE%20Report 2013pdf. The Capital Structure of Privately Held Firms? Evidence (1998). See also 1987, 1993, 1998 and 2003 Surveys report cautions against prematurely concluding that banks are not lending enough to small businesses from the Surveys of Small Business Finance, 42 Fin. of Small Business Finances, available at http:// as the sample period of the study includes the most Management 777–813 (2013). www.federalreserve.gov/pubs/oss/oss3/ recent recession. 1257 See 2003 Survey, note 1255 (estimating that nssbftoc.htm. The Survey of Small Business 1254 We define small business loans to include 34% of small businesses use lines of credit). Finances was discontinued after 2003. Using data commercial and industrial loans to U.S. addressees 1258 Id. from the Kauffman Foundation Firm Surveys, one of up to $1 million and loans secured by nonfarm 1259 Numerous states also offer a variety of small study finds that 44% of startups use loans from nonresidential properties. See Federal Deposit business financing programs, such as Capital financial institutions. See Rebel A. Cole and Insurance Corporation, Statistics on Depository Access Programs, collateral support programs and Tatyana Sokolyk, How Do Start-Up Firms Finance Institutions Report, available at http://www2.fdic. loan guarantee programs. These programs are Their Assets? Evidence from the Kauffman Firm gov/SDI/SOB/ (‘‘FDIC Statistics’’). eligible for support under the State Small Business Continued

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not itself act as a lender, the agency financial institutions difficult to meet outstanding portfolio balance of online guarantees a portion of loans made and and may not be able to rely on these lenders has doubled every year, administered by lending institutions. institutions to secure funding. For although this market represents less SBA loan guarantee programs include example, financial institutions generally than $10 billion in outstanding loan 7(a) loans 1260 and CDC/504 loans.1261 require a borrower to provide collateral capital as of the fourth quarter of 2013. For example, in SBA fiscal year 2014, and/or a guarantee,1265 which startups, Several models of online small business the SBA supported approximately $28.7 small businesses and their owners may lending have emerged: Online lenders billion in 7(a) and CDC/504 loans not be able to provide. Collateral and/ raising capital from institutional distributed to approximately 51,500 or a guarantee may similarly be required investors and lending on their own small businesses.1262 SBA-guaranteed for loans guaranteed by the SBA. account (for example, short-term loan loans, however, currently account for a Another source of debt financing for products similar to a merchant cash relatively small share (18 percent) of the startups and small businesses is peer-to- advance); peer-to-peer platforms; and balances of small business loans peer lending, which began developing ‘‘lender-agnostic’’ online marketplaces 1263 1266 outstanding. The SBA also offers the in 2005. Such debt transactions are that facilitate small business borrower Microloan program, which provides facilitated by online platforms that access to various loan products (such as funds to specially designated connect borrowers and lenders and term loans, lines of credit, merchant intermediary lenders that administer the potentially offer small businesses 1264 cash advances and factoring products) program for eligible borrowers. additional flexibility on pricing, from traditional and alternative Many startups and small businesses repayment schedules, collateral or lenders.1271 may find loan requirements imposed by According to the 2014 guarantee requirements, and other Small Business Credit survey,1272 18% terms. Some market participants offer a Credit Initiative, available at http:// of all small businesses surveyed applied secondary market for loans originated for credit with an online lender. The www.treasury.gov/resource-center/sb-programs/ on their own sites.1267 At least one of Pages/ssbci.aspx. survey also showed differences in the 1260 the platforms sells third-party issued 15 U.S.C. 631 et se. The 7(a) loans provide use of online lenders by type of securities to multiple individual small businesses with financing guarantees for a borrower: 22% of small businesses variety of general business purposes through investors, thus improving the liquidity categorized in the survey as ‘‘startups’’ participating lending institutions. of these securities.1268 Like in any 1261 15 U.S.C. 695 et se. The CDC/504 loans are (i.e., businesses that have been in traditional lending arrangement, made available through ‘‘certified development business for less than five years) applied however, borrowers are required to companies’’ or ‘‘CDCs,’’ typically structured with for credit with online lenders. By the SBA providing 40% of the total project costs, make regular payments to their lenders. comparison, 8% of small businesses a participating lender covering up to 50% of the This requirement could make it a less total project costs and the borrower contributing categorized in the survey as ‘‘growers’’ attractive option for small businesses 10% of the total project costs. (i.e., businesses that were profitable and 1262 with negative cash flows and short See U.S. Small Business Administration, FY experienced an increase in revenue) 2016 Congressional Budget Justification and FY operating histories, both of which may 2014 Annual Performance Report, available at make it more difficult for such applied with online lenders, and 3% of https://www.sba.gov/content/fiscal-year-2016- businesses to demonstrate their ability small businesses categorized in the congressional-budget-justificationannual- survey as ‘‘mature firms’’ (i.e., performance-report (‘‘2014 Annual Performance to repay loans. According to some Report’’). estimates, the global volume of businesses that have been in business 1263 As of the end of SBA fiscal year 2014, the ‘‘lending-based’’ crowdfunding, which for more than five years, had over ten SBA-guaranteed business loans outstanding includes peer-to-peer lending to employees, and had prior debt) applied (including 7(a) and 504 loans) equaled $107.5 with an online lender. The latter two billion. See Small Business Administration Unpaid consumers and businesses, had risen to Loan Balances by Program, available at https:// approximately $11.08 billion in categories of small businesses were www.sba.gov/sites/default/files/files/WDS_Table1_ 1269 more likely to apply for credit with bank _ 2014. UPB Report.pdf. This comprises approximately Technology has facilitated the growth lenders than with online lenders. 18% of the approximately $590 billion in outstanding small business loans for commercial of alternative models of small business Microfinance is another source of debt real estate and commercial and industrial loans lending. According to one study,1270 the financing for startups and small discussed above. In 2014 the SBA expanded businesses. Microfinance consists of eligibility for loans under its business loan 1265 Approximately 92% of all small business programs. See SBA 504 and 7(a) Loan Programs small, working capital loans provided debt to financial institutions is secured, and about by microfinance institutions (‘‘MFIs’’) Updates (Mar. 21, 2014) [79 FR 15641 (Apr. 21, 52% of that debt is guaranteed, primarily by the 2014)]. In addition to loan guarantees, the SBA owners of the firm. See Berger, note 1251. that are invested in microenterprises or program portfolio also includes direct business 1266 loans, which are mainly microloans (outstanding See Ian Galloway, Peer-to-Peer Lending and direct business loans equaled $137.1 billion), and Community Development Finance, Federal Reserve Credit Access during the Recovery and How disaster loans. Bank of San Francisco, Working Paper (2009), Technology May Change the Game, Harvard available at http://www.frbsf.org/publications/ 1264 15 U.S.C. 631 et se. The Microloan program Business School Working Paper 15–004 (2014), community/wpapers/2009/wp2009-06.pdf. provides small, short-term loans to small businesses available at http://ssrn.com/abstract=2470523. 1267 and certain types of not-for-profit childcare centers. Id. 1271 Id. The maximum loan amount is $50,000, but the 1268 Id. We note that under current law, this 1272 The survey was conducted by the Federal average microloan is about $13,000. Intermediaries activity would require broker-dealer registration. Reserve Banks of New York, Atlanta, Cleveland, are nonprofit community-based organizations with 1269 See Massolution, 2015CF Crowdfunding and Philadelphia between September and experience in lending, as well as management and Industry Report: Market Trends, Composition and November of 2014. It focused on credit access technical assistance. Intermediaries set their own Crowdfunding Platforms, available at http:// among businesses with fewer than 500 employees lending requirements and generally require some reports.crowdsourcing.org/index.php?route in Alabama, Connecticut, Florida, Georgia, type of collateral as well as the personal guarantee =product/product&product_id=54 (‘‘Massolution Louisiana, New Jersey, New York, Ohio, of the business owner. See Microloan Program, U.S. 2015’’) at 56. The Massolution 2015 report refers to Pennsylvania, and Tennessee. The survey authors Small Business Administration, available at http:// peer-to-peer lending to consumers and peer-to- note that since the sample is not a random sample, www.sba.gov/content/microloan-program. business lending to small businesses as ‘‘lending- results were reweighted for industry, age, size, and As of the end of SBA fiscal year 2014, the SBA based’’ crowdfunding. The discussion in this geography to reduce coverage bias. See Federal Microloans outstanding equaled $136.7 billion. See economic analysis refers to peer-to-peer business Reserve Banks of New York, Atlanta, Cleveland and Small Business Administration Unpaid Loan lending more broadly in a sense synonymous with Philadelphia, Joint Small Business Credit Survey Balances by Program, available at https://www.sba. ‘‘lending-based’’ crowdfunding. Report (2014), available at http:// gov/sites/default/files/files/WDS_Table1_UPB_ 1270 See Karen Gordon Mills and Brayden www.newyorkfed.org/smallbusiness/SBCS-2014- Report.pdf. McCarthy, The State of Small Business Lending: Report.pdf.

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income-generating activities.1273 The capitalists (‘‘VCs’’) and angel investors. already used some other sources of typical users of microfinance services Entrepreneurs seek VC and angel financing, tend to be concentrated in and, in particular, of microcredit are financing usually after they have certain geographic regions (e.g., family-owned enterprises or self- exhausted sources of capital that California and Massachusetts) and often employed, low-income entrepreneurs, generally do not require the require their investments to have an such as street vendors, farmers, service entrepreneurs to relinquish control attractive business plan, meet certain providers, artisans and small producers, rights (e.g., personal funds from family growth benchmarks or fill a specific who live close to the poverty line in and friends). portfolio or industry niche.1278 In 1274 both urban and rural areas. According to data from the National addition, when investing in companies, The microfinance market has evolved Venture Capital Association, in calendar VCs tend to acquire significant control and grown considerably in the past year 2014, VCs invested approximately rights (e.g., board seats, rights of first decades. While data on the size of the $49.3 billion in 4,361 transactions overall industry is sparse, according to refusal, etc.), which they gradually involving 3,665 companies, which one report, in fiscal year 2012, the U.S. relinquish as the company approaches included seed, early-stage, expansion, 1279 microfinance industry was estimated to an initial public offering. In 2014, and late-stage companies. Seed and have disbursed $292.1 million across according to an industry source, early-stage deals represented 1.5% and 36,936 microloans and was estimated to information technology and medical/ 32.2%, respectively, of the dollar have $427.6 million in outstanding health/life sciences deals attracted the volume of deals and 4.4% and 49.7%, microloans (across 45,744 in largest dollar volume of VC respectively of the overall number of VC microloans).1275 As of 2013, this report financing.1280 According to a 2012 deals.1277 identified 799 microenterprise programs academic study, VCs appear to focus on that provide loans, training, technical Some startups, however, may struggle scale or potential for scale rather than assistance and other microenterprise to attract funding from VCs because VCs short-term profitability in their selection services directly to micro- tend to invest in startups with certain of targets, and firms that receive VC entrepreneurs.1276 characteristics. A defining feature of financing tend to be significantly larger VCs is that they tend to focus on startup than non-VC firms, based on c. Venture Capitalists and Angel companies with high-growth potential employment and sales.1281 Investors and a high likelihood of going public Startups and small businesses also after a few years of financing. VCs also may seek funding from venture tend to invest in companies that have

According to a recent report, angel in 2014, with approximately 73,400 funding and approximately 316,600 investments amounted to $24.1 billion entrepreneurial ventures receiving angel active angel investors.1282 In 2014, angel

1273 See Craig Churchill and Cheryl Frankiewicz, available at http://fieldus.org/Publications/Census Empirical Analysis of Venture Capital Contracts, 70 Making Microfinance Work: Managing for Improved HighlightsFY2012.pdf. Rev. Econ. Stud. 281–316 (2003). Performance, Geneva International Labor 1276 Id. See also note 1264 (describing the SBA 1280 See NVCA, note 1277. Organization (2006). Microloan program). 1281 See Manju Puri and Rebecca Zarutskie, On 1277 1274 See Joanna Ledgerwood, Microfinance See National Venture Capital Association, the Life Cycle Dynamics of Venture-Capital- and Handbook: An Institutional and Financial 2015 National Venture Capital Association Non-Venture-Capital-Financed Firms, 67 J. Fin., Yearbook, available at http://nvca.org/ Perspective, Washington DC, World Bank 2247–2293 (2012) (‘‘Puri’’). ?ddownload=1868 (‘‘NVCA’’). 1282 Publications (1999). See Jeffrey Sohl, The Investor Angel Market 1278 See Gompers, note 1249. in 2014: A Market Correction in Deal Size, Center 1275 See FIELD at the Aspen Institute, U.S. 1279 See Steven N. Kaplan and Per Stromberg, for Venture Research, May 14, 2015, available at Microenterprise Census Highlights, FY 2012, Financial Contracting Meets the Real World: An https://paulcollege.unh.edu/sites/paul Continued

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investments were concentrated in involves a percentage of revenue from a based crowdfunding campaign was software, healthcare, and IT services. license or a usage-based fee for the other $103,618.1297 In 2014, a typical equity- The average angel deal size was parties’ right to the ongoing use of an based campaign was larger, with the approximately $328,500. Seed/startup asset, continues to grow.1289 global average size of $275,461.1298 stage deals accounted for 25% and early The industry report indicates that, in These figures suggest that the types of stage deals accounted for 46%.1283 As 2014, crowdfunding platforms raised ventures financed through equity-based suggested by an academic study, angel approximately $16.2 billion globally, crowdfunding could be different than investors tend to invest in younger which represented a 167% increase over those financed through other companies than VCs.1284 the amount raised in 2013.1290 These crowdfunding methods. In 2014, the 3. Current Crowdfunding Practices amounts include various types of average size of a funded equity-based crowdfunding: lending-based campaign in North America was A recent crowdfunding industry crowdfunding accounted for the largest $175,000.1299 report 1285 defines the current share of volume (approximately $11.08 Since the passage of the JOBS Act, crowdfunding activity in the United billion) followed by equity-based many U.S. states have made changes to 1286 States generally as ‘‘lending-based,’’ crowdfunding (approximately $1.11 their securities laws to accommodate ‘‘reward-based,’’ ‘‘donation-based,’’ billion), reward-based crowdfunding intrastate securities-based crowdfunding 1287 ‘‘royalty-based,’’ ‘‘equity-based,’’ (approximately $1.33 billion), donation- transactions. Based on information from and ‘‘hybrid.’’ We note that the based crowdfunding (approximately NASAA, as of September 2015, 29 states definitions of crowdfunding types used $1.94 billion), royalty-based and the District of Columbia have in this industry report and the crowdfunding (approximately $273 enacted state crowdfunding provisions characteristics of crowdfunding activity million), and hybrid crowdfunding that rely, at the federal level, on the currently in existence are not directly (approximately $487 million).1291 In intrastate offering exemptions under comparable to the contours of security- 2014, North American crowdfunding Securities Act Section 3(a)(11) and Rule based crowdfunding transactions volume was approximately $9.46 147 or on Rule 504 of Regulation D. contemplated by the rules being billion, which represented a 145% These state crowdfunding rules allow adopted today. Thus, considerable increase over the amount raised in businesses in a state to use securities- caution must be exercised when 2013 1292 (including approximately based crowdfunding to raise capital generating projections of future $1.23 billion in reward-based from investors within that state.1300 crowdfunding volume from current crowdfunding, approximately $959 There is limited information available to activity broadly attributed to the million in donation-based us about the scope of domestic ‘‘crowdfunding’’ industry. In particular, crowdfunding, and approximately crowdfunding activity in reliance on the the industry report defines reward- $787.5 million in equity-based intrastate exemptions. Since December based crowdfunding as a model where crowdfunding, with the remainder 2011, when the first state (Kansas) funders receive a ‘‘reward,’’ such as a comprised of lending-based, royalty- enacted its crowdfunding provisions, perk or a pre-order of a product, and it based, and hybrid models 1293). The 118 state crowdfunding offerings have defines donation-based crowdfunding as industry report further indicates that been reported to be filed with the a model where funders make global equity-based crowdfunding respective state regulator and 102 were philanthropic donations to causes that volume grew by 182% in 2014.1294 reported to be approved or cleared, as of they want to support, with no return on According to the report, this rapid August 1, 2015.1301 1288 their investment expected. growth in equity-based crowdfunding 4. Survival Rates for Startups and Small According to the industry report, has been driven largely by North Businesses royalty-based crowdfunding, which America and Europe.1295 The industry report further indicates Startups and small businesses that college.unh.edu/files/webform/2014%20Analysis lack tangible assets or business %20Report.pdf (‘‘Sohl’’). that, in 2014 the worldwide average size 1283 Id. of a funded campaign was less than experience needed to obtain 1284 See Gumpers, note 1249. $4,000 for consumer lending-based, conventional financing might turn to 1285 See Massolution 2015. reward-based, and donation-based 1286 Id. In this industry report, ‘‘lending-based’’ crowdfunding types.1296 Crowdfunded 1297 Id. at 60. crowdfunding includes peer-to-peer lending to business loans and equity-based 1298 Id. at 60. 1299 consumers and peer-to-business lending. campaigns, however, were substantially Id. at 60. The report does not provide the 1287 The report does not identify which average size of North American donation-based, jurisdictions were represented in the survey. For higher. In 2014, the global average size reward-based, or lending-based crowdfunding example, France, Italy, Japan, and the UK have of a funded peer-to-business lending- campaigns. The report notes that, in 2014, the adopted specialized equity crowdfunding regimes. average funded North American donation-based It should be noted that ‘‘equity-based’’ 1289 Id. at 43. The Massolution 2015 report did and reward-based campaigns were 56% and 54%, crowdfunding is not a one-size-fits-all model. The not provide separate statistics on royalty-based and respectively, of the average size of funded European crowdfunding regimes in these four countries differ hybrid crowdfunding models prior to the 2013 donation-based and reward-based campaigns. Id. at on a number of dimensions (e.g., securities allowed report. 60. 1300 to be sold by issuers, or types of issuers allowed to 1290 Id. at 13. See NASAA’s Intrastate Crowdfunding use the exemption), amongst themselves and when Resource Center at http://www.nasaa.org/industry- 1291 Id. at 14. compared to Regulation Crowdfunding. Some resources/corporation-finance/instrastate- 1292 number also allow equity crowdfunding through Id. at 53. crowdfunding-resource-center/, accessed in their general securities laws. See Eleanor Kirby and 1293 Id. at 55. September 2015. See also NASAA’s State Shane Worner, Crowd-funding: An Infant Industry 1294 Id. at 14. By comparison, in 2014, ‘‘reward- Crowdfunding Update, available at: http:// Growing Fast, Staff Working Paper of the IOSCO based’’ crowdfunding grew by 84%, ‘‘lending- nasaa.cdn.s3.amazonaws.com/wp-content/uploads/ Research Department, available at http:// based’’ crowdfunding by 223%; ‘‘donation-based’’ 2014/12/Intrastate-Crowdfunding-Overview- www.iosco.org/research/pdf/swp/Crowd-funding- crowdfunding by 45%; ‘‘royalty-based’’ 2015.pdf. An-Infant-Industry-Growing-Fast.pdf. crowdfunding by 336%; and ‘‘hybrid’’ 1301 Based on information provided by NASAA. 1288 See Massolution 2015 at 42. Many of the crowdfunding by 290%. The jurisdictions included in the estimate are current domestic crowdfunding offerings relate to 1295 Id. at 55. ‘‘Equity-based’’ crowdfunding in Alabama, District of Columbia, Georgia, Idaho, individual projects and may not have a defined or North America ($787.5 million) and Europe ($177.5 Indiana, Kansas, Maine, Maryland, Massachusetts, sustained business model commensurate with million) grew by 301% and 145%, respectively. Michigan, Oregon, Texas, Vermont, Washington, typical issuers of securities. 1296 Id. at 59. and Wisconsin.

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securities-based crowdfunding in 5. Market Participants current market practices may help reliance on Section 4(a)(6) as an The final rules will have their most identify the number and characteristics attractive potential source of financing. significant impact on the market for the of potential issuers. There is broad evidence that many of financing of startups and small It is challenging to precisely predict these potential issuers are likely to fail businesses. The number of participants the number of future securities offerings after receiving funding. For example, a in this market and the amounts raised that might rely on Section 4(a)(6), 2010 study reports that of a random particularly because rules governing the through alternative sources indicate that 1311 sample of 4,022 new high-technology this is a large market. In 2013, there process are being adopted today. According to filings made with the businesses started in 2004, only 68% were more than 5 million small 1302 Commission, from 2009 to 2014, there survived by the end of 2008. businesses, defined by the U.S. Census were approximately 4,559 issuers per Similarly, other studies suggest that Bureau as having fewer than 500 paid year in new Regulation D offerings with startups and small businesses financed employees.1306 As of June 2014, FDIC- offer sizes of up to $1 million (excluding by venture capitalists also tend to have insured depositary institutions held issuers that are pooled investment high failure rates. One study finds that approximately $590 billion in vehicles), including approximately for 16,315 VC-backed companies that approximately 23.4 million small 1,020 (22%) per year that reported received their first institutional funding business loans.1307 According to the having no revenue and approximately round between 1980 and 1999, SBA’s fiscal year 2014 annual 861 (19%) per year that reported approximately one-third failed after the performance report, approximately revenues of up to $1 million.1312 Among first funding round.1303 Additionally, 51,500 small businesses received issuers in new Regulation D offerings another study of more than 2,000 funding in 2014 through SBA’s main with offer sizes of up to $1 million companies that received at least $1 lending programs, 7(a) and 504 (excluding issuers that are pooled million in venture funding, from 2004 loans.1308 In 2014, VCs invested $49.3 investment vehicles) during this period, through 2010, finds that almost three- billion of capital in in 4,361 transactions the overwhelming majority of issuers quarters of these companies failed.1304 involving 3,665 startups, according to 1309 (approximately 80%) are younger than 5 Another study, based on a sample an industry source. In 2014, angel years old, with the median age of ending in 2005, found cumulative investors contributed $24.1 billion, with approximately one year. Approximately failure rates of 34.1% for VC-financed approximately 73,400 entrepreneurial 1310 92% of these issuers were organized as firms and 66.3% for non-VC-financed ventures receiving angel funding. either a corporation or a limited liability firms, with the difference driven by Below, we analyze the economic company. lower failure rates of VC-financed firms effect of the final rules on the following parties: (1) Issuers, typically startups It is expected that many future issuers in the initial years after receiving VC of securities in crowdfunding offerings financing.1305 and small businesses, that seek to raise capital by issuing securities; (2) would have otherwise raised capital Taken all together, the failure rates intermediaries through which issuers from one of the alternative sources of documented in these studies are high seeking to engage in transactions in financing discussed above, while others for startups and small businesses, even reliance on Section 4(a)(6) will offer and would have been financed by friends with the involvement of sophisticated sell their securities; (3) investors who and family or not financed at all. Due to investors like VCs. Because we expect purchase or may consider purchasing the differences between small business that issuers that will engage in offerings securities in such offerings; and (4) loans (including SBA-guaranteed loans) made in reliance on Section 4(a)(6) will other capital providers, broker-dealers and securities-based crowdfunding be in an earlier stage of business and finders who currently participate in offerings that can be conducted under development than the businesses private offerings. The potential the final rules, we are not able to included in the above studies, we economic impact of the final rules will estimate how many small businesses believe that issuers that engage in depend on how these market utilizing these forms of financing may securities-based crowdfunding may participants respond to the final rules. instead pursue an offering in reliance on have higher failure rates than those in Each of these parties is discussed in Section 4(a)(6). Similarly, due to the the studies cited above. further detail below. differences between the terms of crowdfunding campaigns in existence a. Issuers 1302 See Alicia Robb, E.J. Reedy, Janice Ballou, today and the provisions of the final David DesRoches, Frank Potter and Zhanyun Zhao, The final rules will permit certain rules, is not clear how many current An Overview of the Kauffman Firm Survey: Results entities to raise capital by issuing from the 2004–2008 Data, Kauffman Foundation, campaigns can instead become offerings 1313 available at http://www.kauffman.org/uploaded securities for the first time. The number, in reliance on Section 4(a)(6). Files/kfs_2010_report.pdf (‘‘Kauffman Firm type and size of the potential issuers Survey’’). that will seek to use crowdfunding to 1311 See also Section IV.B.1. 1303 See Yael V. Hochberg, Alexander Ljungqvist offer and sell securities in reliance on 1312 In addition, in an average year, and Yang Lu, Whom You Know Matters: Venture Section 4(a)(6) is uncertain, but data on approximately 50% of issuers in new Regulation D Capital Networks and Investment Performance, 62 offerings with offer sizes of up to $1 million J. of Fin. 251–301 (2007). (excluding issuers that are pooled investment 1304 See Deborah Gage, The Venture Capital 1306 See U.S. Department of Commerce, United vehicles) declined to disclose their revenues. It is Secret: 3 Out of 4 Start-Ups Fail, Wall St. J., Sept. States Census Bureau, Business Dynamics Statistics, also possible that some issuers in Regulation D 19, 2012. Data: Firm Characteristics (2013), available at offerings that report revenues in excess of $1 _ 1305 See Puri, note 1281. According to this study, http://www.census.gov/ces/dataproducts/bds/data million may participate in offerings in reliance on the difference in the outcomes of VC-financed and firm.html. Section 4(a)(6). 1307 non-VC-financed firms decreases after accounting For the purposes of this figure, small business 1313 A recent industry report estimated that the for observable differences in firm characteristics, loans are defined as loans secured by nonfarm equity-based crowdfunding volume in North but it does not disappear. However, as the study nonresidential properties and commercial and America in 2014 was $787.5 million and the notes, in evaluating the remaining differences in the business loans of $1,000,000 or less. See FDIC average size of a successful equity-based outcomes of VC-financed and non-VC-financed Statistics, note 1254. crowdfunding campaign was $175,000. See firms, it is not possible to fully differentiate the 1308 See 2014 Annual Performance Report, note Massolution 2015 at 55 and 60. This allows us to effects of superior selection on the basis of 1262. estimate approximately 4,500 successful equity- unobservable firm characteristics from the effects of 1309 See NVCA, note 1277. based crowdfunding campaigns for North America VC monitoring and expertise. 1310 See Sohl, note 1282. Continued

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Hence, while some of the businesses number of potential intermediaries that Under the statute and the final rules, using these alternative funding sources will fill these roles is uncertain, funding portals are constrained in the may become issuers offering and selling practices of existing broker-dealers and services they can provide, and persons securities in reliance on Section 4(a)(6) crowdfunding platforms provide insight (or entities) seeking the ability to in the future, we cannot know how into how the market might develop. participate in activities unavailable to many of these businesses will elect Based on FOCUS Reports filed with funding portals, such as offering securities-based crowdfunding in the Commission, as of December 2014, investment advice or holding, reliance on Section 4(a)(6) once it there were 4,267 broker-dealers managing, possessing or otherwise becomes available, nor can we know registered with the Commission, with handling investor funds, would instead how many future businesses may not be average total assets of approximately need to register as broker-dealers or financed at all. $1.1 billion per broker-dealer. The investment advisers, depending on their We believe that many potential aggregate total assets of these registered activities. Although we expect that issuers of securities through broker-dealers are approximately $4.9 initially, upon adoption of the final crowdfunding will be startups and small trillion. Of these registered broker- rules, more new registrants will register businesses that are close to the ‘‘idea’’ dealers, 816 also are dually registered as as funding portals than as broker-dealers stage of the business venture and that investment advisers. given the less extensive regulatory have business plans that are not Existing crowdfunding platforms are requirements imposed on funding sufficiently well-developed or do not diverse and actively involved in portals, it is possible that market offer the growth potential or business financing, allowing thousands of competition to offer broker-dealer model to attract VCs or angel investors. projects to search for capital. A recent services as part of intermediaries’ In this regard, a study of one large industry report estimates that, as of service capabilities might either drive platform revealed that relatively few 2014, 1,250 crowdfunding platforms more broker-dealer growth in the longer companies on that platform operate in were operating worldwide, including term or provide registered funding technology sectors that typically attract 375 platforms operating in North portals with the incentive to form long- 1315 VC investment activity.1314 America. Globally, approximately term partnerships with registered 19% (236) of platforms were engaged in b. Intermediaries broker-dealers. One commenter equity-based crowdfunding, 18.3% in suggested that funding portals may find Section 4(a)(6)(C) requires that an lending-based crowdfunding, 22.6% in it beneficial to cooperate with registered offer and sale of securities in reliance on donation-based crowdfunding, 28.9% in broker-dealers and transfer agents.1320 Section 4(a)(6) be conducted through a reward-based crowdfunding, with the Other commenters on the proposal did registered funding portal or a broker. remainder engaged in royalty-based and 1316 not provide additional information on Registered broker-dealers, both those hybrid crowdfunding. An earlier this issue. There is anecdotal evidence industry report indicated that that are already registered with the that such partnerships are already crowdfunding platforms typically Commission and those that will register, forming under existing regulations in charge entrepreneurs a ‘‘transaction fee’’ might wish to facilitate securities-based crowdfunding transactions involving that is based on how large the target crowdfunding transactions. New accredited investors.1321 The final rules amount is and/or upon reaching the entrants that do not wish to register as provide that intermediaries will be target and that fees from survey broker-dealers might decide to register deemed to have satisfied the participants worldwide ranged from 2% as funding portals to facilitate requirement to have a reasonable basis to 25%, with an average of 7% in North securities-based crowdfunding for believing that an issuer has America and Europe.1317 The 2012 transactions in reliance on Section established means to keep accurate 4(a)(6). Donation-based or reward-based industry report provides one case study of fees for a ‘‘large-securities-based records of the holders of the securities crowdfunding platforms with it would offer and sell through the established customer relationships CFP’’ stating ‘‘[t]here are no management fees for uncommitted might seek to leverage these 1320 See TinyCat Letter (but noting that such relationships and register as funding capital, but a ‘‘2 and 20’’ arrangement is partnerships should be optional). 1318 portals, or register as or associate with set on deals funded.’’ 1321 See David Drake, Rich Man’s Crowd Funding, registered broker-dealers. Although the We do not know at present which Forbes, Jan. 15, 2013, available at http:// market participants will become www.forbes.com/sites/groupthink/2013/01/15/rich- intermediaries under Section 4(a)(6) and mans-crowd-funding/. See also Mohana in 2014. The report does not provide statistics for Ravindranath, For broker/dealers, crowdfunding the United States alone. Equity-based crowdfunding Regulation Crowdfunding, but we presents new opportunity, Wash. Post, Mar. 29, campaigns in the United States are currently believe that existing crowdfunding 2013, available at http://www.washingtonpost.com/ limited to accredited investors or intrastate platforms might seek to leverage their business/on-small-business/for-brokerdealers- offerings in certain jurisdictions. Further, the already-existing Internet-based crowdfunding-presents-new-opportunity/2013/03/ industry report does not provide information that 28/bb835942–8075–11e2–8074-b26a871b165a_ would allow us to estimate the number of platforms, brand recognition and user story.html; J.J. Colao, In the Crowdfunding Gold crowdfunding campaigns of other types (such as bases to facilitate offerings in reliance Rush, This Company Has a Rare Edge, Forbes, June reward-based or donation-based) in North America on Section 4(a)(6).1319 5, 2013, available at http://www.forbes.com/sites/ or the United States in 2014. We note that many jjcolao/2013/06/05/in-the-crowdfunding-gold-rush- such campaigns, particularly those that relate to this-company-has-a-rare-edge/; Arina Shulga, 1315 See Massolution 2015 at 84. The report does individual projects, may not have a defined or Crowdfunding Right Now (Fund Model, Broker- not provide separate statistics for the United States. sustained business model commensurate with Dealer Model, Lending Platforms and Intrastate 1316 typical issuers of securities. In particular, many of Id. at 89. Offerings), LexisNexis.com, Aug. 7, 2014, available the current reward-based or donation-based 1317 See Massolution Crowdfunding Industry at http://www.lexisnexis.com/legalnewsroom/ crowdfunding projects likely entail endeavors that Report: Market Trends, Composition and banking/b/venture-capital/archive/2014/08/07/ may not be suitable to a long-lived securities Crowdfunding Platforms (May 2012) (‘‘Massolution crowdfunding-right-now-fund-model-broker-dealer- issuance (e.g., certain artistic endeavors or artistic 2012’’) at 38. model-lending-platforms-and-intrastate- projects). 1318 Id. offerings.aspx; Alessandra Malito, Broker-dealer 1314 See Ethan R. Mollick, The Dynamics of 1319 For example, the Massolution 2012 industry expands crowdfunding reach with new partnership, Crowdfunding: An Exploratory Study, Working report suggests that funding portal reputation is InvestmentNews, Apr. 14, 2015, available at http:// Paper (June 26, 2013), available at http:// important in the crowdfunding market, especially www.investmentnews.com/article/20150414/FREE/ papers.ssrn.com/sol3/papers.cfm?abstract_ for equity-based crowdfunding. See Massolution 150419972/broker-dealer-expands-crowdfunding- id=2088298. 2012 at 46. reach-with-new-partnership.

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intermediary’s platform if the issuer has In addition, issuers conducting a new type of exempt offering and engaged the services of a registered private offerings may, outside of required us to adopt rules to implement transfer agent.1322 This registered offerings in reliance on Section 4(a)(6), that framework. To the extent that transfer agent safe harbor may lead currently use broker-dealers to help crowdfunding rules are successfully intermediaries to encourage issuers to them with various aspects of the utilized, the crowdfunding provisions of use a registered transfer agent. offering and to help ensure compliance the JOBS Act are expected to provide c. Investors with the ban on general solicitation and startups and small businesses with the advertising that exists for most private means to raise relatively modest It is unclear what types of investors offerings. Private offerings also could amounts of capital, from a broad cross will participate in offerings made in involve finders who connect issuers section of investors, through securities reliance on Section 4(a)(6), but given the with investors for a fee.1324 These offerings that are exempt from investment limitations in the final rules, private offering intermediaries also may registration under the Securities Act. we believe that many investors affected be affected by the final rules, because They also are expected to permit small by the final rules will likely be once issuers can undertake offerings in investors to participate in a wider range individual retail investors who reliance on Section 4(a)(6), some issuers of securities offerings than may be currently do not have broad access to might no longer need the services of currently available.1327 Specifically, the investment opportunities in early-stage those broker-dealers and finders. statutory provisions and the final rules ventures. Offerings made in reliance on Although we are unable to predict the address several challenges specific to Section 4(a)(6) may provide retail exact size of the market for broker- financing startups and small businesses, investors with additional investment dealers and finders in private offerings including, for example, accessing a large opportunities, although the extent to that are comparable to those that the number of investors, the regulatory which they invest in such offerings will final rules permit, data on the use of requirements associated with issuing a likely depend on their view of the broker-dealers and finders in the security, protecting investors and potential return on investment as well Regulation D markets suggest that they making such securities offerings cost- as the risk for fraud. may not currently play a large role in effective for the issuer. In contrast, larger, more sophisticated private offerings. Based on a staff study, In the sections below, we analyze the or well-funded investors may be less only 21% of all new Regulation D costs and benefits associated with the likely to invest in offerings made in offerings from 2009 to 2014 used an crowdfunding regulatory regime, as well reliance on Section 4(a)(6). The intermediary such as a broker-dealer or as the potential impacts of such a relatively low investment limits set by a finder.1325 The use of a broker-dealer regulatory regime on efficiency, the statute for crowdfunding investors competition and capital formation, in may make these offerings less attractive or a finder increased with offering size; for professional investors, including they participated in approximately 17% light of the baseline discussed above. of offerings for up to $1 million and VCs and angel investors.1323 While an 1. Broad Economic Considerations offering made in reliance on Section 30% of offerings for more than $50 In this release, we discuss the 4(a)(6) can bring an issuer to the million. Moreover, the fee tends to potential costs and benefits of the final attention of these investors, it is decrease with offering size. Unlike the rules. Many of these costs and benefits possible that professional investors will gross spreads in registered offerings, the are difficult to quantify or estimate with prefer, instead, to invest in offerings in differences in fees for Regulation D any degree of certainty, especially reliance on Rule 506, which are not offerings of different sizes are large: the considering that Section 4(a)(6) provides subject to the investment limitations average total fee (commission plus a new method for raising capital in the applicable to offerings made in reliance finder fee) paid by issuers conducting on Section 4(a)(6). offerings of up to $1 million (6.4% in United States. Some costs are difficult to 2014) is almost three times larger on a quantify or estimate because they d. Other Capital Providers, Broker- percentage basis than the average total represent transfers between various Dealers and Finders in Private Offerings fee paid by issuers conducting offerings participants in a market that does not The final rules may affect other of more than $50 million (1.9% in yet exist. For instance, costs to issuers parties that provide sources of capital, 2014).1326 These estimates, however, can be passed on to investors and costs such as small business lenders, VCs, only reflect practices in the Regulation to intermediaries can be passed on to family and friends and angel investors D market. It is possible that issuers issuers and investors. These difficulties that currently finance small private engaging in other types of private in estimating and quantifying such costs businesses. The current scope of offerings (e.g., those relying on Section are exacerbated by the limited public financing provided by these capital 4(a)(2)), for which we do not have data, data that indicates how issuers, providers is discussed above. As may use broker-dealers and finders intermediaries and investors will discussed below, the magnitude of the more frequently and have different fee respond to these new capital raising final rules’ economic impact will structures. opportunities. depend on whether crowdfunding in The discussion below highlights B. Analysis of Final Rules reliance on Section 4(a)(6) emerges as a several general areas where substitute or a complement to these As noted above, we are mindful of the uncertainties about the new financing sources. costs and benefits of the final rules, as crowdfunding market might affect the well as the impact that the final rules potential costs and benefits of the final 1322 See Rule 301(b) of Regulation Crowdfunding. may have on efficiency, competition rules, as well as our ability to quantify 1323 An observer suggests that, unlike angels, VCs and capital formation. In enacting Title those costs and benefits. It also may be less interested in crowdfunding because, if III, Congress established a framework for highlights the potential effects on VCs rely on crowdfunding sites for their deal flow, it would be difficult to justify charging a 2% management fee and 20% carried interest to their 1324 Depending on their activities, these persons 1327 See, e.g., 158 Cong. Rec. S1781 (daily ed. limited partners. See Ryan Caldbeck, may need to be registered as broker-dealers. Mar. 19, 2012) (statement of Sen. Carl Levin) Crowdfunding—Why Angels, Venture Capitalists 1325 See Unregistered Offerings White Paper, note (‘‘Right now, the rules generally prohibit a company And Private Equity Investors All May Benefit, 1230. from raising very small amounts from ordinary Forbes, Aug. 7, 2013. 1326 ID. investors without significant costs.’’).

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efficiency, competition and capital businesses and the pool of investors exchange given their small size,1331 and formation. willing to finance such types of investors may lack adequate strategies The extent to which the statute and businesses. The extent to which such or opportunities to eventually divest the final rules affect capital formation issuers will use the Section 4(a)(6) their holdings.1332 A sale of the business and the cost of capital to issuers offering exemption, however, is difficult will require the issuer to have a track depends in part on the issuers that to assess. record in order to attract investors with choose to participate. In particular, if If startups and small businesses find the capital willing to buy the business. offerings in reliance on Section 4(a)(6) other capital raising options more Further, the likely broad geographical only attract issuers that are otherwise attractive than securities-based dispersion of crowdfunding investors able to raise capital through another crowdfunding, the impact of Section may make shareholder coordination type of exempt offering, the statute and 4(a)(6) on capital formation may be difficult. It may also exacerbate the final rules may result in a limited. Even so, the availability of information asymmetries between redistribution of capital flow, which securities-based crowdfunding as a issuers and investors, if the distance may enhance allocative efficiency but financing option may increase between them diminishes the ability for have a limited impact on the aggregate competition among suppliers of capital, investors to capitalize on local level of capital formation.1328 resulting in a potentially lower cost of knowledge that may be of value in Notwithstanding the existence of capital for all issuers, including those assessing the viability of the issuer’s these alternative methods of capital that choose not to use securities-based business. The use of electronic means raising, we believe that offerings crowdfunding. may mitigate some of these difficulties. pursuant to Section 4(a)(6) will likely For issuers that pursue offerings in Even if an issuer can execute a sale or represent a new source of capital for reliance on Section 4(a)(6), establishing otherwise offer to buy back or retire the many small issuers that currently have an initial offering price might be securities, it might be difficult for difficulty raising capital. Startups and challenging. Offerings relying on investors to determine whether the small businesses usually have smaller Section 4(a)(6) will not involve an issuer is offering a fair market price. and more variable cash flows than underwriter who, for larger offerings, These uncertainties may limit the use of larger, more established companies, and typically assists the issuer with pricing the Section 4(a)(6) exemption. The potential benefits of the final internal financing from their own and placing the offering. Investors in rules also may depend on how investors business operations tends to be limited offerings relying on Section 4(a)(6) may respond to potential liquidity issues and unstable. Moreover, these lack the sophistication to evaluate the unique to the securities-based businesses tend to have smaller asset offering price. Thus, the involvement of 1329 crowdfunding market. It is currently bases and, thus, less collateral for these investors, who are likely to have unclear how securities offered and sold traditional bank loans. As discussed a more limited capacity for conducting in transactions conducted in reliance on above, startups and small businesses, due diligence on deals, may contribute Section 4(a)(6) will be transferred in the which are widely viewed to have more to less accurate valuations. secondary market after the one-year financial constraints than publicly- Moreover, because of the investment traded companies and large private restricted period ends, and investors limitations in securities-based who purchased securities in companies, could therefore benefit crowdfunding transactions, there may significantly from a securities-based transactions conducted in reliance on not be a strong incentive, even assuming Section 4(a)(6) and who seek to divest crowdfunding market. Some small adequate knowledge and experience, for businesses may not qualify for their securities may not find a liquid an investor to perform a thorough market.1333 Assuming a secondary traditional bank loans and may find analysis of the issuer disclosures. To the alternative debt financing too costly or market develops, securities may be extent that these potential information quoted on the over-the-counter market incompatible with their financing asymmetries resulting from the lack of needs. While some small businesses or on trading platforms for shares of a thorough analysis of the disclosures private companies.1334 Nevertheless, it may attract equity investments from are anticipated by prospective investors, angel investors or VCs, other small investor participation in offerings made 1331 businesses, particularly, businesses at As noted, under the statute and the final in reliance on Section 4(a)(6) may rules, issuers relying on Section 4(a)(6) would be the seed stage may have difficulty decline and the associated benefits of limited to raising an aggregate of $1 million during obtaining external equity financing from capital formation may be lower. a 12-month period. By contrast, as noted in the IPO these sources. We believe that the Task Force, the size of an initial public offering Uncertainty surrounding exit generally exceeds $50 million. See IPO Task Force, statute, as implemented by the final strategies for investors in crowdfunding note 1223. rules, may increase both capital offerings also may limit the benefits. In 1332 In contrast, given the required investor formation and the efficiency of capital particular, it is unlikely that purchasers qualifications and offering limit amounts, Regulation D offerings may generally attract issuers allocation among small issuers by in crowdfunding transactions will be expanding the range of methods of that are more experienced and better capitalized. able to follow the typical path to Moreover, such offerings are likely to have a larger external financing available to small liquidity that investors in other exempt proportion of accredited investors because, in offerings follow. For instance, investors contrast to securities-based crowdfunding, there are 1328 For example, a 2012 GAO report on no limitations on individual investment amounts. Regulation A offerings suggests that a significant in a VC-backed startup may eventually As a result, we believe that Regulation D issuers decline in the use of this funding alternative after sell their securities in an initial public and investors are more likely to have potential exit 1997 could be partially attributed to a shift to Rule offering on a national securities strategies in place. 506 offerings under Regulation D, as a result of the exchange or to another company in an 1333 Academic studies have shown that the over- preemption of state law registration requirements 1330 the-counter market is less liquid than the national for Rule 506 offerings that occurred in 1996. See acquisition. We anticipate that most exchanges. See Nicolas Bollen and William GAO Report, note 1231. businesses engaging in offerings in Christie, Market Microstructure of the Pink Sheets, 1329 See, e.g., John Asker, Joan Farre-Mensa and reliance on Section 4(a)(6) will be 33 J. Banking & Fin. 1326–1339 (2009); Andrew Alexander Ljungqvist, Corporate Investment and unlikely to progress directly to an initial Ang, Assaf Shtauber and Paul Tetlock, Asset Pricing Stock Market Listing: A Puzzle? European Corporate public offering on a national securities in the Dark: The Cross Section of OTC Stocks, 26 Governance Institute Finance Working Paper (June Rev. Fin. Stud. 2985–3028 (2013). 2012), available at http://papers.ssrn.com/sol3/ 1334 Given the services that funding portals are papers.cfm?abstract_id=1603484. 1330 See Gompers, note 1249. permitted to provide under the statute and the final

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is possible that secondary trading costs offered and sold in reliance on Section finders that otherwise would have been for investors may be substantial, 4(a)(6). Investors purchasing securities unavailable. effective and quoted spreads may be issued in reliance on Section 4(a)(6) The final rules also may encourage wide, trading volume may be low, and may not have the experience or the current participants in the price volatility may be high compared to market power to negotiate various anti- crowdfunding market to diversify their those of listed securities.1335 Illiquidity, dilution provisions, right of first refusal, funding models to attract a broader to different degrees, remains a concern tag-along rights, superior liquidation group of companies and to provide for other exempt offerings and for preferences and rights upon a change in additional investment opportunities for registered offerings by small issuers. control that have been developed by investors. For example, donation-based However, because investors purchasing institutional and angel investors as crowdfunding platforms that currently securities sold in reliance on Section protections against fundamental offer investment opportunities in micro- 4(a)(6) may be less sophisticated than changes in a business.1336 Moreover, the loans generally do not permit donors to investors in other private offerings due disperse ownership stakes of investors collect interest on their investments to the fact that there are no investor in securities-based crowdfunding because of concerns that this activity qualification requirements, they may offerings may weaken their incentives to will implicate the federal securities laws face additional challenges in addressing monitor the issuer to minimize the risk unless an exemption from registration is the impact of illiquidity, either in of expropriation. The ensuing available.1337 Under the final rules, finding a suitable trading venue or expropriation risk may discourage some these platforms may choose to register negotiating with the issuer for an investors from participating in offerings as funding portals and permit alternative liquidity option. The made in reliance on Section 4(a)(6), businesses to offer securities that potentially high degree of illiquidity potentially limiting the efficiency, provide investors with the opportunity associated with securities purchased in competition and capital formation to obtain a return on investment. This reliance on Section 4(a)(6) may benefits of the final rules. can broaden their user base and attract discourage some investors from The final rules also may have an effect a group of investors different from those investing in issuers through such on broker-dealers and finders already participating in reward-based or offerings, thus limiting the potential participating in private offerings. Some donation-based crowdfunding. It is efficiency, competition and capital issuers that previously relied on broker- likely that some registered broker- formation benefits of the final rules. dealers and finders to assist with raising dealers will find it profitable to enter Even with the mandated disclosures, capital through private offerings may, the securities-based crowdfunding unsophisticated investors purchasing instead, begin to rely on the Section market and operate funding portals as securities issued in reliance on Section 4(a)(6) exemption to find investors. The well. Such an entry will increase the 4(a)(6) may face certain expropriation precise impact of the final rules on these competition among intermediaries and intermediaries will depend on whether risks, potentially limiting the upside of likely lead to lower issuance costs for (and, if so, to what extent) issuers their investment, even when they select issuers. switch from using existing exemptions investments in successful ventures. This However, many projects that are well can occur if issued securities include to using the exemption provided by Section 4(a)(6) or whether the final rules suited for reward-based or donation- certain features (e.g., callable securities based crowdfunding (e.g., because they or securities with differential control primarily attract new issuers. The impact of the final rules on registered have finite lives, their payoffs to rights) or if issuers conduct insider-only investors could come before the project financing rounds or financing rounds at broker-dealers will also depend on the extent to which broker-dealers is completed or could be contingent on reduced prices (so-called ‘‘down the project’s success, etc.) may have rounds’’) that have the effect of diluting participate as intermediaries in the securities-based crowdfunding market. little in common with startups and an investor’s interest or otherwise small businesses that are well suited for diminishing the value of the securities If a significant number of issuers switch from raising capital under existing an offering in reliance on Section 4(a)(6). As a result, diversification rules, investors will not be able to use funding private offering exemptions to relying portals to trade in securities offered and sold in on the exemption provided by Section among existing platforms may not reliance on Section 4(a)(6) in the secondary market. 4(a)(6), this may negatively affect the always be optimal or preferred, 1335 Academic studies show that reducing the revenue of finders and broker-dealers in particularly if complying with the final information transparency about an issuer increases the private offerings market. While this rules proves disproportionately costly the effective and quoted spreads of its shares, compared to the potential amount of reduces share price and increases price volatility. may disadvantage existing private Specifically, percentage spreads triple and volatility offering market intermediaries, the new capital to be raised. doubles when NYSE issuers are delisted to the Pink competition may ultimately lead to 2. Crowdfunding Exemption Sheets. See Jonathan Macey, Maureen O’Hara and more efficient allocation of capital. David Pompilio, Down and Out in the Stock Market: a. Limitation on Capital Raised The Law and Finance of the Delisting Process, 51 If securities-based crowdfunding J.L. & Econ 683–713 (2008). When NASDAQ issuers primarily attracts new issuers to the The statute imposes certain delist and subsequently trade on the OTC Bulletin market, the impact on broker-dealers limitations on the total amount of Board and/or the Pink Sheets, share volume and finder revenue may be negligible declines by two-thirds, quoted spreads more than securities that may be sold by an issuer double, effective spreads triple and volatility and the final rules may even have a during the 12-month period preceding triples. See Jeffrey H. Harris, Venkatesh positive effect on their revenues by the date of the transaction made in Panchapagesan and Ingrid M. Werner, Off But Not revealing more potential clients for reliance on Section 4(a)(6). Specifically, Gone: A Study of NASDAQ Delistings, Fisher them, particularly to the extent that they College of Business Working Paper No. 2008–03– Section 4(a)(6)(A) provides for a 005 and Dice Center Working Paper No. 2008–6 chose to operate a funding portal. maximum aggregate amount of $1 (Mar. 4, 2008), available at http://papers.ssrn.com/ Additionally, greater investor interest in million sold in reliance on the sol3/papers.cfm?abstract_id=628203. One factor private company investment may exemption during a 12-month that may alleviate transparency concerns is the fact increase capital formation, creating new that issuers that sold securities in an offering made in reliance on Section 4(a)(6) will have an ongoing opportunities for broker-dealers and 1337 See, e.g., Deutsche Bank Microcredit reporting obligation, so disclosure of information Development Fund, Inc., SEC No-Action Letter about the issuer will continue to be required. 1336 See Kaplan, note 1279. (Apr. 8, 2012).

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period.1338 The final rules preserve the raising the offering limit. If the funding the terms of an offering made in reliance $1 million limit. The limitation on the portal fees are not known in advance, on Section 4(a)(6), unless that amount that may be raised is expected then this alternative may also create advertisement otherwise complies with to benefit investors by reducing the uncertainty for issuers about how much Section 4(a)(6) and the final rules. This potential loss from dilution or fraud 1339 capital they would be able to raise. may partly alleviate some of in the securities-based crowdfunding Several commenters opposed such an commenters’ concerns because each market. However, we recognize that this alternative.1342 offering will have the investor limit on the amount that may be sold in The costs associated with not protections of the offering exemption reliance on Section 4(a)(6) also can increasing the investment limit above $1 upon which it relies. prevent certain issuers from raising all million are mitigated in part by the As an alternative, in line with the the capital they need to make their ability of issuers to concurrently seek suggestions of some commenters,1344 we businesses viable, which in turn can additional financing in reliance on could have provided guidance that the result in lost opportunities, as indicated another type of exempt offering, such as amounts offered in reliance on Section by various commenters.1340 It also is Regulation D or Regulation A, in 4(a)(6) should be integrated with the likely to limit efficiency to the extent addition to the offering in reliance on amounts offered pursuant to other that capital cannot be channeled to the Section 4(a)(6). In this release, we exempt offerings. Under such an most productive use. Due to the lack of provide guidance clarifying our view alternative, the amounts raised in other data, however, we are not able to that issuers may conduct other exempt exempt offerings would count toward quantify the unrealized efficiency or offerings without having those offerings the maximum offering amount under capital formation associated with the integrated with the offering made in Section 4(a)(6). Such an alternative adoption of the $1 million limit instead reliance on Section 4(a)(6), provided would potentially limit the amount of of the alternative of a higher limit. Since that each offering complies with the capital raised by issuers, including the issuers in securities-based applicable exemption relied upon for set of issuers eligible to conduct an crowdfunding offerings bear certain that particular offering. Several exempt offering relying on Section fixed costs, as discussed in Section commenters opposed this approach on 4(a)(6), and thus potentially limit the III.B.3., offering costs as a percentage of the ground that it could result in fewer capital formation benefits of the final offering proceeds will be larger under investor protections than if the offerings rules. Compared to this alternative, the the $1 million limit than under the were integrated. Some commenters ability of issuers to conduct other alternative of a higher limit. noted that a potential cost to investors exempt offerings that do not count As an alternative, we could have associated with not requiring integration toward the maximum offering amount defined the $1 million limit to be net of is a reduction in investor protection due under Section 4(a)(6) may alleviate intermediary fees, as suggested by some to the possibility of an issuer’s use of some of the concerns that certain issuers 1341 commenters. If a funding portal advertising for one offering to indirectly will not be able to raise sufficient announces in advance the fees it charges promote another exempt offering that capital. The net effect on capital for a given transaction (fixed or would have been subject to more 1343 formation will also depend on whether variable), the economic effects of such stringent advertising restrictions. issuers seeking an aggregate exempt an alternative definition would be While we recognize this concern, we offering amount in excess of $1 million qualitatively similar to the effects of note that the final rules do not provide elect to rely on Regulation a blanket exemption from integration Crowdfunding as part of their capital 1338 See also Rule 100(a)(1) of Regulation with other private offerings that are raising or elect to rely on a different Crowdfunding. conducted simultaneously with, or 1339 exemption, such as Rule 506 of While we lack information to predict the around the same time as, a Section potential incidence of fraud in securities-based Regulation D. These considerations and 4(a)(6) offering. Rather, we provide crowdfunding offerings made in reliance on Section the relative differences in the investor 4(a)(6) and note that current crowdfunding guidance that an offering made in protections associated with the different practices differ significantly from the securities- reliance on Section 4(a)(6) is not offering exemptions will determine the based crowdfunding market that may develop upon required to be integrated with another effectiveness of the final rules, some concern has net effect on the amount of information exempt offering made by the issuer to been expressed about the potential for fraud in this about issuers available to market area. See, e.g., NASAA Enforcement Report: 2015 the extent that each offering complies participants and the level of investor Report on 2014 data, September 2015, available at with the requirements of the applicable http://nasaa.cdn.s3.amazonaws.com/wp-content/ protection. uploads/2011/08/2015-Enforcement-Report-on- exemption that is being relied upon for 2014-Data_FINAL.pdf (listing Internet fraud that particular offering. As mentioned b. Investment Limitations (including social media and crowdfunding) among earlier, an issuer conducting a Since offering documents for offerings the products and schemes that are frequently concurrent exempt offering for which made in reliance on Section 4(a)(6) will investigated by states, without statistics specific to general solicitation is not permitted will securities-based crowdfunding). not be subject to review by Commission 1340 need to be satisfied that purchasers in See, e.g., Advanced Hydro Letter; Bushroe staff prior to the sale of securities, we that offering were not solicited by Letter; Cole D. Letter; Concerned Capital Letter; are sensitive to potential investor Hamman Letter; Harrison Letter; Hillside Letter; means of the offering made in reliance protection concerns arising from the Jazz Letter; Kickstarter Coaching Letter; McCulley on Section 4(a)(6). Alternatively, an Letter; McGladrey Letter; Meling Letter; Miami participation of less sophisticated issuer conducting a concurrent exempt Nation Enterprises Letter; Multistate Tax Service investors in these exempt offerings. Letter; Peers Letter; Pioneer Realty Letter; Public offering for which general solicitation is 1345 Startup Letter 2; Qizilbash Letter; Rosenthal O. permitted, for example, under Rule Some commenters raised concerns Letter; Sarles Letter; SBM Letter; Taylor R. Letter; 506(c), cannot include in any such that the ‘‘wisdom of the crowd’’ will not Taylor T. Letter; Wales Capital Letter 1; Wales general solicitation an advertisement of result in investors pooling information Capital Letter 3; WealthForge Letter; Wear Letter; so as to lead to better informed Wilhelm Letter; Winters Letter; Yudek Letter. 1341 See, e.g., Benjamin Letter; FundHub Letter 1; 1342 See, e.g., Arctic Island Letter 4; ASSOB Hackers/Founders Letter; Joinvestor Letter; Odhner Letter; Commonwealth of Massachusetts Letter; 1344 See, e.g., AFL–CIO Letter; Brown J. Letter; Letter; Omara Letter; Public Startup Letter 2; RFPIA MCS Letter; PeoplePowerFund Letter. Consumer Federation Letter; Fund Democracy Letter; RoC Letter; RocketHub Letter; Seed&Spark 1343 See AFR Letter; BetterInvesting Letter; Letter; MCS Letter; NASAA Letter. Letter; Thomas Letter 1; Wales Capital Letter 1; Consumer Federation Letter; Fund Democracy 1345 See, e.g., AFR Letter; Brown J. Letter; Whitaker Chalk Letter; Wilson Letter. Letter; IAC Recommendation; MCS Letter. Consumer Federation Letter.

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investment decisions.1346 While we investor, thus providing downside expectation that those losses will be acknowledge these concerns, we note protection for investors. offset by the large upside of the that, by adding Section 4(a)(6) to the We recognize that these provisions relatively fewer investments that Securities Act, Congress made an also will limit the potential upside for succeed.1349 The securities-based express determination to facilitate investors. This may particularly affect crowdfunding market is expected to securities-based crowdfunding the decisions of investors with large involve earlier-stage financing transactions under the federal securities portfolios who might be able to absorb compared to venture capital financing, laws, subject to certain specified losses and understand the risks and therefore, the chances of investment investor protections. associated with risky investments and success may be lower.1350 The statutory Consistent with the statute, the final who may have more expertise and caps on aggregate securities-based rules incorporate several important stronger incentives to acquire and crowdfunding investments under investor protections, including limits on analyze information about an issuer. For Section 4(a)(6) may limit an investor’s the amount that can be raised, issuer these investors, the $100,000 aggregate ability to choose a sufficiently large eligibility criteria, and issuer and limit may reduce their incentive to number of investments to offset this risk intermediary requirements, including participate in the securities-based and to recover the due diligence costs of statutorily mandated investor education crowdfunding market, compared to sufficiently investigating individual requirements. The statute and the final other types of investments, potentially investments. One potential solution to rules also impose certain limitations on depriving the securities-based this diversification problem is to invest the aggregate dollar amount of securities crowdfunding market of more smaller amounts in a greater number of experienced and knowledgeable in offerings in reliance on Section ventures. However, such a strategy has investors and impeding capital 4(a)(6) that may be sold to an investor limited benefit to the extent that there formation. Moreover, limiting the during a 12-month period.1347 These is a fixed cost to the due diligence participation of such investors may provisions are designed to limit the associated with identifying and negatively affect the informational potential investment and, consequently, reviewing each investment opportunity, efficiency of the securities-based the potential losses for any single making it more costly to implement crowdfunding market because than a strategy that relies on the sophisticated investors are better able to selection of fewer investment 1346 Predictions in research studies regarding the accurately price such offerings. These impact of social interaction on investor decisions opportunities. are mixed. On the one hand, a recent study of investors also can add value to the In a change from the proposed rules, opinions that were posted on the Internet Web site discussions taking place through an both the investor’s annual income and http://seekingalpha.com finds evidence of intermediary’s communication channels net worth must be above $100,000 for predictability of earnings surprises and returns that about a potential offering by providing is interpreted as potentially suggesting the value the 10 percent limitation to apply. This relevance of user opinions rather than a naı¨ve their views on the issuer’s financial change is intended to strengthen investor reaction. See Hailiang Chen, Prabuddha de, viability and potential for fraud. Persons investor protections for investors whose Yu Hu, and Byoung-Hyoun Hwang, Wisdom of with larger portfolios are also likely to annual income or net worth is below Crowds: The Value of Stock Opinions Transmitted be in a better position to monitor the Through Social Media, 27 Rev. Fin. Stud. 1367– $100,000. Such investors may not be as 1403 (2014). An earlier theoretical paper shows that issuer’s insiders, which can reduce the well situated to bear the risk of loss word-of-mouth can, under some circumstances, extent of moral hazard and the risk of (e.g., in the event of fraud on the part result in superior decisions. See Glenn Ellison and fraud on the part of the issuer and the of an issuer) as investors with both Drew Fudenberg, Word-of-Mouth Communication issuer’s insiders, yielding benefits for all and Social Learning, 110 Quarterly J. Econ. 93–125 income and net worth of $100,000 or (1995). On the other hand, some behavioral finance investors. Such investors also can add more. According to Commission staff literature examines irrational herding and contagion value by advising the issuer and analysis of the data in the 2013 Survey of thought and behavior through social interaction, contributing strategic expertise, which of Consumer Finances, approximately such as the propagation of investing memes, which can be particularly beneficial for early- 17% of U.S. households have both need not be predictive of superior trading stage issuers. Some of these potential performance. For example, one article characterizes income and net worth of $100,000 or memes as ‘‘mental representation (such as an idea, benefits, however, may still be available higher. By comparison, 39% of U.S. proposition, or catchphrase) that can be passed to issuers that seek to attract such households have either income or net from person to person’’. The article provides an investors through another type of worth of $100,000 or higher.1351 Thus, example of investors using ‘‘verbal ‘reasons’ to exempt offering, such as a Regulation D decide how to trade’’ and notes that these reasons approximately 22% of households will ‘‘are often not cogent’’. The article notes that such offering. be subject to a lower investment limit The aggregate limit on crowdfunding reasons, or financial memes, can be simple or can under the final rules than under the be elaborate structures of analysis, examples, investments also can impede the ability proposal. We note that these figures are terminology, catchphrases, and modeling. See for of investors to diversify within the example, David A. Hirshleifer and Siew Hong Teoh, only available at the household level securities-based crowdfunding market. Thought and Behavior Contagion in Capital rather than at the individual level. We As securities-based crowdfunding Markets, Handbook of Financial Markets: Dynamics further note that these figures do not and Evolution (2009). Another article compares the investments might have inherently high account for the fact that only some investment decisions of stock clubs and failure rates,1348 investors who do not or individuals. It finds that while both individuals and cannot diversify their investments households might seek to invest in an clubs are more likely to purchase stocks that are across a number of offerings can face an offering in reliance on Section 4(a)(6). associated with ‘‘good reasons’’ (such as a company Thus, we are not able to determine the that is featured on a list of ‘‘most-admired’’ increased risk of incurring large losses, companies), stock clubs favor such stocks more relative to their investments, even when 1349 than individuals, despite the fact that such reasons they investigate offerings thoroughly. By See, e.g., John Cochrane, The Risk and Return do not improve performance. The article analyzes of Venture Capital, 75 J. of Fin. Econ. 3 (2005). social dynamics that may make ‘‘good reasons’’ comparison, VC firms typically 1350 See Rajshree Agarwal and Michael Gort, Firm more important for groups than individuals. See construct highly diversified portfolios and Product Life Cycles and Firm Survival, 92 Am. Brad Barber, Chip Heath, and Terrance Odean, with the understanding that many Econ. Rev. 184¥190 (2002). Good Reasons Sell: Reason-Based Choice Among ventures fail, resulting in a complete 1351 Based on data from the 2013 Survey of Group and Individual Investors in the Stock Market, Consumer Finances, a triennial survey sponsored 49 Management Science 1636–1652 (2003). loss of some investments, but with the by the Federal Reserve Board, available at http:// 1347 See Section 4(a)(6)(B). See also Rule 100(a)(2) www.federalreserve.gov/econresdata/scf/ of Regulation Crowdfunding. 1348 See discussion in Section III.A.4 above. scfindex.htm.

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actual percentage of investors affected be involved in and have information on additional capital, without necessarily by this change in the final rules relative crowdfunding transactions pertaining to requiring an issuer to become fully to the proposal. the offerings of multiple issuers, which current in its reporting obligations. We Within each investment limitation makes it potentially less costly to recognize that conditioning an issuer’s tier, the investment limitation identify investors that exceed the Section 4(a)(6) eligibility on the percentage is multiplied by the ‘‘lesser investment limitation. As a potential requirement that issuers provide of’’ an investor’s annual income or net alternative, we could have imposed ongoing reports for only the previous worth in the investment limitation more extensive verification two years may result in less information calculation, which was suggested by requirements on issuers, which would being available to investors in some several commenters.1352 This change have resulted in larger compliance costs periods, with potential adverse effects from the proposal is expected to reduce for issuers but could have potentially on the price formation and liquidity of the permitted investment limit for each increased investor compliance with the the securities in the secondary market. individual investor because most investment limitations, with The potential damage to an issuer’s investors are unlikely to have annual corresponding investor protection reputation resulting from being income and net worth amounts that are benefits. As noted above, we believe the delinquent along with potential identical.1353 final rules appropriately consider enforcement action for failure to comply Investment limitations will likely investor protection and facilitating with a regulatory reporting obligation have a negative effect on capital capital formation. and the modification from the proposed rules to require an issuer to disclose in formation. For example, investment c. Issuer Eligibility limitations may make it more difficult its offering statement if it or any of its for some issuers to reach their funding Section 4A(f) of the statute excludes predecessors previously failed to targets. However, these limits also are certain categories of issuers from comply with the ongoing reporting expected to reduce the risk and impact eligibility to engage in securities-based requirements of Rule 203 of Regulation of potential loss for investors that crowdfunding transactions in reliance Crowdfunding, however, may help to accompany the high failure rates on Section 4(a)(6). The final rules mitigate these potential adverse effects. 1355 associated with investments in small exclude those categories of issuers. As an alternative, we could have chosen businesses and startups, thus potentially The final rules also exclude two not to impose this exclusion or adopted improving investor protection. There is additional categories of issuers, beyond a shorter look-back period, as suggested no available market data that would those identified in the statute, from by some commenters.1358 Compared to allow us to empirically evaluate the being eligible to rely on Section 4(a)(6) the provisions in the final rules, either magnitude of these effects. to engage in crowdfunding transactions. of these alternatives could result in less Consistent with the proposed rules, First, the final rules exclude issuers that information being available to investors the final rules allow an issuer to rely on sold securities in reliance on Section and reduced informational efficiency of the efforts that an intermediary is 4(a)(6) and have not filed with the securities prices or possibly increased required to undertake in order to Commission and provided to investors likelihood of issuer misconduct in determine that the aggregate amount of the ongoing annual reports required by offerings made in reliance on Section securities purchased by an investor will Regulation Crowdfunding during the 4(a)(6). not cause the investor to exceed the two years immediately preceding the Second, the final rules exclude a filing of the required offering company that has no specific business investor limits, provided that the issuer 1356 does not have knowledge that the statement, which is generally plan or has indicated that its business consistent with suggestions from several plan is to engage in a merger or investor had exceeded, or would 1357 exceed, the investor limits as a result of commenters. This additional acquisition with an unidentified purchasing securities in the issuer’s exclusion is not expected to impose any company or companies, as suggested by 1359 offering, which was supported by additional burdens and costs on an several commenters. This issuer that it would not have already various commenters.1354 This may requirement is intended to help ensure incurred had it complied with the result in aggregate verification cost that investors have adequate ongoing reporting requirements as they savings since a given intermediary may information about the issuer’s proposed came due. Further, the requirement that business plan to make an informed a delinquent issuer prepare and file up 1352 See, e.g., AFR Letter; BetterInvesting Letter; investment decision, which may Consumer Federation Letter; Fund Democracy to two annual reports at one time in increase investor protection in some Letter; Fryer Letter; Growthfountain Letter; IAC order to become eligible to rely on instances. As an alternative, we could Recommendation (but also stating that the ‘‘greater Section 4(a)(6) is expected to incentivize have chosen not to impose this of’’ approach would be appropriate for accredited issuers to provide updated and current investors); Merkley Letter; NASAA Letter; Schwartz exclusion or to impose a less restrictive Letter; Zhang Letter (recommending that net worth information to investors, if they intend exclusion, as suggested by several not be used to calculate the investment limit). to rely again on Section 4(a)(6) to raise commenters.1360 Although these 1353 Although we lack information to determine alternatives might increase capital the average change in the applicable investment 1355 These categories of issuers are: (1) Issuers that formation by allowing a subset of limit resulting from this change, based on are not organized under the laws of a state or additional issuers to rely on Section Commission staff analysis of the 2013 Survey of territory of the United States or the District of Consumer Finances, a larger percentage of Columbia; (2) issuers that are subject to Exchange 4(a)(6), they may also result in less households exceeded a particular dollar threshold, Act reporting requirements; (3) investment such as $100,000 or $200,000, based on the net companies as defined in the Investment Company 1358 See, e.g., ABA Letter; Parsont Letter; worth standard than the percentage of households Act or companies that are excluded from the Projectheureka Letter; Public Startup Letter 2; that exceeded the same dollar threshold based on definition of investment company under Section RocketHub Letter. the income standard. 3(b) or 3(c) of the Investment Company Act. See 1359 See, e.g., Anonymous Letter 2; CFA Institute 1354 See, e.g., Arctic Island Letter 4; CFA Institute Section 4A(f). See also Rule 100(b) of Regulation Letter; CFIRA Letter 7; Commonwealth of Letter; Consumer Federation Letter; CrowdBouncer Crowdfunding. Massachusetts Letter; Consumer Federation Letter; Letter; EarlyShares Letter; EMKF Letter; Finkelstein 1356 See discussion in Section II.A.4 above. NASAA Letter; ODS Letter; Traklight Letter; Letter; Fund Democracy Letter; Heritage Letter; 1357 See, e.g., ASSOB Letter; Commonwealth of Whitaker Chalk Letter. Joinvestor Letter; Public Startup Letter 2; RoC Massachusetts Letter; Consumer Federation Letter; 1360 See, e.g., ABA Letter; FundHub Letter 1; Letter; RocketHub Letter; Vann Letter; Wefunder Fund Democracy Letter; Grassi Letter; Joinvestor Projectheureka Letter; Public Startup Letter 2; RoC Letter; Whitaker Chalk Letter. Letter; NASAA Letter; Wefunder Letter. Letter; RocketHub Letter; SBM Letter; Wilson Letter.

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informed investor decisions in such (10%); accounting fees of $5,000; quantified these fees 1371 were generally offerings. accounting review fees of $8,000; and very close to our estimates in the Overall, categories of issuers that are other fees (transfer agent, campaign Proposing Release (5% to 15%). We excluded from eligibility under the final development, filing and other) of agree with the commenter that rules may be at a competitive $7,000. A different commenter suggested that there is likely to be a disadvantage relative to those that are estimated that the cost to issuers could fixed component to these costs that eligible to offer securities under the range from 26% to 601% of the offering reflects a certain necessary level of due final rules, to the extent that excluded amount over a five-year period, diligence and background screening, issuers may raise less external capital or depending on the size of the offering, which will result in these costs as a incur a higher direct or indirect cost of which does not account for additional percentage of offering size being higher financing, or additional restrictions, estimated opportunity costs of internal for smaller offerings.1372 Thus, we have when seeking financing from alternative personnel time of $35,000 to $85,000 revised our intermediary fee estimates sources. over a five-year period.1367 Some in the following way: We project (as a 3. Issuer Requirements commenters referred to estimates of percentage of offering proceeds) 5% to total costs without estimating individual 15% for offerings of $100,000 or less, a. Issuer Costs components of those costs.1368 Other 5% to 10% for offerings between We recognize that there are benefits commenters provided additional $100,000 and $500,000, and 5% to 7.5% and costs associated with Regulation analysis of costs under different for offerings above $500,000. Data on Crowdfunding’s requirements scenarios and offering sizes based on the Regulation D offerings that involve pertaining to issuers, including the final estimates in the Proposing Release.1369 intermediaries suggests that offerings of up to $1 million have an intermediary rule’s disclosure requirements. In the In general, commenters identified the fee (commission and/or finder fee) of Proposing Release, we provided cost following as the main costs for issuers approximately 6.5% on average, which estimates for each of these requirements in securities-based crowdfunding is within the range we estimate for and requested comment on our offerings: The intermediary fees; the 1361 larger crowdfunding offerings. Although estimates. In response, we received costs of preparing, ensuring compliance several comment letters providing crowdfunding intermediaries are not with, and filing of Form C and Form C– expected to provide issuers with alternative cost estimates, some of AR; and the cost of accounting review which were lower and some of which 1370 services commensurate with those or audit of financial statements. provided by underwriters in registered were higher than the cost estimates in Below we discuss the comments 1362 offerings (and, in fact, funding portals the Proposing Release. For example, received on each of these costs and any 1363 would be prohibited from doing so), the one commenter provided the revisions to our estimates made in following cost estimates: Portal fees of fees charged in a crowdfunding offering response. 6% to 15% 1364; accounting review fees can be significantly larger on a of $1,950 to $9,000; accounting audit With regard to intermediary fees, the percentage basis relative to the fees of $3,100 to $9,000; financial estimates of the commenters that underwriting fees for registered statements/projections costs of $2,000 to offerings, which range from as high as $5,000; Title III disclosure/compliance 1367 See SeedInvest Letter 1. 7% for initial public offerings to less costs of $1,000 to $4,000; and corporate 1368 See, e.g., WealthForge Letter (suggesting that than 1% for certain bond issuances.1373 formation costs of $300 to $500.1365 In the costs associated with completing a In general, to the extent that a crowdfunding transaction under the current addition, the commenter estimated the regulations can be as high as one hundred thousand significant component of these fees is total cost to raise $99,000 of capital dollars, including audit fees, intermediary fees, fixed, the transaction costs for issuers under the proposed rules to be $9,300 legal fees and other offering costs); Berlingeri Letter will make smaller offerings more to $24,500 (9.4% to 24.7%); to raise (suggesting that the total cost would amount to between 15% and 20% of the offering); Traklight $499,000 of capital to be $33,240 to 1371 See StartEngine Letter 2 (estimating portal Letter (suggesting that the total cost would amount fees of 6–15%). See also Grassi Letter (estimating $84,750 (6.7% to 17%); and to raise $1 to between 15% and 20% of the offering for an intermediary fee of $20,000 for a $200,000 million of capital to be $72,800 to offerings above $100,000); FundHub Letter 1 offering, which amounts to 10% of the offering). But $168,500 (7.3% to 16.9%). The (referring to potential costs, based on the see Wefunder Letter (noting that, in contrast to the commenter stated that the entry of new Commission’s estimates and the commenter’s assumption in the Proposing Release, ‘‘good assumptions, of between $15,000 and $25,000 startups will pay a maximum of $0’’ and citing vendors into the market and ensuing associated with raising $100,000); Harrison Letter three accredited investor crowdfunding platforms competition may lead to a decline in and Ramsey Letter (referencing a Forbes estimate that use a ‘‘carried interest’’ model for Rule 506 some of these costs over time. Another that the costs of disclosure documents, engaging an offerings, including the example of the commenter commenter 1366 estimated that a intermediary, performing background checks, and itself that does not charge a fee to startups but that filing annual reports with the Commission might be charges investors a $25 fee and 10% carried interest $200,000 offering will incur the upwards of $100,000). See also SEC Proposes (share of profits upon acquisition or initial public following average costs: Legal fees of Crowdfunding Rules, Forbes, Oct. 23, 2013, http:// offering)). $10,000; intermediary fees of $20,000 www.forbes.com/sites/deborahljacobs/2013/10/23/ 1372 See Heritage Letter. sec-proposes-crowdfunding-rules/. 1373 See, e.g., Hsuan-Chi Chen and Jay R. Ritter, 1369 See, e.g., EarlyShares Letter; RocketHub 1361 The Seven Percent Solution, 55 J. Fin. 1105¥1131 See Proposing Release, Section III.B.3. Letter; SeedInvest Letter 1. 1362 See, e.g., StartEngine Letter 2; FundHub (2000); Mark Abrahamson, Tim Jenkinson, and 1370 But see Growthfountain Letter (suggesting Letter 2; Heritage Letter; SeedInvest Letter 1; Howard Jones, Why Don’t U.S. Issuers Demand that crowdfunding issuers will also incur investor SeedInvest Letter 2; Traklight Letter. European Fees for IPOs? 66 J. Fin. 2055–2082 relations costs). We do not consider investor (2011); Shane A. Corwin, The Determinants of 1363 See StartEngine Letter 2. relations costs to be incremental to Regulation Underpricing for Seasoned Equity Offers, 58 J. Fin. 1364 The commenter does not specify whether Crowdfunding, as these costs may be incurred by 2249¥2279 (2003); Lily Hua Fang, Investment Bank these fees are expressed as a percentage of the any business that relies on outside sources of Reputation and the Price and Quality of amount sought or raised in the offering. capital and a widely dispersed investor base. Underwriting Services, 60 J. Fin. 2729¥2761 (2005); 1365 We do not consider the costs associated with However, to the extent that investment limitations Rongbing Huang and Donghang Zhang, Managing the incorporation or formation of the business itself in crowdfunding offerings increase the number of Underwriters and the Marketing of Seasoned Equity to be part of the incremental costs of Regulation investors in a typical offering and to the extent that Offerings, 46 J. Fin. Quant. Analysis 141–170 Crowdfunding, as these are costs associated with some investor relations costs are variable, issuers in (2011); Stephen J. Brown, Bruce D. Grundy, Craig forming any business endeavor that relies on crowdfunding offerings may incur higher investor M. Lewis and Patrick Verwijmeren, Convertibles outside sources of capital. relations costs than issuers in types of offerings that and Hedge Funds as Distributors of Equity 1366 See Grassi Letter. typically have fewer investors. Exposure, 25 Rev. Fin. Stud. 3077 ¥3112 (2012).

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expensive on a percentage basis. As and legal fees above $2,500.1377 Another $500,000. Another commenter previously discussed, we believe that commenter noted that issuers and presented higher estimates, ranging competition among crowdfunding intermediaries will likely incur higher from $6,000 to $20,000, with a median venues and the potential development attorney and accounting fees and cost of $10,000, but did not provide of new products and services may have financial and administrative burdens estimates for different offering sizes.1385 a significant impact on these estimates than estimated in the proposed rules but Given commenters’ estimates, we think over time. did not provide estimates.1378 that the $6,000 to $20,000 estimate is The next major cost driver for issuers One commenter submitted several more appropriate for larger offerings (of in securities-based crowdfunding estimates of the compliance costs more than $500,000). Thus, to estimate offerings, as suggested by commenters, associated with the final rules’ the costs of preparing, filing, and is the cost of preparing and filing disclosure requirements. In one complying with Form C for large disclosure documents and the internal comment letter, the commenter offerings, we combine the cost ranges burden of ensuring compliance with the estimated the upfront compliance costs provided by the two commenters for disclosure requirements of the final of the proposed rules to be potentially these types of offerings, resulting in a rules. Issuers will incur costs to comply hundreds of hours in internal company cost estimate between $5,000 and with the disclosure requirements and time and $20,000 to $50,000 in outside $20,000. As in the Proposing Release, file the information in the new Form C: professional costs and noted that such we estimate that the cost of preparing Offering Statement and Form C–U: costs will likely be a significant and complying with the requirements Progress Update before the offering is deterrent to crowdfunding.1379 In a related to Form C–AR will be funded. Thus, issuers will incur those different comment letter,1380 this approximately two-thirds of that for costs regardless of whether their commenter stated that, based on an Form C. We base this estimate on the offerings are successful. In addition, for informal survey of potential vendors, it fact that no offering-specific information successful offerings, issuers will incur believes the costs of preparing a Form will be required in Form C–AR and costs to comply with the ongoing C–AR would range from $6,000 to issuers may thus be able to update reporting requirements and file $20,000, with the median being roughly disclosure previously provided on Form information in the new Form C–AR: $10,000. The commenter 1381 further C. Our estimates of the costs of Forms Annual Report.1374 estimated that an additional $15,000 C and C–AR are exclusive of the costs Several commenters provided worth of internal burden per year would of an accounting review or audit, which estimates of these costs. One commenter be required to prepare Form C–AR and are discussed separately below. stated that Form C could be prepared by an additional $5,000 to $10,000 worth of We expect that the cost of preparing third-party service providers, such as internal burden would be required to itself, at much lower costs than those and filing Forms C and C–AR will vary prepare financial statements. In yet based on the characteristics of issuers, estimated by the Commission, noting another comment letter,1382 this that it can prepare Form C and other but we do not have the information to commenter estimated the cost of quantify such variation. For example, required disclosure documents, perform ongoing disclosure obligations and ‘‘bad actor’’ checks, verify investor issuers with little operating activity may ongoing requirements to file financial have less to disclose than issuers with status and fulfill other compliance statements under the proposed rules to requirements for an estimated total cost more complex operations. Further, some be upwards of $10,000 to $40,000 per issuers may rely to a greater extent on of $2,500 for an offering of $100,000 and year. that, in most cases, its services and the services of outside professionals in Based on these comments, we have preparing the required filings,1386 while associated legal fees will cost an issuer revised our estimates of the compliance between $2,500 and $5,000 for an other issuers may choose to prepare and costs associated with the disclosure file the required forms without seeking offering up to $500,000 and between requirements of the final rules and $5,000 and $10,000 for an offering the assistance of outside Forms C and C–AR. On the lower end professionals.1387 We also recognize the between $500,000 and $1,000,000.1375 of the spectrum, one commenter Other commenters indicated that the possibility that many if not all of the suggested that the cost of preparing and filing requirements may ultimately be compliance costs for issuers are likely to filing these forms and the associated be higher than the Commission’s performed by funding portals on behalf compliance costs would range from of issuers using their platforms. estimates. One commenter indicated $3,000 to $9,000.1383 Another that the burden of completing Form C commenter estimated preparation and The other significant cost for would likely exceed the 60 burden compliance costs of $2,500 for an crowdfunding issuers, as identified by hours estimated by the Commission in offering of $100,000, between $2,500 commenters, is the cost of an the proposed rules and that the sum of and $5,000 for an offering between independent accounting review or attorney and accounting fees and $100,000 and $500,000, and between audit. As discussed above, reviewed management and administrative time $5,000 and $10,000 for an offering financial statements will be required in and other costs to prepare these between $500,000 and $1,000,000.1384 offerings of more than $100,000 but not required disclosures will likely exceed We rely on this commenter’s estimates more than $500,000, unless the issuer $10,500, except in cases of start-ups of the costs of preparing and filling has audited statements otherwise 1376 with no operating history. The Form C for offerings of up to $100,000 available. Audited financial statements commenter also noted that most and offerings between $100,000 and Regulation D offerings, which tend to be 1385 See SeedInvest Letter 1. less complex than crowdfunding 1377 Id. 1386 See, e.g., McGladrey Letter (suggesting that offerings, based on the requirements in 1378 See NSBA Letter. issuers that are startups may rely on outside professional services to a greater extent, which the proposed rules, incur accounting 1379 See SeedInvest Letter 2. would increase costs). 1380 See SeedInvest Letter 1. 1387 For purposes of the PRA, we estimate that, for 1381 1374 See Rule 203(b) of Regulation Crowdfunding. Id. the average issuer, 25 percent of the burden See also Section II.B.3 above. 1382 See SeedInvest Letter 4. associated with preparing and filing Form C and 1375 See FundHub Letter 2. 1383 See StartEngine Letter 2. Form C–AR will be carried by outside professionals. 1376 See Heritage Letter. 1384 See FundHub Letter 2. See Section IV.C.1.a below.

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are required in offerings of more than provided estimates for the cost of an review cost is approximately 60% of the $500,000. accounting review of financial audit cost, this range of audit costs In a change from the proposal, issuers statements that generally ranged from yields an estimate of the accounting that have not previously sold securities $1,500–$10,000.1390 One commenter review cost of approximately $1,500 to in reliance on Section 4(a)(6) will be suggested that the cost of an accounting $18,000. In the Proposing Release, we permitted to provide reviewed financial review is approximately 60% of the cost estimated the accounting review cost to statements in offerings of more than of an audit.1391 Consistent with this be $14,350, which falls within this $500,000 but not more than $1,000,000, comment, we also use an alternative range. Estimates of the cost of an unless the issuer has audited statements way to estimate the cost of an accounting review that we received otherwise available. This change is accounting review: indirectly, from the from commenters also fall within this expected to greatly reduce the initial cost of an audit. range. In light of the wide range of costs associated with providing Commenters provided several estimates provided by commenters for financial statements for first-time estimates of the cost of an audit for the cost of a review or audit of financial crowdfunding issuers offering more securities-based crowdfunding issuers, statements, we use in this release a than $500,000 but not more than most of which ranged from $2,500 to range of estimates ($1,500–$18,000 for $1,000,000. According to one $10,000.1392 Other commenters, the accounting review cost and $2,500– commenter, the difference in cost for however, provided higher annual audit $30,000 for the audit cost) instead of a reviewed versus audited financial cost estimates of up to $20,000– single point estimate for these statements could easily run into tens of $30,000.1393 Based on a compilation of anticipated costs for offerings. thousands of dollars.1388 audit fee data from reporting companies As discussed below, in a change from Some commenters argued that the for fiscal year 2014, the average cost of the proposal, the final rules do not cost of reviewed or audited financial an audit for an issuer with less than $1 require issuers to provide reviewed or statements of startup companies, which million in market capitalization and less audited financial statements in the is the type of companies expected to use than $1 million in revenues is annual report, unless such statements Regulation Crowdfunding, would be approximately $20,000.1394 We estimate are otherwise available, which is lower than our estimates because such the audit cost to be approximately expected to yield cost savings on an companies would be less complex and $2,500 to $30,000. In the Proposing annual basis compared with the because a competitive industry would Release, we estimated the audit cost to proposal. develop to support the compliance and be $28,700, which falls within this The table below presents the main disclosure needs of securities-based range. Assuming that, as suggested by adjusted cost estimates for the final crowdfunding issuers.1389 Commenters one commenter,1395 the accounting rules.1396

Offerings of more than Offerings of $100,000 $100,000, but not Offerings of more than $500,000 or less more than $500,000

Fees paid to the intermediary.1397 ...... $2,500–$7,500 ...... $15,000–$30,000 ...... $37,500–$56,250. Costs per issuer for preparation and filing of $2,500 ...... $2,500–$5,000 ...... $5,000–$20,000. Form C for each offering and related com- pliance costs.

1388 See FundHub Letter 1. The comment letter to perform a complete audit for a startup for $2,500 companies referenced above, because they likely also cites the commenter’s article, which notes that or less); NPCM Letter (suggesting that the minimum would be at an earlier stage of development than ‘‘while a review could be in the range of $1000 in cost to obtain an audit, or even a review, would be issuers that file Exchange Act reports with us and, some cases, a formal audit by a CPA typically starts $5,000); StartEngine Letter 1 (estimating accounting thus, could be less complex to audit. at $5,000 and could be much more.’’ See Kendall review and audit costs of $1,500–$10,000 for 1395 See Traklight Letter. Almerico, Has The SEC Made Equity Crowdfunding smaller, newer companies); StartEngine Letter 2 1396 In addition to the compliance costs outlined Economically Unfeasible? Crowdfund Insider (Nov. (estimating audit costs of $3,100–$9,000). in the table, issuers also will incur costs to (1) 21, 2014), available at http://www.crowdfund 1393 See, e.g., Frutkin Letter (suggesting a ‘‘rough obtain EDGAR access codes on Form ID; (2) prepare insider.com/2013/11/26291-sec-made-equity- estimate of $30,000 per audit’’); Graves Letter and file progress updates on Form C–U; and (3) crowdfunding-economicallyunfeasible. (suggesting that audit costs can be upwards of prepare and file Form C–TR to terminate ongoing 1389 See, e.g., CrowdFunding Network Letter; $18,000 to $25,000); Startup Valley Letter reporting. These additional compliance costs are dbbmckennon Letter; Denlinger Letter 2; FundHub (suggesting that audit fees can be up to $10,000 for discussed further below. In addition, for purposes Letter 2; Holm Letter; StartEngine Letter 1; small startups with no financials and can exceed of the Paperwork Reduction Act (‘‘PRA’’), we StartEngine Letter 2. $20,000 for companies that have been in business provide burden estimates for each of these filings 1390 See, e.g., Grassi Letter (estimating the cost of for a few years); Traklight Letter (suggesting that obligations in Section IV.C.1, below. accounting review for a $200,000 offering as audit costs can be up to $20,000). 1397 For purposes of the table, we estimate the $8,000); NPCM Letter (suggesting that the minimum 1394 See Audit Analytics, Auditor-Fees, available range of fees that an issuer would pay the cost to obtain an audit, or even a review, would be at http://www.auditanalytics.com/0002/audit-data- intermediary assuming the following: (1) The fees $5,000); StartEngine Letter 1 (estimating accounting company.php. The auditor fee database contains fee would be calculated as a percentage of the offering review and audit costs of $1,500–$10,000 for data disclosed by Exchange Act reporting amount ranging from 5% to 15% of the total smaller, newer companies); StartEngine Letter 2 companies in electronic filings since January 1, offering amount for offerings of $100,000 or less, (estimating accounting review costs of $1,950– 2001. For purposes of our calculation, we averaged 5% to 10% for offerings between $100,000 and $9,000). the auditor fee data for companies with both market $500,000, and 5% to 7.5% for offerings of more 1391 See Traklight Letter. capitalization and revenues of greater than zero and than $500,000; and (2) the issuer is offering 1392 See, e.g., dbbmckennon Letter (estimating less than $1 million (the smallest subgroup of $50,000, $300,000 and $750,000, which are the audit costs of $4,000–$9,000 for new companies companies for which data is compiled). We note mid-points of the offering amounts under each of with limited historical operations); Denlinger Letter that the cost of an audit for many issuers the respective columns. The fees paid to the 2 (noting that audit costs may be in the range of conducting a securities-based crowdfunding intermediary may, or may not, cover services to an $2,000–$4,000 for a pre-revenue startup); FundHub offering in reliance on Section 4(a)(6) is likely to be issuer in connection with the preparation and filing Letter 2 (noting the emergence of CPA firms willing lower than for the subset of Exchange Act reporting of the forms identified in this table.

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Offerings of more than Offerings of $100,000 $100,000, but not Offerings of more than $500,000 or less more than $500,000

Costs per issuer for preparation and filing of $1,667 ...... $1,667–$3,333 ...... $3,333–$13,333. annual report on Form C–AR 1398 and re- lated compliance costs. Costs per issuer for review or audit of finan- Not required ...... $1,500–$18,000 ...... $2,500–$30,000. cial statements. ($1,500–$18,000 for first-time issuers raising more than $500,000 but not more than $1,000,000.) 1399

We do not have additional data on the in reliance on Section 4(a)(6) will likely exemption under Regulation D to raise costs likely to be incurred by lead to investors having smaller stakes up to $1 million are not required to crowdfunding issuers to prepare the in the firm, which may reduce their provide audited financial statements, required disclosures beyond the incentives to monitor or gather and there are no periodic disclosure information discussed above. Overall, information for a given investor. These requirements. Regulation D offerings we recognize that cost estimates may considerations may give rise to adverse under Rules 505 and 506 for up to $2 vary from issuer to issuer and from selection and moral hazard in offerings million require issuers to provide service provider to service provider. in reliance on Section 4(a)(6). For audited current balance sheets (and However, even with the additional instance, some issuers may use capital unaudited statements of income, cash accommodations provided in the final to fund riskier projects than what was flows and changes in stockholders’ rules, the costs of compliance may be disclosed to investors, or they may not equity) to non-accredited investors, but significant for some issuers. pursue their stated business objectives. there are no periodic reporting If investors in securities-based b. General Disclosure Requirements requirements. The disclosure crowdfunding have limited information requirements in Regulation The statute and the final rules related about issuers or a limited ability to Crowdfunding are expected to benefit to issuer disclosures are intended to monitor such issuers, they may seek investors by enabling them to better reduce the information asymmetries that higher returns for their investment or evaluate the issuer and the offering, currently exist between small choose to withdraw from the securities- monitor how the issuer is performing businesses and investors. Small private based crowdfunding market altogether, over time and be aware of when the businesses typically do not disclose which would increase the cost of capital issuer may terminate its ongoing to issuers and limit the capital information as frequently or as reporting obligations. This will allow formation benefits of the final rules. In extensively as public companies, if at investors with various risk preferences addition, investors in offerings made in all. Moreover, unlike public companies, to invest in the offerings best suited for reliance on Section 4(a)(6) may make small private businesses generally are their risk tolerance, thus improving relatively small investments, due in part not required to hire an independent allocative efficiency. accountant to review financial to the application of investment statements. When information about a limitations. This potential dispersed The disclosure requirements also may company is difficult to obtain or the investor base may make it difficult for improve informational efficiency in the quality of the information is uncertain, investors to solve collective action market. Specifically, the required investors are at risk of making poorly- problems in monitoring the issuer. disclosure may provide investors with a informed investment decisions about The statute and the final rules seek to useful benchmark to evaluate the issuer that company. reduce information asymmetries by and compare the issuer to other private Such information asymmetries may be requiring issuers to file specified issuers both within and outside of the especially acute in the securities-based disclosures with the Commission for securities-based crowdfunding crowdfunding market because the offerings made in reliance on Section market.1403 Additionally, disclosure by market includes startups and small 4(a)(6) during the offering and on an issuers engaging in crowdfunding businesses that have significant risk annual basis thereafter.1400 Issuers also transactions in reliance on Section factors and other characteristics that are required to provide these disclosures 4(a)(6) may inform financial markets may have led them to be rejected by to investors and, in the case of offering more generally about new consumer other potential funding sources, documents, to investors and the relevant trends and new products, thus creating including banks, VCs and angel intermediary. The disclosure externalities that benefit other types of investors. In addition, the securities- requirements, which are described investors and issuers. based crowdfunding market may attract above,1401 are more extensive than those unsophisticated investors who may not required under some other existing sales in such offerings and to update certain issuer have the resources necessary to gather exemptions from registration. For information by electronically filing a Form 1–Z exit example, although the current report with the Commission not later than 30 and analyze information about issuers calendar days after the termination or completion before investing or to effectively requirements of Tier 1 Regulation A of an offering. Further, Tier 1 offerings must be monitor issuers after investing. offerings include similar initial financial qualified by the Commission and are subject to state Moreover, investment limits in disclosures, issuers in Tier 1 offerings registration requirements. Issuers in Tier 2 offerings securities-based crowdfunding offerings are not required to file ongoing are subject to annual, semiannual and current 1402 reporting requirements. See Regulation A Adopting reports. Issuers using the Rule 504 Release. 1398 As noted above, we estimate that these costs 1403 See Christian Leuz and Peter Wysocki, are approximately two-thirds of the costs for 1400 See Section 4A(b). See also Rules 201, 202 Economic Consequences of Financial Reporting and preparation and filing of Form C. and 203 of Regulation Crowdfunding. Disclosure Regulation: A Review and Suggestions 1399 First-time crowdfunding issuers within this 1401 See Section II.B.1 above. for Future Research, (Working Paper, University of offering range will be permitted to provide 1402 However, issuers in Tier 1 Regulation A Chicago) (2008), available at http://papers.ssrn. reviewed financial statements. offerings are required to provide information about com/sol3/papers.cfm?abstract_id=1105398.

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We recognize, however, that the also may make other types of private statements (balance sheets, statements disclosure requirements also will have offerings more attractive to potential of comprehensive income, statements of associated limitations and costs, securities-based crowdfunding issuers. cash flows and statement of changes in including the direct costs of For example, the 2013 changes to Rule stockholders’ equity) that are prepared preparation, certification, independent 506 of Regulation D,1406 which allow for in accordance with U.S. GAAP and accounting review (when necessary) and general solicitation, subject to certain cover the shorter of the two most dissemination of the disclosure conditions, may make it a more recently completed fiscal years or the documents. As noted above, the attractive option for small business period since inception.1410 We could disclosure requirements for offerings financing and, thus, may divert have chosen an alternative that allows made in reliance on Section 4(a)(6) are potential issuers from crowdfunding. financial statements to be prepared in more extensive, in terms of breadth and In addition, under the statute and the accordance with other comprehensive frequency, than those for other exempt final rules, issuers that complete a bases of accounting, as some offerings. The statute also provides us crowdfunding offering in reliance on commenters suggested.1411 Such an with the discretion to impose additional Section 4(a)(6) are subject to ongoing alternative may have mitigated costs for requirements on issuers engaging in reporting requirements,1407 which will some issuers, especially those smaller crowdfunding transactions, and in some increase compliance costs. The ongoing issuers that historically have prepared cases, the final rules require issuers to reporting, however, may provide a their financial statements in accordance disclose information beyond what is liquidity benefit for secondary sales of with other comprehensive bases of specifically mandated by the statute.1404 securities issued in crowdfunding accounting rather than U.S. GAAP. We recognize that these additional transactions and make the prices of such However, as we discussed above, this discretionary disclosure provisions may securities more informationally alternative would reduce the impose additional compliance costs on efficient, should a secondary market comparability of financial statements issuers compared with the proposal. develop. across issuers and might not provide However, we believe these provisions c. Financial Condition and Financial investors with a fair representation of a will improve investor decision-making Statement Disclosure Requirements company’s financial position and results and may ultimately benefit issuers by of operations. Further, it may be improving price efficiency in the Consistent with the statute, the final difficult for investors to determine securities-based crowdfunding market. rules require narrative disclosure about whether the issuer complied with such Although requiring less disclosure the issuer’s financial condition, basis of accounting.1412 could impose lower compliance costs, including, to the extent material, The final rules also specify that an we believe that the disclosure liquidity, capital resources and the issuer may conduct an offering in requirements we are adopting issuer’s historical results of reliance on Section 4(a)(6) using appropriately consider the need to operations.1408 We expect that this financial statements for the fiscal year enhance the ability of issuers relying on discussion will inform investors about prior to the most recently completed Section 4(a)(6) to raise capital while the financial condition of the issuer, fiscal year, provided that not more than enabling investors to make informed without imposing significant costs on 120 days have passed since the end of investment decisions. In response to the issuers, because issuers likely will the issuer’s most recently completed suggestion by some commenters that already have such information readily fiscal year, and financial statements for issuers not be required to disclose available. In addition, the final rules do the most recently completed fiscal year information in multiple places,1405 not prescribe the content or format for are not otherwise available.1413 This under the final rules, an issuer is not this information. may impose a cost on investors to the required to repeat disclosure that is With respect to the requirement to extent that the investors do not have already provided in the issuer’s provide financial statements, the final more current financial information financial statements. This may help to rules implement tiered financial about the issuer. However, this concern mitigate the cost of compliance for disclosure requirements based on the is somewhat mitigated by the issuers. aggregate amount of securities offered requirement that issuers include a We note that the disclosure and sold in reliance on Section 4(a)(6) discussion of any material changes or requirements may have indirect costs to during the preceding 12-month period, trends known to management in the the extent that information disclosed by inclusive of the offering amount in the financial condition and results of issuers relying on Section 4(a)(6) can be offering for which disclosure is being 1409 used by their competitors, resulting in a provided. The disclosure 1410 See Instruction 3 to paragraph (t) of Rule 201 potential loss of a competitive requirements will provide investors of Regulation Crowdfunding. advantage or intellectual property, with more information than might 1411 See, e.g., ABA Letter (for offerings of otherwise be obtained in private $100,000 or less, but stating that the Commission particularly for high-growth issuers and could require providing U.S. GAAP financial issuers engaged in significant research offerings, but also may create additional statements if available); AICPA Letter; CFIRA Letter and development. Requiring significant costs for those issuers that have limited 5; CFIRA Letter 7; CrowdCheck Letter 4; levels of disclosure at an early stage of financial and accounting expertise EarlyShares Letter; EY Letter (for offerings of necessary to produce the financial $100,000 or less, unless U.S. GAAP financial an issuer’s lifecycle may affect an statements are available); Grassi Letter; Graves issuer’s competitive position and may disclosures envisioned by the statute Letter (for issuers with less than $5 million in limit the use of the exemption in and the final rules. revenue); Mahurin Letter (stating that simple Excel Section 4(a)(6) by issuers who are The final rules, consistent with the spreadsheets accompanied by bank records should proposed rules, require issuers to meet the financial statement requirements); Milken especially concerned with Institute Letter (for early-stage issuers); NFIB Letter; confidentiality. These disclosure costs provide a complete set of their financial SBEC Letter; StartupValley Letter; Tiny Cat Letter (for offerings of less than $500,000); Whitaker Chalk 1406 1404 See Section 4A(b)(5). See also Section See Rule 506(c) Adopting Release, note 5. Letter (for offerings of less than $500,000 if the II.B.1.a.i(g) for a description of the additional 1407 See Rule 202 of Regulation Crowdfunding. issuer has an asset or income level below a certain disclosure requirements. 1408 See Rule 201(s) of Regulation Crowdfunding. level). 1405 See, e.g., EY Letter (noting that certain See also Section II.B.1.a.(ii)(a) above. 1412 See Section II.B.1.a.(ii)(b) above. required disclosure would be included in an 1409 See Rule 201(t) of Regulation Crowdfunding. 1413 See Instruction 10 to paragraph (t) of Rule issuer’s financial statements); Grassi Letter (same). See also Section II.B.1.a.(ii)(b) above. 201 of Regulation Crowdfunding.

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operations subsequent to the period for concerns,1419 the final rules do not exceeding $500,000 to be reviewed by a which financial statements are require complete tax returns and instead public accountant independent of the provided.1414 require that an issuer disclose its total issuer and financial statements for Requiring financial statements income, taxable income and total tax, or offerings exceeding $500,000 to be covering the two most recently the equivalent line items from the audited by a public accountant completed fiscal years is expected to applicable form, and have the principal independent of the issuer. The final benefit investors by providing a basis for executive officer certify that those rules specify that the required financial comparison against the most recently amounts reflect accurately the statements must be reviewed by a public completed fiscal year and by allowing information in the issuer’s federal accountant that is independent of the investors to identify changes in the income tax returns.1420 We believe that issuer for offerings exceeding $100,000 development of the business. Compared the requirement to provide selected but not exceeding $500,000.1422 If, to an alternative that we could have items from the return, rather than the however, financial statements of the selected, that of requiring financial return itself, will alleviate some of the issuer are available that have been statements covering only the most privacy concerns for issuers. This audited by a public accountant that is recently completed fiscal year, as some change may increase record keeping independent of the issuer, the issuer commenters suggested,1415 requiring a costs for issuers and give rise to must provide those financial statements second year of financial statements will potential transcription errors. It also instead and need not include the to some degree increase the cost for the may reduce the amount of information reviewed financial statements.1423 issuer. Also, to the extent that the issuer available to investors, but as we noted Similar to the proposal, issuers in had little or no operations in the prior in the Proposing Release, it is not clear offerings exceeding $500,000 must year, the benefit of comparability may to what extent all of the information provide audited financial statements. In not be realized. We recognize that many presented in a tax return would be a change from the proposal, the final crowdfunding issuers may not have any useful for an investor evaluating rules specify that issuers that have not financial history, and investors may whether or not to purchase securities previously sold securities in reliance on make investment decisions without a from the issuer. Finally, although Section 4(a)(6) and are conducting track record of issuer performance, principal executive officers will incur offerings with a target offering amount relying largely on the belief that an some incremental liability for their exceeding $500,000 but not exceeding issuer can succeed based on their certification that these amounts reflect $1,000,000 can provide reviewed business plan and other factors. accurately the information in the financial statements, unless audited issuer’s federal income tax return, we do Nevertheless, for those issuers that do financial statements are otherwise not expect this change from the 1424 have a financial history, we believe this available. Audited financial proposal to impose substantial disclosure can contribute to better statements can benefit investors in additional costs on officers or issuers informed investment decisions and evaluating offerings by issuers with given the limited scope of the required improve the overall allocative efficiency substantive prior business activity by certification. providing them with potentially higher- of the securities-based crowdfunding Moreover, the final rules specify that market. quality financial statements. However, if an issuer is offering securities in as noted by a number of For offerings of $100,000 or less, the reliance on Section 4(a)(6) before filing commenters 1425 and discussed above, final rules require the issuer to provide a tax return for the most recently requiring audited financial statements financial statements that are certified by completed fiscal year, the issuer may could significantly increase the cost to the principal executive officer to be true use information from the tax return filed issuers compared to requiring reviewed and complete in all material for the prior year, on the condition that financial statements.1426 Further, for respects.1416 The final rules include a the issuer provides information from the issuers that are newly formed, with no form of certification for the principal tax return for the most recently or very limited operations, and for small executive officer to provide in the completed fiscal year when it is filed, if issuers, the benefit of the audit may not issuer’s offering statement, which we 1421 it is filed during the offering period. justify its cost. believe will help issuers comply with This accommodation is expected to As discussed above 1427 the approach the certification required by the statute benefit issuers by enabling them to 1417 in the final rules of requiring reviewed and the final rules. However, if engage in transactions during the time financial statements rather than audited reviewed financial statements or period between the end of their fiscal financial statements, unless otherwise audited financial statements are year and when they file their tax return otherwise available, they must be for that year. This may impose a cost on 1422 See Rule 201(t)(2) of Regulation 1418 provided. investors because they might not receive Crowdfunding. The proposed rules would have the most up-to-date tax information 1423 Id. required income tax returns for the most about the issuer. 1424 See Rule 201(t)(3) of Regulation recently completed year (if any). In a The proposed rules would have Crowdfunding. See also Section II.B.1.a.ii. required financial statements for 1425 See, e.g., AEO Letter; Angel Letter 1; AWBC change from the proposed rules, Letter; CFIRA Letter 5; CfPA Letter; consistent with the suggestions of some offerings exceeding $100,000 but not CrowdFundConnect Letter; EarlyShares Letter; commenters and to respond to privacy EMKF Letter; EY Letter; Finkelstein Letter; 1419 See, e.g., AICPA Letter (stating that disclosure FundHub Letter 1; Generation Enterprise Letter; of an issuer’s tax return ‘‘. . . has the potential to Grassi Letter; Graves Letter; Guzik Letter 1; 1414 See Rule 201(s) of Regulation Crowdfunding. cause serious problems. Tax returns are intended to Hakanson Letter; Holland Letter; Johnston Letter; 1415 See, e.g., Denlinger Letter 1; EY Letter; Fryer be confidential and should remain so.’’); Public Kickstarter Coaching Letter; McGladrey Letter; Letter; Grassi Letter; Joinvestor Letter; Public Startup Letter 2; RocketHub Letter; SBM Letter; Milken Institute Letter; NACVA Letter; NFIB Letter; Startup Letter 2; RFPIA Letter; RocketHub Letter. Wilson Letter (suggesting that personal income tax NPCM Letter; NSBA Letter; PBA Letter; Reed Letter; 1416 See Section 4A(b)(1)(D)(i). See also Rule information should be on a voluntary basis only); RocketHub Letter; Saunders Letter; SBA Office of 201(t)(1) of Regulation Crowdfunding. Zhang Letter. Advocacy Letter; SBEC Letter; SBM Letter; Seyfarth 1417 See Instruction 4 to paragraph (t) of Rule 201 1420 See Rule 201(t)(1) of Regulation Letter; Verrill Dana Letter; WealthForge Letter; of Regulation Crowdfunding. Crowdfunding. Wefunder Letter; Woods Letter; Zeman Letter. 1418 See Rule 201(t)(1) of Regulation 1421 See Instruction 6 to paragraph (t) of Rule 201 1426 See also Section III.B.3.a. Crowdfunding. of Regulation Crowdfunding. 1427 Id.

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available, for first-time crowdfunding higher offering costs as a percentage of independence standards set forth in issuers that undertake offerings of more the amount offered compared to issuers Rule 2–01 of Regulation S–X. The than $500,000 but not more than offering less than but close to $100,000. change also will increase the number of $1,000,000 is expected to reduce the Similarly, the cost of audited financial public accountants able to perform the costs associated with financial statements may cause issuers in follow- reviews or audits, which may lead to a statements for such first-time issuers on crowdfunding offerings exceeding decrease in the price of their services compared to the proposed requirement but close to $500,000 to incur and thus a decrease in the direct of audited financial statements for all significantly higher offering costs as a issuance costs to issuers compared with issuers in offerings of more than percentage of the amount offered the proposal. The benefit from this $500,000. This accommodation is compared to issuers in offerings of less change will accrue to issuers making expected to alleviate the significant than but close to $500,000. We note, offerings of $100,000 to $1,000,000. To upfront cost of an audit for first-time however, that the issuer has the ability the extent that the AICPA independence issuers that have not yet raised capital to select its offering amount, and since standards impose fewer restrictions in a crowdfunding offering and may be the choice of offering amount with respect to potential conflicts of more financially constrained. To the determines which financial statement interest than the independence extent that their financing needs have requirements will apply to its offering, standards in Rule 2–01 of Regulation not been met through alternative the issuer, by choosing its offering S–X, however, this accommodation may financing methods, first-time amount, effectively also chooses its weaken investor protection. Moreover, crowdfunding issuers are likely to be financial statement requirements. any decrease in investor confidence in more financially constrained than We considered the alternative of the reliability of financial statements as issuers that have already established a exempting issuers with no operating a result of this change will limit the track record of successful crowdfunding history or issuers that have been in capital formation benefits of the final offerings. We recognize, however, that existence for fewer than 12 months from rules. there are costs associated with this the requirement to provide financial In addition, the final rules require an accommodation. Not requiring audited statements. We believe that financial issuer to file a signed review report or financial statements for offerings of statements contain valuable information audit report, whichever is applicable, more than $500,000 but not more than that can aid investors in making better and notify the public accountant of the $1,000,000 by first-time issuers may informed decisions, particularly, when issuer’s intended use of the report in the reduce the quality of financial evaluating early-stage issuers offering.1431 This can impose an disclosure, which may be a more characterized by a high degree of additional cost on issuers to the extent significant concern for new information asymmetry. We also expect that the accountant or auditor increases crowdfunding issuers due to the fact that other accommodations in the final the fee associated with the review or that their more limited track record may rules will help alleviate some of these audit to compensate for any additional translate into a higher level of issuer compliance costs. liability that may result from the Similar to the proposed rules, information asymmetry between issuers requirement to file the report. As financial statements must be reviewed 1432 and investors. The potentially reduced discussed above, in a change from in accordance with SSARS issued by the quality of financial disclosure the proposal, the final rules do not AICPA.1428 Although we could have associated with offerings of more than permit qualified audit reports. This chosen to develop a new review $500,000 by first-time issuers may affect change may impose an additional cost standard for purposes of the final rules, the likelihood of detecting fraud, which on issuers, which we are not able to we believe that issuers will benefit from would decrease investor protection. To quantify. However, this change is using the AICPA’s widely-utilized expected to provide investors with more the extent that investors anticipate such review standard. We believe that many increased risks, issuers may face a reliable financial statements, which accountants reviewing financial should enable investors to better higher cost of capital or be unable to statements of issuers raising capital in raise the entire amount offered, which evaluate the prospects of issuers relying reliance on Section 4(a)(6) are familiar on Section 4(a)(6) and thus make better would diminish the capital formation with the AICPA’s standards and benefits of the final rule. We note that informed investment decisions. By procedures for review, which should providing investors with a greater some first-time issuers in offerings of help to partly mitigate review costs. more than $500,000 but not more than degree of confidence in the reliability of As described above, the final rules the financial information, audited $1,000,000 may have audited statements require certain financial statements to otherwise available, which could partly financial statements will reduce the be reviewed or audited by a public information asymmetry about the mitigate the described effects. We also accountant that is independent of the issuer’s financial condition that exists note that some first-time issuers issuer.1429 In a change from the between issuers and potential investors. concerned about investor confidence in proposed rules, the final rules permit This decrease in information asymmetry the quality of their financial statements the use of independence standards set may lead to greater capital formation. may voluntarily provide audited forth in Rule 2–01 of Regulation S–X or financial statements. In a change from the proposed rules, the independence standards of the the final rules do not require financial Tiered disclosure requirements aim to 1430 AICPA. This change to allow the use statements in the annual report that partially mitigate the impact of the fixed of AICPA standards may reduce issuer meet a standard of review equal to the component of compliance costs on compliance costs to the extent that there highest standard provided in a prior issuers in smaller securities-based are higher costs associated with offering.1433 The final rules require an crowdfunding offerings. However, it is engaging an accountant that satisfies the annual report to include financial possible that the thresholds may have statements of the issuer to be certified an adverse competitive effect on some 1428 See Rule 201(t)(2) of Regulation issuers. For example, the cost of Crowdfunding. See also Instruction 8 to paragraph (t) of Rule 201 of Regulation Crowdfunding. 1431 See Instructions 8 and 9 to paragraph (t) of reviewed financial statements may 1429 See Section II.B.1 above. Rule 201 of Regulation Crowdfunding. cause issuers in offerings exceeding but 1430 See Instruction 10 to paragraph (t) of Rule 1432 See Section II.B.1.a.(ii)(b) above. close to $100,000 to incur significantly 201 of Regulation Crowdfunding. 1433 See Section II.B.2.c above.

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by the principal executive officer of the filing,1440 while allowing the issuer to crowdfunding issuers. To the extent that issuer as true and complete in all customize the presentation of other this provision lowers the compliance material respects.1434 Issuers that required disclosures. This approach cost for issuers, it may encourage greater otherwise have available financial provides issuers with the flexibility to use of Regulation Crowdfunding for statements that have been reviewed or present the required disclosures in a raising capital. audited by an independent certified cost-effective manner, while also The final rules require that issuers file public accountant, must provide them requiring the disclosure of certain key a Form C–U: Progress Update to and will not be required to have the offering information in a standardized describe the progress of the issuer in principal executive officer format, which we believe will benefit meeting the target offering amount.1443 certification.1435 As discussed above, investors and help facilitate capital In a change from the proposed rules, these changes will reduce the formation. based on concerns expressed by compliance costs to issuers compared We expect that requiring certain commenters, the final rules permit with the proposal.1436 At the same time, disclosures to be submitted using XML- issuers to satisfy the progress update they may reduce the quality of the based filings will produce benefits for requirement by relying on the relevant ongoing financial statements, resulting issuers, investors and the Commission. intermediary to make publicly available in a potential decrease in investor For instance, using information filed on the intermediary’s platform frequent protection and investor confidence in pursuant to these requirements, updates about the issuer’s progress the quality of these financial statements. investors can track capital generated toward meeting the target offering We note that some issuers may have through crowdfunding offerings without amount. This change is expected to reviewed or audited financial manually inspecting each filing. The mitigate some of the direct cost for the statements otherwise available, which ability to efficiently collect information issuer without reducing the amount of would partly mitigate this concern. In on all issuers also can provide an contemporaneous information available addition, an issuer is able to voluntarily incentive for data aggregators or other to investors. However, an issuer relying provide financial statements that meet a market participants to offer services or on the intermediary to make publicly higher standard, so if an issuer is analysis that investors can use to available frequent progress updates concerned about investor confidence in compare and choose among different must still file a Form C–U at the end of the quality of financial statements, it offerings. For example, reporting key the offering to disclose the total amount can choose to provide reviewed or financial information using XML-based of securities sold in the offering.1444 audited financial statements. filings will allow investors, analysts and Although the final offering information data aggregators to more easily compile, likely will be available on the registered d. Issuer Filing Requirements analyze and compare information about intermediary’s Web site, having the As discussed above, issuers will incur the capital structure and financial information available on EDGAR will costs to prepare and file the various position of various issuers. XML-based allow comparisons across platforms and disclosures required under Regulation filings also will provide the Commission provide ongoing access to historical Crowdfunding.1437 The statute requires with data about the use of the new information for future investor analyses issuers to file and provide to investors crowdfunding exemption that will allow that may otherwise be difficult or certain specified information at the time the Commission to evaluate whether the impossible to perform by accessing of offering, such as information about rules implementing the exemption information from each individual portal. the issuer, officers and directors, and include appropriate investor protections We expect the costs of preparing certain shareholders, a description of and are effectively facilitating capital updates on Form C–U to vary among the business, a description of the formation. issuers but to be relatively small.1445 purpose and intended use of proceeds, Certain provisions of the filing As noted above, the statute also target offering amount and the deadline requirements in the final rules provide requires an issuer to file and provide to to reach it, offering price (or the method flexibility and potentially reduce the investors information about the issuer’s for determining the price) and other compliance burden compared with the financial condition on at least an annual terms of the offering, a description of proposal. The final rules allow issuers basis, as determined by the the financial condition of the issuer, as to customize the presentation of their Commission.1446 Ongoing disclosure well as certain other disclosures.1438 non-XML disclosures and file those requirements are expected to strengthen These disclosure requirements are disclosures as exhibits to Form C in PDF investor protection. Ongoing disclosure expected to strengthen investor format as official filings, consistent with requirements are also expected to protection and enable investors to make the suggestions of some facilitate better informed investment 1441 better informed investment decisions. commenters. In addition, the final decisions in secondary market The statute does not specify a format rules include an optional Question and transactions and enhance the that issuers must use to present the Answer (‘‘Q&A’’) format that issuers informational efficiency of prices of required disclosures to the Commission. may opt to use to provide the crowdfunding securities, should a As noted above, the final rules require disclosures that are not required to be secondary market for such securities 1442 issuers to file the mandated disclosure filed in XML format. Relative to develop. To implement this statutory on EDGAR using new Form C.1439 some other possible formats, this Q&A requirement, the final rules require any Form C requires certain disclosures to format may facilitate the preparation of be submitted using an XML-based the Form C disclosures by 1443 See Rule 203(a)(3) of Regulation Crowdfunding. See also Sections II.B.1.b and II.B.3 1440 See Instruction to paragraph (a)(1) of Rule above. 1434 See Rule 202(a) of Regulation Crowdfunding. 203 of Regulation Crowdfunding. See also Section 1444 See Rule 203(a)(3)(iii) of Regulation 1435 Id. II.B.3 above. Crowdfunding. 1436 See Section III.B.3.a. above. 1441 See, e.g., CFIRA Letter 6; CFIRA Letter 7; 1445 For purposes of the PRA, we estimate that an 1437 See Section III.B.3.a. above. CrowdCheck Letter 1; Grassi Letter; Hackers/ issuer’s compliance with the Form C–U 1438 See Rule 201 of Regulation Crowdfunding. Founders Letter; RocketHub Letter; Wefunder requirement will result, on average, in See also Section II.B.1 above. Letter; Wilson Letter. approximately 0.50 burden hours per issuer. See 1439 See Rule 203(a) of Regulation Crowdfunding. 1442 See Item 1 of General Instruction III to Form Section IV.C.1.a below. See also Section II.B.3 above. C. 1446 See Section 4A(b)(4).

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issuer that has sold securities in a issued pursuant to Securities Act reporting in the future may discourage crowdfunding transaction in reliance on Section 4(a)(6), including any payment prospective investors from making an Section 4(a)(6) to file annually with the in full of debt securities or any complete initial investment in offerings in Commission a new Form C–AR: Annual redemption of redeemable securities; or reliance on Section 4(a)(6) or may cause Report, no later than 120 days after the (3) the issuer liquidates or dissolves its issuers to obtain lower valuations for end of each fiscal year covered by the business in accordance with state the securities they offer, which may report.1447 We believe that annual law.1451 We expect the costs of limit some of the capital formation reports will inform investors in their preparing Form C–TR to vary among benefits of the final rules. We note that portfolio decisions and can enhance issuers but to be relatively small.1452 issuers who believe that increased price efficiency. Moreover, as discussed In a change from the proposed rules, investor confidence justifies the cost of above, under the statute and the final after considering the comments, the annual reporting would be able to rules, the securities will be freely final rules also permit termination of continue ongoing reporting voluntarily. tradable after one year,1448 and ongoing reporting in two additional Termination of ongoing reporting may therefore, this information also will circumstances: (1) The issuer has filed also reduce the informational efficiency benefit potential future holders of the at least one annual report and has fewer of prices and secondary market issuer’s securities by enabling them to than 300 holders of record, or (2) the liquidity, making it more difficult for update their assessments as new issuer has filed annual reports for at investors to exit their holdings after the information is made available through least the three most recent years and has expiration of resale restrictions. A lack the annual updates, potentially allowing total assets not exceeding of ongoing reporting may reduce the for more efficient pricing. More $10,000,000.1453 This change is likelihood that a secondary market for generally, these continued disclosures expected to mitigate some of the such securities develops. We recognize, also may help facilitate the transfer of compliance cost for small issuers and however, that a secondary market for securities in secondary markets after the make the final rules a more attractive securities in offerings in reliance on one-year restricted period ends, which option for capital formation among Section 4(a)(6) may not develop even if can mitigate some of the potential small issuers, and at the same time, help all issuers are required to provide liquidity issues that are unique to the to ensure that larger issuers with a ongoing reports. securities-based crowdfunding market, significant number of investors continue The asset size cap in one of the as discussed above. to provide relevant disclosure. termination thresholds may create As an alternative, we could have This change may, however, make adverse competitive effects for issuers added a current reporting requirement, relevant information about the financial close to but above the termination consistent with the view of some condition of certain issuers no longer threshold. available to investors, resulting in less commenters that there may be major e. Advertising—Notice of Offering events that occur between annual informed investor decisions. This The statute and the final rules reports about which investors would change may affect a large number of prohibit an issuer from advertising the want to be updated.1449 Such an securities-based crowdfunding offerings, terms of the offering, except for notices alternative could result in better since it is likely that many that direct investors to an intermediary’s informed investment decisions. We are crowdfunding issuers will either have platform.1454 The terms of the offering concerned, however, that the benefits of fewer than 300 holders of record or include the amount offered, the nature a current reporting requirement may not assets below $10 million. Termination of the securities, price of the securities justify the additional compliance costs of ongoing reporting may result in a and length of the offering period.1455 associated with such a requirement, decrease in investor protection, The final rules allow an issuer to especially given the size and early stage particularly in the presence of an investor base with a limited degree of publish a notice about the terms of the of development of the issuers likely to offering made in reliance on Section be involved in offerings in reliance on sophistication. Allowing issuers to terminate ongoing reporting can make 4(a)(6), subject to certain limitations on Section 4(a)(6). the content of the notice.1456 The Any issuer terminating its annual monitoring of the issuer more difficult notices are similar to the ‘‘tombstone reporting obligations will be required to for investors and can potentially make ads’’ permitted under Securities Act file a notice under cover of Form C–TR: it more difficult to detect fraud. We Rule 134,1457 except that the final rules Termination of Reporting to notify note, however, that the investment require the notices to direct investors to investors and the Commission that it limits in the final rules serve to limit the the intermediary’s platform, through will no longer file and provide annual amount of each investor’s capital that is which the offering made in reliance on reports pursuant to the requirements of exposed to these and other risks of Section 4(a)(6) is being conducted. Regulation Crowdfunding.1450 The final securities-based crowdfunding offerings. We further note that the investment We believe this approach will allow rules enable issuers to terminate issuers to generate interest in offerings reporting if: (1) The issuer becomes a amounts involved in these transactions might limit a typical investor’s and to leverage the power of social reporting company required to file media to attract investors, potentially reports under Exchange Act Sections incentives to analyze the information contained in ongoing disclosures and to resulting in enhanced capital formation. 13(a) or 15(d); (2) the issuer or another monitor issuers, even if all issuers are At the same time, we believe it also will party repurchases all of the securities required to provide ongoing disclosures. protect investors by limiting the ability Nevertheless, the risk that an issuer in of issuers to provide certain advertising 1447 See Rule 202(a) of Regulation Crowdfunding. See also Section II.B.2 above for a discussion of the a securities-based crowdfunding materials without also directing disclosure requirements of Form C–AR. offering may terminate ongoing 1448 See Section 4A(e). See also Rule 501 of 1454 See Section 4A(b)(2). See also Rule 204 of Regulation Crowdfunding. 1451 See Rule 202(b) of Regulation Crowdfunding. Regulation Crowdfunding. 1449 See, e.g., ABA Letter; Angel Letter 1; 1452 For the purposes of the PRA, we estimate that 1455 See Instruction to Rule 204 of Regulation Denlinger Letter 1; EY Letter; Grassi Letter; issuers will spend, on average, approximately 1.5 Crowdfunding. Hackers/Founders Letter; RocketHub Letter. burden hours to complete this task. See Section 1456 See Rule 204(b) of Regulation Crowdfunding. 1450 See Rule 203(b)(3) of Regulation IV.C.1.a below. See also Section II.B.4 above. Crowdfunding. 1453 Id. 1457 17 CFR 230.134.

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investors to the disclosures, available on information about the offering contained part of the issuer about potential market the intermediary’s platform, that are in advertising materials. demand for the issuer’s securities, we required for an offering made in reliance believe it is valuable for issuers to have f. Compensation of Persons Promoting on Section 4(a)(6). Moreover, this the option to permit oversubscriptions. the Offering requirement is not expected to impose For example, permitting costs on market participants. The statute and the final rules oversubscriptions will allow an issuer to As an alternative, we could have prohibit an issuer from compensating, raise more funds, while lowering required communications about the or committing to compensate, directly compliance costs as a proportion of the offering to be conducted through the or indirectly, any person to promote the amount raised, if the issuer discovers intermediary, as suggested by some issuer’s offering through communication during the offering process that there is commenters.1458 To the extent that an channels provided by the intermediary greater investor interest in the offering issuer might be able to inform more unless the issuer takes reasonable steps than initially anticipated or if the cost investors about its offering if it is not to ensure that such person clearly of capital is lower than initially limited to communications through the discloses the receipt of such anticipated. As an alternative, we could intermediary’s platform, this alternative compensation (both past and have limited the maximum might limit the issuer’s ability to inform prospective) each time a promotional oversubscription amount to a certain 1463 a wide range of investors about its communication is made. percentage of the target offering amount, We believe this requirement will offering. Limited recognition among as suggested by one commenter.1466 benefit the securities-based prospective investors might be a However, such a restriction might crowdfunding market by allowing particularly significant hurdle for early- reduce valuable flexibility and investors to make better informed stage or small issuers. As another potentially limit capital formation investment decisions. Although the alternative, we could have required without appreciably enhancing investor requirement to take steps to ensure issuers to file advertising notices with protection. disclosure of compensation paid to the Commission and/or the relevant persons promoting the offering will The final rules do not require issuers intermediary, as suggested by other impose compliance costs on issuers, we to set a fixed price, as suggested by one commenters.1459 1467 While this could believe that investors will benefit from commenter. While such an increase the likelihood of issuer knowing if the comments about the alternative might reduce an investor’s compliance with advertising investment they are considering are cost of evaluating the investment, it restrictions, it also would impose an being made by a promoter who is would reduce flexibility for issuers additional cost on the issuer. Overall, in compensated by the issuer and therefore while providing only limited benefits to light of the restrictions on advertising may not be providing an independent, investors in light of other disclosures already in place, it is not clear to what disinterested perspective. required in the final rules. Further, the extent, if any, additional restrictions The final rules also require that an required disclosure of the pricing would enhance investor protection. issuer not compensate or commit to method used and the final prices for the Some commenters, suggesting that compensate, directly or indirectly, any securities before an offering closes,1468 advertising restrictions are unnecessary person to promote its offerings outside coupled with the investor’s ability to because sales must occur through an of the communication channels cancel his or her investment intermediary’s platform,1460 provided by the intermediary, unless commitment,1469 can mitigate potential recommended allowing the issuer more the promotion is limited to notices that concerns that dynamic pricing can be leeway to publicize its business or comply with the advertising rules.1464 used to provide preferential treatment to offering on its own Web site or social We believe this will similarly serve to certain investors (e.g., when an issuer media platform so long as the specific improve investors’ ability to make offers better prices to relatives or terms of the offering could be found informed judgments about the insiders). We also believe that the only through the intermediary’s information they encounter through cancellation rights afforded by the rules platform,1461 and recommended various communication channels about will help to address the concerns about allowing advertising notices to have a the issuer, and thus, to make better time pressure on the investment section for supplemental information informed investment decisions. decision because investors will have the highlighting certain intangible purposes opportunity to cancel their investment g. Oversubscription and Offering Price such as a particular social cause.1462 commitments if they decide to do so. The alternative of relaxing or The final rules permit an issuer to eliminating restrictions on advertising accept investments in excess of the h. Types of Securities Offered and could enhance capital formation efforts target offering amount, subject to the $1 Valuation of issuers. However, it might also result million limitation, but require the issuer The final rules do not limit the type in a cost to investors if they make less to disclose the maximum amount the of securities that may be offered in informed investment decisions based on issuer will accept and how shares in reliance on Section 4(a)(6). This incomplete or selectively presented oversubscribed offerings will be provision gives issuers the flexibility to 1465 allocated. We continue to believe offer the types of securities that are most 1458 See Hackers/Founders Letter (supporting the that permitting oversubscriptions will compatible with their desired capital issuer being able to repost the communications provide flexibility to issuers so that they elsewhere so long as it first appeared through the structure and financing needs. Such can raise the amount of capital they flexibility may benefit issuers to the intermediary); Joinvestor Letter. deem necessary to finance their 1459 See, e.g., Commonwealth of Massachusetts extent that capital structure decisions Letter; CFIRA Letter 6. businesses. Given the uncertainty on the can be relevant for an issuer’s firm 1460 See, e.g., FundHub Letter 1; Seed&Spark value. Letter (noting the proposed advertising restrictions 1463 See Section 4A(b)(3). See also Rule 205 of will restrict the ability of filmmakers to market and Regulation Crowdfunding and Section II.B.5 above. raise money for their films); Arctic Island Letter 5; 1464 See Rule 205 of Regulation Crowdfunding. 1466 See Joinvestor Letter; RFPIA Letter. PeoplePowerFund Letter. See also Section II.B.5 above. 1467 See RocketHub Letter. 1461 See Fryer Letter. 1465 See Rule 201(h) of Regulation Crowdfunding. 1468 See Rule 201(l) of Regulation Crowdfunding. 1462 See RocketHub Letter. See also Section II.B.6.a above. 1469 See Rule 201(j) of Regulation Crowdfunding.

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The final rules do not prescribe a final rules permit transfers to trusts activity 1476 but also will provide method for valuing the securities but controlled by, or held for the benefit of, centralized venues for crowdfunding instead require issuers to describe the covered family members.1474 In a activities that are expected to lower terms of the securities and the valuation change from the proposed rules, the investor and issuer search costs. As method in their offering materials. The restrictions apply to any purchasers and discussed earlier, existing lending- required disclosure of valuation method not only to the initial purchasers, based, reward-based, and donation- is intended to facilitate informed consistent with the suggestions of based crowdfunding platforms already investment decisions. As an alternative, commenters.1475 This change addresses engage in a large volume of transactions as suggested by commenters, we could the possibility of the initial purchaser in North America,1477 demonstrating have prescribed the use of particular selling securities to an eligible that the use of platforms for valuation standards,1470 required issuers purchaser and such eligible purchaser crowdfunding may be familiar to to base the valuation of their securities reselling them to the public within the investors and issuers. on the price at which the issuer first year, resulting in the securities We believe that existing non- previously sold securities,1471 or becoming widely traded within the first securities-based crowdfunding considered other standards designed to year. platforms will initially be the primary funding portals in the securities-based ensure that securities are fairly valued We recognize that resale restrictions crowdfunding market. The entry of and that approaches to valuation that will impose costs. The one-year registered broker-dealers and new put investors at a disadvantage are restriction on transfers of securities 1472 funding portals in the securities-based prohibited. If we required a specific purchased in a transaction conducted in crowdfunding market will increase valuation methodology, such as one of reliance on Section 4(a)(6) may impede competition among existing non- the suggested alternatives, and it were price discovery, raise capital costs to appropriate for a particular issuer, it securities-based crowdfunding issuers and limit investor participation, could mitigate the likelihood of intermediaries and potentially lower the particularly among investors who are inaccurate valuations and result in more cost of intermediation to issuers. One unable or unwilling to risk locking up informed decisions by investors. commenter stated that it has ‘‘a serious their investments for this period. The However, specific valuation concern with Broker/Dealers having an illiquidity cost resulting from the resale requirements that do not accommodate unfair advantage in the market, by restriction may be mitigated, in part, by inherent differences among companies, already being regulated and registered provisions that allow investors to particularly in light of the uncertainty with the Commission as well as FINRA. transfer the securities within one year of related to the valuation of early-stage Therefore, they may be able to service issuance by reselling the securities to companies, might result in inaccurate the market well ahead of Portals.’’ 1478 accredited investors, back to the issuer valuations and less informed investor We acknowledge that, to the extent or in a registered offering or transferring decisions. Also, potential additional that it may take less time and cost for them to certain family members or trusts calculations and analysis that might be registered broker-dealers to comply with of those family members. The effect of required to implement a prescribed the requirements of Regulation resale restrictions on the extent to valuation methodology could impose Crowdfunding as compared to funding which investors make informed additional costs on issuers, compared to portals, registered broker-dealers may be investment decisions is unclear. While letting issuers select a valuation method at a competitive advantage compared to resale restrictions may disincentivize that fits the particular circumstances of new entities that seek to register as investors from continuing to gather and their offering. funding portals and enter the analyze information about the issuer crowdfunding market. However, as we i. Restrictions on Resales after investing while the resale discuss below, the registration The statute and the final rules include restrictions are in effect, resale requirements for funding portals are restrictions on the transfer of securities restrictions may also strengthen the tailored to the more limited scope of for one year, subject to limited incentive to conduct due diligence on funding portal activities and are thus exceptions (e.g., for transfers to the the issuer and gather and analyze expected to result in a lower compliance issuer of the securities, in a registered information before the initial cost for these entities. Further, the offering, to an accredited investor or to investment. Nevertheless, at the effective dates of the final rules are certain family members).1473 As we investment amounts involved in these expected to provide time for funding discussed in the proposal, we believe transactions, a typical purchaser’s portals to register and comply with the that including such proposed incentives to gather and analyze other requirements of Regulation restrictions is important for investor information before or after investing Crowdfunding before crowdfunding protection. By restricting the transfer of likely will remain limited, regardless of offerings can occur.1479 We recognize, securities for a one-year period, the final the presence of resale restrictions. however, that registered broker-dealers rules give investors in a business a 4. Intermediary Requirements can retain a competitive advantage defined period to observe the relative to funding portals due to their performance of the business and to The statute and the final rules require potentially obtain more information that offerings in reliance on Section 1476 See Section III.B.3.a above for a discussion of about the potential success or failure of 4(a)(6) be conducted through an intermediary fees. the business before trading occurs. The intermediary that is a registered broker- 1477 See Section III.A.3 above. dealer or registered funding portal. The 1478 See RocketHub Letter. Several other commenters expressed concern about funding 1470 See, e.g., 11 Wells Letter; Active Agenda use of a registered intermediary to portals being at a competitive disadvantage to Letter; Borrell Letter; Ellenbogen Letter; Greer match issuers and investors will cause registered broker-dealers. See, e.g., Joinvestor Letter; Letter; Mountain Hardwear Letter; Moyer Letter; issuers to incur certain transaction costs City First Letter; Seed&Spark Letter; Guzik Letter 1. NaviGantt Letter; Vidal Letter. associated with the intermediation 1479 The time period between the effective date of 1471 See, e.g., Public Startup Letter 3; Wefunder the final rules pertaining to funding portal Letter. registration as compared to the later effective date 1472 See Consumer Federation Letter. 1474 See Rule 501(a)(4) of Regulation for rules governing crowdfunding offerings is 1473 See Section 4A(e). See also Rule 501(a) of Crowdfunding. expected to mitigate some of these effects. See also Regulation Crowdfunding. 1475 See CrowdCheck Letter 3; Moskowitz Letter. Section II.C.2.a above.

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ability to engage in a wider range of intermediaries that are already 4A(a).1484 Among other things, the activities in the securities-based registered as broker-dealers and that intermediary must register with the crowdfunding market.1480 In this regard will choose to serve as crowdfunding Commission as a broker-dealer or a we note that the final rules permit intermediaries; and approximately 50 funding portal, and it also must register funding portals to compensate a intermediaries that are not already with a registered national securities registered broker-dealer and to receive registered as broker-dealers and that association.1485 The final rules compensation from a registered broker- will register as funding portals.1483 It is implement these statutory requirements, dealer for services in connection with possible that the actual number of including by requiring an intermediary the funding portal’s offer or sale of participants will deviate significantly to be a member of FINRA or any other securities in reliance on Section from these estimates, and it is likely that applicable registered national securities 4(a)(6),1481 which may enable funding there will be significant competition association. portals to partly mitigate the impact of between existing crowdfunding venues While the benefits and costs are restrictions on funding portal activities and new entrants that may result in described in further detail below, the in the statute and final rules. Moreover, further changes in the number and types following tables summarize the even if funding portals remain at a of intermediaries as the market develops estimated direct costs to intermediaries, competitive disadvantage to registered and matures. It also is likely that there including broker-dealers and funding broker-dealers in the securities-based will be significant developments in the portals. Some of the direct costs of the crowdfunding market, overall the types and ranges of crowdfunding rules will be incurred by all expected participation of multiple products and services offered by intermediaries, while others are specific registered broker-dealers as intermediaries to potential issuers and to whether the intermediary is a new intermediaries in offerings in reliance investors, particularly as competitors entrant (registering as a broker-dealer or on Section 4(a)(6) may nevertheless gain additional experience in this new a funding portal) or is already registered result in a considerable level of marketplace. Moreover, the business as a broker-dealer. competition in the securities-based models of successful crowdfunding Although we have attempted to crowdfunding marketplace. intermediaries are likely to change over estimate the direct costs of the statute Both existing non-securities-based time as they grow in size or market and the final rules on intermediaries, we crowdfunding platforms and registered share or if they are forced to recognize that some costs can vary broker-dealers will need to invest differentiate from other market significantly across intermediaries, and resources to comply with the participants in order to maintain their within categories of intermediaries. For requirements of the statute and final position in the market. example, some intermediaries may rules. In addition, registered broker- As a result of the uncertainty over choose to leverage existing platforms or dealers will need to develop Internet- how the market may develop, any systems and so may not need to incur based crowdfunding platforms while estimates of the potential number of significant additional expenses to existing non-securities-based market participants, their services or develop a platform or comply with crowdfunding platforms will need to fees charged are subject to significant specific requirements of Regulation register as funding portals or broker- estimation error. While we recognize Crowdfunding. In the Proposing Release dealers and modify their existing that there are benefits as well as costs we provided cost estimates for the platforms to conform to the associated with the statutory various intermediary requirements and requirements of the statute and the final requirements and the final rules requested comment on our estimates. rules. Although the eventual extent of pertaining to intermediaries, there are Several commenters discussed the broker-dealer involvement in the significant limitations to our ability to estimates of the costs associated with securities-based crowdfunding market is estimate these potential benefits and intermediaries or provided cost difficult to estimate, we believe that costs. estimates of their own.1486 Below we some broker-dealers may acquire or The statute requires that the offer or discuss the comments received on each form partnerships with funding portals sale of securities in reliance on of these costs and any revisions to our to obtain access to a new and diverse Securities Act Section 4(a)(6) be estimates made in response. investor base. In addition, some existing conducted through a broker-dealer or a non-securities-based crowdfunding funding portal that complies with the 1484 See Section 4(a)(6)(C). platforms may eventually form 1485 requirements of Securities Act Section See Section 4A(a)(2). partnerships with registered broker- 1486 See, e.g., ASSOB Letter (suggesting that the dealers or funding portals. It is cost to establish a funding portal would run at least challenging to exactly predict the future 1483 These estimates are based, in part, on recent $480,000); Arctic Island Letter 8 (referring to the indications of interest, which may change as the cost of establishing and managing escrow accounts); number of persons (or entities) who will market develops. According to FINRA, as of CapSchedule Letter (citing costs of managing register as either broker-dealers or October 3, 2013, approximately 36 entities have securityholder records); Joinvestor Letter funding portals to act as intermediaries submitted the voluntary Interim Form for Funding (suggesting in reference to records to be kept by in securities-based crowdfunding Portals to FINRA to indicate their intention to act funding portals that ‘‘[u]nder the expectation that as funding portals under Title III of the JOBS Act. crowdfunding portals will be online operations and transactions. For purposes of the See Press Release, Financial Industry Regulatory will almost certainly retain records through digital PRA,1482 we estimate that Authority, FINRA Issues Voluntary Interim Form methods, the burden of collection should be intermediaries will number for Crowdfunding Portals (Jan. 10, 2013), available minimal’’ but not providing a specific estimate of approximately 110, including at http://www.finra.org/Newsroom/NewsReleases/ the cost of compliance). Various commenters 2013/P197636; Financial Industry Regulatory expressed concern with the cost imposed on approximately 10 intermediaries that Authority, Crowdfunding Portals, available at intermediaries. See, e.g., Heritage Letter (suggesting will register as broker-dealers in order to http://www.finra.org/industry/issues/crowdfunding. that the ‘‘costs incurred by the intermediary in engage in securities-based Based on these recent indications of interest, we dealing with an issuer, doing the required due crowdfunding; approximately 50 expect that the number of funding portals that will diligence and background screening, establishing a ultimately register with the Commission will be Web page describing the offering and so on do not approximately 50. vary linearly with the offering size’’); Seed&Spark 1480 See also note 607. We note that these estimates are the same as the Letter; SBEC Letter (suggesting that there will be 1481 See Rule 402(b)(7) and Rule 402(b)(8) of estimates of potential crowdfunding intermediaries ‘‘extensive staff, technology and operational costs’’ Regulation Crowdfunding. See also Section II.D.3.g. set forth in the Proposing Release. We did not in addition to the compliance costs estimated in the 1482 See Section IV.B.2 and Section IV.B.3 below. receive comments about these estimates. Proposing Release).

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We estimate that the cost for an entity portal member of a national securities the ongoing cost will be approximately to register as a broker-dealer and association, we estimate the initial $85,000 per year.1490 However, we become a member of a national registration and membership cost will anticipate considerable variation among securities association in order to engage be approximately $100,000, with an intermediaries depending on whether in crowdfunding pursuant to Section ongoing cost of approximately $10,000 they already have in place platforms 4(a)(6) will be approximately $275,000, in each year thereafter to maintain this and systems that can be adapted to meet with an ongoing annual cost of registration and membership.1489 We the requirements of the final rules. We approximately $50,000 to maintain this estimate that the initial cost for a expect that intermediaries (whether registration and membership.1487 In registered funding portal to comply with broker-dealers or funding portals) that addition, we estimate that the cost to the requirements of the final rules will already have in place platforms and comply with the various requirements be approximately $67,000, with an related systems that will need only to that apply to registered broker-dealers ongoing cost of approximately $40,000 tailor their existing platform and engaging in transactions pursuant to in each year thereafter. systems to comply with the Section 4(a)(6) for these new registrants Finally, we estimate that the requirements of Regulation will be approximately $245,000 initially incremental initial cost for an Crowdfunding, resulting in a lower and approximately $180,000 in each intermediary that is already registered initial cost on average of $250,000. We year thereafter. In making this estimate, as a broker-dealer to comply with the expect the ongoing cost to remain we assume that broker-dealers acting as requirements of the final rules will be approximately $85,000 per year for an intermediaries in transactions pursuant approximately $45,000, with an ongoing intermediary that already has in place a to Section 4(a)(6) will provide a full cost of approximately $30,000 in each platform and related systems. range of brokerage services in year thereafter. Commenters did not provide estimates connection with these transactions, These estimated costs are consistent of the cost of establishing a platform or including certain services such as with those set forth in the Proposing tailoring an existing platform to comply providing investment advice and Release and are exclusive of the cost of with the requirements of Title III. One recommendations, soliciting investors, establishing and maintaining a platform commenter suggested that the cost of and managing and handling customer and related functionality. For purposes operating a funding portal and funds and securities, that funding of the PRA, we estimate that for the regulatory compliance would be at least portals cannot provide.1488 average intermediary, the mid-range $480,000 per year but did not break out If instead an entity were to register as initial external platform development this estimate into separate cost a funding portal and become a funding cost will be approximately $425,000 and components.1491

ESTIMATED COSTS OF FINAL RULES FOR INTERMEDIARIES THAT REGISTER AS BROKER-DEALERS

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-Dealer Activities Related to, Transactions pursuant to Section 4(a)(6) 1492 ...... 245,000 180,000 Platform Development 1493 ...... 425,000 85,000

Total ...... 945,000 315,000

1487 We recognize that the cost of registering and 1489 In making these estimates, we assume that 1490 These estimates are based on intermediaries becoming a member of a national securities the membership process will take approximately that use a third party to develop the platform. association varies significantly among broker- sixty days and that there will be no related Intermediaries that develop the platform in-house dealers, depending on facts and circumstances. The licensing requirement for associated persons of the may incur lower costs. For purposes of the PRA, we cost can vary, among other factors, based on the funding portal. In the Proposing Release, we estimate that intermediaries that develop the number of associated persons of the broker-dealer estimated that the membership process will take platform in-house instead of using a third-party entity and their licensing requirements, the scope approximately one month. While it does not affect provider will spend an average of 1,500 hours for of the brokerage activities, and the means by which our estimate of direct costs, we note that a longer initial planning, programming and implementation the broker-dealer administers the registration membership process can result in incremental and 300 hours per year in ongoing internal burden. process (e.g., it may choose to hire outside counsel indirect costs to funding portals (e.g., opportunity For purposes of the PRA we estimate that costs due to not being able to serve as an to assist with the process). We also recognize that approximately half of the intermediaries will use a intermediary in crowdfunding offerings while the time required for a broker-dealer to become a third party to develop the platform and the other registration requirements are not met and half will develop their platforms in-house. See member of a national securities association varies competitive costs due to requiring additional time Section IV.C.2.b below. and can take six months to one year. We estimate to register compared to registered broker-dealers. 1491 the range of this cost to be between $50,000 and The time period between the effective date of the See ASSOB Letter. $500,000, and so we have chosen the average final rules pertaining to funding portal registration 1492 As discussed above, these costs include, amount of $275,000 for purposes of this analysis. as compared to the later effective date for rules among others, the costs to the broker-dealer of 1488 Among other things, a broker-dealer governing crowdfunding offerings is expected to having associated persons who have licensing providing recommendations and investment advice mitigate these effects. requirements, suitability requirements, is required to comply with FINRA rules on We also only include domestic entities in these requirements relating to advertisements, net capital suitability. See FINRA Rule 2111. A broker-dealer estimates, which do not need to comply with the requirements, and compliance with Exchange Act soliciting through advertisements is required to requirements in Regulation Crowdfunding that Rule 15c2–4 (17 CFR 240.15c2–4), as well as the comply with FINRA rules relating to apply to nonresident funding portals. Nonresident costs of complying with Subpart C of Regulation communications with the public. See FINRA Rule funding portals are subject to an additional cost of Crowdfunding. See Section IV.C.2 below for further 2210. Broker-dealers handling customer funds and completing Schedule C to Form Funding Portal, detail on our estimates, for PRA purposes, of the securities also are required to maintain net capital, hiring and maintaining an agent for service of costs associated with the requirements under segregate customer funds and comply with process and providing the required opinion of Subpart C. Exchange Act Rule 15c2–4. See Exchange Act Rules counsel. See Section IV.C.2.a. below (discussing 1493 See Section IV.C.2.b below for further detail 15c3–1, 15c3–3 and 15c2–4 [17 CFR 240.15c3–1, burden estimates of these additional requirements on our estimates, for PRA purposes, of the costs of 15c3–3 and 15c2–4]. for purposes of the PRA). developing a platform.

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ESTIMATED COSTS OF FINAL RULES FOR 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 1494 ...... $100,000 $10,000 Complying with Requirements to Act as an Intermediary 1495 in Transactions pursuant to Section 4(a)(6) ...... 67,000 40,000 Platform Development 1496 ...... 425,000 85,000

Total ...... 592,000 135,000

ESTIMATED INCREMENTAL COSTS OF FINAL RULES FOR INTERMEDIARIES ALREADY REGISTERED AS BROKER-DEALERS

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) 1497 ...... $45,000 $30,000 Platform Development 1498 ...... 425,000 85,000

Total ...... 470,000 115,000

Commenters suggested that funding protection for the crowdfunding market the tables above. We anticipate that the portals should not be required to while taking into account the more cost for a funding portal to become a register with the Commission or become limited activities of funding portals. member of a registered national FINRA members (or members of any Among other things, in addition to the securities association will be lower than other registered national securities Commission’s oversight and rulemaking the cost for a broker-dealer to do so association), because unlike broker- functions with regard to broker-dealers, because of the more limited nature of a dealers, they serve only as an FINRA currently is responsible for funding portal’s permissible activities ‘‘information delivery service.’’ 1499 One conducting most broker-dealer and the streamlined set of rules that an commenter stated that the Commission’s examinations, mandating certain association is likely to impose on estimates in initial costs of registration disclosures by its members, writing funding portals. In this regard, we note as a funding portal and for ongoing rules governing the conduct of its that FINRA has solicited public expenses create a significant burden members and associated persons, and comment on a set of proposed rules and given that potential funding portals informing and educating the investing related forms for registered funding operate on modest budgets and with public. Similarly, we believe that in portals that become FINRA members thin margins.1500 As we note above, addition to the benefits of the pursuant to the crowdfunding however, registration is a statutory Commission’s oversight with regard to provisions of the JOBS Act.1503 requirement under Securities Act funding portals, the regulatory The final rules also require that an Section 4A(a)(1).1501 While the framework that a registered national intermediary execute transactions registration requirements will securities association—initially exclusively through its online platform. necessarily impose costs on FINRA—will be required to create for This requirement may lower the intermediaries, we believe they also will funding portals will play an important potential for abusive sales practices. be effective in providing investor role in the oversight of these entities. However, it may also prevent investors The estimated costs in the tables who lack Internet access from investing 1494 As described above, this estimate reflects a above reflect the direct costs that through crowdfunding, as suggested by streamlined process of becoming a member of a intermediaries will incur in connection one commenter.1504 We believe that the national securities association, which we assume with registering as a broker-dealer on use of an online platform will enhance will take approximately sixty days and not involve application or licensing of associated persons. Form BD or as a funding portal on Form the ability of issuers and investors to 1495 This includes the costs of complying with the Funding Portal, submitting amendments communicate transparently as compared requirements of Subparts C and D of Regulation to registrations and withdrawing to the alternative of allowing Crowdfunding. See Section IV.C.2 below for further registrations. For the purposes of the transactions to occur offline. This detail on our estimates, for PRA purposes, of these costs. PRA, we estimate that approximately 50 requirement also is expected to help 1496 See Section IV.C.2.b below for further detail intermediaries will be broker-dealers issuers gain exposure to a wide range of on our estimates, for PRA purposes, of the costs of that have already registered with the investors, who also may benefit from developing a platform. Commission 1502 and, as such, these 1497 This includes the incremental costs of broker-dealers will not incur additional 1503 See Proposed Funding Portal Rules, available complying with the requirements of Subpart C of at http://www.finra.org/sites/default/files/Notice Regulation Crowdfunding, but it excludes any SEC registration costs associated with the final rules. Additionally, Attachment/p369763.pdf. See also FINRA Requests registration or membership requirements. See Comment on Proposed Funding Portal Rules and Section IV.C.2 below for further detail on our intermediaries that are not otherwise Related Forms, FINRA Regulatory Notice 13–34, estimates, for PRA purposes, of these costs. registered with FINRA or any other available at http://www.finra.org/sites/default/files/ 1498 See Section IV.C.2.b below for further detail registered national securities association NoticeDocument/p370743.pdf. (‘‘The rule is based on our estimates, for PRA purposes, of the costs of will need to register, and the estimated on the current NASD Rule 1010 Series membership developing a platform. rules that apply to broker-dealers. However, the 1499 See Perfect Circle Letter. cost for such registration is included in process for funding portals is simplified to reflect 1500 See Seed&Spark Letter. the limited nature of their business.’’) 1501 See Section II.C.2.a above. 1502 See Section IV.C.2 below. 1504 See, e.g., Projecteureka Letter.

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having numerous investment although funding portals may be subject mandate by requiring intermediaries to opportunities aggregated in one place, to issuer liability, the changes we have deliver educational materials that resulting in lower search costs or implemented in the final rules will give explain how the offering process works burdens related to identifying suitable them greater ability to control which and the risks associated with investing investment opportunities. issuers conduct offerings on their in crowdfunding securities.1513 The The final rules further require that an platforms and thus to mitigate to some educational requirements will help issuer conduct an offering or concurrent degree the risks of liability arising from make investors aware of the limits and offerings in reliance on Section 4(a)(6) such offerings. risks associated with purchasing using a single intermediary.1505 We crowdfunding securities and facilitate a. Disclosure and Dissemination recognize that this requirement may the selection of investments suited to Requirements impose costs by limiting the set of their level of risk tolerance. They also investors, as well as communication The statute and final rules include may help ensure that offerings proceed about a transaction, to the extent that disclosure and dissemination provisions more efficiently as investors will be some investors do not use a specific designed to provide information to better informed by the time they decide crowdfunding platform.1506 However, it security-based crowdfunding investors. to make their investment commitments may also enhance communication These provisions, together with the and receive required notices. However, between issuers and investors, as issuer disclosure provisions discussed we recognize that the effectiveness of suggested by some commenters,1507 and above, are expected to limit information the educational materials in enhancing enable investors to access investor asymmetries and promote the efficient investor protection will vary depending discussions about a particular allocation of capital amongst upon the quality of the educational transaction on a single platform. This crowdfunding offerings. These materials and the education and requirement may also reduce the risk of provisions also will provide information experience of retail investors.1514 In issuers circumventing the aggregate intended to ensure that investors are addition, materials that highlight the offering limit. aware of the risks associated with their risks of securities-based crowdfunding Some commenters suggested that the investment, which can enhance investor can discourage investor participation, statutory and rule requirements for protection. As discussed above, many of which may limit potential capital establishing a funding portal and the costs and benefits of these formation. ongoing maintenance and compliance provisions are difficult to quantify or Under the final rules, the educational expenses create a significant burden on estimate with any degree of certainty, materials can be in any electronic funding portals.1508 Among other especially considering that securities- format, including video format, and the concerns, commenters highlighted based crowdfunding will constitute a intermediary will have the flexibility to potential liability for intermediaries 1509 new method for raising capital in the determine how best to communicate the under Securities Act Section 4A(c) and United States. Although we are not able contents of the educational material. the cost of conducting background to quantify the direct costs specifically Accordingly, the cost for intermediaries checks 1510 pursuant to Rule 301(c) as associated with each of these to develop educational materials is particularly burdensome for funding requirements, these costs are reflected expected to vary widely. For purposes portals. We are mindful of the in our general estimates of the initial of the PRA, we estimate that the initial potentially significant costs as a and ongoing costs for intermediaries to cost for an intermediary using a third- percentage of offering size incurred by register, comply with their obligations party firm to develop and produce intermediaries, especially funding under the final rules and develop a educational materials will be portals, in securities-based crowdfunding platform, as reflected in approximately $10,000 to $30,000 and crowdfunding offerings. However, the tables above. the ongoing cost will be approximately intermediary requirements are designed The final rules prohibit an $5,000 to $15,000 per year.1515 to provide a measure of investor intermediary or its associated persons The final rules also require that protection from the risk of fraud in from accepting an investment intermediaries obtain representations small offerings by relatively unknown commitment until the investor has from investors about their review of the issuers. Concentration of certain due opened an account with the investor education materials and their diligence tasks at the intermediary level intermediary and the intermediary has understanding of the risks.1516 This may yield efficiency gains relative to obtained the investor’s consent to requirement is expected to improve having each small investor incur the electronic delivery of materials.1511 This investors’ understanding of investments cost to perform such tasks. In addition, requirement will help ensure that in securities-based crowdfunding certain basic information about the offerings. The direct costs of this 1505 See Instruction 1 to Rule 100(a)(3) of investor is on file with the intermediary requirement to an intermediary are Regulation Crowdfunding. See also Section II.A.3. and that all investors are on notice of reflected in the tables above as part of 1506 See, e.g., Graves Letter. the primary method of delivery for the costs of developing a crowdfunding 1507 See, e.g., CFA Institute Letter; RocketHub communications from the intermediary. Letter. platform, and we believe that the 1508 See, e.g., ASSOB Letter (suggesting that the To the extent that an intermediary uses cost to establish a funding portal could be at least a third party to establish account 1513 See Rule 302(b) of Regulation Crowdfunding. $480,000). opening functionality, the costs relevant 1514 See Jennifer E. Bethel and Allen Ferrell, 1509 See, e.g., ABA Letter; AngelList Letter; to this requirement will be incorporated Policy Issues Raised by Structured Products, Harv. BetterInvesting Letter; CFIRA Letter 10; City First L. & Econ. Discussion Paper No. 560, 2007, into the cost to develop the available at http://papers.ssrn.com/sol3/ Letter; EarlyShares Letter; EMKF Letter; FSI Letter; 1512 Graves Letter; Guzik Letter 1; IAC platform. papers.cfm?abstract_id=941720. Recommendation; Inkshares Letter; Milken Institute The statute requires intermediaries to 1515 For the purposes of the PRA, we estimate that Letter; PPA Letter; RocketHub Letter; SBA Office of provide disclosures related to risks and development of educational materials in-house will Advocacy Letter; SBEC Letter; SeedInvest Letter 3; other investor education materials. The be associated with an average initial burden of Seyfarth Letter; StartupValley Letter; Wefunder approximately 20 hours and an average annual Letter; Winters Letter. See also Section II.E.5. final rules implement this statutory burden of approximately 10 hours. See Section 1510 See, e.g., RocketHub Letter; Anonymous IV.C.2.e below. Letter 4; Zhang Letter. See also Section II.C.3.c 1511 See Rule 302(a) of Regulation Crowdfunding. 1516 See Rule 303(b)(2) of Regulation above. 1512 See also Section IV.C.2.d below. Crowdfunding.

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ongoing burden to comply will be intermediaries to make the issuer opportunity, as relevant, to cancel their minimal after the intermediary has information publicly available and investment commitments. Investors will systems in place to obtain such easily accessible on their platforms will benefit from these requirements because representations. This requirement also reduce information asymmetries they will be provided with additional may limit capital formation to the extent between issuers and investors and will information with which to evaluate that it deters investors from making enhance both transparency and their investment commitments, their investment commitments or otherwise efficiency of the crowdfunding market. securities transactions and the participating in offerings made in Greater accessibility of issuer intermediaries that are effecting those reliance on Section 4(a)(6). information may reduce incremental transactions. The direct costs of these Under the final rules, an intermediary costs to investors of locating issuer requirements are reflected in the tables must clearly disclose the manner in information and may increase their above as part of the costs of developing which the intermediary is compensated willingness to participate in a securities- a crowdfunding platform.1523 in connection with offers and sales of based crowdfunding offering, thereby The final rules implement the securities in reliance on Section enhancing capital formation. statutory requirement for intermediaries 4(a)(6).1517 As explained above, we The final rules also require an to allow investors to cancel their believe that investors will benefit by intermediary to provide communication commitments to invest, by requiring having information about how channels on its platform, meeting investors to have until 48 hours prior to intermediaries are compensated, such as certain conditions, which will allow the deadline identified in the issuer’s through compensation arrangements investors who have opened accounts offering materials to cancel their with affiliates. We believe that the costs with intermediaries and representatives investment commitments.1524 If an of complying with this requirement of the issuer to interact and exchange issuer reaches its target offering amount generally will be included in the overall comments about the issuer’s offering on prior to the target offering deadline, the cost for intermediaries to develop their that intermediary’s platform, and which final rules permit early closing of the platforms, as it will entail adding an will be publicly available for viewing offering under certain conditions, item of disclosure to the functionality of (i.e., by those who may not have opened including a requirement that the their platforms.1518 While the accounts with the intermediary).1521 intermediary send notices to investors requirement to disclose compensation Compared with the alternative of not informing them of the closing and the arrangements may give rise to indirect requiring intermediaries to provide deadline for the opportunity to costs due to the intermediary’s communication channels, we believe cancel.1525 The final rules also set forth competitors learning about the this requirement will allow investors, notice requirements and requirements compensation arrangements, we do not particularly those who may be less related to the intermediary directing expect such indirect costs to be familiar with online social media, to payments in the event of cancellations significant since the intermediary’s participate in online discussions about and material changes to offerings.1526 competitors can generally infer ongoing offerings without having to Additionally, the final rules impose information about the intermediary’s actively search for such discussions on specific obligations on intermediaries compensation arrangements from other external Web sites. Moreover, the related to informing investors about sources. requirement that promoters be clearly their right to cancel an investment identified on these channels will The statute and the final rules further commitment.1527 require that intermediaries make enhance transparency, allowing those We believe that investors will benefit available certain issuer-provided investors that draw information from an from receiving these notices because the information.1519 We recognize that intermediary’s online platform to make notifications and accompanying potentially better informed investment requiring intermediaries to provide information will keep investors decisions. The direct costs of this prospective investors with information informed about the status of the offering requirement are reflected in the tables about the issuer will impose costs. We and thereby facilitate better investment above as part of costs of developing a expect that intermediaries will incur decisions. This approach also will crowdfunding platform, and we believe costs to develop the functionality that benefit investors by providing them that once the platform has been set up, will allow the uploading and with a specified period of time to review the ongoing burden to comply will be downloading of issuer information. We and assess information and minimal. We recognize, however, that believe that the direct costs of communications about the issuer. complying with this requirement will be this requirement will not assure that We recognize that allowing investors included in the overall cost to participants in online discussions on to cancel their investment commitments intermediaries to develop their the intermediary’s online platform up to 48 hours prior to the deadline platforms and that this requirement will convey accurate or relevant information identified in the issuer’s offering impose only nominal incremental costs in their postings, and it will not materials may impose a cost on issuers on intermediaries on an ongoing basis, preclude investors from participating in who, because of investors cancelling primarily because the functionality discussions on external Web sites or commitments late in the offering period, necessary to upload the required issuer other external social media. may fall below the target offering The final rules also require disclosure information is a standard amount and so decide to cancel the intermediaries, upon receipt of an feature offered on many Web sites and offering or to extend the offering period. 1520 investment commitment from an would not require frequent updates. Accordingly, we recognize that this investor, promptly to provide or send to The issuer disclosure requirements requirement may reduce the overall the investor a notification of that are expected to benefit investors by amount of capital raised in offerings in enabling them to better evaluate the investment commitment.1522 This requirement will provide investors with issuer and the offering. Requiring 1523 See also Section IV.C.2.h below. key information about their investment 1524 See Rule 304(a) of Regulation Crowdfunding. 1517 See Rule 302(d) of Regulation Crowdfunding. commitments, including notice of the 1525 See Rule 304(b) of Regulation Crowdfunding. 1518 See also Section IV.C.2.f below. 1526 See Rule 304(c) and Rule 304(d) of Regulation 1519 See Rule 303(a) of Regulation Crowdfunding. 1521 See Rule 303(c) of Regulation Crowdfunding. Crowdfunding. 1520 See also Section IV.C.2.g below. 1522 See Rule 303(d) of Regulation Crowdfunding. 1527 See Rule 302(b) of Regulation Crowdfunding.

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reliance on Section 4(a)(6) and thus Each of these requirements is intermediaries may rely on the have an adverse effect on capital intended to help reduce the risk of fraud representations of the issuer unless they formation. Intermediaries are expected in securities-based crowdfunding. As a have reason to question the reliability of to incur direct costs in developing and result of these requirements, investors those representations. Overall, a more maintaining systems to send the will be able to rely on the efforts of the rigorous review requirement represents relevant notices to investors. These intermediary that conducted a a tradeoff between enhanced investor costs are reflected in the tables above as background and securities enforcement confidence in the portal and higher part of the cost of developing a check, solving a collective action compliance costs for intermediaries. We crowdfunding platform.1528 problem that would be prohibitively recognize that permitting an costly if left to individual investors. To intermediary to rely on an issuer’s b. Measures To Reduce the Risk of the extent that these checks help representations unless the intermediary Fraud prevent fraudulent activity, they may has reason to question the reliability of The statute and final rules require increase investor willingness to the representations can potentially intermediaries to have a reasonable participate in crowdfunding offerings, lessen the incentive for an intermediary basis for believing that an issuer seeking thereby facilitating capital formation. to thoroughly investigate the issuers and to offer and sell securities in reliance on We anticipate that most intermediaries securities to be offered on its platform. Section 4(a)(6) through the will employ third parties to perform Such an outcome may result in higher intermediary’s platform complies with these background checks. levels of fraud compared to a the requirements in the final rules 1529 We received several suggestions from requirement that intermediaries perform and has established means to keep commenters aimed at reducing or an independent investigation to ensure accurate records of holders of the scaling the costs of the proposed that the issuer complied with all the securities.1530 Under the final rules, an requirements. One commenter suggested requirements. A higher level of fraud intermediary must deny access to an that the checks be required only after an will negatively affect both investors in issuer if it has a reasonable basis for issuer has met its target offering amount, crowdfunding offerings and non- believing that the issuer or the offering so as to prevent unnecessary expense to fraudulent issuers. While we recognize presents the potential for fraud or the intermediary.1536 Requiring a this potential adverse effect, we note otherwise raises concerns about investor background check only after an issuer that intermediaries may be subject to protection 1531 or that the issuer or any has reached its target may reduce the liability as ‘‘issuers,’’ and this liability, of its officers, directors (or any person total cost of performing background together with potential reputational occupying a similar status or performing checks for intermediaries; however, it harm, is expected to provide significant a similar function) or 20 Percent also may result in intermediaries having incentives for intermediaries to monitor Beneficial Owners was subject to a to cancel offerings by issuers who fail and investigate the offerings on their disqualification under the final the background checks, resulting in platforms. We also note that the rules.1532 The intermediary also must additional transactional and communication channels provided on conduct a background and securities reputational costs for the intermediary. these platforms can provide a potential enforcement check on each of these Overall, relative to this alternative, we source of information for intermediaries, persons.1533 We believe that these believe that an intermediary performing further facilitating their evaluation of requirements will increase investor a background check on an issuer prior prospective issuers. to the securities offering will improve protection in connection with the c. Other Limitations on Intermediaries offering.1534 investor confidence in using a given As noted above, the specific costs and intermediary. The statute and final rules place While intermediaries are required to benefits of these provisions are difficult certain limitations on intermediaries. take certain steps to reduce the risk of to quantify or estimate with any degree These limitations are expected to fraud, the final rules provide of certainty. However, we have increase investor protection in the intermediaries with the flexibility to attempted to reflect the direct costs of securities-based crowdfunding market. decide the specific steps to take, The final rules require an these provisions in the tables above as consistent with some of the intermediary before accepting an part of our general estimates for the cost commenters’ suggestions.1537 We investment commitment to have a of complying with requirements to act believe this may reduce intermediary reasonable basis for believing that an as an intermediary in transactions costs relative to establishing a more investor has not exceeded the final pursuant to Section 4(a)(6). For stringent or more specific standard for rules’ investment limits but permit an purposes of the PRA, the cost for an intermediaries. For example, deeming intermediary to rely on investor intermediary to fulfill the required an intermediary to have satisfied the representations concerning compliance background checks and securities Rule 301(b) requirement if the issuer has unless the intermediary has reason to enforcement regulatory history checks is engaged the services of a transfer agent question the reliability of the estimated to be approximately $13,818 that is registered under Section 17A of representations.1539 to $34,546 in the first year and While we realize the Exchange Act will reduce the approximately the same in subsequent that investors may make inaccurate intermediary cost while at the same representations, we believe that this years.1535 time potentially improving investor provision represents a reasonable protection.1538 In addition, approach to implement the statutory 1528 See also Section IV.C.2.h below. requirement, appropriately considering 1529 See Rule 301(a) of Regulation Crowdfunding. 1536 Anonymous Letter 4. 1530 See Rule 301(b) of Regulation Crowdfunding. the need for investors to adhere to 1537 See, e.g., StartupValley Letter; Vann Letter. 1531 See Rule 301(c)(2) of Regulation investment limitations while mitigating 1538 We note that while for purposes of this Crowdfunding. the costs incurred by intermediaries. provision, the issuer is not required to continue to 1532 See Rule 301(c)(1) of Regulation engage the services of a registered transfer agent on Crowdfunding. an ongoing basis, since the use of a registered incentive to continue to engage the services of a 1533 Id. transfer agent is a condition for the Section 12(g) registered transfer agent. See Section III.B.8. below. 1534 See also Section II.C.3 above. exemption, issuers with a large number of 1539 See Rule 303(b)(1) of Regulation 1535 See Section IV.C.2.c below. shareholders of record are expected to have an Crowdfunding. See also Section II.C.5.b above.

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The cost to update the required crowdfunding offering through the third party that has agreed in writing to functionality for processing issuer intermediary’s platform. By not hold the funds for the benefit of the disclosure and investor extending the prohibition from having investors and the issuer and to promptly acknowledgment information is any financial interest in an issuer to transmit or return the funds to the reflected in the tables above as part of intermediaries in all instances, the final persons entitled to such funds.1545 the costs to develop a crowdfunding rules allow for more flexibility in the Based on several commenters’ platform, and we believe that the payment arrangements between issuers suggestions,1546 we modified the ongoing burden to comply would be and intermediaries. This additional proposed definition of qualified third minimal. option by which the issuer may pay an parties in Rule 303(e) also to include Under the final rules, intermediaries intermediary for its services may be registered broker-dealers that carry must require any person, when posting beneficial for issuers by allowing them customer or broker or dealer accounts a comment in the communication to use more of the capital raised in an and hold funds or securities for those channels, to clearly disclose with each offering for future investments rather persons and credit unions insured by posting whether he or she is a founder than paying a portion of it as a fee to the NCUA.1547 The final rules also or an employee of an issuer engaging in the intermediaries. It also allows require a funding portal to direct the promotional activities on behalf of the funding portals to share in the upside of qualified third party to transmit funds to issuer or a compensated promoter 1540 successful issuers, generating the issuer once the target offering We believe that these disclosure potentially larger revenue than the amount is reached and the cancellation requirements will benefit investors by offering fee. While allowing period has elapsed; to return funds to an promoting a transparent information intermediaries to have a financial investor when an investment sharing process. We further believe that interest in issuers can align incentives commitment has been cancelled; and to intermediaries are in an appropriate between intermediaries and return funds to investors when the position to take such steps as part of investors,1542 it can alternatively lead to offering has not been completed. designing communication channels on potential conflicts of interest between These requirements will benefit their platform. intermediaries and investors.1543 While investors and issuers by helping ensure Under the final rules, intermediaries we believe that such conflicts of interest that funds are appropriately refunded or will incur direct costs in complying are possible and may reduce investor transmitted in accordance with the with the requirements to disclose protection, they will be significantly terms of the offering. In particular, the compensation to promoters, and certain mitigated by the requirement that an requirement that the account in which additional costs from time to time to intermediary’s financial interest in an funds are deposited be exclusively for ensure continued compliance. These issuer consist of securities of the same the benefit of investors and the issuer costs are reflected in the table above as class and having the same terms, will help prevent the intermediary or part of the costs of complying with the conditions and rights as the securities other parties from claiming or otherwise requirements to act as an intermediary being offered or sold in the unlawfully appropriating funds from in a Section 4(a)(6) transaction. In crowdfunding offering through the that account. Expanding the definition addition, if this requirement discourages intermediary’s platform. Such of ‘‘qualified third parties’’ will increase the use of promoters by issuers, it may limitations on an intermediary’s the number of third parties available to limit the investor pool for an offering financial interest, combined with hold funds in an escrow or in an made in reliance on Section 4(a)(6), thus reputational concerns and the account for the benefit of investors and limiting the ability of an issuer to raise accompanying disclosure requirements, the issuer, potentially reducing the cost capital.1541 will likely curb the incentives of of the service due to increased The statute prohibits the directors, intermediaries to act in a way that competition. We do not expect any officers or partners of an intermediary, harms the interests of crowdfunding significant costs due to this change from or any person occupying a similar status investors. the proposed rules because credit or performing a similar function, from The statute requires that unions insured by the NCUA offer having any financial interest in an intermediaries ensure that all offering similar protections to banks while issuer that uses the services of the proceeds are provided to the issuer only registered broker-dealers that carry intermediary. The final rules implement when the aggregate capital raised from customer or broker or dealer accounts this statutory requirement. In a change all investors is equal to or greater than and hold funds or securities for those from the proposed rules, the final rules a target offering amount.1544 The final persons are subject to various regulatory provide exceptions to the prohibition on rules implement this requirement by obligations, which are designed to an intermediary having a financial requiring intermediaries that are provide protection of investor funds interest in a crowdfunding issuer. The registered as broker-dealers to comply through the imposition of capital and intermediary may hold a financial with the existing requirements of other requirements.1548 interest in the crowdfunding issuer if Exchange Act Rule 15c2–4 and by Under the statute, intermediaries may the financial interest represents requiring intermediaries that are not compensate promoters, finders or compensation for the services provided registered funding portals to direct lead generators for providing broker- to or for the benefit of the issuer in investors to transmit the funds or other dealers or funding portals with the connection with the offer or sale of consideration directly to a qualified personally identifiable information of securities in a crowdfunding offering any potential investor. The final rules and consists of securities of the same 1542 See, e.g., AngelList Letter (‘‘So long as the implement this statutory requirement by class and having the same terms, program was consistently applied without judgment prohibiting an intermediary from conditions and rights as the securities by the intermediary, the net effect would purely be to align the interests of the intermediary with the being offered or sold in the investor.’’). See also EMKF Letter; Hackers/ 1545 See Rule 303(e) of Regulation Crowdfunding. Founders Letter; Heritage Letter; Milken Institute 1546 See, e.g., Growthfountain Letter; Vann Letter; 1540 See Rule 303(c)(4) of Regulation Letter; RoC Letter; RocketHub Letter; Thomas Letter Ex24 Letter; FOLIOfn Letter. Crowdfunding. See also Section II.C.5.c above. 1. 1547 See Rule 303(e) of Regulation Crowdfunding. 1541 See Rule 300(b) of Regulation Crowdfunding 1543 See Jacobson Letter. See also Section II.C.5.b above. and Section II.C.2.b. 1544 See Section 4A(a)(7). 1548 See note 868.

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compensating any person for providing funding portals and to withdraw from we are not able to estimate the the personally identifiable information funding portal registration. Although magnitude of these potential effects. of any crowdfunding investor to funding portals would incur time and Although the requirements with 1549 intermediaries. Investors will benefit compliance costs to update Form respect to the appointment of an agent from the privacy protection provided by Funding Portal, we expect funding for service of process, a certification and this prohibition. Intermediaries will portals will have experience with the a legal opinion will impose costs on incur a cost because the rule will not filing process for Form Funding Portal allow them to use personally from their registration and, as a result, nonresident funding portals, these identifiable information to target and will be familiar with the filing process requirements are expected to enhance seek out specific investors, thus by the time they update the form. In the investor protection by requiring steps reducing the potential investor pool for tables above, this cost is reflected in the designed to ensure that the books and certain offerings. However, subject to $10,000 annual compliance cost records of funding portals that are not this restriction, the final rules permit an associated with registering on Form based in the United States, or that are intermediary to compensate a person for Funding Portal and becoming a member subject to laws other than those of the directing issuers or investors to the of a registered national securities United States, nevertheless are intermediary’s platform in certain association. accessible to the Commission and other situations.1550 This provision will The final rules allow nonresident relevant regulators for purposes of provide intermediaries with an funding portals to register with the conducting examinations of, and alternative means to attract more Commission, provided that certain enforcing U.S. laws and regulations investors to their crowdfunding conditions are met.1552 The final rules against these entities. For PRA platforms, thereby mitigating some of require a nonresident funding portal to purposes, we estimate that nonresident the costs associated with the restriction appoint an agent for service of process intermediaries will face an additional on paying for personally identifiable in the United States and to certify both cost for outside professional services of information. that it can, as a matter of law, and will $25,179 per intermediary to retain an provide the Commission and any 5. Additional Funding Portal agent for service of process and provide national securities association of which an opinion of counsel to register as a Requirements it becomes a member with prompt nonresident funding portal.1554 Under the final rules, a funding portal access to its books and records and must register with the Commission by submit to onsite inspection and The statute also provides an filing a complete Form Funding Portal examination by the Commission and the exemption from broker-dealer with information concerning the national securities association. The registration for funding portals. The funding portal’s operation.1551 The final funding portal also must provide an final rules implement the statutory rules also include the statutory opinion of counsel attesting to the requirement by stating that a registered requirement that a funding portal be a funding portal’s ability to comply with funding portal is exempt from the member of a registered national these requirements under home country broker-dealer registration requirements securities association. In the table law. As discussed above, the final rules of Exchange Act Section 15(a)(1) in above, we estimate the costs that condition nonresident funding portal connection with its activities as a intermediaries will incur related to registration on the presence of an funding portal.1555 We believe this registering as a funding portal on Form information sharing arrangement approach of exempting funding portals Funding Portal and becoming a member between the Commission and the from broker-dealer registration and its of a national securities association to be regulator in the funding portal’s accompanying regulations will benefit 1553 approximately $100,000 in the initial jurisdiction. This provision is the market and its participants. The year and $10,000 thereafter. expected to facilitate Commission activities of funding portals will be The requirement that funding portals oversight of registered nonresident more limited than those of broker- funding portals, with the potential register with the Commission and dealers. Thus, the final rules require benefit of stronger protection of become a member of a national funding portals to comply with securities association will benefit investors in offerings conducted on such registration requirements that are more investors by providing regulatory portals. However, it may limit the appropriate for their limited, oversight for these new entities, which ability of some nonresident funding permissible activities, rather than the will help to reduce the risk for fraud. portals to register, potentially resulting Although there are costs associated with in adverse competitive effects on more extensive and higher cost this requirement, we believe that the nonresident portals in jurisdictions requirements that accompany broker- protections deriving from this without an information sharing dealer registration. Lower registration requirement will benefit investors, agreement. costs for funding portals may translate issuers and potentially intermediaries Compared to the alternative of not into lower fees charged to issuers that by helping to create a marketplace in allowing nonresident entities to operate use these portals, thus possibly which investors are more willing to as funding portals in the U.S. benefiting issuers of crowdfunding participate and issuers are more crowdfunding market, the final rules securities and potentially increasing comfortable using this method of capital may increase competition among capital formation. Due to lack of data, formation. crowdfunding intermediaries, which in we are unable to quantify these The final rules also require that turn may reduce the fees that potential benefits. funding portals use Form Funding intermediaries charge to issuers. Lower Portal to provide updates whenever costs of raising capital can also attract 1554 For the purposes of the PRA, we estimate that information on file becomes inaccurate more potential issuers to the entities that register as nonresident funding portals for any reason, to register successor crowdfunding market, thus enhancing also will incur an additional internal burden of half an hour to complete Schedule C, half an hour to capital formation. Due to lack of data, hire an agent for the service of process, and one 1549 See Rule 305(a) of Regulation Crowdfunding. hour to provide an opinion of counsel. See Section 1550 See Rule 305(b). 1552 See Rule 400(f) of Regulation Crowdfunding. IV.C.2.a. 1551 See Rule 400(a) of Regulation Crowdfunding. 1553 See Rule 400(f) of Regulation Crowdfunding. 1555 See Rule 401 of Regulation Crowdfunding.

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a. Safe Harbor for Certain Activities these communication channels will portals relative to registered brokers, as 1563 Exchange Act Section 3(a)(80) likely vary from offering to offering. suggested by several commenters. prohibits funding portals from (1) In a change from the proposal, the The final rules also allow a funding offering investment advice or final rules include a conditional safe portal to highlight particular issuers or recommendations, (2) soliciting harbor that will permit funding portals, offerings of securities made in reliance purchases, sales or offers to buy consistent with the prohibitions under on Section 4(a)(6) on its platform based securities offered or displayed on the Exchange Act Section 3(a)(80), to on objective criteria, for example: (1) funding portal’s platform, (3) determine whether and under what The type of securities being offered (e.g., compensating employees, agents or circumstances to allow an issuer to offer common stock, preferred stock or debt other such persons for solicitation or and sell securities in reliance on Section securities); (2) the geographic location of based on the sale of securities displayed 4(a)(6) of the Securities Act (15 U.S.C. the issuer; (3) the industry or business or referenced on the funding portal’s 77d(a)(6)) through their platforms.1559 segment of the issuer; (4) the number or platform, or (4) holding, managing, Allowing funding portals to decide amount of investment commitments possessing or otherwise handling which securities to offer through their made; (5) the progress in meeting the investor funds or securities. The final platforms will potentially decrease target offering amount or, if applicable, rules give funding portals, their compliance costs for funding portals the maximum offering amount, and (6) the minimum or maximum investment associated persons, affiliates and because limiting the offerings available 1564 business associates, a measure of clarity on their platform can help decrease the amount. The final rules require that on activities that are permissible risk of statutory liability under Section these criteria be objective and reasonably designed to highlight a broad without violating these statutory 4A(c) of the Securities Act, consistent selection of issuers and offerings and be prohibitions, while also helping to with the suggestions of some applied consistently to all potential protect investors from activities that commenters.1560 The ability to issuers and offerings. They also specify create potential conflicts of interest.1556 determine which issuers may offer and that such criteria may not be related to Thus, compared with the alternative sell securities through their platforms the advisability of investing in the that we could have chosen, that of not may also make it easier for funding issuer or offering and may not give the providing the safe harbor, the safe portals to bar potentially fraudulent impression of an investment harbor provisions in the final rules may offerings from their platforms, thereby recommendation.1565 Under the final facilitate regulatory compliance for potentially enhancing investor funding portals, potentially with rules, funding portals may provide protection, consistent with the search functions or other tools on its corresponding benefits for both issuers 1561 suggestions of various commenters, platform that users may use to search, and investors. Some safe harbor as well as screen out offerings by issuers provisions have additional benefits and sort or categorize available offerings that are unprepared or not ‘‘crowdfund- according to objective criteria.1566 costs, which we discuss below. Other 1562 ready.’’ A reduction in the A funding portal may choose to safe harbor provisions may facilitate the prevalence of potentially fraudulent categorize offerings into general subject implementation of other provisions of offerings, in turn, may increase investor areas or provide search functions that, the final rules in instances where the confidence and facilitate capital for example, allowing an investor to sort crowdfunding intermediary is a funding formation in the securities-based through offerings based on a portal, in which case the benefits and crowdfunding market. However, we combination of different objective costs of such safe harbor provisions will recognize that, depending on the criteria. We believe that these safe be inseparable from the benefits and funding portal, the ability to exercise harbor provisions will benefit investors costs of the other provisions of the final discretion with respect to which by facilitating investor access to rules as applied to instances where the offerings to include on the platform may information about offerings crowdfunding intermediary is a funding result in the exclusion of some issuers characterized by certain broad, objective portal. that do not pose a risk of fraud, The safe harbor for a funding portal to criteria, to the extent that funding potentially limiting capital formation portals provide such features and tools provide communication channels on its and investor access to crowdfunding platform 1557 will facilitate the in reliance on the final rules. By investment opportunities in those enabling issuers to utilize technology to realization of the benefits of the instances. This concern is expected to provision in the final rules that requires lower the costs of each investor to be mitigated, in part, by the reputational search for information about a particular the intermediary to provide incentives of intermediaries and communication channels on its category of offerings, these provisions 1558 competition within the crowdfunding also may enhance efficiency. To the platform in instances where the market. We also recognize that, while crowdfunding intermediary is a funding extent that the availability of these funding portals remain subject to more portal. The provision of communication features and tools encourages investor limitations concerning their activities in channels by the funding portal has the participation in crowdfunding offerings, the crowdfunding market relative to potential to attract a greater number of these provisions may have a beneficial registered broker-dealers, the ability to investors to crowdfunding transactions effect on capital formation in the exercise discretion with respect to through funding portals than otherwise crowdfunding market. which offerings to include on their would be the case, thereby encouraging The final rules prohibit a funding platforms is expected to partly mitigate capital formation. The provision of portal from receiving any special or the competitive disadvantage of funding communication channels may enhance additional compensation for information sharing among investors, although the relevance and accuracy of 1559 See Rule 402(b)(1) of Regulation 1563 See e.g., BetterInvesting Letter; EMKF Letter; Crowdfunding. SBA Office of Advocacy Letter; ABA Letter; CfPA the information shared by investors on 1560 See e.g., CrowdCheck 2 Letter; Milken Letter; CrowdCheck 2 Letter; Graves Letter; Seyfarth Institute Letter; RocketHub Letter. See also Section Letter; IAC Recommendation; CFIRA Letter 12. 1556 See Rule 402 of Regulation Crowdfunding. II.D.3.a. 1564 See Rule 402(b)(2) of Regulation 1557 See Rule 402(b)(4) of Regulation 1561 See e.g., ABA Letter; CrowdCheck 2 Letter; Crowdfunding. Crowdfunding. Graves Letter; Seyfarth Letter. 1565 Id. 1558 See Rule 303(c) of Regulation Crowdfunding. 1562 See EMKF Letter; SBEC Letter. 1566 See Rule 402(b)(3) Regulation Crowdfunding.

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highlighting (or offering to highlight) reduce the incentive for abusive available on its platform, it must do so one or more issuers or offerings on its practices. on the basis of objective criteria that are platform.1567 This prohibition is The final rules also provide a safe reasonably designed to identify a broad expected to benefit investors by helping harbor for a funding portal to pay or selection of issuers and offerings and are prevent conflicts of interest and offer to pay compensation to a registered applied consistently to all potential incentives for funding portals to favor broker-dealer for services provided in issuers and offerings. In addition, certain issuers over others. The final connection with the offer or sale of advertisements sent by a funding portal rules also make clear that such objective securities in reliance on Section 4(a)(6), must not suggest that it is a criteria may not include the advisability subject to conditions set forth in the recommendation to purchase a security of investing in the issuer or its offering rule.1572 Similarly, a funding portal can, or advice as to the advisability in or an assessment of any characteristic of subject to certain conditions, receive investing in any security.1576 While we the issuer, its business plan, its compensation from a registered broker- believe these conditions are appropriate management, or risks associated with an dealer for services provided in to protect the integrity of the investment.1568 connection with the offer or sale of crowdfunding market, we recognize that Under the final rules, funding portals securities by the funding portal in they may impose costs on funding are permitted to provide advice to an reliance on Section 4(a)(6).1573 We note portals. For example these conditions issuer on the structure and content of its that some commenters expressed may limit the utility of advertising for offerings, including assistance to the concern that such relationships between the funding portal while the prohibition issuer in preparing offering funding portals and broker-dealers on special or additional compensation documentation.1569 This will allow could create conflicts of interest.1574 for identifying the offering in an issuers to obtain guidance that may not However, funding portals are expected advertisement may reduce the funding typically be available to them and to benefit from being able to enter into portal’s revenue. thereby help to lower funding costs. these types of arrangements with As discussed above, the final rules Many potential issuers seeking to offer registered broker-dealers who can require an intermediary to deny access and sell crowdfunding securities are provide services that the funding portals to its platform to an issuer that the unlikely to be familiar with how to otherwise are prohibited from intermediary has a reasonable basis for structure offerings so as to raise capital providing, such as engaging a broker- believing presents the potential for in the most cost effective manner, and dealer to serve as a qualified third party fraud or otherwise raises concerns about they may not have the capital, for the transmission of investor funds. investor protection.1577 The final rules knowledge or resources to hire outside Broker-dealers also will benefit from the also provide a conditional safe harbor to advisors. Given that an issuer will be additional business that funding portals intermediaries that are funding portals required to conduct its securities-based may be able to attract through the to deny access to the platform or cancel crowdfunding offerings through an funding portals’ platforms, as well as an offering in such instances.1578 These intermediary, we believe that permitting from services, such as those related to provisions are expected to enhance funding portals to provide these services technology, that funding portals can investor protection by giving funding to issuers will lower overall transaction provide. We anticipate that these types portals greater ability to deny costs for issuers, as they will not need of service arrangements will ultimately potentially fraudulent offerings. to engage additional parties to provide benefit investors. Funding portals are expected to benefit these services. This effect will in turn The final rules permit a funding from the ability to deny access to certain help enhance market efficiency. portal to advertise its existence and issuers to protect the integrity of the The final rules also provide a safe identify one or more issuers or offerings offering process and the market harbor for a funding portal to available through its platform subject to reputation of their crowdfunding compensate a third party for referring a certain conditions.1575 This provision platforms, without fear of violating the person to the funding portal in certain will benefit funding portals by allowing statutory prohibition on providing circumstances.1570 This enables funding them to potentially attract more investment advice. portals to realize the benefits of the investors to their crowdfunding The final rules specify that a funding provision in the final rules that permits platforms. This provision also may portal may accept, on behalf of an an intermediary to compensate a person enhance market efficiency as investors issuer, investment commitments for for directing issuers or investors to the become more aware of available crowdfunding offerings from intermediary’s platform in certain offerings through advertisements by investors.1579 Under the final rules circumstances.1571 This provision is funding portals and are thus able to funding portals also can direct investors expected to benefit intermediaries by better match their investments with where to transmit funds or remit providing them with a means to attract projects that are better suited to their payment in connection with the more investors to their crowdfunding risk preferences and investment purchase of securities offered and sold platforms, thereby encouraging capital strategies. The conditions on advertising in reliance on Section 4(a)(6).1580 formation. Investors also will benefit by funding portals in the final rules aim Similarly, a funding portal can direct a from the condition of this safe harbor to consider informational benefits and qualified third party to release proceeds prohibiting transaction-based investor protection concerns. For of a successful offering to the issuer compensation (other than to registered instance, while a funding portal upon completion of the offering or to broker-dealers), which is expected to advertising its existence may also return investor proceeds when an identify one or more issuers or offerings investment commitment or offering is 1567 See Rule 402(b)(2) of Regulation Crowdfunding. 1572 See Rule 402(b)(7) of Regulation 1576 See Section II.D.3.h. 1568 See Rule 402(b)(2) and Rule 402(b)(3) of Crowdfunding. 1577 See Rule 301(c) of Regulation Crowdfunding. Regulation Crowdfunding. 1573 See Rule 402(b)(8) of Regulation 1578 See Rule 402(b)(10) of Regulation 1569 See Rule 402(b)(5) of Regulation Crowdfunding. Crowdfunding. Crowdfunding. 1574 See e.g., Commonwealth of Massachusetts 1579 See Rule 402(b)(11) of Regulation 1570 See Rule 402(b)(6) of Regulation Letter; RocketHub Letter. Crowdfunding. Crowdfunding. 1575 See Rule 402(b)(9) of Regulation 1580 See Rule 402(b)(12) of Regulation 1571 See Rule 305(b) of Regulation Crowdfunding. Crowdfunding. Crowdfunding.

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cancelled.1581 These provisions will final rules, we may avoid the possibility 3(h)(1)(A) requires that registered facilitate the implementation of the of conflicting or overlapping funding portals remain subject to, requirements of the final rules regarding requirements. Registered broker-dealers among other things, the Commission’s the maintenance and transmission of that serve as intermediaries in examination authority. Under the final investor funds 1582 for intermediaries securities-based crowdfunding rules, a funding portal is required to that are funding portals and give both transactions continue to have AML permit the examination and inspection funding portals and entities with which obligations, as do certain other parties of all its business and business they do business a measure of legal involved in transactions conducted operations relating to its activities as a certainty that funding portals accepting pursuant to Section 4(a)(6), such as a funding portal, such as its premises, investment commitments for bank acting as a qualified third party to systems, platforms and records, by crowdfunding offerings and providing hold investor funds.1587 To the extent Commission representatives and by direction for funds to and from qualified that this difference in compliance representatives of the registered national third parties in compliance with the obligations between funding portals and securities association of which it final rules will not be in violation of the registered broker-dealers affects becomes a member.1589 Although statutory prohibitions on holding, compliance costs and persists in the funding portals will face time and managing, possessing or otherwise future, it may place funding portals at compliance costs in submitting to handling investor funds or securities. a relative competitive advantage. If this Commission and registered national While we agree with the commenter that difference in compliance obligations securities association examinations, stated that the requirement to use a between funding portals and registered inspections or investigations, and qualified third party to handle customer broker-dealers persists in the future, it potentially responding to any issues funds creates an additional cost,1583 may also potentially expose investors in identified, funding portals, investors Section 3(a)(80)(D) of the Exchange Act those securities-based crowdfunding and issuers will benefit from the explicitly prohibits funding portals from offerings for which the intermediary is enhanced compliance with legal handling customer funds and securities. a funding portal to additional risks. obligations due to this oversight, as well Additionally, the statute requires that b. Compliance Requirements as the sanctions or other disciplinary intermediaries take such steps to protect actions that may follow upon findings of The final rules require that a funding the privacy of information collected violations through such inspections, portal implement written policies and from investors as we determine examinations or investigations. procedures, reasonably designed to appropriate. In the final rules, we Further, the final rules require a achieve compliance with the federal implement this statutory provision by registered funding portal to maintain securities laws and the rules and requiring a funding portal to comply and preserve certain books and records regulations thereunder, relating to its with Regulation S–P, S–ID and relating to its business for a period of business as a funding portal.1584 This Regulation S–AM, as they apply to not less than five years and in an easily- requirement will provide a benefit to broker-dealers.1588 We recognize that accessible place for the first two investors and funding portals alike, as compliance with these privacy years.1590 Recordkeeping requirements written policies and procedures will requirements will impose costs on can assist registrants with compliance. enhance compliance with the final funding portals. However, we believe They are a well-established and rules. Funding portals will incur costs that requiring a funding portal to important element of the approach to associated with the requirement to comply with privacy obligations will broker-dealer regulation, as well as the develop their own procedures and help protect the personally identifiable regulation of investment advisers and implement written policies and information of investors, consistent with others, and are designed to maintain the procedures, as well as to update and how it is required to be protected by effectiveness of our inspection program enforce them. These costs are reflected other financial intermediaries. These for regulated entities, facilitating our in the tables above as part of the costs privacy protections can give investors review of their compliance with to comply with requirements to act as the confidence to participate in offerings statutory mandates and with our rules. an intermediary in transactions made in reliance on Section 4(a)(6), These requirements will enable the pursuant to Section 4(a)(6). which will facilitate capital formation Commission and registered national In contrast to the proposal, the final and benefit the markets generally. As an securities organizations to more rules do not impose anti-money alternative, we could have developed a effectively gather information about the laundering (AML) obligations for more limited privacy regime applicable activities in which a funding portal has funding portals. Some commenters only to funding portals. Such an been engaged to discern whether the generally suggested that since funding alternative would result in inconsistent funding portal and the other parties are portals are prohibited from handling treatment of funding portals and broker- in compliance with the requirements of customer funds and securities, they dealers with respect to privacy Regulation Crowdfunding and other should not be required to comply with obligations and could reduce the relevant regulatory requirements. AML provisions.1585 As noted above, we willingness of investors to participate in Standardized recordkeeping practices believe it would be appropriate to work securities-based crowdfunding offerings. with other regulators to develop for intermediaries will enable regulators This alternative might also affect to perform more efficient, targeted consistent and effective AML competition between funding portals obligations for funding portals.1586 By inspections and examinations and and registered broker-dealers in the thereby increase the likelihood of not imposing AML requirements in the market for securities-based crowdfunding offerings. 1589 See Rule 403(c) of Regulation Crowdfunding. 1581 See Rule 402(b)(13) of Regulation As a condition to exempting funding 1590 Crowdfunding. See Rule 404(a) of Regulation Crowdfunding. portals from the requirement to register We note that registered broker-dealers already are 1582 See Rule 303(e) of Regulation Crowdfunding. required to comply with Exchange Act Rules 17a– 1583 as broker-dealers under Exchange Act See Stephenson, et al., Letter. 3 and 17a–4 pertaining to books and records (17 1584 Section 15(a)(1), Exchange Act Section See Rule 403(a) of Regulation Crowdfunding. CFR 240.17a–3 and 17a–4). Thus, all 1585 See, e.g., PeoplePowerFund Letter; Public intermediaries, whether registered as broker-dealers Startup Letter 3; RFPIA Letter. 1587 Id. or as funding portals, are required to make and 1586 See Section II.D.4.b. 1588 See Rule 403(b) of Regulation Crowdfunding. preserve books and records.

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identifying improper conduct at earlier 6. Insignificant Deviations alternative could have significantly stages of the inspection or examination, We are providing a safe harbor for undermined the utility of the Section which ultimately will benefit investors issuers for certain insignificant 4(a)(6) exemption by subjecting issuers 1595 and the marketplace as a whole. To the deviations from a term, condition or to loss of state law preemption and extent that these requirements result in requirement of Regulation potential state enforcement action for better regulatory oversight, they may Crowdfunding.1593 This safe harbor will insignificant deviations from Regulation increase investor confidence in funding provide that insignificant deviations Crowdfunding’s requirements. portals and may also benefit funding from a term, condition or requirement of 7. Relationship With State Law portals by promoting issuer reliance on Regulation Crowdfunding will not result Section 305 of the JOBS Act amended in a loss of the exemption, so long as the funding portals in crowdfunding Securities Act Section 18(b)(4) 1596 to issuer relying on the exemption can offerings. preempt the ability of states to regulate show that: (1) The failure to comply was Funding portals may incur costs in certain aspects of crowdfunding insignificant with respect to the offering establishing the systems necessary to conducted pursuant to Section 4(a)(6). as a whole; (2) the issuer made a good comply with the books and records faith and reasonable attempt to comply This statutory amendment will benefit requirements. We note that the records with all applicable terms, conditions issuers by preempting any registration required to be made and preserved and requirements of Regulation requirements in states in which they under the final rules are those that Crowdfunding; and (3) the issuer did offer or sell securities in reliance on would ordinarily be made and not know of the failure to comply, Section 4(a)(6), thereby reducing the preserved in the ordinary course of where the failure to comply with a term, costs for these transactions. It also can business by a regulated broker-dealer condition or requirement was the result benefit investors because these cost engaging in these activities. Entities that of the failure of the intermediary to savings ultimately may be passed on to newly register as broker-dealers will be comply with the requirements of investors. Absent preemption of state subject to the recordkeeping Section 4A(a) and the related rules, or registration requirements, an offering requirements of Rules 17a–3 and 17a–4. such failure by the intermediary made through the Internet in reliance on While these costs will constitute part of occurred solely in offerings other than Section 4(a)(6) and the final rules could the cost of compliance for entities that the issuer’s offering. result in an issuer potentially violating choose to become intermediaries in The safe harbor is expected to state securities laws. Some evidence in crowdfunding transactions by decrease the costs incurred by issuers donation-based and reward-based registering as broker-dealers, the cost of compared to the alternative of not crowdfunding campaigns suggests that contributions are not exclusively broker-dealer compliance with providing a safe harbor. In the absence local.1597 The statutory preemption of recordkeeping requirements of Rules of a safe harbor, issuers might be state registration requirements will 17a–3 and 17a–4 is not by itself a result hesitant to participate in this new reduce issuer uncertainty about the of the final rule. Entities solely marketplace for fear of inadvertently violating an applicable regulatory necessity of state registration. On the intending to serve as intermediaries in other hand, state registration crowdfunding transactions for which requirement, thereby reducing the benefits of Regulation Crowdfunding on requirements may provide an additional the cost of compliance with broker- efficiency, competition and capital layer of investor protection, and their dealer recordkeeping requirements is formation. We recognize that providing preemption will remove a potential too high may elect to register as funding a safe harbor can impose costs on layer of review that may help to deter portals. Funding portals will be required investors, intermediaries and regulators, fraud. This potential cost of state law to make and keep records related to compared with the alternative of not preemption, however, may be offset by their activities to facilitate transactions providing a safe harbor, to the extent some of the statutory and final rule in reliance on Section 4(a)(6), which we that issuers lessen the vigor with which requirements that are designed to estimate for the purposes of the PRA to they develop and implement systems protect investors, such as public result in an initial burden of 325 hours and controls to achieve compliance with disclosure,1598 investment limits,1599 and an initial cost of $5,350 per funding the requirements of Regulation the use of a registered intermediary,1600 portal. We estimate that ongoing Crowdfunding, which may result in a provisions regarding measures to reduce recordkeeping burden and cost will be decrease in investor protection. the risk of fraud,1601 and similar to the initial burden and Accordingly, we have designed the disqualification provisions.1602 The cost.1591 We also note that some conditions of the safe harbor— requirement in the final rules that commenters stated that the cost burden specifically, the issuer must show that issuers file information on EDGAR also for a funding portal to maintain the the failure to comply was insignificant helps to ensure that information about proposed books and records would not with respect to the offering as a whole; be significant.1592 We recognize that it made a good faith and reasonable 1595 See Section III.B.7. there may be a slight competitive attempt to comply; and it did not know 1596 15 U.S.C. 77r(b)(4). of the failure or such failure occurred 1597 For example, in crowdfunding campaigns for advantage for funding portals over early stage musical projects, the average distance broker-dealers to the extent that the solely in offerings other than the issuer’s between artist-entrepreneurs and contributors was recordkeeping rule for funding portals is offering—to lessen the potential impact 3,000 miles. See Ajay Agrawal, Christian Catalini less burdensome for than the on investor protection. and Avi Goldfarb, The Geography of Crowdfunding, Several commenters suggested that NET Institute Working Paper No. 10–08 (Oct. 29, requirements applicable to broker- the safe harbor for insignificant 2010), available at http://ssrn.com/ dealers. At the same time, we believe abstract=1692661. deviations should not apply with 1598 See Rule 201 of Regulation Crowdfunding. that the recordkeeping rule for funding respect to state regulatory enforcement portals is consistent with the narrow 1599 See Rule 100(a)(2) of Regulation actions.1594 Adopting such an Crowdfunding. range of their permitted activities. 1600 See Rule 100(a)(3) of Regulation 1593 See Rule 502(a) of Regulation Crowdfunding. Crowdfunding. 1591 See Section IV.C.2.n. 1594 See, e.g., Commonwealth of Massachusetts 1601 See Rule 301 of Regulation Crowdfunding. 1592 See CFIRA Letter 1; Joinvestor Letter. Letter; NASAA Letter. 1602 See Rule 503 of Regulation Crowdfunding.

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issuers is available to individual state investor eligibility restrictions, or as a Act reporting, potentially placing them regulators, which retain the authority to result of secondary market transactions at a competitive disadvantage to issuers bring enforcement actions for fraud. in crowdfunding securities after the that are close to but below the size expiration of resale restrictions. Given threshold. It may also discourage some 8. Exemption From Section 12(g) the $1 million offering limitation, the high-growth issuers from relying on Rule 12g–6 provides that securities potential cost of becoming an Exchange Section 4(a)(6) or may lead issuers issued pursuant to an offering made Act reporting company could have approaching the size threshold to divest under Section 4(a)(6) are exempted from made many offerings in reliance on assets to remain under the threshold, the record holder count under Section Section 4(a)(6) prohibitively costly. potentially resulting in inefficient 12(g) provided the issuer is current in The condition that the issuer remain investment decisions. its ongoing annual reports required current in its ongoing reporting, as While the condition requiring an pursuant to Rule 202 of Regulation suggested by one commenter,1607 is issuer to use a registered transfer agent Crowdfunding, has total assets as of the intended to provide sufficient to rely on the exemption will impose end of its last fiscal year not in excess disclosure to help investors make costs on issuers,1608 it is designed to of $25 million, and has engaged the informed decisions. We believe that the provide investor protection benefits by services of a transfer agent registered ongoing disclosures required of introducing a regulated entity with with the Commission pursuant to crowdfunding issuers in the final rules experience in maintaining accurate Section 17A of the Exchange Act. The accomplish this objective and provide shareholder records, thus helping to issuer size test is broadly consistent an appropriate consideration of investor ensure that security holder records and with some commenters’ suggestions.1603 protection and capital formation. This secondary trades will be handled An issuer that exceeds the $25 million condition is expected to increase the accurately. total asset threshold in addition to level of investor protection by 9. Disqualification exceeding the thresholds in Section strengthening the incentives of 12(g) will be granted a two-year securities-based crowdfunding issuers The statute and the final rules impose transition period before it is required to that exceed the Section 12(g) thresholds disqualification provisions under which register its class of securities pursuant to related to issuer size and the number of an issuer is not eligible to offer Section 12(g), provided it timely files all shareholders of record to comply with securities pursuant to Section 4(a)(6) its ongoing reports due pursuant to Rule the ongoing reporting requirements of and an intermediary is not eligible to 202 of Regulation Crowdfunding during Regulation Crowdfunding. The extent of effect or participate in transactions such period.1604 Section 12(g) additional investor protection benefits pursuant to Section 4(a)(6).1609 The registration will be required only if, on from this condition is difficult to disqualification provisions for issuers the last day of the fiscal year in which estimate, given a separate provision in are substantially similar to those the company exceeded the $25 million the final rules that conditions the use of imposed under Rule 262 of Regulation total asset threshold, the company has the Section 4(a)(6) exemption for future A and Rule 506 of Regulation D,1610 total assets of more than $10 million offerings on compliance with Regulation while the disqualification provisions for and the class of equity securities is held Crowdfunding’s ongoing reporting intermediaries under Section 3(a)(39), by more than 2,000 persons or 500 requirements. which is an established standard for persons who are not accredited The issuer size limit condition is broker-dealers, are substantially similar investors.1605 In such circumstances, an designed to be broadly consistent with to the provisions of Rule 262. the crowdfunding exemption being issuer that exceeds the thresholds in a. Issuers Section 12(g) and has total assets of $25 tailored to facilitate small company million or more is required to begin capital formation and the likely small The final rules are expected to induce reporting under the Exchange Act the size of a typical issuer in the issuers to implement measures to fiscal year immediately following the crowdfunding market. This condition is restrict bad actor participation in end of the two-year transition expected to strengthen investor offerings made in reliance on Section period.1606 An issuer entering Exchange protection by reducing the likelihood 4(a)(6). This will help reduce the Act reporting will be considered an that an issuer will grow and accumulate potential for fraud in the market for ‘‘emerging growth company’’ to the a significant number of investors as a such offerings, which in turn may extent the issuer otherwise qualifies for result of multiple offerings in reliance reduce the cost of raising capital to such status. on Section 4(a)(6) while remaining issuers that rely on Section 4(a)(6), to The conditional 12(g) exemption will permanently exempt from the more the extent that disqualification defer the more extensive Exchange Act extensive reporting requirements of the standards lower the risk premium reporting requirements until the issuer Exchange Act that would otherwise be associated with the presence of bad either sells securities in a registered required pursuant to Section 12(g) transaction or registers a class of (unless the issuer registers a class of 1608 See STA Letter (stating that strong competition in the registered transfer agent industry securities under the Exchange Act. securities). The size limit condition will require larger issuers to provide may result in monthly fees of $75–$300 for transfer Consequently, smaller issuers will not agent services, depending on a number of factors). investors with the more extensive be required to become an Exchange Act See also CapSchedule Letter (stating that there exist disclosures required by the Exchange reporting company as a result of a cost-effective ways to keep records of security Act for reporting companies. However, holders, such as ‘‘Software-As-A-Service’’ products, Section 4(a)(6) offering. These offerings we recognize that this condition also that costs $0 to set up initial records regardless of may have a large number of investors the number of investors, then pricing from $5 per may subject crowdfunding issuers that due to the limits on the amount each month for up to 100 investors, $15 per month up are larger than the size threshold or that investor may invest and the absence of to 1,000 investors and $25 per month for over 1,000 have a higher rate of growth, and are investors). thus more likely to exceed the size 1609 See Section 302(d) of the JOBS Act and Rule 1603 See, e.g., ABA Letter ($25 million); threshold in the future, to the costs of 503 of Regulation Crowdfunding. See also PeoplePowerFund Letter. discussion in Section II.E.6 above. 1604 Id. Section 12(g) registration and Exchange 1610 See Disqualification Adopting Release, note 1605 15 U.S.C. 78l(g). 1182. See also Regulation A Adopting Release, note 1606 17 CFR 240.12g–6. 1607 See Joinvestor Letter. 506.

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actors in securities offerings. In specificity in the rule, while providing give rise to CFTC sanctions is similar to addition, the requirement that issuers flexibility to the issuer to tailor its the type of conduct that will result in determine whether any covered persons factual inquiry as appropriate to a disqualification if it were the subject of are subject to disqualification may particular offering, may increase these sanctions by another financial services obviate the need for investors to do their costs because uncertainty can drive industry regulator. This is likely to own investigations and eliminate issuers to do more than necessary under enable the disqualification rules to more redundancies that may exist in the rule. effectively screen out bad actors. otherwise separate investigations. This The requirement under the final rules As discussed above, the baseline for is expected to help reduce information- that issuers disclose matters that would our economic analysis of Regulation gathering costs to investors, to the have triggered disqualification, had they Crowdfunding, including the baseline extent that issuers are at an advantage occurred after the effective date of for our consideration of the effects of the in accessing much of the relevant Regulation Crowdfunding,1612 also will final rules on efficiency, competition information and to the extent that impose costs and benefits. The and capital formation, is the situation in issuers can do so at a lower cost than disclosure requirement will reduce costs existence today, in which startups and investors. associated with covered persons who small businesses seeking to raise capital The final rules will, however, impose would be disqualified under the final through securities offerings must costs on some issuers, other covered rules but for the fact that the register the offer and sale of securities persons and investors. If issuers are disqualifying event occurred prior to the under the Securities Act unless they can disqualified from relying on Section effective date of the rules. However, this comply with an existing exemption 4(a)(6) to make their offerings, they may approach will allow the participation of from registration under the federal experience increased costs in raising past bad actors, whose disqualifying securities laws. Relative to the current capital through alternative methods that events occurred prior to the effective baseline, we believe that the do not require bad actor date of the final rules, which can expose disqualification provisions will not disqualification, if available, or they investors to the risks that arise when impose significant incremental costs on may be precluded from raising capital bad actors are associated with an issuers and other covered persons altogether. This can result in negative offering. Nevertheless, investors will because the final rules are substantially effects on capital formation. In addition, benefit by having access to such similar to the disqualification issuers may incur costs in connection information that can inform their provisions under existing exemptions. with internal personnel changes that investment decisions. Issuers also may As an alternative, we could have issuers may make to avoid the incur costs associated with the factual specified that pre-existing events are participation of those covered persons inquiry, preparing the required subject to the disqualification rules, as who are subject to disqualifying events. disclosure and making any internal or suggested by some commenters.1614 As Issuers also may incur costs associated share ownership changes to avoid the another alternative, we could have with restructuring share ownership participation of covered persons that expanded the list of covered persons to positions to avoid having 20 Percent trigger the disclosure requirement. include transfer agents and lawyers, as Beneficial Owners who are subject to Disclosure of triggering events also may suggested by one commenter.1615 By disqualifying events. Finally, issuers make it more difficult for issuers to expanding the range and categories of may incur costs in connection with attract investors, and issuers may potentially disqualified persons, both of seeking waivers of disqualification from experience some or all of the impact of these alternatives could have the benefit the Commission or determinations by disqualification as a result. of strengthening investor protection. At other authorities that existing orders do We believe the inclusion of the same time, they would increase the not give rise to disqualification. Commission cease-and-desist orders in compliance costs for issuers and The final rules provide a reasonable the list of disqualifying events will not disqualified persons described above. care exception whereby an issuer will impose a significant, incremental cost Overall, we believe that preserving not lose the benefit of the Section 4(a)(6) on issuers and other covered persons consistency with the disqualification exemption if it is able to show that it did because many of these actors may criteria of Rule 262 and Rule 506, as we not know, and in the exercise of already be subject to disqualifying do in the final rules, can potentially reasonable care could not have known, orders issued by the states, federal yield compliance cost savings for of the existence of a disqualification.1611 banking regulators and the National issuers that undertake multiple types of A reasonable care exception may Credit Union Administration.1613 exempt offerings while still maintaining encourage capital formation by Under the final rules, orders issued by appropriate investor protections. eliminating any hesitation issuers may the CFTC will trigger disqualification to otherwise experience under a strict the same extent as orders of the b. Intermediaries liability standard. However, such an regulators enumerated in Section With regard to intermediaries, the exception also may encourage issuers to 302(d)(2)(B)(i) of the JOBS Act (e.g., final rules apply the disqualification take fewer steps to inquire about the state securities, insurance and banking provisions under Section 3(a)(39) of the existence of a disqualification than they regulators, federal banking agencies and Exchange Act, rather than a standard would if a strict liability standard the National Credit Union based on Rule 262.1616 The Section applied, increasing the potential for Administration). We believe that 3(a)(39) standard is an established one fraud in the market for offerings made including orders of the CFTC will result among broker-dealers and their in reliance on Section 4(a)(6). in the similar treatment, for regulators, and we believe that, despite Nevertheless, some issuers, in disqualification purposes, of the differences, Section 3(a)(39) and exercising reasonable care, may incur comparable sanctions. In this regard, we Rule 262 are substantially similar with costs associated with conducting and note that the conduct that will typically documenting their factual inquiry into 1614 See, e.g., Guzik Letter 1; NASAA Letter. possible disqualifications. The lack of 1612 See Rule 201(u) of Regulation Crowdfunding. 1615 See Brown J. Letter (also recommending the See also Section II.E.6.a.v. Commission adopt similar bad actor provisions 1611 See Rule 503(b)(4) of Regulation 1613 See Disqualification Adopting Release, note under Rule 504). Crowdfunding. See also Section II.E.6.a.iii. 1182. 1616 See Rule 503(d) of Regulation Crowdfunding.

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regard to the persons and events they (‘‘PRA’’).1618 We published a notice collection as specified above. Responses cover, their scope and their purpose.1617 requesting comment on the collection of to these new collections of information We believe that imposing any new or information requirements in the will be mandatory for issuers raising different standard, including one based Proposing Release, and we submitted capital under Regulation Crowdfunding on Rule 262, for those intermediaries the proposal to the Office of and intermediaries participating in that engage in crowdfunding Management and Budget (‘‘OMB’’) for offerings under Regulation transactions would likely create review in accordance with the PRA.1619 Crowdfunding. confusion and unnecessary burdens, as In the Proposing Release, we solicited The hours and costs associated with currently-registered broker-dealers and comment on the assumptions and preparing disclosure, filing forms, and their associated persons would become estimates in our PRA analysis. We retaining records constitute reporting subject to two distinct standards for received no comments on our estimates and cost burdens imposed by the disqualification. Moreover, adopting a of and assumptions about the number of collections of information. In deriving more stringent disqualification standard issuers and intermediaries that will estimates of these hours and costs, we may reduce the number of participate in securities-based recognize that the burdens likely will intermediaries eligible under the final crowdfunding transactions or the size vary among individual issuers and rules and decrease competition among and frequency of those transactions. We intermediaries based on a number of intermediaries in the securities-based received several comments on our factors, including the stage of crowdfunding market. By contrast, estimates of the time and expense development of the business, the consistent standards for all broker- required of issuers to meet their filing amount of capital an issuer seeks to dealers and funding portals will assist a obligations.1620 We also received several raise, the number of offerings an registered national securities association comments on our estimates of the costs intermediary hosts on its platform, and in monitoring compliance and enforcing incurred by intermediaries.1621 One the number of years since inception of its rules. commenter recommended a lessened the business. We believe that some 1622 The final rules implement the paperwork burden in general. These issuers and intermediaries will statutory requirement for intermediaries comments are discussed in further experience costs in excess of the average by providing that a person subject to a detail below, and where appropriate, we and some issuers and intermediaries statutory disqualification, as defined in have revised our burden estimates in may experience less than the average Exchange Act Section 3(a)(39), may not response to commenters’ suggestions costs. act as, or be an associated person of, an and to reflect changes in the final rules, B. Estimate of Issuers and intermediary in a transaction involving as adopted. Intermediaries the offer or sale of securities in reliance The titles for the collections of on Section 4(a)(6) unless so permitted information are: 1. Issuers (1) ‘‘Form ID’’ (OMB Control Number by Commission rule or order. While this 3235–0328); The number, type and size of the requirement will potentially reduce the (2) ‘‘Form C’’ (OMB Control Number issuers that will participate in number of intermediaries for Section 3235–0716) (a new collection of securities-based crowdfunding 4(a)(6) transactions, we expect that it information); transactions are uncertain, but data on will strengthen investor protection by (3) ‘‘Form BD’’ (OMB Control Number current market practices may help preventing bad actors from entering the 3235–0012); and identify the number and characteristics securities-based crowdfunding market, (4) ‘‘Crowdfunding Rules 300–304— of potential issuers that may offer and thereby reducing the potential for fraud Intermediaries’’ (OMB Control Number sell securities in reliance on Section and other abuse. 1623 3235–0726) (a new collection of 4(a)(6).1625 While it is not possible to As discussed above, the baseline for information) and predict the number of future offerings our economic analysis of Regulation (5) ‘‘Crowdfunding Rules 400–404— made in reliance on Section 4(a)(6), Crowdfunding, including the baseline Funding Portals’’ (OMB Control Number particularly because rules governing for our consideration of the effects of the 1624 3235–0727) (a new collection of securities-based crowdfunding are not final rules on efficiency, competition information). yet in effect, for purposes of this and capital formation, is the situation in An agency may not conduct or analysis, we estimate that existence today, in which sponsor, and a person is not required to approximately 1,900 issuers will seek to intermediaries intending to facilitate respond to, a collection of information offer and sell securities in reliance on securities transactions are required to unless it displays a currently valid OMB Section 4(a)(6) per year. We base this register with the Commission as broker- control number. We applied for OMB estimate on the average number of dealers under Exchange Act Section control numbers for the new collections issuers (excluding issuers that are 15(a). Relative to this baseline, we of information in accordance with 44 pooled investment vehicles) per year believe that the disqualification U.S.C. 3507(j) and 5 CFR 1320.13, and that conducted a new Regulation D provisions will not impose significant as of the date of this release, OMB has offering of up to $1 million from 2009 incremental costs to broker-dealers assigned a control number to each new to 2014 and had no revenues or less because the final rules include the same than $1 million in revenues.1626 We disqualification provisions that are 1618 44 U.S.C. 3501 et seq. 1619 44 U.S.C. 3507(d); 5 CFR 1320.11. already imposed on broker-dealers. 1625 See Section III.A.5.a for a discussion of the 1620 See, e.g., Angel Letter 1; Heritage Letter; data regarding current market practices. IV. Paperwork Reduction Act SeedInvest Letter 1. 1626 Id. This estimate differs from our estimate in 1621 A. Background See, e.g., Arctic Island Letter 8; CapSchedule the proposal. It uses more recent data than the Letter; Heritage Letter; Joinvestor Letter; SBEC proposal and is based on the average number of Certain provisions of the final rules Letter; Seed & Spark Letter; STA Letter. issuers per year rather than the average number of contain ‘‘collection of information’’ 1622 Peers Letter. unique issuers. According to filings made with the requirements within the meaning of the 1623 This includes burdens for compliance with Commission, an average of approximately 4,559 privacy rules (Reg. S–P, Reg. S–AM and Reg S–ID) issuers per year conducted new Regulation D Paperwork Reduction Act of 1995 as required by Rule 403(b). offerings of up to $1 million from 2009 to 2014. 1624 This includes burdens for Form Funding 22%, or 1,003, of those issuers reported having no 1617 See discussion in Section II.E.6.b above. Portal. revenues. (0.22 × 4,559 = 1,003). 19%, or 866, of

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believe those issuers will be similar in interested in becoming crowdfunding no comments on our estimates on the size to the potential issuers that may intermediaries. Therefore, we recognize number of funding portals that will act participate in securities-based that the number of brokers per year that as intermediaries crowdfunding, and we assume that each may engage in crowdfunding activities C. Estimate of Burdens issuer will conduct one offering per could differ significantly from our year. current estimate. We received no 1. Issuers comments on our estimates of the We received no comments on our a. Form C: Offering Statement and number of broker-dealers that will act as estimate of the number of issuers Progress Update expected to participate in securities- intermediaries. Under the final rules, an issuer based crowdfunding transactions or the 3. Funding Portals number of offerings in reliance on conducting a transaction in reliance on Section 4(a)(6) we expect those issuers Consistent with the Proposing Section 4(a)(6) will be required to file to conduct. In developing the estimate Release, we estimate that on average with us specified disclosures on a Form for the number of issuers in the final approximately 50 intermediaries per C: Offering Statement.1630 An issuer also rule, we refined the methodology used year that are not already registered as will be required to file with us in the Proposing Release and applied brokers will choose to be registered as amendments to Form C to disclose any that methodology to more recent data, funding portals during the first three material change in the offer terms or resulting in an updated estimate that we years following effectiveness of the final disclosure previously provided to believe is reasonable and appropriate. rules. This estimate assumes that, upon investors.1631 Form C is similar to the effectiveness of the final rules, about Form 1–A offering statement under 2. Intermediaries That Are Registered 15% of the approximately 200 U.S.- Regulation A, but it requires fewer Brokers based crowdfunding portals 1627 disclosure items (e.g., it does not require The final rules require intermediaries currently in existence will participate in disclosure about the plan of to register with us as either a broker- securities-based crowdfunding and that distribution, the compensation of dealer or as a funding portal. Consistent the number of crowdfunding portals officers and directors, litigation or a with the Proposing Release, we estimate will grow at 60% per year over the next discussion of federal tax aspects). We that the collection of information three years.1628 Therefore, we estimate note that offerings made in reliance on requirements in the final rules will that an average of approximately 50 Regulation A allow issuers to offer up to apply to approximately 10 respondents will be registered as $50 million, involve review by SEC staff intermediaries per year that are not funding portals annually.1629 Of those and, in the case of Tier 1 offerings, currently registered with the 50 funding portals, we estimate that two require filings at the state level.1632 In Commission and that will choose to will be nonresident funding portals. light of these factors, we expect that register as brokers, rather than as These estimates are based in part on issuers seeking to raise capital pursuant funding portals, to act as intermediaries indications of interest expressed in to a Regulation A offering generally will for offerings made in reliance on Section responses to FINRA’s voluntary interim be at a more advanced stage of 4(a)(6). However, we believe that, given form for funding portals. We received development than issuers likely to raise the cost that an unregistered entity will capital pursuant to Section 4(a)(6), so incur to register as a broker compared 1627 This estimate is based in part on an industry the complexity of the required estimate that, as of April 2012, there were with the lower cost of becoming a approximately 200 non-securities-based disclosure and, in turn, the burden of funding portal, unregistered entities that crowdfunding portals operating in the United compliance with the requirements of choose to act as crowdfunding States. See Massolution 2012 at 16. We did not Form C will be significantly less than intermediaries will generally be more receive comment on these estimates and therefore for Form 1–A.1633 In the Proposing continue to believe our estimates in the Proposing likely to register as funding portals than Release are appropriate. See also Massolution 2015 Release we estimated that the burden to as brokers. at 84 (estimating that, as of December 2014, there prepare and file Form C would be Consistent with the Proposing were approximately 375 crowdfunding portals approximately 60 hours per issuer, Release, we further estimate that operating in North America, not just the United which represented approximately 10% States). approximately 50 intermediaries per 1628 of the burden to prepare then-existing A worldwide survey of crowdfunding portals 1634 year that are already registered as indicated that, in 2011, approximately 14.8% of the Form 1–A. We estimated that 75% brokers with the Commission will surveyed crowdfunding portals (mostly based in of the burden, or 45 hours, would be choose to add to their current service Europe) participated in ‘‘equity-based’’ carried internally and the remaining crowdfunding. Id. Also, the total number of 25% of the burden would be carried by offerings by also serving as crowdfunding portals worldwide grew by an crowdfunding intermediaries. These estimated 60% from 2011 to 2012. Id. at 13. We did outside professionals at a cost of $6,000 entities will not have to file a new not receive comment on these estimates and per issuer. application for registration with us, and therefore continue to believe our estimates in the As discussed in more detail in the Proposing Release are appropriate. See also Economic Analysis, above, we received if currently doing business with the Massolution 2015 at 82–83 (estimating that, as of public, they will already be members of December 2014, there were approximately 1250 a number of comments concerning the FINRA (the applicable national crowdfunding portals worldwide compared to 813 burdens and costs of the proposed securities association registered under worldwide in 2012, which represents an increase of rules.1635 Many of these commenters Exchange Act Section 15A). We note, approximately 54%). 1629 200 U.S.-based crowdfunding portals × 15% however, that given the nascent nature 1630 See Rule 203(a)(1) of Regulation (estimated percentage of crowdfunding portals that Crowdfunding. of the equity-based crowdfunding will participate in securities-based crowdfunding) = 1631 See Rule 203(a)(2) of Regulation 30 funding portals that will participate in market, we do not have any data or Crowdfunding. securities-based crowdfunding. Assuming 60% other evidence indicating the number of 1632 growth over three years, the number of registered See Rule 256 of Regulation A; Regulation A currently-registered brokers that will be funding portals will be 30 during the first year, 48 Adopting Release, note 506. during the second year and 77 during the third year. 1633 We currently estimate the average burden per those issuers reported having less than $1 million The average number of registered funding portals response for preparing and filing a Form 1–A to be in revenues. (0.19 × 4,559 = 866). Therefore, the over three years is (30 + 48 + 77)/3 = 52 funding approximately 750 hours. average number of issuers per year is 1,003 + 866 portals (or approximately 50 funding portals per 1634 See Proposing Release at 78 FR 66540. = 1,869, or approximately 1,900 issuers. year). 1635 See Section III.B.3.a.

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provided monetary estimates without for first-time crowdfunding issuers available on the intermediary’s platform distinguishing between internal burden conducting offerings between $500,000 frequent updates about the issuer’s hours and outside professional costs. and $1,000,000, and $7,500 to $50,000 progress toward meeting the target Some commenters suggested that the for other issuers conducting an offering offering amount. Nevertheless, an issuer Proposing Release underestimated the in the largest offering amount category. relying on the intermediary’s reports of time and expense that would be For purposes of the PRA, however, we progress must still file a progress update required to prepare and file Form C.1636 must provide a single estimate, at the end of the offering to disclose the In contrast, one commenter stated that comprised of both burden hours and total amount of securities sold in the it was a third-party service provider that outside professional costs, for an offering. The issuer is required to make could prepare Form C at much lower average issuer. the filing under cover of a Form C–U: costs than those estimated by the Based on these comments and our Progress Update. Form C–U is similar to Commission.1637 Another commenter Economic Analysis, we have revised our a Form D Notice of Exempt Offering of suggested that the cost of preparing and estimate of the burden associated with Securities under Regulation D.1642 Form filing these forms and the associated the preparation and filing of Form C. We C–U will require significantly less compliance costs would range from acknowledge that a number of disclosure than the Form D, however, as $3,000 to $9,000.1638 Additionally, we commenters suggested that we it will require disclosure only of the received a number of comments about underestimated the burdens of the issuer’s progress in meeting the target the costs of the audit and review of proposed rule, but believe that changes offering amount, rather than financial statements, as proposed. We in the final rule, particularly with compensation and use of proceeds believe that these costs would be a respect to the financial statement disclosures or other information about component of the outside professional requirements for first-time the issuer and the offering. Thus, the costs associated with Form C. In the crowdfunding issuers, may mitigate the complexity of the required disclosure Economic Analysis, we have set forth impact of those costs. Accordingly, we and the burden to prepare and file Form our monetized estimates of the various estimate that the average total burden to C–U will be significantly less than for cost components, grouped into prepare and file the Form C, including Form D. We continue to estimate that categories based on the size of the any amendment to disclose any material the burden to prepare and file each offering. Our Form C estimates range change, will be approximately 100 progress update will be 0.50 hours. In from $2,500 for the smallest offerings hours, which, while higher than our light of the change from the proposal, (up to $100,000); to a range of $2,500 to proposed estimate, is still substantially we expect most issuers will rely on the $5,000 for somewhat larger offerings less than the burden to prepare a Form relevant intermediary to provide interim (more than $100,000 but not more than 1–A for an offering under Regulation A, progress updates and therefore will be $500,000) and a range of $5,000 and as recently amended. We continue to required to file an average of one $20,000 for the largest offerings (more estimate that 75 percent of the burden progress update during each offering than $500,000). Additionally, our of preparation will be carried by the rather than the two progress updates estimates of the cost of financial issuer internally and that 25 percent that we estimated in the Proposing statement review or audit range from $0 will be carried by outside Release.1643 As in the Proposing for the smallest offerings; to between professionals 1639 retained by the issuer Release, we estimate that the entirety of $1,500 and $18,000 for larger offerings at an average cost of $400 per hour.1640 this burden will be borne internally by and for first-time crowdfunding issuers This reflects 75 internal burden hours the registrant. conducting offerings between $500,000 per issuer and $10,000 in external Overall, we estimate that compliance and $1,000,000; and $2,500 to $30,000 professional costs. While for PRA with the requirements of a Form C filed for other issuers that are conducting an purposes, we must present this estimate in connection with offerings made in offering in the largest offering amount in terms of hours and costs, we believe reliance on Section 4(a)(6) will require category. Accordingly, in our Economic that this estimate is consistent with the 190,000 burden hours (1,900 offering Analysis we estimate a cost range monetary ranges that we set forth in the statements × 100 hours/offering estimate for Form C and the financial Economic Analysis. statement) in aggregate each year, which statement review of: $2,500 for the Under the final rules, the issuer also corresponds to 142,500 hours carried by smallest offerings, $4,000 to $23,000 for will be required to file with us regular the issuer internally (1,900 offering the larger offerings, $6,500 to $38,000 updates on the progress of the issuer in statements × 100 hours/offering meeting the target offering amount.1641 statement × 0.75) and costs of 1636 See, e.g., Heritage Letter (stating that the costs In a change from the proposal, the rules $19,000,000 (1,900 offering statements × to prepare the required disclosures will likely permit issuers to satisfy the progress 100 hours/offering statement × 0.25 × exceed $10,500, except in cases of start-ups with no update requirement by relying on the $400) for the services of outside operating history); NSBA Letter (stating that issuers and intermediaries will likely incur higher attorney relevant intermediary to make publicly professionals. We also estimate that and accounting fees and financial and compliance with the requirements of administrative burdens than estimated in the 1639 For example, an issuer could retain an Form C–U filed during an offering will proposed rules but without providing estimates); outside professional to assist in the preparation of require 950 burden hours (1,900 offering SeedInvest Letter 2 (estimating upfront compliance the financial statements, but could decide to × costs to be ‘‘potentially hundreds of hours [in address the remaining disclosure requirements statements 1 progress update per internal company time] and $20,000 to $50,000 [in internally. offering × 0.50 hours per progress outside professional costs]’’). 1640 We estimate the average external cost of update) in aggregate each year. 1637 FundHub Letter 2 (stating that the commenter preparing Form C to be 0.25 × 100 hours × $400 per will prepare Form C and all disclosure documents, hour = $10,000. b. Form C–AR: Annual Report do all bad actor checks, verify investor status and We recognize that the costs of retaining outside Under the final rules, unless the perform all other necessary compliance measures professionals may vary depending on the nature of for a $100,000 offering for $2,500 total, and that, in the professional services, but for purposes of this reporting has been terminated, any most cases, its services and associated legal fees PRA analysis, we estimate that such costs would be will cost an issuer between $2,500 and $5,000 for an average of $400 per hour. This is the rate we 1642 We currently estimate the burden per an offering up to $500,000 and between $5,000 and typically estimate for outside legal services used in response for preparing and filing a Form D to be $10,000 for an offering between $500,000 and connection with public company reporting. 4.00 hours. $1,000,000). 1641 See Rule 203(a)(3) of Regulation 1643 See Rule 203(a)(3) of Regulation 1638 See StartEngine Letter 2. Crowdfunding. Crowdfunding.

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issuer that sells securities in a carried by outside professionals 1648 d. Form ID Filings transaction made pursuant to Section retained by the issuer at an average cost Under the final rules, an issuer will be 1649 4(a)(6) will be required to file annually of $400 per hour. required to file specified disclosures with us an annual report on Form C– We estimate that compliance with the with us on EDGAR.1653 We anticipate 1644 AR: Annual Report. Form C–AR will requirements of Form C–AR in the first that the majority of first-time issuers require disclosure substantially similar year after issuers sell securities pursuant seeking to offer and sell securities in to the disclosure provided in the Form to Section 4(a)(6) will require 95,000 reliance on Section 4(a)(6) will not C: Offering Statement, except that burden hours (1,900 issuers × 50 hours/ previously have filed an electronic offering-specific disclosure will not be issuer) in the aggregate, which submission with us and so will need to required and the issuer may be able to corresponds to 71,250 hours carried by file a Form ID. Form ID is the update disclosure previously provided the issuer internally (1,900 issuers × 50 application form for access codes to in the Form C. In addition, in a change hours/issuer × 0.75) and costs of permit filing on EDGAR. The final rules from the proposal, instead of requiring $9,500,000 (1,900 issuers × 50 hours/ will not change the form itself, but we financial statements in the annual report issuer × 0.25 × $400) for the services of anticipate that the number of Form ID that meet the highest standard of review outside professionals. filings will increase due to new issuers previously provided (either reviewed or seeking to offer and sell securities in c. Form C–TR: Termination of Reporting audited), the final rules require financial reliance on Section 4(a)(6). One statements of the issuer certified by the Under the final rules, any issuer commenter stated that it would take principal executive officer of the issuer terminating its annual reporting approximately 70 minutes to complete a to be true and complete in all material obligations will be required to file a Form ID, considerably more time than 1645 respects. Therefore, we estimate that notice under cover of Form C–TR: the estimated 0.15 hours.1654 However, the burden to prepare and file Form C– Termination of Reporting to notify the information required by Form ID is AR will be less than that required to investors and the Commission that it no very limited, primarily the name and prepare and file Form C. longer will file and provide annual address of the filer, so we continue to As discussed in the Economic reports pursuant to the requirements of believe the estimated 0.15 hours per Analysis, we received some comments Regulation Crowdfunding.1650 We response is appropriate. For purposes of on the costs of Form C–AR.1646 One estimate that eight percent of the issuers this PRA analysis, we estimate that all commenter that submitted comments that sell securities pursuant to Section of the issuers who will seek to offer and concerning both Form C and Form C– 4(a)(6) will file a notice under cover of sell securities in reliance on Section AR provided several cost estimates or Form C–TR during the first year.1651 4(a)(6) will not have filed an electronic ranges for Form C–AR that varied but The Form C–TR will be similar to the submission with us previously and will, were ranges or amounts that were lower Form 15 that issuers file to provide therefore, be required to file a Form ID. than the commenter’s estimates for notice of termination of the registration As noted above, we estimate that Form C.1647 Our analysis of the cost of of a class of securities under Exchange approximately 1,900 issuers per year Form C–AR in our Economic Analysis Act Section 12(g) or to provide notice of will seek to offer and sell securities in reflects these comments, and in that the suspension of the duty to file reports reliance on Section 4(a)(6), which will analysis, we estimate that the cost of required by Exchange Act Sections 13(a) correspond to 1,900 additional Form ID Form C–AR represents two-thirds of the or 15(d).1652 Therefore, we estimate that filings. As a result, we estimate the cost of Form C (exclusive of the compliance with the Form C–TR will additional annual burden associated financial statement review). result in a similar burden as compliance with this form will be approximately Additionally, in light of the change to × with Form 15, that is, a burden of 1.50 285 hours (1,900 filings 0.15 hours/ the final rules for Form C–AR to require filing).1655 financial statements that are certified by hours per response. We estimate that the principal executive officer of the compliance with Form C–TR will result 2. Brokers and Funding Portals issuer to be true and complete in all in a burden of 228 hours (1,900 issuers × 0.08 issuers filing Form C–TR × 1.50 Below, we discuss our estimates of material respects, rather than requiring the internal burdens and professional financial statements that meet the hours/issuer) in the aggregate during the first year for issuers terminating their costs associated with the collections of highest level of review previously information required under the final provided, we estimate that for Form C– reporting obligations. As in the Proposing Release, we estimate that the rules as they relate to intermediaries. AR there will be a further reduction of Where relevant, we discuss any PRA burden compared with the burden entirety of this burden will be borne internally by the registrant. We received comments received on these estimates of Form C. Accordingly, we estimate and any changes to estimates, including that compliance with Form C–AR will no comments on our estimates with respect to Form C–TR and continue to changes made in response to comments be approximately one-half of the burden on them. of Form C, resulting in a burden of 50 believe that these estimates are hours per response. We further estimate reasonable. a. Registration Requirements that 75 percent of the burden of (1) Time Burden preparation will be carried by the issuer 1648 See note 1639. 1649 The final rules will require internally and that 25 percent will be See note 1640. 1650 See Rule 203(b)(2) of Regulation intermediaries to register with us as Crowdfunding. either a broker or as a funding portal. As 1644 See Rule 202 of Regulation Crowdfunding. 1651 For purposes of this PRA analysis, we noted above, we believe that some 1645 See Rule 202(a) of Regulation Crowdfunding. estimate that eight percent of issuers will not intermediaries for transactions made in However, issuers that have available financial survive past their first year, based on a recent study statements that have been reviewed or audited by that found that of a random sample of 4,022 new an independent certified public accountant because high-technology businesses started in 2004, 92.3% 1653 See Rules 201–203 of Regulation they prepare them for other purposes shall provide survived past their first year. See Kauffman Firm Crowdfunding. them and will not be required to have the principal Survey, note 1302 at 13. 1654 Angel Letter 1. executive officer certification. Id. 1652 We currently estimate the burden per 1655 We currently estimate the burden per 1646 See Section III.B.3.a. response for preparing and filing a Form 15 to be response for preparing and filing with Form ID to 1647 See SeedInvest Letter 1; SeedInvest Letter 4. 1.50 hours. be 0.15 hours.

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reliance on Section 4(a)(6) and hours to register, for a total additional as with Form BDW, will take Regulation Crowdfunding will already annual burden of four hours. approximately 0.25 hours. This will be registered as brokers. Therefore, this We have taken into consideration that result in an aggregate annual reporting registration requirement will impose no brokers that register to engage in burden of approximately 1.25 hours new requirement on these entities and crowdfunding transactions conducted in (0.25 hours/respondent × 5 funding no additional burden for purposes of reliance on Section 4(a)(6) may portals). this PRA analysis. Entities that are not eventually decide to withdraw their In the Proposing Release, we also already registered as brokers may decide registration. Withdrawal requires an included an estimate of PRA burdens to register either as brokers or as entity to complete and file with us a and costs for newly-registered funding portals and to become members Form BDW.1658 We further estimate that intermediaries to become members of of a registered national securities approximately 430 broker-dealers FINRA or any other registered national association (if they are not already a withdraw from Commission registration securities association. Specifically, the member) pursuant to the final rules. We annually 1659 and, therefore, file a Form Proposing Release included a discussion estimate that each year, on average, BDW. Of them, we estimate that of an estimate of the paperwork burdens approximately 10 entities may decide to approximately one broker who had and costs that would be incurred by an be registered as brokers and registered in order to facilitate intermediary to register with a national approximately 50 entities may decide to crowdfunding offerings made in securities association as well as an be registered as funding portals by filing reliance on Section 4(a)(6) will decide to estimate of the ongoing fees (e.g., FINRA Form Funding Portal.1656 In addition, withdraw in each year following annual assessment fees) that would be we estimate that of those 50 entities that adoption of the rules.1660 Therefore, the incurred by an intermediary to remain register as funding portals, two will be one broker-dealer that withdraws from registered with a national securities nonresident funding portals and subject registration by filing Form BDW will association. However, after further to the additional requirements under incur an aggregate annual reporting consideration, we do not believe the Rule 400(f) of completing Schedule C burden of approximately 0.25 hours hour burdens and costs associated with (including the required certifications), (0.25 hours/respondent × 1 broker). FINRA’s membership constitute requirements related to the agent for Similarly, we estimate that paperwork burdens and costs service of process in the United States, approximately five funding portals will attributable to the Commission’s rules. and obtaining an opinion of counsel. choose to withdraw from registration Accordingly, we are not providing We estimate the burden for registering each year 1661 and that each withdrawal, estimates of burdens and costs resulting with the Commission as a broker based from membership in a registered upon the existing burdens for 1658 The time necessary to complete Form BDW national securities association in this completing and filing Form BD, varies depending on the nature and complexity of PRA analysis. We have, however, 1657 the applicant’s securities business. We currently currently estimated as 2.75 hours. estimate that it takes a broker-dealer approximately considered the costs of such Consequently, we estimate that the total 0.25 burden hours to complete and file a Form BDW membership, both initial and ongoing, annual burden hours required for all to withdraw from Commission registration, as in our Economic Analysis above.1662 crowdfunding intermediaries, including required by Exchange Act Rule 15b6–1 (17 CFR Once registered, a broker must brokers and funding portals, to register 240.15b6–1). 1659 This estimate is based on Form BDW data promptly file an amended Form BD with us under the final rules will be collected over the past five years and may be high when information originally reported on approximately 165 hours (2.75 hours/ as a result of the impact of the financial crisis on Form BD changes or becomes × respondent (10 brokers + 50 funding broker-dealers. For the past five fiscal years (from inaccurate. Similarly, a registered portals)). In addition, those entities that 10/1 through 9/30), the number of broker-dealers that withdrew from registration was as follows: 524 funding portal must file amendments register as nonresident funding portals in 2011 and 428 in 2012, 434 in 2013, 454 in 2014 relating to changes in information filed will face an additional burden of half an and 306 by September 15, 2015. We thus estimate in a Form Funding Portal filing.1663 hour to complete Schedule C and make the number of broker-dealers that withdraw from Based on the number of amended Forms the required certifications, half an hour the Commission annually to be 430 ((524+428+434+454+306)/5). BD that we received from October 1, to document the appointment of an 1660 As of September 2015, there were 4,213 2011 through September 15, 2015, we agent for the service of process, and one broker-dealers registered with the Commission. An estimate that the total number of hour to obtain an opinion of counsel. average of 430 broker-dealers per year withdraw amendments that we will receive on Consequently, we estimate that, of the from registration, or 10% of the number of registered broker-dealers (430 withdrawing broker- Form BD from the 10 brokers that 50 registered funding portals, two will dealers/4,213 registered broker-dealers). We assume register under Regulation Crowdfunding each face an additional burden of two that the same percentage of broker-dealers that will be approximately 32.1664 Therefore, withdraw from registration will apply to the 1656 As noted above, funding portals will have to population of registered broker-dealers participating in offerings in reliance on Section 4(a)(6). Of our withdraw registration will be required to be complete and file Form ID in order to obtain access reported to us in the same way as an amendment; codes to file on EDGAR. Based on our estimates, 50 estimate of 10 registered broker-dealers per year however, for brokers, withdrawal requires the filing funding portals per year will newly register through registering to participate in crowdfunding of Form BDW. EDGAR, which will correspond to 50 additional transactions in reliance on Section 4(a)(6), we 1662 Form ID filings. As a result, we estimate the estimate that approximately one broker-dealer per See Section III.B.4. additional annual burden associated with this form year (10 registered broker-dealers × 0.10) will 1663 We currently estimate that the average time will be approximately 7.5 hours (50 filings × 0.15 withdraw from registration. necessary to complete an amended Form BD to be hours/filing). 1661 We estimate that the percentage of registered approximately 20 minutes, or 0.33 hours. We 1657 While it is likely that the time necessary to funding portals participating in crowdfunding estimate that an amendment to Form Funding complete Form BD varies depending on the nature transactions in reliance on Section 4(a)(6) that will Portal will take the same amount of time as an and complexity of the entity’s securities business, withdraw from registration annually would be the amendment to Form BD because the forms are we currently estimate the average time necessary for same as the percentage of broker dealers that similar. a broker-dealer to complete and file an application withdraw from registration annually because of the 1664 We received 15,491, 13,271, 12,902, 14,330 for broker-dealer registration on Form BD to be similarity of these entities’ businesses. Of our and 10,848 amended Forms BD during the fiscal approximately 2.75 hours. We also estimate that the estimate of 50 registered funding portals years ending 2011, 2012, 2013, 2014 and 2015, time burden to register as a funding portal on Form participating in crowdfunding transactions in respectively, reflecting an average of 13,368 Funding Portal will be, for purposes of this PRA reliance on Section 4(a)(6), we estimate that amendment filings per year (15,491 + analysis, the same as the time required to complete approximately five funding portals per year (50 13,271+12,902+ 14,330+10,848)/5 years). As of and file Form BD because the information required registered funding portals × 0.10) will withdraw September 15, 2015, there were 4,213 broker- for that form is similar. from registration. For funding portals, a decision to dealers registered with the Commission. Therefore,

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we estimate that the total additional their systems. Based on our discussions functionality.1671 Assuming that half of annual burden hours necessary for with potential intermediaries prior to the 110 newly-registered intermediaries broker-dealers to complete and file the publication of our proposed rules, hire outside developers to build or to amended Forms BD will be we estimate that intermediaries creating tailor their platforms, the total initial approximately 10.6 hours (32 amended the initial platform in-house will cost will range from $13,750,000 to Forms BD per year × 0.33 hours). Using typically have a team of approximately $33,000,000 (55 intermediaries × the same ratios, we estimate that the four to six developers that will work on $250,000 = $13,750,000; 55 total annual burden hours for funding all aspects of platform development, intermediaries × $600,000 = portals to complete and file amended including, but not limited to, front-end $33,000,000). For purposes of this PRA Forms Funding Portal will be programming, data management, analysis, we estimate the cost to be approximately 52.8 hours (50 funding systems analysis, communication $23,375,000 (the average of $13,750,000 portals × 3.2 amendments per year × channels, document delivery, and and $33,000,000). 0.33 hours per amendment). Internet security.1667 We estimate, based We estimate that it will typically cost an intermediary approximately one-fifth (2) Cost on our discussions with potential intermediaries prior to the publication of the initial development cost per year We estimate that two intermediaries of our proposed rules, that in to use a third-party developer to provide will face a cost per intermediary of developing a platform in-house, annual maintenance on an Internet- $25,179 to retain an agent for service of intermediaries will spend an average of based crowdfunding portal, including process and provide an opinion of 1,500 hours for planning, programming, updating and basic functionality, or counsel to register as a nonresident and implementation.1668 $85,000 per year on average.1672 If we 1665 funding portal. It is difficult to estimate the number assume that half of the 110 b. Development of Intermediary of intermediaries that will develop their crowdfunding intermediaries updated Platform initial platforms in-house, but assuming their systems accordingly, the total that half of the 110 newly-registered ongoing cost will be $4,675,000 per year (1) Time Burden intermediaries 1669 do so, the total initial (55 intermediaries × $85,000 = The final rules envision that time burden on those intermediaries $4,675,000). intermediaries will develop electronic will be 82,500 hours (55 intermediaries c. Measures To Reduce the Risk of platforms to offer securities to the × 1,500 hours = 82,500 hours). Fraud public in reliance on Section 4(a)(6). We We estimate that annually updating anticipate that an intermediary’s the features and functionality of an (1) Time Burden platform will incorporate related intermediary’s platform will require The final rules will require systems functionality to comply with approximately 20% of the hours intermediaries to have a reasonable our final rules (including the collection required to initially develop the basis for believing that an issuer seeking of information associated with, for platform, for an average burden of 300 to offer and sell securities in reliance on example, the requirements of Rules 302, hours per year. If we assume that half Section 4(a)(6) through the 303 and 304) as well as execute other of the 110 crowdfunding intermediaries intermediary’s platform complies with platform capabilities and system update their systems accordingly each the requirements in Section 4A(b) and operations. The estimated time burdens year, the total ongoing time burden will the related requirements in Regulation and costs for platform development be 16,500 hours per year (55 Crowdfunding.1673 The final rules will discussed in this section include the intermediaries × 300 hours = 16,500 also require intermediaries to have a estimated time burdens and costs for the hours). reasonable basis for believing that an functionalities that will allow funding (2) Cost issuer has established means to keep portals to comply with their disclosure, accurate records of the holders of the communication channel, and investor There will be a cost associated with securities it will offer and sell through notification requirements.1666 developing a platform for an the intermediary’s platform.1674 For Intermediaries that develop their intermediary that hires a third-party to both requirements, an intermediary may platforms in-house will incur an initial develop its platform rather than reasonably rely on the representations of time burden associated with setting up developing it in-house. Based on our the issuer, unless the intermediary has discussions with potential reason to question the reliability of we estimate that there are approximately 3.17 intermediaries prior to the publication those representations. For the purposes amendments (13,368 amended Forms BD/4,213 of our proposed rules, we estimate that broker-dealers) per registered broker-dealer per year. We therefore estimate that the 10 broker- it will cost an intermediary 1671 We anticipate that some percentage of dealers who register under Regulation approximately $250,000 to $600,000 1670 intermediaries will already have in place platforms Crowdfunding will file, on aggregate, approximately to build a new Internet-based and related systems that will need to be tailored to 32 amendments per year. crowdfunding portal and all of its basic comply with the requirements of Title III of the 1665 We have altered our cost estimates slightly JOBS Act and Regulation Crowdfunding. We from the Proposing Release (from $25,130 to anticipate that these intermediaries will hire $25,179) and note that the amended estimates are 1667 See Sections IV.C.2.g. and IV.C.2.h. outside developers to tailor their platforms. We consistent with our recent estimates of what it 1668 This average takes into account estimate an average cost of approximately $250,000 would cost other types of nonresident entities to intermediaries that will develop a brand new in the first year in order to tailor the current retain an agent for service of process and provide platform and those that will modify an existing systems for an intermediary that already has in an opinion of counsel. See Registration Process for platform to function in accordance with Regulation place a platform and related systems. Thus, this Security-Based Swap Dealers and Major Security- Crowdfunding. amount is already covered in our range of costs Based Swap Participants, Exchange Act Release No. 1669 As discussed above, we anticipate that 10 above—$250,000 to $600,000. 34–75611, 80 FR 48964, 48994 (Aug. 14, 2015). We intermediaries will newly register as brokers, 50 1672 Our estimate of the average initial external inadvertently included the costs to non-resident intermediaries will be brokers that are already cost per intermediary to develop a crowdfunding funding portals of completing Schedule C in the registered, and 50 intermediaries will register as platform is the average of the cited range of Proposing Release. We anticipate, however, that funding portals. $250,000 to $600,000, or $425,000 (($250,000 + nonresident funding portals will incur a time 1670 See, e.g., ASSOB Letter (suggesting that the $600,000)/2). One-fifth of the cost of $425,000 is burden rather than a cost burden to complete cost to establish a funding portal would run at least $85,000. Schedule C. $480,000, which is within the range of our 1673 See Rule 301(a) of Regulation Crowdfunding. 1666 See Sections IV.C.2.g. and IV.C.2.h. estimate). 1674 See Rule 301(b) of Regulation Crowdfunding.

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of this PRA analysis, we expect that capability to conduct such checks. costs would be disproportionately high 100% of intermediaries will rely on the Therefore, for the purposes of this PRA for smaller offerings.1679 representations of issuers. Based on our analysis, we assume that 100% of We believe that, on an ongoing basis, industry knowledge and discussions intermediaries will use these third-party intermediaries will continue to use service providers. with participants prior to the third-party services to conduct publication of our proposed rules, we The cost for a third party to perform background and securities enforcement calculate that this requirement will a background check is estimated to be regulatory history checks. We also impose a time burden in the first year between $200 and $500, depending on of five hours per intermediary to the nature and extent of the information believe that the total estimated ongoing establish standard representations it provided.1675 We recognize that some cost for all intermediaries to fulfill the will request from issuers, and six issuers will require more than one required background and securities minutes per intermediary per issuer to background check (e.g., for officers or enforcement regulatory history checks obtain the issuer representation, which directors of the issuer), and we estimate will be the same as the estimated initial is consistent with estimates we have that intermediaries will perform four cost, or on average $24,182 per used for other regulated entities to background checks per issuer, on intermediary per year. average. We base this number on the obtain similar documentation, such as d. Account Opening: Accounts and assumption that most crowdfunding consents, from customers. Electronic Delivery Based on our estimate that there will issuers will be startups and small be approximately 1,900 offerings per businesses with small management The final rules provide that no year, that each issuer will conduct one teams and few owners. Assuming an intermediary or associated person of an offering per year, and that there will be average of approximately 1,900 offerings intermediary may accept an investment 110 intermediaries, we estimate that made in reliance on Section 4(a)(6) per commitment in a transaction involving each intermediary will facilitate an year, the total estimated initial cost for the offer or sale of securities made in average of approximately 17 offerings all intermediaries to fulfill the required reliance on Section 4(a)(6) until an per year (1,900 offerings/(10 newly background and securities enforcement investor has opened an account with the registered broker-dealers + 50 regulatory history checks will range intermediary and consented to previously registered broker-dealers + from approximately $1,520,000 to 1680 50 funding portals)). Therefore, we $3,800,000 per year,1676 or electronic delivery of materials. This estimate that the total initial burden approximately $13,818 to $34,546 per requirement will impose certain hours will be approximately 740 hours intermediary per year.1677 For purposes information gathering and ((5 hours/intermediary × (10 newly- of this PRA analysis, we average this recordkeeping burdens on registered broker-dealers + 50 cost to $24,182 per intermediary per intermediaries. For the purposes of this previously-registered broker-dealers + year. PRA analysis, we expect that the 50 funding portals)) + (0.1 hours/issuer One commenter noted, as a general functionality required to allow an × 17 offerings × 110 intermediaries). matter, that the ‘‘costs incurred by the investor to open an account with an We believe that the ongoing time intermediary in dealing with an issuer, intermediary and obtain consents will burdens for this requirement will be doing the required due diligence and result in an initial time burden of approximately one hour per background screening, establishing a approximately 10 hours per intermediary per year to review and Web page describing the offering and so intermediary in the first year. Therefore, confirm that the standard on do not vary linearly with the offering we estimate that the total initial burden representations it requests from issuers size. As a percentage of the offering hours resulting from this functionality remain appropriate, and six minutes amount, they will be disproportionately will be approximately 1,100 hours (10 (0.1 hours) per intermediary per issuer high for smaller offerings.’’ 1678 This hours/intermediary × (10 newly- to obtain an issuer’s representation. commenter did not, however, question registered broker-dealers + 50 Therefore, we estimate that the ongoing our underlying assumptions or our previously-registered broker-dealers + total burden hours necessary for estimates of these costs. For purposes of 50 funding portals)). intermediaries to rely on the this PRA analysis and as discussed representations of the issuers will be above, we believe that these cost We believe that the ongoing time approximately 300 hours per year ((1 estimates are reasonable. We also burdens for this requirement will be hour/intermediary × (10 newly- believe that intermediaries are in a significantly less than the initial time registered broker-dealers + 50 better position to make their own burden, and thus we estimate previously-registered broker-dealers + business decisions as to whether such approximately two hours per 50 funding portals)) + (0.1 hours/issuer intermediary per year to review and × 17 offerings × 110 intermediaries). 1675 See, e.g., A Matter of Fact, Background Check assess the related processes. Therefore, FAQ: Frequently Asked Questions, available at we estimate that the ongoing total (2) Cost http://www.amof.info/faq.htm (Matter of Fact is a burden hours necessary for this The final rules will require background check provider accredited by the National Association of Professional Background functionality will be approximately 220 intermediaries to conduct a background Screeners and the Background Screening hours per year (2 hours/intermediary × and securities enforcement regulatory Credentialing Council. This source states that the (10 newly-registered broker-dealers + 50 history check on each issuer and each cost for a comprehensive background check is $200 previously-registered broker-dealers + officer, director or 20 Percent Beneficial to $500). 50 funding portals)). 1676 1,900 securities-based offerings made in Owner of an issuer to determine reliance on Section 4(a)(6) per year × ($200 to $500 whether the issuer or such person is per background and securities enforcement 1679 As noted above, we agree with the subject to a disqualification. We regulatory history check) × 4 checks per offering = commenter’s suggestion that there is likely to be a anticipate that most intermediaries will $1,520,000 to $3,800,000 per year. fixed component to these costs that reflects a employ third parties to perform 1677 $1,520,000/110 intermediaries = certain necessary level of due diligence and approximately $13,818 per intermediary; background screening, which will result in these background and securities enforcement $3,800,000/110 intermediaries = approximately costs, as a percentage of offering size, being higher regulatory history checks in light of the $34,546 per intermediary. for smaller offerings. costs of developing an in-house 1678 Heritage Letter. 1680 See Rule 302(a) of Regulation Crowdfunding.

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e. Account Opening: Educational approximately $1,000 to $3,000 per the platform.1686 We expect that this Materials production minute.1683 Based on requirement will result in an estimated (1) Time Burden discussions with industry participants time burden of five hours per prior to the publication of our proposed intermediary in the first year, to prepare The final rules require intermediaries rules, we assume that, on average, each this particular disclosure and to provide educational materials to intermediary will produce a series of incorporate it into the account opening 1681 investors, about the risks and costs short educational videos that will cover process. Therefore, we estimate that the of investing in securities offered and all of the requirements of the final rules total initial burden hours necessary for sold in reliance on Section 4(a)(6). and that the video material will be 10 intermediaries to comply with this Because the intermediary will minutes long in total. Based on this requirement will be approximately 550 determine what electronic format will assumption, we estimate that the hours (5 hours/intermediary × (10 prove most effective in communicating average initial cost for an intermediary newly-registered broker-dealers + 50 the requisite contents of the educational to develop and produce educational previously-registered broker-dealers + material, the expected costs for materials will range from approximately 50 funding portals)). intermediaries to develop the $10,000 to $30,000. The total initial cost We believe that the ongoing time educational material are expected to across all intermediaries estimated to burdens for this requirement will be vary widely and are difficult to estimate. employ a third party per year will be approximately one hour per For the purposes of this PRA analysis, $550,000 to $1,650,000.1684 For intermediary per year to review and we assume that half of the purposes of this PRA analysis, we check that the disclosures remain intermediaries will develop their average the cost to $20,000 per appropriate. Therefore, we estimate that educational materials in-house, intermediary per year. We note that the the ongoing total burden hours potentially including online estimated initial cost may be necessary for intermediaries to comply presentations and written documents, significantly lower, because not all with this requirement will be and that the other half will employ third intermediaries that outsource the approximately 110 hours per year (1 parties to produce educational development of educational materials hour/intermediary × (10 newly- materials, such as professional-quality may choose to produce professional- registered broker-dealers + 50 online video presentations. We estimate quality online video presentations; previously-registered broker-dealers + that to develop their educational others may produce videos of shorter 50 funding portals)). materials in-house, each intermediary length or use other types of educational will incur an initial time burden of g. Issuer Disclosures To Be Made materials. approximately 20 hours. Therefore, the Available total initial burden will be We estimate that, on an ongoing basis, (1) Time Burden approximately 1,100 hours (55 when using a third-party company to intermediaries × 20 hours/ update their video educational The final rules require an intermediary).1682 materials, each intermediary will spend intermediary to make publicly available Assuming that half of the approximately half of the initial average on its platform the information that an intermediaries will develop their cost. We estimate, therefore, that the issuer of crowdfunding securities is educational materials in-house, we also average ongoing annual cost for an required to provide to investors, in a expect that these intermediaries will intermediary to update its video manner that reasonably permits a update their educational materials in- educational materials will range from person accessing the platform to save, house, as needed. We estimate that to approximately $5,000 to $15,000 and download or otherwise store the update their educational materials in- that the total ongoing annual cost across information, until the offer and sale of house, each intermediary will incur an all intermediaries will range from securities is completed or cancelled.1687 ongoing time burden of approximately approximately $275,000 to $825,000 per For purposes of the PRA, our estimate 1685 10 hours per year. Therefore, the total year. For purposes of this PRA of the hourly burdens related to the ongoing burden will be approximately analysis, we average the cost to $10,000 public availability of the issuer 550 hours per year (55 intermediaries × per intermediary per year. information is included in our estimate 10 hours/intermediary). f. Account Opening: Promoters of the hourly burdens associated with (2) Cost overall platform development, The final rules require an discussed above in Section IV.C.2.b. We As stated above, for the purposes of intermediary, at the account opening note that the platform functionality will this PRA analysis, we assume that half stage, to disclose to users of its platform include not only the ability to display, of the intermediaries will employ third- that any person who receives upload and download issuer party firms to produce educational compensation to promote an issuer’s information as required under the final materials, such as professional-quality offering, or who is a founder or rules, but also the ability to provide online video presentations, instead of employee of an issuer engaging in users with required online disclosures developing materials in-house. Public promotional activities on behalf of the We recognize that, over time, sources indicate that the typical cost to issuer, must clearly disclose the receipt intermediaries may need to update their produce a professional corporate of compensation and his or her systems that allow issuer information to training video ranges from engagement in promotional activities on be uploaded to their platforms. We do not expect a significant ongoing burden 1681 1683 See, e.g., Lee W. Frederiksen, What Is the See Rule 302(b) of Regulation Crowdfunding. related to the requirement for providing 1682 In the Proposing Release we did not take into Cost of Video Production for the Web?, Hinge account in our estimated time burden and cost Marketing, available at http:// issuer disclosures, primarily because the calculations our assumption that half of the www.hingemarketing.com/library/article/what-is- functionality required for required intermediaries would develop educational materials the-cost-of-video-production-for-the-web. issuer disclosure information to be 1684 × in-house. Therefore, we have re-calculated the 55 intermediaries $10,000 production cost uploaded is a standard feature offered estimated total initial and ongoing time burdens = $550,000. 55 intermediaries × $30,000 production and costs for the development of in-house materials cost = $1,650,000. in this release based on 55 (rather than 110) 1685 $550,000 total cost × 0.50 = $275,000. 1686 See Rule 302(c) of Regulation Crowdfunding. intermediaries. $1,650,000 total cost × 0.50 = $825,000. 1687 See Rule 303(a) of Regulation Crowdfunding.

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on many Web sites and will not require require frequent updates. We basis, and to review and update that frequent or significant updates. incorporate the total burden to update agreement on an ongoing basis. the required functionality for processing Based on discussion with industry (2) Cost investor disclosures and investor participants, we estimate that funding We do not expect a significant acknowledgment information in the portals will incur an initial burden of ongoing cost for providing issuer total burden estimates relating to approximately 20 hours each to comply disclosures, primarily because the platform development discussed with these requirements, for a total functionality required to upload above.1689 burden of 1,000 hours (20 hours per required issuer disclosure information is funding portal × 50 funding portals). We a standard feature offered on many Web (2) Cost expect that the burden associated with sites and will not require frequent We recognize that some the Web site functionality required to updates. To the extent an intermediary intermediaries may implement the send directions to third parties will be uses a third party to develop the required functionality for processing included as part of the platform functionality for this requirement, the investor disclosures and investor development discussed above.1692 initial costs relevant to this requirement acknowledgments by using a third-party We expect that, on an ongoing basis, will be incorporated into the cost of developer. The total cost for issuers to a registered funding portal will have to hiring a third party to develop the use third-party developers to add the periodically review and update its platform, discussed above in subsection required functionality for processing written agreement with the qualified IV.C.2.b.2. investor disclosures and investor third party to hold its client funds. A acknowledgments, as well as to update h. Other Disclosures to Investors registered funding portal will also be the required functionality for processing required to send directions on an (1) Time Burden investor disclosures and investor ongoing basis to a qualified third party Intermediaries will be required to acknowledgments, is incorporated into depending on whether an investing implement and maintain systems to our discussion of the total cost estimates target is met or an investment comply with the information disclosure, relating to platform development in commitment or offering is cancelled. communication channels, and investor Section IV.C.2.b. Based on discussion with industry notification requirements of Regulation We also do not expect there to be a participants, we estimate that funding Crowdfunding, including providing significant ongoing cost for developing portals will incur an ongoing annual disclosure about compensation at the functionality to process these burden of approximately 5 hours each to account opening, obtaining investor disclosures and acknowledgments, comply with these requirements, or 250 acknowledgments to confirm investor primarily because this functionality will hours total (5 hours per funding portal qualifications and review of educational likely not require frequent updates by × 50 funding portals). materials, providing investor third-party developers. j. Compliance: Policies and Procedures questionnaires, maintaining i. Maintenance and Transmission of communication channels with third Funds The final rules require a funding parties and among investors, notifying portal to implement written policies and investors of investment commitments, The final rules contain requirements procedures reasonably designed to confirming completed transactions and related to the maintenance and achieve compliance with the federal confirming or reconfirming offering transmission of funds. A registered securities laws and the rules and cancellations. broker will be required to comply with regulations thereunder, relating to its For purposes of the PRA analysis, our the requirements of Rule 15c2–4 of the business as a funding portal. We estimate of the hourly burdens related to Exchange Act (Transmission or anticipate that funding portals will these information disclosure, Maintenance of Payments Received in comply with this requirement by using 1690 communication channel and investor Connection with Underwritings). A internal personnel and internal notification requirements of Regulation registered funding portal will be information technology resources Crowdfunding is included in our required to enter into a written integrated into their platforms. Based on estimate of the hourly burdens agreement with a qualified third party discussion with industry participants, associated with overall platform that has agreed in writing to hold the we estimate that a funding portal will development, discussed above in client funds.1691 It also will be required spend approximately 40 hours to Section IV.C.2.b. Based on our to send directions to the qualified third establish written policies and discussions with industry participants, party depending on whether an procedures to achieve compliance with we expect that these functionalities will investing target is met or if an these requirements. This will result in a generally be part of the overall platform investment commitment or offering is total aggregate initial recordkeeping development process and costs. We cancelled. For purposes of the PRA, we burden of 2,000 hours (40 hours × 50 discuss the burdens of platform are providing an estimate for the hour funding portals). development above, and note that these burden that a funding portal will incur We estimate that, on an ongoing basis, will include developing the to enter into a written agreement with funding portals will spend functionality that will allow the qualified third party on an initial approximately 5 hours per year intermediaries to comply with updating, as necessary, the policies and disclosure and notification 1689 See Section IV.C.2.b.1. procedures required by the final rules. requirements.1688 1690 See Rule 303(e)(1) of Regulation This will result in an aggregate ongoing Crowdfunding. See also 17 CFR 240.15c2–4. For We do not expect a significant purposes of this PRA discussion, any burdens recordkeeping burden of 250 hours (5 ongoing burden for providing associated with Rule 15c2–4, as well as for any hours × 50 funding portals). disclosures, as required by the final other rule to which brokers are subject regardless rules, because the functionality required of whether they engage in transactions pursuant to k. Compliance: Privacy to provide information and Section 4(a)(6), are not addressed here; rather, they Funding portals will be required to are included in any OMB approvals for the relevant communication channels will likely not rules. comply with the Privacy Rules as they 1691 See Rule 303(e)(2) of Regulation 1688 See Section IV.C.2.b.1. Crowdfunding. 1692 See Section IV.C.2.b.

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apply to broker-dealers, including have affiliations that will subject them counsel and 1 one hour will be spent by Regulation S–P, S–AM and S–ID.1693 to the requirements of Regulation S–AM a compliance director. We estimate that Under Rule 403(b), a funding portal under the final rules, and that they will all 50 funding portals will incur these will be required to comply with incur an average one-time burden of one ongoing burdens, for a total ongoing Regulation S–P, which will require the hour to review affiliate marketing burden 400 hours (8 hours/respondent × funding portal to provide notice to practices, for a total of 20 burden hours 50 funding portals). investors about its privacy policies and (1 hour/respondent × 20 funding practices; describe the conditions under portals). l. Records to be Made and Kept by which a broker may disclose nonpublic We estimate that these 20 funding Funding Portals personal information about investors to portals will be required to provide (1) Time Burden nonaffiliated third parties; and provide notice and opt-out opportunities to All funding portals will be required to a method for investors to prevent a consumers pursuant to the requirements make and keep records related to their funding portal from disclosing that of Regulation S–AM, as imposed by activities to facilitate transactions in information to most nonaffiliated third Rule 403(b), and that they will incur an reliance on Section 4(a)(6) and the parties by ‘‘opting out’’ of that average initial burden of 18 hours to do related rules.1696 These books and disclosure, subject to certain exceptions. so, for a total estimated initial burden of records requirements are based For funding portals, we expect that the 360 hours (18 hours/respondent × 20 generally on Exchange Act Rules 17a–3 privacy and opt-out notices will be funding portals). We also estimate that and 17a–4, which apply to broker- delivered electronically, thereby funding portals will incur an ongoing dealers. To estimate the initial burden reducing the delivery burden as burden related to Regulation S–AM’s for funding portals, we base our analysis compared to paper delivery. requirements for providing notice and upon the current annual burdens of We estimate that under the final rules opt-out opportunities of approximately Rules 17a–3 and 17a–4. all 50 funding portals will be subject to four hours per respondent per year. This We currently estimate the annual the requirements of Regulation S–P burden will cover the creation and recordkeeping burden for broker-dealer pursuant to Rule 403(b). In developing delivery of notices to new investors and compliance with Rule 17a–3 to be an estimate of the burden relating to the the recording of any opt-outs that are 394.16 hours per respondent, and the Regulation S–P requirements under received on an ongoing basis, for a total most recently approved annual Rule 403(b), we have considered: (1) of approximately 80 annual burden- recordkeeping burden for broker-dealer The minimal recordkeeping burden hours (4 hours/respondent × 20 funding compliance with Rule 17a–4 to be 249 imposed by Regulation S–P; 1694 (2) the portals). summary fashion in which information Funding portals will be required to hours per respondent. must be provided to investors in the comply with rule S–ID, which will Given the more limited scope of a privacy and opt-out notices required by require funding portals to develop and funding portal’s business as compared Regulation S–P; 1695 and (3) the implement a written identity theft to that of a broker, the more targeted availability of the model privacy form prevention program that is designed to scope of the books and records rules, and online model privacy form builder. detect, prevent and mitigate identity and the fact that funding portals will be Given these considerations, we estimate theft in connection with certain existing required to make, deliver and store that each funding portal will spend, on accounts or the opening of new records electronically, we expect the an ongoing basis, an average of accounts. We estimate that the initial burden of the final rules will likely be approximately 12 hours per year burden for funding portals to comply less than that of Rules 17a–3 and 17a– complying with the information with the applicable portions of 4. For the purposes of the PRA, we collection requirement of Regulation S– Regulation S–ID, as imposed by Rule assume that the recordkeeping burden, P, for a total of approximately 600 403(b), will be (1) 25 hours to develop on average, for a funding portal to annual burden-hours (12 hours/ and obtain board approval of a program; comply with the final rules will be 50% respondent × 50 funding portals). (2) four hours to train staff; and (3) two of the burdens of a broker-dealer to Funding portals will be required to hours to conduct an initial assessment comply with Rules 17a–3 and 17a–4. comply with Regulation S–AM, which of relevant accounts, for a total of 31 Therefore, we estimate the initial will require funding portals to provide hours per funding portal. We estimate burden to be approximately 325 hours notice to each affected individual that all 50 funding portals will incur per respondent,1697 or 16,250 hours × informing the individual of his or her these initial burdens, resulting in an total (325 hours/respondent 50 right to prohibit such marketing before aggregate time burden of 1,550 hours respondents). We expect the ongoing a receiving affiliate may make marketing ((25 + 4 + 2 hours/respondent) × 50 recordkeeping burden for funding solicitations based on the funding portals). portals will be the same as the initial communication of certain consumer With respect to the requirements of burden because the requirements financial information from the broker. Rule 403(b) relating to Regulation S–ID, regarding maintaining such records will Based on our discussions with industry we estimate that the ongoing burden per be consistent each year. participants, we estimate that year will include: (1) Two hours to (2) Cost approximately 20 funding portals will periodically review and update the program, review and preserve contracts We currently estimate the annual 1693 See Rule 403(b) of Regulation Crowdfunding. with service providers and review and recordkeeping cost for broker-dealer 1694 Regulation S–P has no recordkeeping preserve any documentation received compliance with Rule 17a–3 to be requirement, and records relating to customer from service providers; (2) four hours to $5,706.67 per respondent. These communications already must be made and ongoing recordkeeping costs reflect the retained by broker-dealers pursuant to other prepare and present an annual report to Commission rules. The estimates of the burdens a compliance director; and (3) two hours costs of systems and equipment relating to recordkeeping requirements for funding to conduct periodic assessments to portals are discussed below in Section IV.C.2.l. determine if the entity offers or 1696 See Rule 404 of Regulation Crowdfunding. 1695 The model privacy form adopted by the 1697 394.16 hours (recordkeeping burden for Rule Commission and the other agencies in 2009, maintains covered accounts, for a total 17a–3) + 249 hours (recordkeeping burden for Rule designed to serve as both a privacy notice and an of eight hours, of which we estimate 7 17a–4) = 643.16 hours. 638.16 hours/2 = 321.58 opt-out notice, is only two pages. seven hours will be spent by internal hours.

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development. We currently estimate the Forms Funding Portal will not be kept and by providing crowdfunding annual recordkeeping cost for broker- confidential. platforms a means by which to facilitate dealer compliance with Rule 17a–4 to the offer and sale of securities without F. Retention Period of Recordkeeping be $5,000 per respondent. registering as brokers, with a framework Requirements Given the more limited scope of a for regulatory oversight to protect funding portal’s business as compared Issuers are not subject to investors. to that of a broker, the more targeted recordkeeping requirements under scope of the books and records rules, Regulation Crowdfunding. B. Significant Issues Raised by Public and the fact that funding portals will be Intermediaries that are brokers will be Comments required to make, deliver and store required to retain records and In the Proposing Release, we records electronically, we expect the information relating to Regulation requested comment on every aspect of annual recordkeeping cost of the final Crowdfunding for the required retention the IRFA, including the number of small rule requirements will likely be less periods specified in Exchange Act Rule entities that would be affected by the than that of Rules 17a–3 and 17a–4. For 17a–4. Intermediaries that are funding proposed amendments, the existence or purposes of the PRA, we assume that portals will be required to retain records nature of the potential impact of the the annual recordkeeping cost on and information under Regulation proposals on small entities discussed in average for a funding portal to comply Crowdfunding for the required retention the analysis, and how to quantify the with the requirements that records be periods specified in Rule 404.1701 impact of the proposed rules. made and kept will be about 50% less Some commenters expressed concern than burdens of a broker-dealer to V. Final Regulatory Flexibility Act that the IRFA did not comply with the comply with Rules 17a–3 and 17a–4. Analysis Regulatory Flexibility Act because it did We expect the initial recordkeeping cost The Commission has prepared the not, in their view, adequately describe for funding portals, therefore, to be following Final Regulatory Flexibility the costs of the proposed rule on small approximately $5,350 per Analysis (‘‘FRFA’’), in accordance with entities, and did not set forth significant respondent,1698 or $267,500 total the provisions of the Regulatory alternatives which accomplish the rule’s ($5,350 per respondent × 50 Flexibility Act,1702 regarding Regulation objectives and which minimize the respondents). We expect the ongoing Crowdfunding. It relates to the rules for significant economic impact of the recordkeeping cost burden for funding securities-based crowdfunding being proposal on small entities.1703 These portals will be the same as the initial adopted today. An Initial Regulatory commenters recommended that the burden because the requirements Flexibility Analysis (‘‘IRFA’’) was Commission republish for public regarding maintaining such records will prepared in accordance with the comment a supplemental IRFA to be consistent each year. Regulatory Flexibility Act and included address these concerns. One commenter One commenter stated that ‘‘[u]nder in the Proposing Release. stated that the IRFA did not set forth the expectation that crowdfunding significant alternatives which A. Need for the Rule portals will be online operations and accomplish the Commission’s stated will almost certainly retain records The regulation is designed to objectives because the IRFA only through digital methods, the burden of implement the requirements of Title III considered alternatives related to collection should be minimal.’’ 1699 We of the JOBS Act. Title III added exempting small business from the agree that digital recordkeeping can Securities Act Section 4(a)(6), which proposed rules.1704 One commenter help to minimize costs, and our provides a new exemption from the believed that the Commission should estimates reflect this assessment. registration requirements of Securities exercise its discretion and eliminate the Act Section 5 for securities-based need for two years of audited financial D. Collections of Information are crowdfunding transactions, provided statements,1705 whereas another Mandatory the transactions are conducted in the commenter viewed the audit The collections of information manner set forth in new Securities Act requirement as a ‘‘heavy-handed’’ required under Rules 201 through 203 Section 4A. Section 4A includes regulatory approach.1706 will be mandatory for all issuers. The requirements for issuers that offer or sell Commenters suggested several collections of information required securities in reliance on the alternatives which in their view could under Rules 300 through 304 will be crowdfunding exemption, as well as for reduce costs while accomplishing the mandatory for all intermediaries. The persons acting as intermediaries in rule’s objectives.1707 Commenters collections of information required those transactions. The rules prescribe suggested that the Commission use its under Rules 400 through 404 will be requirements governing the offer and discretion to raise the threshold amount mandatory for all funding portals. sale of securities in reliance on Section above which issuers would be required 4(a)(6) and provide a framework for the to provide audited financial E. Confidentiality regulation of registered funding portals statements,1708 with one commenter Responses on Form C, Form C–A, and brokers that act as intermediaries in specifically recommending a threshold Form C–U, Form C–AR and Form C–TR the offer and sale of securities in of $900,000.1709 One commenter also will not be kept confidential. Responses reliance on Section 4(a)(6). suggested that the Commission adopt a on Form ID will be kept confidential by As discussed above, the ‘‘question and answer’’ format for the Commission, subject to a request crowdfunding provisions of the JOBS nonfinancial disclosures similar to the under the Freedom of Information Act, which we implement through this Act.1700 Responses on Forms BD and regulation, are intended to help alleviate 1703 See SBA Office of Advocacy Letter; NAHB the funding gap and accompanying Letter; Graves Letter. 1704 1698 $5,706.67 (recordkeeping cost for Rule 17a– regulatory concerns faced by small See SBA Office of Advocacy Letter. 1705 See Guzik Letter. 3) + $5,000 (recordkeeping cost for Rule 17a–4) = businesses by making relatively low $10,706.67. $10,706.67/2 = $5,353.34. 1706 See Rockethub Letter. 1699 Joinvestor Letter. dollar offerings of securities less costly 1707 See Graves Letter; SBA Office of Advocacy 1700 5 U.S.C. 552. The Commission’s regulations Letter. that implement the Freedom of Information Act are 1701 See Rule 404 of Regulation Crowdfunding. 1708 Id. at 17 CFR 200.80 et seq. 1702 5 U.S.C. 603. 1709 See Graves Letter.

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format used in Regulation A commenter thought it was appropriate day of the preceding fiscal year (or in offerings.1710 This same commenter also to apply the same level of liability that the time that it has been in business if recommended that the Commission is reserved for issuers to broker-dealers, shorter); and (2) is not affiliated with could develop ‘‘standard, boilerplate but not funding portals.1716 This any person (other than a natural person) disclosures’’ for some of the ‘‘more commenter urged the Commission to that is not a small business or small complicated’’ nonfinancial disclosures either eliminate liability for funding organization as defined in this such as risk factors. This commenter portals, or create regulatory alternatives release.’’ 1720 Currently, based on stated that the nonfinancial disclosures for funding portals such as allowing FOCUS Report 1721 data, there are 871 are not required under the JOBS Act and them to limit the offerings on their broker-dealers that are classified as encouraged the Commission to develop platforms.1717 One commenter stated ‘‘small’’ entities for purposes of the alternatives that would be less that the IRFA did not account for the Regulatory Flexibility Act.1722 Because burdensome for small issuers. One cost of prohibiting funding portals from of some overlap in permitted functions commenter recommended that the limiting the offerings on their platforms of funding portals and brokers, we look Commission revise the ongoing on the basis of subjective factors and to the definition of a small broker-dealer financial reporting requirements for suggested that the Commission create a to quantify the estimated numbers of small issuers to require the disclosure of safe harbor for funding portals that small funding portals that will likely reviewed rather than audited financial allows them to limit such offerings.1718 register under the new regulation. Based on discussions with industry statements, even if such issuers were C. Small Entities Subject to the Rules previously required to disclose audited participants prior to the publication of financial statements pursuant to Section For purposes of the Regulatory the proposed rules, we estimate that, of 4A(b)(1)(D).1711 This commenter also Flexibility Act, under our rules, an the anticipated 50 funding portals we supported a requirement that issuers issuer (other than an investment expect to register under the new submit annually an updated statement company) is a ‘‘small business’’ or regulation, 30 will be classified as of financial condition, similar in nature ‘‘small organization’’ if it has total assets ‘‘small’’ entities for purposes of the to an abbreviated management’s of $5 million or less as of the end of its Regulatory Flexibility Act. most recently completed fiscal year and discussion and analysis of financial D. Projected Reporting, Recordkeeping condition and results of operations.1712 is engaged or proposing to engage in an offering of securities which does not and Other Compliance Requirements This commenter also suggested that 1719 issuers with total revenue below $5 exceed $5 million. We believe that As discussed above, the final rules many issuers seeking to offer and sell million should be permitted to use include reporting, recordkeeping and securities in reliance on Section 4(a)(6) either cash-based or accrual-based other compliance requirements. In will be at a very early stage of their methods of accounting, so that particular, the final rules impose certain business development and will likely businesses using cash accounting will disclosure requirements on issuers have total assets of $5 million or less. not be required to create two sets of offering and selling securities in a Also, to qualify for the exemption under accounting records in order to access transaction relying on the exemption Section 4(a)(6), the amount raised by an crowdfunding.1713 provided by Section 4(a)(6). The final issuer must not exceed $1 million in a One commenter suggested that rules require that issuers relying on the 12-month period. Therefore, we smaller entities tend to be more volatile exemption provided by Section 4(a)(6) estimate that all issuers who offer or sell and more illiquid than larger file with the Commission certain 1714 securities in reliance on the exemption specified information about the issuer entities. This commenter explained will be classified as a ‘‘small business’’ that this illiquidity needs to be and the offering, including information or ‘‘small organization.’’ about the issuer’s contact information; considered when crafting regulations for For purposes of the Regulatory small entity intermediaries and small directors, officers and certain beneficial Flexibility Act when used with owners; business and business plan; entity issuers. This commenter also reference to a broker or dealer, the stated that, regardless of whether an current number of employees; financial Commission has defined the term condition; target offering amount and intermediary has internal compliance ‘‘small entity’’ to mean a broker-dealer personnel, or uses a third party, these the deadline to reach the target offering that: (1) Had total capital (net worth amount; use of proceeds from the compliance costs ultimately will have to plus subordinated liabilities) of less be borne by the investors and issuers offering and price or method for than $500,000 on the date in the prior calculating the price of the securities using the intermediary service. Another fiscal year as of which its audited commenter expressed concern that the being offered; ownership and capital financial statements were prepared structure; material factors that make an statutory liability standard of Section pursuant to Rule 17a–5(d) or, if not 4A(c) will be particularly burdensome investment in the issuer speculative or required to file such statements, a risky; indebtedness; description of other for funding portals and noted that the broker or dealer that had total capital IRFA does not account for the large offerings of securities; and transactions (net worth plus subordinated debt) of with related parties. Issuers also will be expense statutory liability will impose less than $500,000 on the last business on intermediaries.1715 Similarly, one required to file updates with the Commission to describe the progress of 1716 See Graves Letter (stating that the 1710 the issuer in meeting the target offering See SBA Office of Advocacy Letter. Commission should recognize the difference in the 1711 See Graves Letter. ability of funding portals and registered broker- amount, unless the issuer relies on the 1712 See Id. dealers to use discretion in selecting or curating 1713 See Id. offerings, and apply liability to each as 1720 17 CFR 240.0–10(c). 1714 See RocketHub Letter. appropriate). 1721 FOCUS Reports, or ‘‘Financial and 1715 See SBA Office of Advocacy Letter (stating 1717 Id. (suggesting that funding portals should be Operational Combined Uniform Single’’ Reports, that the liability standard is especially burdensome allowed the discretion to exclude offerings from are monthly, quarterly, and annual reports that for funding portals because broker-dealers already their platforms if they deem them to be overly risky, broker-dealers generally are required to file with the have procedures in place for conducting due or if they view the offerings as having shortcomings Commission and/or self-regulatory organizations diligence on issuers in order to meet FINRA that could be detrimental to investors). pursuant to Exchange Act Rule 17a–5 (17 CFR requirements, and funding portals will have to 1718 See SBA Office of Advocacy Letter. 240.17a–5). establish these procedures anew). 1719 17 CFR 230.157. 1722 See 17 CFR 240.0–10(a).

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intermediary to include this information the proposal, many of which were made Also, as discussed above, we do not on its platform, and to disclose the total to minimize the effect of the rules on believe that financial statements amount of securities sold in the offering. small entities. These changes are prepared in accordance with other In addition, any issuer that sells outlined in detail above in the comprehensive bases of accounting, securities in reliance on Section 4(a)(6) discussions of the rules adopted. such as cash or accrual-based also will be required to file with the accounting, as suggested by one 1. Issuers Commission an annual report to update commenter, provide investors with a the previously provided disclosure To address commenters’ concerns fair representation of a company’s about the issuer’s contact information; about the cost of the rules to small financial position and results of directors, officers and certain beneficial issuers, we have considered the operations, and it may be difficult for owners; business and business plan; alternatives suggested by commenters investors to determine whether the current number of employees; financial and are adopting final rules which issuer complied with such basis. condition; ownership and capital implement certain alternatives we Although we acknowledge, as some structure; material factors that make an believe will minimize the cost of the commenters observed, that other bases investment in the issuer speculative or final rules to small issuers while also of accounting may be less expensive risky; indebtedness; description of other preserving necessary investor protection than U.S. GAAP, we believe the benefit offerings of securities; and transactions measures. of a single standard that will facilitate with related parties. First, the final rules include an comparison among securities-based Intermediaries will be required to accommodation for issuers conducting crowdfunding issuers justifies any register with the Commission as either an offering for the first time in reliance incremental expenses associated with brokers or as funding portals. on Regulation Crowdfunding. Under the U.S. GAAP. We also note that financial Intermediaries also will be required to final rules, issuers conducting an statements prepared in accordance with provide quarterly reports to the offering of more than $500,000 but not U.S. GAAP are generally self-scaling to Commission. Funding portals will be more than $1,000,000 that have not the size and complexity of the issuer, required to make and keep certain previously sold securities in reliance on which we expect to reduce the burden records in accordance with the rules. Section 4(a)(6) will not be required to of preparing financial statements for Registered broker-dealers are already provide audited financial statements, many early stage issuers, including required to make and keep certain unless audited financial statements are small issuers. records in accordance with existing otherwise available. Instead, the final The final rules also maintain the Exchange Act Rules 17a–3 and 17a–4. In rules permit these issuers to provide progress update requirement, but with a addition, the final rules impose specific reviewed financial statements. As significant modification from the compliance requirements on discussed above, this is a change from proposed rule which is intended to intermediaries, such as the maintenance the proposal that is responsive to reduce duplicative disclosure and of written policies and procedures. concerns raised by many commenters minimize the burden on small issuers. In adopting this regulation, we took about the expense of obtaining audited The final rules will require an issuer to into account that the regulation, as financial statements, especially for start- file a Form C–U at the end of the mandated by the JOBS Act, aimed to up issuers without a track record of offering to disclosure the total amount address difficulties encountered by successfully raising capital.1723 We of securities sold in the offering, but the small entities. Accordingly, we designed believe that requiring reviewed financial rules permit issuers to satisfy the 50% the final rules for intermediaries, to the statements for issuers using Regulation and 100% progress update requirements extent possible in light of investor Crowdfunding for the first time to raise by relying on the relevant intermediary protection concerns, with the needs and more than $500,000 but not more than to make publicly available on the constraints of small entities in mind, $1 million, rather than audited financial intermediary’s platform frequent including small intermediaries. We statements, will minimize costs for updates about the issuer’s progress believe that the reporting, recordkeeping issuers while providing sufficient toward meeting the target offering and other compliance requirements of investor protection by maintaining the amount. the final rules applicable to benefit of an independent review. With respect to ongoing reporting intermediaries will impact, in As suggested by one commenter,1724 requirements, rather than requiring an particular, small entities that decide to and as discussed above, the final Form issuer to provide financial statements in register as funding portals. We believe C includes an optional question-and- the annual report that meet the highest that most of these requirements will be answer format that issuers may elect to standard previously provided, as performed by internal compliance use to provide the disclosures that are proposed, the final rules require personnel of the broker or funding not required to be filed in XML format. financial statements of the issuer portal, but we expect that at least some Issuers opting to use this format would certified by the principal executive funding portals may decide to hire prepare their disclosures by answering officer of the issuer to be true and outside counsel and third-party service the questions provided and filing that complete in all material respects. We providers to assist in meeting the disclosure as an exhibit to the Form C. expect that reducing the required level compliance requirements. Given the Given our expectation that issuers of public accountant involvement will statutory limitations on crowdfunding, engaged in offerings in reliance on minimize the costs and burdens for all we believe that the potential impact of Section 4(a)(6) will encompass a wide issuers, including small issuers, the final rules on larger brokers and variety of industries at different stages associated with preparing reviewed and funding portals will be proportionally of business development, we do not audited financial statements on an less than on small brokers and small believe it would be practical or useful ongoing basis. intermediaries. to develop standard, predetermined In addition, the final rules provide for disclosure, as suggested by one termination of the ongoing reporting E. Agency Action To Minimize Effect on commenter, for such a variety of issuers. obligation in two additional Small Entities circumstances: (1) The issuer has filed In response to comments, the final 1723 See, e.g., SBA Office of Advocacy Letter. at least one annual report and has fewer rules include a number of changes from 1724 Id. than 300 holders of record, or (2) the

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issuer has filed the annual reports for at rules, we are not requiring a fidelity List of Subjects least the three most recent years and has bond for intermediaries and also are 17 CFR Part 200 total assets not exceeding $10,000,000. expanding the definition of qualified We believe the addition of these third party. These changes should Administrative practice and termination events should help reduce reduce costs for all intermediaries, procedure, Authority delegations related costs for issuers that may not including small entities. (Government agencies), Organization and functions (Government agencies). have achieved a level of financial The final rules have been tailored to Reporting and recordkeeping success that would sustain an ongoing the more limited role intermediaries reporting obligation. requirements. will play in offerings made pursuant to Overall, we considered whether to 17 CFR Part 227 establish different compliance or Securities Act Section 4(a)(6) (as reporting requirements or timetables or compared to the wide range of services Crowdfunding, Funding Portals, to clarify, consolidate or simplify that a traditional broker-dealer may Intermediaries, Reporting and compliance and reporting requirements provide). Registered brokers and recordkeeping requirements, Securities. funding portals will engage in similar for small issuers. As noted above, we 17 CFR Parts 232 and 239 have made significant revisions to the activities related to crowdfunding and final rules to address commenters’ must comply with the adopted rules. Reporting and recordkeeping concerns about compliance and The effective date for the registration requirements, Securities. provisions for funding portals will allow reporting burdens faced by issuers, 17 CFR Part 240 especially small issuers. With respect to funding portals to be in a position to using performance rather than design engage in crowdfunding at the same Brokers, Confidential business standards, we used performance time as registered brokers once the rest information, Fraud, Reporting and standards to the extent appropriate of the rules become effective. These recordkeeping requirements, Securities. under the statute. For example, issuers effective dates are designed to 17 CFR Part 249 have the flexibility to customize the accommodate competitiveness concerns presentation of certain disclosures in related to funding portals’ and Brokers, Reporting and recordkeeping their offering statements.1725 We also registered broker dealers’ abilities to requirements, Securities. considered whether there should be an begin crowdfunding concurrently. 17 CFR Part 269 exemption from coverage of the rule, or While registered broker-dealers may Reporting and recordkeeping any part of the rule, for small issuers. perform services that a funding portal is requirements, Securities, Trusts and However, because the rules have been prohibited from performing, the Trustees. designed to implement crowdfunding, Exchange Act and rules thereunder, as which focuses on capital formation by well as SRO rules, already govern those 17 CFR Part 270 issuers that are small entities, while at activities. Therefore, we believe that the Confidential business information, the same time provide appropriate adopted rules are appropriate and Fraud, Investment companies, Life investor protections, we do not believe properly tailored for the permissible insurance, Reporting and recordkeeping that small issuers should be exempt, in activities of all brokers and funding requirements, Securities. whole or in part, from the proposed portals. In accordance with the foregoing, title rules. We also considered whether, for small 17, chapter II of the Code of Federal 2. Intermediaries brokers or small funding portals, to Regulations is amended as follows: establish different compliance, reporting In response to comments, we have or timing requirements, or whether to PART 200—ORGANIZATION; made a number of changes from the clarify, consolidate or simplify those CONDUCT AND ETHICS; AND proposal with respect to intermediaries requirements in our rules. While the INFORMATION AND REQUESTS that will help to alleviate the final rules are based in large part on compliance burdens faced by small existing compliance requirements Subpart A—Organization and Program entities. Most significantly, and in applicable to registered brokers to the Management response to commenters’ concerns about extent they are applicable to activities the application of Section 4A(c) ■ 1. The authority citation for Part 200, permitted for funding portals, we do not liability,1726 as discussed above, Rule Subpart A, continues to read, in part as believe we should establish different 402(b)(1) has been modified from the follows: requirements for small entities (whether proposal to include a safe harbor that registered brokers or funding portals) Authority: 15 U.S.C. 77c, 77o, 77s, 77z– provides a funding portal the ability to that engage in crowdfunding because 3, 77sss, 78d, 78d–1, 78d–2, 78o–4, 78w, determine whether and under what 78ll(d), 78mm, 80a–37, 80b–11, 7202, and such activities are limited in scope and, terms to allow an issuer to offer and sell 7211 et seq., unless otherwise noted. as such, the adopted rules are tailored securities in reliance on Section 4(a)(6) to that more limited activity. * * * * * of the Securities Act through its ■ 2. Amend § 200.30–1 by: platform; provided that a funding portal VI. Statutory Authority ■ a. Redesignating paragraphs (d), (e), otherwise complies with Regulation (f), (g), (h), (i), (j) and (k) as paragraphs Crowdfunding. This change is expected We are adopting the rules and forms (e), (f), (g), (h), (i), (j), (k) and (l), to allow intermediaries, including small contained in this document under the respectively; and entities, to reduce their exposure to authority set forth in the Securities Act ■ b. Adding new paragraph (d). such liability by denying access to (15 U.S.C. 77a et seq.), particularly, The addition reads as follows: issuers that present risk of fraud or other Sections 4(a)(6), 4A, 19 and 28 thereof; investor protection concerns. In the Exchange Act (15 U.S.C. 78a et seq.), § 200.30–1 Delegation of authority to addition, in a change from the proposed particularly, Sections 3(b), 3(h), 10(b), Director of Division of Corporation Finance. 15, 17, 23(a) and 36 thereof; and Pub. L. * * * * * 1725 See Section II.B.3. 112–106, secs. 301–305, 126 Stat. 306 (d) With respect to the Securities Act 1726 See, e.g., SBA Office of Advocacy Letter. (2012). of 1933 (15 U.S.C. 77a et seq.) and

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§§ 227.100 through 227.503 of this successor may, within 30 days after the (ii) Each nonresident funding portal chapter, to authorize the granting of succession, amend the registration of registered or applying for registration applications under § 227.503(b)(2) of the predecessor on Form Funding Portal pursuant to this section shall, at the this chapter upon the showing of good (§ 249.2000 of this chapter) to reflect time of filing its application on Form cause that it is not necessary under the these changes. Funding Portal (§ 249.2000 of this circumstances that the exemption under (d) Withdrawal. A funding portal chapter), furnish to the Commission the Regulation Crowdfunding be denied. must promptly file a withdrawal of name and address of its United States * * * * * registration on Form Funding Portal agent for service of process on Schedule (§ 249.2000 of this chapter) in ■ 3. Effective January 29, 2016, part 227 C to the Form. accordance with the instructions on the (iii) Any change of a nonresident is added to read as follows: form upon ceasing to operate as a funding portal’s agent for service of PART 227—REGULATION funding portal. Withdrawal will be process and any change of name or CROWDFUNDING, GENERAL RULES effective on the later of 30 days after address of a nonresident funding AND REGULATIONS receipt by the Commission (after the portal’s existing agent for service of funding portal is no longer operational), process shall be communicated Authority: 15 U.S.C. 77d, 77d–1, 77s, 78c, or within such longer period of time as promptly to the Commission through 78o, 78q, 78w, 78mm, and Pub. L. 112–106, to which the funding portal consents or amendment of the Schedule C to Form secs. 301–305, 126 Stat. 306 (2012). which the Commission by order may Funding Portal (§ 249.2000 of this determine as necessary or appropriate in chapter). § 227.400 Registration of funding portals. the public interest or for the protection (iv) Each nonresident funding portal (a) Registration. A funding portal of investors. must promptly appoint a successor must register with the Commission, by (e) Applications and reports. The agent for service of process if the filing a complete Form Funding Portal applications and reports provided for in nonresident funding portal discharges (§ 249.2000 of this chapter) in this section shall be considered filed its identified agent for service of process accordance with the instructions on the when a complete Form Funding Portal or if its agent for service of process is form, and become a member of a (§ 249.2000 of this chapter) is submitted unwilling or unable to accept service on national securities association registered with the Commission. Duplicate behalf of the nonresident funding portal. under section 15A of the Exchange Act originals of the applications and reports (v) Each nonresident funding portal (15 U.S.C. 78o–3). The registration will provided for in this section must be must maintain, as part of its books and be effective the later of: filed with surveillance personnel records, the written consent and power (1) Thirty calendar days after the date designated by any registered national of attorney identified in paragraph that the registration is received by the securities association of which the (f)(2)(i) of this section for at least three Commission; or funding portal is a member. years after the agreement is terminated. (2) The date the funding portal is (f) Nonresident funding portals. (3) Access to books and records; approved for membership by a national Registration pursuant to this section by inspections and examinations—(i) securities association registered under a nonresident funding portal shall be Certification and opinion of counsel. section 15A of the Exchange Act (15 conditioned upon there being an Any nonresident funding portal U.S.C. 78o–3). information sharing arrangement in applying for registration pursuant to this (b) Amendments to registration. A place between the Commission and the section shall: funding portal must file an amendment competent regulator in the jurisdiction (A) Certify on Schedule C to Form to Form Funding Portal (§ 249.2000 of under the laws of which the nonresident Funding Portal (§ 249.2000 of this this chapter) within 30 days of any of funding portal is organized or where it chapter) that the nonresident funding the information previously submitted on has its principal place of business, that portal can, as a matter of law, and will Form Funding Portal becoming is applicable to the nonresident funding provide the Commission and any inaccurate for any reason. portal. registered national securities association (c) Successor registration. (1) If a (1) Definition. For purposes of this of which it becomes a member with funding portal succeeds to and section, the term nonresident funding prompt access to the books and records continues the business of a registered portal shall mean a funding portal of such nonresident funding portal and funding portal, the registration of the incorporated in or organized under the can, as a matter of law, and will submit predecessor will remain effective as the laws of a jurisdiction outside of the to onsite inspection and examination by registration of the successor if the United States or its territories, or having the Commission and any registered successor, within 30 days after such its principal place of business in any national securities association of which succession, files a registration on Form place not in the United States or its it becomes a member; and Funding Portal (§ 249.2000 of this territories. (B) Provide an opinion of counsel that chapter) and the predecessor files a (2) Power of attorney. (i) Each the nonresident funding portal can, as a withdrawal on Form Funding Portal; nonresident funding portal registered or matter of law, provide the Commission provided, however, that the registration applying for registration pursuant to this and any registered national securities of the predecessor funding portal will be section shall obtain a written consent association of which it becomes a deemed withdrawn 45 days after and power of attorney appointing an member with prompt access to the registration on Form Funding Portal is agent in the United States, other than books and records of such nonresident filed by the successor. the Commission or a Commission funding portal and can, as a matter of (2) Notwithstanding paragraph (c)(1) member, official or employee, upon law, submit to onsite inspection and of this section, if a funding portal whom may be served any process, examination by the Commission and succeeds to and continues the business pleadings or other papers in any action any registered national securities of a registered funding portal and the under the federal securities laws. This association of which it becomes a succession is based solely on a change consent and power of attorney must be member. of the predecessor’s date or state of signed by the nonresident funding (ii) Amendments. The nonresident incorporation, form of organization, or portal and the named agent(s) for funding portal shall re-certify, on composition of a partnership, the service of process. Schedule C to Form Funding Portal

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(§ 249.2000 of this chapter), within 90 Subpart A—General purchasing securities in the issuer’s days after any changes in the legal or offering. regulatory framework that would impact § 227.100 Crowdfunding exemption and (3) The transaction is conducted requirements. the nonresident funding portal’s ability through an intermediary that complies to provide, or the manner in which it (a) Exemption. An issuer may offer or with the requirements in section 4A(a) sell securities in reliance on section provides, the Commission, or any of the Securities Act (15 U.S.C. 77d– 4(a)(6) of the Securities Act of 1933 (the registered national securities association 1(a)) and the related requirements in ‘‘Securities Act’’) (15 U.S.C. 77d(a)(6)), of which it is a member, with prompt this part, and the transaction is provided that: conducted exclusively through the access to its books and records or that (1) The aggregate amount of securities would impact the Commission’s or such intermediary’s platform; and sold to all investors by the issuer in Instruction to paragraph (a)(3). An registered national securities reliance on section 4(a)(6) of the association’s ability to inspect and issuer shall not conduct an offering or Securities Act (15 U.S.C. 77d(a)(6)) concurrent offerings in reliance on examine the nonresident funding portal. during the 12-month period preceding section 4(a)(6) of the Securities Act of The re-certification shall be the date of such offer or sale, including 1933 (15 U.S.C. 77d(a)(6)) using more accompanied by a revised opinion of the securities offered in such than one intermediary. counsel describing how, as a matter of transaction, shall not exceed $1,000,000; (4) The issuer complies with the (2) The aggregate amount of securities law, the nonresident funding portal can requirements in section 4A(b) of the sold to any investor across all issuers in continue to meet its obligations under Securities Act (15 U.S.C. 77d–1(b)) and reliance on section 4(a)(6) of the paragraphs (f)(3)(i)(A) and (B) of this the related requirements in this part; Securities Act (15 U.S.C. 77d(a)(6)) section. provided, however, that the failure to during the 12-month period preceding comply with §§ 227.202, 227.203(a)(3) ■ 4. Effective May 16, 2016, part 227 is the date of such transaction, including and 227.203(b) shall not prevent an revised to read as follows: the securities sold to such investor in issuer from relying on the exemption such transaction, shall not exceed: PART 227—REGULATION (i) The greater of $2,000 or 5 percent provided by section 4(a)(6) of the CROWDFUNDING, GENERAL RULES of the lesser of the investor’s annual Securities Act (15 U.S.C. 77d(a)(6)). AND REGULATIONS income or net worth if either the (b) Applicability. The crowdfunding investor’s annual income or net worth is exemption shall not apply to Subpart A—General less than $100,000; or transactions involving the offer or sale Sec. (ii) 10 percent of the lesser of the of securities by any issuer that: 227.100 Crowdfunding exemption and investor’s annual income or net worth, (1) Is not organized under, and subject requirements. not to exceed an amount sold of to, the laws of a State or territory of the United States or the District of Subpart B—Requirements for Issuers $100,000, if both the investor’s annual income and net worth are equal to or Columbia; 227.201 Disclosure requirements. more than $100,000; (2) Is subject to the requirement to file 227.202 Ongoing reporting requirements. Instruction 1 to paragraph (a)(2). To reports pursuant to section 13 or section 227.203 Filing requirements and form. determine the investment limit for a 15(d) of the Securities Exchange Act of 227.204 Advertising. natural person, the person’s annual 1934 (the ‘‘Exchange Act’’) (15 U.S.C. 227.205 Promoter compensation. income and net worth shall be 78m or 78o(d)); Subpart C—Requirements for calculated as those values are calculated (3) Is an investment company, as Intermediaries for purposes of determining accredited defined in section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3), 227.300 Intermediaries. investor status in accordance with or is excluded from the definition of 227.301 Measures to reduce risk of fraud. § 230.501 of this chapter. 227.302 Account opening. Instruction 2 to paragraph (a)(2). A investment company by section 3(b) or 227.303 Requirements with respect to person’s annual income and net worth section 3(c) of that Act (15 U.S.C. 80a– transactions. may be calculated jointly with that 3(b) or 80a–3(c)); 227.304 Completion of offerings, person’s spouse; however, when such a (4) Is not eligible to offer or sell cancellations and reconfirmations. joint calculation is used, the aggregate securities in reliance on section 4(a)(6) 227.305 Payments to third parties. investment of the investor spouses may of the Securities Act (15 U.S.C. not exceed the limit that would apply to 77d(a)(6)) as a result of a Subpart D—Funding Portal Regulation an individual investor at that income or disqualification as specified in 227.400 Registration of funding portals. net worth level. § 227.503(a); 227.401 Exemption. Instruction 3 to paragraph (a)(2). An (5) Has sold securities in reliance on 227.402 Conditional safe harbor. issuer offering and selling securities in section 4(a)(6) of the Securities Act (15 227.403 Compliance. reliance on section 4(a)(6) of the U.S.C. 77d(a)(6)) and has not filed with 227.404 Records to be made and kept by Securities Act (15 U.S.C. 77d(a)(6)) may the Commission and provided to funding portals. rely on the efforts of an intermediary investors, to the extent required, the Subpart E—Miscellaneous Provisions required by § 227.303(b) to ensure that ongoing annual reports required by this the aggregate amount of securities part during the two years immediately 227.501 Restrictions on resales. purchased by an investor in offerings preceding the filing of the required 227.502 Insignificant deviations from a pursuant to section 4(a)(6) of the offering statement; or term, condition or requirement of this Securities Act will not cause the Instruction to paragraph (b)(5). An part (Regulation Crowdfunding). investor to exceed the limit set forth in issuer delinquent in its ongoing reports 227.503 Disqualification provisions. section 4(a)(6) of the Securities Act and can again rely on section 4(a)(6) of the Authority: 15 U.S.C. 77d, 77d–1, 77s, 78c, § 227.100(a)(2), provided that the issuer Securities Act (15 U.S.C. 77d(a)(6)) once 78o, 78q, 78w, 78mm, and Pub. L. 112–106, does not know that the investor has it has filed with the Commission and secs. 301–305, 126 Stat. 306 (2012). exceeded the investor limits or would provided to investors both of the annual exceed the investor limits as a result of reports required during the two years

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immediately preceding the filing of the (c) The name of each person, as of the deadline at least five business days prior required offering statement. most recent practicable date but no to such new offering deadline (absent a (6) Has no specific business plan or earlier than 120 days prior to the date material change that would require an has indicated that its business plan is to the offering statement or report is filed, extension of the offering and engage in a merger or acquisition with who is a beneficial owner of 20 percent reconfirmation of the investment an unidentified company or companies. or more of the issuer’s outstanding commitment); and (c) Issuer. For purposes of voting equity securities, calculated on (4) If an investor does not cancel an § 227.201(r), calculating aggregate the basis of voting power; investment commitment before the 48- amounts offered and sold in § 227.100(a) (d) A description of the business of hour period prior to the offering and § 227.201(t), and determining the issuer and the anticipated business deadline, the funds will be released to whether an issuer has previously sold plan of the issuer; the issuer upon closing of the offering securities in § 227.201(t)(3), issuer (e) The current number of employees and the investor will receive securities includes all entities controlled by or of the issuer; in exchange for his or her investment; under common control with the issuer (f) A discussion of the material factors (k) A statement that if an investor and any predecessors of the issuer. that make an investment in the issuer does not reconfirm his or her Instruction to paragraph (c). The term speculative or risky; investment commitment after a material control means the possession, direct or (g) The target offering amount and the change is made to the offering, the indirect, of the power to direct or cause deadline to reach the target offering investor’s investment commitment will the direction of the management and amount, including a statement that if be cancelled and the committed funds policies of the entity, whether through the sum of the investment commitments will be returned; the ownership of voting securities, by does not equal or exceed the target (l) The price to the public of the contract or otherwise. offering amount at the offering deadline, securities or the method for determining (d) Investor. For purposes of this part, no securities will be sold in the offering, the price, provided that, prior to any investor means any investor or any investment commitments will be sale of securities, each investor shall be potential investor, as the context cancelled and committed funds will be provided in writing the final price and requires. returned; all required disclosures; (h) Whether the issuer will accept (m) A description of the ownership Subpart B—Requirements for Issuers investments in excess of the target and capital structure of the issuer, offering amount and, if so, the including: § 227.201 Disclosure requirements. maximum amount that the issuer will (1) The terms of the securities being An issuer offering or selling securities accept and how oversubscriptions will offered and each other class of security in reliance on section 4(a)(6) of the be allocated, such as on a pro-rata, first of the issuer, including the number of Securities Act (15 U.S.C. 77d(a)(6)) and come-first served, or other basis; securities being offered and/or in accordance with section 4A of the (i) A description of the purpose and outstanding, whether or not such Securities Act (15 U.S.C. 77d–1) and intended use of the offering proceeds; securities have voting rights, any this part must file with the Commission Instruction to paragraph (i). An issuer limitations on such voting rights, how and provide to investors and the must provide a reasonably detailed the terms of the securities being offered relevant intermediary the following description of any intended use of may be modified and a summary of the information: proceeds, such that investors are differences between such securities and (a) The name, legal status (including provided with enough information to each other class of security of the issuer, its form of organization, jurisdiction in understand how the offering proceeds and how the rights of the securities which it is organized and date of will be used. If an issuer has identified being offered may be materially limited, organization), physical address and Web a range of possible uses, the issuer diluted or qualified by the rights of any site of the issuer; should identify and describe each other class of security of the issuer; (b) The names of the directors and probable use and the factors the issuer (2) A description of how the exercise officers (and any persons occupying a may consider in allocating proceeds of rights held by the principal similar status or performing a similar among the potential uses. If the issuer shareholders of the issuer could affect function) of the issuer, all positions and will accept proceeds in excess of the the purchasers of the securities being offices with the issuer held by such target offering amount, the issuer must offered; persons, the period of time in which describe the purpose, method for (3) The name and ownership level of such persons served in the position or allocating oversubscriptions, and each person, as of the most recent office and their business experience intended use of the excess proceeds practicable date but no earlier than 120 during the past three years, including: with similar specificity. days prior to the date the offering (1) Each person’s principal (j) A description of the process to statement or report is filed, who is the occupation and employment, including complete the transaction or cancel an beneficial owner of 20 percent or more whether any officer is employed by investment commitment, including a of the issuer’s outstanding voting equity another employer; and statement that: securities, calculated on the basis of (2) The name and principal business (1) Investors may cancel an voting power; of any corporation or other organization investment commitment until 48 hours (4) How the securities being offered in which such occupation and prior to the deadline identified in the are being valued, and examples of employment took place. issuer’s offering materials; methods for how such securities may be Instruction to paragraph (b). For (2) The intermediary will notify valued by the issuer in the future, purposes of this paragraph (b), the term investors when the target offering including during subsequent corporate officer means a president, vice amount has been met; actions; president, secretary, treasurer or (3) If an issuer reaches the target (5) The risks to purchasers of the principal financial officer, comptroller offering amount prior to the deadline securities relating to minority or principal accounting officer, and any identified in its offering materials, it ownership in the issuer and the risks person routinely performing similar may close the offering early if it associated with corporate actions functions. provides notice about the new offering including additional issuances of

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securities, issuer repurchases of securities, calculated on the basis of the proceeds from the offering will securities, a sale of the issuer or of voting power; affect the issuer’s liquidity, whether assets of the issuer or transactions with (3) If the issuer was incorporated or receiving these funds and any other related parties; and organized within the past three years, additional funds is necessary to the (6) A description of the restrictions on any promoter of the issuer; or viability of the business, and how transfer of the securities, as set forth in (4) Any member of the family of any quickly the issuer anticipates using its § 227.501; of the foregoing persons, which includes available cash. In addition, issuers (n) The name, SEC file number and a child, stepchild, grandchild, parent, should describe the other available Central Registration Depository (CRD) stepparent, grandparent, spouse or sources of capital to the business, such number (as applicable) of the spousal equivalent, sibling, mother-in- as lines of credit or required intermediary through which the offering law, father-in-law, son-in-law, daughter- contributions by shareholders. is being conducted; in-law, brother-in-law, or sister-in-law, Instruction 3 to paragraph (s). (o) A description of the intermediary’s and shall include adoptive References to the issuer in this financial interests in the issuer’s relationships. The term spousal paragraph and its instructions refer to transaction and in the issuer, including: equivalent means a cohabitant the issuer and its predecessors, if any. (1) The amount of compensation to be occupying a relationship generally (t) For offerings that, together with all paid to the intermediary, whether as a equivalent to that of a spouse. other amounts sold under section 4(a)(6) Instruction 1 to paragraph (r). For dollar amount or a percentage of the of the Securities Act (15 U.S.C. each transaction identified, disclose the offering amount, or a good faith estimate 77d(a)(6)) within the preceding 12- name of the specified person and state if the exact amount is not available at month period, have, in the aggregate, his or her relationship to the issuer, and the time of the filing, for conducting the the following target offering amounts: the nature and, where practicable, the (1) $100,000 or less, the amount of offering, including the amount of approximate amount of his or her total income, taxable income and total referral and any other fees associated interest in the transaction. The amount tax, or the equivalent line items, as with the offering, and of such interest shall be computed reported on the federal income tax (2) Any other direct or indirect without regard to the amount of the returns filed by the issuer for the most interest in the issuer held by the profit or loss involved in the recently completed year (if any), which intermediary, or any arrangement for the transaction. Where it is not practicable shall be certified by the principal intermediary to acquire such an interest; to state the approximate amount of the executive officer of the issuer to reflect (p) A description of the material terms interest, the approximate amount accurately the information reported on of any indebtedness of the issuer, involved in the transaction shall be the issuer’s federal income tax returns, including the amount, interest rate, disclosed. and financial statements of the issuer, maturity date and any other material Instruction 2 to paragraph (r). For which shall be certified by the principal terms; purposes of paragraph (r), a transaction executive officer of the issuer to be true (q) A description of exempt offerings includes, but is not limited to, any and complete in all material respects. If conducted within the past three years; financial transaction, arrangement or financial statements of the issuer are Instruction to paragraph (q). In relationship (including any available that have either been reviewed providing a description of any prior indebtedness or guarantee of or audited by a public accountant that exempt offerings, disclose: indebtedness) or any series of similar is independent of the issuer, the issuer (1) The date of the offering; transactions, arrangements or must provide those financial statements (2) The offering exemption relied relationships. instead and need not include the upon; (s) A discussion of the issuer’s information reported on the federal (3) The type of securities offered; and financial condition, including, to the income tax returns or the certifications (4) The amount of securities sold and extent material, liquidity, capital of the principal executive officer; the use of proceeds; resources and historical results of (2) More than $100,000, but not more (r) A description of any transaction operations; than $500,000, financial statements of since the beginning of the issuer’s last Instruction 1 to paragraph (s). The the issuer reviewed by a public fiscal year, or any currently proposed discussion must cover each period for accountant that is independent of the transaction, to which the issuer was or which financial statements of the issuer issuer. If financial statements of the is to be a party and the amount involved are provided. An issuer also must issuer are available that have been exceeds five percent of the aggregate include a discussion of any material audited by a public accountant that is amount of capital raised by the issuer in changes or trends known to independent of the issuer, the issuer reliance on section 4(a)(6) of the management in the financial condition must provide those financial statements Securities Act (15 U.S.C. 77d(a)(6)) and results of operations of the issuer instead and need not include the during the preceding 12-month period, subsequent to the period for which reviewed financial statements; and inclusive of the amount the issuer seeks financial statements are provided. (3) More than $500,000, financial to raise in the current offering under Instruction 2 to paragraph (s). For statements of the issuer audited by a section 4(a)(6) of the Securities Act, in issuers with no prior operating history, public accountant that is independent of which any of the following persons had the discussion should focus on financial the issuer; provided, however, that for or is to have a direct or indirect material milestones and operational, liquidity issuers that have not previously sold interest: and other challenges. For issuers with securities in reliance on section 4(a)(6) (1) Any director or officer of the an operating history, the discussion of the Securities Act (15 U.S.C. issuer; should focus on whether historical 77d(a)(6)), offerings that have a target (2) Any person who is, as of the most results and cash flows are representative offering amount of more than $500,000, recent practicable date but no earlier of what investors should expect in the but not more than $1,000,000, financial than 120 days prior to the date the future. Issuers should take into account statements of the issuer reviewed by a offering statement or report is filed, the the proceeds of the offering and any public accountant that is independent of beneficial owner of 20 percent or more other known or pending sources of the issuer. If financial statements of the of the issuer’s outstanding voting equity capital. Issuers also should discuss how issuer are available that have been

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audited by a public accountant that is accommodation must disclose it at the financial statements if the review report independent of the issuer, the issuer time the issuer files its offering includes modifications. must provide those financial statements statement and apply the election to all Instruction 9 to paragraph (t). instead and need not include the standards. Issuers electing not to use Financial statement audits shall be reviewed financial statements. this accommodation must forgo this conducted in accordance with either Instruction 1 to paragraph (t). To accommodation for all financial auditing standards issued by the determine the financial statements accounting standards and may not elect American Institute of Certified Public required under this paragraph (t), an to rely on this accommodation in any Accountants (referred to as U.S. issuer must aggregate amounts sold in future filings. Generally Accepted Auditing Standards) reliance on section 4(a)(6) of the Instruction 6 to paragraph (t). An or the standards of the Public Company Securities Act (15 U.S.C. 77d(a)(6)) issuer required to provide information Accounting Oversight Board. A signed within the preceding 12-month period from a tax return under paragraph (t)(1) audit report must accompany audited and the offering amount in the offering of this section before filing a tax return financial statements, and an issuer must for which disclosure is being provided. with the U.S. Internal Revenue Service notify the public accountant of the If the issuer will accept proceeds in for the most recently completed fiscal issuer’s intended use of the audit report excess of the target offering amount, the year may provide information from its in the offering. An issuer will not be in issuer must include the maximum tax return for the prior year (if any), compliance with the requirement to offering amount that the issuer will provided that the issuer provides provide audited financial statements if accept in the calculation to determine information from the tax return for the the audit report includes a qualified the financial statements required under most recently completed fiscal year opinion, an adverse opinion, or a this paragraph (t). when it is filed with the U.S. Internal disclaimer of opinion. Instruction 2 to paragraph (t). An Revenue Service (if the tax return is Instruction 10 to paragraph (t). To issuer may voluntarily meet the filed during the offering period). An qualify as a public accountant that is requirements of this paragraph (t) for a issuer that requested an extension from independent of the issuer for purposes higher aggregate target offering amount. the U.S. Internal Revenue Service would of this part, the accountant must satisfy Instruction 3 to paragraph (t). The not be required to provide information the independence standards of either: financial statements must be prepared from the tax return until the date the (i) 17 CFR 210.2–01 of this chapter, or in accordance with U.S. generally return is filed, if filed during the (ii) The American Institute of accepted accounting principles and offering period. If an issuer has not yet Certified Public Accountants. The include balance sheets, statements of filed a tax return and is not required to public accountant that audits or reviews comprehensive income, statements of file a tax return before the end of the the financial statements provided by an cash flows, statements of changes in offering period, then the tax return issuer must be: stockholders’ equity and notes to the information does not need to be (A) Duly registered and in good financial statements. If the financial provided. standing as a certified public accountant statements are not audited, they must be Instruction 7 to paragraph (t). An under the laws of the place of his or her labeled as ‘‘unaudited.’’ The financial issuer providing financial statements residence or principal office; or statements must cover the two most that are not audited or reviewed and tax (B) In good standing and entitled to recently completed fiscal years or the information as specified under practice as a public accountant under period(s) since inception, if shorter. paragraph (t)(1) of this section must the laws of his or her place of residence Instruction 4 to paragraph (t). For an have its principal executive officer or principal office. offering conducted in the first 120 days provide the following certification: Instruction 11 to paragraph (t). Except of a fiscal year, the financial statements I, [identify the certifying individual], as set forth in § 227.100(c), references to provided may be for the two fiscal years certify that: the issuer in this paragraph (t) and its prior to the issuer’s most recently (1) the financial statements of instructions (2) through (10) refer to the completed fiscal year; however, [identify the issuer] included in this issuer and its predecessors, if any. financial statements for the two most Form are true and complete in all (u) Any matters that would have recently completed fiscal years must be material respects; and triggered disqualification under provided if they are otherwise available. (2) the tax return information of § 227.503(a) but occurred before May 16, If more than 120 days have passed since [identify the issuer] included in this 2016. The failure to provide such the end of the issuer’s most recently Form reflects accurately the information disclosure shall not prevent an issuer completed fiscal year, the financial reported on the tax return for [identify from continuing to rely on the statements provided must be for the the issuer] filed for the fiscal year ended exemption provided by section 4(a)(6) of issuer’s two most recently completed [date of most recent tax return]. the Securities Act (15 U.S.C. 77d(a)(6)) fiscal years. If the 120th day falls on a [Signature and title]. if the issuer establishes that it did not Saturday, Sunday, or holiday, the next Instruction 8 to paragraph (t). know and, in the exercise of reasonable business day shall be considered the Financial statement reviews shall be care, could not have known of the 120th day for purposes of determining conducted in accordance with the existence of the undisclosed matter or the age of the financial statements. Statements on Standards for Accounting matters; Instruction 5 to paragraph (t). An and Review Services issued by the Instruction to paragraph (u). An issuer may elect to delay complying Accounting and Review Services issuer will not be able to establish that with any new or revised financial Committee of the American Institute of it could not have known of a accounting standard that applies to Certified Public Accountants. A signed disqualification unless it has made companies that are not issuers (as review report must accompany the factual inquiry into whether any defined under section 2(a) of the reviewed financial statements, and an disqualifications exist. The nature and Sarbanes-Oxley Act of 2002 (15 U.S.C. issuer must notify the public accountant scope of the factual inquiry will vary 7201(a)) until the date that such of the issuer’s intended use of the based on the facts and circumstances companies are required to comply with review report in the offering. An issuer concerning, among other things, the such new or revised accounting will not be in compliance with the issuer and the other offering standard. Issuers electing this requirement to provide reviewed participants.

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(v) Updates regarding the progress of have its principal executive officer updates, the issuer shall check the box the issuer in meeting the target offering provide the following certification: indicating that investors must reconfirm amount, to be provided in accordance I, [identify the certifying individual], an investment commitment within five with § 227.203; certify that the financial statements of business days or the investor’s (w) Where on the issuer’s Web site [identify the issuer] included in this commitment will be considered investors will be able to find the issuer’s Form are true and complete in all cancelled. annual report, and the date by which material respects. (3) Progress updates. (i) An issuer such report will be available on the [Signature and title]. must file with the Commission and issuer’s Web site; (b) An issuer must continue to comply provide to investors and the relevant (x) Whether the issuer or any of its with the ongoing reporting requirements intermediary a Form C: Progress Update predecessors previously failed to until one of the following occurs: (Form C–U) (§ 239.900 of this chapter) comply with the ongoing reporting (1) The issuer is required to file to disclose its progress in meeting the requirements of § 227.202; and reports under section 13(a) or section target offering amount no later than five (y) Any material information 15(d) of the Exchange Act (15 U.S.C. business days after each of the dates necessary in order to make the 78m(a) or 78o(d)); when the issuer reaches 50 percent and statements made, in light of the (2) The issuer has filed, since its most 100 percent of the target offering circumstances under which they were recent sale of securities pursuant to this amount. made, not misleading. part, at least one annual report pursuant (ii) If the issuer will accept proceeds Instruction to § 227.201. If disclosure to this section and has fewer than 300 in excess of the target offering amount, provided pursuant to any paragraph of holders of record; the issuer must file with the this section also satisfies the (3) The issuer has filed, since its most Commission and provide to investors requirements of one or more other recent sale of securities pursuant to this and the relevant intermediary, no later paragraphs of this section, it is not part, the annual reports required than five business days after the offering necessary to repeat the disclosure. pursuant to this section for at least the deadline, a final Form C–U (§ 239.900 of Instead of repeating information, an three most recent years and has total this chapter) to disclose the total issuer may include a cross-reference to assets that do not exceed $10,000,000; amount of securities sold in the offering. disclosure contained elsewhere in the (4) The issuer or another party (iii) The requirements of paragraphs offering statement or report, including repurchases all of the securities issued (a)(3)(i) and (ii) of this section shall not to information in the financial in reliance on section 4(a)(6) of the apply to an issuer if the relevant statements. Securities Act (15 U.S.C. 77d(a)(6)), intermediary makes publicly available including any payment in full of debt on the intermediary’s platform frequent § 227.202 Ongoing reporting requirements. securities or any complete redemption updates regarding the progress of the (a) An issuer that has offered and sold of redeemable securities; or issuer in meeting the target offering securities in reliance on section 4(a)(6) (5) The issuer liquidates or dissolves amount; however, the issuer must still of the Securities Act (15 U.S.C. its business in accordance with state file a Form C–U (§ 239.900 of this 77d(a)(6)) and in accordance with law. chapter) to disclose the total amount of section 4A of the Securities Act (15 securities sold in the offering no later U.S.C. 77d–1) and this part must file § 227.203 Filing requirements and form. than five business days after the offering with the Commission and post on the (a) Form C—Offering statement and deadline. issuer’s Web site an annual report along amendments (§ 239.900 of this chapter). Instruction to paragraph (a)(3). If with the financial statements of the (1) Offering statement. An issuer multiple Forms C–U (§ 239.900 of this issuer certified by the principal offering or selling securities in reliance chapter) are triggered within the same executive officer of the issuer to be true on section 4(a)(6) of the Securities Act five business day period, the issuer may and complete in all material respects (15 U.S.C. 77d(a)(6)) and in accordance consolidate such progress updates into and a description of the financial with section 4A of the Securities Act (15 one Form C–U, so long as the Form C– condition of the issuer as described in U.S.C. 77d-1) and this part must file U discloses the most recent threshold § 227.201(s). If, however, an issuer has with the Commission and provide to that was met and the Form C–U is filed available financial statements that have investors and the relevant intermediary with the Commission and provided to either been reviewed or audited by a a Form C: Offering Statement (Form C) investors and the relevant intermediary public accountant that is independent of (§ 239.900 of this chapter) prior to the by the day on which the first progress the issuer, those financial statements commencement of the offering of update is due. must be provided and the certification securities. The Form C must include the Instruction 1 to paragraph (a). An by the principal executive officer will information required by § 227.201. issuer would satisfy the requirement to not be required. The annual report also (2) Amendments to offering statement. provide to the relevant intermediary the must include the disclosure required by An issuer must file with the information required by this paragraph paragraphs (a), (b), (c), (d), (e), (f), (m), Commission and provide to investors (a) if it provides to the relevant (p), (q), (r), and (x) of § 227.201. The and the relevant intermediary an intermediary a copy of the disclosures report must be filed in accordance with amendment to the offering statement filed with the Commission. the requirements of § 227.203 and Form filed on Form C (§ 239.900 of this Instruction 2 to paragraph (a). An C (§ 239.900 of this chapter) and no later chapter) to disclose any material issuer would satisfy the requirement to than 120 days after the end of the fiscal changes, additions or updates to provide to investors the information year covered by the report. information that it provides to investors required by this paragraph (a) if the Instruction 1 to paragraph (a). through the intermediary’s platform, for issuer refers investors to the information Instructions (3), (8), (9), (10), and (11) to any offering that has not yet been on the intermediary’s platform by means paragraph (t) of § 227.201 shall apply for completed or terminated. The of a posting on the issuer’s Web site or purposes of this section. amendment must be filed on Form C: by email. Instruction 2 to paragraph (a). An Amendment (Form C/A) (§ 239.900 of (b) Form C: Annual report and issuer providing financial statements this chapter), and if the amendment termination of reporting (§ 239.900 of that are not audited or reviewed must reflects material changes, additions or this chapter). (1) Annual reports. An

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issuer that has sold securities in reliance number and Web site of the issuer, the Subpart C—Requirements for on section 4(a)(6) of the Securities Act email address of a representative of the Intermediaries (15 U.S.C. 77d(a)(6)) and in accordance issuer and a brief description of the with section 4A of the Securities Act (15 business of the issuer. § 227.300 Intermediaries. U.S.C. 77d–1) and this part must file an (c) Notwithstanding the prohibition (a) Requirements. A person acting as annual report on Form C: Annual Report on advertising any of the terms of the an intermediary in a transaction (Form C–AR) (§ 239.900 of this chapter) offering, an issuer, and persons acting involving the offer or sale of securities with the Commission no later than 120 on behalf of the issuer, may in reliance on section 4(a)(6) of the days after the end of the fiscal year communicate with investors and Securities Act (15 U.S.C. 77d(a)(6)) covered by the report. The annual report potential investors about the terms of must: shall include the information required the offering through communication (1) Be registered with the Commission by § 227.202(a). channels provided by the intermediary as a broker under section 15(b) of the (2) Amendments to annual report. An on the intermediary’s platform, Exchange Act (15 U.S.C. 78o(b)) or as a issuer must file with the Commission an provided that an issuer identifies itself funding portal in accordance with the amendment to the annual report filed on as the issuer in all communications. requirements of § 227.400; and Form C: Annual Report (Form C–AR) Persons acting on behalf of the issuer (2) Be a member a national securities (§ 239.900 of this chapter) to make a must identify their affiliation with the association registered under section 15A material change to the previously filed issuer in all communications on the of the Exchange Act (15 U.S.C. 78o–3). annual report as soon as practicable intermediary’s platform. (b) Financial interests. Any director, after discovery of the need for the Instruction to § 227.204. For purposes officer or partner of an intermediary, or material change. The amendment must of this section, terms of the offering any person occupying a similar status or be filed on Form C: Amendment to means the amount of securities offered, performing a similar function, may not Annual Report (Form C–AR/A) the nature of the securities, the price of have a financial interest in an issuer that (§ 239.900 of this chapter). the securities and the closing date of the is offering or selling securities in (3) Termination of reporting. An offering period. reliance on section 4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6)) issuer eligible to terminate its obligation § 227.205 Promoter compensation. to file annual reports with the through the intermediary’s platform, or (a) An issuer, or person acting on Commission pursuant to § 227.202(b) receive a financial interest in an issuer behalf of the issuer, shall be permitted must file with the Commission, within as compensation for the services to compensate or commit to five business days from the date on provided to or for the benefit of the compensate, directly or indirectly, any which the issuer becomes eligible to issuer in connection with the offer or person to promote the issuer’s offerings terminate its reporting obligation, Form sale of such securities. An intermediary made in reliance on section 4(a)(6) of C: Termination of Reporting (Form C– may not have a financial interest in an the Securities Act (15 U.S.C. 77d(a)(6)) TR) (§ 239.900 of this chapter) to advise issuer that is offering or selling through communication channels investors that the issuer will cease securities in reliance on section 4(a)(6) provided by an intermediary on the reporting pursuant to this part. of the Securities Act (15 U.S.C. intermediary’s platform, but only if the 77d(a)(6)) through the intermediary’s § 227.204 Advertising. issuer or person acting on behalf of the platform unless: (a) An issuer may not, directly or issuer, takes reasonable steps to ensure (1) The intermediary receives the indirectly, advertise the terms of an that the person promoting the offering financial interest from the issuer as offering made in reliance on section clearly discloses the receipt, past or compensation for the services provided 4(a)(6) of the Securities Act (15 U.S.C. prospective, of such compensation with to, or for the benefit of, the issuer in 77d(a)(6)), except for notices that meet any such communication. connection with the offer or sale of the the requirements of paragraph (b) of this Instruction to paragraph (a). The securities being offered or sold in section. disclosure required by this paragraph is reliance on section 4(a)(6) of the Instruction to paragraph (a). For required, with each communication, for Securities Act (15 U.S.C. 77d(a)(6)) purposes of this paragraph (a), issuer persons engaging in promotional through the intermediary’s platform; includes persons acting on behalf of the activities on behalf of the issuer through and issuer. the communication channels provided (2) the financial interest consists of (b) A notice may advertise any of the by the intermediary, regardless of securities of the same class and having terms of an issuer’s offering made in whether or not the compensation they the same terms, conditions and rights as reliance on section 4(a)(6) of the receive is specifically for the the securities being offered or sold in Securities Act (15 U.S.C. 77d(a)(6)) if it promotional activities. This includes reliance on section 4(a)(6) of the directs investors to the intermediary’s persons hired specifically to promote Securities Act (15 U.S.C. 77d(a)(6)) platform and includes no more than the the offering as well as to persons who through the intermediary’s platform. For following information: are otherwise employed by the issuer or purposes of this paragraph, a financial (1) A statement that the issuer is who undertake promotional activities interest in an issuer means a direct or conducting an offering pursuant to on behalf of the issuer. indirect ownership of, or economic section 4(a)(6) of the Securities Act (15 (b) Other than as set forth in interest in, any class of the issuer’s U.S.C. 77d(a)(6)), the name of the paragraph (a) of this section, an issuer securities. intermediary through which the offering or person acting on behalf of the issuer (c) Definitions. For purposes of this is being conducted and a link directing shall not compensate or commit to part: the potential investor to the compensate, directly or indirectly, any (1) Associated person of a funding intermediary’s platform; person to promote the issuer’s offerings portal or person associated with a (2) The terms of the offering; and made in reliance on section 4(a)(6) of funding portal means any partner, (3) Factual information about the legal the Securities Act (15 U.S.C. 77d(a)(6)), officer, director or manager of a funding identity and business location of the unless such promotion is limited to portal (or any person occupying a issuer, limited to the name of the issuer notices permitted by, and in compliance similar status or performing similar of the security, the address, phone with, § 227.204. functions), any person directly or

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indirectly controlling or controlled by rely on the representations of the issuer an investment commitment in a such funding portal, or any employee of concerning compliance with these transaction involving the offer or sale of a funding portal, except that any person requirements unless the intermediary securities in reliance on section 4(a)(6) associated with a funding portal whose has reason to question the reliability of of the Securities Act (15 U.S.C. functions are solely clerical or those representations; 77d(a)(6)) until the investor has opened ministerial shall not be included in the (b) Have a reasonable basis for an account with the intermediary and meaning of such term for purposes of believing that the issuer has established the intermediary has obtained from the section 15(b) of the Exchange Act (15 means to keep accurate records of the investor consent to electronic delivery U.S.C. 78o(b)) (other than paragraphs (4) holders of the securities it would offer of materials. and (6) of section 15(b) of the Exchange and sell through the intermediary’s (2) An intermediary must provide all Act). platform, provided that an intermediary information that is required to be (2) Funding portal means a broker may rely on the representations of the provided by the intermediary under acting as an intermediary in a issuer concerning its means of subpart C of this part (§§ 227.300 transaction involving the offer or sale of recordkeeping unless the intermediary through 227.305), including, but not securities in reliance on section 4(a)(6) has reason to question the reliability of limited to, educational materials, of the Securities Act (15 U.S.C. those representations. An intermediary notices and confirmations, through 77d(a)(6)), that does not: will be deemed to have satisfied this electronic means. Unless otherwise (i) Offer investment advice or requirement if the issuer has engaged indicated in the relevant rule of subpart recommendations; the services of a transfer agent that is C of this part, in satisfying this (ii) Solicit purchases, sales or offers to registered under Section 17A of the requirement, an intermediary must buy the securities displayed on its Exchange Act (15 U.S.C. 78q–1(c)). provide the information through an platform; (c) Deny access to its platform to an electronic message that contains the (iii) Compensate employees, agents, or issuer if the intermediary: information, through an electronic other persons for such solicitation or (1) Has a reasonable basis for message that includes a specific link to based on the sale of securities displayed believing that the issuer or any of its the information as posted on or referenced on its platform; or officers, directors (or any person intermediary’s platform, or through an (iv) Hold, manage, possess, or occupying a similar status or performing electronic message that provides notice otherwise handle investor funds or a similar function) or beneficial owners of what the information is and that it is securities. of 20 percent or more of the issuer’s located on the intermediary’s platform (3) Intermediary means a broker outstanding voting equity securities, or on the issuer’s Web site. Electronic registered under section 15(b) of the calculated on the basis of voting power, messages include, but are not limited to, Exchange Act (15 U.S.C. 78o(b)) or a is subject to a disqualification under email, social media messages, instant funding portal registered under § 227.503. In satisfying this requirement, messages or other electronic media § 227.400 and includes, where relevant, an intermediary must, at a minimum, messages. an associated person of the registered conduct a background and securities (b) Educational materials. (1) In broker or registered funding portal. enforcement regulatory history check on connection with establishing an account (4) Platform means a program or each issuer whose securities are to be for an investor, an intermediary must application accessible via the Internet or offered by the intermediary and on each deliver educational materials to such other similar electronic communication officer, director or beneficial owner of investor that explain in plain language medium through which a registered 20 percent or more of the issuer’s and are otherwise designed to broker or a registered funding portal acts outstanding voting equity securities, communicate effectively and accurately: as an intermediary in a transaction calculated on the basis of voting power. (i) The process for the offer, purchase (2) Has a reasonable basis for involving the offer or sale of securities and issuance of securities through the believing that the issuer or the offering in reliance on section 4(a)(6) of the intermediary and the risks associated presents the potential for fraud or Securities Act (15 U.S.C. 77d(a)(6)). with purchasing securities offered and Instruction to paragraph (c)(4). An otherwise raises concerns about investor sold in reliance on section 4(a)(6) of the intermediary through which a protection. In satisfying this Securities Act (15 U.S.C. 77d(a)(6)); crowdfunding transaction is conducted requirement, an intermediary must deny (ii) The types of securities offered and may engage in back office or other access if it reasonably believes that it is sold in reliance on section 4(a)(6) of the administrative functions other than on unable to adequately or effectively Securities Act (15 U.S.C. 77d(a)(6)) the intermediary’s platform. assess the risk of fraud of the issuer or available for purchase on the its potential offering. In addition, if an intermediary’s platform and the risks § 227.301 Measures to reduce risk of intermediary becomes aware of fraud. associated with each type of security, information after it has granted access including the risk of having limited An intermediary in a transaction that causes it to reasonably believe that voting power as a result of dilution; involving the offer or sale of securities the issuer or the offering presents the in reliance on section 4(a)(6) of the potential for fraud or otherwise raises (iii) The restrictions on the resale of Securities Act (15 U.S.C. 77d(a)(6)) concerns about investor protection, the a security offered and sold in reliance must: intermediary must promptly remove the on section 4(a)(6) of the Securities Act (a) Have a reasonable basis for offering from its platform, cancel the (15 U.S.C. 77d(a)(6)); believing that an issuer seeking to offer offering, and return (or, for funding (iv) The types of information that an and sell securities in reliance on section portals, direct the return of) any funds issuer is required to provide under 4(a)(6) of the Securities Act (15 U.S.C. that have been committed by investors § 227.202, the frequency of the delivery 77d(a)(6)) through the intermediary’s in the offering. of that information and the possibility platform complies with the that those obligations may terminate in requirements in section 4A(b) of the Act § 227.302 Account opening. the future; (15 U.S.C. 77d–1(b)) and the related (a) Accounts and electronic delivery. (v) The limitations on the amounts an requirements in this part. In satisfying (1) No intermediary or associated investor may invest pursuant to this requirement, an intermediary may person of an intermediary may accept § 227.100(a)(2);

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(vi) The limitations on an investor’s (1) This information must be made involves risk, and the investor should right to cancel an investment publicly available on the intermediary’s not invest any funds in an offering made commitment and the circumstances in platform, in a manner that reasonably in reliance on section 4(a)(6) of the which an investment commitment may permits a person accessing the platform Securities Act unless he or she can be cancelled by the issuer; to save, download, or otherwise store afford to lose the entire amount of his (vii) The need for the investor to the information; or her investment. consider whether investing in a security (2) This information must be made (c) Communication channels. An offered and sold in reliance on section publicly available on the intermediary’s intermediary must provide on its 4(a)(6) of the Securities Act (15 U.S.C. platform for a minimum of 21 days platform communication channels by 77d(a)(6)) is appropriate for that before any securities are sold in the which persons can communicate with investor; offering, during which time the one another and with representatives of (viii) That following completion of an intermediary may accept investment the issuer about offerings made offering conducted through the commitments; available on the intermediary’s intermediary, there may or may not be (3) This information, including any platform, provided: any ongoing relationship between the additional information provided by the (1) If the intermediary is a funding issuer and intermediary; and issuer, must remain publicly available portal, it does not participate in these (ix) That under certain circumstances on the intermediary’s platform until the communications other than to establish an issuer may cease to publish annual offer and sale of securities in reliance on guidelines for communication and reports and, therefore, an investor may section 4(a)(6) of the Securities Act (15 remove abusive or potentially not continually have current financial U.S.C. 77d(a)(6)) is completed or fraudulent communications; information about the issuer. cancelled; and (2) The intermediary permits public (2) An intermediary must make the (4) An intermediary may not require access to view the discussions made in most current version of its educational any person to establish an account with the communication channels; material available on its platform at all the intermediary to access this (3) The intermediary restricts posting times and, if at any time, the information. of comments in the communication intermediary makes a material revision (b) Investor qualification. Each time channels to those persons who have to its educational materials, it must before accepting any investment opened an account with the make the revised educational materials commitment (including any additional intermediary on its platform; and available to all investors before investment commitment from the same (4) The intermediary requires that any accepting any additional investment person), an intermediary must: person posting a comment in the commitments or effecting any further (1) Have a reasonable basis for communication channels clearly and transactions in securities offered and believing that the investor satisfies the prominently disclose with each posting sold in reliance on section 4(a)(6) of the investment limitations established by whether he or she is a founder or an Securities Act (15 U.S.C. 77d(a)(6)). section 4(a)(6)(B) of the Act (15 U.S.C. employee of an issuer engaging in (c) Promoters. In connection with 77d(a)(6)(B)) and this part. An promotional activities on behalf of the establishing an account for an investor, intermediary may rely on an investor’s issuer, or is otherwise compensated, an intermediary must inform the representations concerning compliance whether in the past or prospectively, to investor that any person who promotes with the investment limitation promote the issuer’s offering. an issuer’s offering for compensation, requirements concerning the investor’s (d) Notice of investment commitment. whether past or prospective, or who is annual income, net worth, and the An intermediary must promptly, upon a founder or an employee of an issuer amount of the investor’s other receipt of an investment commitment that engages in promotional activities on investments made pursuant to section from an investor, give or send to the behalf of the issuer on the 4(a)(6) of the Securities Act (15 U.S.C. investor a notification disclosing: intermediary’s platform, must clearly 77d(a)(6)) unless the intermediary has (1) The dollar amount of the disclose in all communications on the reason to question the reliability of the investment commitment; intermediary’s platform, respectively, representation. (2) The price of the securities, if the receipt of the compensation and that (2) Obtain from the investor: known; he or she is engaging in promotional (i) A representation that the investor (3) The name of the issuer; and activities on behalf of the issuer. has reviewed the intermediary’s (4) The date and time by which the (d) Compensation disclosure. When educational materials delivered investor may cancel the investment establishing an account for an investor, pursuant to § 227.302(b), understands commitment. an intermediary must clearly disclose that the entire amount of his or her (e) Maintenance and transmission of the manner in which the intermediary is investment may be lost, and is in a funds. (1) An intermediary that is a compensated in connection with financial condition to bear the loss of registered broker must comply with the offerings and sales of securities in the investment; and requirements of 17 CFR 240.15c2–4. reliance on section 4(a)(6) of the (ii) A questionnaire completed by the (2) An intermediary that is a funding Securities Act (15 U.S.C. 77d(a)(6)). investor demonstrating the investor’s portal must direct investors to transmit understanding that: the money or other consideration § 227.303 Requirements with respect to (A) There are restrictions on the directly to a qualified third party that transactions. investor’s ability to cancel an has agreed in writing to hold the funds (a) Issuer information. An investment commitment and obtain a for the benefit of, and to promptly intermediary in a transaction involving return of his or her investment; transmit or return the funds to, the the offer or sale of securities in reliance (B) It may be difficult for the investor persons entitled thereto in accordance on section 4(a)(6) of the Securities Act to resell securities acquired in reliance with paragraph (e)(3) of this section. For (15 U.S.C. 77d(a)(6)) must make on section 4(a)(6) of the Securities Act purposes of this subpart C (§§ 227.300 available to the Commission and to (15 U.S.C. 77d(a)(6)); and through 227.305), a qualified third party investors any information required to be (C) Investing in securities offered and means a: provided by the issuer of the securities sold in reliance on section 4(a)(6) of the (i) Registered broker or dealer that under §§ 227.201 and 227.203(a). Securities Act (15 U.S.C. 77d(a)(6)) carries customer or broker or dealer

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accounts and holds funds or securities (vi) The source, form and amount of of the material change and that the for those persons; or any remuneration received or to be investor’s investment commitment will (ii) Bank or credit union (where such received by the intermediary in be cancelled unless the investor credit union is insured by National connection with the transaction, reconfirms his or her investment Credit Union Administration) that has including any remuneration received or commitment within five business days agreed in writing either to hold the to be received by the intermediary from of receipt of the notice. If the investor funds in escrow for the persons who persons other than the issuer. fails to reconfirm his or her investment have the beneficial interests therein and (2) An intermediary satisfying the within those five business days, the to transmit or return such funds directly requirements of paragraph (f)(1) of this intermediary within five business days to the persons entitled thereto when so section is exempt from the requirements thereafter must: directed by the funding portal as of § 240.10b–10 of this chapter with (i) Give or send the investor a described in paragraph (e)(3) of this respect to a transaction in a security notification disclosing that the section, or to maintain a bank or credit offered and sold in reliance on section commitment was cancelled, the reason union account (or accounts) for the 4(a)(6) of the Securities Act (15 U.S.C. for the cancellation and the refund exclusive benefit of investors and the 77d(a)(6)). amount that the investor is expected to issuer. receive; and § 227.304 Completion of offerings, (ii) Direct the refund of investor (3) A funding portal that is an cancellations and reconfirmations. intermediary in a transaction involving funds. the offer or sale of securities in reliance (a) Generally. An investor may cancel (2) If material changes to the offering on section 4(a)(6) of the Securities Act an investment commitment for any or to the information provided by the (15 U.S.C. 77d(a)(6)) shall promptly reason until 48 hours prior to the issuer regarding the offering occur direct the qualified third party to: deadline identified in the issuer’s within five business days of the offering materials. During the 48 hours (i) Transmit funds from the qualified maximum number of days that an prior to such deadline, an investment third party to the issuer when the offering is to remain open, the offering commitment may not be cancelled aggregate amount of investment must be extended to allow for a period except as provided in paragraph (c) of commitments from all investors is equal of five business days for the investor to this section. to or greater than the target amount of reconfirm his or her investment. (b) Early completion of offering. If an the offering and the cancellation period (d) Return of funds if offering is not issuer reaches the target offering amount as set forth in § 227.304 has elapsed, completed. If an issuer does not prior to the deadline identified in its provided that in no event may the complete an offering, an intermediary offering materials pursuant to funding portal direct this transmission must within five business days: § 227.201(g), the issuer may close the of funds earlier than 21 days after the (1) Give or send each investor a offering on a date earlier than the date on which the intermediary makes notification of the cancellation, deadline identified in its offering publicly available on its platform the disclosing the reason for the materials pursuant to § 227.201(g), information required to be provided by cancellation, and the refund amount provided that: the issuer under §§ 227.201 and that the investor is expected to receive; (1) The offering remains open for a (2) Direct the refund of investor funds; 227.203(a); minimum of 21 days pursuant to (ii) Return funds to an investor when and § 227.303(a); (3) Prevent investors from making an investment commitment has been (2) The intermediary provides notice cancelled in accordance with § 227.304 investment commitments with respect to any potential investors, and gives or to that offering on its platform. (including for failure to obtain effective sends notice to investors that have made reconfirmation as required under investment commitments in the § 227.305 Payments to third parties. § 227.304(c)); and offering, of: (a) Prohibition on payments for (iii) Return funds to investors when (i) The new, anticipated deadline of personally identifiable information. An an issuer does not complete the offering. the offering; intermediary may not compensate any (f) Confirmation of transaction. (1) An (ii) The right of investors to cancel person for providing the intermediary intermediary must, at or before the investment commitments for any reason with the personally identifiable completion of a transaction in a security until 48 hours prior to the new offering information of any investor or potential in reliance on section 4(a)(6) of the deadline; and investor in securities offered and sold in Securities Act (15 U.S.C. 77d(a)(6)), give (iii) Whether the issuer will continue reliance on section 4(a)(6) of the or send to each investor a notification to accept investment commitments Securities Act (15 U.S.C. 77d(a)(6)). disclosing: during the 48-hour period prior to the (b) For purposes of this rule, (i) The date of the transaction; new offering deadline. personally identifiable information (ii) The type of security that the (3) The new offering deadline is means information that can be used to investor is purchasing; scheduled for and occurs at least five distinguish or trace an individual’s (iii) The identity, price, and number business days after the notice required identity, either alone or when combined of securities purchased by the investor, in paragraph (b)(2) of this section is with other personal or identifying as well as the number of securities sold provided; and information that is linked or linkable to by the issuer in the transaction and the (4) At the time of the new offering a specific individual. price(s) at which the securities were deadline, the issuer continues to meet or sold; exceed the target offering amount. Subpart D—Funding Portal Regulation (iv) If a debt security, the interest rate (c) Cancellations and reconfirmations and the yield to maturity calculated based on material changes. (1) If there § 227.400 Registration of funding portals. from the price paid and the maturity is a material change to the terms of an (a) Registration. A funding portal date; offering or to the information provided must register with the Commission, by (v) If a callable security, the first date by the issuer, the intermediary must filing a complete Form Funding Portal that the security can be called by the give or send to any investor who has (§ 249.2000 of this chapter) in issuer; and made an investment commitment notice accordance with the instructions on the

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form, and become a member of a (§ 249.2000 of this chapter) is submitted unwilling or unable to accept service on national securities association registered with the Commission. Duplicate behalf of the nonresident funding portal. under section 15A of the Exchange Act originals of the applications and reports (v) Each nonresident funding portal (15 U.S.C. 78o–3). The registration will provided for in this section must be must maintain, as part of its books and be effective the later of: filed with surveillance personnel records, the written consent and power (1) Thirty calendar days after the date designated by any registered national of attorney identified in paragraph that the registration is received by the securities association of which the (f)(2)(i) of this section for at least three Commission; or funding portal is a member. years after the agreement is terminated. (2) The date the funding portal is (f) Nonresident funding portals. (3) Access to books and records; approved for membership by a national Registration pursuant to this section by inspections and examinations—(i) securities association registered under a nonresident funding portal shall be Certification and opinion of counsel. section 15A of the Exchange Act (15 conditioned upon there being an Any nonresident funding portal U.S.C. 78o–3). information sharing arrangement in applying for registration pursuant to this (b) Amendments to registration. A place between the Commission and the section shall: funding portal must file an amendment competent regulator in the jurisdiction (A) Certify on Schedule C to Form to Form Funding Portal (§ 249.2000 of under the laws of which the nonresident Funding Portal (§ 249.2000 of this this chapter) within 30 days of any of funding portal is organized or where it chapter) that the nonresident funding the information previously submitted on has its principal place of business, that portal can, as a matter of law, and will Form Funding Portal becoming is applicable to the nonresident funding provide the Commission and any inaccurate for any reason. portal. registered national securities association (c) Successor registration. (1) If a (1) Definition. For purposes of this of which it becomes a member with funding portal succeeds to and section, the term nonresident funding prompt access to the books and records continues the business of a registered portal shall mean a funding portal of such nonresident funding portal and funding portal, the registration of the incorporated in or organized under the can, as a matter of law, and will submit predecessor will remain effective as the laws of a jurisdiction outside of the to onsite inspection and examination by registration of the successor if the United States or its territories, or having the Commission and any registered successor, within 30 days after such its principal place of business in any national securities association of which succession, files a registration on Form place not in the United States or its it becomes a member; and Funding Portal (§ 249.2000 of this territories. (B) Provide an opinion of counsel that chapter) and the predecessor files a (2) Power of attorney. (i) Each the nonresident funding portal can, as a withdrawal on Form Funding Portal; nonresident funding portal registered or matter of law, provide the Commission provided, however, that the registration applying for registration pursuant to this and any registered national securities of the predecessor funding portal will be section shall obtain a written consent association of which it becomes a deemed withdrawn 45 days after and power of attorney appointing an member with prompt access to the registration on Form Funding Portal is agent in the United States, other than books and records of such nonresident filed by the successor. the Commission or a Commission funding portal and can, as a matter of (2) Notwithstanding paragraph (c)(1) member, official or employee, upon law, submit to onsite inspection and of this section, if a funding portal whom may be served any process, examination by the Commission and succeeds to and continues the business pleadings or other papers in any action any registered national securities of a registered funding portal and the under the federal securities laws. This association of which it becomes a succession is based solely on a change consent and power of attorney must be member. of the predecessor’s date or state of signed by the nonresident funding (ii) Amendments. The nonresident incorporation, form of organization, or portal and the named agent(s) for funding portal shall re-certify, on composition of a partnership, the service of process. Schedule C to Form Funding Portal successor may, within 30 days after the (ii) Each nonresident funding portal (§ 249.2000 of this chapter), within 90 succession, amend the registration of registered or applying for registration days after any changes in the legal or the predecessor on Form Funding Portal pursuant to this section shall, at the regulatory framework that would impact (§ 249.2000 of this chapter) to reflect time of filing its application on Form the nonresident funding portal’s ability these changes. Funding Portal (§ 249.2000 of this to provide, or the manner in which it (d) Withdrawal. A funding portal chapter), furnish to the Commission the provides, the Commission, or any must promptly file a withdrawal of name and address of its United States registered national securities association registration on Form Funding Portal agent for service of process on Schedule of which it is a member, with prompt (§ 249.2000 of this chapter) in C to the Form. access to its books and records or that accordance with the instructions on the (iii) Any change of a nonresident would impact the Commission’s or such form upon ceasing to operate as a funding portal’s agent for service of registered national securities funding portal. Withdrawal will be process and any change of name or association’s ability to inspect and effective on the later of 30 days after address of a nonresident funding examine the nonresident funding portal. receipt by the Commission (after the portal’s existing agent for service of The re-certification shall be funding portal is no longer operational), process shall be communicated accompanied by a revised opinion of or within such longer period of time as promptly to the Commission through counsel describing how, as a matter of to which the funding portal consents or amendment of the Schedule C to Form law, the nonresident funding portal can which the Commission by order may Funding Portal (§ 249.2000 of this continue to meet its obligations under determine as necessary or appropriate in chapter). paragraphs (f)(3)(i)(A) and (B) of this the public interest or for the protection (iv) Each nonresident funding portal section. of investors. must promptly appoint a successor (e) Applications and reports. The agent for service of process if the § 227.401 Exemption. applications and reports provided for in nonresident funding portal discharges A funding portal that is registered this section shall be considered filed its identified agent for service of process with the Commission pursuant to when a complete Form Funding Portal or if its agent for service of process is § 227.400 is exempt from the broker

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registration requirements of section offered (for example, common stock, promotional activities on behalf of the 15(a)(1) of the Exchange Act (15 U.S.C. preferred stock or debt securities); the issuer, or is otherwise compensated, 78o(a)(1)) in connection with its geographic location of the issuer; the whether in the past or prospectively, to activities as a funding portal. industry or business segment of the promote an issuer’s offering; issuer; the number or amount of (5) Advise an issuer about the § 227.402 Conditional safe harbor. investment commitments made, structure or content of the issuer’s (a) General. Under section 3(a)(80) of progress in meeting the issuer’s target offering, including assisting the issuer the Exchange Act (15 U.S.C. 78c(a)(80)), offering amount or, if applicable, the in preparing offering documentation; a funding portal acting as an maximum offering amount; and the (6) Compensate a third party for intermediary in a transaction involving minimum or maximum investment referring a person to the funding portal, the offer or sale of securities in reliance amount; provided that the funding so long as the third party does not on section 4(a)(6) of the Securities Act portal may not highlight an issuer or provide the funding portal with (15 U.S.C. 77d(a)(6)) may not: offer offering based on the advisability of personally identifiable information of investment advice or recommendations; investing in the issuer or its offering; any potential investor, and the solicit purchases, sales, or offers to buy and compensation, other than that paid to a the securities offered or displayed on its (iii) The funding portal does not registered broker or dealer, is not based, platform or portal; compensate receive special or additional directly or indirectly, on the purchase or employees, agents, or other persons for compensations for highlighting one or sale of a security in reliance on section such solicitation or based on the sale of more issuers or offerings on its platform; 4(a)(6) of the Securities Act (15 U.S.C. securities displayed or referenced on its (3) Provide search functions or other 77d(a)(6)) offered on or through the platform or portal; hold, manage, tools that investors can use to search, funding portal’s platform; possess, or otherwise handle investor sort, or categorize the offerings available (7) Pay or offer to pay any funds or securities; or engage in such through the funding portal’s platform compensation to a registered broker or other activities as the Commission, by according to objective criteria where; dealer for services, including referrals rule, determines appropriate. This (i) The criteria may include, among pursuant to paragraph (b)(6) of this section is intended to provide clarity other things, the type of securities being section, in connection with the offer or with respect to the ability of a funding offered (for example, common stock, sale of securities by the funding portal portal to engage in certain activities, preferred stock or debt securities); the in reliance on section 4(a)(6) of the consistent with the prohibitions under geographic location of the issuer; the Act(15 U.S.C. 77d(a)(6)), provided that: section 3(a)(80) of the Exchange Act. No industry or business segment of the (i) Such services are provided presumption shall arise that a funding issuer; the number or amount of pursuant to a written agreement portal has violated the prohibitions investment commitments made, between the funding portal and the under section 3(a)(80) of the Exchange progress in meeting the issuer’s target registered broker or dealer; Act or this part by reason of the funding offering amount or, if applicable, the (ii) Such services and compensation portal or its associated persons engaging maximum offering amount; and the are permitted under this part; and in activities in connection with the offer minimum or maximum investment (iii) Such services and compensation or sale of securities in reliance on amount; and comply with the rules of any registered section 4(a)(6) of the Securities Act that (ii) The criteria may not include, national securities association of which do not meet the conditions specified in among other things, the advisability of the funding portal is a member; paragraph (b) of this section. The investing in the issuer or its offering, or (8) Receive any compensation from a antifraud provisions and all other an assessment of any characteristic of registered broker or dealer for services applicable provisions of the federal the issuer, its business plan, its key provided by the funding portal in securities laws continue to apply to the management or risks associated with an connection with the offer or sale of activities described in paragraph (b) of investment. securities by the funding portal in this section. (4) Provide communication channels (b) Permitted activities. A funding by which investors can communicate reliance on section 4(a)(6) of the portal may, consistent with the with one another and with Securities Act (15 U.S.C. 77d(a)(6)), prohibitions under section 3(a)(80) of representatives of the issuer through the provided that: the Exchange Act (15 U.S.C. 78c(a)(80)) funding portal’s platform about offerings (i) Such services are provided and this part: through the platform, so long as the pursuant to a written agreement (1) Determine whether and under funding portal (and its associated between the funding portal and the what terms to allow an issuer to offer persons): registered broker or dealer; and sell securities in reliance on section (i) Does not participate in these (ii) Such compensation is permitted 4(a)(6) of the Securities Act (15 U.S.C. communications, other than to establish under this part; and 77d(a)(6)) through its platform; provided guidelines for communication and (iii) Such compensation complies that a funding portal otherwise complies remove abusive or potentially with the rules of any registered national with this part; fraudulent communications; securities association of which the (2) Apply objective criteria to (ii) Permits public access to view the funding portal is a member; highlight offerings on the funding discussions made in the communication (9) Advertise the existence of the portal’s platform where: channels; funding portal and identify one or more (i) The criteria are reasonably (iii) Restricts posting of comments in issuers or offerings available on the designed to highlight a broad selection the communication channels to those portal on the basis of objective criteria, of issuers offering securities through the persons who have opened an account on as long as: funding portal’s platform, are applied its platform; and (i) The criteria are reasonably consistently to all issuers and offerings (iv) Requires that any person posting designed to identify a broad selection of and are clearly displayed on the funding a comment in the communication issuers offering securities through the portal’s platform; channels clearly disclose with each funding portal’s platform, and are (ii) The criteria may include, among posting whether he or she is a founder applied consistently to all potential other things, the type of securities being or an employee of an issuer engaging in issuers and offerings;

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(ii) The criteria may include, among § 227.404 Records to be made and kept by (c) Format. The records required to be other things, the type of securities being funding portals. maintained and preserved pursuant to offered (for example, common stock, (a) Generally. A funding portal shall paragraph (a) of this section must be preferred stock or debt securities); the make and preserve the following records produced, reproduced, and maintained geographic location of the issuer; the for five years, the first two years in an in the original, non-alterable format in industry or business segment of the easily accessible place: which they were created or as permitted issuer; the expressed interest by (1) All records related to an investor under § 240.17a–4(f) of this chapter. investors, as measured by number or who purchases or attempts to purchase (d) Third parties. The records amount of investment commitments securities through the funding portal; required to be made and preserved made, progress in meeting the issuer’s (2) All records related to issuers who pursuant to this section may be target offering amount or, if applicable, offer and sell or attempt to offer and sell prepared or maintained by a third party the maximum offering amount; and the securities through the funding portal on behalf of a funding portal. An minimum or maximum investment and the control persons of such issuers; agreement with a third party shall not amount; and (3) Records of all communications relieve a funding portal from the 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 receive special or additional records as specified in this rule. A use communication channels provided funding portal must file with the compensation for identifying the issuer by a funding portal to promote an or offering in this manner; registered national securities association 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, pursuant (5) All records required to registered national securities to § 227.301(c)(2), if the funding portal demonstrate compliance with the association, signed by a duly authorized has a reasonable basis for believing that requirements of subparts C (§§ 227.300 person of the third party, stating in the issuer or the offering presents the through 227.305) and D (§§ 227.400 effect that such records are the property potential for fraud or otherwise raises through 227.404) of this part; of the funding portal and will be (6) All notices provided by such concerns about investor protection; surrendered promptly on request of the funding portal to issuers and investors (11) Accept, on behalf of an issuer, an funding portal. The undertaking shall generally through the funding portal’s investment commitment for securities include the following provision: offered in reliance on section 4(a)(6) of platform or otherwise, including, but not limited to, notices addressing hours With respect to any books and records the Securities Act (15 U.S.C. 77d(a)(6)) maintained or preserved on behalf of [name by that issuer on the funding portal’s of funding portal operations (if any), funding portal malfunctions, changes to of funding portal], the undersigned hereby platform; acknowledges that the books and records are funding portal procedures, maintenance (12) Direct investors where to transmit the property of [name of funding portal], and of hardware and software, instructions funds or remit payment in connection hereby undertakes to permit examination of pertaining to access to the funding with the purchase of securities offered such books and records at any time, or from portal and denials of, or limitations on, time to time, during business hours by and sold in reliance on section 4(a)(6) of access to the funding portal; representatives of the Securities and the Securities Act (15 U.S.C. 77d(a)(6)); (7) All written agreements (or copies Exchange Commission and the registered and thereof) entered into by such funding national securities association of which the (13) Direct a qualified third party, as portal relating to its business as such; funding portal is a member, and to promptly required by § 227.303(e), to release (8) All daily, monthly and quarterly furnish to the Commission, its proceeds to an issuer upon completion representatives, and the registered national summaries of transactions effected securities association of which the funding of a crowdfunding offering or to return through the funding portal, including: portal is a member, a true, correct, complete proceeds to investors in the event an (i) Issuers for which the target offering and current hard copy of any, all, or any part investment commitment or an offering amount has been reached and funds of, such books and records. is cancelled. distributed; and (e) Review of records. All records of a (ii) Transaction volume, expressed in: § 227.403 Compliance. (A) Number of transactions; funding portal are subject at any time, (B) Number of securities involved in or from time to time, to reasonable (a) Policies and procedures. A funding periodic, special, or other examination portal must implement written policies a transaction; (C) Total amounts raised by, and by the representatives of the and procedures reasonably designed to Commission and the registered national achieve compliance with the federal distributed to, issuers; and (D) Total dollar amounts raised across securities association of which a securities laws and the rules and funding portal is a member. Every regulations thereunder relating to its all issuers, expressed in U.S. dollars; and funding portal shall furnish promptly to business as a funding portal. (9) A log reflecting the progress of the Commission, its representatives, and (b) Privacy. A funding portal must each issuer who offers or sells securities the registered national securities comply with the requirements of part through the funding portal toward association of which the funding portal 248 of this chapter as they apply to meeting the target offering amount. is a member true, correct, complete and brokers. (b) Organizational documents. A current copies of such records of the (c) Inspections and examinations. A funding portal shall make and preserve funding portal that are requested by the funding portal shall permit the during the operation of the funding representatives of the Commission and examination and inspection of all of its portal and of any successor funding the registered national securities business and business operations that portal, all organizational documents association. relate to its activities as a funding relating to the funding portal, including (f) Financial recordkeeping and portal, such as its premises, systems, but not limited to, partnership reporting of currency and foreign platforms, and records by agreements, articles of incorporation or transactions. A funding portal that is representatives of the Commission and charter, minute books and stock subject to the requirements of the of the registered national securities certificate books (or other similar type Currency and Foreign Transactions association of which it is a member. documents). Reporting Act of 1970 (15 U.S.C. 5311

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et seq.) shall comply with the reporting, Section 5 of the Securities Act (15 Securities Act (15 U.S.C. 77d–1(b)) that, recordkeeping and record retention U.S.C. 77e) for any offer or sale to a at the time of such filing, restrains or requirements of 31 CFR chapter X. particular individual or entity, if the enjoins such person from engaging or Where 31 CFR chapter X and issuer relying on the exemption shows: continuing to engage in any conduct or § 227.404(a) and (b) require the same (1) The failure to comply was practice: records or reports to be preserved for insignificant with respect to the offering (i) In connection with the purchase or different periods of time, such records as a whole; sale of any security; or reports shall be preserved for the (2) The issuer made a good faith and (ii) Involving the making of any false longer period of time. reasonable attempt to comply with all filing with the Commission; or applicable terms, conditions and (iii) Arising out of the conduct of the Subpart E—Miscellaneous Provisions requirements of this part; and business of an underwriter, broker, (3) The issuer did not know of such dealer, municipal securities dealer, § 227.501 Restrictions on resales. failure where the failure to comply with investment adviser, funding portal or (a) Securities issued in a transaction a term, condition or requirement of this paid solicitor of purchasers of securities; exempt from registration pursuant to part was the result of the failure of the (3) Is subject to a final order of a state section 4(a)(6) of the Securities Act (15 intermediary to comply with the securities commission (or an agency or U.S.C. 77d(a)(6)) and in accordance with requirements of section 4A(a) of the officer of a state performing like section 4A of the Securities Act (15 Securities Act (15 U.S.C. 77d–1(a)) and functions); a state authority that U.S.C. 77d–1) and this part may not be the related rules, or such failure by the supervises or examines banks, savings transferred by any purchaser of such intermediary occurred solely in associations or credit unions; a state securities during the one-year period offerings other than the issuer’s offering. insurance commission (or an agency or beginning when the securities were (b) Paragraph (a) of this section shall officer of a state performing like issued in a transaction exempt from not preclude the Commission from functions); an appropriate federal registration pursuant to section 4(a)(6) bringing an enforcement action seeking banking agency; the U.S. Commodity of the Securities Act (15 U.S.C. any appropriate relief for an issuer’s Futures Trading Commission; or the 77d(a)(6)), unless such securities are failure to comply with all applicable National Credit Union Administration transferred: terms, conditions and requirements of that: (1) To the issuer of the securities; this part. (i) At the time of the filing of the (2) To an accredited investor; information required by section 4A(b) of (3) As part of an offering registered § 227.503 Disqualification provisions. the Securities Act (15 U.S.C. 77d–1(b)), with the Commission; or (a) Disqualification events. No bars the person from: (4) To a member of the family of the exemption under this section 4(a)(6) of (A) Association with an entity purchaser or the equivalent, to a trust the Securities Act (15 U.S.C. 77d(a)(6)) regulated by such commission, controlled by the purchaser, to a trust shall be available for a sale of securities authority, agency or officer; created for the benefit of a member of if the issuer; any predecessor of the (B) Engaging in the business of the family of the purchaser or the issuer; any affiliated issuer; any securities, insurance or banking; or equivalent, or in connection with the director, officer, general partner or (C) Engaging in savings association or death or divorce of the purchaser or managing member of the issuer; any credit union activities; or other similar circumstance. beneficial owner of 20 percent or more (ii) Constitutes a final order based on (b) For purposes of this § 227.501, the of the issuer’s outstanding voting equity a violation of any law or regulation that term accredited investor shall mean any securities, calculated on the basis of prohibits fraudulent, manipulative or person who comes within any of the voting power; any promoter connected deceptive conduct entered within ten categories set forth in § 230.501(a) of with the issuer in any capacity at the years before such filing of the offering this chapter, or who the seller time of such sale; any person that has statement; reasonably believes comes within any of been or will be paid (directly or Instruction to paragraph (a)(3). Final such categories, at the time of the sale indirectly) remuneration for solicitation order shall mean a written directive or of the securities to that person. of purchasers in connection with such declaratory statement issued by a (c) For purposes of this section, the sale of securities; or any general partner, federal or state agency, described in term member of the family of the director, officer or managing member of § 227.503(a)(3), under applicable purchaser or the equivalent includes a any such solicitor: statutory authority that provides for child, stepchild, grandchild, parent, (1) Has been convicted, within 10 notice and an opportunity for hearing, stepparent, grandparent, spouse or years before the filing of the offering which constitutes a final disposition or spousal equivalent, sibling, mother-in- statement (or five years, in the case of action by that federal or state agency. law, father-in-law, son-in-law, daughter- issuers, their predecessors and affiliated (4) Is subject to an order of the in-law, brother-in-law, or sister-in-law issuers), of any felony or misdemeanor: Commission entered pursuant to section of the purchaser, and shall include (i) In connection with the purchase or 15(b) or 15B(c) of the Exchange Act (15 adoptive relationships. For purposes of sale of any security; U.S.C. 78o(b) or 78o–4(c)) or Section this paragraph (c), the term spousal (ii) Involving the making of any false 203(e) or (f) of the Investment Advisers equivalent means a cohabitant filing with the Commission; or Act of 1940 (15 U.S.C. 80b–3(e) or (f)) occupying a relationship generally (iii) Arising out of the conduct of the that, at the time of the filing of the equivalent to that of a spouse. business of an underwriter, broker, information required by section 4A(b) of dealer, municipal securities dealer, the Securities Act (15 U.S.C. 77d–1(b)): § 227.502 Insignificant deviations from a investment adviser, funding portal or (i) Suspends or revokes such person’s term, condition or requirement of this part paid solicitor of purchasers of securities; registration as a broker, dealer, (Regulation Crowdfunding). (2) Is subject to any order, judgment municipal securities dealer, investment (a) A failure to comply with a term, or decree of any court of competent adviser or funding portal; condition, or requirement of this part jurisdiction, entered within five years (ii) Places limitations on the activities, will not result in the loss of the before the filing of the information functions or operations of such person; exemption from the requirements of required by section 4A(b) of the or

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(iii) Bars such person from being (1) With respect to any conviction, PART 232—REGULATION S–T— associated with any entity or from order, judgment, decree, suspension, GENERAL RULES AND REGULATIONS participating in the offering of any expulsion or bar that occurred or was FOR ELECTRONIC FILINGS penny stock; issued before May 16, 2016; (5) Is subject to any order of the (2) Upon a showing of good cause and ■ 5. The authority citation for part 232 Commission entered within five years without prejudice to any other action by continues to read, in part, as follows: before the filing of the information the Commission, if the Commission Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, required by section 4A(b) of the determines that it is not necessary under 77s(a), 77z-3, 77sss(a), 78c(b), 781, 78m, 78n, Securities Act (15 U.S.C. 77d–1(b)) that, the circumstances that an exemption be 78o(d), 78w(a), 78ll, 80a–6(c), 80a–8, 80a–29, at the time of such filing, orders the denied; 80a–30, 80a–37, 7201 et seq.; and 18 U.S.C. person to cease and desist from (3) If, before the filing of the 1350, unless otherwise noted. committing or causing a violation or information required by section 4A(b) of * * * * * future violation of: the Securities Act (15 U.S.C. 77d–1(b)), (i) Any scienter-based anti-fraud ■ 6. Amend § 232.101 by: the court or regulatory authority that provision of the federal securities laws, ■ a. In paragraph (a)(1)(xvii) removing entered the relevant order, judgment or including without limitation Section ‘‘and’’ at the end of the paragraph; and decree advises in writing (whether 17(a)(1) of the Securities Act (15 U.S.C. ■ b. In paragraph (a)(1)(xviii) removing 77q(a)(1)), Section 10(b) of the Exchange contained in the relevant judgment, order or decree or separately to the the period at the end of the paragraph Act (15 U.S.C. 78j(b)) and 17 CFR and adding in its place a semicolon; and 240.10b–5, section 15(c)(1) of the Commission or its staff) that disqualification under paragraph (a) of ■ c. Adding paragraphs (a)(1)(xix) and Exchange Act (15 U.S.C. 78o(c)(1)) and (a)(1)(xx). Section 206(1) of the Investment this section should not arise as a Advisers Act of 1940 (15 U.S.C. 80b– consequence of such order, judgment or The addition reads as follows: decree; or 6(1)) or any other rule or regulation § 232.101 Mandated electronic thereunder; or (4) If the issuer establishes that it did submissions and exceptions. (ii) Section 5 of the Securities Act (15 not know and, in the exercise of U.S.C. 77e); reasonable care, could not have known (a) * * * (6) Is suspended or expelled from that a disqualification existed under (1) * * * membership in, or suspended or barred paragraph (a) of this section. (xix) Form C (§ 239.900 of this from association with a member of, a Instruction to paragraph (b)(4). An chapter). Exhibits to Form C (§ 239.900 registered national securities exchange issuer will not be able to establish that of this chapter) may be filed on EDGAR or a registered national or affiliated it has exercised reasonable care unless as PDF documents in the format securities association for any act or it has made, in light of the required by the EDGAR Filer Manual, as omission to act constituting conduct circumstances, factual inquiry into defined in Rule 11 of Regulation S–T inconsistent with just and equitable whether any disqualifications exist. The (§ 232.11 of this chapter). principles of trade; nature and scope of the factual inquiry Notwithstanding Rule 104 of Regulation (7) Has filed (as a registrant or issuer), will vary based on the facts and S–T (§ 232.104 of this chapter), the PDF or was or was named as an underwriter circumstances concerning, among other documents filed under this paragraph in, any registration statement or things, the issuer and the other offering will be considered as officially filed Regulation A (17 CFR 230.251 through participants. with the Commission; and 230.263) offering statement filed with (c) Affiliated issuers. For purposes of (xx) Form Funding Portal (§ 249.2000 the Commission that, within five years paragraph (a) of this section, events of this chapter). Exhibits and before the filing of the information relating to any affiliated issuer that attachments to Form Funding Portal required by section 4A(b) of the occurred before the affiliation arose will (§ 249.2000 of this chapter) may be filed Securities Act (15 U.S.C. 77d–1(b)), was be not considered disqualifying if the on EDGAR as PDF documents in the the subject of a refusal order, stop order, affiliated entity is not: format required by the EDGAR Filer or order suspending the Regulation A (1) In control of the issuer; or Manual, as defined in Rule 11 of exemption, or is, at the time of such (2) Under common control with the Regulation S–T (§ 232.11 of this filing, the subject of an investigation or chapter). Notwithstanding Rule 104 of proceeding to determine whether a stop issuer by a third party that was in control of the affiliated entity at the time Regulation S–T (§ 232.104 of this order or suspension order should be chapter), the PDF documents filed issued; or of such events. (d) Intermediaries. A person that is under this paragraph will be considered (8) Is subject to a United States Postal as officially filed with the Commission. Service false representation order subject to a statutory disqualification as entered within five years before the defined in section 3(a)(39) of the * * * * * filing of the information required by Exchange Act (15 U.S.C. 78c(a)(39)) may not act as, or be an associated person of, PART 239—FORMS PRESCRIBED section 4A(b) of the Securities Act (15 UNDER THE SECURITIES ACT OF 1933 U.S.C. 77d–1(b)), or is, at the time of an intermediary in a transaction such filing, subject to a temporary involving the offer or sale of securities ■ in reliance on section 4(a)(6) of the 7. The authority citation for part 239 restraining order or preliminary continues to read, in part, as follows: injunction with respect to conduct Securities Act (15 U.S.C. 77d(a)(6)) alleged by the United States Postal unless so permitted pursuant to Authority: 15 U.S.C. 77c, 77f, 77g, 77h, Service to constitute a scheme or device Commission rule or order. 77j, 77s, 77z–2, 77z–3, 77sss, 78c, 78l, 78m, Instruction to paragraph (d). 78n, 78o(d), 78o–7 note, 78u–5, 78w(a), 78ll, for obtaining money or property through 78mm, 80a–2(a), 80a–3, 80a–8, 80a–9, 80a– the mail by means of false § 240.17f–2 of this chapter generally 10, 80a–13, 80a–24, 80a–26, 80a–29, 80a–30, representations. requires the fingerprinting of every and 80a–37, unless otherwise noted. (b) Transition, waivers, reasonable person who is a partner, director, officer care exception. Paragraph (a) of this or employee of a broker, subject to * * * * * section shall not apply: certain exceptions. ■ 8. Add § 239.900 to read as follows:

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§ 239.900 Form C. Note: The text of Form C will not appear This form shall be used for filings in the Code of Federal Regulations. under Regulation Crowdfunding (part BILLING CODE 8011–01–P 227 of this chapter).

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

FORMC

UNDER THE SECURITIES ACT OF 1933

(Mark one.)

D Form C: Offering Statement D Form C-U: Progress Update: D Form CIA: Amendment to Offering Statement: ______D Check box if Amendment is material and investors must reconfirm within five business days. D Form C-AR: Annual Report D Form C-AR/A: Amendment to Annual Report D Form C-TR: Termination ofReporting

Nrumeofissuer: ------­ Legal status of issuer: Form: ------Jurisdiction of Incorporation/Organization: ______Date of organization): Physical address of issuer: ------­ Website of issuer: ------

Nrume of intermediary through which the offering will be conducted: ______CIK number of intermediary: SEC file number of intermediary: CRD number, if applicable, of intermediary: ______

Amount of compensation to be paid to the intermediary, whether as a dollar rumount or a percentage of the offering rumount, or a good faith estimate if the exact rumount is not available at the time of the filing, for conducting the offering, including the rumount of referral and any other fees associated with the offering:

Any other direct or indirect interest in the issuer held by the intermediary, or any arrangement for the intermediary to acquire such an interest:

Type of security offered: ------­ Target number of securities to be offered: Price (or method for determining price):------­ Target offering rumount: ------­ Oversubscriptions accepted: o Yes o No If yes, disclose how oversubscriptions will be allocated: o Pro-rata basis o First-come, first-served basis o Other- provide a description: ______Maximum offering amount (if different from target offering rumount): ______Deadline to reach the target offering amount:------

NOTE: If the sum of the investment commitments does not equal or exceed the target offering amount at the offering deadline, no securities will be sold in the offering, investment commitments will be cancelled and committed funds will be returned.

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Currentnumberofemployees: ------

Total Assets: Most recent fiscal year-end: Prior fiscal year-end: Cash & Cash Equivalents: Most recent fiscal year-end: Prior fiscal year-end: Accounts Receivable: Most recent fiscal year-end: Prior fiscal year-end: Short-term Debt: Most recent fiscal year-end: Prior fiscal year-end: Long-term Debt: Most recent fiscal year-end: Prior fiscal year-end: Revenues/Sales Most recent fiscal year-end: Prior fiscal year-end: Cost of Goods Sold: Most recent fiscal year-end: Prior fiscal year-end: Taxes Paid: Most recent fiscal year-end: Prior fiscal year-end: Net Income: Most recent fiscal year-end: Prior fiscal year-end:

Using the list below, select the jurisdictions in which the issuer intends to offer the securities:

[List will include all U.S. jurisdictions, with an option to add and remove them individually, add all and remove all.]

GENERAL INSTRUCTIONS

I. Eligibility Requirements for Use of Form C

This Form shall be used for the offering statement, and any related amendments and progress reports, required to be filed by any issuer offering or selling securities in reliance on the exemption in Securities Act Section 4(a)(6) and in accordance with Section 4A and Regulation Crowdfunding (§ 227.100 et seq.). This Form also shall be used for an annual report required pursuant to Rule 202 of Regulation Crowdfunding (§ 227.202) and for the termination of reporting required pursuant to Rule 203(b)(2) of Regulation Crowdfunding (§ 227.203(b )(2)). Careful attention should be directed to the terms, conditions and requirements of the exemption.

II. Preparation and Filing of Form C

Information on the cover page will be generated based on the information provided in XML format. Other than the cover page, this Form is not to be used as a blank form to be filled in, but only as a guide in the preparation of Form C. General information regarding the preparation, format and how to file this Form is contained in Regulation S-T (§ 232 et seq.).

III. Information to be Included in the Form

Item 1. Offering Statement Disclosure Requirements

An issuer filing this Form for an offering in reliance on Section 4(a)(6) of the Securities Act and pursuant to Regulation Crowdfunding (§ 227.100 et seq.) must file the Form prior to the commencement of the offering and include the information required by Rule 201 of Regulation Crowdfunding (§ 227.201). An issuer must include in the XML-based portion of this Form: the information required by paragraphs (a), (e), (g), (h), (1), (n), and (o) ofRule 201 ofRegulation Crowdfunding (§ 227.20l(a), (e), (g), (h), (1), (n), and (o)); selected fmancial data for the prior two fiscal years (including total assets, cash and cash equivalents, accounts receivable, short-term debt, long-term debt, revenues/sales, cost of goods sold, taxes paid and net income); the jurisdictions in which the issuer intends to offer the securities; and any information required by Rule 203(a)(3) of Regulation Crowdfunding (§ 227.203(a)(3)). Other than the information required to be provided in XML format, an issuer may provide the required information in the optional Question and Answer format included herein or in any other format included on the intermediary's platform, by filing such information as an exhibit to this Form, including copies of screen shots of the relevant information, as appropriate and necessary.

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If disclosure in response to any paragraph of Rule 201 of Regulation Crowdfunding (§ 227.201) or Rule 203(a)(3) is responsive to one or more other paragraphs of Rule 201 of Regulation Crowdfunding (§ 227.201) or to Rule 203(a)(3) of Regulation Crowdfunding (§ 227.203(a)(3)), issuers are not required to make duplicate disclosures. Item 2. Legends

(a) An issuer filing this Form for an offering in reliance on Section 4(a)(6) of the Securities Act and pursuant to Regulation Crowdfunding (§ 227.100 et seq.) must include the following legends: A crowdfunding investment involves risk. You should not invest any funds in this offering unless you can afford to lose your entire investment. In making an investment decision, investors must rely on their own examination of the issuer and the terms of the offering, including the merits and risks involved. These securities have not been recommended or approved by any federal or state securities commission or regulatory authority. Furthermore, these authorities have not passed upon the accuracy or adequacy of this document. The U.S. Securities and Exchange Commission does not pass upon the merits of any securities offered or the terms of the offering, nor does it pass upon the accuracy or completeness of any offering document or literature. These securities are offered under an exemption from registration; however, the U.S. Securities and Exchange Commission has not made an independent determination that these securities are exempt from registration. (b) An issuer filing this Form for an offering in reliance on Section 4(a)(6) of the Securities Act and pursuant to Regulation Crowdfunding (§ 227.100 et seq.) must disclose in the offering statement that it will file a report with the Commission annually and post the report on its website, no later than 120 days after the end of each fiscal year covered by the report. The issuer must also disclose how an issuer may terminate its reporting obligations in the future in accordance with Rule 202(b) of Regulation Crowdfunding (§ 227.202(b)). Item 3. Annual Report Disclosure Requirements

An issuer filing this Form for an annual report, as required by Regulation Crowdfunding (§ 227.100 et seq.), must file the Form no later than 120 days after the issuer's fiscal year end covered by the report and include the information required by Rule 201(a), (b), (c), (d), (e), (t), (m), (p), (q), (r), (s), (t), (x) and (y) of Regulation Crowdfunding (§§ 227.201(a), (b), (c), (d), (e), (t), (m), (p), (q), (r), (s), (t), (x) and (y)). For purposes of paragraph (t), the issuer shall provide fmancial statements certified by the principal executive officer of the issuer to be true and complete in all material respects. If, however, the issuer has available fmancial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) that have been reviewed or audited by an independent certified public accountant, those fmancial statements must be provided and the principal executive officer certification will not be required. An issuer must include in the XML-based portion of this Form: the information required by paragraphs (a), and (e) of Rule 201 of Regulation Crowdfunding (§ 227.201(a) and (e)); and selected fmancial data for the prior two fiscal years (including total assets, cash and cash equivalents, accounts receivable, short-term debt, long-term debt, revenues/sales, cost of goods sold, taxes paid and net income).

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SIGNATURE

Pursuant to the requirements of Sections 4(a)(6) and 4A of the Securities Act of 1933 and Regulation Crowdfunding (§ 227.100 et seq.), the issuer certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form C and has duly caused this Form to be signed on its behalf by the duly authorized undersigned.

(Issuer)

By

(Signature and Title)

Pursuant to the requirements of Sections 4(a)(6) and 4A of the Securities Act of 1933 and Regulation Crowdfunding (§ 227.100 et seq.), this Form C has been signed by the following persons in the capacities and on the dates indicated.

(Signature)

(Title)

(Date)

Instructions.

1. The form shall be signed by the issuer, its principal executive officer or officers, its principal fmancial officer, its controller or principal accounting officer and at least a majority of the board of directors or persons performing similar functions.

2. The name of each person signing the form shall be typed or printed beneath the signature.

Intentional misstatements or omissions of facts constitute federal criminal violations. See 18 U.S.C. 1001.

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OPTIONAL QUESTION & ANSWER FORMAT

FOR AN OFFERING STATEMENT

Respond to each question in each paragraph of this part. Set forth each question and any notes, but not any instructions thereto, in their entirety. If disclosure in response to any question is responsive to one or more other questions, it is not necessary to repeat the disclosure. If a question or series of questions is inapplicable or the response is available elsewhere in the Form, either state that it is inapplicable, include a cross-reference to the responsive disclosure, or omit the question or series of questions. Be very careful and precise in answering all questions. Give full and complete answers so that they are not misleading under the circumstances involved. Do not discuss any future performance or other anticipated event unless you have a reasonable basis to believe that it will actually occur within the foreseeable future. If any answer requiring significant information is materially inaccurate, incomplete or misleading, the Company, its management and principal shareholders may be liable to investors based on that information.

THE COMPANY

1. N arne of issuer:

ELIGIBILITY

2. o Check this box to certify that all of the following statements are true for the issuer:

• Organized under, and subject to, the laws of a State or territory of the United States or the District of Columbia. • Not subject to the requirement to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934. • Not an investment company registered or required to be registered under the Investment Company Act of 1940. • Not ineligible to rely on this exemption under Section 4(a)(6) of the Securities Act as a result of a disqualification specified in Rule 503(a) of Regulation Crowdfunding. (For more information about these disqualifications, see Question 30 of this Question and Answer format). • Has filed with the Commission and provided to investors, to the extent required, the ongoing annual reports required by Regulation Crowdfunding during the two years immediately preceding the filing of this offering statement (or for such shorter period that the issuer was required to file such reports). • Not a development stage company that (a) has no specific business plan or (b) has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies.

INSTRUCTION TO QUESTION 2: If any of these statements is not true, then you are NOT eligible to rely on this exemption under Section 4(a)(6) of the Securities Act.

3. Has the issuer or any of its predecessors previously failed to comply with the ongoing reporting requirements of Rule 202 of Regulation Crowdfunding? o Yes o No Explain:

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DIRECTORS OF THE COMPANY

4. Provide the following information about each director (and any persons occupying a similar status or performing a similar function) of the issuer:

Name: Dates of Board Service: ____ Principal Occupation: Employer: ______Dates of Service: Employer's principal business:

List all positions and offices with the issuer held and the period of time in which the director served in the position or office:

Position: ______Dates of Service: Position: ______Dates of Service: Position: ______Dates of Service:

Business Experience: List the employers, titles and dates of positions held during past three years with an indication of job responsibilities:

Employer: Employer's principal business: Title: ______Dates of Service: Responsibilities: ------

Employer: Employer's principal business: Title: ______Dates of Service: Responsibilities: ------

Employer: Employer's principal business: Title: ______Dates of Service: Responsibilities: ------

OFFICERS OF THE COMPANY

5. Provide the following information about each officer (and any persons occupying a similar status or performing a similar function) of the issuer:

Name: ------Title: ______Dates of Service: Responsibilities:

List any prior positions and offices with the issuer and the period of time in which the officer served in the position or office:

Position: ______Dates of Service: Responsibilities: ------Position: ______Dates of Service: Responsibilities: ------

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Position: ______Dates of Service: ______Responsibilities:

Business Experience: List any other employers, titles and dates of positions held during past three years with an indication of job responsibilities:

Employer: ------­ Employer's principal business: Title: ______Dates of Service: ______Responsibilities: ------

Employer: ------­ Employer's principal business: Title: ______Dates of Service: ______Responsibilities: ------

Employer: ------­ Employer's principal business: Title: ______Dates of Service: ______Responsibilities: ------

INSTRUCTION TO QUESTION 5: For purposes of this Question 5, the term officer means a president, vice president, secretary, treasurer or principal fmancial officer, comptroller or principal accounting officer, and any person routinely performing similar functions.

PRINCIPAL SECURITY HOLDERS

6. Provide the name and ownership level of each person, as of the most recent practicable date, who is the beneficial owner of 20 percent or more of the issuer's outstanding voting equity securities, calculated on the basis of voting power.

% ofVoting No. and Class of Power Prior to Name of Holder Securities Now Held Offering 0/o 0/o 0/o 0/o

INSTRUCTION TO QUESTION 6: The above information must be provided as of a date that is no more than 120 days prior to the date of filing of this offering statement.

To calculate total voting power, include all securities for which the person directly or indirectly has or shares the voting power, which includes the power to vote or to direct the voting of such securities. If the person has the right to acquire voting power of such securities within 60 days, including through the exercise of any option, warrant or right, the conversion of a security, or other arrangement, or if securities are held by a member of the family, through corporations or partnerships, or otherwise in a manner that would allow a person to direct or control the voting of the securities (or share in such direction or control- as, for example, a co-trustee) they should be included as being "beneficially owned." You should include an explanation of these circumstances in a footnote to the "Number of and Class of Securities Now Held." To calculate outstanding voting equity securities, assume all outstanding options are exercised and all outstanding convertible securities converted.

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BUSINESS AND ANTICIPATED BUSINESS PLAN

7. Describe in detail the business of the issuer and the anticipated business plan of the issuer.

RISK FACTORS

A crowdfunding investment involves risk. You should not invest any funds in this offering unless you can afford to lose your entire investment.

In making an investment decision, investors must rely on their own examination of the issuer and the terms of the offering, including the merits and risks involved. These securities have not been recommended or approved by any federal or state securities commission or regulatory authority. Furthermore, these authorities have not passed upon the accuracy or adequacy of this document.

The U.S. Securities and Exchange Commission does not pass upon the merits of any securities offered or the terms of the offering, nor does it pass upon the accuracy or completeness of any offering document or literature.

These securities are offered under an exemption from registration; however, the U.S. Securities and Exchange Commission has not made an independent determination that these securities are exempt from registration.

8. Discuss the material factors that make an investment in the issuer speculative or risky:

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

(10)

INSTRUCTION TO QUESTION 8: Avoid generalized statements and include only those factors that are unique to the issuer. Discussion should be tailored to the issuer's business and the offering and should not repeat the factors addressed in the legends set forth above. No specific number of risk factors is required to be identified. Add additional lines and number as appropriate.

THE OFFERING

9. What is the purpose of this offering?

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10. How does the issuer intend to use the proceeds of this offering?

If Target If Maximum Offering Amount Amount Sold Sold Total Proceeds $ $ Less: Offering Expenses (A) (B) (C) Net Proceeds $ $ Use of Net Proceeds (A) (B) (C) Total Use of Net Proceeds $ $

INSTRUCTION TO QUESTION 10: An issuer must provide a reasonably detailed description of any intended use of proceeds, such that investors are provided with an adequate amount of information to understand how the offering proceeds will be used. If an issuer has identified a range of possible uses, the issuer should identify and describe each probable use and the factors the issuer may consider in allocating proceeds among the potential uses. If the issuer will accept proceeds in excess of the target offering amount, the issuer must describe the purpose, method for allocating oversubscriptions, and intended use of the excess proceeds with similar specificity.

11. How will the issuer complete the transaction and deliver securities to the investors?

12. How can an investor cancel an investment commitment?

NOTE: Investors may cancel an investment commitment until 48 hours prior to the deadline identified in these offering materials.

The intermediary will notify investors when the target offering amount has been met.

If the issuer reaches the target offering amount prior to the deadline identified in the offering materials, it may close the offering early if it provides notice about the new offering deadline at least five business days prior to such new offering deadline (absent a material change that would require an extension of the offering and reconfirmation of the investment commitment).

If an investor does not cancel an investment commitment before the 48-hour period prior to the offering deadline, the funds will be released to the issuer upon closing of the offering and the investor will receive securities in exchange for his or her investment.

If an investor does not reconfirm his or her investment commitment after a material change is made to the offering, the investor's investment commitment will be cancelled and the committed funds will be returned.

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OWNERSHIP AND CAPITAL STRUCTURE

The Offering

13. Describe the terms of the securities being offered.

14. Do the securities offered have voting rights? o Yes o No

15. Are there any limitations on any voting or other rights identified above? o Yes o No Explain:

16. How may the terms of the securities being offered be modified?

Restrictions on Transfer of the Securities Being Offered

The securities being offered may not be transferred by any purchaser of such securities during the one­ year period beginning when the securities were issued, unless such securities are transferred:

( 1) to the issuer; (2) to an accredited investor; (3) as part of an offering registered with the U.S. Securities and Exchange Commission; or ( 4) to a member of the family of the purchaser or the equivalent, to a trust controlled by the purchaser, to a trust created for the benefit of a member of the family of the purchaser or the equivalent, or in connection with the death or divorce of the purchaser or other similar circumstance.

NOTE: The term "accredited investor" means any person who comes within any of the categories set forth in Rule SOl(a) of Regulation D, or who the seller reasonably believes comes within any of such categories, at the time of the sale of the securities to that person.

The term "member of the family of the purchaser or the equivalent" includes a child, stepchild, grandchild, parent, stepparent, grandparent, spouse or spousal equivalent, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law of the purchaser, and includes adoptive relationships. The term "spousal equivalent" means a cohabitant occupying a relationship generally equivalent to that of a spouse.

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Description of Issuer's Securities

17. What other securities or classes of securities of the issuer are outstanding? Describe the material terms of any other outstanding securities or classes of securities of the issuer.

Securities Securities (or Amount) (or Amount) Class of Security Authorized Outstanding Voting Rights Other Rights Preferred Stock (list each class in order of preference): D Yes o No D Yes D No Specify: D Yes o No D Yes D No Specify: Common Stock: D Yes D No D Yes D No Specify: Debt Securities: D Yes D No D Yes D No Specify: Other: D Yes o No D Yes D No Specify: D Yes o No D Yes D No Specify:

Securities Reserved for Issuance upon Exercise or Class of Security Conversion Warrants: Options: Other Rights:

18. How may the rights of the securities being offered be materially limited, diluted or qualified by the rights of any other class of security identified above?

19. Are there any differences not reflected above between the securities being offered and each other class of security of the issuer? o Yes o No Explain:

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20. How could the exercise of rights held by the principal shareholders identified in Question 6 above affect the purchasers of the securities being offered?

21. How are the securities being offered being valued? Include examples of methods for how such securities may be valued by the issuer in the future, including during subsequent corporate actions.

22. What are the risks to purchasers of the securities relating to minority ownership in the issuer?

23. What are the risks to purchasers associated with corporate actions including: • additional issuances of securities, • issuer repurchases of securities, • a sale of the issuer or of assets of the issuer or • transactions with related parties?

24. Describe the material terms of any indebtedness of the issuer:

Amount Creditor(s) Outstanding Interest Rate Maturity Date Other Material Terms $ _____ % $ _____ % $ _____ %

25. What other exempt offerings has the issuer conducted within the past three years?

Date of Exemption Offering Relied Upon Securities Offered Amount Sold Use of Proceeds $ _____ $ _____ $ _____

26. Was or is the issuer or any entities controlled by or under common control with the issuer a party to any transaction since the beginning of the issuer's last fiscal year, or any currently proposed transaction, where the amount involved exceeds five percent of the aggregate amount of capital raised by the issuer in reliance on Section 4(a)(6) of the Securities Act during the preceding 12- month period, including the amount the issuer seeks to raise in the current offering, in which any of the following persons had or is to have a direct or indirect material interest:

(I) any director or officer of the issuer; (2) any person who is, as of the most recent practicable date, the beneficial owner of 20 percent or more of the issuer's outstanding voting equity securities, calculated on the basis of voting power; (3) if the issuer was incorporated or organized within the past three years, any promoter of the issuer; or ( 4) any immediate family member of any of the foregoing persons.

If yes, for each such transaction, disclose the following:

Relationship to Nature of Interest Amount of Specified Person Issuer in Transaction Interest $ _____

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$ _____ $ _____

INSTRUCTIONS TO QUESTION 26:

The term transaction includes, but is not limited to, any fmancial transaction, arrangement or relationship (including any indebtedness or guarantee of indebtedness) or any series of similar transactions, arrangements or relationships.

Beneficial ownership for purposes of paragraph (2) shall be determined as of a date that is no more than 120 days prior to the date of filing of this offering statement and using the same calculation described in Question 6 of this Question and Answer format.

The term "member of the family" includes any child, stepchild, grandchild, parent, stepparent, grandparent, spouse or spousal equivalent, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law of the person, and includes adoptive relationships. The term "spousal equivalent" means a cohabitant occupying a relationship generally equivalent to that of a spouse.

Compute the amount of a related party's interest in any transaction without regard to the amount of the profit or loss involved in the transaction. Where it is not practicable to state the approximate amount of the interest, disclose the approximate amount involved in the transaction.

FINANCIAL CONDITION OF THE ISSUER

27. Does the issuer have an operating history? o Yes o No

28. Describe the financial condition of the issuer, including, to the extent material, liquidity, capital resources and historical results of operations.

INSTRUCTIONS TO QUESTION 28:

The discussion must cover each year for which fmancial statements are provided. Include a discussion of any known material changes or trends in the fmancial condition and results of operations of the issuer during any time period subsequent to the period for which fmancial statements are provided.

For issuers with no prior operating history, the discussion should focus on fmancial milestones and operational, liquidity and other challenges.

For issuers with an operating history, the discussion should focus on whether historical results and cash flows are representative of what investors should expect in the future.

Take into account the proceeds of the offering and any other known or pending sources of capital. Discuss how the proceeds from the offering will affect liquidity, whether receiving these funds and any other additional funds is necessary to the viability of the business, and how quickly the issuer anticipates using its available cash. Describe the other available sources of capital to the business, such as lines of credit or required contributions by shareholders.

References to the issuer in this Question 28 and these instructions refer to the issuer and its predecessors, if any.

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FINANCIAL INFORMATION

29. Include the financial information specified below covering the two most recently completed fiscal years or the period(s) since inception, if shorter:

Aggregate Offering Amount Financial Information Financial Statement (defined below): Required: Requirements: (a) $100,000 or less: • The following information Financial statements must be certified or their equivalent line by the principal executive officer of items as reported on the the issuer as set forth below. federal income tax return filed by the issuer for the If financial statements are available most recently completed that have either been reviewed or year (if any): audited by a public accountant that is o Total income independent of the issuer, the issuer o Taxable income; and must provide those financial o Total tax; statements instead along with a signed certified by the principal audit or review report and need not executive officer of the include the information reported on issuer to reflect accurately the federal income tax returns or the the information reported on certification of the principal executive the issuer's federal income officer. tax returns; and • Financial statements of the issuer and its predecessors, if any.

(b) More than • Financial statements of the Financial statements must be $100,000, but not issuer and its predecessors, reviewed by a public accountant that more than if any. is independent of the issuer and must $500,000: include a signed review report.

If financial statements of the issuer are available that have been audited by a public accountant that is independent of the issuer, the issuer must provide those financial statements instead along with a signed audit report and need not include the reviewed financial statements.

(c) More than • Financial statements of the If the issuer has previously sold $500,000: issuer and its predecessors, securities in reliance on Regulation if any. Crowdfunding:

Financial statements must be audited by a public accountant that is independent of the issuer and must include a signed audit report.

If the issuer has not previously sold securities in reliance on Regulation Crowdfunding and it is offering more than $500,000 but not more than

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$1,000,000:

Financial statements must be reviewed by a public accountant that is independent of the issuer and must include a signed review report.

If financial statements of the issuer are available that have been audited by a public accountant that is independent of the issuer, the issuer must provide those financial statements instead along with a signed audit report and need not include the reviewed financial statements.

INSTRUCTIONS TO QUESTION 29: To determine the financial statements required, the Aggregate Offering Amount for purposes of this Question 29 means the aggregate amounts offered and sold by the issuer, all entities controlled by or under common control with the issuer, and all predecessors of the issuer in reliance on Section 4(a)(6) of the Securities Act within the preceding 12-month period plus the current maximum offering amount provided on the cover of this Form.

To determine whether the issuer has previously sold securities in reliance on Regulation Crowdfunding for purposes of paragraph (c) of this Question 29, "issuer" means the issuer, all entities controlled by or under common control with the issuer, and all predecessors of the issuer.

Financial statements must be prepared in accordance with U.S. generally accepted accounting principles and must include balance sheets, statements of comprehensive income, statements of cash flows, statements of changes in stockholders' equity and notes to the financial statements. If the financial statements are not audited, they shall be labeled as "unaudited."

Issuers offering securities and required to provide the information set forth in row (a) before filing a tax return for the most recently completed fiscal year may provide information from the tax return filed for the prior year (if any), provided that the issuer provides information from the tax return for the most recently completed fiscal year when it is filed, if filed during the offering period. An issuer that requested an extension of the time to file would not be required to provide information from the tax return until the date when the return is filed, if filed during the offering period.

A principal executive officer certifying financial statements as described above must provide the following certification**:

I, [identify the certifying individual], certify that:

(1) the financial statements of [identify the issuer] included in this Form are true and complete in all material respects; and

(2) the tax return information of [identify the issuer] included in this Form reflects accurately the information reported on the tax return for [identify the issuer] filed for the fiscal year ended [date of most recent tax return].

[Signature] [Title]

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** Intentional misstatements or omissions of facts constitute federal criminal violations. See 18 U.S. C. 1001.

To qualify as a public accountant that is independent of the issuer for purposes of this Question 29, the accountant must satisfy the independence standards of either: (i) Rule 2-01 of Regulation S-X or (ii) the AICP A.

The public accountant that audits or reviews the financial statements provided by an issuer must be (1) duly registered and in good standing as a certified public accountant under the laws of the place of his or her residence or principal office or (2) in good standing and entitled to practice as a public accountant under the laws of his or her place of residence or principal office.

An issuer will not be in compliance with the requirement to provide reviewed financial statement if the issuer received a review report that includes modifications. An issuer will not be in compliance with the requirement to provide audited financial statements if the issuer received a qualified opinion, an adverse opinion, or a disclaimer of opinion.

The issuer must notify the public accountant of the issuer's intended use of the public accountant's audit or review report in the offering.

For an offering conducted in the first 120 days of a fiscal year, the financial statements provided may be for the two fiscal years prior to the issuer's most recently completed fiscal year; however, financial statements for the two most recently completed fiscal years must be provided if they are otherwise available. If more than 120 days have passed since the end of the issuer's most recently completed fiscal year, the financial statements provided must be for the issuer's two most recently completed fiscal years. If the 120th day falls on a Saturday, Sunday, or holiday, the next business day shall be considered the 120th day for purposes of determining the age of the financial statements.

An issuer may elect to delay complying with any new or revised financial accounting standard until the date that a company that is not an issuer (as defined under section 2(a) of the Sarbanes-Oxley Act of 2002 is required to comply with such new or revised accounting standard, if such standard also applies to companies that are not issuers. Issuers electing such extension of time accommodation must disclose it at the time the issuer files its offering statement and apply the election to all standards. Issuers electing not to use this accommodation must forgo this accommodation for all financial accounting standards and may not elect to rely on this accommodation in any future filings

30. With respect to the issuer, any predecessor of the issuer, any affiliated issuer, any director, officer, general partner or managing member of the issuer, any beneficial owner of 20 percent or more of the issuer's outstanding voting equity securities, calculated in the same form as described in Question 6 of this Question and Answer format, any promoter connected with the issuer in any capacity at the time of such sale, any person that has been or will be paid (directly or indirectly) remuneration for solicitation of purchasers in connection with such sale of securities, or any general partner, director, officer or managing member of any such solicitor, prior to May 16, 2016:

(1) Has any such person been convicted, within 10 years (or five years, in the case of issuers, their predecessors and affiliated issuers) before the filing of this offering statement, of any felony or misdemeanor: (i) in connection with the purchase or sale of any security? o Yes o No (ii) involving the making of any false filing with the Commission? o Yes o No

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(iii) arising out of the conduct of the business of an underwriter, broker, dealer, municipal securities dealer, investment adviser, funding portal or paid solicitor ofpurchasers of securities? o Yes o No If Yes to any of the above, explain:

(2) Is any such person subject to any order, judgment or decree of any court of competent jurisdiction, entered within five years before the filing of the information required by Section 4A(b) of the Securities Act that, at the time of filing of this offering statement, restrains or enjoins such person from engaging or continuing to engage in any conduct or practice: (i) in connection with the purchase or sale of any security? o Yes o No; (ii) involving the making of any false filing with the Commission? o Yes o No (iii) arising out of the conduct of the business of an underwriter, broker, dealer, municipal securities dealer, investment adviser, funding portal or paid solicitor ofpurchasers of securities? o Yes o No If Yes to any of the above, explain:

(3) Is any such person subject to a final order of a state securities commission (or an agency or officer of a state performing like functions); a state authority that supervises or examines banks, savings associations or credit unions; a state insurance commission (or an agency or officer of a state performing like functions); an appropriate federal banking agency; the U.S. Commodity Futures Trading Commission; or the National Credit Union Administration that: (i) at the time of the filing of this offering statement bars the person from: (A) association with an entity regulated by such commission, authority, agency or officer? o Yes o No (B) engaging in the business of securities, insurance or banking? o Yes o No (C) engaging in savings association or credit union activities? o Yes o No (ii) constitutes a final order based on a violation of any law or regulation that prohibits fraudulent, manipulative or deceptive conduct and for which the order was entered within the 1 0-year period ending on the date of the filing of this offering statement? o Yes o No If Yes to any of the above, explain:

( 4) Is any such person subject to an order of the Commission entered pursuant to Section 15(b) or 15B(c) of the Exchange Act or Section 203(e) or (f) of the Investment Advisers Act of 1940 that, at the time of the filing of this offering statement: (i) suspends or revokes such person's registration as a broker, dealer, municipal securities dealer, investment adviser or funding portal? o Yes o No (ii) places limitations on the activities, functions or operations of such person? o Yes o No (iii) bars such person from being associated with any entity or from participating in the offering of any penny stock? o Yes o No If Yes to any of the above, explain:

(5) Is any such person subject to any order of the Commission entered within five years before the filing of this offering statement that, at the time of the filing of this offering statement, orders the person to cease and desist from committing or causing a violation or future violation of: (i) any scienter-based anti-fraud provision of the federal securities laws, including without limitation Section 17 (a )(I) of the Securities Act, Section 1O(b) of the

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Exchange Act, Section 15( c )(1) of the Exchange Act and Section 206(1) of the Investment Advisers Act of 1940 or any other rule or regulation thereunder? o Yes o No (ii) Section 5 of the Securities Act? o Yes o No If Yes to either of the above, explain:

(6) Is any such person suspended or expelled from membership in, or suspended or barred from association with a member of, a registered national securities exchange or a registered national or affiliated securities association for any act or omission to act constituting conduct inconsistent with just and equitable principles of trade? o Yes o No If Yes, explain:

(7) Has any such person filed (as a registrant or issuer), or was any such person or was any such person named as an underwriter in, any registration statement or Regulation A offering statement filed with the Commission that, within five years before the filing of this offering statement, was the subject of a refusal order, stop order, or order suspending the Regulation A exemption, or is any such person, at the time of such filing, the subject of an investigation or proceeding to determine whether a stop order or suspension order should be issued? o Yes o No If Yes, explain:

(8) Is any such person subject to a United States Postal Service false representation order entered within five years before the filing of the information required by Section 4A(b) of the Securities Act, or is any such person, at the time of filing of this offering statement, subject to a temporary restraining order or preliminary injunction with respect to conduct alleged by the United States Postal Service to constitute a scheme or device for obtaining money or property through the mail by means of false representations? o Yes o No If Yes, explain:

If you would have answered "Yes" to any of these questions had the conviction, order, judgment, decree, suspension, expulsion or bar occurred or been issued after May 16, 2016, then you are NOT eligible to rely on this exemption under Section 4(a)(6) of the Securities Act.

INSTRUCTIONS TO QUESTION 30: Final order means a written directive or declaratory statement issued by a federal or state agency, described in Rule 503(a)(3) of Regulation Crowdfunding, under applicable statutory authority that provides for notice and an opportunity for hearing, which constitutes a final disposition or action by that federal or state agency.

No matters are required to be disclosed with respect to events relating to any affiliated issuer that occurred before the affiliation arose if the affiliated entity is not (i) in control of the issuer or (ii) under common control with the issuer by a third party that was in control of the affiliated entity at the time of such events.

OTHER MATERIAL INFORMATION

31. In addition to the information expressly required to be included in this Form, include: (1) any other material information presented to investors; and (2) such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading.

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BILLING CODE 8011–01–C held of record shall not include which time the issuer must file a * * * * * securities issued pursuant to the registration statement that registers that offering exemption under section 4(a)(6) class of securities under the Act within PART 240—GENERAL RULES AND of the Securities Act (15 U.S.C. 120 days. REGULATIONS, SECURITIES 77d(a)(6)) by an issuer that: EXCHANGE ACT OF 1934 (1) Is current in filing its ongoing PART 249—FORMS, SECURITIES annual reports required pursuant to EXCHANGE ACT OF 1934 ■ 9. The authority citation for part 240 § 227.202 of this chapter; continues to read, in part, as follows: (2) Has total assets not in excess of ■ 11. The authority citation for part 249 Authority: 15 U.S.C. 77c, 77d, 77g, 77j, $25 million as of the end of its most continues to read, in part, as follows: 77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, recently completed fiscal year; and 77sss, 77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f, (3) Has engaged a transfer agent Authority: 15 U.S.C. 78a et seq. and 7201 78g, 78i, 78j, 78j–1, 78k, 78k–1, 78l, 78m, et seq.; 12 U.S.C. 5461 et seq.; and 18 U.S.C. registered pursuant to Section 17A(c) of 1350, unless otherwise noted. 78n, 78n–1,78o, 78o–4, 78o–10, 78p, 78q, the Act to perform the function of a 78q–1, 78s, 78u–5, 78w, 78x, 78ll, 78mm, * * * * * 80a–20, 80a–23, 80a–29, 80a–37, 80b–3, 80b– transfer agent with respect to such 4, 80b–11, 7201 et. seq., and 8302; 7 U.S.C. securities. ■ 12. Add subpart U, consisting of 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. (b) An issuer that would be required § 249.2000 to read as follows: 1350; and Public Law 111–203, 939A, 124 to register a class of securities under Stat. 1376, (2010), unless otherwise noted. Section 12(g) of the Act as a result of Subpart U—Forms for Registration of ■ 10. Add § 240.12g–6 to read as exceeding the asset threshold in Funding Portals follows: paragraph (a)(2) of this section may continue to exclude the relevant § 249.2000 Form Funding Portal. § 240.12g–6 Exemption for securities securities from the definition of ‘‘held of This form shall be used for filings by issued pursuant to section 4(a)(6) of the record’’ for a transition period ending funding portals under Regulation Securities Act of 1933. on the penultimate day of the fiscal year Crowdfunding (part 227 of this chapter). (a) For purposes of determining two years after the date it became whether an issuer is required to register ineligible. The transition period Note: The text of Form Funding Portal will a security with the Commission terminates immediately upon the failure not appear in the Code of Federal pursuant to Section 12(g)(1) of the Act of an issuer to timely file any periodic Regulations. (15 U.S.C. 78l(g)(1)), the definition of report due pursuant to § 227.202 at BILLING CODE 8011–01–P

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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM FUNDING PORTAL APPLICATION OR AMENDMENT TO APPLICATION FOR REGISTRATION OR WITHDRAWAL FROM REGISTRATION AS FUNDING PORTAL UNDER THE SECURITIES EXCHANGE ACT OF 1934

¥ ARNING: Failure to complete this form truthfully, to keep this form current and to file .ccurate supplementary information on a timely basis, or the failure to keep accurate books and ecords or otherwise to comply with the provisions of law applying to the conduct of business as a unding portal, would violate the Federal securities laws and may result in disciplinary, dministrative, injunctive or criminal action.

:heck the appropriate box: 'his is: an initial application to register as a funding portal with the SEC. an amendment to any part of the funding portal's most recent Form Funding Portal, including a successor registration. a withdrawal of the funding portal's registration with the SEC.

:chedule A must be completed as part of all initial applications. Amendments to Schedule A aust be provided on Schedule B. Schedule C must be completed by nonresident funding portals. f this is a withdrawal of a funding portal's registration, complete Schedule D.

f this is an amendment to any part of the funding portal's most recent Form Funding Portal, 1rovide an explanation describing the amendment: ------

tern 1 - Identifying Information

~xact name, principal business address, mailing address, if different, and contact information of lle funding portal:

A. Full name ofthefundingportal: ______

B. Name(s)/Website URL(s) under which business is conducted, if different from Item lA:

C. IRS Empl. Ident. No.: ______

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D. If a name and/or website URL in (lA) or (lB) has changed since the funding portal's most recent Form Funding Portal, enter the previous name and/or website URL and specify whether the name change is ofthe ofunding portal name (lA), oro name/website URL (lB).

Previous name(s) or website URL(s): ------

E. Funding portal's main street address (Do not use a P.O. Box):

F. Mailing address(es) (if different) and office locations (if more than one):

G. Contact Information: Telephone Number: ______Fax Number: ______Email Address: ______

H. Contact Employee Information: Name: ______Title: Direct Telephone Number: ______Fax Number: ______Direct Email Address: ______

I. Month applicant's fiscal year ends: _____

J. Registrations

Was the applicant previously registered on Form Funding Portal as afunding portal or with the Commission in any other capacity?

o Yes SEC File No.: ------o No

K. 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.

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o Yes o No

If "yes," complete Section K.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.

English Name of Foreign Financial Regulatory Authority:

Registration Number (if any): ------NameofCountry: ------

Item 2 - Form of Organization

A. Indicate legal status of applicant.

D Corporation D Limited Liability Company D Sole Proprietorship D Other (please specify) ______D Partnership

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 ofthis filing succeeding to the business of a currently registered funding portal?

o Yes o 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 registered funding 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.

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Name of Acquired Funding Portal:

Acquired Funding Portal's SEC File No.: ______

C. Briefly describe details of the succession including any assets or liabilities not assumed by the successor.

Item 4 - Control Relationships

In this Item, identify every_ person that, directly or indirectly, controls the applicant, controls management or pohcies ofthe applicant, or that the applicant directly or indirectly controls.

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 or control affiliates of the applicant (as applicable). This information is used to decide whether to revoke registration, to place limitations on the applicant's activities as afundingportal, 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. Check all answers that apply. Refer to the Explanation of Terms section of Form Funding Portal Instructions for explanation of italicized terms.

If the answer is "yes" to any question in this Item, the applicant must complete the appropriate Disclosure Reporting Page ("DRP") (FP)- Criminal, Regulatory Action, Civil Judicial Action, Bankruptcy/SIPC, Bond, or Judgment/Lien, as applicable.

Criminal Disclosure

If the answer is "yes" to any question below, complete a Criminal DRP.

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A. In the past ten years, has the applicant or any associated person:

(1) been convicted of any felony, or pled guilty or nolo contendere ("no contest") to any charge of a felony, in a domestic, foreign, or military court?

oYes oNo

The response to the following question may be limited to charges that are currently pending:

(2) been charged with any felony?

oYes oNo

B. In the past ten years, has the applicant or any associated person:

(1) 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 fraud, false statements, or omissions, wrongful taking of property, bribery, perjury, forgery, counterfeiting, extortion, or a conspiracy to commit any of these offenses?

o Yes oNo

The response to the following question may be limited to charges that are currently pending:

(2) been charged with a misdemeanor listed in Item 5-B(l )?

oYes oNo

Regulatory Action Disclosure

Ifthe answer is "yes" to any question below, complete a Regulatory ActionDRP.

C. Has the SEC or the Commodities Futures Trading Commission ("CFTC") ever:

(1) found the applicant or any associated person to have made a false statement or omission?

o Yes oNo

(2) found the applicant or any associated person to have been involved in a violation of any SEC or CFTC regulations or statutes?

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o Yes oNo

(3)found the applicant or any associated person to have been a cause ofthe denial, suspension, revocation, or restriction of the authorization of an investment­ related business to operate?

o Yes oNo

(4) entered an order against the applicant or any associated person m connection with investment-related activity?

o Yes oNo

(5) 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?

o Yes o No

D. Has any other federal regulatory agency, any state regulatory agency, or any foreign financial regulatory authority:

(1) ever found the applicant or any associated person to have made a false statement or omission, or been dishonest, unfair, or unethical?

o Yes o No

(2) ever found the applicant or any associated person to have been involved in a violation of investment-related regulations or statutes?

o Yes o No

(3) 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?

o Yes o No

(4) in the past ten years entered an order against the applicant or any associated person in connection with an investment-related activity?

o Yes o No

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(5) 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?

o Yes o No

E. Has any self-regulatory organization or commodities exchange ever:

(1) found the applicant or any associated person to have made a false statement or omission?

o Yes o No (2) 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)?

o Yes o No

(3) 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?

o Yes o No

(4) 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?

o Yes o No

F. Has the applicant or any associated person ever had an authorization to act as an attorney, accountant, or federal contractor revoked or suspended?

o Yes o No

G. Is the applicant or any associated person currently the subject of any regulatory proceeding that could result in a "yes" answer to any part ofltem 5- C, 5-D, or 5-E?

o Yes o No

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Civil Judicial Disclosure

If the answer is "yes" to a question below, complete a Civil Judicial Action DRP.

H. Has any domestic or foreign court:

(1) in the past ten years, enjoined the applicant or any associated person in connection with any investment-related activity?

o Yes oNo

(2) ever found that the applicant or any associated person was involved in a violation of investment-related statutes or regulations?

o Yes oNo

(3) ever dismissed, pursuant to a settlement agreement, an investment- related civil action brought against the applicant or any associated person by a state or foreign financial regulatory authority?

o Yes oNo

I. Is the applicant or any associated person now the subject of any civil proceeding that could result in a "yes" answer to any part ofltem 5-H(l )-(3)?

o Yes oNo

Financial Disclosure

Ifthe answer is "yes" to a question below, complete a Bankruptcy/Disclosure, Bond Disclosure or Judgment/Lien DRP, as applicable.

J. In the past ten years, has the applicant or a control affiliate ofthe applicant ever been a securities firm or a control affiliate of a securities firm that:

(1) has been the subject of a bankruptcy petition?

o Yes oNo

(2) has had a trustee appointed or a direct payment procedure initiated under the Securities Investor Protection Act?

o Yes oNo

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K. Has a bonding company ever denied, paid out on, or revoked a bond for the applicant?

o Yes oNo

L. Does the applicant have any unsatisfied judgments or liens against it?

o Yes oNo

Item 6- Non-Securities Related Business

Does applicant engage in any non-securities related business?

o Yes oNo

If "yes," briefly describe the non-securities business.

Item 7 - Qualified Third Party Arrangements; Compensation Arrangements A. Qualified Third Party Arrangements. Complete the following information for each person that will hold investor funds in escrow or otherwise pursuant to the requirements of Rule 303(e) of Regulation Crowdfunding (17 CFR 227.303(e)).

Nameofperson: ------

Address:------

Phone Number: ______

B. Compensation. Please describe any compensation arrangements funding portal has with issuers.

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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., l.F ., and l.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 ChiefExecutive 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) ofthe 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 of the 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/FE/NP column below, enter "DE" if the 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 10% C- 25% but less than 50% E- 75% or more G- Other (general partner, trustee, or elected member)

6. Control Person: (a) In the Control Person column, enter "Yes" ifthe person has control as defined in the Glossary of Terms to Form Funding Portal, and enter "No" ifthe person does not have control. Note that under this definition, most executive officers and al125% 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) ofthe Exchange Act.

7. Complete each column.

FULL DE/FE/NP Title or Date Title or Ownership Control CRDNo. LEGAL Status Status Code Person (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 IRS Name, Employer Middle ID No.) Name)

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FORM FUNDING PORTAL SCHEDULED

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 Ownership Control CRDNo. NAME E/ Amendment Status or Status Code Person (If None: S.S. No. (Natural FE Acquired and Date of Birth, Persons: IN MM yyyy Yes/No PR IRS Tax No., or Last Name, p IRS Employer ID First Name, No.) Middle

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FORM FUNDING PORTAL SCHEDULEC

Nonresident Funding Portals

Service ofProcess and Certification Regarding Prompt Access to Books and Records and Ability to Submit to Inspections and Examinations

Each nonresident funding portal applicant shall use Schedule C of Form Funding Portal to: identify its United States agent for service of process, and certify that it can, as a matter oflaw and will: (1) provide the Commission and any registered national securities association of which it becomes a member with prompt access to its books and records, and (2) submit to onsite inspection and examination by the Commission and any registered national securities association of which it becomes a member.

A. Agent for Service of Process:

1. Name of United States person applicant designates and appoints as agent for service of process:

2. 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 information; and (b) any civil or criminal suit or action or proceeding under the federal securities laws 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 ofthe United States or of any of its territories or possessions or of the District of Columbia. 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 thereofhad been made.

B. Certification regarding access to records and ability to submit to inspections and examinations: Applicant can, as a matter of law, and will:

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1. provide the Commission and any registered national securities association of which it becomes a member with prompt access to its books and records, and

2. submit to onsite inspection and examination by the Commission and any registered national securities association of which it becomes a member.

Applicant must attach as an exhibit to this Form Funding Portal, Exhibit C, a copy of the opinion ofcounsel it is required to obtain in accordance with Rule 400(/) of Regulation Crowdfunding, i.e., the opinion ofcounsel that the nonresidentfunding portal can, as a matter oflaw, provide the Commission and any registered national securities association ofwhich the nonresident funding portal becomes a member with prompt access to the books and records ofsuch nonresident funding portal, and that the nonresident funding portal can, as a matter oflaw, submit to onsite inspection and examination by the Commission and any registered national securities association ofwhich the nonresident funding portal becomes a member. EXECUTION FOR NON-RESIDENT FUNDING PORTALS

The undersigned represents and warrants that he/she has executed this form on behalf of, and is duly authorized to bind, the nonresident funding portal. The undersigned and the nonresident 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 nonresident 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.

The undersigned certifies that the nonresident funding portal can, as a matter of law, and will provide the Commission and any registered national securities association of which it becomes a member with prompt access to the books and records of such nonresident funding portal and can, as a matter of law, and will submit to onsite inspection and examination by the Commission and any registered national securities association of which it becomes a member. Finally, the undersigned authorizes any person having custody or possession of these books and records to make them available to federal regulatory representatives.

Signature: ______

Name and Title: ______

Dme: ______

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FORM FUNDING PORTAL SCHEDULED

If this is a withdrawal of registration:

A. The date the funding portal ceased business or withdrew its registration request: Date (MMIDD/YYYY): ______

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.

Name and address of entity where books and records are kept:

(area code)(telephone number) (area code) (fax number)

This is (check one): D one of applicant's branch offices or affiliates. D a third party unaffiliated recordkeeper. D other.

If this address is a private residence, check this box: D

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

o Yes oNo

2. Investor initiated complaint

o Yes oNo

3. Private civil litigation

o Yes oNo

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CRIMINAL ACTION DISCLOSURE REPORTING PAGE (FP)

General Instructions

This Disclosure Reporting Page (DRP FP) is an DINITIAL OR DAMENDED response used to report details for affirmative responses to Items 5-A or 5-B of Form Funding Portal.

Check item(s) being responded to: D 5-A(l) 05-A(2) 05-B(l) 05-B(2)

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 ofthe same event(s) should be reported on the same DRP. Unrelated criminal actions, including separate cases arising out of the same event, must be reported on separate DRPs. Use this DRP to report all charges arising out ofthe same event. One event may result in more than one affirmative answer to the items listed above.

Part]

Check all that apply:

1. The person(s) or entity(ies) for whom this DRP is being filed is (are) the:

Select only one.

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):

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If the associated person has a CRD number, provide that number. ------

Ifthis 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:

Part2

1. If charge(s) were brought against a firm or organization over which the applicant or a associated person exercise( s)(d) control:

A. Enter the firm or organization's name------

B. Was the firm or organization engaged in an investment-related business?

DYes D No

C. What was the relationship ofthe applicant with the firm or organization? (In the case of a associated person, include any position or title with the firm or organization.)

2. Court where 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).

A. N arne of Court: ------B. Location of Court: Street Address: City or County: ______State/Country: ______Postal Code:

C. Docket/Case Number: ______

3. Event Disclosure Detail (Use this for both organizational and individual charges.)

A. Date First Charged (MM/DD/YYYY): ______D Exact D Explanation

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If not 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 ofthe charge(s) within the event involve afelony? DYes ONo

D. Current status ofthe event? D Pending DOn Appeal D Final

E. Event status date (Complete unless status is pending)

(MMIDD/YYYY): _____ D Exact D Explanation

If not 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, (f) Penalty/Fine Amount, and (g) Date Paid.

5. Provide a brief summary of circumstances leading to the charge(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)

I GENERAL INSTRUCTIONS

This Disclosure Reporting Page (DRP FP) is an 0 INITIAL OR 0 AMENDED response used to report details for affirmative responses to Item 5-C, 5-D, 5-E-5-F or 5-G of Form Funding Portal.

Check item(s) being responded to: D 5-C(l) D 5-C(2) D 5-C(3) D 5-C(4) D 5-C(5) D 5-D(l) D 5-D(2) D 5-D(3) D 5-D(4) D 5-D(5) D 5-E(l) D 5-E(2) D 5-E(3) D 5-E(4) D 5-F D 5-G

Use a separate DRP for each event or proceeding. An 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-C, 5-D, 5-E, 5- For 5-G. 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.

Part]

The person(s) or entity(ies) for whom this DRP is being filed is (are) the:

Select only one.

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)

Ifthis 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

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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. _____

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 DRP was filed in error. Explain the circumstances:

Part2

1. Regulatory Action was initiated by:

0 SEC 0 Other Federal Authority 0 SRO D Foreign Authority D State

(Full name ofregulator,foreignfinancial regulatory authority, federal authority, state or SRO)

2. Principal Sanction (check appropriate item):

D Civil and Administrative Penalty(ies)/Fine(s) D Restitution D Expulsion D Disgorgement D Bar D Revocation D Suspension D Cease and Desist D Injunction D Undertaking D Censure D Prohibition DOther D Denial D Reprimand

Other Sanctions:

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3. Date Initiated (MM/DD/YYYY): ______D Exact D Explanation

If not exact, provide explanation:

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 Mutual Fund(s) D Annuity(ies)- Variable D Direct Investment(s)- DPP & LP Interest(s) D Money Market Fund(s) D Equity- OTC D Options D CD(s) D Equity Listed (Common & Preferred Stock) D Commodity Option(s) D Futures- Commodity D Penny Stock(s) D Debt- Asset Backed D Futures- Financial D Unit Investment Trust(s) D Debt- Corporate D Index Option(s) D Other D Debt- Government D Insurance D No Product D Debt- Municipal D Investment Contract(s)

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

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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 (A WC) D Dismissed D Vacated D Consent D Withdrawn D Order D Decision D Settled D Other D Decision & Order of Offer of Settlement D Stipulation and Consent

11. Resolution Date (MM/DD/YYYY): ______D Exact D Explanation If not exact, provide explanation:

12. Resolution Detail:

A. Were any ofthe following Sanctions Ordered (check all appropriate items)?

D Monetary/Fine D Revocation/Expulsion/Denial DCensure Amount: $------D Disgorgement D Suspension DBar D Cease & Desist/Injunction

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 oftime 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-H or 5-I of Form Funding Portal.

Check item(s) being responded to: D 5-H(l) D 5-H(2) D 5-H(3) D 5-I

Use a separate DRP for each event or proceeding. An 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-H or 5-I. Use only one DRP to report details related to the same event. Unrelated civil judicial actions must be reported on separate DRPs.

Part]

The person(s) or entity(ies) for whom this DRP is being filed is (are) the:

Select only one.

D Applicant (the funding portal) D Applicant and one or more of the applicant's associated person (s) D One or more ofthe applicant's associated person (s)

Ifthis 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: 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 DRP was filed in error. Explain the circumstances:

Part2

1. Court Action initiated by: (Name ofregulator,foreignfinancial 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 0 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) 0 Equity - OTC D Mutual Fund(s) D Commodity Option( s) DNo Product D Equity Listed D Options (Common & Preferred Stock) 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

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Other Product Types:

5. Formal Action was brought in (include the name ofthe 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? DPending DOn Appeal D Final

9. If on appeal, court to which the action was appealed (provide name of the court) and Date Appeal Filed (MM/DD/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):

DConsent D Judgment Rendered D Settled D Dismissed D Opinion DWithdrawn D Other _____

12. Resolution Date (MM/DD/YYYY): ______D Exact D Explanation

If not exact, provide explanation:

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13. Resolution Detail:

A. Were any of the following Sanctions Ordered or Relief Granted (check appropriate items)?

D Monetary/Fine D Revocation/Expulsion/Denial 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-J of Form Funding Portal.

Check item(s) being responded to: D 5-J(l) D 5-J(2)

Use a separate DRP for each event or proceeding. An 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-J. 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:

Select only one.

D Applicant D Applicant and one or more control affiliate(s) D One or more of control affiliate(s)

Ifthis DRP is being filed for a control affiliate, give the full name ofthe control affiliate below (for individuals, Last name, First name, Middle name).

If the control affiliate is registered with the CRD, provide the CRD number. If not, indicate "non-registered'' by checking the appropriate checkbox.

FP DRP- CONTROL AFFILIATE

Control Affiliate CRD Number This control affiliate is: D a firm D a natural person

Registered: D Yes 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.

2. Ifthe 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? Ifthe answer is "Yes," no other information on this DRP must be provided. Yes D No D NOTE: The completion of this Form does not relieve the control affiliate of its obligation to update its CRD records.

Part2

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

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If not exact, provide explanation: ______

3. If the financial action relates to an organization over which the applicant or control affiliate person exercise(s)(d) control, enter organization name and the applicant's or control affiliate's position, title or relationship:

Was the Organization investment-relatecl? DYes DNo

4. Court action brought in (Name ofFederal, 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? D Yes DNo

6. If not 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 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 provided):

9. If a SIP A trustee was appointed or a direct payment procedure was begun, enter the amount paid by you; or the name oftrustee:

Currently Open? DYes DNo

Date Direct Payment Initiated/Filed or Trustee Appointed (MM/DD/YYYY): ______

D Exact D Explanation

If not exact, provide explanation: ______

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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 affirmative responses to Item 5-K of Form Funding Portal.

Check item(s) being responded to: D 5-K

Use a separate DRP for each event or proceeding. An 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-K. 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. Firm Name: (Policy Holder)

2. Bonding Company Name:

3. Disposition Type: (check appropriate item)

D Denied D Payout D Revoked

4. Disposition Date (MM/DD/YYYY): DExact 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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JUDGMENT I LIEN 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-L of Form Funding Portal.

Check item(s) being responded to: D 5-L

Use a separate DRP for each event or proceeding. An 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-L. 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. Judgment/Lien Amount: ______2. Judgment/Lien Holder: ______

3. Judgment/Lien Type: (check appropriate item)

D Civil D Default DTax

4. Date Filed (MM/DD/YYYY): _____ D Exact D Explanation

If not exact, provide explanation: ------

5. Is Judgment/Lien outstanding? DYes DNo

IfNo, provide explanation: ______IfNo, how was matter resolved? (check appropriate item) D Discharged D Released D Removed D Satisfied

6. Court where judgment was given:

A. Name of Court

B. Location of Court: Street Address: City or County: ______State/Country: ______Postal Code:

C. Docket/Case Number

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7. Provide a brief summary of events leading to the action and any payment schedule details, including current status (if applicable): ______

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FORM FUNDING PORTAL INSTRUCTIONS

A. GENERAL INSTRUCTIONS

1. EXPLANATION OF FORM • This is the form that a funding portal must use to register with the Securities and Exchange Commission ("SEC" or "Commission"), to amend its registration and to withdraw from registration. • The Commission may make publicly accessible all current Forms Funding Portal, including amendments and registration withdrawal requests, which may be searchable by the public, with the exception of certain personally identifiable information or other information with significant potential for misuse (including the contact employee's direct phone number, fax number and e-mail address and any IRS Tax Number, IRS Employer Identification Number, social security number, date of birth, or any other similar information). If the applicant submits any attachments to Form Funding Portal in PDF format it is the responsibility of the applicant to redact certain personally identifiable information or other information with significant potential for misuse (including the contact employee's direct phone number, fax number and e-mail address and any IRS Tax Number, IRS Employer Identification Number, social security number, date of birth, or any other similar information) from the PDF.

2. WHEN TO FILE FORM FUNDING PORTAL A funding portal's registration must become effective before offering or selling any securities in reliance on Section 4(a)(6) through a platform. Under Rule 400, a funding portal's registration will be effective the later of: (1) 30 calendar days after the date a complete Form Funding Portal is received by the Commission or (2) the date the funding portal is approved for membership by a national securities association registered under Section 15A ofthe Securities Exchange Act of 1934 ("Exchange Act").

A registered funding portal must promptly file an amendment to Form Funding Portal when any information previously submitted on Form Funding Portal becomes inaccurate or incomplete for any reason.

A successor funding portal may succeed to the registration of a registered funding portal by filing a registration on Form Funding Portal within 30 days after the successiOn.

If a funding portal succeeds to and continues the business of a registered funding portal and the succession is based solely on a change ofthe predecessor's date or state of incorporation, form of organization, or composition of a partnership or similar reason, the successor may, within 30 days ofthe succession, amend the registration on Form Funding Portal to reflect these changes.

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Afundingportal must also file a withdrawal on Form Funding Portal (and complete Schedule D) promptly upon ceasing to operate as a funding portal. Withdrawal will be effective on the later of 30 days after receipt by the Commission, after the funding portal is no longer operational, or within such longer period of time as to which the funding portal consents or which the Commission by order may determine as necessary or appropriate in the public interest or for the protection of investors.

A Form Funding Portal filing will not be considered complete unless it complies with all applicable requirements.

3. ELECTRONIC FILING- The applicant must file Form Funding Portal electronically, and must utilize this system to file and amend Form Funding Portal electronically to assure the timely acceptance and processing of those filings. 4. CONTACT EMPLOYEE - The individual listed as the contact employee must be authorized to receive all compliance information, communications, and mailings, and be responsible for disseminating it within the applicant's organization.

5. FEDERAL INFORMATION LAW AND REQUIREMENTS

• The principal purpose of this form is to provide a mechanism by which a funding portal can register with the Commission, amend its registration and withdraw from registration. The Commission maintains a file of the information on this form and will make certain information collected through the form publicly available. The SEC will not accept forms that do not include the required information.

• Section 4A(a) of the Securities Act of 1933 [15 U.S.C. §77d-1(a)] and Sections 3(h) and 23(a) the Exchange Act [15 U.S.C. §§78c(h) and 78w(a)] authorize the SEC to collect the information required by Form Funding Portal. The SEC collects the information for regulatory purposes. Filing Form Funding Portal is mandatory for persons that are registering as funding portals with the SEC.

• Any member of the public may direct to the Commission any comments concerning the accuracy ofthe burden estimate on this Form and any suggestions for reducing this burden. This collection of information has been reviewed by the Office of Management and Budget in accordance with the clearance requirements of 44 U.S.C. §3507. The information contained in this form is part of a system of records subject to the Privacy Act of 1974, as amended. The Securities and Exchange Commission has published in the Federal Register the Privacy Act Systems of Records Notice for these records.

B. FILING INSTRUCTIONS 1. FORMAT

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• All fields requiring a response in Items 1-7 must be completed before the filing will be accepted.

• Applicant must complete the execution page certifying that Form Funding Portal and amendments thereto have been executed properly and that the information contained therein is accurate and complete.

• To amend information, the applicant must update the appropriate Form Funding Portal pages or Schedules.

• A paper copy, with original manual signatures, of the initial Form Funding Portal filing and amendments to Form Funding Portal and Disclosure Reporting Pages must be retained by the applicant and be made available for inspection upon a regulatory request.

2. DISCLOSURE REPORTING PAGES (DRP) -Information concerning the applicant or associated person that relates to the occurrence of an event reportable under Item 5 must be provided on the applicant's appropriate DRP (FP). If an associated person is an individual or organization registered through the CRD, such associated person need only complete the associated person name and CRD number of the applicant's appropriate DRP. Details for the event must be submitted on the associated person's appropriate DRP or DRP (U-4). If an associated person is an individual or organization not registered through the CRD, provide complete answers to all of the questions and complete all fields requiring a response on the associated person's appropriate DRP (FP).

3. DIRECT OWNERS - Amend the Direct Owners and Executive Officers page when changes in ownership occur.

4. NONRESIDENT APPLICANTS -Any applicant that is a nonresident funding portal must complete Schedule C and attach the opinion of counsel referred to therein.

C. EXPLANATION OF TERMS

1. GENERAL

APPLICANT - The funding portal applying on or amending this form.

ASSOCIATED PERSON- Any partner, officer, director or manager of the funding portal (or any person occupying a similar status or performing similar functions), any person directly or indirectly controlling or controlled by the funding portal, or any employee of the funding portal, except that any person associated with a funding portal whose functions are solely clerical or ministerial shall not be included in the meaning of such term for purposes of section 15(b) of the Exchange Act (other than paragraphs (4) and (6) thereof).

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CONTROL- The power, directly or indirectly, to direct the management or policies of the funding portal, whether through contract, or otherwise. A person is presumed to control a funding portal ifthat person: (1) is a director, general partner or officer exercising executive responsibility (or has a similar status or functions); (2) directly or indirectly has the right to vote 25 percent or more of a class of a voting security or has the power to sell or direct the sale of 25 percent or more of a class of voting securities of the funding portal; or (3) in the case of a partnership, has contributed, or has a right to receive, 25 percent or more of the capital of the funding portal. (This definition is used solely for the purposes of Form Funding Portal).

CONTROL AFFILIATE- A person named in Item 4 or any other individual or organization that directly or indirectly controls, is under common control with, or is controlled by, the applicant, including any current employee of the applicant except one performing only clerical, administrative, support or similar functions, or who, regardless of title, performs no executive duties or has no senior policy making authority.

FOREIGN FINANCIAL REGULATORY AUTHORITY- Includes (1) a foreign securities authority; (2) other governmental body or foreign equivalent of a self-regulatory organization empowered by a foreign government to administer or enforce its laws relating to the regulation of investment or investment-related activities; and (3) a foreign membership organization, a function of which is to regulate the participation of its members in the activities listed above.

FUNDING PORTAL- A broker acting as an intermediary in a transaction involving the offer or sale of securities offered and sold in reliance on Section 4(a)(6), that does not, directly or indirectly: (1) offer investment advice or recommendations; (2) solicit purchases, sales or offers to buy the securities displayed on its platform; (3) compensate employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its platform; or ( 4) hold, manage, possess, or otherwise handle investor funds or securities.

JURISDICTION- Any state ofthe United States, the District of Columbia, the Commonwealth of Puerto Rico, the U.S. Virgin Islands, any other territory of the United States, or any subdivision or regulatory body thereof.

NONRESIDENT FUNDING PORTAL- A funding portal incorporated in or organized under the laws of a jurisdiction outside of the United States or its territories, or having its principal place of business in any place not in the United States or its territories.

PERSON- An individual, partnership, corporation, trust, or other organization.

SELF-REGULATORY ORGANIZATION ("SRO")- A national securities association registered under Section 15A of the Exchange Act or any national securities exchange or registered clearing agency.

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SUCCESSOR-Afundingportalthat assumes or acquires substantially all ofthe assets and liabilities, and that continues the business of, a registered predecessor funding portal that ceases its funding portal activities. See Rule 400( c) of Regulation Crowdfunding ( 17 CFR 227.400(c)).

2. FOR THE PURPOSE OF ITEM 5 AND THE CORRESPONDING DISCLOSURE REPORTING PAGES (DRPs) (FP)

CHARGED - Being accused of a crime in a formal complaint, information, or indictment (or equivalent formal charge).

ENJOINED -Includes being subject to a mandatory injunction, prohibitory injunction, preliminary injunction, or temporary restraining order.

FELONY- For jurisdictions that do not differentiate between afelony and a misdemeanor, a felony is an offense punishable by a sentence of at least one year imprisonment and/or a fine of at least $1,000. The term also includes a general court martial.

FOUND - Includes adverse final actions, including consent decrees in which the respondent has neither admitted nor denied the findings, but does not include agreements, deficiency letters, examination reports, memoranda of understanding, letters of caution, admonishments, and similar informal resolutions of matters.

INVESTMENT OR INVESTMENT-RELATED- Pertaining to securities, commodities, banking, savings association activities, credit union activities, insurance, or real estate (including, but not limited to, acting as or being associated with afundingportal broker-dealer, municipal securities dealer, government securities broker or dealer, issuer, investment company, investment adviser, futures sponsor, bank, security-based swap dealer, major security-based swap participant, savings association, credit union, insurance company, or insurance agency).

INVOLVED -Doing an act or aiding, abetting, counseling, commanding, inducing, conspiring with or failing reasonably to supervise another in doing an act.

MINOR RULE VIOLATION- A violation of a self-regulatory organization rule that has been designated as "minor" pursuant to a plan approved by the SEC or Commodity Futures Trading Commission. A rule violation may be designated as "minor" under a plan if the sanction imposed consists of a fine of $2,500 or less and ifthe sanctioned person does not contest the fine. (Check with the appropriate self-regulatory organization to determine if a particular rule violation has been designated as "minor" for these purposes).

MISDEMEANOR- For jurisdictions that do not differentiate between a felony and a misdemeanor, a misdemeanor is an offense punishable by a sentence ofless than one year

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BILLING CODE 8011–01–C Note: The amendments to Form ID will not Angel 2: Letter from James J. Angel, Ph.D., appear in the Code of Federal Regulations. CFA, Visiting Associate Professor, PART 269—FORMS PRESCRIBED Georgetown University, Jul. 1, 2014 UNDER THE TRUST INDENTURE ACT Dated: October 30, 2015. AngelList: Letter from Naval Ravikant, CEO, OF 1939 By the Commission. AngelList, Jan. 24, 3014 Jill M. Peterson, Anonymous 1: Letter from an anonymous person, Nov. 9, 2013 ■ 13. The authority citation for part 269 Assistant Secretary. continues to read as follows: Anonymous 2: Letter from an anonymous Note: The following Exhibit A will not person, Nov. 13, 2013 Authority: 15 U.S.C. 77ddd(c), 77eee, appear in the Code of Federal Regulations. Anonymous 3: Letter from an anonymous 77ggg, 77hhh, 77iii, 77jjj, 77sss, and 78ll(d), person, Nov. 25, 2013 unless otherwise noted. Exhibit A Anonymous 4: Letter from an anonymous person, Dec. 5, 2013 PART 274—FORMS PRESCRIBED Comment Letters Received Regarding Anonymous 5: Letter from an anonymous UNDER THE INVESTMENT COMPANY Proposing Release To Implement Regulation person, Jan. 25, 2014 ACT OF 1940 Crowdfunding (File No. S7–09–13) Anonymous 6: Letter from an anonymous AABOC: Letter from Doby Gavn, President person, Feb. 7, 2014 ■ 14. The authority citation for part 274 and CEO, African American Business Arctic Island 1: Letter from Scott Purcell, Founder and CEO, Arctic Island LLC, Nov. continues to read, in part, as follows: Opportunities Communities, Oct. 26, 2013 ABA: Letter from Catherine T. Dixon, Chair, 4, 2013 Authority: 15 U.S.C. 77f, 77g, 77h, 77j, Federal Regulation of Securities Arctic Island 2: Letter from Scott Purcell, 77s, 78c(b), 78l, 78m, 78n, 78o(d), 80a–8, Committee, Business Law Section, Founder and CEO, Arctic Island LLC, Dec. 80a–24, 80a–26, and 80a–29, unless American Bar Association 4, 2013 otherwise noted. Accredify: Letter from Herwig G. Konings, Arctic Island 3: Letter from Scott Purcell, Founder and CEO, Arctic Island LLC, Dec. * * * * * CEO, Accredify LLC, Nov. 30, 2013 4, 2013 Active Agenda: Letter from Daniel F. Zahlis, ■ 15. Form ID (referenced in §§ 239.63, Arctic Island 4: Letter from Scott Purcell, Founder, Product Architect, Active Agenda 249.446, 269.7 and 274.402) is amended Founder and CEO, Arctic Island LLC, Dec. LLC, Jan. 29, 2014 by adding a check box that reads 4, 2013 Advanced Hydro: Letter from Dileep ‘‘Funding Portal’’ in alphabetical order Arctic Island 5: Letter from Scott Purcell, Agnihotri, Ph.D., CEO, Advanced Hydro Founder and CEO, Arctic Island LLC, Dec. in the list of applicants in Part I; and the Inc., Oct. 23, 2013 Instructions to Form ID are amended to 6, 2013 AEO: Letter from Connie E. Evans, President Arctic Island 6: Letter from Scott Purcell, include the definition of ‘‘Funding & CEO, Association for Enterprise Portal’’ in alphabetical order under Part Founder and CEO, Arctic Island LLC, Dec. Opportunity, Feb. 3, 2014 6, 2013 I and reads ‘‘Funding Portal: A broker AFL–CIO: Letter from Brandon J. Rees, Acting Arctic Island 7: Letter from Scott Purcell, acting as an intermediary in a Director, Office of Investment, AFL–CIO, Founder and CEO, Arctic Island LLC, Dec. transaction involving the offer or sale of Feb. 3, 2014 6, 2013 securities offered and sold in reliance AFR: Letter from Americans for Financial Arctic Island 8: Letter from Scott Purcell, on Section 4(a)(6) of the Securities Act, Reform, March 5, 2014 Founder and CEO, Arctic Island LLC, Dec. that does not: (1) Offer investment Ahmad: Letter from Mohamed Ahmad, Aug. 31, 2013 advice or recommendations; (2) solicit 21, 2014 ASSOB: Letter from Paul M. Niederer, CEO, purchases, sales or offers to buy the AICPA: Letter from The American Institute of ASSOB Equity Funding Platform Australia, Certified Public Accountants, Feb. 3, 2014 securities displayed on its platform; (3) Oct. 25, 2013 Amram 1: Letter from Elan Amram, Feb. 3, compensate employees, agents, or other ASTTC: Letter from Mark C. Healy, President 2014 and Chief Executive Officer, American persons for such solicitation or based on Amram 2: Letter from Elan Amram, Feb. 3, Stock Transfer & Trust Company, the sale of securities displayed or 2014 Brooklyn, New York, Feb. 3, 2014 referenced on its platform; or (4) hold, Angel 1: Letter from James J. Angel, Ph.D., AWBC: Letter from Marsha Bailey, Chair, manage, possess, or otherwise handle CFA, Visiting Associate Professor, Association of Women’s Business Centers, investor funds or securities.’’ Georgetown University, Feb. 5, 2014 Feb. 3, 2014

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BackTrack: Letter from Randy Shain, CFIRA 12: Letter from Kim Wales, CEO, Crowdpassage 3: Letter from Matthew R. Founder and EVP, BackTrack Reports, Nov. Wales Capital, and CFIRA Executive Board Nutting, Esq., Executive Director, National 12, 2013 Member, and Scott Purcell, CEO, Artic Legal Director, Crowdpassage.com, Jan. 31, Ball: Letter from Robert Ball, Feb. 1, 2014 Island, and CFIRA Board Member, Apr. 24, 2014 BCFCU: Letter from Margot Brandenburg, 2014 CrowdStockz: Letter from Frederic C. Chair, Brooklyn Cooperative Federal Credit City First: Letter from John Hamilton, Schultz, Esq. and Alastair Onglingswan, Union, New York, New York, Feb. 3, 2014 President, City First Enterprises, Esq., Owners of CrowdStockz.com., Benavente: Letter from Javier E. Benavente, Washington, District of Columbia, Feb. 3, CrowdStockETFs.com., and Jan. 16, 2014 2014 CrowdStockFunds.com, Feb. 3, 2014 Benjamin: Letter from Jordan Benjamin, Nov. Clapman: Letter from Mordechai Clapman, Crowley: Letter from Vincent Crowley, Nov. 30, 2013 Oct. 25, 2013 11, 2013 BetterInvesting: Letter from Kamie Zaracki, ClearTrust: Letter from Kara Kennedy, CrwdCorp: Letter from Sean Shepherd, Chief Executive Officer, et. al., Jul. 29, 2014 Executive Director, ClearTrust, LLC, Jan. Founder & Chief Executive Officer, Borrell: Letter from Monica L. Borell, Jan. 27, 20, 2014 CrwdCorp, LLC, Jan. 16, 2014 2014 Cole A.: Letter from Adam Cole, Nov. 24, Cunningham 1: Letter from William Michael Brown D.: Letter from Douglas Brown, Start- 2013 Cunningham, Social Investing Advisor, up business owner, Jan. 29, 2014 Cole D.: Letter from Don Cole, Oct. 25, 2013 Washington, District of Columbia, Feb. 3, Brown J.: Letter from J. Robert Brown, Jr., Commonwealth of Massachusetts: Letter from 2014 Professor of Law, University of Denver, William F. Galvin, Secretary of the Cunningham 2: Letter from William Michael Sturm College of Law, Jan. 27, 2014 Commonwealth of Massachusetts, Feb. 3, Cunningham, M.B.A., M.A., Social Bullock: Letter from Leo M. Bullock, IV, Nov. 2014 Investing Advisor, Washington, District of 10, 2013 Computershare: Letter from Martin (Jay) J. Columbia, Feb. 3, 2014 Bushroe: Letter from Fred Bushroe, Oct. 29, McHale, Jr., President, US Equity Services, dbbmckennon: Letter from dbbmckennon, 2013 Computershare, Canton, Massachusetts, Certified Public Accountants, Oct. 1, 2014 CalTech Entrepreneurs: Letter from Russell Feb. 3, 2014 DeMarco: Letter from Peter J. DeMarco, M. Frandsen, Esquire, The Business Legal Concerned Capital: Letter from Bruce Dobb, Student, Stanford Law School, Nov. 12, Group Executive Committee of the Caltech Concerned Capital—A Social Benefit Corp., 2013 Entrepreneurs Forum, Jan. 29, 2014 Feb. 2, 2014 Denlinger 1: Letter from Craig Denlinger, Campbell R.: Letter from Rutheford B. Consumer Federation: Letter from Barbara CPA, Denver, Colorado, Feb. 3, 2014 Campbell, Jr., Spears-Gilbert Professor of Roper, Director of Investor Protection, Denlinger 2: Letter from Craig Denlinger, Law, University of Kentucky, Feb. 14, 2014 Consumer Federation of America, Feb. 2, CPA, CrowdfundCPA, Aug. 21, 2014 2014 CAMEO: Letter from Claudia Viek, CEO, Doctor: Letter from Roger Doctor, Dec. 10, Craw: Letter from Kristopher R. Craw, J.D., California Association for Micro Enterprise 2013 Denver, Colorado, Jun. 14, 2014 Opportunity, Feb. 3, 2014 Donohue: Letter from Patrick E. Donohue, CSTTC: Letter from Steven G. Nelson, CapSchedule: Letter from Scott Purcell, Minneapolis, Minnesota, Feb. 24, 2014 President and Chairman of Continental DreamFunded: Letter from Manny CapSchedule.com, LLC, Oct. 23, 2013 Stock Transfer Trust Company, Jan. 31, Fernandez, Co-Founder and CEO, CarbonTech: Letter from Robert Shatz, CEO, 2014 www.DreamFunded.com, Jan. 8, 2014 CarbonTech Global LLC, Oct. 24, 2013 CST: Letter from Carylyn K. Bell, President, CCI: Letter from Carrie Devorah, The Center Corporate Stock Transfer, Inc., Jan. 15, Duke: Letter from Heather Duke, Dec. 3, 2013 For Copyright Integrity, Feb. 3, 2014 2014 EarlyShares: Letter from Joanna Schwartz, CEI: Letter from John Berlau, Senior Fellow, Coombs: Letter from Jason Coombs, Feb. 7, CEO, EarlyShares.com, Inc., Feb. 3, 2014 Finance and Access to Capital, Competitive 2014 Echterling: Letter from Ian Echterling, Enterprise Institute, Feb. 3, 2014 CfPA: Letter from Charles Sidman, MBA, Entrepreneur Feb. 21, 2014 CFA Institute: Letter from Kurt N. Schacht, Ph.D., President and Chair, for the Board Ellenbogen: Letter from David M. Ellenbogen, CFA, Managing Director, Standards and of, the Crowdfunding Professional Jan. 27, 2014 Financial Market Integrity, and Linda L. Association, Feb. 3, 2014 EMKF: Letter from Alicia Robb, Ph.D., Senior Rittenhouse, Director, Capital Markets, CRF: Letter from Frank Altman, President Fellow, and Dane Stangler, Vice President, CFA Institute, Feb. 3, 2014 and CEO, Community Reinvestment Fund, Research & Policy, Ewing Marion CFIRA 1: Letter from Freeman White, Board USA, Feb. 3, 2014 Kauffman Foundation, Feb. 3, 2014 Member, et al., CFIRA, Jan. 19, 2014 Cromwell: Letter from David M. Cromwell, Empire Stock: Letter from Matthew J. CFIRA 2: Letter from Kim Wales, Executive Yale School of Management, Adjunct Blevins, Vice President, Empire Stock Board Member, and Chris Tyrrell, Professor of Entrepreneurship, Oct. 27, Transfer Inc., Jan. 15, 2014 Chairman, CFIRA, Jan. 20, 2014 2013 EquityNet: Letter from Judd E. Hollas, CFIRA 3: Letter from Kim Wales, Executive CrowdBouncer: Letter from Robert C. Founder and CEO, EquityNet, LLC Board Member, and Chris Tyrrell, Carbone, Founder & CEO, CrowdBouncer, Equity Stock: Letter from Mohit Bhansali, Chairman, CFIRA, Jan. 26, 2014 Inc., Buffalo, New York, Feb. 3, 2014 Chief Operating Officer, Equity Stock CFIRA 4: Letter from Kim Wales, Executive CrowdCheck 1: Letter from Sara Hanks, CEO, Transfer LLC, New York, New York, Feb. Board Member, et al., CFIRA, Jan. 26, 2014 CrowdCheck, Inc., Jan. 9, 2014 3, 2014 CFIRA 5: Letter from Kim Wales, Founder CrowdCheck 2: Letter from Andrew D. Ex24: Letter from James. P. Lennane, ex24, and CEO, Wales Capital, and Executive Stephenson, Research Manager, Inc., Jan. 29, 2014 Board Member, CFIRA, Jan. 26, 2014 CrowdCheck, Inc., Jan. 23, 2014 EY: Letter from Ernst & Young LLP, Feb. 3, CFIRA 6: Letter from Joy Schoffler, Board CrowdCheck 3: Letter from Sara Hanks, CEO, 2014 Member, et al., CFIRA, Jan. 27, 2014 CrowdCheck, Inc., Feb. 2, 2014 Farnkoff: Letter from Brian Farnkoff, Editor- CFIRA 7: Letter from Mary Juetten, Board CrowdCheck 4: Letter from Brian R. Knight, in-Chief, Journal of Contemporary Health Member, et al., CFIRA, Jan. 31, 2014 VP, CrowdCheck, Inc., Feb. 2, 2014 Law and Policy, Feb. 3, 2014 CFIRA 8: Letter from Jonathan Miller, Board CrowdFundConnect: Letter from Randy A. Farese: Letter from Robert L. Farese, Jr., Oct. Member, et al., CFIRA Shipley, CrowdFundConnect Incorporated, 30, 2014 CFIRA 9: Letter from Daryl Bryant, Board Dec. 14, 2013 FAST: Letter from Salli A. Marinov, Member, et al., CFIRA, Feb. 4, 2014 Crowdpassage 1: Letter from Matthew R. President and CEO, First American Stock CFIRA 10: Letter from Robert Carbone, CFIRA Nutting, Esq., Executive Director, National Transfer, Inc., January 23, 2014 Board Member, CrowdBouncer, CEO, New Legal Director, Crowdpassage.com, Jan. 31, Feinstein: Letter from Todd Feinstein, York, New York, Feb. 6, 2014 2014 Feinstein Law, P.A., Feb. 3, 2014 CFIRA 11: Letter from Chris Tyrell, Crowdpassage 2: Letter from Matthew R. Finkelstein: Letter from Elizabeth R. Makris, Chairman, and Kim Wales, Executive Nutting, Esq., Executive Director, National Finkelstein Thompson LLP, Jan. 31, 2014 Board Member, CFIRA, New York, New Legal Director, Crowdpassage.com, Jan. 31, FOLIOfn: Letter from Michael J. Hogan, York, Feb. 6, 2014 2014 President & Chief Executive Officer,

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FOLIOfn Investments, Inc., McLean, Martin: Letter from Andrew Martin, OFS, CB, and Staci Warden, Executive Director, Virginia, Feb. 3, 2014 Rockville, Maryland, Oct. 18, 2014 Center for Financial Markets, Milken Frutkin: Letter from Jonathan Frutkin, The MCS: Letter from Andrew M. Hartnett, Institute, Washington, District of Columbia, Frutkin Law Firm, Jan. 30, 2014 Missouri Commissioner of Securities, Feb. Feb. 3, 2014 Fryer: Letter from Gregory S. Fryer, Esq., 3, 2014 Mlinarich: Letter from Brett A. Mlinarich, Partner, Verrill Dana, LLP, Portland, Merkley: Letter from Jeffrey A. Merkley, Jan. 2, 2014 Maine, Feb. 5, 2014 United States Senator, Apr. 29, 2014 Mollick: Letter from Ethan R. Mollick, FSI: Letter from David T. Bellaire, Esq., Haylock: Letter from Todd Haylock, Dec. 10, Edward B. and Shirley R. Shils Assistant Executive Vice President & General 2013 Professor of Management, Wharton School, Counsel, Financial Services Institute, Feb. Heritage: Letter from David R. Burton, Senior University of Pennsylvania, Phildelphia, 3, 2014 Fellow in Economic Policy, The Heritage Pennsylvania, Feb. 5, 2014 Fund Democracy: Letter from Mercer Bullard, Foundation, Feb. 3, 2014 Morse: Letter from Matt R. Morse, Sr., Dec. President and Founder, Fund Democracy, Hyatt: Letter from Todd R. Hyatt, Nov. 6, 3, 2013 Associate Professor, University of 2013 Moskowitz: Letter from Yonatan Moskowitz, Mississippi School of Law, Oxford, IAC Recommendation: Recommendation of Nov. 13, 2013 Mississippi, Feb. 3, 2014 the SEC’s Investor Advisory Committee: Moyer: Letter from Mike Moyer, Adjunct Funderbuddies: Letter from John Mark Crowdfunding Regulations, Apr. 10, 2014 Associate Professor of Entrepreneurship at Wendler, CPA, Funderbuddies, Nov. 26, iCrowd: Letter from J. Bradford McGee and the University of Chicago Booth School of 2013 John P. Callaghan, Founders, iCrwod, LLC, Business, Adjunct Lecturer of FundHub 1: Letter from Kendall Almerico, Jan. 31, 2014 Entrepreneurship at Northwestern Crowdfunding Expert, Attorney and CEO, Inkshares: Letter from Adam J. Gomolin, University, Jan. 25, 2014 Fund Hub and ClickStartMe, Jan. 29, 2014 General Counsel, Inkshares, Inc., Feb. 3, Mountain Hardwear: Letter from Alan A. FundHub 2: Letter from Kendall Almerico, 2014 Tabor, Co-founder, Mountain Hardwear, Crowdfunding Attorney and CEO of Jacobson: Letter from William A. Jacobson, Jan. 27, 2014 FundHub.Biz, Tampa, Florida, Oct. 8, 2014 Clinical Professor of Law, Cornell Law Multistate Tax: Letter from Frank L. Generation Enterprise: Letter from Ubon School, and Director, Cornell Securities Dantonio, Managing Principal, Multistate Isang, Executive, Generation Enterprise Law Clinic, Ithaca, New York, Feb. 3, 2014 Tax Service, LLC, Oct. 29, 2013 Corporation, Oct. 24, 2013 Jazz: Letter from Jim C. Shaw, Jazz Gas, Jan. NAAC: Letter from Faith Bautista, President Gibb: Letter from Jeremy Gibb, Nov. 13, 2013 12, 2014 and CEO, National Asian American Gill: Letter from Michael D. Gill, III, Esq., Jan. Johnston: Letter from Phil Johnston, Feb. 3, Coalition, Oct. 31, 2013 NACVA: Letter from David M. Freedman, 22, 2014 2014 Editorial Advisor, The Value Examiner Gimpelson 1: Letter from Alexander Joinvestor: Letter from Bryan Healey, CEO, magazine (NACVA), Jan. 16, 2014 Gimpelson, Chest Nut Hill, Massachusetts, Joinvestor, Jan. 2, 2014 NAHB: Letter from David L. Ledford, Senior Feb. 3, 2014 Kelso: Letter from Carl Kelso, Jan. 7, 2014 Vice President, Housing Finance & Gimpelson 2: Letter from Alexander Kickstarter Coaching: Letter from Jay Wittner, Regulatory Affairs, National Association of Gimpelson, Chest Nut Hill, Massachusetts, President Kickstarter Coaching, Bradenton, Home Builders, Jan. 31, 2014 Feb. 3, 2014 Florida, Feb. 3, 2014 NASAA: Letter from Andrea Seidt, President, Grassi: Letter from Louis C. Grassi, CPA, Kingonomics: Letter from Rodney S. North American Securities Administrators CFE, Managing Partner, Grassi and Co., Jan. Sampson, CEO, Kingonomics, Feb. 3, 2014 Association, Inc. (NASAA) 20, 2014 Kishon: Letter from Mannis Kishon, Dec. 22, NASE: Letter from Katie Vlietstra, Vice Graves: Letter from Sam Graves, Chairman, 2013 President of Government Relations Public U.S. House of Representatives, Committee Knudsen: Letter from Michael Knudsen, Jan. Affairs, The National Association for the on Small Business, Washington, District of 6, 2014 Self-Employed, Washington, District of Columbia, Feb. 3, 2014 Konecek: Letter from Kathleen Konecek, Nov. Columbia, Feb. 3, 2014 Greenfield: Letter from Richard D. Greenfield, 30, 2013 NaviGantt: Letter from Christopher R. York, Esq., Greenfield Goodman LLC, Nov. 10, Langrell: Letter from Alex M. Langrell, Camp CEO, NaviGantt, Jan. 27, 2014 2013 Pendelton, California, Jan. 21, 2014 NYSSCPA: Letter from J. Michael Kirkland, Greer: Letter from Diana Greer, Jan. 27, 2014 Leverage PR: Letter from Joy Schoffler, President, New York State Society of Growthfountain: Letter from Growthfountain Principal, Leverage PR, Austin, Texas, Sep. Certified Public Accountants, Jan. 20, 2014 LLC, Jan. 7, 2014 2, 2014 Nether: Letter from Darrell W. Nether, Nov. GSJ Advisors: Letter from George Surgeon, Lopossa: Letter from Gabriel M. Lopossa, Oct. 1, 2013 President and CEO, GSJ Advisors, Ltd., 30, 2013 NFIB: Letter from Dan Danner, President and Feb. 3, 2014 Luster: Letter from Louise Luster, Oct. 31, CEO, National Federation of Independent Guzik 1: Letter from Samuel S. Guzik, Guzik 2013 Business, Feb. 3, 2014 and Associates, Los Angeles, California, Mahoney: Letter from Steve Mahoney, NPCM: Letter from Robert C. Guinto, Jr., Feb. 11, 2014 Managing Director, Highlands Ranch, President, Non Profit Capital management, Guzik 2: Letter from Samuel S. Guzik, Guzik Colorado, Jan. 20, 2014 LLC, Oct. 24, 2013 and Associates, Los Angeles, Feb. 20, 2014 Mantel: Letter from Russ Mantel, Oct. 23, NSBA: Letter from Todd O. McCracken, Guzik 3: Letter from Samuel S. Guzik, Guzik 2013 President, National Small Business and Associates, Los Angeles, California, M.A.V.: Letter from M.A.V., Nov. 3, 2013 Association, Feb. 3, 2014 Feb. 28, 2014 Marsala: Letter from Charles E. Marsala Odhner: Letter from Chad E. Odhner, Nov. Hackers/Founders: Letter from Charles Belle, -Profitibale Dining LLC, Feb. 15, 2014 25, 2013 Ken Priore, and Timothy Yim, Hackers/ McCulley: Letter from Matthew McCulley, ODS: Letter from Faye Morton, General Founders, Feb. 3, 2014 Jan. 10, 2014 Counsel, Oklahoma Department of Hakanson: Letter from Sten E. Hakanson, McGladrey: Letter from McGladrey LLP, Feb. Securities, Feb. 3, 2014 Stillwater, Minnesota, Feb. 28, 2014 3, 2014 Omara: Letter from Sherouk Omara, Nov. 14, Hamilton: Letter from Brenda L. Hamilton, Meling: Letter from Rosemary Meling, Oct. 2013 Hamilton & Associates Law Group, P.A., 30, 2013 Otherworld: Letter from Mark Henry, Nov. 8, 2013 Menlo Park: Letter from James O. Mason, Founder, Otherworld Pictures, Apr. 11, Hamman: Letter from Charles J. Hamman, Founder/CEO, Menlo Park Social Media 2014 Oct. 24, 2013 Crowdfunding Incubator, Feb. 28, 2014 Parsont: Letter from Jason W. Parsont, Feb. Harrison: Letter from Mark Harrison, Ph.D., Miami Nation: Letter from Ben Barnes, 18, 2014 Jan. 6, 2014 Director of Tribal Gaming, Miami Nation Partners: Letter from Jeannine Jacokes, CEO, Holland: Letter from Alexandra D. Holland, Enterprises, Oct. 25, 2013 Partners for the Common Good, Ph.D., Founder and CEO, PIARCS, PBC, Milken Institute: Letter from Daniel S. Washington DC, District of Columbia, Feb. June 3, 2014 Gorfine, Director, Financial Markets Policy, 3, 2014

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Patel: Letter from Raj Patel, Jan. 17, 2014 SBA Office of Advocacy: Letter from Taylor R.: Letter from Ryan S. Taylor, PBA: Letter from Graham R. Laub, Chair, and Winslow Sargeant, Ph.D., Chief Counsel for Crowdfunder, Oct. 24, 2013 Katayun I. Jaffari, Vice Chair, Securities Advocacy, and Dillon Taylor, Assistant Taylor T.: Letter from Terry L. Taylor, Oct. Regulation Committee of the Business Law Chief Counsel for Advocacy, SBA Office of 24, 2013 Section, Philadelphia Bar Association, Advocacy, Jan. 16, 2014 Thomas 1: Letter from Jeff Thomas, JD, CPA, Philadelphia, Pennsylvania, Feb. 3, 2014 SBEC: Letter from Karen Kerrigan, President Chair of Business and Associate Professor, Peers: Letter from Kit Hayes, Campaign & CEO, Small Business & Entrepreneurship Johnson & Wales University, Charlotte, Director, Peers.org, Feb. 7, 2014 Council, Feb. 3, 2014 North Carolina, Feb. 3, 2014 Perfect Circle: Letter from Frederick C. SBM: Letter from Cassie Mills, Thomas 2: Letter from Jeff Thomas, JD, CPA, Young, Perfect Circle Solutions, Oct. 30, Communications Associate, Small Chair of Business and Associate Professor, 2013 Business Majority, Feb. 4, 2014 Charlotte, North Carolina, Feb. 3, 2014 PeoplePowerFund: Letter from Steve Mayer, Schatz: Letter from Jonathan Schatz, Nov. 13, Thompson: Letter from Lyle Thompson, PeoplePowerFund.com, Jan. 31, 2014 2013 Entrepreneur, Dec.10, 2013 Phillips: Letter from Everette Phillips, Schwartz: Letter from Andrew A. Schwartz, Tiny Cat: Letter from L. David Varvel and Entrepreneur, Jan. 15, 2014 Associate Professor of Law, University of Ellenor Varvel, Founders, Tiny Cat Loans, Pioneer Realty: Letter from Charles E. Colorado, Boulder, Colorado, Feb. 3, 2014 Feb. 3, 2014 Williams, MBA, EA, Founder and Scruggs: Letter from Frank Scruggs, Jan. 17, TraceFind: Letter from Wendi C. Hawley, Managing Director, Pioneer Realty Capital, 2014 MA, ATR–BC, CEO, TraceFind Jan 15, 2014 SeedInvest 1: Letter from Kiran Lingam, Esq., Technologies, Inc., Oct. 24, 2013 Platkin: Letter from Matthew Platkin, Nov. General Counsel, SeedInvest, Jan. 21, 2014 Traklight: Letter from Mary E. Juetten, 13, 2013 SeedInvest 2: Letter from Kiran Lingam, Founder & CEO, Traklight.com, Feb. 2, Powers: Letter from Jordan Berg Powers, Nov. General Counsel, SeenInvest, Jan. 22, 2014 2014 4, 2013 SeedInvest 3: Letter from Kiran Lingam, Esq., Tucker: Letter from Gary Tucker, Feb. 17, PPA: Letter from Douglas R. Slain, Managing General Counsel, SeedInvest, Feb. 3, 2014 2014 Partner, Private Placement Advisors LLC Seed&Spark: Letter from Max Silverman, US Black Chambers: Letter from Ron Busby, Projectheureka: Letter from Anthony and COO, Seed & Spark President, US Black Chambers, Inc., Erika Endres, Projectheureka LLC, Nov. 17, Sewell: Letter from Michael J. Sewell, Esq., Washington, District of Columbia, Feb. 3, 2013 Jan 17, 2014 2014 Propellr 1: Letter from Todd M. Lippiatt, Seyfarth: Letter from Seyfarth Shaw LLP, U.S. Chamber of Commerce: Letter from Tom CEO, Propellr, LLC, Jan. 27, 2014 New York, New York, Feb. 10, 2014 Quaadman, Vice President, Center for Propellr 2: Letter from Todd M. Lippiatt, SFAA: Letter from Robert. J. Duke, Corporate Capital Markets Competitiveness, U.S. Chamber of Commerce, Feb. 3, 2014 CEO, Propellr, LLC, Jan. 27, 2014 Counsel, The Surety & Fidelity Association Public Startup 1: Letter from Jason Coombs, Verinvest: Letter from David Benway, Chief of America, Nov. 19, 2013 Co-Founder and CEO, Public Startup Executive Officer, Verinvest Corporation, Sfinarolakis Letter from Manolis E. Company, Inc., Dec. 15, 2013 Jan. 17, 2014 Sfinarolakis, CFIRA, CFPA, NLCFA, New Public Startup 2: Letter from Jason Coombs, Vann: Letter from James Vann, Greenfield, Britain, Connecticut, Aug. 6, 2014 Co-Founder and CEO, Public Startup Missouri, Apr. 11, 2014 Sharewave: Letter from Joshua S. Levine, Co- Company, Inc., Feb. 3, 2014 Vest: Letter from Sean Osterday & Peter Wild, Founder and CEO, Sharewave, LLC, Dec. Public Startup 3: Letter from Jason Coombs, Vest Inc., San Francisco, California, Feb. 3, Co-Founder and CEO, Public Startup 18, 2013 2014 Company, Inc., Feb. 11, 2014 Smith D.: Letter from Darrell Smith, Jan. 19, Vidal: Letter from Eduardo Vidal, Jan. 27, Public Startup 4: Letter from Jason Coombs, 2014 2014 Co-Founder and CEO, Public Startup Smith K.: Letter from Kevin G. Smith, Vossberg: Letter from Trevor Vossberg, Oct. Company, Inc., Feb. 22, 2014 Electrical Engineer, Oct. 31, 2013 23, 2013 Qizilbash: Letter from Muhammad A. Song: Letter from Ntxhi Song, Student, Wales Capital 1: Letter from Kim Wales, Qizilbash, Dec. 18. 2013 Johnson and Wales University Charlotte, Founder and CEO, Wales Capital, Feb. 3, Raindance: Letter from Jeffrey L. Tucker, Charlotte, North Carolina, Feb. 3, 2014 2014 CEO, The Raindance Group, Dec. 17, 2013 STA: Letter from Charles V. Rossi, Chairman, Wales Capital 2: Letter from Kim Wales, Ramsey: Letter from Rebecca Ramsey, Oct. STA Board Advisory Committee, The Founder and CEO, Wales Capital, Mar. 2, 24, 2013 Securities Transfer Association, Inc., Dec. 2014 Reed: Letter from Terry Reed, J.D., Jan. 21, 18, 2013 Wales Capital 3: Letter from Kim Wales, 2014 Stalt: Letter from Bill Senner, Stalt, Inc., Jan. Founder and CEO, Wales Capital, Mar. 12, Reichman: Letter from Vic Reichman, Esq., 27, 2014 2014 Dec. 2, 2013 StartEngine 1: Letter from Ron Miller, CEO, WealthForge: Letter from Mathew Dellorso, RFPIA: Letter from T. W. Kennedy, BE, CEO, StartEngine, Los Angeles, California, Jul. CEO, WealthForge Holdings, Inc., Regulated Funding Portal Industry 25, 2014 Richmond, Virginia, Feb. 3, 2014 Association, Jan. 26, 2014 StartEngine 2: Letter from Ron Miller, CEO, Wear: Letter from Zak Wear, Dec. 10, 2013 Ritter: Letter from Justin A. Ritter, Esquire, StartEngine Crowdfunding, Inc., Oct. 7, Wefunder: Letter from Nicholas Tommarello, Associate Attorney, Spinella, Owings & 2014 CEO, Wefunder, January 31, 2014 Shaia, P.C., Nov. 18, 2013 StartupValley: Letter from Daryl H. Bryant, Whitaker Chalk: Letter from John R. Fahy and RoC: Letter from Sang H. Lee, CEO, Return CEO, StartupValley, Inc., Jan. 15, 2014 Wayne M. Whitaker, Whitaker Chalk on Change, Jan. 30, 2014 Stephenson: Letter from Andrew D. Swindle & Schwartz PLLC, Jan. 7, 2014 RocketHub: Letter from Alon Hillel-Tuch and Stephenson, Brian Knight, and Matthew Wilhelm: Letter from Jonathan R. Wilhelm, Jed Cohen, RocketHub, New York, New Bahleda, Feb. 3, 2014 Jan. 27, 2014 York, Feb. 3, 2014 Stieglitz: Letter from Edward B. Stieglitz, Oct. Wilson: Letter from Margaret A. Wilson, Rosenthal O.: Letter from Oren Rosenthal, 28, 2013 Professor of Technology Attorney, Nov. 4, 2013 Syed: Letter from Idrus R. Syed, MBA, Oct. Commercialization, Austin, Texas, Feb. 3, Sam H.: Letter from Sam H., Oct. 27, 2013 24, 2013 2014 Sander: Letter from Steven M. Sander, CEO, Tafara: Letter from Peter Tafara, Nov. 8, 2013 Winters: Letter from Dennis Winters, Esq., Oct. 27, 2013 Hillside: Letter from Anthony M. Tate, Jan. 9, 2014 Sarles: Letter from Jeff Sarles, Oct. 25, 2013 Hillside Technological Innovation LLC, WIPP: Letter from Barbara Kasoff, President, Saunders: Letter from R. Kevin Saunders, Cedar Rapids, Iowa, Feb. 11, 2014 Women Impacting Public Policy, Feb. 3, Staff Editor, Vanderbilt Journal of TAN: Letter from Olawale Ayeni, MBA, and 2014 Entertainment Technology Law, Nashville, Bolaji Olutade, Ph.D., The African Woods: Letter from Thell M. Woods, Jan. 13, Tennessee, Feb. 3, 2014 Network, Dec. 12, 2013 2014 Sawhney: Letter from Sanjay Sawhney, Jan. Taylor M.: Letter from Mack Taylor, Nov. 8, Yudek: Letter from David B. Kopp, CEO, 27, 2014 2013 Yudek, Inc. Oct. 29, 2013

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Zeman: Letter from Jason Zeman, Nov. 30, 7thenterprise: Letter from Jarone V. Price, 11 Wells: Letter from Robert McManus, The 2013 CEO, 7thenterprise International Inc., Jan. 11 Wells Spirits Company, Jan. 28, 2014 Zhang: Letter from Runan Zhang, Esq., Law 22, 2014 [FR Doc. 2015–28220 Filed 11–13–15; 8:45 am] Offices of Runan Zhang, Washington, BILLING CODE 8011–01–P District of Columbia, Feb. 3, 2014

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