Securities and Exchange Commission Proposed Rules on Crowdfunding

1See, e.g., C. Steven Bradford, Crowdfunding and the Federal Securities Laws, 2012 Colum. Bus. L. Rev. 1, 10 (2012) (‘‘Bradford’’). Crowdfunding has some similarities to ‘‘crowdsourcing,’’ which is the concept that ‘‘the power of the many can be leveraged to accomplish feats that were once the SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 200, 227, 232, 239, 240 and 249 [Release Nos. 33–9470; 34–70741; File No. S7–09–13] RIN 3235–AL37 Crowdfunding AGENCY: Securities and Exchange Commission. ACTION: Proposed rules. SUMMARY: The Securities and Exchange Commission is proposing for comment new Regulation Crowdfunding under the Securities Act of 1933 and the Securities Exchange Act of 1934 to implement the requirements of Title III of the Jumpstart Our Business Startups Act. Regulation Crowdfunding would prescribe rules governing the offer and sale of securities under new Section 4(a)(6) of the Securities Act of 1933. The proposal also would provide a framework for the regulation of registered funding portals and brokers that issuers are required to use as intermediaries in the offer and sale of securities in reliance on Section 4(a)(6). In addition, the proposal would exempt securities sold pursuant to Section 4(a)(6) from the registration requirements of Section 12(g) of the Securities Exchange Act of 1934. DATES: Comments should be received on or before February 3, 2014. ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments

• Use the Commission’s Internet
  comment form (http://www.sec.gov/ rules/proposed.shtml);
• Send an email to rule-comments@
  sec.gov. Please include File Number S7– 09–13 on the subject line; or
• Use the Federal eRulemaking Portal
  (http://www.regulations.gov). Follow the instructions for submitting comments. Paper Comments
• Send paper comments in triplicate
  to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number S7–09–13. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://sec.gov/rules/proposed.shtml). Comments also are available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you would like to make publicly available. FOR FURTHER INFORMATION CONTACT:
  With regard to requirements for issuers, Sebastian Gomez Abero or Jessica Dickerson, Division of Corporation Finance, at (202) 551–3500, and with regard to requirements for intermediaries, Joseph Furey, Joanne Rutkowski, Leila Bham, Timothy White or Carla Carriveau, Division of Trading and Markets, at (202) 551–5550, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549. SUPPLEMENTARY INFORMATION:
  Table of Contents
  I. Introduction and Background
  A. Overview of Crowdfunding B. Title III of the JOBS Act
  C. Approach to Proposed Rules
  II. Discussion of Proposed Regulation
  Crowdfunding
  A. Crowdfunding Exemption

1. Limitation on Capital Raised
2. Investment Limitation
3. Transaction Conducted Through an
   Intermediary
4. Exclusion of Certain Issuers From
   Eligibility Under Section 4(a)(6) B. Requirements on Issuers
5. Disclosure Requirements
6. Ongoing Reporting Requirements
7. Form C and Filing Requirements
8. Prohibition on Advertising Terms of the
   Offering
9. Compensation of Persons Promoting the
   Offering
10. Other Issuer Requirements
    C. Requirements on Intermediaries
11. Brokers and Funding Portals
12. Requirements and Prohibitions
13. Measures To Reduce Risk of Fraud
14. Account Opening
15. Requirements With Respect to
    Transactions
16. Completion of Offerings, Cancellations
    and Reconfirmations
17. Payments to Third Parties
    D. Additional Requirements on Funding Portals
18. Registration Requirement
19. Exemption From Broker-Dealer
    Registration
20. Safe Harbor for Certain Activities
21. Compliance
22. Records To Be Created and Maintained
    by Funding Portals
    E. Miscellaneous Provisions
23. Insignificant Deviations From Regulation
    Crowdfunding
24. Restrictions on Resales
25. Information Available to States
26. Exemption From Section 12(g)
27. Scope of Statutory Liability
28. Disqualification
    F. General Request for Comment
    III. Economic Analysis
    A. Economic Baseline
29. Existing Funding Sources Available to
    Startups and Small Businesses
30. Current Sources of Funding for Startups
    and Small Businesses That Could Be Substitutes or Complements to Crowdfunding
31. Survival Rates for Startups and Small
    Businesses
32. Market Participants
    B. Analysis of Proposed Rules
33. Broad Economic Considerations
34. Crowdfunding Exemption
35. Issuer Requirements
36. Intermediary Requirements
37. Additional Funding Portal Requirements
38. Insignificant Deviations
39. Relationship With State Law
40. Exemption From Section 12(g)
41. Disqualification
    C. Request for Comment
    IV. Paperwork Reduction Act
    A. Background
    B. Estimate of Issuers and Intermediaries
    C. Estimate of Burdens
    D. Collections of Information Are Mandatory E. Confidentiality F. Retention Period of Recordkeeping Requirements G. Request for Comment
    V. Small Business Regulatory Enforcement
    Fairness Act
    VI. Initial Regulatory Flexibility Act Analysis
    A. Reasons for the Proposed Actions B. Objectives
    C. Small Entities Subject to the Proposed
    Rules
    D. Projected Reporting, Recordkeeping and Other Compliance Requirements E. Duplicative, Overlapping or Conflicting Federal Rules F. Significant Alternatives
42. Issuers
43. Intermediaries
    G. Request for Comment
    VII. Statutory Authority and Text of Proposed
    Regulation
    Exhibit A
    I. Introduction and Background
    A. Overview of Crowdfunding Crowdfunding is a new and evolving method to raise money using the Internet. Crowdfunding serves as an alternative source of capital to support a wide range of ideas and ventures. An entity or individual raising funds through crowdfunding typically seeks small individual contributions from a large number of people.1 A

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

14Title III amended Securities Act Section 4 to add Section 4(6); however, Title II of the JOBS Act also amended Securities Act Section 4 and inserted subsections (a) and (b). The U.S. Code implemented the amendment by adding paragraph (6) at the end of subsection (a). 15See note 7. 16See notes 1 and 2. As discussed in Section II.C.5.c below, the proposed rules would require a person to open an account with an intermediary before posting comments on the intermediary’s platform. However, as discussed in Section II.C.5.a below, a person would not need to open an account with the intermediary in order to view the issuer’s disclosure materials. 17See Hazen, note 8. 18See 158 Cong. Rec. S1829 (daily ed. Mar. 20,
2012) (statement of Sen. Jeff Merkley) (‘‘The Web
sites are subject to oversight by the SEC and security regulators of their principal States . . . This is a key predatory protection to prevent pump-and￾dump schemes.’’). 19See Mollick Letter (stating that allowing ongoing discussions between potential investors, community members and issuers is a vital aspect of avoiding fraud and improving proposed projects). 20One press article, for example, described non￾securities-based crowdfunding campaigns that successfully raised funds but have had problems manufacturing and delivering the ‘‘perks’’ or products that were promised in exchange for contributions. See Matt Krantz, Crowd-funding dark side: Sometimes investments go down drain, USA Today at B1 (Aug. 15, 2012). Investor confidence in crowdfunding could be eroded if such delays occur with regularity in securities-based crowdfunding and compounded by any prevalence of fraud. See, e.g., Laws Provide Con Artists with Personal Economic Growth Plan, North American Securities Administrators Association (Aug. 21, 2012) (identifying crowdfunding and Internet-based offers of securities as a threat to investors), available at http://www.nasaa.org/14679/laws-provide-con￾artists-with-personal-economic-growth-plan/. See also Adrianne Jeffries, This is What a Kickstarter Scam Looks Like, BetaBeat (Apr. 30, 2012), available at http://betabeat.com/2012/04/this-is￾what-a-kickstarter-scam-looks-like/. But see Olga Khazan, Kickstarter spies a sunglass start-up, Washington Post at A14 (May 28, 2012) (discussing a successful sunglasses company that used crowdfunding for startup funds); Crowdfunding:
Invested Central raises $120,000, Washington Post at A10 (Jul. 23, 2012) (mentioning a company that was able to raise capital through crowdfunding when it could not otherwise secure traditional financing for an expansion of its business). 4(a)(6),14 which provides an exemption from the registration requirements of Securities Act Section 5 for certain crowdfunding transactions. To qualify for the exemption under Section 4(a)(6), crowdfunding transactions by an issuer (including all entities controlled by or under common control with the issuer) must meet specified requirements, including the following:

• The amount raised must not exceed
  $1 million in a 12-month period (this amount is to be adjusted for inflation at least every five years);
• individual investments in a 12-
  month period are limited to:
  Æ the greater of $2,000 or 5 percent of annual income or net worth, if annual income or net worth of the investor is less than $100,000; and Æ 10 percent of annual income or net worth (not to exceed an amount sold of $100,000), if annual income or net worth of the investor is $100,000 or more (these amounts are to be adjusted for inflation at least every five years); and
• transactions must be conducted
  through an intermediary that either is registered as a broker or is registered as a new type of entity called a ‘‘funding portal.’’ In addition, Title III:
• adds Securities Act Section 4A,
  which requires, among other things, that issuers and intermediaries that facilitate transactions between issuers and investors in reliance on Section 4(a)(6) provide certain information to investors and potential investors, take certain other actions and provide notices and other information to the Commission;
• adds Exchange Act Section 3(h),
  which requires the Commission to adopt rules to exempt, either conditionally or unconditionally, ‘‘funding portals’’ from having to register as brokers or dealers pursuant to Exchange Act Section 15(a)(1);
• includes disqualification provisions
  under which an issuer would not be able to avail itself of the Section 4(a)(6) exemption if the issuer or other related parties, including an intermediary, was subject to a disqualifying event; and
• adds Exchange Act Section 12(g)(6),
  which requires the Commission to adopt rules to exempt from the registration requirements of Section 12(g), either conditionally or unconditionally, securities acquired pursuant to an offering made in reliance on Section 4(a)(6). In this release, we are proposing new rules and forms to implement Securities Act Sections 4(a)(6) and 4A and Exchange Act Sections 3(h) and 12(g)(6). The proposed rules are described in detail below. Until we adopt rules relating to crowdfunding transactions and such rules become effective, issuers and intermediaries may not rely on the exemption provided under Section 4(a)(6).
  C. Approach to Proposed Rules
  We understand that Title III was designed to help alleviate the funding gap and accompanying regulatory concerns faced by startups and small businesses in connection with raising capital in relatively low dollar amounts.15 The proposed rules are intended to align crowdfunding transactions under Section 4(a)(6) with the central tenets of the original concept of crowdfunding, in which the public— or the crowd—is presented with an opportunity to invest in an idea or business and individuals decide whether or not to invest after sharing information about the idea or business with, and learning from, other members of the crowd.16 In this role, members of the crowd are not only sharing information about the idea or business, but also are expected to help evaluate the idea or business before deciding whether or not to invest.17 At the same time, Congress provided important investor protections for crowdfunding transactions under
  Section 4(a)(6), including individual
  investment limits, required disclosures by issuers and the use of intermediaries. The proposed rules would require that all crowdfunding transactions under
  Section 4(a)(6) be conducted through a
  registered intermediary on an Internet Web site or other similar electronic medium to help ensure that the offering is accessible to the public and that members of the crowd can share information and opinions. Registered intermediaries are necessary to bring the issuer and potential investors together and to provide safeguards to potential investors.18 The proposed rules also would require that intermediaries provide communication channels to facilitate the sharing of information that will allow the crowd to decide whether or not to fund the idea or business.19 The proposed rules further provide intermediaries a means by which to facilitate the offer and sale of securities without registering as brokers. We are mindful of the timing and presentation of information required to be disclosed to investors pursuant to the terms of the statute. The proposed rules would require that this information be provided to investors at various points in time in connection with an offering and through various electronic means, such as through filings with the Commission and disclosures provided on the intermediary’s platform. We believe this approach would be most practical and useful to investors in the crowdfunding context. We understand that these proposed rules, if adopted, could significantly affect the viability of crowdfunding as a capital-raising method for startups and small businesses. Rules that are unduly burdensome could discourage participation in crowdfunding. Rules that are too permissive, however, may increase the risks for individual investors, thereby undermining the facilitation of capital raising for startups and small businesses.20 We have directed the Commission staff, accordingly, to develop a comprehensive work plan to review and monitor the use of the crowdfunding

21See Section II.C below for a discussion of the requirements on intermediaries. See also Section II.D below for a discussion of the additional requirements on funding portals. 22Securities Act Section 4(a)(6)(A). 23See High Tide Letter; TechnologyCrowdfund Letter 3 (stating that a minimum of $5 million to $10 million is necessary to start any business other than a software business); EnVironmental Letter (stating that the upper limit should be increased to $5 million or higher); VTNGLOBAL Letter (stating that Rule 506 of Regulation D permits an unlimited capital raise from accredited investors and that the same should apply to crowdfunding). 24See NSBA Letter (stating that the $1 million limitation should pertain only to offerings made in reliance on Section 4(a)(6)); ABA Letter 1; NCA Letter. 25See CommunityLeader Letter; Ohio Division of Securities Letter. 26See Crowdfunding Offerings Ltd. Letter 6. 27The integration doctrine seeks to prevent an issuer from improperly avoiding registration by artificially dividing a single offering into multiple offerings such that Securities Act exemptions would apply to multiple offerings that would not be available for the combined offering. 28 17 CFR 230.501 through 230.508. 29See ABA Letter 1; Lingam Letter 2 (stating that offerings under Regulation D and Section 4(a)(6) should not be integrated if: (1) No general solicitation takes place; (2) the Section 4(a)(6) offering closes prior to any general solicitation related to a Regulation D offering; or (3) the Regulation D and the Section 4(a)(6) offerings occur simultaneously and the offerings have the same economic terms, but the size of the Regulation D offering is greater than the size of the Section 4(a)(6) offering); CFIRA Letter 8 (stating that CFIRA’s members have opposing views on whether the integration doctrine should be applied to crowdfunded offerings); Liles Letter 1; CFIRA Letter 2; CommunityLeader Letter. See also Final Report of the 2012 SEC Government-Business Forum on Small Business Capital Formation (April 2013) (‘‘2012 SEC Government-Business Forum’’), available at http://www.sec.gov/info/smallbus/ sbforumreps.htm (recommending that we consider permitting concurrent offerings to be made to accredited investors in excess of the $1 million limit). 30 158 Cong. Rec. S1829 (daily ed. Mar. 20, 2012) (statement of Sen. Jeff Merkley) (‘‘[T]he amendment allows existing small businesses and startup companies to raise up to $1 million per year. That is a substantial amount for a small business.’’). 31Cf. Securities Act Section 4A(b)(1)(D)(iii) (giving the Commission discretion to increase the aggregate target offering amount that requires audited financial statements). exemption under Section 4(a)(6) and the rules the Commission adopts to implement crowdfunding. Upon adoption of final rules, the Commission staff will monitor the market for offerings made in reliance on Section 4(a)(6), focusing in particular on the types of issuers using the
exemption, the level of compliance with Regulation Crowdfunding by issuers and intermediaries and whether the exemption is promoting new capital formation while at the same time providing key protections for investors. These efforts will assist the Commission in evaluating the development of market practices in offerings made in reliance on Section 4(a)(6). These efforts also will facilitate future Commission consideration of any potential amendments to the rules implementing crowdfunding that would be consistent with the Commission’s mission of protecting investors, maintaining fair, orderly and efficient markets and facilitating capital formation. We urge commenters, as they review the proposed rules, to consider and address the role that our oversight, enforcement and regulation should play once a crowdfunding market under Section 4(a)(6) begins to develop.
II. Discussion of Proposed Regulation
Crowdfunding
A. Crowdfunding Exemption New Securities Act Section 4(a)(6) provides an exemption from the registration requirements of Securities Act Section 5 for certain crowdfunding transactions. To qualify for the exemption under Section 4(a)(6), crowdfunding transactions by an issuer must meet specified requirements, including requirements with regard to the dollar amount of the securities that may be sold by an issuer and the dollar amount that may be invested by an individual in a 12-month period. The crowdfunding transaction also must be conducted through a registered intermediary that complies with specified requirements.21 Title III also provides limitations on who may rely on the exemption and establishes a liability scheme for improper use of the exemption. As discussed below, the rules we are proposing are designed to aid issuers and investors in determining the applicable limitations on capital raised and individual investments.

1. Limitation on Capital Raised
   The exemption from registration provided by Section 4(a)(6) is available to a U.S. issuer provided that ‘‘the aggregate amount sold to all investors by the issuer, including any amount sold in reliance on the exemption provided under [Section 4(a)(6)] during the 12- month period preceding the date of such transaction, is not more than $1,000,000.’’ 22 Under Section 4A(h), the Commission is required to adjust the dollar amounts in Section 4(a)(6) ‘‘not less frequently than once every five years, by notice published in the Federal Register, to reflect any change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics.’’ Several commenters indicated that the $1 million maximum aggregate amount is too low.23 Several commenters requested that the Commission state that the $1 million aggregate limit pertains only to offerings under Section 4(a)(6) and does not include all exempt offerings.24 Two commenters suggested, however, that the calculation of the $1 million aggregate limit should include all issuer transactions that were exempt under Securities Act Section 4(a) during the preceding 12-month period.25 Another commenter requested clarification that the limitations and requirements of the offering exemption under Section 4(a)(6) would not affect other methods of raising capital that do not involve the sale of securities, such as contributions from friends and family, donation crowdfunding, gifts, grants or loans.26 Several commenters had concerns about the possible integration 27 of an offering under
   Section 4(a)(6) with other exempt
   offerings and suggested that the Commission should allow for simultaneous or sequential offerings under Regulation D 28 and Section 4(a)(6) without integration.29
   Section 4(a)(6) specifically provides
   for a maximum aggregate amount of $1 million sold in reliance on the exemption in any 12-month period. The only reference in the statute to changing that amount is the requirement that the Commission update the amount not less frequently than every five years based on the Consumer Price Index. Additionally, statements in the Congressional Record indicate that Congress believed that $1 million was a substantial amount for a small business.30 We do not believe that Congress intended for us to modify the maximum aggregate amount permitted to be sold under the exemption when promulgating rules to implement the statute.31 Therefore, we are not proposing to increase the limitation on the aggregate amount sold. Title III provides that the $1 million limitation applies to the ‘‘aggregate amount sold to all investors by the issuer, including any amount sold in reliance on the exemption provided under [Section 4(a)(6)].’’ Section 4A(g), however, provides that ‘‘[n]othing in the exemption shall be construed as preventing an issuer from raising capital through means other than [S]ection 4(a).’’ These two provisions create statutory ambiguity because the first provision could be read to provide for the aggregation of amounts raised in all exempt transactions, even those that do not involve crowdfunding, while the second provision could be read to provide that nothing in the Section

32 In contrast, if an issuer sold $800,000 in a crowdfunding transaction pursuant to Section 4(a)(6) during the preceding 12 months, the issuer would be required to count that amount toward the $1 million aggregate amount and, thus, could only offer and sell $200,000 more in reliance on Section 4(a)(6). 33For example, if the prospective investor in a concurrent private placement for which general solicitation is not permitted became interested in that private placement through some means other than the offering made in reliance on Section 4(a)(6), such as through a substantive, pre-existing relationship with the issuer or direct contact by the issuer or its agents outside of the offering made in reliance on Section 4(a)(6), then the fact that the offering made in reliance on Section 4(a)(6) was posted publicly on the intermediary’s platform would not affect the availability of the other private placement exemption. On the other hand, if an investor first discovers the issuer through a solicitation in a Section 4(a)(6) offering, that investor would likely not be eligible to participate in a concurrent private placement in which general solicitation is not permitted. 34See proposed Rule 204 of Regulation Crowdfunding. See also discussion in Section II.B.4 below. 35See 17 CFR 230.405 (‘‘The term control (including the terms controlling, controlled by and under common control with) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.’’). Exchange Act Rule 12b–2 similarly defines the term ‘‘control.’’ See 17 CFR 240.12b–2. 36See proposed Instruction to paragraph (c) of proposed Rule 100 of Regulation Crowdfunding. 37See proposed Rule 100(c) of Regulation Crowdfunding (proposing to define issuer to include all entities controlled by or under common control with the issuer and any predecessor of the issuer). 4(a)(6) exemption should limit an issuer’s capital raising through other methods. We believe that the overall intent of providing the exemption under
Section 4(a)(6) was to provide an
additional mechanism for capital raising for startup and small businesses and not to affect the amount an issuer could raise outside of that exemption. Thus, we believe the capital raised in reliance on the exemption provided by Section 4(a)(6) should be counted toward the limitation. Capital raised through other means should not be counted in determining the aggregate amount sold in reliance on Section 4(a)(6). The opposite approach—requiring aggregation of amounts raised in any exempt transaction—would be inconsistent with the goal of alleviating the funding gap faced by startups and small businesses because it would place a cap on the amount of capital startups and small business could raise. An issuer that already sold $1 million in reliance on the exemption provided under Section 4(a)(6), for example, would be prevented from raising capital through other exempt methods and, conversely, an issuer that sold $1 million through other exempt methods would be prevented from raising capital under Section 4(a)(6). In determining the amount that may be available to be offered and sold in reliance on Section 4(a)(6) in light of the $1 million aggregate amount limitation, an issuer would include amounts sold by the issuer (including amounts sold by entities controlled by the issuer or under common control with the issuer, as well as any amounts sold by any predecessor of the issuer) in reliance on
Section 4(a)(6) during the preceding 12-
month period. The issuer would aggregate any amounts previously sold with the amount the issuer intends to raise in reliance on the exemption, and under the proposed rules, the combined amount could not exceed $1 million. An issuer would not include amounts sold in other exempt offerings during the preceding 12-month period. For example, if an issuer sold $800,000 pursuant to the exemption provided in Regulation D during the preceding 12 months, this amount would not be aggregated in an issuer’s calculation to determine whether it had reached the maximum amount for purposes of
Section 4(a)(6).32 In addition, in
determining the amount sold in reliance on Section 4(a)(6) during the preceding 12-month period, an issuer would not need to consider amounts received through methods that do not involve the offer or sale of securities (such as donations it received from a separate non-securities-based crowdfunding effort, contributions from friends and family, gifts, grants or loans). Further, in light of Section 4A(g) and the reasons discussed above, we believe that an offering made in reliance on
Section 4(a)(6) should not be integrated
with another exempt offering made by the issuer, provided that each offering complies with the requirements of the applicable exemption that is being relied upon for the particular offering. An issuer could complete an offering made in reliance on Section 4(a)(6) that occurs simultaneously with, or is preceded or followed by, another exempt offering. An issuer conducting a concurrent exempt offering for which general solicitation is not permitted, however, would need to be satisfied that purchasers in that offering were not solicited by means of the offering made in reliance on Section 4(a)(6).33 Similarly, any concurrent exempt offering for which general solicitation is permitted could not include an advertisement of the terms of an offering made in reliance on Section 4(a)(6) that would not be permitted under Section 4(a)(6) and the proposed rules.34 Under Section 4(a)(6), the amount of securities sold in reliance on Section 4(a)(6) by entities controlled by or under common control with the issuer must be aggregated with the amount to be sold by the issuer in the current offering to determine the aggregate amount sold in reliance on Section 4(a)(6) during the preceding 12-month period. The statute does not define the term ‘‘controlled by or under common control with’’ the issuer; however, the term ‘‘control’’ is defined in Securities Act Rule 405.35 For purposes of determining whether an entity is ‘‘controlled by or under common control with’’ the issuer, an issuer would be required to consider whether it has ‘‘control’’ based on this definition.36 Under the proposed rules, the amount of securities sold in reliance on Section 4(a)(6) also would include securities sold by any predecessor of the issuer in reliance on Section 4(a)(6) during the preceding 12-month period.37 We believe this approach is necessary to prevent an issuer from exceeding the $1 million limit by reorganizing the issuer into a new entity that would otherwise not be limited by previous sales made by its predecessor. For example, if an issuer reaches the $1 million limit under Section 4(a)(6), we do not believe the reorganization of the issuer into a new entity should permit the successor to make additional offers and sales in reliance on Section 4(a)(6) during the relevant 12-month period. Request for Comment

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

38The definition of the term ‘‘accredited investor’’ is set forth in Rule 501(a) of Regulation D [17 CFR 230.501(a)] and includes any person who comes within one of the definition’s enumerated categories of persons, or whom the issuer ‘‘reasonably believes’’ comes within any of the enumerated categories, at the time of the sale of the securities to that person. For natural persons, Rule 501(a) defines an accredited investor as a person:
(1) Whose individual net worth, or joint net worth with that person’s spouse, exceeds $1 million, excluding the value of the person’s primary residence (the ‘‘net worth test’’); or (2) who had an individual income in excess of $200,000 in each of the two most recent years, or joint income with that person’s spouse in excess of $300,000 in each of those years, and has a reasonable expectation of reaching the same income level in the current year (the ‘‘income test’’). Although the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111–203, 124 Stat. 1376, 1577 (July 21, 2010), (the ‘‘Dodd-Frank Act’’) did not change the amount of the $1 million net worth test, it did change how that amount is calculated—by excluding the value of a person’s primary residence. This change took effect upon the enactment of the Dodd-Frank Act. In December 2011, we amended Rule 501 to incorporate this change into the definition of accredited investor. See Net Worth Standard for Accredited Investors, Release No. 33–9287 (Dec. 21,
2011) [76 FR 81793 (Dec. 29, 2011)]. In addition,
Section 413(b) of the Dodd-Frank Act specifically
authorizes us to undertake a review of the definition of the term ‘‘accredited investor’’ as it applies to natural persons, it and requires us to undertake a review of the definition in its entirety every four years, beginning four years after enactment of the Dodd-Frank Act. Release No. 33– 9416 (July 10, 2013) requests public comments on the definition of ‘‘accredited investor.’’ 39See RocketHub Letter 1 (stating that the Commission should clarify that the greater of income or net worth will be used to determine the investment limit); NASAA Letter (stating that the Commission should resolve the ambiguity by requiring the lesser of the two investment limits); Ohio Division of Securities Letter (stating that the Commission should apply the stricter investment limitation); ABA Letter 1; Friedman Letter. efforts be included in the calculation of the $1 million limit? Why or why not?
3. As described above, we believe that
offerings made in reliance on Section 4(a)(6) should not necessarily be integrated with other exempt offerings if the conditions to the applicable exemptions are met. How would an alternative interpretation affect the utility of crowdfunding as a capital raising mechanism? Are there circumstances under which other exempt offers should be integrated with an offer made in reliance on Section 4(a)(6)? If so, what are those circumstances? Should we prohibit an issuer from concurrently offering securities in reliance on Section 4(a)(6) and another exemption? Why or why not? Should we prohibit an issuer from offering securities in reliance on Section 4(a)(6) within a specified period of time after or concurrently with a Rule 506(c) offering under Regulation D involving general solicitation? Why or why not? Should we prohibit an issuer from using general solicitation or general advertising under Rule 506(c) in a manner that is intended, or could reasonably be expected, to condition the market for a Section 4(a)(6) offering or generate referrals to a crowdfunding intermediary? Why or why not? Should issuers that began an offering under
Section 4(a)(6) be permitted to convert
the offering to a Rule 506(c) offering? Why or why not?
4. Under the proposed rules, whether
an entity is controlled by or under common control with the issuer would be determined based on whether the issuer possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the entity, whether through the ownership of voting securities, by contract or otherwise. This standard is based on the definition of ‘‘control’’ in Securities Act Rule 405. Is this approach appropriate? Why or why not? Should we define control differently? If so, how?
5. Under the proposed rules, the
definition of issuer would include any predecessor of the issuer. Is this approach appropriate? Why or why not? Should an issuer aggregate amounts sold by an affiliate of the issuer when determining the aggregate amount sold in reliance on Section 4(a)(6) during the preceding 12-month period? Why or why not? If so, how should we define affiliate?
2. Investment Limitation
Under Section 4(a)(6)(B), the aggregate amount sold to any investor by an issuer, including any amount sold in reliance on the exemption during the 12-month period preceding the date of such transaction, cannot exceed: ‘‘(i) The greater of $2,000 or 5 percent of the annual income or net worth of such investor, as applicable, if either the annual income or the net worth of the investor is less than $100,000; and (ii) 10 percent of the annual income or net worth of such investor, as applicable, not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000.’’ Section 4A(h) further provides that these dollar amounts shall be adjusted by the Commission not less frequently than once every five years based on the Consumer Price Index. As discussed in more detail below, Section 4A(h) also provides that the income and net worth of a natural person who is investing in a crowdfunding transaction pursuant to Section 4(a)(6) shall be calculated in accordance with the Commission’s rules regarding the calculation of income and net worth of an accredited investor.38 Several commenters noted that Sections 4(a)(6)(B)(i) and (ii) technically subject some investors to two potential investment limits.39 The language of the statute may be read to create potential conflicts or ambiguity between the two investment limits because paragraph (i) applies if ‘‘either’’ annual income or net worth is less than $100,000 and paragraph (ii) applies if ‘‘either’’ annual income or net worth is equal to or more than $100,000. Accordingly, in any situation in which annual income is less than $100,000 and net worth is equal to or more than $100,000 (or vice versa), the language of the statute may be read to cause both paragraphs to apply. Paragraph (i) also fixes the maximum annual investment by an investor at 5 percent of ‘‘the annual income or net worth of such investor, as applicable’’ and paragraph (ii) fixes the maximum annual investment by an investor at 10 percent of ‘‘the annual income or net worth of such investor, as applicable’’, but neither paragraph (i) nor paragraph (ii) explicitly states when that percentage should be applied against the investor’s annual income and when the percentage should be applied against the investor’s net worth. Finally, paragraph (i) sets a floor for the investment limit of $2,000 per year and paragraph (ii) sets a ceiling for the investment limit of $100,000 per year, but the statutory language does not explicitly state whether the floor applies if the maximum is calculated under paragraph (ii) or whether the ceiling applies if the maximum is calculated under paragraph (i). Accordingly, discretion is required in interpreting and applying this provision of the statute. We believe that the appropriate approach to the investment limit provision is to provide for an overall investment limit of $100,000, but within that overall limit, to provide for a ‘‘greater
of’’ limitation based on annual income and net worth. Under the proposed rules, therefore, if both annual income and net worth are less than $100,000, then a limit of $2,000 or 5 percent of annual income or net worth, whichever is greater, would apply. If either annual income or net worth exceeds $100,000, then a limit of 10 percent of annual income or net worth, whichever is greater, but not to exceed $100,000, would apply. We believe that this clarification would give effect to the provision and would be consistent with Congressional intent in providing investment limitations; however, we request comment below on whether to calculate the investment limit based on

40See proposed Instruction 1 to paragraph (a)(2) of proposed Rule 100 of Regulation Crowdfunding. See also note 9. 41See Securities Act Rule 501(a)(5) [17 CFR 230.501(a)(5)] (net worth) and Securities Act Rule 501(a)(6) [17 CFR 230.501(a)(6)] (income). Consistent with these rules, the calculation of a natural person’s net worth for purposes of the investment limit would exclude the value of the primary residence of such person. A natural person’s income for purposes of the investment limit calculation would be the lower of such person’s income for each of the two most recent years as long as such person has a reasonable expectation of the same income level in the current year. 42See Friedman Letter. 43See proposed Instruction 2 to paragraph (a)(2) of proposed Rule 100 of Regulation Crowdfunding. 44See discussion in Section II.C.5.b.i below. 45See proposed Instruction 3 to paragraph (a)(2) of proposed Rule 100 of Regulation Crowdfunding. 46See CFIRA Letter 2. 47See TechnologyCrowdFund Letter 5. 48See ASBC Letter; City First Letter. See also Spinrad Letter 1 (supporting the two-tier approach described in the ASBC Letter). 49See ASBC Letter. 50See City First Letter. 51See 158 Cong. Rec. S1689 (daily ed. Mar. 15,
2012) (statement of Sen. Mark Warner) (‘‘There is
now the ability to use the Internet as a way for small investors to get the same kind of deals that up to this point only select investors have gotten that have been customers of some of the best known investment banking firms, where we can now use the power of the Internet, through a term called crowdfunding.’’). the lesser of annual income or net worth. As required by Section 4A(h), the proposed rules would require a natural person’s annual income and net worth to be calculated in accordance with the Commission’s rules for determining accredited investor status.40 Securities Act Rule 501 specifies the manner in which annual income and net worth are calculated for purposes of determining accredited investor status.41 One commenter stated that Section 4(a)(6)(B) is unclear in regard to how to address the joint net worth of spouses.42 The proposed rules would clarify that an investor’s annual income and net worth may be calculated jointly with the income and net worth of the investor’s spouse.43 We believe that this approach is consistent with the rules for determining accredited investor status because the accredited investor definition contemplates both individual and joint income and net worth with a spouse as methods of calculating annual income and net worth. We also are proposing to allow an issuer to rely on efforts that an intermediary takes in order to determine that the aggregate amount of securities purchased by an investor will not cause the investor to exceed the investor limits,44 provided that the issuer does not have knowledge that the investor had exceeded, or would exceed, the investor limits as a result of purchasing securities in the issuer’s offering.45 In discussing the investment limitations, one commenter requested that the Commission distinguish between retail investors and institutional or accredited investors and allow institutional and accredited investors to invest in excess of the investment limitations included in the statute.46 Another commenter asked that the Commission clarify whether non￾U.S. citizens or non-U.S. residents are bound by the same investment limits.47 Three commenters proposed that the Commission create a two-tier regulatory system based on different investment limits to reduce the regulatory burden for small, local offerings.48 One of the commenters suggested that one of the tiers could consist of a ‘‘small local offering’’ in which investment limits would be up to $250 per investor.49 The commenter asserted that smaller investments could be subject to significantly reduced regulation because a $250 investment is unlikely to pose significant risk to an investor. The second commenter suggested reducing the anticipated personal disclosure requirements for investors who invest less than $500 through an intermediary that is a community development financial institution.50 The limitations in Section 4(a)(6)(B) apply to any investor seeking to participate in a crowdfunding transaction. We believe that
Congress intended for investment opportunities through crowdfunding transactions relying on Section 4(a)(6) to be available to all types of investors and established the investment limitations accordingly.51 The statute provides specific investment limits, and the only reference in the statute regarding changing those investment limits is the requirement that the Commission update the investment limits not less frequently than every five years based on the Consumer Price Index. Therefore, we do not believe it would be appropriate to alter those limits for any particular type of investor or, at this time, to create a different exemption based on different investment limits. Issuers can rely on other exemptions to offer and sell securities to accredited investors and institutional investors (and, in some cases, investors that do not meet the definition of accredited investor). As discussed above, concurrent offerings to these types of investors are possible if the conditions of the applicable exemption are met. Therefore, as proposed, the limitations would apply to all investors, including retail, institutional or accredited investors and both U.S. and non-U.S. citizens or residents. Request for Comment
6. While we acknowledge that there is
ambiguity in the statutory language and there is some comment regarding a contrary reading, we believe that the appropriate approach to the investment limitations in Section 4(a)(6)(B) is to provide for an overall investment limit of $100,000 and, within that limit, to provide for a ‘‘greater of’’ limitation based on an investor’s annual income or net worth. In light of ambiguity in the statutory language, we are specifically asking for comment as to the question of whether we should instead require investors to calculate the investment limitation based on the investor’s annual income or net worth at the five percent threshold of Section 4(a)(6)(B)(i) if either annual income or net worth is less than $100,000? Similarly, for those investors falling within the Section 4(a)(6)(B)(i) framework, should we require them to calculate the five percent investment limit based on the lower of annual income or net worth? Should we require the same for the calculation of the 10 percent investment limit within the Section 4(a)(6)(B)(ii) framework? If we were to pursue any of these calculations, would we unnecessarily impede capital formation?
7. The statute does not address how
joint annual income or joint net worth should be treated for purposes of the investment limit calculation. The proposed rules clarify that annual income and net worth may be calculated jointly with the annual income and net worth of the investor’s spouse. Is this approach appropriate? Should we distinguish between annual income and net worth and allow only one or the other to be calculated jointly for purposes of calculating the investment limit? Why or why not? Should the investment limit be calculated differently if it is based on the spouses’ joint income, rather than each spouse’s annual income? Why or why not?
8. We are proposing to permit an
issuer to rely on the efforts that an intermediary takes in order to determine that the aggregate amount of securities purchased by an investor will not cause the investor to exceed the investor limits, provided that the issuer does not have knowledge that the investor had exceeded, or would exceed, the investor limits as a result of purchasing securities in the issuer’s offering. Is this approach appropriate? Why or why not? Should an issuer be required to obtain a written representation from the investor that the investor has not and

52See ASBC Letter.
53See City First Letter.
54See proposed Instruction 1 to paragraph (a)(3) of proposed Rule 100 of Regulation Crowdfunding. 55 In this regard, we note that Section 301 of the JOBS Act states that ‘‘[Title III] may be cited as the ‘Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012’ ’’. See
Section 301 of the JOBS Act. See also 158 Cong.
Rec. S1689 (daily ed. March 15, 2012) (statement of Sen. Mark Warner) (‘‘There is now the ability to use the Internet as a way for small investors to get the same kind of deals that up to this point only select investors have gotten . . ., where we can now use the power of the Internet, through a term called crowdfunding.’’); id. at S1717 (Statement of Sen. Mary Landrieu) (‘‘this crowdfunding bill—which is, in essence, a way for the Internet to be used to raise capital. . . .’’). 56See note 2 and accompanying text. The Internet is considered to be a ‘‘perfect technology capable of aggregating millions of disparate, independent ideas in the way markets and intelligent voting systems do, without the dangers of ‘too much communication’ and compromise.’’ Brabham, note 1 (citing James Surowiecki, The Wisdom of Crowds xix (2004)). 57See proposed Rule 100(a)(3) of Regulation Crowdfunding. 58See proposed Rule 100(d) of Regulation Crowdfunding. 59See proposed Instruction 2 to paragraph (a)(3) of proposed Rule 100 of Regulation Crowdfunding. 60See, e.g., Use of Electronic Media by Broker￾Dealers, Transfer Agents and Investment Advisers for Delivery of Information, Release No. 34–37182 (May 9, 1996) [61 FR 24644 (May 15, 1996)]; Use of Electronic Media, Release No. 34–42728 (Apr. 28,
2000) [65 FR 25843 (May 4, 2000)] (‘‘Use of
Electronic Media’’). will not exceed the limit by purchasing from the issuer? Why or why not?
9. Should institutional and accredited
investors be subject to the investment limits, as proposed? Why or why not? Should we adopt rules providing for another crowdfunding exemption with a higher investment limit for institutional and accredited investors? If so, how high should the limit be? Are there categories of persons that should not be subject to the investment limits? If yes, please identify those categories of persons. If the offering amount for an offering made in reliance on Section 4(a)(6) is not aggregated with the offering amount for a concurrent offering made pursuant to another exemption, as proposed, is it necessary to exclude institutional and accredited investors from the investment limits since they would be able to invest pursuant to another exemption in excess of the investment limits in Section 4(a)(6)?
10. Should we adopt rules providing
for another crowdfunding exemption with different investment limits (e.g., an exemption with a $250 investment limit and fewer issuer requirements), as one commenter suggested,52 or apply different requirements with respect to individual investments under a certain amount, such as $500, as another commenter suggested?53 Why or why not? If so, should the requirements for issuers and intermediaries also change? What investment limits and requirements would be appropriate? Would adopting such an exemption be consistent with the purposes of Section 4(a)(6)?
11. Should we consider additional
investment limits on transactions made in reliance on Section 4(a)(6) where the purchaser’s annual income and net worth are both below a particular threshold? If so, what should such threshold be and why?
3. Transaction Conducted Through an
Intermediary
Under Section 4(a)(6)(C), a transaction in reliance on Section 4(a)(6) must be ‘‘conducted through a broker or funding portal that complies with the requirements of [S]ection 4A(a).’’ We believe that requiring an issuer to use only one intermediary, rather than allowing the issuer to use multiple intermediaries, to conduct an offering or concurrent offerings in reliance on
Section 4(a)(6) would help foster the
creation of a crowd and better accomplish the purpose of the statute. As discussed above, a central tenet of the concept of crowdfunding is presenting members of the crowd with an idea or business so members of the crowd can share information and evaluate the idea or business. Allowing an issuer to conduct a single offering or simultaneous offerings in reliance on
Section 4(a)(6) through more than one
intermediary would diminish the ability of the members of the crowd to effectively share information, because essentially, there would be multiple ‘‘crowds.’’ Also, because practices among intermediaries may differ, were multiple intermediaries to conduct a single offering or simultaneous offerings, this could result in significant differences among such offerings. Finally, allowing an issuer to conduct an offering using more than one intermediary would make it more difficult for intermediaries to determine whether an issuer is exceeding the $1 million aggregate offering limit. Therefore, in addition to requiring the use of an intermediary in connection with an offering made in reliance on
Section 4(a)(6), the proposed rules
would prohibit an issuer from using more than one intermediary to conduct an offering or concurrent offerings made in reliance on Section 4(a)(6).54 Although the statute does not expressly require it, we also believe that in enacting Section 4(a)(6)(C), Congress contemplated that crowdfunding transactions made in reliance on Section 4(a)(6) and activities associated with these transactions would occur over the Internet or other similar electronic medium that is accessible to the public.55 We believe that an ‘‘online￾only’’ requirement enables the public to access offering information and share information publicly in a way that will allow members of the crowd to decide whether or not to participate in the offering and fund the business or idea.56 We believe that other mechanisms would not offer this opportunity. The proposed rules would require that an intermediary, in a transaction involving the offer or sale of securities in reliance on Section 4(a)(6), effect such transactions exclusively through an intermediary’s platform.57 We propose to define the term ‘‘platform’’ to mean an Internet Web site or other similar electronic medium through which a registered broker or a registered funding portal acts as an intermediary in a transaction involving the offer or sale of securities in reliance on Section 4(a)(6).58 The requirement that a transaction be conducted exclusively through a platform does not preclude an intermediary from performing back office and other administrative functions offline. Therefore, we propose to state that intermediaries may engage in back office and other administrative functions other than on their platforms.59 Examples of such functions include document maintenance, preparation of notices and confirmations, preparing internal policies and procedures, defining and approving business security requirements and policies for information technology, and preparing information required to be filed or otherwise provided to regulators. The proposed rules would accommodate other electronic media that currently exist or may develop in the future. For instance, applications for mobile communication devices, such as cell phones or smart phones, could be used to display offerings and to permit investors to make investment commitments. In our releases concerning the use of electronic media for delivery purposes, we discussed so￾called ‘‘electronic-only’’ offerings as those in which investors are permitted to participate only if they agree to accept electronic delivery of all documents and other information in connection with the offering.60 As discussed below, the proposed rules would require that an intermediary, in its standard account opening materials,

61See proposed Rule 302(a) of Regulation Crowdfunding. The proposed rules would require consent to electronic delivery because we believe Congress contemplated that crowdfunding would, by its very nature, occur exclusively through electronic media. 62See, e.g., MacDonald Letter (stating that readily-available information on the Internet already provides a safeguard for crowdfunding investors); NAASA Letter (stating that NASAA is considering whether open Internet access to funding portals would provide sufficient and updated information to state regulators). 63See Cera Technology Letter. 64See Tally Letter. 65See proposed Rule 205 of Regulation Crowdfunding (promoter compensation), proposed Rule 305 of Regulation Crowdfunding (payments to third parties) and proposed Rule 402(b)(6) of Regulation Crowdfunding (conditional safe harbor), discussed below in Sections II.B.5, II.C.7 and II.D.3, respectively. 66See proposed Rule 204 of Regulation Crowdfunding (advertising) discussed below in
Section II.B.4. 67See City First Letter and note 355.
68These are issuers who are required to file reports with the Commission pursuant to Exchange Act Sections 13(a) (15 U.S.C. 78m(a)) or 15(d) (15 U.S.C. 78o(d)). 69 15 U.S.C 80a–1 et seq. 70 15 U.S.C. 80a–3(b) or (c). 71Commonwealth of Massachusetts Letter. 72See proposed Rules 100(b)(1)–(3) of Regulation Crowdfunding. 73See proposed Rule 100(b)(4) of Regulation Crowdfunding. See also proposed Rule 503 of Regulation Crowdfunding and Section II.E.6 below for a discussion of the disqualification provisions. 74See proposed Rules 202 and 203(b) of Regulation Crowdfunding and Section II.B.2 below for a discussion of the ongoing reporting requirements. 75See proposed Rule 100(b)(5) of Regulation Crowdfunding. obtain from investors consent for such electronic delivery.61 Some commenters appear to assume that all offers and sales made in reliance on Section 4(a)(6) would be conducted online.62 One commenter recommended that the Commission expressly require that all disclosure and affirmations required for crowdfunding transactions take place online.63 In contrast, another commenter requested that we permit some crowdfunding elements to take place offline to encourage local community investments through entities such as community banks, community development companies and business development companies.64 This commenter stated that permitting crowdfunding to take place offline also will help persons without Internet access to invest. The proposed rules would, subject to certain conditions, separately permit outreach by third parties and a third party’s promotion of an issuer’s offering through communication channels provided by an intermediary.65 In addition, an issuer may provide a notice, subject to the conditions in the proposed rules, that directs potential investors to the intermediary’s platform through which the issuer will conduct its offering.66 Finally, we are not proposing to permit offerings to be conducted through means other than the Internet or similar electronic medium because we believe that allowing other non-electronic means would be inconsistent with the underlying principles of crowdfunding and the statute. Offerings made by other means would not be widely accessible by the public, which would defeat the benefit of the collective wisdom of the members of the crowd. We also believe that Internet access may be available to the public, such as through local public libraries, alleviating one commenter’s concern about some persons not being able to invest unless the offerings also take place offline. Request for Comment
12. The proposed rules would
prohibit an issuer from conducting an offering or concurrent offerings in reliance on Section 4(a)(6) using more than one intermediary. Is this proposed approach appropriate? Why or why not? If issuers were permitted to use more than one intermediary, what requirements and other safeguards should or could be employed?
13. Should we define the term
‘‘platform’’ in a way that limits crowdfunding in reliance on Section 4(a)(6) to transactions conducted through an Internet Web site or other similar electronic medium? Why or why not?
14. Should we permit crowdfunding
transactions made in reliance on Section 4(a)(6) to be conducted through means other than an intermediary’s electronic platform? If so, what other means should we permit? For example, should we permit community-based funding in reliance on Section 4(a)(6) to occur other than on an electronic platform? 67 To foster the creation and development of a crowd, to what extent would such other means need to provide members of the crowd with the ability to observe and comment (e.g., through discussion boards or similar functionalities) on the issuer, its business or statements made in the offering materials?
15. Should we allow intermediaries to
restrict who can access their platforms? For example, should we permit intermediaries to provide access by invitation only or only to certain categories of investors? Why or why not? Would restrictions such as these negatively impact the ability of investors to get the benefit of the crowd and its assessment of an issuer, business or potential investment? Would these kinds of restrictions affect the ability of small investors to access the capital markets? If so, how?
16. As noted above, the proposed
rules would not require intermediaries’ back office or other administrative functions to be conducted exclusively on their platforms. Do the proposed rules require any clarification? Are there other activities in which an intermediary may engage that would not be considered back office or administrative functions and that should be permitted to occur other than on a platform? If so, what activities are they, and why should they be permitted to occur other than on a platform?
4. Exclusion of Certain Issuers From
Eligibility Under Section 4(a)(6)
Section 4A(f) excludes certain
categories of issuers from eligibility to rely on Section 4(a)(6) to engage in crowdfunding transactions. These issuers are: (1) Issuers that are not organized under the laws of a state or territory of the United States or the District of Columbia; (2) issuers that are subject to Exchange Act reporting requirements; 68 (3) investment companies as defined in the Investment Company Act of 1940 (the ‘‘Investment Company Act’’) 69 or companies that are excluded from the definition of investment company under Section 3(b) or 3(c) of the Investment Company Act; 70 and (4) any other issuer that the Commission, by rule or regulation, determines appropriate. One commenter suggested that the Commission’s rules should specify that the crowdfunding exemption under
Section 4(a)(6) is not available for blank
check companies or hedge funds and noted that ‘‘permitting these kinds of high-risk and often complex entities to use the exemption is not consistent with the statutory goal of deterring fraud and unethical non-disclosure in crowdfunding offerings.’’ 71 The proposed rules would exclude the categories of issuers identified in the statute,72 as well as issuers that are disqualified from relying on Section 4(a)(6) pursuant to the disqualification provisions of Section 302(d) of the JOBS Act.73 The proposed rules also would exclude an issuer that has sold securities in reliance on Section 4(a)(6) if the issuer has not filed with the Commission and provided to investors, to the extent required, the ongoing annual reports required by Regulation Crowdfunding74 during the two years immediately preceding the filing of the required new offering statement.75 We believe that the ongoing reporting requirement should benefit investors by enabling them to consider updated

76See, e.g., Section 4A(b)(1)(C) (requiring a description of the business of the issuer and the anticipated business plan of the issuer). 77See discussion below in Section II.B.1.a.i.(b) below. 78 Investment Advisers Act (‘‘Advisers Act’’) Form PF defines a ‘‘hedge fund’’ generally as any ‘‘private fund’’ (other than a securitized asset fund) that: (1) Pays a performance fee or allocation calculated by taking into account unrealized gains (other than a fee or allocation the calculation of which may take into account unrealized gains solely for the purpose of reducing such fee or allocation to reflect net unrealized losses); (2) may borrow an amount in excess of one-half of its net asset value (including any committed capital) or may have gross notional exposure in excess of twice its net asset value (including any committed capital); or (3) may sell securities or other assets short or enter into similar transactions (other than for the purpose of hedging currency exposure or managing duration). See Form PF: Glossary of Terms at 4, available at http://www.sec.gov/rules/ final/2011/ia-3308-formpf.pdf. A ‘‘private fund’’ is defined as any issuer that would be an investment company as defined in Section 3 of the Investment Company Act but for Section 3(c)(1) or 3(c)(7) of that Act. Id. at 7. 79See Section II.B.1.b below for a discussion of progress updates. information about the issuer, thereby allowing them to make more informed investment decisions. If issuers fail to comply with this requirement, we do not believe that they should have the benefit of relying on the exemption under Section 4(a)(6) again until they file, to the extent required, the two most recent annual reports. The proposed rules also would exclude an issuer that has no specific business plan or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies. As described above, crowdfunding is a new and evolving method to raise money that serves as an alternative source of capital to support a wide range of ideas and ventures. We believe that the exemption under Section 4(a)(6) is intended to provide an issuer with an early stage project, idea or business an opportunity to share it publicly with a wider range of potential investors. Those potential investors may then share information with each other about the early stage proposal and use that information to decide whether or not to provide funding based on the ‘‘wisdom of the crowd.’’ Under such circumstances, this mechanism requires the public to have sufficient information about the issuer’s proposal to discuss its merit and flaws.76 At the same time, an early stage proposal may not allow the crowdfunding mechanism to work appropriately if the issuer does not describe a specific project, idea, or business, or is seeking funding for unspecified corporate transactions. In such cases, individuals reviewing the proposal may not have sufficient information to formulate a
considered view of the proposal, or the proposal may be less likely to attract enough perspectives to inform a crowd decision. Investors who nonetheless choose to participate may therefore be more likely to be participating in an issuance that has not been reviewed by the crowd in the manner contemplated by the exemption under Section 4(a)(6). We are cognizant of the challenges associated with distinguishing between early stage proposals that should provide information sufficient to support the crowdfunding mechanism and those that cannot by their terms do so. We preliminarily believe that an appropriate balance can be struck by excluding an issuer that has no specific business plan or that has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies. As described below, we do not expect that a specific ‘‘business plan’’ requires a formal document prepared by management or used for marketing to investors.77 We understand that issuers engaging in crowdfunding transactions may have businesses at various stages of development in differing industries, and therefore, we believe that a specific ‘‘business plan’’ could encompass a wide range of project descriptions, articulated ideas, and business models. In particular, we recognize that the business plan for startups or small businesses seeking to rely on Section 4(a)(6) may not be fully developed or highly specific and that for many it may be less defined or detailed than the plan associated with larger issuers. With respect to hedge funds, we believe that under Section 4A(f)(3), hedge funds would be excluded from eligibility to rely on Section 4(a)(6) because hedge funds and other private funds typically rely on one of the exclusions from the definition of investment company under Section 3(c) of the Investment Company Act.78 Request for Comment
17. Section 4A(b)(4) requires that,
‘‘not less than annually, [the issuer] file with the Commission and provide to investors reports of the results of operations and financial statements of the issuer. . . .’’ Should an issuer be excluded from engaging in a crowdfunding transaction in reliance on
Section 4(a)(6), as proposed, if it has not
filed with the Commission and provided to investors, to the extent required, the ongoing annual reports required by proposed Regulation Crowdfunding during the two years immediately preceding the filing of the required offering statement? Why or why not? Should an issuer be eligible to engage in a crowdfunding transaction in reliance on Section 4(a)(6) if it is delinquent in other reporting requirements (e.g., updates regarding the progress of the issuer in meeting the target offering amount)? 79 Why or why not? Should the exclusion be limited to a different timeframe (e.g., filings required during the five years or one year immediately preceding the filing of the required offering statement)?
18. Is the proposed exclusion of
issuers who fail to comply with certain ongoing annual reporting requirements too broad? If so, how should it be narrowed and why? Should the exclusion cover issuers whose affiliates have sold securities in reliance on
Section 4(a)(6) if the affiliates have not
complied with the ongoing annual reporting requirements? If so, should this encompass all affiliates? If not, which affiliates should it cover? Should we exclude any issuer with an officer, director or controlling shareholder who served in a similar capacity with another issuer that failed to file its annual reports? Why or why not?
19. What specific risks do investors
face with ‘‘idea-only’’ companies and ventures? Please explain. Do the proposed rules provide sufficient protection against the inherent risks of such ventures? Why or why not?
20. Does the exclusion of issuers that
do not have a specific idea or business plan from eligibility to rely on Section 4(a)(6) strike the appropriate balance between the funding needs of small issuers and the information requirements of the crowd? Why or why not? Are there other approaches that would strike a better balance among those considerations? If the proposed approach is appropriate, should we define ‘‘specific business plan’’ or what criteria could be used to identify them? How would any such criteria comport with the disclosure obligations described in Section II.B.1.a.i.(b) (description of the business) below?
21. Are there other categories of
issuers that should be precluded from relying on Section 4(a)(6)? If so, what categories of issuers and why? B. Requirements on Issuers

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

80Section 4A(b)(1)(A).
81Section 4A(b)(1)(B).
82Section 4A(b)(1)(C).
83Section 4A(b)(1)(D). This provision also establishes a framework of tiered financial disclosure requirements based on aggregate offering amounts for offerings under Section 4(a)(6) within the preceding 12-month period. 84Section 4A(b)(1)(E). 85Section 4A(b)(1)(F). 86Section 4A(b)(1)(G). This provision also requires that ‘‘prior to sale, each investor shall be provided in writing the final price and all required disclosures, with a reasonable opportunity to rescind the commitment to purchase the securities.’’ This provision is addressed in Sections II.C.5 and II.C.6 below. 87Section 4A(b)(1)(H). Specifically, Section 4A(b)(1)(H) requires a description of: ‘‘(i) Terms of the securities of the issuer being offered and each other class of security of the issuer . . .; (ii) a description of how the exercise of the rights held by the principal shareholders of the issuer could negatively impact the purchasers of the securities being offered; (iii) the name and ownership level of each existing shareholder who owns more than 20 percent of any class of the securities of the issuer; (iv) how the securities being offered are being valued . . .; and (v) the risks to purchasers of the securities relating to minority ownership in the issuer, the risks associated with corporate actions, including additional issuances of shares, a sale of the issuer or of assets of the issuer, or transactions with related parties.’’ 88See Vim Funding Letter; ExpertBeacon Letter; CrowdFund Connect Letter. 89Section II.B.3 below further discusses the proposed format of Form C and requests comments on the format and presentation of the information. 90While the proposed rules do not mandate a specific disclosure format, Rule 306 of Regulation S–T (17 CFR 232.306) requires that all electronic filings made with the Commission, including the filings that would be required under the proposed rules, be in English. The proposed rules would not, however, prevent an issuer from providing to the relevant intermediary both an English and a foreign language version of the information for the intermediary to make publicly available through its platform. The anti-fraud and civil liability provisions of the Securities Act would apply equally to both the English and the foreign language version of the information. 91 Issuers would use Form C to provide the required disclosures about the crowdfunding transaction and the information required to be filed annually. See Section II.B.3 below. 92See proposed Rule 201(a) of Regulation Crowdfunding. 93 Id. 94See proposed Rule 201(b) of Regulation Crowdfunding. 95 17 CFR 230.405. 96 17 CFR 240.3b–2. funding portal and make these disclosures available to potential investors. These disclosures include:

• The name, legal status, physical
  address and Web site address of the issuer 80;
• The names of the directors and
  officers (and any persons occupying a similar status or performing a similar function), and each person holding more than 20 percent of the shares of the issuer 81;
• a description of the business of the
  issuer and the anticipated business plan of the issuer 82;
• a description of the financial
  condition of the issuer83;
• a description of the stated purpose
  and intended use of the proceeds of the offering sought by the issuer with respect to the target offering amount 84;
• the target offering amount, the
  deadline to reach the target offering amount and regular updates regarding the progress of the issuer in meeting the target offering amount 85;
• the price to the public of the
  securities or the method for determining the price 86; and
• a description of the ownership and
  capital structure of the issuer.87 In addition, Section 4A(b)(1)(I) specifies that the Commission may require additional disclosures for the protection of investors and in the public interest. Commenters expressed concerns about the extent of the disclosure requirements and stated that overly burdensome rules would make offers and sales in reliance on Section 4(a)(6) prohibitively expensive.88 We recognize these concerns and have considered them in determining the disclosure requirements that we should propose in this release. The proposed rules generally describe the type of information that issuers would be required to disclose. We expect, however, that an issuer, along with the intermediary, would determine the format that best conveys the required disclosures and any other information the issuer determines is material to investors.89 We recognize that there are numerous ways to achieve that goal and, as such, we are not proposing to mandate a specific disclosure format.90 Similarly, to the extent some of the required disclosures overlap, issuers would not be required to duplicate disclosures. As discussed further in Section II.B.3, we are proposing to require issuers to file the disclosures with the Commission on Form C.91 As proposed, Form C would be filed in the standard format of eXtensible Markup Language (XML). An XML-based fillable form would enable issuers to provide information in a convenient medium without requiring the issuer to purchase or maintain additional software or technology. This would provide the Commission with data about offerings made in reliance on Section 4(a)(6). Information not required to be provided in text boxes would be filed as attachments to Form C. Request for Comment

22. Rule 306 of Regulation S–T
    requires that all electronic filings made with the Commission, including the filings that would be required under the proposed rules, be in English. Some startups and small businesses, and their potential investors, may principally communicate in a language other than English. Should we amend Rule 306 to permit filings by issuers under the proposed rules to be filed in the other language? Why or why not? If we retain the requirement to make filings only in English, will this impose a disproportionate burden on issuers and potential investors who principally communicate in a language other than English? What will be the impact on capital formation for such issuers? a. Offering Statement Disclosure Requirements
    i. Information About the Issuer and the
    Offering
    (a) General Information About the Issuer, Officers and Directors Consistent with Sections 4A(b)(1)(A) and (B), we are proposing to require an issuer to disclose information about its legal status, directors, officers and certain shareholders and how interested parties may contact the issuer. Specifically, an issuer would be required to disclose:

• Its name and legal status, including
  its form of organization, jurisdiction in which it is organized and date of organization 92;
• its physical address and its Web site
  address 93; and
• the names of the directors and
  officers, including any persons occupying a similar status or performing a similar function, all positions and offices with the issuer held by such persons, the period of time in which such person served in the position or office and their business experience during the past three years,94 including:
  Æ each person’s principal occupation and employment, including whether any officer is employed by another employer; and Æ the name and principal business of any corporation or other organization in which such occupation and employment took place. Although the statute does not define ‘‘officer,’’ the term is defined in Securities Act Rule 405 95 and in Exchange Act Rule 3b–2.96 We are proposing to define ‘‘officer’’ consistent with these existing rules. Thus, an issuer would be required to disclose information regarding its president, vice president, secretary, treasurer or principal financial officer, comptroller or principal accounting officer and any person routinely performing corresponding functions with respect to

97See Item 401(e) of Regulation S–K [17 CFR 229.401(e)]. 98See Item 8(c) of Form 1–A [17 CFR 239.90]. 99There is no cap on the amount of proceeds that may be raised in a registered offering, and Regulation A limits offerings to $5 million. 100See proposed Rule 201(c) of Regulation Crowdfunding. 101See proposed Rule 503 of Regulation Crowdfunding and Section II.E.6 below for a discussion of the proposed disqualification provisions. This approach also would be consistent with how beneficial ownership is calculated for the Rule 506 disqualification rules. See Disqualification of Felons and Other ‘‘Bad Actors’’ from Rule 506 Offerings, Release No. 33–9414 (July 10, 2013) [78 FR 44729 (July 24, 2013)] (‘‘Disqualification Adopting Release’’). 102See proposed Rule 201(c) of Regulation Crowdfunding. 103See Item 403 of Regulation S–K [17 CFR 229.403]. 104 17 CFR 230.405. 105 17 CFR 240.3b–2. 106 17 CFR 230.405. 107 17 CFR 240.3b–7. any organization, whether incorporated or unincorporated, to the extent it has individuals serving in these capacities. We are proposing to require disclosure of the business experience of directors and officers of the issuer during the past three years. A three-year period is less than the five-year period that applies to issuers conducting registered offerings 97 or exempt offerings pursuant to Regulation A.98 We believe that startups and small businesses that may seek to raise capital in reliance on Section 4(a)(6) generally would be smaller than the issuers conducting registered offerings or exempt offerings pursuant to Regulation A; 99 thus, we believe that the less burdensome three-year period would reduce the compliance cost for issuers while still providing potential investors with sufficient information about the business experience of directors and officers of the issuer to make an informed investment decision.
Section 4A(b)(1)(B) requires
disclosure of ‘‘the names of . . . each person holding more than 20 percent of the shares of the issuer.’’ In contrast,
Section 4A(b)(1)(H)(iii) requires
disclosure of the ‘‘name and ownership level of each existing shareholder who owns more than 20 percent of any class of the securities of the issuer’’ (emphasis added). The proposed rules would require disclosure of the names of persons, as of the most recent practicable date, who are the beneficial owners of 20 percent or more of the issuer’s outstanding voting equity securities, calculated on the basis of voting power.100 We refer to this group of persons as ‘‘20 Percent Beneficial Owners.’’ We believe that the universe of 20 Percent Beneficial Owners should be the same for the disclosure requirements and the disqualification provisions101 because this would ease the burden on issuers by requiring issuers to only identify one set of persons who would be the subject of these rules. We believe that assessing beneficial ownership based on total outstanding voting securities is consistent with Section 4A(b)(1)(B).
Section 4A(b)(1)(B) is not limited to
voting equity securities, but we believe the limitation would be necessary to clarify how beneficial ownership would be required to be calculated since issuers could potentially have multiple classes of securities with different voting powers. Assessing beneficial ownership based on ownership of total outstanding voting securities, rather than based on ownership of any class of securities as potentially contemplated by Section 4A(b)(1)(H)(iii), also should ease the burden of compliance because there would be fewer 20 Percent Beneficial Owners to track. Neither Section 4A(b)(1)(B) nor
Section 4A(b)(1)(H)(iii) states as of what
date the beneficial ownership should be calculated. The proposed rules would require issuers to calculate beneficial ownership as of the most recent practicable date.102 This is the same requirement that applies to issuers conducting registered offerings or Exchange Act reporting companies.103 We believe that it is appropriate to provide issuers relying on Section 4(a)(6) the flexibility to calculate beneficial ownership as of the most recent practicable date, otherwise such issuers would be subject to a more burdensome standard than the one that applies to issuers conducting registered offerings or Exchange Act reporting companies. Request for Comment
23. Under the proposed rules the
definition of the term ‘‘officer’’ is consistent with how that term is defined in Securities Act Rule 405 104 and in Exchange Act Rule 3b–2.105 Should we instead define ‘‘officer’’ consistent with the definition of ‘‘executive officer’’ in Securities Act Rule 405 106 and in Exchange Act Rule 3b–7?107 Why or why not? Which definition would be more appropriate for the types of issuers that would be relying on the exemption?
24. Are these proposed disclosure
requirements relating to the issuer and its officers and directors appropriate? Why or why not? Should we only require the disclosures specifically called for by statute or otherwise modify or eliminate any of the proposed requirements? Should we require any additional disclosures (e.g., disclosure about significant employees)? Is there other general information about the issuer or its officers and directors that we should require to be disclosed? If so, what information and why? For example, should we require disclosure of any court orders, judgments or civil litigation involving any directors and officers, including any persons occupying a similar status or performing a similar function? Why or why not? If so, what time period should this disclosure cover and why?
25. The proposed rules would require
disclosure of the business experience of directors and officers of the issuer during the past three years. Is the three￾year period an appropriate amount of time? Why or why not? If not, please discuss what would be an appropriate amount of time and why. Should the requirement to disclose the business experience of officers and directors include a specific requirement to disclose whether the issuer’s directors and officers have any prior work or business experience in the same type of business as the issuer? Why or why not?
26. The proposed rules would require
disclosure of the names of persons who are beneficial owners of 20 percent or more of the issuer’s outstanding voting equity securities, calculated on the basis of voting power. Is this approach appropriate? Why or why not? Should the proposed rules require disclosure of the names of beneficial owners of 20 percent or more of any class of the issuer’s voting securities, even if such beneficial ownership does not exceed 20 percent of all of the issuer’s outstanding voting equity securities? Why or why not? Should the proposed disclosure requirement apply to the names of beneficial owners of 20 percent or more, as proposed, or to more than 20 percent of the issuer’s outstanding voting equity securities? Why or why not?
27. The proposed rules would require
that beneficial ownership be calculated as of the most recent practicable date. Is this approach appropriate? Why or why not? Should beneficial ownership be calculated as of a different date? For example, should the reported beneficial ownership only reflect information as of the end of a well-known historical period, such as the end of a fiscal year? Please explain. Should there be a maximum amount of time from this calculation date to the filing to ensure that the information is current? If so, what maximum amount of time would be appropriate?
28. Should we provide additional
guidance on how to calculate beneficial ownership on the basis of voting power? If so, what should that guidance include? Should the proposed rules

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

120See proposed Rule 201(h) of Regulation Crowdfunding. 121The issuer in this case also would need to disclose the intended use of the additional proceeds. See proposed Instruction to paragraph (i) of proposed Rule 201 of Regulation Crowdfunding. See also Section II.B.1.a.i(c) above. In addition, the issuer in this case would need to provide audited financial statements at the commencement of the offering, rather than financial statements reviewed by an independent public accountant as would be required for the lower target amount. See Section II.B.1.a.ii below for a discussion of the financial statements requirements. As another example, an issuer that sets a target offering amount of $80,000 and a maximum offering amount of $105,000 would be required to provide financial statements reviewed by an independent public accountant (rather than tax returns for the most recently completed fiscal year and financial statements certified by the principal executive officer). 122See proposed Rule 201(h) of Regulation Crowdfunding. 123Although not specifically required by Title III, Securities Act Section 4A(b)(1)(I) provides us with discretion to require issuers engaged in transactions in reliance on Section 4(a)(6) to provide additional information for the protection of investors and in the public interest. 124See proposed Rule 201(j) of Regulation Crowdfunding. 125Section II.C.6 below further discusses the proposed cancelation provisions and requests comments on the proposed approach. 126 Id. 127See proposed Rule 201(k) of Regulation Crowdfunding. 128See proposed Rule 201(g) of Regulation Crowdfunding. See also Section 4A(a)(7) (requiring intermediaries to ‘‘ensure that all offering proceeds are only provided to the issuer when the aggregate capital raised from all investors is equal to or greater than a target offering amount . . . .’’) and discussion in Section II.C.6 below. 129See proposed Rule 201(l) of Regulation Crowdfunding. See also Sections II.C.5 and II.C.6 below for a discussion of information that issuers would be required to provide to investors. 130See proposed Rule 201(m) of Regulation Crowdfunding. accept.120 For example, if the issuer sets a target offering amount of $200,000 but is willing to accept up to $750,000, the issuer would be required to disclose both the $200,000 target offering amount and the $750,000 maximum offering amount that it will accept.121 In addition, the issuer would be required to disclose, at the commencement of the offering, how shares in oversubscribed offerings would be allocated.122 If this disclosure is made, we do not believe it would be necessary for us to prescribe how oversubscribed offerings would be allocated because this approach would allow issuers the flexibility to structure the offering as they believe appropriate. At the same time, this approach would provide investors with the disclosure they need to make an informed investment decision. We believe that investors in a crowdfunding transaction
would benefit from clear disclosure about their right to cancel, the circumstances under which an issuer may close an offering early and the need to reconfirm the investment commitment under certain circumstances, so investors are more aware of their rights to rescind an investment commitment.123 As such, we propose to require issuers to describe the process to cancel an investment commitment or to complete the transaction once the target amount is met,124 including a statement that:

• Investors may cancel an investment
  commitment until 48 hours prior to the deadline identified in the issuer’s offering materials; 125
• the intermediary will notify
  investors when the target offering amount has been met;
• if an issuer reaches the target
  offering amount prior to the deadline identified in its offering materials, it may close the offering early if it provides notice about the new offering deadline at least five business days prior to that new deadline (absent another material change that would require an extension of the offering and reconfirmation of the investment commitment); 126 and
• if an investor does not cancel an
  investment commitment before the 48- hour period prior to the offering deadline, the funds will be released to the issuer upon closing of the offering and the investor will receive securities in exchange for his or her investment. We also propose to require issuers to disclose that if an investor does not reconfirm his or her investment commitment after a material change is made to the offering, the investor’s investment commitment will be cancelled and committed funds will be returned.127 The proposed rules also would require issuers to disclose that if the sum of the investment commitments does not equal or exceed the target offering amount at the time of the offering deadline, no securities will be sold in the offering, investment commitments will be cancelled and committed funds will be returned.128 Request for Comment

34. Are these proposed disclosure
    requirements appropriate? Why or why not? Should we modify or eliminate any of the proposed requirements? Should we require any additional disclosures?
35. The proposed rules would require
    an issuer willing to accept investments in excess of the target offering amount to provide, at the commencement of the offering, the disclosure that would be required in the event the offer is oversubscribed. Is this approach appropriate? Why or why not? (e) Offering Price Consistent with Section 4A(b)(1)(G), the proposed rules would require an issuer to disclose the offering price of the securities or the method for determining the price, provided that prior to the sale, each investor is provided in writing the final price and all required disclosures.129 Request for Comment
36. Are these proposed disclosure
    requirements appropriate? Why or why not? Should we modify or eliminate any of the proposed requirements? Should we require any additional disclosures? Please explain. (f) Ownership and Capital Structure Consistent with Section 4A(b)(1)(H), the proposed rules would require an issuer to provide a description of its ownership and capital structure.130 This disclosure would include:

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

131See proposed Rule 501 of Regulation Crowdfunding and Section II.E.2 below for a discussion of restrictions on resales. 132Section 4A(b)(1)(I) provides us with discretion to require crowdfunding issuers to provide additional information for the protection of investors and in the public interest. 133The Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) will issue the CRD number. 134See proposed Rule 201(n) of Regulation Crowdfunding. 135See proposed Rule 201(o) of Regulation Crowdfunding. 136See Item 2 of General Instruction III to proposed Form C. 137See proposed Rule 201(e) of Regulation Crowdfunding. 138See proposed Rule 201(f) of Regulation Crowdfunding. 139See proposed Rule 201(p) of Regulation Crowdfunding. 140See proposed Rule 201(q) of Regulation Crowdfunding. 141See proposed Rule 201(r) of Regulation Crowdfunding. 142See FINRA, FINRA BrokerCheck, available at http://www.finra.org/Investors/ToolsCalculators/ BrokerCheck/P015175. 143See proposed Rule 201(f) of Regulation Crowdfunding. 144See proposed Rule 201(r) of Regulation Crowdfunding. 145 17 CFR 229.404. See proposed Rule 201(r)(4) of Regulation Crowdfunding. 146 17 CFR 239.90. Form 1–A is the form used for securities offerings made pursuant to Regulation A. 147See Commonwealth of Massachusetts Letter; Coan Letter; Liles Letter 1; Vim Funding Letter; NASAA Letter. whether or not such securities have voting rights, any limitations on such voting rights and a description of the restrictions on the transfer of the securities.131 Although Section 4A(b)(1)(H) does not specifically call for this disclosure, we believe that such disclosure would be necessary to provide investors with a more complete picture of the issuer’s capital structure than would be obtained solely pursuant to the statutory requirements. We believe this would help investors better evaluate the terms of the offer before making an investment decision. Request for Comment
37. Are these proposed disclosure
requirements appropriate? Why or why not? Should we modify or eliminate any of the proposed requirements? Should we require any additional disclosures? Please explain. (g) Additional Disclosure Requirements In addition to the statutory disclosure requirements,132 we propose to require:

• Disclosure of the name,
  Commission file number and Central Registration Depository number (‘‘CRD number’’) 133 (as applicable) of the intermediary through which the offering is being conducted; 134
• disclosure of the amount of
  compensation paid to the intermediary for conducting the offering, including the amount of any referral or other fees associated with the offering; 135
• disclosure of certain legends to be
  included in the offering statement; 136
• disclosure of the current number of
  employees of the issuer; 137
• a discussion of the material factors
  that make an investment in the issuer speculative or risky; 138
• a description of the material terms
  of any indebtedness of the issuer, including the amount, interest rate, maturity date and any other material terms; 139
• disclosure of exempt offerings
  conducted within the past three years; 140 and
• disclosure of certain related-party
  transactions.141
  Requiring an issuer to identify the name, Commission file number and CRD number (as applicable) of the intermediary through which the offering is being conducted should assist investors and regulators in obtaining information about the offering and facilitate monitoring the use of the exemption. It also could help investors obtain background information on the intermediary, for instance through filings made by the intermediary with the Commission as well as through the Financial Industry Regulatory Authority’s (‘‘FINRA’’) BrokerCheck system for brokers 142 or a similar system, if created, for funding portals. In addition, requiring an issuer to disclose the amount of compensation paid to the intermediary for conducting the offering, including the amount of referral or other fees associated with the offering, would permit investors and regulators to determine how much of the proceeds of the offering are used to compensate the intermediary and to facilitate the monitoring of compensation paid to intermediaries. The requirement for an issuer to include in the offering statement certain specified legends about the risks of investing in a crowdfunding transaction is intended to help investors understand the general risks of investing in a crowdfunding transaction. In addition, the requirement that an issuer include in the offering statement certain legends about the required ongoing reports, including how those reports would be made available to investors and how an issuer may terminate its ongoing reporting obligations, is intended to help investors understand an issuer’s ongoing reporting obligations and inform investors of how they will be able to access those reports. The proposed rules also would require disclosure of the material factors that make an investment in the issuer speculative or risky.143 We believe that this risk factor information should help investors to better understand the risks of investing in a specific issuer’s offering. The proposed rules also would require disclosure of certain related￾party transactions between the issuer and any director or officer of the issuer, any person who is a 20 Percent Beneficial Owner, any promoter of the issuer (if the issuer was incorporated or organized within the past three years), or immediate family members of the foregoing persons.144 For purposes of this related-party transactions disclosure, ‘‘immediate family member’’ would have the same meaning that it has in Item 404 of Regulation S–K,145 which relates to the disclosure of related-party transactions for Exchange Act reporting companies. This related￾party transactions disclosure should assist investors in obtaining a more complete picture of the financial relationships between certain related parties and the issuer. Several commenters suggested that we should model the disclosure form after Securities Act Form 1–A 146 or the North American Securities Administrators Association’s (‘‘NASAA’’) uniform Small Company Offering Registration
  Form (U–7).147 The proposed disclosure requirements regarding risk factors and related-party transactions are similar to those in Form 1–A except that, with respect to the disclosure about related￾party transactions, the proposed rules would require disclosure about transactions since the beginning of the issuer’s last full fiscal year, rather than the two fiscal years required in Form 1– A. Given the early stage of development of the small businesses and startups that we expect would seek to raise capital pursuant to Section 4(a)(6), as well as the investment limitations prescribed by the proposed rules, we believe that limiting the disclosure to related-party transactions since the beginning of the issuer’s last full fiscal year will reduce the burden on issuers while still providing investors with sufficient information to evaluate the relationship between related parties and the issuer. Also, the proposed rules only would require disclosure of related-party transactions in excess of five percent of the aggregate amount of capital raised by the issuer in reliance on Section 4(a)(6) during the preceding 12-month period, inclusive of the amount the issuer seeks to raise in the current offering under Section 4(a)(6). For

148See NASAA Letter; Ohio Division of Securities Letter. 149See proposed Rule 201(e) of Regulation Crowdfunding. 150 Issuers would be required to disclose the current number of employees in the offering document and the ongoing reports, which should permit comparison of the number of employees over different time periods. 151See proposed Rule 201(p) of Regulation Crowdfunding. 152See proposed Rule 201(q) Regulation Crowdfunding. 153See proposed Instruction to paragraph (q) of proposed Rule 201 of Regulation Crowdfunding. 154 17 CFR 229.404. See proposed Rule 201(r)(4) of Regulation Crowdfunding. 155See proposed Rule 501(c) of Regulation Crowdfunding and the related instruction thereto. See also Section II.E.2 below for a discussion of spousal equivalent. example, an issuer seeking to raise $1 million would be required to disclose related-party transactions in excess of $50,000, which is the same threshold required in Form 1–A. We believe that, in light of the sizes and varieties of issuers that may make offerings in reliance on Section 4(a)(6), this scaled approach is more appropriate than the fixed amount approach used in Form 1– A, which might be disproportionate to the size of certain offerings and issuers. Two commenters suggested that the Commission require the issuer to disclose the total number of employees.148 The proposed rules would require disclosure of the issuer’s current number of employees.149 This information should assist investors and regulators in obtaining information about the size of the businesses using the exemption. This information would make data available that could be used to evaluate whether the businesses using the exemption are creating additional jobs.150 The proposed rules also would require disclosure of the material terms of any indebtedness of the issuer, including, among other items, the amount, interest rate and maturity date.151 We believe this information would be important to investors because servicing debt could place additional pressures on an issuer in the early stages of development. In addition, the proposed rules would require disclosure of exempt offerings conducted within the past three years.152 For each exempt offering within the past three years, the proposed rules would require a description of the date of the offering, the offering exemption relied upon, the type of securities offered and the amount of securities sold and the use of proceeds.153 We believe that it would be important to investors to know of prior offerings of securities. This information would better inform investors about the capital structure of the issuer and would provide information about how prior offerings were valued. Request for Comment
38. Are these proposed disclosure
requirements appropriate? Why or why not? Should we modify or eliminate any of the proposed requirements? If so, how and why?
39. To assist investors and regulators
in obtaining information about the offering and to facilitate monitoring the use of the exemption, the proposed rules would require an issuer to identify the name, Commission file number and CRD number (as applicable) of the intermediary through which the offering is being conducted. Is there a better approach? What other information should be provided? If so, please describe it.
40. Should we require disclosure of
the amount of compensation paid to the intermediary, as proposed? Why or why not? Should we require issuers to separately disclose the amounts paid for conducting the offering and the amounts paid for other services? Why or why not?
41. Should we require the issuer to
include certain specified legends about the risks of investing in a crowdfunding transaction and disclosure of the material factors that make an investment in the issuer speculative or risky, as proposed? Why or why not? Should we provide examples in our rules of the types of material risk factors an issuer should consider disclosing? Why or why not? If so, what should those examples be?
42. Should we require disclosure of
certain related-party transactions, as proposed? Why or why not? The proposed rules would require disclosures of certain transactions between the issuer and directors or officers of the issuer, 20 Percent Beneficial Owners, any promoter of the issuer, or relatives of the foregoing persons. Is this the appropriate group of persons? Should we limit or expand the list of persons? If so, how and why?
43. As proposed, immediate family
member, for purposes of related-party transactions disclosure, would have the same meaning that it has in Item 404 of Regulation S–K.154 Is this the appropriate approach? Why or why not? If not, what would be a more appropriate definition and why? For purposes of restrictions on resales of securities issued in transactions made in reliance on Section 4(a)(6), ‘‘member of the family of the purchaser or the equivalent’’ would, as proposed, expressly include spousal equivalents.155 Should the definition of immediate family member for purposes of related-party transactions disclosure also expressly include spousal equivalents, or would including spousal equivalents create confusion in light of the fact that the definition for purposes of related-party transactions already includes any persons (other than a tenant or employee) sharing the same household? Please explain.
44. Is it appropriate to limit the
disclosure about related-party transactions to transactions since the beginning of the issuer’s last full fiscal year? Why or why not? Is it appropriate to limit disclosure to those related-party transactions that exceed five percent of the aggregate amount of capital raised by the issuer in reliance on Section 4(a)(6)? Should we instead require disclosure of all related-party transactions or all transactions in excess of an absolute threshold amount?
45. Is it appropriate to require a
description of any prior exempt offerings conducted within the past three years, as proposed? Why or why not? Would another time period (e.g., one year, five years, etc.) or no time limit be more appropriate?
46. Should we require any additional
disclosures (e.g., should we require disclosure about executive compensation and, if so, what level of detail should be required in such disclosure)? If so, what disclosures and why?
ii. Financial Disclosure
Section 4A(b)(1)(D) requires ‘‘a
description of the financial condition of the issuer.’’ It also establishes a framework of tiered financial disclosure requirements based on aggregate target offering amounts of the offering and all other offerings made in reliance on
Section 4(a)(6) within the preceding 12-
month period:

• issuers offering $100,000 or less are
  required to file with the Commission, provide to investors and the relevant intermediary and make available to potential investors income tax returns filed by the issuer for the most recently completed year (if any) and financial statements that are certified by the principal executive officer to be true and complete in all material respects;
• issuers offering more than $100,000,
  but not more than $500,000, are required to file with the Commission, provide to investors and the relevant intermediary and make available to

156See proposed Rule 201(s) of Regulation Crowdfunding. 157 17 CFR 229.303. 158See RocketHub Letter 1 (stating that information can be taken from the issuer’s tax return and entered digitally, by the issuer, for inclusion in the offering materials). 159See CompTIA Letter. 160See Commonwealth of Massachusetts Letter; NASAA Letter. 161See Philipose Letter 1. 162See CFIRA Letter 2. 163See CFIRA Letter 2 (stating that the requirement to provide audited financial statements should apply solely to issuers that have been engaged in their current business for more than 12 months and which are seeking to raise at least $1,000,000); Vim Funding Letter (stating that the statute gives the Commission the discretion to raise the threshold at which audits are required, ‘‘in theory all the way up to the $1,000,000 level’’ and asking that the Commission exercise its discretion); RocketHub Letter 1 (stating that the threshold for the audit requirement should be raised to an amount in excess of $1,000,000 and audited financial statements should only be required for issuers that have been in operation for more than two years); Parker Letter (stating that the audit requirement is an unnecessary expense); Cera Technology Letter (stating that the audit requirement should be raised to $1,000,000); ABA Letter 1 (stating that the Commission should consider a higher threshold, such as $750,000, or identify additional criteria, such as revenue levels, that would require audited financial statements); Loofbourrow Letter (stating that the Commission should not impose an audit requirement); InitialCrowdOffering Letter (stating that the requirement for audited financial statements should be eliminated); Genedyne Letter 1 (stating that the Commission should not impose an audit requirement for offerings under $1,000,000); BrainThrob Laboratories Letter (stating that the Commission should defer imposing an audit requirement until further study can determine whether it is economically beneficial to the investment community); Vogele Letter (stating that obtaining audited financial statements takes time and new businesses do not have a lot of time). See also 2012 SEC Government-Business Forum, note potential investors financial statements reviewed by a public accountant that is independent of the issuer; and

• issuers offering more than $500,000
  (or such other amount as the Commission may establish) are required to file with the Commission, provide to investors and the relevant intermediary and make available to potential investors audited financial statements.
  Section 4A(h) further provides that
  these dollar amounts shall be adjusted by the Commission not less frequently than once every five years, by notice published in the Federal Register, to reflect any change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics. (a) Financial Condition Discussion Consistent with Section 4A(b)(1)(D), the proposed rules would require an issuer to provide a narrative discussion of its financial condition.156 This discussion should address, to the extent material, the issuer’s historical results of operations in addition to its liquidity and capital resources. If an issuer does not have a prior operating history, the discussion should focus on financial milestones and operational, liquidity and other challenges. If an issuer has a prior operating history, the discussion should focus on whether historical earnings and cash flows are representative of what investors should expect in the future. An issuer’s discussion of its financial condition should take into account the proceeds of the offering and any other known or pending sources of capital. Issuers also should discuss how the proceeds from the offering will affect their liquidity and whether these funds and any other additional funds are necessary to the viability of the business. In addition, issuers should describe the other available sources of capital to the business, such as lines of credit or required contributions by principal shareholders. We expect that the discussion required by the proposed rule and instruction would inform investors about the financial condition of the issuer in a manner similar to the management’s discussion and analysis of financial condition and results of operations (‘‘MD&A’’) required by Item 303 of Regulation S–K 157 for registered offerings. Because issuers seeking to engage in crowdfunding transactions would likely be smaller, less complex and at an early stage of development compared to issuers conducting registered offerings or Exchange Act reporting companies, we expect that the discussion would not generally need to be as lengthy or detailed as the MD&A of Exchange Act reporting companies. We are not proposing to prescribe content or format for this information, but rather to set forth principles of disclosure. To the extent these items of disclosure overlap with the issuer’s discussion of its business or business plan, issuers are not required to make duplicate disclosures. While we are not proposing to mandate a specific presentation, we expect issuers to present the required disclosures, including any other information that would be material to an investor, in a clear and understandable manner. Request for Comment

47. Are these proposed requirements
    for the discussion of the financial condition of the issuer appropriate? Why or why not? Should we modify or eliminate any of the requirements in the proposed rule or instruction? If so, which ones and why? Should we require any additional disclosures? If so, what disclosures and why? Should we prescribe a specific format or presentation for the disclosure? Please explain.
48. Should we exempt issuers with no
    operating history from the requirement to provide a discussion of their financial condition? If so, why? Should we require such issuers to specifically state that they do not have an operating history, as proposed? Why or why not?
49. In the discussion of the issuer’s
    financial condition, should we require issuers to provide specific disclosure about prior capital raising transactions? Why or why not? Should we require specific disclosure relating to prior transactions made pursuant to Section 4(a)(6), including crowdfunding transactions in which the target amount was not reached? Why or why not? (b) Financial Disclosures As noted above, Section 4A(b)(1)(D) establishes tiered financial statement disclosure requirements that are based on aggregate target offering amounts within the preceding 12-month period. We received a range of comments on this requirement. In response to the requirement for issuers offering $100,000 or less to file with the Commission, provide to investors and the relevant intermediary and make available to potential investors their income tax returns for the most recently completed year, one commenter suggested that, even if redacted, income tax returns should not be made public.158 One commenter suggested that financial statements should cover the most recently completed fiscal year.159 Other commenters suggested that issuers offering $100,000 or less should provide financial statements prepared in accordance with generally accepted accounting principles (‘‘GAAP’’), including explanatory notes, even though those financial statements would not be subject to an independent accountant’s review or audit.160 For issuers offering more than $100,000, but not more than $500,000, one commenter suggested that the Commission require the financial statement review to be done by accountants in good standing for at least five years.161 Another commenter stated that issuers in existence for less than 12 months should not be required to provide independently reviewed financial statements.162 Several commenters objected to the requirement for issuers to provide audited financial statements when offering more than $500,000 and suggested alternatives.163 One

29 (recommending that the Commission consider raising the offering amount at which audited financial statements are required). 164See ABA Letter 1. 165See RocketHub Letter 1 (stating that disclosure of the identity of the accountant used to review or audit the financial statements would allow investors to conduct diligence on the accountant and permit the intermediary to track accountant activities and block issuers on their platform from using accountants who produce poor quality or fraudulent work). 166See proposed Instruction 1 to paragraph (t) of proposed Rule 201 of Regulation Crowdfunding. 167See also Hutchens Letter (suggesting that the Commission ‘‘devise a rule that creates a relationship between the amount of capital actually raised by an issuer in a crowdfunding offering and the degree of financial disclosure the issuer must provide’’). 168For example, we believe aggregating completed offerings within the preceding 12-month period is necessary to avoid having an issuer who seeks to raise more than $500,000, which requires audited financial statements, structure the offering as a series of smaller offerings to circumvent this requirement. 169See proposed Instruction 10 to paragraph (t) of proposed Rule 201 of Regulation Crowdfunding. 170See proposed Instruction 2 to paragraph (t) of proposed Rule 201 of Regulation Crowdfunding. Financial statements prepared in accordance with U.S. GAAP are generally self-scaling to the size and complexity of the issuer, which should reduce the burden of preparing financial statements for many issuers. 171See Commonwealth of Massachusetts Letter; NASAA Letter. 172See Part F/S of Form 1–A. [17 CFR 239.90]. 173See CompTIA Letter. 174See Smaller Reporting Company Regulatory Relief and Simplification, Release No. 33–8876 (Dec. 19, 2007) [73 FR 934 (Jan. 4, 2008)] (in the context of requiring two years, rather than just one year, of audited balance sheet data for smaller reporting companies, the Commission noted that comparative balance sheets will provide a much more meaningful presentation for investors without a significant additional burden on smaller reporting companies, since the earlier year data should be readily available for the purposes of preparing the other financial statements). See also SEC Advisory Committee on Smaller Public Companies, Final Report (Apr. 23, 2006), available at http:// www.sec.gov/info/smallbus/acspc.shtml. 175Requiring a third year of financial statements also would place a greater burden on issuers relying on Section 4(a)(6) than on emerging growth companies conducting registered offerings. See
Section 102(b) of the JOBS Act.
176See proposed Instruction 8 to paragraph (t) of proposed Rule 201 of Regulation Crowdfunding. 177 Issuers conducting a registered offering after the end of their fiscal year also are permitted to use financial statements for their prior period until the 90th day after their fiscal-year end for non￾accelerated filers (or 75th day for accelerated filers and 60th day for large accelerated filers) if certain conditions are satisfied. See Rule 3–01(c) of Regulation S–X [17 CFR 210.3–01(c)]. 178See Section II.B.2 below for a discussion of ongoing reporting requirements. 179Additionally, if the offering period remains open beyond 120 days after the end of the issuer’s fiscal year (resulting in financial statements older than 485 days at the time the offering closes), then the issuer would be required to update the disclosure in the offering statement to include financial statements for the most recently completed fiscal year. See proposed Instruction 8 to paragraph (t) of proposed Rule 201 of Regulation Crowdfunding. commenter suggested that an issuer should not be required to provide audited financial statements if: (1) The target offering amount is not greater than $100,000 (notwithstanding any other transactions made in reliance on
Section 4(a)(6) within the preceding 12-
month period); and (2) the issuer has not conducted a transaction in reliance on Section 4(a)(6) within the preceding six months.164 Another commenter suggested that issuers should be required to identify the accountant used to certify or audit the financial statements.165 Under the proposed rules, in determining the financial statements that would be required, an issuer would need to aggregate the amounts offered and sold in reliance on Section 4(a)(6) within the preceding 12-month period with the target offering amount (or the maximum offering amount, including the aggregate amount of any possible oversubscriptions if the issuer will accept oversubscriptions) of the offering for which disclosure is being provided.166 The statute refers to aggregate ‘‘offering amounts’’ within the preceding 12-month period. We are proposing to require issuers to aggregate only amounts offered and sold (rather than all offered amounts, including those not sold) within the preceding 12- month period with the amount the issuer is seeking to raise in the transaction.167 We do not believe that this provision should require an issuer to aggregate amounts offered in prior offerings but not sold (for example, because the target offering amount was not met). Otherwise, an issuer that initially sought to raise $400,000, did not complete the crowdfunding transaction because the target offering amount was not met, and would like to raise $200,000 in a second attempt would be required to provide audited financial statements rather than financial statements reviewed by a public accountant in connection with that $200,000 offering. We believe that this result would increase costs to issuers when those issuers were unsuccessful in prior offerings within the preceding 12-month period. Requiring issuers to aggregate amounts offered and sold should still prevent issuers from circumventing the framework of tiered financial disclosure requirements by structuring a larger offering as a series of smaller offerings.168 We do not propose to prohibit issuers from providing financial statements that meet the requirements for a higher aggregate target offering amount than the proposed rules would require.169 The proposed rules would require all issuers to file with the Commission, provide to investors and the relevant intermediary and make available to potential investors a complete set of their financial statements (a balance sheet, income statement, statement of cash flows and statement of changes in owners’ equity), prepared in accordance with U.S. generally accepted accounting principles (‘‘U.S. GAAP’’), covering the shorter of the two most recently completed fiscal years or the period since inception of the business.170 In proposing this requirement we considered commenters’ suggestions that we require financial statements prepared in accordance with U.S. GAAP,171 as well as the fact that the same requirement applies to offerings under Regulation A.172 We considered proposing to
require financial statements covering only the most recently completed fiscal year, as one commenter suggested,173 rather than the two most recently completed fiscal years; however, we believe that requiring a second year will provide investors with a basis for comparison against the most recently completed period, without substantially increasing the burden for the issuer.174 We also considered proposing to require a third year of financial statements, but we are concerned that this could be overly burdensome for the types of issuers that likely would engage in crowdfunding transactions.175 During the first 120 days of the issuer’s fiscal year, an issuer would be able to conduct an offering in reliance on Section 4(a)(6) and the related rules using financial statements for the fiscal year prior to the most recently completed fiscal year if the financial statements for the most recently completed fiscal year are not otherwise available or required to be filed.176 We believe this accommodation is needed because otherwise issuers would not be able to conduct offerings in reliance on
Section 4(a)(6) for a period of time
between the end of their fiscal year and the date when the financial statements for that period are available.177 The issuer could not do this, however, if it was otherwise required to provide updated financial statements by the ongoing reporting requirements 178 or financial statements are otherwise available.179 For example, if an issuer that has a calendar fiscal year end conducts an offering in April 2014, it would be permitted to include financial statements for the fiscal year ended December 31, 2012 if the financial statements for the fiscal year ended

180 Id. 181See proposed Instruction 9 to paragraph (t) of proposed Rule 201 of Regulation Crowdfunding. 182See proposed Rule 201(t)(1) of Regulation Crowdfunding. 183See RocketHub Letter 1. 184See proposed Instruction 4 to paragraph (t) of proposed Rule 201 of Regulation Crowdfunding. 185 17 CFR 210.2–01. Rule 2–01 of Regulation S– X is designed to ensure that auditors are qualified and independent both in fact and in appearance. The rule sets forth restrictions on, including but not limited to, financial, employment, and business relationships between an accountant and a client and restrictions on an accountant providing certain non-audit services to a client. The general standard of independence is set forth in Rule 2–01(b). The rule does not purport to, and the Commission could not, consider all the circumstances that raise independence concerns, and these are subject to the general standard in paragraph (b) of Rule 2–01. In considering this standard, the Commission looks in the first instance to whether a relationship or the provision of a service: (a) Creates a mutual or conflicting interest between the accountant and the client; (b) places the accountant in the position of auditing his or her own work; (c) results in the accountant acting as management or an employee of the client; or (d) places the accountant in a position of being an advocate for the client. 186For example, under the Commission’s independence rules, an auditor cannot provide bookkeeping services to an audit client, so investors would be able to rely on the benefits that accompany the prohibition against an auditor auditing its own work. See Rule 2–01(c)(4) of Regulation S–X [17 CFR 210.2–01(c)(4)]. 187Using an accountant that is not independent in accordance with our independence rules could result in increased expense and delay to the extent that an issuer seeking to become an Exchange Act reporting company would need to obtain an audit of the financial statements by an accountant complying with the Commission’s independence standards. 188See proposed Rule 201(t)(2) of Regulation Crowdfunding. 189See proposed Instruction 5 to paragraph (t) of proposed Rule 201 of Regulation Crowdfunding. 190See RocketHub Letter 1. 191See CFIRA Letter 2; Vim Funding Letter; RocketHub Letter 1; Cera Technology Letter; Genedyne Letter 1; Schwartz Letter. December 31, 2013 are not yet available. Once more than 120 days have passed since the end of the issuer’s most recent fiscal year, the issuer would be required to include financial statements for its most recent fiscal year.180 Regardless of the age of the financial statements, an issuer would be required to include a discussion of any material changes in the financial condition of the issuer during any time period subsequent to the period for which financial statements are provided, including changes in reported revenue or net income, to inform investors of changes to the financial condition of the issuer.181
Section 4A(b)(1)(D)(i) requires issuers
to file with the Commission, provide to investors and the relevant intermediary and make available to potential investors income tax returns and financial statements. As specified in the statute, we are proposing to require an issuer that is conducting an offering of $100,000 or less in reliance on Section 4(a)(6) to provide its filed income tax returns for the most recently completed fiscal year, if any, and its financial statements certified by its principal executive officer.182 Although one commenter suggested the Commission should provide otherwise,183 the statute specifically calls for the Commission to require the filing of income tax returns. To address the privacy concerns raised by commenters with regard to the requirement to provide tax returns, we are proposing to require issuers to redact personally identifiable information, such as social security numbers, from their tax returns before filing. Issuers that offer securities in reliance on Section 4(a)(6) before filing their tax returns for the most recently completed fiscal year would be allowed to use the tax return filed for the prior year, provided that the issuer discloses any material changes since that prior year. In addition, the issuer would be required to provide the tax return for the most recent fiscal year when filed with the U.S. Internal Revenue Service (if filed during the offering period). With regard to the requirement to provide financial statements that are certified to be true and complete in all material respects, we are proposing a form of the certification that would be provided by the issuer’s principal executive officer.184 For offerings of more than $100,000, but not more than $500,000, Section 4A(b)(1)(D)(ii) requires issuers to file with the Commission, provide to investors and the relevant intermediary and make available to potential investors financial statements reviewed by a public accountant who is ‘‘independent’’ of the issuer, using professional standards and procedures or standards and procedures established by the Commission for this purpose. The statute does not define the term ‘‘independent.’’ We propose that to qualify as an independent public accountant for purposes of this requirement, the accountant would need to comply with the Commission’s independence rules, which are set forth in Rule 2–01 of Regulation S–X.185 We believe that accounting professionals could benefit from the guidance the Commission and staff have provided about these independence rules. We also believe that financial statement reviews under these standards could provide investors with more confidence regarding the reliability of the financial statements.186 An issuer subject to this requirement that seeks to eventually become an Exchange Act reporting company may have an easier transition because the issuer would already be complying with our independence rules.187 The statute also gives the Commission discretion to determine the professional standards and procedures used
for the review of the financial statements. To implement this requirement, the proposed rules would require issuers to provide financial statements reviewed in accordance with the Statements on Standards for Accounting and Review Services (‘‘SSARS’’) issued by the Accounting and Review Services Committee of the American Institute of Certified Public Accountants (‘‘AICPA’’).188 We are not proposing new review standards for purposes of these rules at this time because we do not believe it is necessary. The AICPA’s review standard is widely utilized, and we are not aware of any other widely utilized standards for reviews. Many accountants reviewing financial statements of crowdfunding issuers should be familiar with the AICPA’s standards and procedures for review, which could make it less burdensome for issuers. The issuer would be required to file with the Commission, provide to investors and the relevant intermediary and make available to potential investors a copy of the public accountant’s review report.189 This should benefit investors by giving them the ability to consider any modification that may have been made to the review report. It also would serve as a way to identify the accounting firm used to review the financial statements. As one commenter suggested,190 investors then could conduct due diligence on the accounting firm by, for example, researching the other offerings made in reliance on Section 4(a)(6) in which the accounting firm was involved or reviewing the accounting firm’s licensure status and any publicly￾available disciplinary proceedings. For offerings of more than $500,000, consistent with the threshold identified in Section 4A(b)(1)(D)(iii), the proposed rules would require issuers to file with the Commission, provide to investors and the relevant intermediary and make available to potential investors audited financial statements. While Congress authorized the Commission to establish a different threshold, we are not proposing at this time to raise the threshold at which an issuer would be required to provide audited financial statements, as some commenters suggested.191 We note that Congress specifically selected $500,000 as the threshold at which to require audited

192See CFIRA Letter 2; Vim Funding Letter; Cera Technology Letter; Genedyne Letter 1. 193See proposed Rule 201(t)(3) of Regulation Crowdfunding. 194 17 CFR 210.2–01. 195See proposed Instruction 6 to paragraph (t) of proposed Rule 201 of Regulation Crowdfunding. 196 Id. 197 Id. 198See 17 CFR 210.2–01(a). 199Accountants also would be subject to Rule 102(e) of the Rules of Practice and Investigations. See 17 CFR 201.102(e). Under Rule 102(e), the Commission can censure, suspend or bar professionals who appear or practice before it if it finds such professionals, after notice and an opportunity for hearing: (1) Not to possess the requisite qualifications to represent others; or (2) to be lacking in character or integrity or to have engaged in unethical or improper professional conduct; or (3) to have willfully violated, or willfully aided and abetted the violation of, any provision of the Federal securities laws or the rules and regulations thereunder. See 17 CFR 201.102(e)(1)(i), (ii) and (iii). 200See Philipose Letter 1. 201See CFIRA Letter 2. 202 Id. financial statements. If we were to raise the threshold to $1 million, as suggested by some commenters,192 it would eliminate the requirement for issuers ever to provide audited financial statements because the maximum offering amount under Section 4(a)(6) is $1 million. Leaving the $500,000 threshold unchanged also would provide the Commission, investors and issuers an opportunity to become familiar with the new offering exemption before considering possible changes to the threshold. Under the proposed rules, the auditor conducting the audit of the financial statements would be required to be independent of the issuer and the audit would have to be conducted in accordance with the auditing standards issued by either the AICPA or the Public Company Accounting Oversight Board (‘‘PCAOB’’).193 The proposed instructions to the rules would provide that the auditor would be required to be independent of the issuer based on the Commission’s independence standard in Rule 2–01 of Regulation S–X.194 Providing issuers with a choice of auditing standards could provide a benefit in a number of ways. If an issuer currently has audited financial statements using one of the specified standards, the issuer would not need to obtain a new audit or engage a different auditor to conduct an audit in order to engage in a crowdfunding transaction in reliance on Section 4(a)(6). If an issuer chooses to have an audit conducted in accordance with PCAOB auditing standards, it generally would not need to obtain a new audit in order to file a registration statement with the Commission for a registered offering or to register a class of securities under the Exchange Act and become an Exchange Act reporting company. The proposed rules would not require the audit to be conducted by a PCAOB-registered firm. This should mean that a greater number of accountants would be eligible to audit the issuers’ financial statements, which may
reduce issuers’ costs. An issuer would be required to file with the Commission, provide to investors and the relevant intermediary and make available to potential investors a copy of the audit report.195 This should benefit investors by serving as a way to identify the accounting firm used to audit the financial statements. Investors then could conduct due diligence by, for example, researching other offerings made in reliance on
Section 4(a)(6) in which the accounting
firm was involved or reviewing the accounting firm’s licensure status and any publicly-available disciplinary proceedings. An issuer that received an unqualified or a qualified audit opinion would be in compliance with the audited financial statement requirements.196 An issuer that received an adverse opinion or a disclaimer of opinion, however, would not be in compliance with the audited financial statement requirements,197 because the auditor determined that the financial statements of the issuer do not present fairly its financial position, results of operations or cash flows in conformity with U.S. GAAP, or that the auditor does not express an opinion on the financial statements. Under Rule 2–01 of Regulation S–X, the Commission does not recognize as a public accountant any person who: (1) Is not duly registered and in good standing as a certified public accountant under the laws of the place of his residence or principal office; or (2) is not in good standing and entitled to practice as a public accountant under the laws of the place of his residence or principal office.198 We believe that this rule promotes the use of qualified accountants that are in compliance with the requirements for their profession for the review or audit of the financial statements with respect to all offerings, including offerings in reliance on
Section 4(a)(6).199 We are not proposing
to require that the public accountant be in good standing for at least five years, as one commenter suggested,200 because that could unnecessarily restrict the pool of available public accountants by, for example, excluding accountants who are in good standing but who have been in business for fewer than five years. We believe that many issuers engaging in crowdfunding transactions in reliance on Section 4(a)(6) are likely to be at a very early stage of their business development and may not have an operating history. In many instances, these issuers will have no more than a business plan for which they are seeking investors to help fund. We are not proposing to exempt these issuers (or issuers that have been in existence for less than 12 months, as one commenter suggested) 201 from the requirement to provide financial statements based on the tiered offering amounts. Financial statements prepared in accordance with U.S. GAAP are generally self-scaling to the size and complexity of the issuer, which reduces the burden of preparing financial statements for many early stage issuers. We would not expect that the required financial statements would be long or complicated for issuers that are recently formed and have limited operating histories. We preliminarily believe, nevertheless, that financial statements for such issuers would be useful for investors, particularly when presented along with a description of the issuer’s financial condition. This would give investors a more complete picture of the issuer and would highlight its early stage of development. Request for Comment
50. Under the statute and the
proposed rules, issuers are required to file with the Commission, provide to investors and the relevant intermediary and make available to potential investors financial statements. The proposed rules would require all issuers to provide a complete set of financial statements (a balance sheet, income statement, statement of cash flows and statement of changes in owner’s equity) prepared in accordance with U.S. GAAP. Should we define financial statements differently than under U.S. GAAP? If so, what changes would be appropriate and why? What costs or challenges would be associated with the use of a model other than U.S. GAAP (e.g., lack of comparability)? What would be the benefits? Please explain.
51. Should we exempt issuers with no
operating history or issuers that have been in existence for fewer than 12 months from the requirement to provide financial statements, as one commenter suggested? 202 Why or why not? Specifically, what difficulties would issuers with no operating history or issuers that have been in existence for fewer than 12 months have in providing financial statements? Please explain.
52. If we were to exempt issuers with
little or no operating history from the requirement to provide financial statements, should we require

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

204See ABA Letter 1 (stating that revenue could be a criteria for determining when audited financial statements would be required). 205See Philipose Letter 1. 206See proposed Rules 201(v) and 203(a)(3) of Regulation Crowdfunding. 207See RocketHub Letter 1 (also stating that if the Commission mandates the filing of status updates, it should not mandate a particular form of update). 208See proposed Rule 203(a)(3) of Regulation Crowdfunding. 209 Id. 210See proposed Instruction 2 to paragraph (a)(3) of proposed Rule 203 of Regulation Crowdfunding. 211See proposed Rule 303(a) of Regulation Crowdfunding and Section II.C.5.a below. suggested,204 that could be used to determine when to require an issuer to provide audited financial statements? If so, what should those criteria be?
65. Should financial statements be
required to be dated within 120 days of the start of the offering? If so, what standard should apply? Should those financial statements be reviewed or audited? Why or why not?
66. Under Rule 502(b)(2)(B)(1)–(2) of
Regulation D, if an issuer, other than a limited partnership, cannot obtain audited financial statements without unreasonable effort or expense, then only the issuer’s balance sheet must be audited. Should we include a similar provision in the proposed rules? Why or why not? Should we provide any guidance as to what would constitute unreasonable effort or expense in this context? If so, please describe what should be considered to be an unreasonable effort or expense. If we were to require an issuer’s balance sheet to be dated within 120 days of the start of the offering, should we allow the balance sheet to be unaudited? Why or why not?
67. As proposed, an issuer with a
target offering amount greater than $500,000 could select between the auditing standards issued by the AICPA or the PCAOB. Should we instead mandate one of the two standards? If so, which standard and why? Alternatively, should we create a new audit standard for purposes of Section 4(a)(6)? If so, what would be an appropriate standard? What costs would be involved for companies and auditors in complying with a new audit standard?
68. Should we require that all audits
be conducted by PCAOB-registered firms? Why or why not?
69. Should we consider the
requirement to file with the Commission, provide to investors and the relevant intermediary and make available to potential investors financial statements subject to a review to be satisfied if the review report includes modifications? Why or why not? Would your response differ depending on the nature of the modification? Please explain.
70. As proposed, an issuer receiving
an adverse audit opinion or disclaimer of opinion would not satisfy its requirement to file with the Commission, provide to investors and the relevant intermediary and make available to potential investors audited financial statements. Should an issuer receiving a qualified audit opinion be deemed to have satisfied this requirement? Should certain qualifications (e.g., non-compliance with U.S. GAAP) result in the financial statements not satisfying the requirement to provide audited financial statements while other types of qualifications would be acceptable? If so, which qualifications would be acceptable and why?
71. Should we require that the
certified public accountant reviewing or auditing the financial statements be in good standing for at least five years, as one commenter suggested? 205 Why or why not? Should we require that the public accountant be in good standing for a lesser period of time? If so, for how long? Would such a requirement restrict the pool of available public accountants? If so, by how much? Would such a requirement reduce investor protections? If so, how? b. Progress Updates Consistent with Section 4A(b)(1)(F), the proposed rules would require an issuer to prepare regular updates on its progress in meeting the target offering amount.206 These updates would be filed with the Commission on EDGAR, under cover of Form C, provided to investors and the relevant intermediary and made available to potential investors. The issuer would check the box for ‘‘Form C–U: Progress Update’’ on the cover of the Form C and provide the required update in the space provided. One commenter suggested that issuers should be exempted from issuing status updates and/or reports so long as the funding portal publicly displays the progress of the issuer in meeting the target offering amount.207 As proposed, the rules would require an issuer to file with the Commission and provide investors and the relevant intermediary regular updates regarding the issuer’s progress in meeting the target offering amount no later than five business days after the issuer reaches particular intervals—i.e., one-half and 100 percent—of the target offering amount.208 If the issuer will accept proceeds in excess of the target offering amount, the issuer also would be required to file with the Commission and provide investors and the relevant intermediary a final progress update, no later than five business days after the offering deadline, disclosing the total amount of securities sold in the offering.209 If, however, multiple progress updates are triggered within the same five-business-day period (e.g., the issuer reaches one-half of the target offering amount on November 5 and 100 percent of the target offering amount on November 8), the issuer could consolidate such progress updates into one Form C–U, so long as the Form C– U discloses the most recent threshold that was met and the Form C–U is filed with the Commission and provided to investors and the relevant intermediary by the day on which the first progress update would be due.210 The proposed rules also would require the intermediary to make these updates available to investors and potential investors through the intermediary’s platform.211 We believe that this information would be important to investors by allowing them to gauge whether interest in the offer has increased gradually or whether it was concentrated at the beginning or at the end of the offering period. In addition, we believe that the final progress update would be necessary to inform investors of the total amount of securities sold by the issuer, especially in cases where an issuer may
have sold more than the target offering amount. The proposed rules do not include an exemption from this requirement when progress updates are provided solely on the intermediary’s platform. We believe that proposing to require that the progress updates be filed with the Commission would create a central repository for this information—information that otherwise might no longer be available on the intermediary’s platform after the offering terminated. The progress updates filed with the Commission also would make data available that could be used to evaluate the effects of the
Section 4(a)(6) exemption on capital
formation.
Request for Comment
72. Views about what constitutes a
‘‘regular update’’ may vary, particularly when considering the length of the offering. Is the requirement to file an update when the issuer reaches one-half and 100 percent of the target offering amount appropriate? Is the proposed requirement to file a final update in offerings in which the issuer will accept proceeds in excess of the target offering amount appropriate? Why or why not?

212See proposed Rule 203(a)(2) of Regulation Crowdfunding. 213See Basic Inc. v. Levinson, 485 U.S. 224 (1988) (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976)). 214See proposed Rule 203(a)(2) of Regulation Crowdfunding. 215See proposed Instruction to paragraph (a)(2) of proposed Rule 203 of Regulation Crowdfunding. 216See Commonwealth of Massachusetts Letter. 217See Crowdfunding Offerings Ltd. Letter 5. 218See ABA Letter 1 (suggesting that financial statements reviewed by an independent accountant be required only if the issuer’s total assets as of the end of its fiscal year exceeded $300,000 and that audited financial statements be required only if the issuer’s total assets exceeded $750,000 because (i) public reporting pursuant to Exchange Act Section 12(g) is based, in part, on an asset test and (ii) this would offer a reasonable predicate for balancing the relative costs to very small, early-stage issuers and the informational benefits to investors). 219See Philipose Letter 2. Should we require the progress updates to be filed at different intervals (e.g., one-third, two-thirds or some other intervals)? Why or why not? Alternatively, should the progress updates be filed after a certain amount of the offering time has elapsed (e.g., weekly or monthly until the target or maximum is reached or until the offering closes)? Should the progress updates be based on reaching other milestones or on some other basis? If so, what milestones or other basis and why?
73. As proposed, issuers would have
five business days from the time they reach the relevant threshold to file a progress update. Is this time period appropriate? Why or why not? If not, what would be an appropriate time period? Please explain. Should issuers be allowed to consolidate multiple progress updates into one Form C–U if multiple progress updates are triggered within a five-business-day period, as proposed? Why or why not?
74. Should issuers be required to
certify that they have filed all the required progress updates prior to the close of the offering? Why or why not?
75. Should we exempt issuers from
the requirement to file progress updates with the Commission as long as the intermediary publicly displays the progress of the issuer in meeting the target offering amount? Why or why not? If so, should the Commission establish standards about how prominent the display would need to be?
c. Amendments to the Offering
Statement
We are proposing to require that an issuer amend its disclosure for any material change in the offer terms or disclosure previously provided to investors. The amended disclosure would be filed with the Commission on Form C, provided to investors and the relevant intermediary and made available to potential investors.212 The issuer would check the box for ‘‘Form C–A: Amendment’’ on the cover of the Form C and explain, in summary manner, the nature of the changes, additions or updates in the space provided. An issuer would determine whether changes in the offer terms or disclosure are material based on the facts and circumstances. Information is material if there is a substantial likelihood that a reasonable investor would consider it important in deciding whether or not to purchase the securities.213 For example, we believe that a material change to financial condition or to the intended use of proceeds would require an amendment to an issuer’s disclosure. Also, in those instances in which an issuer has previously disclosed only the method for determining the price, and not the final price, of the securities offered, we believe that determination of the final price would be considered a material change to the terms of the offer and would have to be disclosed. These are not, however, the only possible material changes that would require amended disclosure. In addition, as discussed further in Section II.C.6 below, if any change, addition or update constitutes a material change to information previously disclosed, the issuer shall check the box indicating that investors must reconfirm their investment commitments. Investors would have five business days to reconfirm their investment commitments, or the investment commitments would be cancelled.214 Issuers would be permitted, but not required, to amend the Form C to provide information with respect to other changes that are made to the information presented on the intermediary’s platform and provided to investors and potential investors.215 Issuers amending the Form C to provide information that it considers not material would not check the box indicating that investors must reconfirm their investment commitments. Request for Comment
76. Should we specify that an
amendment to an offering statement must be filed within a certain time period after a material change occurs? Why or why not? What would be an appropriate time period for filing an amendment to an offering statement to reflect a material change? Why?
77. If an issuer amends its Form C,
should the intermediary be required to notify investors? If so, should we specify the method of notification, such as via email or other electronic means?
78. Should establishment of the final
price be considered a material change that would always require an amendment to Form C and reconfirmation, as proposed? Would it be appropriate to require disclosure of the final price but not require reconfirmation? Should we consider any change to the information required by
Section 4A(b)(1) to be a material
change? Why or why not?
79. Should we require issuers to
amend Form C to reflect all changes, additions or updates regardless of materiality so that the Form C filed with us would reflect all information provided to investors through the intermediary’s platform? Why or why not?
2. Ongoing Reporting Requirements
Section 4A(b)(4) requires, ‘‘not less
than annually, [the issuer to] file with the Commission and provide to investors reports of the results of operations and financial statements of the issuer, as the Commission shall, by rule, determine appropriate, subject to such exceptions and termination dates as the Commission may establish, by rule.’’ One commenter suggested that the Commission should create a standardized form or template for this ongoing disclosure.216 The same commenter suggested that this ongoing disclosure should be publicly available and shared with other regulators. Another commenter noted that the requirement to file reports not less than annually could be difficult to enforce and that it is unclear who would be responsible for enforcing the requirement.217 The same commenter noted that this provision seems to presume the success of every business that raises capital through crowdfunding and questioned what would happen when an issuer goes out of business. One commenter suggested that financial statements included in an annual report should be required to be reviewed or audited only if the issuer’s total assets exceeded a specified amount at the last day of the issuer’s fiscal year.218 One commenter suggested that annual reports should be required to be reviewed by a qualified accountant in good standing for at least five years.219 Two commenters noted that compliance with the exemption would not be known at the time of the transaction if the annual reports are a condition to the

220See Ohio Division of Securities Letter; Whitaker Letter (suggesting that the filing of the annual report should not be a condition to satisfying the exemption under Section 4(a)(6)). 221See Ohio Division of Securities Letter. 222See proposed Rule 202(a) of Regulation Crowdfunding. See also proposed Rule 203(b) of Regulation Crowdfunding and proposed Instruction to paragraph (b)(1) thereof. 223We are not proposing to require issuers to post the annual report on the intermediary’s platform because issuers may not necessarily have an ongoing relationship with the intermediary following an offering. See discussion in Section II.C.4.b below. 224See note 55. 225We believe that in order for the issuer to have email addresses for the investors, it would need to obtain those email addresses from the intermediary, since it would be the intermediary that would collect that information when a potential investor opens an account. In order for the issuer to have email addresses after the shares issued pursuant to
Section 4(a)(6) are traded, an issuer would need to
collect that information from each new investor in connection with any sale of the issuer’s securities in a secondary market. 226For example, if an issuer had previously completed an offering with a $200,000 target and an offering with a $700,000 target, the issuer would be required to provide audited financial statements rather than reviewed financial statements. This would be the case even if the $200,000 offering was conducted more recently than the $700,000 offering. 227An issuer would not be required to provide information about: (1) The stated purpose and intended use of the proceeds of the offering; (2) the target offering amount and the deadline to reach the target offering amount; (3) whether the issuer will accept investments in excess of the target offering amount; (4) whether, in the event that the offer is oversubscribed, shares will be allocated on a pro￾rata basis, first come-first served basis, or other basis; (5) the process to complete the transaction or cancel an investment commitment once the target amount is met; (6) the price to the public of the securities being offered; (7) the terms of the securities being offered; (8) the name, Commission file number and CRD number (as applicable) of the intermediary through which the offering is being conducted; and (9) the amount of compensation paid to the intermediary. 228 Issuers would be required to provide disclosure about its directors and officers, business, current number of employees, financial condition (including financial statements), capital structure, significant factors that make an investment in the issuer speculative or risky, material indebtedness and certain related-party transactions. 229See proposed Rule 202(b) of Regulation Crowdfunding. 230See proposed Rule 203(b)(2) of Regulation Crowdfunding. exemption under Section 4(a)(6).220 One commenter suggested that the Commission should require a failed business that issued securities pursuant to Section 4(a)(6) to file a final annual report, in the year of the failure, that provides final financial statements and discloses to investors the material reasons for the liquidation, dissolution, wind-down or bankruptcy.221 To implement the ongoing reporting requirement in Section 4A(b)(4), the proposed rules would require an issuer that sold securities in reliance on
Section 4(a)(6) to file a report on EDGAR
annually, no later than 120 days after the end of the most recent fiscal year covered by the report.222 Although the statute provides that an ‘‘issuer who offers or sells securities’’ in reliance on
Section 4(a)(6) shall provide ongoing
reports, we do not believe the intent was to require ongoing reports from a company that has not completed a crowdfunding transaction and thus did not issue any securities. To implement the statutory requirement that issuers provide the report to investors, we propose to require issuers to post the annual report on their Web sites.223 We believe that investors in this type of Internet-based offering would be familiar with obtaining information on the Internet and that providing the information in this manner would be cost-effective for issuers. As discussed above, we believe Congress contemplated that crowdfunding would, by its very nature, occur over the Internet or other similar electronic media accessible to the public,224 so we are not proposing to require issuers to provide physical copies of the report to investors. We also are not proposing to require issuers to provide a copy of the annual report, or refer investors to the posting of the annual report, via email because we believe that many issuers may not have email addresses for the investors, especially after the shares issued pursuant to Section 4(a)(6) are traded by the original purchasers.225 To the extent email addresses for investors are available to issuers, an issuer could refer investors to the posting of the annual report via email. When filing the annual report with the Commission, an issuer would check the box for ‘‘Form C–AR: Annual Report’’ on the cover of the Form C. The issuer would be required to disclose information similar to the information required in the offering statement, including disclosure about its financial condition that meets the financial statement requirements that were applicable to its offering statement. The issuer also would be able to voluntarily provide financial statements that meet the requirements for a higher aggregate target offering amount than it was required to provide in its offering statement. If an issuer undertakes multiple offerings, which individually require different levels of financial statements, the issuer would be required to provide financial statements that meet the highest standard previously provided. We believe that investors who purchased on the basis of the higher level of financial statements should continue to receive that level of disclosure, and investors in other offerings of the issuer should receive the same information.226 Although an issuer would not be required to provide the offering-specific information that it filed at the time of the offering (because the issuer will not be offering or selling securities),227 it would be required to disclose information about the company and its financial condition, as was required in connection with the offer and sale of the securities.228 This should minimize the disclosure burden for issuers to the extent they would be able to use the offering materials as a basis to prepare the ongoing disclosure. Investors should benefit from receiving annual updates to the information
they received when making the decision to invest in the issuer’s securities, which should allow them to continue to be informed about issuer developments. Under the statute and the proposed rules, the securities will be freely tradable after one year and, therefore, this information also would benefit potential future holders of the issuer’s securities and help them to make more informed investment decisions. We are proposing to require issuers to file the annual report until one of the following events occurs: (1) The issuer becomes a reporting company required to file reports under Exchange Act Sections 13(a) or 15(d); (2) the issuer or another party purchases or repurchases all of the securities issued pursuant to Securities Act Section 4(a)(6), including any payment in full of debt securities or any complete redemption of redeemable securities; or (3) the issuer liquidates or dissolves its business in accordance with state law.229 In these situations, we believe it is appropriate to terminate an issuer’s reporting obligations because it will either be required by other provisions of the securities laws to provide investors with necessary information or it will no longer have investors. Any issuer terminating its annual reporting obligations would be required to file on EDGAR, within five business days from the date of the terminating event, a notice to investors and the Commission that it will no longer file and provide annual reports pursuant to the requirements of Regulation Crowdfunding.230 The issuer would check the box for ‘‘Form C–TR:
Termination of Reporting’’ on the cover of Form C. Request for Comment
80. Should we require ongoing annual
reports, as proposed? Why or why not? Should we require ongoing reporting more frequently than annually? Why or

231See Ohio Division of Securities Letter; Whitaker Letter. 232See ABA Letter 1. 233See Schwartz Letter. 234See ABA Letter 1. 235 17 CFR 249.308. Form 8–K is a report that public companies must file to announce major events that shareholders should know about on a more current basis. Form 8–K includes a specific list of the types of events that trigger a public company’s obligation to file a current report, including matters relating to the company’s business and operations, financial information, securities and trading markets, accountants and financial statements, corporate governance and management, asset-backed securities, exhibits and other matters that are not specifically called for by Form 8–K that the company considers to be of importance to security holders. Generally, a Form 8–K must be filed within four business days from the date of the event that triggered the report. why not? If so, how often (e.g., semi￾annually or quarterly)?
81. Two commenters noted that
compliance with the exemption would not be known at the time of the transaction if the annual reports are a condition to the exemption under
Section 4(a)(6).231 Should the
requirement to provide ongoing annual reports be a condition to the exemption under Section 4(a)(6)? If so, for how long (e.g., until the first annual report is filed, until the termination of an issuer’s reporting obligations or some other period)? Please explain.
82. Should we require that the annual
reports be provided to investors by posting the reports on the issuer’s Web site and filing them on EDGAR, as proposed? Should we require issuers also to directly notify investors of the availability of the annual report, such as by email or other electronic means? Should we instead require issuers to deliver the annual reports directly to investors? If so, should we specify the method of delivery (e.g., email or other electronic means, U.S. mail or some other method)? Would investors have an electronic relationship with the issuer after the offering terminates? If not, how would an issuer notify or deliver a copy of the annual report to the investor? Would issuers continue to have an ongoing relationship with intermediaries once the offering is completed? If so, should we also require that the issuer post its annual report on the intermediary’s platform? Why or why not?
83. After completion of the offering,
should we require that investors be represented by a nominee or other party who could help to facilitate physical delivery of the annual report to investors? Why or why not? Should the nominee or other party have other responsibilities, such as speaking on behalf of and representing the interests of investors (e.g., when the issuer wishes to take certain corporate actions that could impact or dilute the rights of investors, distribution of dividend payments, etc.)? If a nominee or other party should be required, what structure should this arrangement take and why?
84. Are the proposed ongoing
disclosure requirements appropriate? Why or why not? Should we modify or eliminate any of the proposed requirements?
85. Should the discussion of the
issuer’s financial condition address changes from prior periods? Why or why not? Should the number of years covered by the financial statements be the same as in the offering statement? Why or why not? If not, what should they be?
86. Should we require that reviewed
or audited financial statements be provided only if the total assets of the issuer at the last day of its fiscal year exceeded a specified amount, as one commenter suggested? 232 Why or why not? If so, what level of total assets would be appropriate (e.g., $1 million, $10 million, or some other amount)? Are there other criteria (other than total assets) that we should consider? Please explain.
87. The proposed rules would require
any issuer terminating its annual reporting obligations to file on EDGAR, within five business days from the date of the terminating event, a notice to investors and the Commission that it will no longer file and provide annual reports. Is this approach appropriate? Why or why not? Should we require issuers to file the notice earlier (e.g., within two business days of the event) or later (e.g., within 10 business days of the event)? If so, what would be an appropriate amount of time after the event and why?
88. Should an issuer be able to
terminate its annual reporting obligation in circumstances other than those provided in the proposed rules? For example, should an issuer be allowed to terminate its reporting obligation after filing a certain number of annual reports, as one commenter suggested,233 so long as the issuer does not engage in additional transactions in reliance on
Section 4(a)(6) (e.g., after filing one
annual report, two annual reports or some other number of annual reports)? Why or why not? If so, what would be an appropriate number of annual reports? Should all issuers be allowed to terminate their reporting obligations or only issuers that have not sold more than a certain amount of securities in reliance on Section 4(a)(6)? If so, what would be an appropriate amount of securities (e.g., $100,000, $500,000, or some other amount)? Should an issuer be allowed to terminate its reporting obligation following the issuer’s or another party’s purchase or repurchase of a significant percentage of the securities issued in reliance on Section 4(a)(6) (including any payment of a significant percentage of debt securities or redemption of a significant percentage of redeemable securities), or receipt of consent to cease reporting from a specified percentage of the unaffiliated security holders? Why or why not? If so, what would be an appropriate percentage (greater than 50 percent, 75 percent or some other percentage)? Should an issuer be allowed to terminate its reporting obligation if the securities issued in reliance on Section 4(a)(6) are held by less than a specified number of holders of record, as suggested by a commenter? 234 Why or why not? If so, what would be an appropriate number of holders of record (less than 500, 300 or some other number)?
89. If an issuer files a petition for
bankruptcy, what effect should that filing have on the issuer’s reporting obligations? Please explain.
90. Should issuers be required to file
reports to disclose the occurrence of material events on an ongoing basis? What events would be material and therefore require disclosure? Should we identify a list of material events that would trigger a report, similar to the list in Form 8–K 235 (such as changes in control, bankruptcy or receivership, material acquisitions or dispositions of assets, issuances of securities and changes to the rights of security holders)? Or should we require that all material events be reported without specifying any particular events? How many days after the occurrence of the material event should the issuer be required to file the report? Please explain.
91. We have the authority to include
exceptions to the ongoing reporting requirements in Section 4A(b)(4). Should we consider excepting certain issuers from ongoing reporting obligations (e.g., those raising a certain amount, such as $100,000 or less)? Should any exception always apply or only after a certain number of reports have been filed? Please explain.
3. Form C and Filing Requirements
Section 4A(b)(1) does not specify a
format that issuers must use to present the required disclosures and file these disclosures with the Commission. Several commenters stated that the Commission should require the disclosure on a form modeled after, or

236See Coan Letter; Liles Letter 1; Vim Funding Letter; NASAA Letter. 237 17 CFR 230.251 et seq. 238See Commonwealth of Massachusetts Letter. 239CFIRA Letter 2. 240The Motley Fool Letter. 241See 2012 SEC Government-Business Forum, note 29. 242See ABA Letter 1. 243See Ohio Division of Securities Letter. 244An issuer that does not already have EDGAR filing codes, and to which the Commission has not previously assigned a user identification number, which we call a ‘‘Central Index Key (CIK)’’ code, would need to obtain the codes by filing electronically a Form ID [17 CFR 239.63; 249.446;
269.7 and 274.402] at https://
www.filermanagement.edgarfiling.sec.gov. The applicant also would be required to submit a notarized authenticating document as a Portable Document Format (PDF) attachment to the electronic filing. The authenticating document would need to be manually signed by the applicant over the applicant’s typed signature, include the information contained in the Form ID and confirm the authenticity of the Form ID. See 17 CFR 232.10(b)(2). 245See proposed Instruction to paragraph (a)(1) of proposed Rule 203 of Regulation Crowdfunding. Issuers would input in the proposed XML-based filing the following information: name, legal status and contact information of the issuer; name, Commission file number and CRD number (as applicable) of the intermediary through which the offering will be conducted; the amount of compensation paid to the intermediary to conduct the offering, including the amount of referral and other fees associated with the offering; type of security offered; number of securities offered; offering price; target offering amount and maximum offering amount (if different from the target offering amount); whether oversubscriptions will be accepted and, if so, how they will be allocated; deadline to reach the target offering amount; current number of employees of the issuer; and selected financial data for the prior two fiscal years. 246The Commission would disseminate the information in a format that provides normal text for reading and XML-tagged data for analysis. Currently the Commission’s OnlineForms Web site (https://www.onlineforms.edgarfiling.sec.gov) supports the assembly and transmission of XML filings required by Exchange Act Section 16 (15 U.S.C. 78p). 247See proposed Rule 203 of Regulation Crowdfunding. 248EDGAR would tag the offering statement as ‘‘Form C,’’ any amendments to the offering statement as ‘‘Form C–A,’’ progress updates as ‘‘Form C–U,’’ annual reports as ‘‘Form C–AR’’ and termination reports as ‘‘Form C–TR.’’ 249Section 4A(b)(4) requires issuers to file with the Commission and provide to investors, not less than annually, reports of the results of operations and financial statements of the issuer. As discussed above in Section II.B.2, to satisfy this requirement, the proposed rules would require an issuer to post the annual report on its Web site and file it on EDGAR. See proposed Rule 202(a) of Regulation Crowdfunding. 250See proposed Instruction 1 to paragraph (a) of proposed Rule 203 of Regulation Crowdfunding. We anticipate that issuers seeking to engage in an offering in reliance on Section 4(a)(6) may likely work with an intermediary to prepare the disclosure that would be provided on the intermediary’s platform and filed on EDGAR. In some cases, intermediaries may offer, as part of their service, to file the disclosure on EDGAR on behalf of the issuer. require the use of NASAA’s Small Company Offering Registration Form (U–7).236 One commenter suggested using Form 1–A, which is used for securities offerings made
pursuant to Regulation A,237 as a model.238 One commenter requested that we create a form for issuers that ‘‘simplifies the process and provides legal certainty for investors, intermediaries and issuers,’’ 239 while another commenter suggested that we adopt a ‘‘simple, uniform, easy-to-understand yet comprehensive template prospectus that is similar in principle to the mutual fund industry’s summary prospectus.’’ 240 Another commenter recommended that disclosure be simple, allow for standardization and take into account the size and stage of development of the issuer.241 One commenter suggested we create a disclosure template that would allow issuers to complete certain fields by inserting the required disclosure.242 Another commenter suggested we require a single offering document incorporating disclosures that intermediaries and issuers are required to make.243 We are proposing to require issuers to file the mandated disclosure on EDGAR using new Form C.244 As proposed, Form C would require certain disclosures to be presented in a specified format, while allowing the issuer to customize the presentation of other disclosures required by Section 4A(b)(1) and the related rules. This approach should provide key offering information in a standardized format and give issuers flexibility in the presentation of other required disclosures. We believe this flexibility is important given that we expect that issuers engaged in crowdfunding transactions in reliance on Section 4(a)(6) would encompass a wide variety of industries at different stages of business development. We propose to require issuers to use an XML-based fillable form to input certain information.245 This XML-based fillable form would support the assembly and transmission of those required disclosures to EDGAR on Form C.246 It also would help the Commission to collect certain key information about each offering to monitor the implementation of the crowdfunding exemption under Section 4(a)(6). For example, the Commission could monitor the types of issuers using the exemption, including the issuers’ size, location, securities offered and offering amounts and the intermediaries through which the offerings are taking place. Monitoring the implementation of the crowdfunding exemption also would give the Commission more information to evaluate whether the rules include appropriate investor protections and facilitate capital formation. Issuers could customize the presentation of the rest of their disclosures and file those disclosures as exhibits to the Form C. For example, an issuer could provide the required disclosures by uploading to EDGAR, as an exhibit to Form C, a text version of the relevant information presented on the intermediary’s platform, including a transcript of any video presentation and a description of any charts or graphs. Under the proposed rules, Form C would be used for all of an issuer’s filings with the Commission.247 The issuer would check one of the following boxes on
the cover of the Form C to indicate the purpose of the Form C filing:

• ‘‘Form C: Offering Statement’’ for
  issuers filing the initial disclosures required for an offering made in reliance on Section 4(a)(6);
• ‘‘Form C–A: Amendment’’ for
  issuers seeking to amend a previously￾filed Form C for an offering;
• ‘‘Form C–U: Progress Update’’ for
  issuers filing a progress update required by Section 4A(b)(1)(H) and the related rules;
• ‘‘Form C–AR: Annual Report’’ for
  issuers filing the annual report required by Section 4A(b)(4) and the related rules; and
• ‘‘Form C–TR: Termination of
  Reporting’’ for issuers terminating their reporting obligations pursuant to
  Section 4A(b)(4) and the related rules.
  We believe that the use of one form would be more efficient than requiring multiple forms and would simplify the filing process for issuers and their preparers. EDGAR would automatically provide each filing with an appropriate tag depending on which box the issuer checks so that investors could distinguish between the different filings.248
  Section 4A(b)(1) requires issuers to
  file the offering information with the Commission, provide it to investors and the relevant intermediary and make it available to potential investors.249 Under the proposed rules, issuers would satisfy the requirement to file the information with the Commission by filing the Form C: Offering Statement, including any amendments and progress updates, on EDGAR. To satisfy the requirement to provide the disclosures to the relevant intermediary, we propose that issuers provide to the relevant intermediary a copy of the disclosures filed with the Commission on EDGAR.250 To satisfy the requirement to

251See proposed Instruction 2 to paragraph (a) of proposed Rule 203 of Regulation Crowdfunding. 252 Id. 253See note 55. 254See note 225. To the extent that intermediaries have the email addresses of investors and potential investors (e.g., as a result of investors and potential investors opening an account with the intermediary), intermediaries could provide an issuer’s disclosures to investors and potential investors through email. 255 17 CFR 232.201 and 232.202. These hardship exemptions allow filers, under certain conditions, to submit their filings and exhibits in paper form instead of electronically. 256See VTNGLOBAL Letter. 257See Loofbourrow Letter. 258See CommunityLeader Letter. 259See Crowdfunding Offerings Ltd. Letter 5. 260See CFIRA Letter 2. 261See NCA Letter (stating that the Commission should clarify whether the rules will permit notices to state the offering period, whether investors may contact the issuer’s management to discuss the offering or whether the notices may include names of accredited investors participating in the offering). 262 Id. 263See RocketHub Letter 1. 264See NSBA Letter. 265See CFIRA Letter 1 (providing examples of notices varying in length from zero to 1,500 characters). 266See CompTIA Letter. 267See Commonwealth of Massachusetts Letter. 268See City First Letter. 269See proposed Rule 204 of Regulation Crowdfunding. provide the disclosures to investors and make them available to potential investors, we propose that issuers provide the information to investors electronically by referring investors to the information on the intermediary’s platform.251 Issuers could refer investors through a posting on the issuer’s Web site or by email.252 We believe that investors in this type of Internet-based offering would be familiar with obtaining information on the Internet and that providing the information in this manner would be cost-effective for issuers. As discussed above, we believe Congress contemplated that crowdfunding would, by its very nature, occur over the Internet or other similar electronic medium that is accessible to the public,253 so we are not proposing to require issuers to provide physical copies of the information to investors. We propose to allow issuers to refer investors to the information on the intermediary’s platform through a posting on the issuer Web site or by email, rather than requiring email, because we believe that many issuers may not have email addresses for investors.254 Request for Comment
92. Should we require a specific
format that issuers must use to disclose the information required by Section 4A(b)(1) and the related rules?
93. Should issuers be required to file
the Form C with the Commission in electronic format only, as proposed? Alternatively, should we permit issuers to file the Form C in paper format? What are the relative costs and benefits of permitting the filing of the Form C in paper format? Should issuers be precluded from relying on the hardship exemptions in Rules 201 and 202 of Regulation S–T? 255 Why or why not?
94. In what format would the
information about an issuer be presented on an intermediary’s platform? Will there be written text, graphics, charts or graphs, or video testimonials by the founder or other key stakeholders? Will the information be presented in a way that would allow for the filing of the information as an exhibit to Form C on EDGAR? If not, how should the rules address these types of materials?
95. Should we require different forms
for each type of required filing? Would the use of one form with different EDGAR tags for each type of filing create confusion among investors who review the issuer’s filings? Would it create confusion for issuers that are filing the forms? Please explain.
96. Should we allow issuers to refer
investors and potential investors to the information on the intermediary’s platform? Are the proposed methods (Web site posting or email) to refer investors effective and appropriate? Would issuers have access to the investors’ email addresses? Are there other methods we should consider? If so, what methods and why?
4. Prohibition on Advertising Terms of
the Offering
Section 4A(b)(2) provides that an
issuer shall ‘‘not advertise the terms of the offering, except for notices which direct investors to the funding portal or broker.’’ We received a number of comments regarding this provision. One commenter stated that the inability to market an offering will prevent startups from reaching their desired goal.256 One commenter suggested that we should allow issuers unrestricted use of advertising, both on the Internet and through conventional forms of advertising.257 Another commenter suggested that communications between the issuer and investors should be limited to communication channels controlled by the intermediary and that direct communications between an issuer and investors should be discouraged.258 Another commenter stated that it is unclear what constitutes a notice for these purposes and that issuers should be able to promote their offerings as long as investors register with the intermediary and participate in the offering through that intermediary.259 Another commenter suggested that issuers should be able to promote their offerings through ‘‘their own platforms’’ as long as all such notices include a link directly to the registered intermediary.260 One commenter suggested that an issuer should be permitted to place a notice consisting of the basic terms of the offering on the issuer’s Web site or at its place of business.261 Alternatively, the commenter suggested an issuer should be permitted to include such notice in correspondence to its customers or mailing list subscribers.262 Another commenter stated that the advertising prohibition should not be read to restrict notices that: (1) Alert the public to the issuer’s project or company; (2) state that the public may participate in the fundraising; or (3) direct the public to the funding platform.263 Another commenter suggested notices should be allowed to include: (1) The type of security being offered; (2) the offering amount; (3) the opening and closing date of the offering; and (4) the issuer’s line of business or whether the offering will fund a new line of business.264 One commenter suggested that, given the limitations on the number of characters allowed by some social media sites, we should allow notices that do not require lengthy legends or disclosure.265 Another commenter suggested that we define the term ‘‘advertising’’ and provide a model form that can be used by issuers to direct investors to the intermediary.266 Another commenter suggested that we require issuers to file all advertising and other materials that the issuers create relating to offerings made in reliance on
Section 4(a)(6).267 One commenter
suggested that we allow advertising of non-financial elements of a transaction in the case of offerings conducted through an intermediary that is a community development financial institution.268 Under the proposed rules, an issuer could publish a notice advertising the terms of an offering in reliance on
Section 4(a)(6), provided that the notice
includes the address of the intermediary’s platform on which additional information about the issuer and the offering may be found.269 Consistent with Section 4A(b)(2), an issuer would not otherwise be permitted to advertise, directly or indirectly, the terms of an offering made in reliance on
Section 4(a)(6). While we understand

270See proposed Rule 204(b) of Regulation Crowdfunding. While notices would not be required to include all of this information, they would be required to, at a minimum, direct investors and potential investors to the intermediary’s platform on which additional information about the issuer and the offering may be found. See proposed Rule 204(a) of Regulation Crowdfunding. 271See proposed Instruction to proposed Rule 204 of Regulation Crowdfunding. 272 17 CFR 230.134. 273See proposed Rule 204(a) of Regulation Crowdfunding. 274See proposed Rule 204(b)(1) of Regulation Crowdfunding. 275 17 CFR 230.169. 276 Id. See also Securities Offering Reform, Release No. 33–8591 (July 19, 2005) [70 FR 44722 (Aug. 3, 2005)]. 277See City First Letter. the importance that potential issuers likely will place on the ability to advertise, the statute specifically restricts the ability of issuers to advertise the terms of offerings made in reliance on Section 4(a)(6). Limiting the advertising of the terms of the offering to the information permitted in the notice is intended to direct investors to the intermediary’s platform and to make investment decisions with access to the disclosures necessary for them to make informed investment decisions. The proposed rules would allow notices advertising the terms of the offering to include no more than the following: (1) A statement that the issuer is conducting an offering, the name of the intermediary through which the offering is being conducted and a link directing the potential investor to the intermediary’s platform; (2) the terms of the offering; and (3) factual information about the legal identity and business location of the issuer, limited to the name of the issuer of the security, the address, phone number and Web site of the issuer, the email address of a representative of the issuer and a brief description of the business of the issuer.270 Under the proposed rules, ‘‘terms of the offering’’ would include:
(1) The amount of securities offered; (2) the nature of the securities; (3) the price of the securities; and (4) the closing date of the offering period.271 The permitted notices would be similar to the ‘‘tombstone ads’’ permitted under Securities Act Rule 134,272 except that the notices would be required to direct investors to the intermediary’s platform through which the offering is being conducted,273 such as by including a link directing the potential investor to the platform.274 We are not proposing to impose limitations on how the issuer distributes the notices. For example, issuers could place notices in newspapers or could post notices on social media sites. We believe this approach would allow issuers to leverage social media to attract potential investors, while at the same time protecting potential investors by limiting the ability of issuers to advertise the terms of the offering without providing the required disclosures. The proposed rules also would allow an issuer to communicate with investors and potential investors about the terms of the offering through communication channels provided by the intermediary on the intermediary’s platform, so long as the issuer identifies itself as the issuer in all communications. We believe that one of the central tenets of the concept of crowdfunding is that the members of the crowd decide whether or not to fund an idea or business after sharing information with each other. As
part of those communications, we
believe it is important for the issuer to be able to respond to questions about the terms of the offering or even challenge or refute statements made through the communication channels provided by the intermediary. Therefore, we have not proposed to restrict issuers from participating in those communications. The proposed rules would not restrict an issuer’s ability to communicate other information that does not refer to the terms of the offering. We believe that this is consistent with the statute because Section 4A(b)(2) only appears to impose a restriction on the advertising of the terms of the offer. To prohibit communications that do not refer to the terms of the offering would place a greater burden on issuers relying on Section 4(a)(6) than on issuers in registered offerings. For example, Securities Act Rule 169 275 permits non￾Exchange Act reporting issuers engaged in an initial public offering to continue to publish, subject to certain exclusions and conditions, regularly released factual business information that is intended for use by persons other than in their capacity as investors or potential investors.276 We believe that permitting issuers to continue to engage in communications that do not refer to the terms of the offering during the pendency of offering made in reliance on Section 4(a)(6) would increase the likelihood of the success of an issuer’s business because the issuer could continue to advertise its products or services, so long as it does so without discussing the terms of the offering. Request for Comment
97. Should we require issuers to file
with the Commission or provide to the intermediary a copy of any notice directing investors to the intermediary’s platform? Why or why not?
98. The proposed rules would define
‘‘terms of the offering’’ to include: (1) The amount of securities offered; (2) the nature of the securities; (3) the price of the securities; and (4) the closing date of the offering period. Is this definition appropriate? Why or why not? Should the definition be modified to eliminate or include other items? If so, which ones and why? Should we provide further guidance as to the meaning of ‘‘terms of the offering?’’ Please explain.
99. Should we restrict the media that
may be used for the advertising of notices (e.g., prohibit advertising via television, radio or phone calls)? If so, why and what media should we restrict? What media should we permit? Please explain.
100. Should we require a specific
format for issuer notices? Should we provide examples of notices that would comply with the requirements?
101. Should we further restrict or
specify the information that could be included in a notice of the offering? If so, how and why? Is the information that we have proposed to permit in notices sufficient to inform potential investors of an offering? Should we permit the issuer to include any additional information in the notice if, for example, the offering aims to promote a particular social cause, such as driving economic growth in underinvested communities, as one commenter suggested? 277 If so, what information and why? Should we allow any additional information to be included in the notices for all offerings made in reliance on Section 4(a)(6)? Please explain. Should we impose restrictions on the timing or frequency of notices? Why or why not? If so, what restrictions would be appropriate?
102. Should we limit the issuer’s
participation in communication channels provided by the intermediary on the intermediary’s platform? Why or why not? If so, what limitations would be appropriate?
103. The proposed rules would allow
an issuer to communicate with investors and potential investors about the terms of an offering through communication channels provided by the intermediary on the intermediary’s platform, so long as the issuer identifies itself as the issuer in all communications. Is this approach appropriate? Why or why not? If not, why not?
104. The proposed rules would not
restrict an issuer’s ability to communicate information that does not refer to the terms of the offering. Is this

278See Crowdfunding Offerings Ltd. Letter 5 (asking a number of questions about what constitutes direct or indirect compensation, whether it is acceptable to promote offerings if no compensation is paid and whether the provision covers third parties who may have an interest in the offering and who pay for the promotion). 279See RocketHub Letter 1. 280See Schwartz Letter. 281See Commonwealth of Massachusetts Letter. 282See proposed Rule 205 of Regulation Crowdfunding. See also proposed Rule 303(c)(4) and the discussion in Section II.C.5.c below for requirements on intermediaries as they relate to disclosure in intermediary-provided communication channels of certain compensation and promotional activities. 283The receipt of transaction-based compensation in connection with the offer and sale of a security could cause a person to be a broker required to register with us under Exchange Act Section 15(a)(1) [15 U.S.C. 78o(a)(1)]. Issuers also would need to consider the application of Securities Act
Section 17(b) [15 U.S.C. 77q] to these activities.
Section 17(b) provides that ‘‘[i]t shall be unlawful
for any person, by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, to publish, give publicity to, or circulate any notice, circular, advertisement, newspaper, article, letter, investment service, or communication which, though not purporting to offer a security for sale, describes such security for a consideration received or to be received, directly or indirectly, from an issuer, underwriter, or dealer, without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof.’’ 284See proposed Rule 205(b) of Regulation Crowdfunding. approach appropriate? Why or why not? If not, what limitations should we include on an issuer’s communications that do not refer to the terms of the offering and why?
5. Compensation of Persons Promoting
the Offering
Section 4A(b)(3) provides that an
issuer shall ‘‘not compensate or commit to compensate, directly or indirectly, any person to promote its offerings through communication channels provided by a broker or funding portal, without taking such steps as the Commission shall, by rule, require to ensure that such person clearly discloses the receipt, past or prospective, of such compensation, upon each instance of such promotional communication.’’ We received comments offering varying views on this provision. One commenter noted that it is unclear precisely what this provision attempts to prohibit or protect against.278 Another commenter suggested the rules should distinguish between an issuer hiring an individual or entity for promotion, where investors may not be aware of the commercial relationship between the parties, and more standard web-based advertising, including through search engines or trending topics.279 This commenter suggested that we should not adopt rules that may interfere with promotional compensation, but rather, we should require simple disclosure of a commercial relationship when it would not otherwise be apparent. One commenter suggested that the rules should provide that a clear statement of the compensation amount paid to promoters (or a formula for determining the same) in the disclosure document would satisfy this disclosure obligation.280 Another commenter suggested that if the issuer will use any promoters in connection with the offering, the issuer should identify the promoters and disclose the amount and structure of promoter compensation.281 Consistent with the statute, the proposed rules 282 would prohibit an issuer from compensating, or committing to compensate, directly or indirectly, any person to promote the issuer’s offering through communication channels provided by the intermediary unless the issuer takes reasonable steps to ensure that the person clearly discloses the receipt (both past and prospective) of compensation each time the person makes a promotional communication.283 In this regard, we anticipate that an issuer could, for example, contractually require any promoter to include the required statement about receipt of compensation, confirm that the promoter is adhering to the intermediary’s terms of use that require promoters to affirm whether or not they are compensated by the issuer, monitor communications made by such persons and take the necessary steps to have any communications that do not have the required statement removed promptly from the communication channels, or retain a person specifically identified by the intermediary to promote all issuers on its platform. We anticipate that communication channels provided by the intermediary would provide a forum through which potential investors could share information to help the members of the crowd decide whether or not to fund the issuer. We believe that it would be important for potential investors to know whether persons using these communication channels are the issuer, persons
acting on behalf of the issuer or persons receiving compensation from the issuer to promote the issuer’s offering because of the potential for self-interest or bias in communications by these persons. As such, the proposed rules would apply broadly to persons acting on behalf of the issuer, regardless of whether or not they are compensated or they receive compensation specifically for the promotional activities. For example, the proposed rules would apply to persons hired specifically to promote the offering, as well as to individuals who are otherwise employed by the issuer or who undertake promotional activities on behalf of the issuer. A founder or an employee of the issuer who engages in promotional activities on behalf of the issuer through the communication channels provided by the intermediary would be required to disclose, with each posting, that he or she is engaging in those activities on behalf of the issuer. The proposed rules also would specify that the issuer shall not compensate or commit to compensate, directly or indirectly, any person to promote its offerings outside of the communication channels provided by the intermediary, unless the promotion is limited to notices that comply with the advertising rules discussed above in
Section II.B.4.284 This prohibition
should prevent issuers from circumventing the restrictions on advertising by compensating a third party to do what the issuer cannot do directly. Request for Comment
105. The proposed rules would
prohibit an issuer from compensating or committing to compensate, directly or indirectly, any person to promote its offering outside of the communication channels provided by the intermediary, unless the promotion is limited to notices that direct investors to the intermediary’s platform. Is this approach appropriate? Why or why not?
106. The proposed rules would
require issuers to take reasonable steps to ensure that persons promoting the issuer’s offering through communication channels provided by the intermediary disclose the receipt (both past and prospective) of direct or indirect compensation each time they make a promotional communication. Is this an appropriate approach to the statutory requirement for issuers to ensure that promoters make the required disclosures? If not, what standard should we apply and why?
107. Should we require that any
person who receives compensation from the issuer to promote an issuer’s offering through communication channels provided by the intermediary register with, or otherwise provide notice to, the intermediary? If so, should we require that person to disclose the amount of the compensation and the structure of the compensation arrangement to the intermediary? Why or why not? If so, what would be the purpose of such a requirement?

285Securities Act Section 4A(b)(5) states that issuers shall ‘‘comply with such other requirements as the Commission may, by rule, prescribe, for the protection of investors and in the public interest.’’ 286See ABA Letter 1 (stating that if the maximum amount exceeds the target offering amount, the issuer should be required to disclose: (1) The maximum amount that it could raise; (2) the total amount of securities that would be issued should the maximum amount be raised; (3) the anticipated use of proceeds should the maximum amount be raised; and (4) financial statements that would have been required had the target offering amount been equal to the maximum amount); Hutchens Letter (stating that issuers should be allowed to raise capital in excess of the target offering amount so long as the amount raised does not fall within a higher tier of financial statement requirements). 287See proposed Rule 201(h) of Regulation Crowdfunding. 288 Id. Issuers also would need to allow investors to cancel the commitment to purchase the securities in the same way as it would have done had it not accepted oversubscriptions. See Section II.C.6 below for a discussion of the right to cancel the purchase commitment. 289See RocketHub Letter 1; CFIRA Letter 5; Hutchens Letter. 290See Section II.B.1.a.i(d) above for a discussion of the disclosure requirements if the issuer will accept investments in excess of the target offering amount. 291See Spinrad Letter 1. 292See Section II.C.6 below for a discussion of cancellation rights. 293See RocketHub Letter 1. 294See Sjogren Letter. 295See The Motley Fool Letter (stating that the Commission should specify a maximum valuation for issuers, perhaps at two, five, or 10 times the aggregate issue limit and should implement a rule to protect investors from issuers that might sell a special class of shares to the crowdfunding public that they eventually dilute in future offerings). 296See Commonwealth of Massachusetts Letter (stating that the Commission should require disclosure about the risks of buying securities of an early-stage company at a high valuation). 297See CrowdFund Connect Letter (stating that the Commission should clarify that an issuer would satisfy the requirement to describe how the securities being offered are being valued by providing an operating and management statement that clearly defines capital distributions). 298See proposed Rule 201(m) of Regulation Crowdfunding.
108. Should the issuer provide
disclosure of any person who receives compensation from the issuer to promote an issuer’s offering? Why or why not?
6. Other Issuer Requirements
Some commenters addressed issues relating to oversubscriptions, the offering price, the type of securities that may be offered and how those securities should be valued.285 a. Oversubscriptions Two commenters suggested that we should permit an issuer to raise capital in excess of the target offering amount, subject to certain conditions.286 The proposed rules would not limit an issuer’s ability to accept investments in excess of the target offering amount, subject to the $1 million annual limitation.287 Issuers, however, would be required to provide disclosure to investors concerning this possibility.288 Some commenters suggested that the rules require a defined range for permissible oversubscriptions.289 We believe, however, that limits on oversubscriptions are not necessary if an issuer discloses how much it would be willing to accept in oversubscriptions, how the oversubscriptions would be allocated and the intended purpose of those additional funds.290 We believe that this approach would provide investors, prior to the sale, with useful information to make an informed investment decision about an issuer that is seeking investments in excess of the target offering amount. Request for Comment
109. Should we require that
oversubscribed investments be allocated using a pro-rata, first-come, first-served or other method, rather than leaving that decision up to the issuer? Please explain.
110. Should we limit the maximum
oversubscription amount to a certain percentage of the target offering amount? If so, what should the limit be and why?
111. Should we allow issuers to
accept commitments in excess of the $1 million limitation so that if an investor withdraws his or her investment commitment prior to the closing of the offering, the issuer would still be able to raise $1 million? If so, should we require that investments in excess of $1 million be allocated using a pro-rata, first-come, first-served or other method, or should we leave that decision up to the issuer? Please explain. b. Offering Price One commenter suggested that the Commission should require issuers to set a fixed price for the offering and prohibit any dynamic pricing (e.g., pricing per share that increases with the passage of time) because dynamic pricing schemes may apply time pressure on the investment decision.291 We are not proposing to require issuers to set a fixed price or prohibit dynamic pricing because we believe that the statute contemplated flexible pricing by providing that issuers may disclose the method for determining the price provided that the final price and required disclosures are provided to each investor prior to the sale. We also believe that the proposed cancellation rights would address the concerns about time pressure on the investment decision because investors would have a reasonable opportunity to cancel the investment commitment after the price is fixed.292 Request for Comment
112. Should we require issuers to set
a fixed price at the commencement of an offering or prohibit dynamic pricing? Why or why not?
c. Types of Securities Offered and
Valuation
We received comments about the types of securities that could be offered and the valuation of securities offered. One commenter suggested that the Commission should not prescribe eligible types of securities because markets and securities may evolve.293 Instead, the commenter urged the Commission to set forth minimum disclosure requirements for issuers and intermediaries to use when communicating the price and structure of offered securities. Another commenter suggested that the Commission require issuers to disclose their valuation and the factors they considered when determining such valuation.294 Another commenter suggested that the Commission should prescribe a maximum valuation and ban certain dilution practices.295 Another commenter suggested that if an offering exceeds certain valuation limitations (based, for instance, on company financial ratios), then the Commission should require that the shares held by company insiders be subject to a lock￾up that would terminate after a period of time or after the company meets certain financial benchmarks.296 Another commenter indicated that there are significant costs to properly ascertaining future valuations and that such a requirement could only be applied to corporations.297 The proposed rules would neither limit the type of securities that may be offered in reliance on Section 4(a)(6) nor prescribe a method for valuing the securities. In this regard, we note that the statute refers to ‘‘securities’’ and does not limit the types of securities that could be offered pursuant to the exemption. In addition, the statute does not require the use of a specific valuation method or ban any dilution practices. Issuers would be required to describe the terms of the securities and the valuation method in their offering materials.298 We believe this approach is consistent with the statute and will provide flexibility to issuers to determine the types of securities that they offer to investors and how those securities are valued, while providing investors with the information they

299 15 U.S.C. 77aaa et seq. 300See Trust Indenture Act Section 309 [15 U.S.C. 77iii]. 301See Trust Indenture Act Section 304 [15 U.S.C. 77ddd]. 302 15 U.S.C. 77ddd(b). 303Trust Indenture Act Section 304(a)(8) [15 U.S.C. 77ddd(a)(8)] and Rule 4a–1 [17 CFR 260.4a– 1] also provide an exemption to issue up to $5 million of debt securities without an indenture in any 12-month period. 304See City First Letter. 305See The Motley Fool Letter. 306The JOBS Act inadvertently created two Sections 3(a)(80) in the Exchange Act, the other being the definition of ‘‘emerging growth company’’ (added by Section 101(b) of Title I of the JOBS Act). 307See discussion in Section II.D.2 below. 308See proposed Rule 300(c)(2) of Regulation Crowdfunding. 309 In proposing Regulation Crowdfunding, we propose requirements that are tailored to the limited brokerage activities in which funding portals may engage. Even where requirements proposed for funding portals are the same as those imposed on brokers, such as the AML requirements discussed in Section II.D.4 below, due to the limited nature of funding portals’ activities, the compliance burden on funding portals should be less extensive than those applicable to full service brokers under the existing regulatory regime for broker-dealers. 310See proposed Rule 300(c)(1) of Regulation Crowdfunding. 311Exchange Act Section 15(b)(4) (15 U.S.C. 78o(b)(4)) authorizes the Commission to bring administrative proceedings against a broker when the broker violates the federal securities laws (and for other misconduct) and provides for the imposition of sanctions, up to and including the revocation of a broker’s registration. Exchange Act
Section 15(b)(6) (15 U.S.C. 78o(b)(6)) provides
similar enforcement authority against the persons associated with a broker, including barring persons from associating with any Commission registrant. See note 559. 312 15 U.S.C. 78c(a)(18). need to make an informed investment decision. The proposed rules do not limit the types of securities that may be offered in reliance on Section 4(a)(6), and thus, debt securities may be offered and sold in crowdfunding transactions. In general, the issuance of a debt security raises questions about the applicability of the Trust Indenture Act of 1939 (‘‘Trust Indenture Act’’).299 The Trust Indenture Act applies to any debt security sold through the use of the mails or interstate commerce, including debt securities sold in transactions that are exempt from Securities Act registration. A debt security sold in reliance on Section 4(a)(6) would need to be issued under a qualified indenture 300 or under an indenture that is exempt from qualification.301 The Trust Indenture Act and related rules provide exemptions in some circumstances. For example, Trust Indenture Act Section 304(b) provides an exemption for any transaction that is exempted from the provisions of Securities Act Section 5 by Section 4 thereof.302 We believe an issuer offering debt securities in reliance on Section 4(a)(6) would be able to rely on this exemption.303 Based on the availability of this exemption from the requirements of the Trust Indenture Act, we are not proposing a specific exemption from the requirements of the Trust Indenture Act for offerings of debt securities made in reliance on Section 4(a)(6). Request for Comment
113. Should we limit the types of
securities that may be offered and sold in reliance on Section 4(a)(6) (e.g., should the exemption be limited to offers and sales of equity securities)? If so, to what securities should crowdfunding be limited and why? Should we create a separate exemption for certain types of offerings of limited types of securities, as one commenter proposed? 304
114. Is it anticipated that issuers may
want to conduct crowdfunding offerings of securities under Section 4(a)(6) alongside non-securities-based crowdfunding, such as a crowdfunding campaign for donations or rewards? If so, please describe how these offerings may be structured. Are there any issues in particular that our rules should address in the context of such simultaneous crowdfunding offerings? Please explain.
115. Should we require or prohibit a
specific valuation methodology? If so, what method and why? Should we specify a maximum valuation allowed as suggested by one commenter? 305 Why or why not?
C. Requirements on Intermediaries

1. Brokers and Funding Portals
   Securities Act Section 4(a)(6)(C) requires a crowdfunding transaction to be conducted through a broker or funding portal that complies with the requirements of Securities Act Section 4A(a). The term ‘‘broker’’ is generally defined in Exchange Act Section 3(a)(4) as any person that effects transactions in securities for the account of others. Exchange Act Section 3(a)(80),306 as added by Section 304 of the JOBS Act, defines the term ‘‘funding portal’’ as any person acting as an intermediary in a transaction involving the offer or sale of securities for the account of others, solely pursuant to Securities Act
   Section 4(a)(6), that does not: (1) Offer
   investment advice or recommendations; (2) solicit purchases, sales or offers to buy the securities offered or displayed on its platform or portal; (3) compensate employees, agents or other person for such solicitation or based on the sale of securities displayed or referenced on its platform or portal; (4) hold, manage, possess or otherwise handle investor funds or securities; or (5) engage in such other activities as the Commission, by rule, determines appropriate. Because a funding portal would be engaged in the business of effecting securities transactions for the accounts of others through crowdfunding, it would meet the Exchange Act definition of broker.307 The proposed rules would define ‘‘funding portal’’ consistent with the statutory definition of ‘‘funding portal,’’ substituting the word ‘‘broker’’ for the word ‘‘person,’’ 308 to state explicitly and make clear that funding portals are brokers under the federal securities laws. We are not proposing at this time to exercise our discretion under Section 3(a)(80)(E) to prohibit any activities in which a funding portal may engage, other than those identified in the statute.309 The proposed rules would not only apply to funding portals, but also to their associated persons in many instances. The proposed rules would define the term ‘‘person associated with a funding portal or associated person of a funding portal’’ to mean any partner, officer, director or manager of a funding portal (or any person occupying a similar status or performing similar functions), any person directly or indirectly controlling or controlled by a funding portal, or any employee of a funding portal, but would exclude any persons whose functions are solely clerical or ministerial.310 The rules would provide, however, that excluded persons nevertheless would be subject to our authority under Exchange Act Sections 15(b)(4) and 15(b)(6) because they are associated with a broker.311 This definition is consistent with, and modeled on, the definition of ‘‘person associated with a broker or dealer or associated person of a broker or dealer’’ under Exchange Act Section 3(a)(18).312 Request for Comment
2. Are there other funding portal
   activities, other than those in Exchange Act Section 3(a)(80), that we should prohibit? If so, which activities and why? Are there any prohibitions that should be modified or removed? If so, which ones and why?
3. Do we need to provide further
   guidance concerning which provisions of the Exchange Act and the rules and regulations thereunder would apply to funding portals? If so, what further guidance is necessary and why?

313See proposed Rule 300(a)(1) of Regulation Crowdfunding. 314See Commonwealth of Massachusetts Letter. See also Schwartz Letter (stating that the registration document should be made public because it would likely include many relevant disclosures, which would make it possible for the intermediary to file a single document to satisfy both the registration and disclosure requirements). 315See FINRA, note 142. 316See discussion in Section II.D.1 below. 317See Loofbourrow Letter. 318See ABA Letter 1. 319See 17 CFR 240.3b–16 (subject to the exceptions provided in part (b) of the rule, an organization, association or group of persons would generally be considered a market place or facility for bringing together purchasers and sellers of securities or for otherwise performing, with respect to securities, the functions commonly performed by a stock exchange, ‘‘if such organization, association, or group of persons (1) Brings together the orders for securities of multiple buyers and sellers; and (2) Uses established, non-discretionary methods (whether by providing a trading facility or by setting rules) under which such orders interact with each other, and the buyers and sellers entering such orders agree to the terms of a trade.’’). 320See Section II.C.1 above. 321 15 U.S.C. 78c(a)(26). Exchange Act Section 3(a)(26) defines an ‘‘SRO’’ to mean ‘‘any national securities exchange, registered securities association, or registered clearing agency, or (solely for the purposes of [S]ections [19(b), 19(c), and 23 of the Exchange Act]) the Municipal Securities Rulemaking Board established by [S]ection [15B of the Exchange Act.]’’ Id. 322See proposed Rule 300(a)(2) of Regulation Crowdfunding. We have proposed definitions for the terms ‘‘intermediary’’ and ‘‘SRO’’ in proposed Rule 300(c)(3) and 300(c)(5) of Regulation Crowdfunding, respectively. Intermediary would mean a broker registered under Section 15(b) of the Exchange Act or a funding portal registered under proposed Rule 400 and would include, where relevant, an associated person of the registered broker or registered funding portal. SRO is proposed to have the same meaning as in Section 36(a)(26) of the Exchange Act. See also Section II.D.1 below for a discussion regarding proposed Rule 400 of Regulation Crowdfunding, which addresses registration requirements for funding portals. 323See Priore Letter. 324The statute also permits brokers-dealers to be members of a national securities exchange if the broker-dealer effects transactions in securities solely on that exchange. 325 15 U.S.C. 78o–3. 326FINRA, Inc., http://www.finra.org/ AboutFINRA/P125239 (last visited Oct. 15, 2012). 327See, e.g., 15 U.S.C. 78o–3(b)(2); Testimony Before the Senate Subcommittee on Securities, Insurance, and Investment Committee on Banking, Housing, and Urban Affairs, 111th Cong. 8 (2010) (testimony of Stephen Luparello, Vice Chairman, FINRA). 328 15 U.S.C. 78o–3.
2. Requirements and Prohibitions
a. Registration and SRO Membership Securities Act Section 4A(a)(1) requires that a person acting as an intermediary in a crowdfunding transaction register with the Commission as a broker or as a funding portal. The proposed rules would implement this requirement by providing that a person acting as an intermediary in a transaction involving the offer or sale of securities made in reliance on Section 4(a)(6) must be registered with the Commission as a broker under Exchange Act Section 15(b) or as a funding portal pursuant to Securities Act Section 4A(a)(1) and proposed Rule 400 of Regulation Crowdfunding.313 One commenter requested transparency in the registration process, stating that intermediaries’ completed registration materials should be accessible to the public.314 Brokers currently register with the Commission using Form BD. Information on that form regarding the broker’s credentials, including current registrations or licenses and employment and disciplinary history, is publicly available on FINRA’s BrokerCheck.315 As discussed below, we are proposing to make the information that a funding portal provides on proposed Form Funding Portal, other than personally identifiable information or other information with a significant potential for misuse, accessible to the public.316 One commenter urged the Commission to grant funding portals a one-year moratorium from having to register.317 We are not proposing such a moratorium because the statute clearly states that a person acting as an intermediary in a crowdfunding transaction made in reliance on Section 4(a)(6) must be registered with the Commission either as a broker or as a funding portal. Another commenter requested clarification on whether a person acting as an intermediary in a transaction under Section 4(a)(6) would be required to register with us as an exchange, as defined in Exchange Act Section 3(a)(1), or as an alternative trading system.318 As discussed above, Section 4A(a)(1) requires an intermediary that facilitates crowdfunded issuances of securities to register with us either as a broker or as a funding portal. Facilitating crowdfunded transactions alone would not require an intermediary to register as an exchange or as an alternative trading system (i.e., registration as a broker-dealer subject to Regulation ATS). To the extent that an intermediary facilitates secondary market activity in securities issued in reliance on Section 4(a)(6), the intermediary would be required to register as an exchange or as an alternative trading system if it met the criteria in Exchange Act Rule 3b–
16.319 We note, however, that a funding
portal, by definition, is limited to acting as an intermediary in transactions involving the offer or sale of securities for the account of others solely pursuant to Section 4(a)(6),320 which are primary issuances of securities. Thus, a funding portal could not effect secondary market transactions in securities. Exchange Act Section 4A(a)(2) requires an intermediary to register with any applicable self-regulatory organization (‘‘SRO’’), as defined in Exchange Act Section 3(a)(26).321 Exchange Act Section 3(h)(1)(B) separately requires, as a condition of the exemption from broker registration, a funding portal to be a member of a national securities association that is registered with the Commission under Exchange Act Section 15A. The proposed rules would implement these provisions by requiring an intermediary in a transaction involving the offer or sale of securities made in reliance on
Section 4(a)(6) to be a member of FINRA
or any other national securities association registered under Exchange Act Section 15A.322 Today, FINRA is the only registered national securities association. One commenter generally objected to the requirement for an intermediary to be a member of a registered national securities association.323 As we noted above, the statute clearly requires a funding portal to be a member of a registered national securities association. Likewise, under Section 15(b)(8) of the Exchange Act, a broker￾dealer that is engaged in crowdfunding activities must be a member of a national securities association.324 We believe that requiring intermediary membership in a registered national securities association should help to ensure consistent regulation of intermediaries with fewer opportunities for regulatory gaps. In regulating broker￾dealers that effect securities transactions with members of the public, FINRA has the most members and is responsible for conducting broker-dealer examinations of its members, mandating disclosures by its members, writing rules governing the conduct of its members and associated persons 325 and informing and educating the investing public.326 FINRA investigates and brings enforcement actions against FINRA members and their associated persons who are suspected of violating its rules and the federal securities laws.327 While FINRA has primary responsibility for examining its members,328 the Commission staff generally examines broker-dealers if specific firm or industry risks have been identified or when fraud and rule violations may have occurred. Because the statute requires a national securities association to write rules expressly for funding

329See Exchange Act Section 3(h)(2) [15 U.S.C. 78c(h)(2)]. 330 Id. 331See NCA Letter; NSBA Letter. 332For requirements to register as a national securities association, see Exchange Act Section 15A [15 U.S.C. 78o–3]. 333Exchange Act Section 15(b)(7) (15 U.S.C. 78o(b)(7)) requires that natural persons associated with brokers and dealers that are registered under Exchange Act Section 15(a)(1) (15 U.S.C. 78o(a)(1)) meet such standards of training, experience, competence and such other qualifications as the Commission finds necessary or appropriate in the public interest. The Commission historically has not exercised this authority but instead has relied on and deferred to the ‘‘substantive content of the SROs’ entry requirements imposed on securities personnel in the various qualification categories.’’ See Requirement of Broker-Dealers to Comply with SRO Qualification Standards, Release No. 34– 32261 (May 4, 1993). See also Sections II.D.1 and II.D.2 below for a discussion regarding proposed Rules 400 and 401 of Regulation Crowdfunding. 334 15 U.S.C. 78s(b). 335 17 CFR 240.19b–4. 336We note, however, that a registered broker could nonetheless have a competitive advantage to the extent it would be able to provide a wider range of services than a registered funding portal could provide in connection with crowdfunding transactions made in reliance on Section 4(a)(6). Unlike a funding portal, a registered broker-dealer could make recommendations, engage in solicitations and handle investor funds and securities. In addition, a registered broker-dealer, but not a funding portal, could potentially facilitate a secondary market for securities sold pursuant to
Section 4(a)(6). See Exchange Act Section 3(a)(80)
[15 U.S.C. 78c(a)(80)] (providing that a funding portal may act as an intermediary solely in securities transactions effected pursuant to Securities Act Section 4(a)(6), which are offerings by issuers and not resales). 337See NCA Letter (stating that registered brokers should not be permitted to engage in crowdfunding activities until funding portals also become registered with, and members of, SROs). 338See proposed Rule 300(b) of Regulation Crowdfunding. 339See NCA Letter. portals,329 we anticipate that funding portals would be subjected to requirements targeted to their limited business model and not the more comprehensive requirements applicable to brokers. We anticipate that the regulatory framework FINRA creates for funding portals would play an important role in the oversight of these entities and, through the information that FINRA shares with the Commission, the Commission’s ability to effectively regulate registered funding portals’ activities.330 In response to commenters’ requests that we clarify the applicable SRO for crowdfunding intermediaries, and to address any confusion about which entity or entities may serve as an SRO for crowdfunding brokers and funding portals, we are expressly identifying FINRA as a registered national securities association within the meaning of the statute.331 While FINRA currently is the only registered national securities association, we are not foreclosing the possibility that another national securities association could register with us in the future. In that event, the proposed rule would permit funding portals to become members of the new association (should one become established in the future) instead of, or in addition to, FINRA.332 FINRA currently provides licensing and qualification requirements for associated persons of brokers. While we are not proposing any such requirement for persons associated with a funding portal, FINRA (or any other registered national securities association) could propose such requirements, as well as requirements dealing with supervision of funding portal personnel and appropriate compliance structures.333 FINRA, like all SROs, is required to file all proposed rules with us under Exchange Act Section 19(b) 334 and Rule 19b–4.335 In general, the Commission reviews proposed SRO rules and rule changes, publishes them for comment, approves or disapproves them, or the rules become effective immediately or by operation of law. Request for Comment
118. We have named FINRA expressly
in the proposed rules as an applicable registered national securities association for crowdfunding intermediaries. Is this helpful? Is this appropriate? Why or why not? Are there other entities considering applying to become registered national securities associations?
119. The proposed rules would
require that an intermediary be a member of FINRA or of any other applicable national securities association. Is this an appropriate approach? At present, FINRA is the only registered national securities association. If we were in the future to approve the registration of another national securities association under Exchange Act Section 15A, would it be appropriate for us to require membership in both the existing and new association? Why or why not?
120. No intermediary can engage in
crowdfunding activities without being registered with the Commission and becoming a member of FINRA or another registered national securities association. We recognize that while there is an established framework for brokers to register with the Commission and become members of FINRA, no such framework is yet in place for funding portals. We do not intend to create a regulatory imbalance that would unduly favor either brokers or funding portals.336 Are there steps we should take to ensure that we do not create a regulatory imbalance? 337 Please explain.
121. The proposed rules do not
independently establish licensing or other qualification requirements for intermediaries and their associated persons. The applicable registered national securities associations may or may not seek to impose such requirements. Should the Commission consider establishing these requirements? Should the Commission consider establishing requirements only if the associations do not? Would licensing or other qualifications for intermediaries and their associated persons be necessary, for example, to provide assurances that those persons are sufficiently knowledgeable and qualified to operate a funding portal? Why or why not? If so, what types of licensing or other qualifications should we consider? b. Financial Interests Exchange Act Section 4A(a)(11) requires an intermediary to prohibit its directors, officers or partners (or any person occupying a similar status or performing a similar function) from having any financial interest in an issuer using its services. The proposed rules would implement this prohibition by importing the language of the statute, and also by extending this prohibition to the intermediary itself. The proposed rules would add that these persons are not only prohibited from having any financial interest in an issuer using its services, but also would specifically be prohibited from receiving a financial interest in the issuer as compensation for services provided to, or for the benefit of, the issuer, in connection with the offer and sale of its securities.338 The proposed rules would interpret ‘‘any financial interest in an issuer,’’ for purposes of Securities Act Section 4A(a)(11), to mean a direct or indirect ownership of, or economic interest in, any class of the issuer’s securities. One commenter sought clarification of whether Section 4A(a)(11) prohibits an intermediary—as an entity—from accepting equity from an issuer as compensation for its services.339 In the commenter’s view, Section 4A(a)(11) should be interpreted as prohibiting an intermediary from having a financial interest in an issuer only at the time of the offering and not thereafter. Another commenter stated that permitting a funding portal to have a financial interest in an issuer would align the funding portal’s interests with those of

340See Dex Offshore Letter 1. See also Dex Offshore Letter 2 (stating that allowing funding portals to have an equity interest in an issuer would align the funding portals with investors, much like venture capital or private equity models, and that transparent disclosure would quell any concerns related to portals maintaining equity interests in issuers). 341See EarlyShares Letter 2 (stating that the following principles should govern a funding portal’s financial interest in an issuer: first, to prevent any potential unfair advantage, an intermediary should only be able to invest on the same terms under which the crowd invests; second, any material nonpublic information that the intermediary (or any person acting on behalf of the intermediary) possessed prior to and/or after taking a financial interest in an issuer must be disclosed on the platform in a secure manner, consistent with the disclosure of other material nonpublic information that investors will receive through the issuer’s profile page on an intermediary’s platform; third, because under Securities Act Section 4A(e), an intermediary will be bound by the same one-year restriction on sales period as any other investor, there would be no risk that investors would be misled by a ‘‘false start’’ or ‘‘pump-and-dump’’ scheme; and finally, an intermediary’s interest should remain anonymous throughout the investment campaign, to avoid having the intermediary’s interest be considered ‘‘investment advice or recommendations,’’ in violation of the prohibitions in the definition of funding portal). 342See proposed Rule 300(b) of Regulation Crowdfunding. See also Securities Act Section 4A(a)(12) (granting us discretionary authority to include other requirements on intermediaries for the protection of investors and the public interest). 343See id. 344See proposed Rule 300(b) of Regulation Crowdfunding. 345See EarlyShares Letter 2. 346See proposed Rule 301 of Regulation Crowdfunding. potential investors and that full disclosure of any financial interest should quell any potential concerns.340 Another commenter stated that Section 4A(a)(11) does not expressly prohibit an intermediary, as an entity, from having a financial interest in an issuer and that this should be permitted under certain circumstances.341 We believe the prohibition in Section 4A(a)(11) is designed to protect investors from the conflicts of interest that may arise when the persons facilitating a crowdfunding transaction have a financial stake in the outcome. The proposed rules would extend the prohibition on holding a financial interest to the intermediary itself,342 because we believe that the same concerns apply to the intermediary as to its directors, officers or partners (or any person occupying a similar status or performing a similar function). The existence of a financial interest in an issuer may create an incentive to advance that issuer’s fundraising efforts over those of other issuers, which could potentially adversely
affect investors. For similar reasons, the proposed rules also would prohibit receipt of a financial interest in an issuer as compensation for services provided to or on behalf of an issuer.343 The proposed rules would define ‘‘financial interest in an issuer’’ to mean a direct or indirect ownership of, or economic interest in, any class of the securities of an issuer.344 As discussed above, one commenter suggested that an investor’s and intermediary’s interests may be aligned if an intermediary were allowed to take a financial interest in an issuer. We are concerned that the promise of a financial stake in the outcome could give an intermediary an incentive to ensure the success of its own investment in the issuer, to the disadvantage of investors and other issuers using the intermediary’s platform, particularly if the financial interest is provided to the intermediary on different terms than to other investors. Request for Comment
122. Should we permit an
intermediary to receive a financial interest in an issuer as compensation for the services that it provides to the issuer? Why or why not? If we were to permit this arrangement, the proposed rules on disclosure requirements for issuers would require the arrangement to be disclosed to investors in the offering material. Are there other conditions that we should require? If so, please identify those conditions and explain.
123. If an intermediary receives a
financial interest in an issuer, should it be permitted to provide future services as long as it retains the interest? Why or why not?
124. One commenter suggested that
an intermediary should be able to receive a financial interest under the same terms as other investors participating in an offering made in reliance on Section 4(a)(6).345 We request comment on this suggestion. How could an intermediary address potential conflicts of interest that may arise from this practice? Would disclosure of the arrangement be sufficient? Please explain.
125. The proposed rules define
‘‘financial interest in an issuer,’’ for purposes of Securities Act Section 4A(a)(11), to mean a direct or indirect ownership of, or economic interest in, any class of the issuer’s securities. Should we define the term more broadly to include other potential forms of a financial interest? For example, should the term include a contract between an intermediary and an issuer or the issuer’s directors, officers or partners (or any person occupying a similar status or performing a similar function), for the intermediary to provide ancillary or consulting services to the issuer after the offering? Should it include an arrangement under which the intermediary is a creditor of an issuer? Should it include any carried interest or other arrangement that provides the intermediary or its associated persons with an interest in the financial or operating success of the issuer, other than fixed or flat-rate fees for services performed? Should any other interests or arrangements be specified in the term ‘‘financial interest in an issuer?’’ If so, what are they and what concerns do they raise?
126. In light of the reasons for the
prohibition, should there be a de minimis exception? Why or why not? If so, what would be an appropriate de minimis amount? For example, would a one percent holding be an appropriate amount? Would another amount be more appropriate? Please explain. Should there be disclosure requirements for any de minimis exception? Why or why not?
127. Should we impose any other
requirements or prohibitions on intermediaries? If so, what requirements or prohibitions and why?
3. Measures To Reduce Risk of Fraud
Securities Act Section 4A(a)(5) requires an intermediary to ‘‘take such measures to reduce the risk of fraud with respect to [transactions made in reliance on Section 4(a)(6)], as established by the Commission, by rule, including obtaining a background and securities enforcement regulatory history check on each officer, director, and person holding more than 20 percent of the outstanding equity of every issuer whose securities are offered by such person.’’ The proposed rules would implement this provision by requiring an intermediary to have a reasonable basis for believing that the issuer is in compliance with relevant regulations and has established means to keep accurate records of holders of the securities it offers, and by requiring that the intermediary deny access if it believes the issuer or its offering would present a potential for fraud.346 Specifically, the proposed rules would require an intermediary to have a reasonable basis for believing that an issuer seeking to offer and sell securities in reliance on Section 4(a)(6), through the intermediary’s platform, complies with the requirements in Securities Act
Section 4A(b) and the related
requirements in Regulation

347See proposed Rule 301(a) of Regulation Crowdfunding. 348See Section II.E.5 below for a discussion relating to intermediaries’ potential statutory liability for statements made by issuers and intermediaries’ policies and procedures. Proposed Rule 403(a) of Regulation Crowdfunding would require funding portals to have policies and procedures designed to achieve compliance with federal securities laws, while intermediaries that are brokers would be subject to FINRA rules requiring similar policies and procedures. See discussion in Section II.D.4 below. 349See proposed Rule 301(b) of Regulation Crowdfunding. 350See discussion in Section II.D.3 below relating to proposed Rule 402(b)(5) of Regulation Crowdfunding. 351See RocketHub Letter 1. See also STA Letter. 352See STA Letter. 353See, e.g., STA Letter. 354An intermediary that is a funding portal could not provide these services, however, because by statute, it cannot ‘‘hold, manage, possess, or otherwise handle investor funds or securities.’’ See Exchange Act Section 3(a)(80)(D) [15 U.S.C. 78c(a)(80)]. 355See City First Letter (indicating that there was interest in leveraging resources of Community Development Financial Institutions, which are certified by the U.S. Department of Treasury and include community development banks, credit unions, loan funds, and venture capital funds, with crowdfunded capital). 356Transfer agent registration is required with respect to securities registered under Exchange Act
Section 12 (15 U.S.C. 78l). Because securities issued
pursuant to a transaction relying on Section 4(a)(6) will not be registered under Exchange Act Section 12, as explained above, we are not proposing to require the use of transfer agents on the transfers of these securities. Nevertheless, issuers relying on
Section 4(a)(6) could choose to engage a registered
transfer agent to provide these services. See Exchange Act Section 17A(c)(1) [15 U.S.C. 78q–1]. See also id. 357See proposed Rule 301(b) of Regulation Crowdfunding. Crowdfunding.347 While an issuer has an independent obligation to comply with these requirements, we believe it would help to reduce the risk of fraud if an intermediary were to also have an obligation to have a reasonable basis to believe that the issuer is in compliance.348 The proposed rules would permit intermediaries to reasonably rely on representations of the issuer, absent knowledge or other information or indications that the representations are not true. While we do not propose to specify particular actions an intermediary must take in satisfying this requirement, we anticipate that in the course of its interactions with potential issuers, an intermediary may determine whether it could in fact reasonably rely on an issuer’s representations and have a reasonable basis to believe the issuer is in compliance. The proposed rules also would require an intermediary to have a reasonable basis for believing that an issuer has established means to keep accurate records of the holders of the securities it would offer and sell through the intermediary’s platform.349 The ability to keep track of the ownership of an issuer’s securities is necessary to protect investors and critical for maintaining the integrity of securities transactions made in reliance on Section 4(a)(6), both with respect to the initial offering and any subsequent transfers of the securities. The statute does not assign responsibility in this regard but intermediaries would be well-positioned to make this determination, given that they would be interacting with the issuer, and particularly if they are advising the issuer to some extent about the offering.350 One commenter stated that a direct registration system provides the best solution to policing transfers at a low cost and that, to the extent physical certificates are issued, they should include legends similar to those required for restricted securities.351 Another commenter suggested that the Commission should require the use of registered transfer agents, which are already subject to SEC regulations and examinations, to maintain records of share ownership and transfers in connection with crowdfunding transactions.352 This commenter stated that small issuers may not have the resources to properly execute the routine services that registered transfer agents provide, including procedures to:
record and balance registered shareowner positions; follow shareholder instructions (and retain records of the instruction) to change an address or transfer their interests as a result of death, divorce or sale (including signature guarantees where necessary); escheat unclaimed assets under state laws; or address lost or stolen certificates. We are not proposing to require a particular form or method of recordkeeping of securities, nor are we proposing to require that an issuer use a transfer agent or any other third party. We recognize the importance of accurate recordkeeping for investors and issuers, and that the failure to accurately record or maintain shareholder records of an issuer, or to prevent fraudulent transfers, can have significant negative impacts for both investors and issuers.353 Among other things, investors without accurate records of their ownership of shares can find it difficult to prove such ownership in connection with a sale of their shares or execution of a corporate transaction. We believe that accurate recordkeeping can be accomplished by diligent issuers or through a variety of third parties. Accordingly, under the proposed rules, the recordkeeping function may be provided by the issuer, a broker, a transfer agent or some other (registered or unregistered) person.354 In certain business models, for example, it may be possible for other regulated entities, such as banks, to provide this function.355 Requiring a direct registration system to monitor transfers could create additional costs to implement that we have not required in connection with any types of securities offerings, and thus we are not proposing to require it here. Similarly, we are not proposing to require the use of a registered transfer agent. While requiring a registered transfer agent to be involved after the offering could introduce a regulated entity with experience in maintaining accurate shareholder records, a transfer agent is not necessary for accurate recordkeeping. Issuers and other third parties can also be well-positioned to keep accurate records of the holders of the securities an issuer would offer and sell through an intermediary’s platform.356 In satisfying this requirement that an intermediary have a reasonable basis to believe that an issuer has established means to keep accurate records of the securities it would offer and sell through the intermediary’s platform, the intermediary may rely on an issuer’s representations concerning the means it has established, unless the intermediary has reason to question the reliability of the representations.357 To keep accurate records, an issuer may need to have established means to perform a range of functions with respect to shareholder records. The precise scope of the needed functions will depend on the nature of the issuer and its securities. Such functions could include, for example, the ability to (1) monitor the issuance of the securities the issuer would offer and sell through the
intermediary’s platform, (2) maintain a master security holder list reflecting the owners of those securities, (3) maintain a transfer journal or other such log recording any transfer of ownership, (4) effect the exchange or conversion of any applicable securities, (5) maintain a control book demonstrating the historical registration of those securities, and (6) countersign or legend physical certificates of those securities. For some issuers, not all of these functions may be needed. There are a number of ways by which an issuer could demonstrate or represent that it has established the necessary recordkeeping means. The issuer itself may have capabilities to maintain accurate records of its

358See proposed Rule 301(c) of Regulation Crowdfunding. 359See proposed Rules 201 and 503 of Regulation Crowdfunding, as well as the discussion in Section II.B.1 above and Section II.E.6 below. 360See CompTIA Letter; NASAA Letter; CrowdFund Connect Letter. 361CRD is a central licensing and registration system for the U.S. securities industry and its regulators. It includes a computerized database of registration records, as well as qualification, employment and complaint histories. 362See NASAA Letter (stating that these types of checks and reviews are necessary to ensure bad actors are not permitted to raise money in lightly regulated public offerings). Compare RocketHub Letter 1 (stating that intermediaries should query commonly-used databases for criminal background checks, bankruptcy filings and tax liens, as well as cross reference against the Department of Treasury’s (‘‘Treasury’’) Office of Foreign Asset Control sanctions lists and Specially Designated Nationals and Blocked Persons lists). 363See CFIRA Letter 2 (stating that because there is no mandated infrastructure that intermediaries are required to use, each intermediary should utilize an infrastructure that incorporates some type of fraud deterrence and fraud detection system, whether proprietary or licensed through a third party; that, in order to deter fraud, funding portals should have a video interface ‘‘whereby each issuer is required to give a short presentation on their business which is capable of being viewed live and saved for later viewing at any time by a potential investor;’’ and that in terms of detecting fraud, we should require intermediaries to build certain fraud detection systems into the functionality of their platforms). 364See id. 365See NSBA Letter; Arctic Island Letter. 366For example, in conducting the background checks on the officers and directors of an issuer, an intermediary may learn that an officer or director misrepresented his or her experience or background. In this situation, an intermediary may determine that the misrepresentation was intentional or material (e.g., it was not the result of an inadvertent clerical error) and is an indication that an offering by the issuer would present potential for fraud or otherwise raises concerns regarding investor protection. The intermediary would then be required to deny access to its platform to the issuer. 367See Arctic Island Letter; The Motley Fool Letter (stating the information should be displayed insofar as it bears on the honesty of the individual checked). securities and, as noted above, may represent such capabilities to the intermediary. The intermediary also may be able to establish a reasonable belief, for example, if the issuer has engaged a broker, transfer agent, or other third party that can provide the requisite recordkeeping services, including a third party providing such services tailored to crowdfunding issuers. The proposed rules would require an intermediary to deny access to its
platform, if the intermediary has a reasonable basis for believing that an issuer, or any of its officers, directors (or any person occupying a similar status or performing a similar function) or 20 Percent Beneficial Owners, is subject to a disqualification under the proposed rules or if the intermediary believes that the issuer or the offering presents the potential for fraud or otherwise raises concerns regarding investor protection.358 The rules would require an intermediary to conduct a background and securities enforcement regulatory history check on each issuer whose securities are to be offered by the intermediary, as well as on each of its officers, directors (or any person occupying a similar status or performing a similar function) and 20 Percent Beneficial Owners. While the statute requires that these checks be conducted on persons holding more than 20 percent of the outstanding equity of the issuer, the proposed rules would extend this requirement to apply to the 20 Percent Beneficial Owners. This proposed requirement is consistent with the issuer disclosure requirements and with the issuer disqualification provisions.359 Using the same standard here would be consistent with and reinforce the disclosure requirements and disqualification provisions applicable to issuers and would provide investors with protections and additional comfort when making investment decisions. At this time, we believe that requiring these background checks would be sufficient to meet the aims of Section 4A(a)(5) without imposing an undue burden, which could in turn discourage the use of the exemption provided in Section 4(a)(6). A number of commenters requested guidance on the acceptable scope of background and securities enforcement regulatory history checks that an intermediary would be required to conduct.360 One commenter suggested that the background check should consist of: A review of credit reports, verification of necessary business or professional licenses, evidence of corporate good standing, uniform commercial code checks and a CRD 361 snapshot report.362 Another stated that the scope of the background and securities enforcement regulatory history check should be commensurate with the size of the transaction and that we should establish a minimum level of diligence that an intermediary must undertake to promulgate an effective mechanism against fraud.363 The commenter further stated that such minimum level should be below that required of registered broker-dealers.364 Other commenters requested guidance on the actions that an intermediary should take with respect to information uncovered during a background check.365 We are not proposing to establish specific procedures for intermediaries to follow to reduce the risk of fraud beyond conducting the prescribed background and securities enforcement regulatory history checks. We believe that this proposed approach would allow an intermediary to use its experience and judgment, as well as its concern
for the reputational integrity of its platform and crowdfunding pursuant to Section 4(a)(6) in general, to design systems and processes to help reduce the risk of fraud in securities-based crowdfunding. In this regard, the proposed rules would require an intermediary to deny access to an issuer if it has information that is not necessarily the basis for a disqualification under proposed rules, but that the intermediary nevertheless believes presents the potential for fraud or otherwise raises concerns regarding investor protection.366 For this particular proposed requirement to deny access, the intermediary would not be required to have a reasonable basis for its belief. This is because we believe it is important to provide intermediaries discretion in taking steps to reduce the risk of fraud as Congress intended, which would strengthen investor protection. The proposed rules also require that if this information becomes known to the intermediary after it has granted the issuer access to its platform, the intermediary must promptly remove the offering from its platform, cancel the offering and return to investors any funds they may have committed. Under the proposed rules, an intermediary would also be required to deny access to an issuer if it believes that it is unable to adequately or effectively assess the risk of fraud of the issuer or its potential offering. For example, if certain officers of the issuer reside in a jurisdiction where background checks and securities enforcement regulatory history checks are not readily available to the intermediary, the intermediary may determine that it is unable to assess the risk of fraud of the issuer, and thus must deny the issuer access to its platform. Some commenters stated that background checks could help reduce fraud if intermediaries were required to prominently display the results of the background checks on their platforms.367 We believe that requiring intermediaries to conduct the checks and deny access to persons subject to disqualification satisfies the statutory requirement and achieves the underlying goal of the provision, which is to restrict the ability of certain parties to use the exemption. We do not believe it would be necessary to make publicly available the results of the background

368See CrowdFund Connect Letter.
369See Cera Technology Letter.
370See CrowdFund Connect Letter; Cera Technology Letter; Schwartz Letter (stating that the Commission should not add to the costs of background and securities enforcement regulatory history checks by tacking on additional antifraud measures). 371See CrowdFund Connect Letter (further stating that the requirement should be worded in a way ‘‘as to be compatible with the numerous online sites that currently provide criminal background checks and that only felonies be reported’’). 372See discussion in Sections III.B.4 and IV.C below. 373An intermediary should investigate and understand the procedures used by the third party to determine the reasonableness of the reliance on a third party. Furthermore, depending on how an arrangement is structured or the services provided, a third-party service provider could come within the meaning of the term associated person of a broker or dealer in Exchange Act Section 3(a)(18) (15 U.S.C. 78c(a)(18)). See also National Association of Securities Dealers (‘‘NASD’’ n/k/a FINRA), Outsourcing, Notice to Members 05–48 (July 2005), available at http://www.finra.org/Industry/ Regulation/Notices/2005/p014736. 374See proposed Rule 301(a) of Regulation Crowdfunding. checks, especially as such a requirement could add to the cost of administration and could expose the individuals in question to harm, for example, if there were errors in the information made publicly available. Therefore, we are not proposing to require intermediaries to make publicly available the results of background checks. Other commenters suggested creating an online database of securities law violators,368 or otherwise making certain information available so that investors could conduct their own background checks on officers and directors of an issuer,369 which could help lower costs on intermediaries and, indirectly, on issuers, associated with conducting an offering pursuant to
Section 4(a)(6). We are not persuaded at
this time that the administrative costs of posting the information, which the intermediary might not be able to verify, would be justified. Some commenters expressed concern over the costs and burdens associated with conducting background and securities enforcement regulatory history checks.370 One commenter stated that it is important to control the expense of background checks to avoid making the cost of raising capital prohibitive to the issuer.371 While we are mindful of the costs associated with conducting these checks, the statutory requirement is clear. To help mitigate the costs, however, the proposed rules provide intermediaries with flexibility in how they would meet this requirement, while still helping to reduce the risk of fraud. We anticipate that an intermediary may use the services of a third party to gather the information to conduct the required background and regulatory checks on issuers and their control persons.372 The intermediary, of course, would remain responsible for compliance with the requirements of
Section 4A(a)(5) and proposed Rule
301(c).373
Request for Comment
128. We are not proposing to require
that an issuer relying on Section 4(a)(6) engage a transfer agent due, in part, to the potential costs we believe such a requirement would impose on issuers. What would be the potential benefits and costs associated with having a regulated transfer agent for small issuers? Are there other less costly means by which an issuer could rely on a qualified third party to assist with the recordkeeping related to its securities?
129. The proposed rules incorporate a
‘‘reasonable basis’’ standard for intermediaries to determine whether issuers comply with the requirements in Securities Act Section 4A(b) and the related requirements of Regulation Crowdfunding, as well as for satisfying the requirement that the issuer has established means to keep accurate records of the holders of the securities it would offer and sell through the its platform.374 Is a ‘‘reasonable basis’’ the appropriate standard for intermediaries making such determinations? Why or why not? Is it appropriate for one determination but not the other? If so, please explain which one and why. What other standard would be more appropriate, and why? What circumstances in the crowdfunding context should not be considered to constitute a reasonable basis? Should we permit an intermediary to reasonably rely on the representation of an issuer with respect to one or both determinations?
130. The proposed rules incorporate a
‘‘reasonable basis’’ standard for intermediaries to determine whether an issuer would be subject to a disqualification. In contrast, there is no reasonableness standard for intermediaries’ requirement under the proposed rules to deny access to an issuer if it believes the issuer or the offering presents potential for fraud or otherwise raises concerns regarding investor protection. Is it appropriate to have these two different standards under the proposed rules? Why or why not? If one of these standards is not appropriate, please explain what would be a more appropriate standard and why.
131. The proposed rules would
implement Section 4A(a)(5) by requiring the intermediary to conduct a background and securities enforcement regulatory history check aimed at determining whether an issuer or any of its officers, directors (or any person occupying a similar status or performing a similar function) or 20 Percent Beneficial Owners is subject to a disqualification, presents potential for fraud or otherwise raises concerns regarding investor protection. Is this approach appropriate? Why or why not? If not, why not? Would another approach be more appropriate? Why or why not?
132. Should we require intermediaries
to make the results of the proposed background checks publicly available? Why or why not? Would doing so raise privacy concerns?
133. Should we specify the steps that
an intermediary must take in obtaining background and securities enforcement regulatory history checks on the issuer and its officers, directors (or any person occupying a similar status or performing a similar function) and 20 Percent Beneficial Owners? Should we require, for example, an intermediary to check publicly-available databases, such as FINRA’s BrokerCheck and the Commission’s Investment Adviser Public Disclosure program? Why or why not? Are there third parties who would be in a position to provide these types of services? Please discuss.
134. Should we require intermediaries
to conduct specific checks or other steps (such as a review of credit reports, verification of necessary business or professional licenses, evidence of corporate good standing, Uniform Commercial Code checks or a CRD snapshot report)? Why or why not? Separately, should we specify a minimum or baseline level of due diligence to help establish a reasonable basis? Why or why not? If so, what should that level include? For instance, should it include a review or a verification of certain publicly available information about an issuer and its officers, directors (or any person occupying a similar status or performing a similar function) and 20 Percent Beneficial Owners? Should it include searches related or tailored to their location or place of incorporation, assets including real property and liens on those assets? Are there items it should or should not include? Please explain.
135. Are there resources available to
an intermediary that enable it to collect the information necessary for making a determination regarding disqualification or the potential for fraud or potential concerns as to investor protection? If so, which resources? Are there aspects of the proposed issuer disqualification rule that would make it difficult for an

375See proposed Rule 302(a)(1) of Regulation Crowdfunding. 376 Intermediaries also are subject to anti-money laundering obligations, including those relating to customer identification. See discussion in Section II.D.4 below regarding proposed Rule 403(b) of Regulation Crowdfunding. 377See Use of Electronic Media, note 60 (citing Use of Electronic Media for Delivery Purposes, Release No. 34–36345 (Oct. 6, 1995) [60 FR 53548, 53454 (Oct. 13, 1995)]). 378See proposed Rule 302(a)(2) of Regulation Crowdfunding. 379See discussion in Section II.C.6 below and proposed Rule 304(c) of Regulation Crowdfunding. We also note that, to the extent intermediaries are required to provide notices or other material to investors, it would not be sufficient for the intermediary simply to make the notice or material available for investors to access, such as by posting it on its platform or through social media sites; rather, the intermediary would need to deliver the notice or material to the investor, such as by email or other electronic delivery methods. See Use of Electronic Media, note 60 at 25853 (discussing the ‘‘access equals delivery’’ concept). 380See proposed Rule 100(a)(3) of Regulation Crowdfunding. See also discussion in Section II.A.4 above, particularly the text accompanying note 55, regarding the requirement that crowdfunding transactions made in reliance on Section 4(a)(6) be conducted exclusively through an intermediary’s platform. See also Use of Electronic Media, note 60 (citing Use of Electronic Media for Delivery Purposes, Release No. 34–36345 [60 FR 53548, 53454 (Oct. 13, 1995)]). 381See Section II.D.4.b below for a discussion of the anti-money laundering provisions applicable to intermediaries. intermediary to assess whether the issuer is subject to a disqualification? If so, please explain. Are there additional events or factors relevant to reducing the risk of fraud that intermediaries should be required to check? Please explain.
136. Section 4A(a)(5) authorizes the
Commission to specify measures to reduce the risk of fraud, in addition to background checks. Are there other risks of fraud which are not contemplated by the proposed rules? Are there any additional measures that we should specifically require? Please discuss any suggested measures, and explain. For example, should we require intermediaries to monitor investment commitments and cancellations or take any other actions to detect potential attempts to promote an issuer’s securities? If so, which actions and why?
137. Should the intermediary be
required to report to the Commission (or another agency) issuers that are denied access? Why or why not?
4. Account Opening
Under the proposed rules, an investor seeking to invest in an offering conducted in reliance on Section 4(a)(6) would need to open an account with an intermediary and provide consent to electronic delivery of materials. The intermediary also would be required to deliver to the investor educational materials, as discussed below. a. Accounts and Electronic Delivery The proposed rules would prohibit an intermediary or its associated persons from accepting an investment commitment unless the investor has opened an account with the intermediary and the intermediary has obtained from the investor consent to electronic delivery of materials.375 We are not proposing to specify any particular type or form of information that an intermediary must obtain from an investor in order to open an account; however, we anticipate that at a minimum the intermediary would obtain basic identifying and contact information, such as full name, physical address and email address.376 Because we believe that Congress contemplated that crowdfunding would, by its very nature, occur exclusively through electronic media, the proposed rules require that investors consent to electronic delivery.377 The proposed rules also would require an intermediary to provide all information it is required to provide under Subpart C, such as educational materials, notices and confirmations, through electronic means.378 We also propose to require that, unless otherwise permitted, an intermediary must provide the information through an electronic message that contains the information, through an electronic message that includes a specific link to the information as posted on the intermediary’s platform, or through an electronic message that provides notice of what the information is and that it is located on the intermediary’s platform or on the issuer’s Web site. The proposed rules would state that electronic messages include, but are not limited to, email messages. According to the proposed rule, for example, in complying with requirements to provide notices to investors under proposed Rule 304(b), the intermediary must provide those notices electronically to investors, such as through an email message containing or attaching the notice. With respect to the provision of issuer materials as required under proposed Rule 303(a), however, the proposed rule specifies that the intermediary must make the information publicly available on its platform. Therefore, the intermediary would only need to post the information on its platform in a manner complying with proposed Rule 303(a) and would not be required to send any electronic messages with regard to its posting. We believe that requiring consent to electronic delivery of documents relating to the offering, and requiring that intermediaries provide information electronically, would facilitate the ability of the investor, intermediary and issuer to comply with, and act in a timely manner, with respect to certain proposed requirements of Regulation
Crowdfunding (such as the requirement for investors to reconfirm investment commitments within five business days of receiving notice of material changes).379 As such, under the proposed rules, offerings made in reliance on Section 4(a)(6) would be ‘‘electronic-only,’’ such that all information to be provided by intermediaries must be provided electronically, and investors would be permitted to participate only if they agree to accept electronic delivery of all documents in connection with the offering.380 Request for Comment
138. Should we specify the types of
information that an intermediary must obtain from an investor as part of the account-opening process? If so, what information and why? How would this information differ from what intermediaries would be required to obtain to fulfill their anti-money laundering obligations? 381
139. Should we permit any exceptions
to the proposed requirements to obtain consent to electronic delivery? If so, why and under what circumstances? If an investor does not receive materials electronically, how would he or she be able to participate fully in an offering made in reliance on Section 4(a)(6)?
140. Are there any other means of
providing information electronically by an intermediary that are not covered in the proposed rules but that should be covered? Are there any means proposed to be included that should be eliminated or modified? If so, what means are they? For example, should intermediaries be permitted to post information in an investor’s account on its platform, without sending a notification that it is posted there? Why or why not? Should different types of information be required to be provided through different means? Please explain. b. Educational Materials
Section 4A(a)(3) states that an
intermediary must ‘‘provide such disclosures, including disclosures related to risks and other investor education materials, as the Commission shall, by rule, determine appropriate,’’ but it does not elaborate on the scope of

382See proposed Rule 302(b) of Regulation Crowdfunding. 383See Securities Act Sections 4A(a)(4), 4A(a)(7), 4A(e), and 4A(b)(4). 384See proposed Rule 302(b)(1)(ii) of Regulation Crowdfunding. 385See Commonwealth of Massachusetts Letter (stating that the investor education materials and other disclosures should make clear to investors the risks of their crowdfunding investments, including that investors may not have any meaningful voting power as minority shareholders and that their investment may not be readily liquid). See also 2012 SEC Government-Business Forum, note 29 (recommending that certain investor education materials, such as those relating to dilution, may need to be mandated by the Commission). 386See proposed Rule 100(a)(2) of Regulation Crowdfunding. 387See proposed Rule 303(b)(1) of Regulation Crowdfunding. 388See proposed Rule 302(b)(1)(viii) of Regulation Crowdfunding. 389See Vim Funding Letter. 390See CFIRA Letter 2. this requirement. As described in further detail below, the proposed rules would require the intermediary to deliver to investors, at account opening, educational materials that are in plain language and otherwise designed to communicate effectively specified information. Intermediaries also would be required to make the current version of the educational materials available on their platforms and to make revised materials available to all investors before accepting any additional investment commitments or effecting any further transactions in securities offered and sold in reliance on Section 4(a)(6).382 The proposed rules would require the materials to include:

• The process for the offer, purchase
  and issuance of securities through the intermediary;
• the risks associated with investing
  in securities offered and sold in reliance on Section 4(a)(6);
• the types of securities that may be
  offered on the intermediary’s platform and the risks associated with each type of security, including the risk of having limited voting power as a result of dilution;
• the restrictions on the resale of
  securities offered and sold in reliance on Section 4(a)(6);
• the types of information that an
  issuer is required to provide in annual reports, the frequency of the delivery of that information, and the possibility that the issuer’s obligation to file annual reports may terminate in the future;
• the limitations on the amounts
  investors may invest, as set forth in
  Section 4(a)(6)(B);
• the circumstances in which the
  issuer may cancel an investment commitment;
• the limitations on an investor’s
  right to cancel an investment commitment;
• the need for the investor to consider
  whether investing in a security offered and sold in reliance on Section 4(a)(6) is appropriate for him or her; and
• that following completion of an
  offering, there may or may not be any ongoing relationship between the issuer and intermediary. The proposed disclosures relating to the risks of investing in securities offered and sold in reliance on Section 4(a)(6), investors’ cancellation rights, resale restrictions and issuer reporting are generally drawn from the statutory requirements.383 These items of information are basic terms, relevant to transactions conducted in reliance on
  Section 4(a)(6), of which all investors
  should be aware before making an investment commitment. The circumstances in which an investor can cancel an investment commitment and obtain a return of his or her funds are particularly important to an investor’s understanding of the investment process. Information on resale restrictions could affect an investor’s decision to consider any offerings made pursuant to Section 4(a)(6). We are proposing to require intermediaries to provide educational material about the types of securities available for purchase on their platforms and the risks associated with each type of security, including the risk of having limited voting power as a result of dilution.384 As one commenter noted, some forms of securities may have limited rights with respect to voting, input into management decisions or redemption, among others, and also may be subject to dilution.385 Because we are not restricting the types of securities that an issuer may offer through Section 4(a)(6) transactions, this requirement would help investors understand the various types of securities that could be available on the platform and their associated risks. We also are proposing to require intermediaries to provide educational material regarding the limitation on the amounts investors may invest pursuant to Section 4(a)(6)(B) and the proposed rules.386 We believe it is important that investors are made aware of and understand the limits to which they would be subject, prior to making any investment commitments. As noted above, we are proposing to permit intermediaries to reasonably rely on investors’ representations concerning compliance with the investment limitation requirements.387 We believe providing these educational materials should enhance the accuracy of investor representations, because an investor may be less likely to inadvertently make an inaccurate representation that he or she complies with the investment limits after being presented with an explanation of what those limits are, how they apply and how they are calculated. In addition, we are proposing to require that intermediaries provide, in the educational materials, a notice that the intermediary may or may not continue to have a relationship with the issuer following completion of the offering.388 We believe that persons opening an account with an intermediary, for instance because they are interested in the offering of a particular issuer, could mistakenly assume that the intermediary will have an ongoing relationship with the issuer. Such persons also could assume that, following an offering conducted through the intermediary’s platform through which they purchased securities, the intermediary would be the primary contact for investors wishing to obtain information about, or wishing to communicate with, the issuer or wishing to participate in secondary trading of the issuer’s securities. Because intermediaries may not necessarily have an ongoing relationship with the issuer following an offering, and funding portals
  would not be permitted to be involved in secondary trading, we believe it would be helpful to require intermediaries to alert investors about this limitation the time they open accounts. One commenter suggested that the user experience for investors engaging in crowdfunding transactions should be a ‘‘painless process’’ and that investors should be subject to mandatory investor education prior to investing.389 Another commenter suggested that, in order to protect investors, intermediaries should be required to provide a glossary explaining each type of security available for purchase in each of the offerings on its portal.390 We are proposing to require intermediaries to provide educational material about the types of securities available for purchase on their platforms and the risks associated with each type of security; however, in order to provide intermediaries with flexibility in how they present or format this information, we are not proposing to require that it be presented as a glossary. One commenter suggested that a warning on the front page of an issuer’s offering materials should suffice for the

391See InitialCrowdOffering Letter (stating that the following type of language should be used: ‘‘you should purchase these shares only if you can afford a complete loss of your investment’’). 392See also discussion in Section II.C.5.b below and proposed Rule 303(b)(2)(i) of Regulation Crowdfunding. 393See, e.g., NASAA Letter (providing model language for use in investor education material and recommending that the material state that: (1) Investments in small businesses and start-up companies are often risky; (2) according to the U.S. Small Business Administration, half of all new businesses fail within five years; (3) because of these risks, investors should only invest if they can afford to lose the entire investment; and (4) an investor should not invest if the investor has an immediate need for the return of the funds). See also Tri Valley Law Letter; NSBA Letter. But see 2012 SEC Government-Business Forum, note 29 (recommending that while some investor education materials may need to be mandated by the Commission, the industry should work together to standardize educational materials). 394See RocketHub Letter 1; Spinrad Letter 1. 395See Schwartz Letter. 396See proposed Rule 302(a)(2) of Regulation Crowdfunding and discussion in Section II.C.4.a above. 397See 2012 SEC Government-Business Forum, note 29 (recommending that the market for transactions in reliance on Section 4(a)(6) should be permitted to develop best practices wherever possible). 398As discussed in Section II.C.3 above, proposed Rule 302(a) of Regulation Crowdfunding would require that an intermediary obtain an investor’s consent to such electronic delivery. 399Pursuant to proposed Rule 303(b)(2)(i) of Regulation Crowdfunding, the intermediary would be required to obtain, from each investor, a representation that the investor has reviewed these educational materials before accepting an investment commitment from the investor. 400See proposed Rule 205 of Regulation Crowdfunding and the discussion in Section II.B.5 above. purposes of Section 4A(a)(3).391 We do not believe that a disclaimer in isolation would be sufficient information to satisfy the statutory educational requirement.392 Other commenters requested that the Commission prepare and make available investor educational material or model text for use by intermediaries.393 Other commenters requested that the Commission clarify whether educational materials may be provided to investors through electronic means, such as through the Internet or email.394 One commenter requested that intermediaries be given ‘‘wide latitude’’ to experiment with different methods of investor education.395 We are not proposing to require a particular format or manner of presentation, other than the requirement that the materials be provided electronically.396 Rather than requiring specific text or a particular format or presentation, we believe that the better approach is to provide each intermediary with sufficient flexibility to prepare
educational materials in a manner reasonably designed to provide the required information, based on the types of offerings on the intermediary’s platform and the types of investors drawn to its platform.397 Under the proposed rules, the educational materials may be in any electronic format, including electronic and video format, that the intermediary determines is effective in communicating the contents of the educational material.398 Because the proposed rules require that the educational materials convey the specified pieces of information accurately, an intermediary would be required to update these materials over time as, for instance, the types of offerings on its platform change. For example, if an intermediary decides to expand the types of securities it offers through its platform, the intermediary would be required to update its educational materials. Similarly, an intermediary would be required to periodically review and update other aspects of its educational materials, such as the discussion of risk factors, as necessary. The proposed rules would require an intermediary to keep its educational materials accurate and thus current, which would require it to make the most current version of its educational materials available on its platform. In addition, to the extent an intermediary makes a material revision to its educational materials, it would be required to make the revised educational materials available to all investors before accepting any investment commitments.399 We believe that this requirement is consistent with the Internet-based nature of crowdfunding. We also believe that this requirement would benefit investors, by helping to ensure that they have information about key aspects of investing through the intermediary’s platform that may have changed since the last time they received the materials, prior to making investment commitments, as those key aspects could influence their investment decisions. Because these materials must be accurate, and thereby current, a change in the types of offerings conducted on an intermediary’s platform would trigger an update. We believe requiring intermediaries to provide updated material on this basis, rather than at any regular intervals, should help to minimize the ongoing burden on intermediaries. Request for Comment
141. Is the scope of information
proposed to be required in an intermediary’s educational materials appropriate? Why or why not? Is there other information that we should require an intermediary to provide as
part of the educational materials? If so,
what information and why?
142. Should any of the proposed
requirements be modified or deleted, and if so, which requirements and why?
143. Should we prescribe the text or
content of educational materials for intermediaries to use? Why or why not? Should we provide models that intermediaries could use? Why or why not?
144. Should we specifically prohibit
certain types of electronic media from being used to communicate educational material? If so, which ones and why?
145. Should we require intermediaries
to submit the educational materials to us or FINRA (or other applicable national securities association) for review? Why or why not? If we should require submission of materials, should we require submission before or after use, when they are first used, when the intermediary changes them or at some other point(s) in time? Please explain.
146. Should we require intermediaries
to provide educational material at additional or different specified points in time, rather than only when the investor begins to open an account or make an investment commitment? Why or why not? If so, why would that be preferable to requiring updates on an as￾needed basis? For example, should educational material be provided on a quarterly, semi-annual, or annual basis? Should this material be provided again to investors who have not logged onto or accessed an intermediary’s platform for a specified period of time? Why or why not? If so, what should that period of time be?
c. Promoters
Section 4A(b)(3) provides that an
issuer shall ‘‘not compensate or commit to compensate, directly or indirectly, any person to promote its offerings through communication channels provided by a broker or funding portal, without taking such steps as the Commission shall, by rule, require to ensure that such person clearly discloses the receipt, past or prospective, of such compensation, upon each instance of such promotional communication.’’ As discussed above, the proposed rules would include this prohibition.400 We also propose to require the intermediary to inform investors, at the account opening stage, that any person who promotes an issuer’s offering for compensation, whether past or prospective, or who is a founder or an employee of an issuer that engages in promotional activities on behalf of the

401See proposed Rule 302(c) of Regulation Crowdfunding. 402 In addition to the information proposed Rule 302(c) requires, promoters would also be required to disclose the amount of compensation pursuant to
Section 17(b) of the Securities Act (15 U.S.C.
77q(b)).
403See proposed Rule 303(c)(4) of Regulation Crowdfunding. We recognize that after opening an account, an investor may come to be compensated by, or become an employee of, an issuer or potential issuer. For this reason, proposed Rule 303(c)(4) would require an intermediary to require that any person, when posting a comment in the communication channels, clearly disclose with each posting whether he or she is a founder or an employee of an issuer engaging in promotional activities on behalf of the issuer, or receives compensation, whether in the past or prospectively, to promote an issuer’s offering. We anticipate that an intermediary could comply with this requirement in part by, for example, establishing a ‘‘pop-up’’ window which reminds the investor of the requirement each time the investor accesses, or attempts to post a comment on, the communication channels on the intermediary’s platform. See discussion in Section II.C.5 below. See also proposed Rule 205 of Regulation Crowdfunding. 404See proposed Rule 302(d) of Regulation Crowdfunding. See also proposed Rule 303(f) of Regulation Crowdfunding. 405See Staff of the U.S. Securities and Exchange Commission, Study on Investment Advisers and Broker-Dealers: As Required by Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Jan. 2011) (‘‘Study on Investment Advisers and Broker-Dealers’’), available at http:// www.sec.gov/news/studies/2011/913studyfinal.pdf, for more information about how compensation disclosure impacts investment decisions. issuer on the intermediary’s platform, must clearly disclose in all communications on the platform the receipt of the compensation and the fact that he or she is engaging in promotional activities on behalf of the issuer.401 We believe that requiring intermediaries to inform investors about these disclosure obligations at the outset of their relationship should help to ensure and monitor issuers’ compliance with Section 4A(b)(3) and the proposed rules, as it would alert investors that information about the participation of issuers or representatives of issuers would have to be disclosed at a later time. Promoters also would need to disclose this information 402 each time they post a comment in the communication channels on the platform.403 Request for Comment
147. Should the proposed rules
require intermediaries to take any different or additional steps to help achieve compliance with the requirement for promoters to disclose the receipt of compensation? If so, what other steps would be appropriate and why?
148. Should the proposed disclosures
to investors be required to be made at some time other than at account opening? For instance, should the reminder about disclosure obligations be made each time an investor accesses the intermediary’s platform or the communication channels provided by the intermediary? Why or why not?
149. The proposed rules would
require disclosure be made to investors, in relation to obligations of any person who receives compensation, whether in the past or prospectively, to promote an issuer’s offering, or who is a founder or an employee of an issuer that engages in promotional activities on behalf of the issuer on the intermediary’s platform. Should the obligations apply to other classes of persons as well, such as affiliates of the issuer, regardless of whether they are engaged in promotional activities? Why or why not? d. Compensation Disclosure The proposed rules would require the intermediary, when establishing an account for an investor, to clearly disclose the manner in which it will be compensated in connection with offerings and sales of securities made in reliance on Section 4(a)(6).404 This requirement would help to ensure investors are aware of any potential conflicts of interest of an intermediary that arise from the manner in which the intermediary is compensated. While the JOBS Act does not require this disclosure, we believe that providing this information to investors before they invest would help to ensure that they are making informed investment decisions.405 Request for Comment
150. Is the requirement for an
intermediary to disclose how it is compensated an appropriate requirement? Why or why not? Would a time other than at account opening be more appropriate for this disclosure? Please explain.
151. Should the proposed rules
include any additional requirements with regard to disclosure of compensation? If so, what other requirements would be appropriate and why?
152. While the proposed rules do not
specify the types of information that an intermediary must obtain from an investor at the account opening stage, we recognize that this stage provides an opportunity for intermediaries to collect certain demographic information about investors. Although some information intermediaries would collect from investors might already be required under their anti-money laundering obligations or pursuant to registered national securities association rules, there is some information about investors which might not be required to be collected but which, without involving disclosure of any personally identifiable information of investors, could help us and the applicable national securities association to better understand the level of investor sophistication in this market and investor protection needs, among other things. For instance, connecting certain demographic information to offering characteristics and outcomes could help in the evaluation of the effectiveness of crowdfunding in raising capital for startups and small businesses. The information that could be collected includes, for example, demographic information about investors that excludes any personally identifiable information and is aggregated on a per offering basis, indicating characteristics such as education level, income, wealth, geographic distance from the issuer and professional affiliations. At the same time, we recognize that requiring the collection of this data could likely increase the burden on investors and intermediaries participating in transactions conducted pursuant to
Section 4(a)(6). Should we require
intermediaries to collect and provide some or all of this information to us and the applicable national securities association? Should some or all of this information be made more widely available? Why or why not? If so, which metrics should we require, and in what format, if any, should we require it be provided? To what extent do brokers already collect this information for offerings in which they are involved? Is there a particular point in time or method that would be more appropriate or convenient for intermediaries to collect this information? Would a requirement for intermediaries to collect this information at the account opening stage discourage investors from opening accounts with intermediaries, and ultimately limit the ability of issuers to raise capital in reliance on the exemption in Section 4(a)(6)? Please explain.
5. Requirements With Respect to
Transactions a. Issuer Information
Section 4A(a)(6) requires each
intermediary to make available to the Commission and potential investors, not later than 21 days prior to the first day on which securities are sold to any investor (or such other period as the Commission may establish), any information provided by the issuer pursuant to Section 4A(b). The proposed rules would implement this

406See proposed Rule 303(a) of Regulation Crowdfunding. 407While we are not requiring that intermediaries make the relevant information available in any particular format, we note that issuers would be required to file the information on EDGAR. See proposed Rule 203 of Regulation Crowdfunding. See also Section II.B.3 above for a discussion of the filing requirements applicable to issuers. 408Accordingly, the offering could not close at any time before the end of the 21st day after the issuer disclosure materials are made available on the intermediary’s platform. 409Additional information could include, for example, information required to be filed with the Commission in a specific format (e.g., on EDGAR) under proposed Rules 201 and 203(a) of Regulation Crowdfunding, but prepared in a different presentation format, for example on slides, on the intermediary’s platform. 410See proposed Rule 303(a)(1) of Regulation Crowdfunding. See also proposed Rules 303(a)(2) and 303(a)(3) of Regulation Crowdfunding. Intermediaries have broad recordkeeping obligations that would include any written materials that are used as part of an intermediary’s business, which include issuer materials made available on its platform. Registered brokers would have to maintain records pursuant to Exchange Act
Section 17 and the rules thereunder. 15 U.S.C. 78q;
17 CFR 240.17a et seq. Funding portals would be subject to the recordkeeping requirements of proposed Rule 406 of Regulation Crowdfunding. See discussion in Section II.D.5 below. 411See Crowdfunding Offerings Ltd. Letter 2. 412See Arctic Island Letter. 413See proposed Rule 302 of Regulation Crowdfunding and discussion in Section II.C.3 above. 414See proposed Rule 303(b)(1) of Regulation Crowdfunding. See also Section II.A.2 above for a further discussion of the limitations on investments. 415See Cera Technology Letter; Crowdfunding Offerings Letter 3; Schwartz Letter. provision by requiring each intermediary in a transaction involving the offer or sale of securities in reliance on Section 4(a)(6) to make available to the Commission and to potential investors any information required to be provided by the issuer under Rules 201 and 203(a) of proposed Regulation Crowdfunding.406 The proposed rules would further require that: (1) An intermediary make this information publicly available on the intermediary’s platform, in a manner that reasonably permits a person accessing the platform to save, download or otherwise store the information; 407 (2) this information be made publicly available on the intermediary’s platform for a minimum of 21 days before any securities are sold in the offering, during which time the intermediary may accept investment commitments; 408 and (3) this information, including any additional information provided by the issuer,409 remain publicly available on the intermediary’s platform until the offer and sale of securities is completed or cancelled. An intermediary would be prohibited from requiring any person to establish an account with the intermediary in order to access this information. We believe that this approach also would satisfy the requirement under
Section 4A(d) for the Commission to
‘‘make [available to the states], or . . . cause to be made [available] by the relevant broker or funding portal, the information’’ issuers are required to provide under Section 4A(b) and the rules thereunder. This approach should help investors, the Commission, FINRA (and any other applicable registered national securities association) and other interested parties, such as state regulators, to access information without impediment. The proposed rules should help to ensure that an investor has an adequate opportunity to evaluate the investment opportunity and determine whether it is suitable for him or her.410 Finally, we do not believe that any person should be required to open an account with, or otherwise provide personal information to, an intermediary before reviewing the materials related to an offering or the educational materials provided by the intermediary. One commenter expressed the view that an intermediary should not be required to send information to the Commission before listing an offering on its platform.411 The proposed rules would permit an intermediary to make issuer information available to both the Commission and potential investors simultaneously through its platform. Another commenter recommended that the private placement memorandum provided by the issuer should be reviewed by a properly qualified securities representative prior to the intermediary providing the information to potential investors.412 We are not proposing at this time to impose such a requirement. Although review by a securities professional could provide some degree of additional investor protection, we are mindful of Congress’ intent that these offerings present a cost￾effective method of raising capital. Further, the proposed rules would provide a safeguard for investors by requiring an intermediary to have a reasonable basis for believing that an issuer complies with the requirements of Section 4A(b) and Regulation Crowdfunding, and to deny access to an issuer or cancel its offering, if the intermediary believes that the issuer or the offering presents the potential for fraud or otherwise raises concerns regarding investor protection.413 Request for Comment
153. Should we require intermediaries
to continue to display issuer materials for some period of time after completion of the offering? Why or why not? If such a requirement were used, which time period would be appropriate? Why? What would be the potential costs and benefits associated with any such requirement?
154. Section 4A(a)(6) requires an
intermediary to make available the information that an issuer is required to provide under Section 4A(b). Should we require an intermediary to make efforts to ensure that an investor who has made an investment commitment has actually reviewed the relevant issuer information? Why or why not? If so, how could we implement this?
155. Instead of, or in addition to,
requiring that intermediaries make issuer information available on their platforms, should we require that intermediaries deliver this information to investors? Why or why not? If so, should we specify a particular medium, such as email or a screen the investor must click through?
156. Should we consider timeframes
other than the minimum 21 days from the time an issuer offers securities on an intermediary’s platform, during which the offering information should be made available?
157. Should some or all of the issuer’s
offering materials be required to remain on an intermediary’s platform after the close of an offering? Why or why not? If so, for how long? b. Investor Qualification
i. Compliance With Investment
Limitations
Section 4(a)(6)(B) imposes certain
limitations on the aggregate amount of securities that can be sold to an investor in reliance on Section 4(a)(6) during a 12-month period. Section 4A(a)(8) further imposes an obligation on intermediaries to ensure that no investor exceeds those limits. The proposed rules would implement this latter requirement by providing that, before permitting an investor to make an investment commitment on its platform, an intermediary must have a reasonable basis to believe that the investor satisfies the investment limitations under Section 4(a)(6)(B) and Regulation Crowdfunding.414 Three commenters stated that it would be difficult for an intermediary to determine whether an investor has exceeded the investment limitations because an investor may not always use the same intermediary.415 Another commenter stated that it is unclear how an intermediary will be able to verify the investment limits, unless the

416See NSBA Letter. See also 2012 SEC Government-Business Forum, note 30 (recommending that investors should be permitted to self-certify as to their statutory investment limits and that funding portals should be permitted to rely on certifications made by third parties as to investment limits). 417See Grow VC Letter (stating that the Commission should require the following measures:
‘‘closely monitoring investment activity in any user account; requiring each user account to provide unique bank account details which are not used by any other user account; and requiring the investor to represent and warrant that such investor understands the maximum investment limit and will not exceed such limits’’). 418See RocketHub Letter 1. 419See Spinrad Letter 1 (stating that the underlying database would consist of information representing users, offerings, transactions and other elements of the market, and it would be used to ensure that investors do not purchase beyond the annual limits, even from multiple issuers across multiple intermediaries). 420See proposed Rule 302(b) of Regulation Crowdfunding and discussion in Section II.C.4.b above. 421See proposed Rule 303(b)(2) of Regulation Crowdfunding. 422We proposed this requirement under discretionary authority granted in Section 4A(a)(4)(C)(iii). As discussed in Section II.C.4.b above, in relation to the educational materials, we believe that it is important for investors to receive this information before making any investment commitments. 423See CFIRA Letter 2. 424See Cera Technology Letter (stating that a check-the-box type approach could be used, as well as the following draft text: ‘‘I understand that I could easily lose all of the money I invest in this company,’’ or ‘‘I understand that X% of start-ups in this category fail’’). See also Liles Letter 2 (stating that asking potential investors to take a test to demonstrate understanding of risks would be unorthodox and awkward at best and that a signed acknowledgement by investors that they understand each enumerated warning about the specific risks in the investment would suffice for compliance with the risk disclosure requirement); Verdant Ventures Letter (stating that a check-the-box type of approach could be used on funding portal Web sites to acknowledge the understanding of risk specifically for investors who are making low investments of $100 to $500 and that the regulation levels should be adjusted proportionally to larger individual dollar investments, and therefore, low contribution amounts should be subject to less regulation). intermediary is permitted to rely upon an investor’s representations regarding his or her prior crowdfunding investments.416 Another commenter raised concerns that an investor may be able to establish multiple user accounts with a single intermediary and thereby exceed the maximum investment limit, despite the best efforts of the intermediary.417 Another commenter suggested that each intermediary should be required to monitor investor activity only on its own platform.418 The commenter further stated that before completing an investment through an intermediary, investors should be required to make representations to an intermediary regarding any investments made through another intermediary within the last year. Another commenter suggested that the Commission should permit intermediaries to
create and use a centralized database for aggregate checks.419 We recognize that it would be difficult for intermediaries to monitor or independently verify whether each investor remains within his or her investment limits for each particular offering in which he or she intends to participate. While the proposed rules would permit reliance on a centralized database providing information about particular investors, if it could help provide an intermediary with a reasonable basis for a conclusion, we understand that none currently exists. For these reasons, the proposed rules provide that an intermediary may rely on an investor’s representations concerning compliance with investment limitation requirements based on the investor’s annual income and net worth and the amount of the investor’s other investments in securities sold in reliance on Section 4(a)(6) through other intermediaries. For example, an intermediary may choose to satisfy this requirement by providing a function on its platform that prompts investors to enter amounts of their annual income, net worth, and the amount of total investments made over the past 12 months on all intermediaries’ platforms, that would then generate the amount of investment the investor would be permitted to make at that time pursuant to the investment limitations. The intermediary could not rely on an investor’s representations if the intermediary had reason to question the reliability of the representation. In this regard, it would not be reasonable for an intermediary to ignore other investments made by an investor in securities sold in reliance on Section 4(a)(6) through an account with that intermediary or other information or facts about an investor within its possession. Request for Comment
158. Is the proposed approach for
establishing compliance with investment limits appropriate? Why or why not? Is there another approach that we should consider? Please explain.
159. As mentioned above, we are
proposing that an intermediary may rely on the representations of a potential investor. Is this an appropriate approach? Why or why not? Is there another approach we should consider? Please explain.
160. Should we require an
intermediary to avail itself of readily available information concerning investor limits, such as a centralized database containing information relating to whether particular investors were in compliance with the investment limits, should one become established? Why or why not?
161. Should we require intermediaries
to request other intermediary accounts that an investor may have before accepting an investment commitment? Why or why not?
ii. Acknowledgement of Risk
Section 4A(a)(4) requires an
intermediary to ensure that each investor: (1) Reviews the educational materials discussed above; (2) positively affirms that the investor understands that he or she is risking the loss of the entire investment and that the investor could bear such a loss; and (3) answer questions demonstrating an understanding of the level of risk generally applicable to investments in startups, emerging businesses and small issuers, the risk of illiquidity and such other matters as the Commission determines appropriate. As discussed above, the proposed rules would require an intermediary to provide to investors certain educational materials in connection with the opening of an account.420 The proposed rules would further require an intermediary, each time before accepting an investment commitment, to obtain from the investor a representation that the investor has reviewed the intermediary’s educational materials, understands that the entire amount of his or her investment may be lost and is in a financial condition to bear the loss of the investment.421 The intermediary also must ensure each time before accepting an investment commitment that each investor answers questions demonstrating the investor’s understanding that there are restrictions on the investor’s ability to cancel an investment commitment 422 and obtain a return of his or her investment, that it may be difficult for the investor to resell the securities, and that the investor should not invest any funds in a crowdfunding offering unless he or she can afford to lose the entire amount of his or her investment. A commenter requested guidance on the steps intermediaries must take to ensure that an investor understands the educational materials intermediaries are required to provide.423 One commenter expressed concern that the requirements in Section 4A(a)(4) could be intimidating to potential investors and recommended that we require very short affirmations that could easily be understood.424 Another commenter stated that the level of understanding that an investor can prove is too

425See Crowdfunding Offerings Ltd. Letter 2. 426See proposed Rule 303(b)(2) of Regulation Crowdfunding. 427See proposed Rule 303(b)(2)(ii) of Regulation Crowdfunding. See, e.g., Spinrad Letter 1; NASAA Letter (stating that intermediaries ‘‘should [at a minimum] be required to design their web portals to require investors to click through a page that indicates they have read the investor-education information and to require investors to correctly answer a series of specific questions that are controlled by the Commission,’’ and further stating that such requirements should be a precondition for membership or registration of an investor with a funding portal); The Motley Fool Letter (stating that a more involved process than a simple check-the￾box type approach should be used to verify that investors acknowledge and understand the risks and that multiple choice questions should be used and tailored to testing whether potential investors understand the nature of crowdfunding risk, the potential for fraud, their legal rights and responsibilities and the probability of losing their entire investment). See also TechnologyCrowdFund Letter 1 (stating that the Commission should require each individual seeking to invest more than $2,000 to take an on-line course with a quiz on the possible pitfalls of crowdfunding). 428See CompTIA Letter. 429See Schwartz Letter. 430See proposed Rule 303(b)(2)(i) of Regulation Crowdfunding. 431See Spinrad Letter 1 (stating that if an investor were to answer a question incorrectly, an issuer could, for example, push the investor education material to investors for further review, or alternatively could, through a pop-up feature, explain the correct answer and then permit the investor to choose the right answer). See also note 427. 432See proposed Rule 303(b)(2) of Regulation Crowdfunding. 433See Commonwealth of Massachusetts Letter. 434FINRA (or any other applicable registered national securities association) could seek to impose a compliance structure that may require such designation. Any proposed requirement by FINRA (or any other applicable registered national securities association) would be filed with us pursuant to the Exchange Act and the rules thereunder. 17 CFR 240.19b–4. 435See proposed Rule 303(c) of Regulation Crowdfunding. 436See 158 Cong. Rec. S2231 (daily ed. Mar. 29,
2012) (statement of Sen. Scott Brown) (‘‘In addition
to facilitating communication between issuers and investors, intermediaries should allow fellow investors to endorse or provide feedback about issuers and offerings, provided that these investors Continued subjective to be useful and that an intermediary could not design a system to guarantee that an investor understands a disclosure.425 We agree that it would not be possible for an intermediary to ensure that all investors understand the risk disclosure. The requirements of the proposed rules are intended to require intermediaries to provide investors with meaningful disclosures concerning the risks of any potential investment and obtain answers demonstrating an understanding of the required statutory elements.426 The questionnaire required under the proposed rules should help to address concerns of commenters that Section 4A(a)(4) requires more than a mere self￾certification.427 One commenter requested that the Commission develop a model form of acknowledgment that intermediaries can use and retain to satisfy the requirements of Section 4A(a)(4).428 Another commenter suggested that intermediaries should have flexibility to try different methods of obtaining this acknowledgement.429 We are not proposing a model form of acknowledgement or questionnaire. Rather, the proposed rules would permit an intermediary to develop the representation and questionnaire in any format that is reasonably designed to demonstrate the investor’s receipt of the information and compliance with the other requirements under the proposed rules. As with the educational material requirements, we believe that an intermediary’s familiarity with its business and likely investor base would make it best able to determine the format in which to present the material required under the proposed rules.430 As one commenter suggested, an intermediary could design a multiple choice quiz that would not permit an investor to successfully make an investment commitment until the investor has correctly answered a specific number of questions.431 Other formats that could be used are questions that must be answered ‘‘Yes’’ or ‘‘No,’’ or ‘‘True’’ or ‘‘False.’’ Any format used must be reasonably designed to demonstrate receipt and understanding of the information. Thus, the requirements of proposed Rule 303(b) would not be satisfied if, for example, an intermediary were to pre-select answers for an investor. We propose to give intermediaries flexibility in how they fulfill this requirement because we do not want to foreclose viable alternatives. There are many ways, especially on a web-based system, to convey information to, and obtain effective acknowledgement from, investors. The proposed rules would require an intermediary to obtain an investor representation and completed questionnaire before accepting any investment commitment. Accordingly, the intermediary would be required to obtain these items each time an investor seeks to make an investment commitment.432 This proposed requirement is
intended to help ensure that investors engaging in transactions made in reliance on Section 4(a)(6) are fully informed and reminded of the risks associated with their particular investment before making any investment commitment. Another commenter suggested that intermediaries should be required to designate a key person who will bear the responsibility to ensure that all investors demonstrate an understanding of the level of risks applicable to investments.433 We are not proposing this requirement at this time. Although
Section 4A(a)(4) requires an
intermediary to ensure that each investor positively affirms that he or she understands the risks of investing in securities sold in reliance on Section 4(a)(6), at this time, we believe that each intermediary should have flexibility to design its own compliance program in a manner that is effective for it in light of its business model, types of offerings and any other relevant considerations.434 Request for Comment
162. Should we require intermediaries
to have investors acknowledge issuer￾specific or security-specific risks as part of the transaction process? Why or why not? If so, to what extent?
163. Are there considerations relating
to investor acknowledgments we should take into account, other than those discussed above? Is the proposed requirement to obtain an acknowledgement as to investors’ understanding of their ability to cancel investment commitments appropriate? Why or why not? Should we require acknowledgement of investors’ understanding of any other matters? Why or why not? If so, which ones and why?
164. Are there any matters apart from
the risks identified above that we should require to be addressed in the investor acknowledgements? If so, which ones, and why? How should they be addressed?
165. Should we provide a
recommended form of questions and representations? Why or why not? If so, should the Commission provide the form as a starting point, and not a safe harbor, so that intermediaries can adapt the questions and representations to particular offerings? Why or why not?
c. Communication Channels
The proposed rules would require an intermediary to provide, on its platform, channels through which investors can communicate with one another and with representatives of the issuer about offerings made available on the intermediary’s platform, subject to certain conditions.435 While the JOBS Act does not impose this requirement, we believe that Congress contemplated that there would be such a mechanism in place for offerings made in reliance on Section 4(a)(6).436 Some commenters

are not employees of the intermediary. Investors’ credentials should be included with their comments to aid the collective wisdom of the crowd.’’). 437See RocketHub Letter 1. 438See Mollick Letter, Lucas Letter. One commenter raised a concern about communications being construed as investment advice by funding portals. See Grow VC Letter. See also Section II.D.3 below for a discussion of the proposed safe harbor for funding portals. 439See Mollick Letter. 440See proposed Rule 204 of Regulation Crowdfunding and discussion in Section II.B.4 above. 441See proposed Rule 100(a)(3) of Regulation Crowdfunding and discussion in Section II.A.3 above. 442See proposed Rule 303(c) of Regulation Crowdfunding. 443The Investment Advisers Act of 1940 excludes from the definition of investment adviser any broker or dealer whose performance of investment advisory services is ‘‘solely incidental’’ to the conduct of its business as a broker or dealer and who receives no ‘‘special compensation’’ for those advisory services. See Advisers Act Section 202(a)(11)(C) [15 U.S.C. 80b–2(a)(11)(C)]. See also Study on Investment Advisers and Broker-Dealers, note 405 at 15–16 (discussing the terms used in this exclusion). As such, brokers that are not registered as investment advisers are able to provide investment advice, provided they meet these two requirements. Subject to applicable rules, brokers also can make recommendations concerning securities, if they have a reasonable basis to believe that the recommendations are suitable. See, e.g., FINRA Rule 2111 (‘‘Suitability’’). 444See discussion in Section II.B.5 above. refer to communication channels as an integral part of crowdfunding. For example, one commenter suggested that intermediaries should provide a mechanism for communication between issuers and investors, without necessarily requiring the communication itself to take place.437 Others have urged us to encourage dialogue among potential investors and issuers as a key component of the crowdfunding model, suggesting that it would contribute to low levels of fraud.438 One commenter also maintained that there is value in allowing interested parties generally, such as experts and journalists, to participate in these discussions, as well as maintaining transparency regarding the identity of those participating in the discussions.439 The communication channels we are proposing would provide a centralized and transparent means for members of the public that have opened an account with an intermediary to share their views about investment opportunities and to communicate with representatives of the issuer to better assess the issuer and investment opportunity. Also, though communications among investors could occur outside the intermediary’s platform, communications by an investor with a crowdfunding issuer or its representatives about the terms of the offering would be required to occur through these channels,440 on the single platform through which the offering is
conducted.441 This requirement should provide transparency and accountability, and thereby further the protection of investors. Under the proposed rules, an intermediary that is a funding portal would be prohibited from participating in any communications in these channels, apart from establishing guidelines for communication and removing abusive or potentially fraudulent communications.442 For example, a funding portal could establish guidelines pertaining to the length or size of individual postings in the communication channels and could remove postings that include offensive or incendiary language. Intermediaries that are funding portals are prohibited from providing investment advice or recommendations. In contrast, intermediaries that are brokers may provide investment advice and recommendations, subject to certain conditions.443 The proposed rules would require the intermediary to make the communications on the channels publicly available for viewing. For instance, an intermediary could not restrict viewing of the communications to only those investors who have opened accounts with it. We believe that this requirement is consistent with the concept of crowdfunding, as it provides transparent crowd discussions about a potential investment opportunity. The proposed rule would, however, require the intermediary to permit only those persons who have opened accounts with it to post comments. While we recognize that this requirement could narrow the range of views represented by excluding posts by anyone who has not opened an account with the intermediary, we believe that this proposed requirement would help to establish accountability for comments made in the communication channels. Among other things, the records required to be kept by intermediaries should help to track the origins of any abusive or potentially fraudulent comments made through the communication channels. Without this measure, we believe there could be greater risk of the communications including unfounded, potentially abusive, biased statements aimed unjustifiably to promote or discredit the issuer and improperly influence the investment decisions of members of the crowd. The proposed rules also would require any person posting a comment in the communication channels to clearly and prominently disclose with each posting whether he or she is a founder or an employee of an issuer engaging in promotional activities on behalf of the issuer, or is otherwise compensated, whether in the past or prospectively, to promote the issuer’s offering. This disclosure would apply to officers, directors and other representatives of the issuer, and also would be required of an intermediary that is a broker or its associated persons. Although the statute requires issuers, but not intermediaries, to disclose compensation to promoters of an offering, we believe that intermediaries, as the hosts of the communication channels, would be well placed to take measures to ensure that promoters are
clearly identified in their communication channels, in accordance with Section 4A(b)(3).444 This requirement would be consistent with
Section 4A(b)(3), which requires issuers
to take steps required by the Commission and established by rule, to ensure disclosure of compensation or promotional activity ‘‘upon each instance of such promotional communication.’’ Request for Comment
166. Should we require intermediaries
to provide communication channels, as proposed, on their platforms? Why or why not? If not, what other methods of communication could, or should, be used and why?
167. Are the proposed conditions
imposed on the requirement to provide communication channels appropriate? Why or why not? For example, should the communications on the channels be available for public viewing or participation? Why or why not? What other restrictions, if any, should communication channels be subject to, and why? For example, should we require more specific actions for intermediaries to take in order to ensure adequate disclosure of issuers’ and promoters’ communications? If so, what actions and why?
168. Under the proposed rules, we
limit the ability to post in the communication channels to only those persons who have opened accounts with the intermediaries and thereby identified themselves to the intermediaries. Is this restriction adequate? Why or why not? Would it be appropriate to permit anyone, including persons who have not identified themselves in any way, to post comments in intermediaries’

445See proposed Rule 303(d) of Regulation Crowdfunding. The statutory requirements for intermediaries do not expressly address an intermediary’s obligation to notify an investor of receipt of the investor’s commitment, although the statutory provision provides us with authority to do so in our rules. See Section 4A(a)(12). 446 Intermediaries that are brokers would be subject to the recordkeeping requirements of Exchange Act Rules 17a–3 and 17a–4, and intermediaries that are funding portals would be subject to recordkeeping requirements under proposed Rule 404 of Regulation Crowdfunding. 447See proposed Rule 303(e) of Regulation Crowdfunding. 448 17 CFR 240.15c2–4. 449See proposed Rule 303(e)(1) of Regulation Crowdfunding. 450Adoption of Rule 15c2–4 under the Securities Exchange Act of 1934, Release No. 34–6737 (Feb. 21, 1962) [27 F.R. 2089 (Mar. 3, 1962)]. 451See proposed Rule 303(e)(2) of Regulation Crowdfunding. 452This written agreement would be required to be maintained by the funding portal pursuant to proposed Rule 404 of Regulation Crowdfunding. See discussion in Section II.D.5 below. 453 In the crowdfunding context, it is expected that the intermediary would be making the determination as to whether the contingency, i.e., the target offering amount, has been met. 454See Exchange Act Section 3(a)(6) [15 U.S.C. 78c(a)(6)] (defining ‘‘bank’’). 455For example, protections afforded to bank accounts include FDIC deposit insurance. See Federal Deposit Insurance Corp., FDIC Deposit Insurance Coverage, http://www.fdic.gov/deposit/ deposits/dis/. 456See Section II.C.6 below for a discussion of the cancellation period. 457See proposed Rule 303(e)(3)(i) of Regulation Crowdfunding. See also Exchange Act Rule 10b–9 [17 CFR 240.10b–9]. communication channels? Why or why not?
169. The proposed rules would
require any person posting a comment in the communication channels to disclose with each posting whether he or she is a founder or an employee of an issuer engaging in promotional activities on behalf of the issuer, or is otherwise compensated, whether in the past or prospectively, to promote the issuer’s offering. Should we impose this requirement on other types of persons as well, such as affiliates of the issuer, regardless of whether they are engaging in promotional activities? Why or why not?
170. Should we require the
intermediary to maintain the communication channels of its platform during the post-offering period, in order to permit communication between investors and the issuer after the offering has completed? Why or why not? If so, for how long after the offering is completed (e.g., for one month, for six months, for one year, or longer) should the intermediary be required to maintain the channels? d. Notice of Investment Commitment The proposed rules would require an intermediary, upon receipt of an investment commitment from an investor, to promptly give or send to the investor a notification disclosing: (1) The dollar amount of the investment commitment; (2) the price of the securities, if known; (3) the name of the issuer; and (4) the date and time by which the investor may cancel the investment commitment.445 This notification would be required to be provided by email or other electronic media, and to be documented in accordance with applicable recordkeeping rules.446 The proposed notification is intended, among other things, to provide the investor with a written record of the basic terms of the transaction, as well as a reminder regarding his or her ability to cancel the investment commitment. Request for Comment
171. Would the notifications we are
proposing to require be useful to investors? Why or why not? Should we provide further specificity as to when notice must be provided?
172. Are there any other
circumstances under which an investor should receive a notice? If so, under what other circumstances? e. Maintenance and Transmission of Funds Securities Act Section 4A(a)(7) requires that an intermediary ‘‘ensure that all offering proceeds are only provided to the issuer when the aggregate capital raised from all investors is equal to or greater than a target offering amount, . . . as the Commission shall, by rule, determine appropriate.’’ The proposed rules would implement this provision and address the maintenance and protection of investor funds, pending completion of a transaction made in reliance on Section 4(a)(6).447 The proposed rules would require an intermediary that is a registered broker to comply with established requirements in Exchange Act Rule 15c2–4 448 for the maintenance and transmission of investor funds.449 Application of Exchange Act Rule 15c2– 4(b) to an intermediary that is a broker in the crowdfunding context, would require, in relevant part, that money or other consideration received is promptly deposited in a separate bank account, as agent or trustee for the persons who have the beneficial interest therein, until the appropriate event or contingency has occurred, and then the funds would be promptly transmitted or returned to the persons entitled thereto; or all such funds would be promptly transmitted to a bank, which has agreed in writing to hold such funds in escrow for the persons who have the beneficial interests therein and to transmit or return such funds directly to the persons entitled thereto when the appropriate event or contingency has occurred. Under Section 4A(a)(7), proceeds are to be transmitted to the issuer only if the target offering amount is met or exceeded. As explained in the adopting release to Rule 15c2–4, this rule was designed to prevent fraud ‘‘either upon the person on whose behalf the distribution is being made or upon the customer to whom the payment is to be returned if the distribution is not completed.’’ 450 The proposed rules would establish separate requirements for an intermediary that is a funding portal.451 Because a funding portal cannot receive any funds, it would be required to direct investors to transmit money or other consideration directly to a qualified third party that has agreed in writing 452 to hold the funds for the benefit of the investors and the issuer and to promptly transmit or return the funds to the persons entitled to such funds.453 The proposed rules would define ‘‘qualified third party’’ to mean a bank 454 that has agreed in writing either (i) to hold the funds in escrow for the persons who have the beneficial interests in the funds and to transmit or return the funds directly to the persons entitled to them when the appropriate event or contingency has occurred; or (ii) to establish a bank account (or accounts) for the exclusive benefit of investors and the issuer. We have chosen to specify that the qualified third party would be a bank because investors,
as well as intermediaries and issuers, would then be afforded the protections of existing regulations that apply to banks, in particular those pertaining to the safeguarding of customer funds.455 The proposed rules also would require an intermediary that is a funding portal to promptly direct transmission of funds from the qualified third party to the issuer when the aggregate amount of investment commitments from all investors is equal to or greater than the target amount of the offering and the cancellation period for each investor has expired,456 but no earlier than 21 days after the date on which the intermediary makes publicly available on its platform the information required to be provided by the issuer such as information about the issuer and the offering pursuant to Rules 201 and 203(a) of proposed Regulation Crowdfunding.457 We believe that this approach is consistent

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

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

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

procedures required under proposed Rule 304(b), and not 304(c), would apply. See discussion in this
Section II.C.6 above.
503See proposed Rule 304(c)(1) of Regulation Crowdfunding. 504 Intermediaries that are brokers would be subject to the recordkeeping requirements of Exchange Act Rules 17a–3 and 17a–4, and intermediaries that are funding portals would be subject to recordkeeping requirements under proposed Rule 404 of Regulation Crowdfunding. 505See proposed Rule 304(d) of Regulation Crowdfunding. 506 Intermediaries that are brokers would be subject to the recordkeeping requirements of Exchange Act Rules 17a–3 and 17a–4, and intermediaries that are funding portals would be subject to recordkeeping requirements under proposed Rule 404 of Regulation Crowdfunding. 507See Crowdfunding Offerings Letter 2. 508See id. (stating that there could be circumstances in which a third party stands to gain in some way by a successful crowdfunding effort). 509See RocketHub Letter 1. 510See id. 511See id. 512See proposed Rule 305(a) of Regulation Crowdfunding. information provided by the issuer regarding the offering, the proposed rules would require the intermediary to give or send to any potential investors who have made investment commitments notice of the material change, stating that the investor’s investment commitment will be cancelled unless the investor reconfirms his or her commitment within five business days of receipt of the notice.503 We recognize that complying with this requirement could result in certain offerings being extended beyond the offering period specified in the offering statement. If the investor fails to reconfirm his or her investment within those five business days, the proposed rules would require an intermediary, within five business days thereafter, to:
(1) Provide or send the investor a notification disclosing that the investment commitment was cancelled, the reason for the cancellation and the refund amount that the investor should expect to receive; and (2) direct the refund of investor funds. We believe that when material changes arise during the course of an offering, an investor who had made a prior investment commitment should have a reasonable period during which to review the new information and to decide whether to invest. This notification would be required to be provided by email or other electronic media, and to be documented in accordance with applicable recordkeeping rules.504 Finally, if an issuer does not complete an offering because the target is not reached or the issuer decides to terminate the offering, the proposed rules would require an intermediary, within five business days, to: (1) Give or send to each investor who had made an investment commitment a notification disclosing the cancellation of the offering, the reason for the cancelation, and the refund amount that the investor should expect to receive; (2) direct the refund of investor funds; and (3) prevent investors from making investment commitments with respect to that offering on its platform.505 This notification would be required to be provided by email or other electronic media, and to be documented in accordance with applicable recordkeeping rules.506 Request for Comment
182. Are the proposed requirements
for cancellations and notifications appropriate? Why or why not? Should investors be permitted to withdraw commitments at any time until the offering closes? Should investors be provided with additional time to cancel their commitments after the closing of the offering if the commitment was made within 48 hours of the offering deadline? Would some time period other than 48 hours be more appropriate? Do the proposed rules, whereby an investor cannot cancel commitments made within 48 hours of the offering deadline, strike the appropriate balance between (1) giving investors the ability to cancel commitments in light of new views expressed in the crowd and (2) providing issuers with certainty about their ability to close an offering by meeting the target offering amount? Please explain. What are the advantages and disadvantages of any alternative time period? Should no new investment commitments be permitted after a date that is two full business days prior to the beginning of the 48-hour period when investments are no longer cancellable? Why or why not?
183. Should an investor be required to
reconfirm his or her commitment to invest when a material change has occurred? Why or why not? Is the five business day period for reconfirmation after material changes appropriate? Would another time period be more appropriate? If so, what time period and why?
184. The proposed rules provide a
mechanism by which existing disclosure materials can be modified in the event of a material change, with the original offering remaining open. Should the proposed rules require that an offering be cancelled in the event of a material change, and then, if the issuer desires, reopened in a new offering that includes the revised disclosure? Why or why not?
185. Are there any other
circumstances under which an investor should receive a notification? If so, under what other circumstances? Should we provide further specificity on when notifications must be provided?
186. Under the proposed rules, in the
event of a cancellation an intermediary would be required to provide a notice to prospective investors within five business days. Is this requirement appropriate? Should the time period be longer or shorter, such as 3 business days or 10 business days? Why or why not? Should we include any other notification requirements in the event an offering is canceled? If so, what requirement should we include and why?
7. Payments to Third Parties
Section 4A(a)(10) provides that an
intermediary in a transaction made in reliance on Section 4(a)(6) shall not compensate ‘‘promoters, finders, or lead generators for providing the broker or funding portal with the personal identifying information of any potential investor.’’ One commenter noted that the terms ‘‘promoters,’’ ‘‘finders’’ and ‘‘lead generators’’ are not defined in the statute.507 The commenter also expressed concern that promoters, finders and lead generators could provide a broker or funding portal with potential investors’ personally identifiable information as long as the broker or funding portal did not directly compensate them.508 Another commenter stated that ‘‘personal identifying information’’ should be clearly defined.509 While agreeing that funding portals should not be permitted to compensate third parties for personally identifiable information of potential investors, the commenter asserted that funding portals, but not registered brokers, should be allowed to compensate promoters, finders or lead generators for directing potential issuers or investors to view either the portal itself or specific offerings.510 The commenter further stated that revenue sharing arrangements should not be restricted when these relationships are not promoter-, finder- or lead generator￾based.511 The proposed rules would broadly prohibit an intermediary from compensating any person for providing it with the personally identifiable information of any investor or potential investor.512 The term ‘‘personally identifiable information’’ would be defined to mean any information that

513See proposed Rule 305(c) of Regulation Crowdfunding. The proposed definition is consistent with those used in other government agency reports that discuss strategies for protecting personally identifiable information. See, e.g., Government Accountability Office (‘‘GAO’’), Privacy: Alternatives Exist for Enhancing Protection of Personally Identifiable Information, GAO–08– 536, at 1 n.1 (May 2008); GAO, Information Security: Protecting Personally Identifiable Information, GAO–08–343, at 5 n.9 (Jan. 2008). See also Erika McCallister, Tim Grance and Karen Scarfone, Guide to Protecting the Confidentiality of Personally Identifiable Information (PII):
Recommendations of the National Institute of Standards and Technology, U.S. Department of Commerce, National Institute of Standards and Technology, Special Publication 800–122, at ES–1 (Apr. 2010). 514See proposed Rule 305(b) of Regulation Crowdfunding. We note that the receipt of direct or indirect transaction-based compensation would strongly indicate that the recipient is acting as a broker. As such, the party receiving the compensation in the scenario described needs to consider whether it would be required to register as a broker 515See Persons Deemed Not to Be Brokers, Release No. 34–22172 (June 27, 1985) [50 FR 27,940, 27942 (July 9, 1985)] (‘‘Compensation based on transactions in securities can induce high pressure sales tactics and other problems of investor protection that require application of broker-dealer regulation.’’). See also 158 Cong. Rec. S5474–03 (daily ed. July 26, 2012) (statement of Sen. Jeff Merkley) (‘‘[T]he limitation on off-platform advertising is intended to prohibit issuers— including officers, directors, and 20 percent shareholders—from promoting or paying promoters to express opinions outside the platform that would go beyond pointing the public to the funding portal. Such paid testimonials and manufactured excitement would represent a prohibited form of off-site advertising if those disclosures were not present. Whether on or off the platform, paid advertising must clearly be disclosed as such. In short, the investor deserves a transparent medium for making healthy decisions.’’). 516A flat fixed fee is one that is not based on the success of the offering, and so would not be transaction-based compensation. As noted above, receipt of transaction-based compensation would strongly indicate that the recipient is acting as a broker, and the party receiving this kind of compensation needs to consider whether it would be required to register as a broker. 517See also proposed Rule 402 of Regulation Crowdfunding and discussion in Section II.D.3 below. 518Compare Exchange Act Section 15(b) [15 U.S.C. 78o(b)] (prescribing the manner of registration of broker-dealers). 519See NSBA Letter; RocketHub Letter 1. See also Applied Dynamite Letter (stating that the requirements for those who wish to be intermediaries in offerings pursuant to Rule 506 of Regulation D should be harmonized with those for funding portals, and that we should provide for a common registration process for the two). We note, however, that Securities Act Section 4(b)(1) provides an exemption from broker-dealer registration for certain portals facilitating transactions pursuant to Rule 506 of Regulation D, as revised by Section 201 of the JOBS Act. 520See NCA Letter. 521See CFIRA Letter 2 (further stating that the system should ‘‘clearly identify the registration status of a funding portal and its management, display any regulatory actions against such portal and provide a hyperlink to its Web site’’). can be used to distinguish or trace an individual’s
identity, either alone or when combined with other personal or identifying information that is linked or linkable to a specific individual.513 Personally identifiable information could include, for example, any information, such as name, social security number, date or place of birth, mother’s maiden name or biometric records, that can be used to identify an individual, as well as any other information that is linked directly to an individual, such as financial, employment, educational or medical information. We believe that any person compensated for providing the personally identifiable information of potential investors would be acting as a promoter, finder or lead generator within the meaning of Section 4A(a)(10). Thus, the proposed rules would prohibit compensation broadly to ‘‘any person.’’ The proposed rules would, however, permit an intermediary to compensate a person for directing issuers or potential investors to the intermediary’s platform if (1) the person does not provide the intermediary with the personally identifiable information of any potential investor, and (2) the compensation, unless it is paid to a registered broker or dealer, is not based, directly or indirectly, on the purchase or sale of a security offered in reliance on Section 4(a)(6) on or through the intermediary’s platform.514 The proposed rules would not permit a funding portal to compensate third parties by commission or other transaction-based compensation unless that third party is a registered broker or dealer and thereby subject to an established regulatory and oversight regime that provides important safeguards to investors. We believe that the prohibition on transaction-based compensation in the proposed rules would help to remove the incentive for high-pressure sales tactics and other abusive practices.515 Under the proposed rules, an intermediary could pay a person a flat fixed fee 516 to direct other persons to the intermediary’s platform through, for example, hyperlinks or search term results, if the intermediary received no personally identifiable information. Although the statute is clear that an intermediary cannot pay for the personally identifiable information of potential investors, we do not believe Congress intended to disrupt current practices, such as paying for advertising based on Internet search rankings. It would be acceptable under the proposed rules, therefore, for an intermediary to make payments to advertise its existence, provided that in doing so, it does not pay for the personally identifiable information of investors or potential investors.517 Request for Comment
187. Should we permit an
intermediary to compensate a third party for directing potential investors to the intermediary’s platform under the limited circumstances described above? Why or why not? Should any disclosures be required? Why or why not? Please identify reasonable alternatives to this approach, if any.
188. What other concerns may be
relevant in the context of third parties referring others to intermediaries, and how could they be addressed? For example, should compensation be limited in some additional way? Please explain. D. Additional Requirements on Funding Portals

1. Registration Requirement
   a. Generally
   Securities Act Section 4A(a)(1) requires that an intermediary facilitating a transaction made in reliance on
   Section 4(a)(6) register with the
   Commission as a broker or a funding portal. The statute does not, however, prescribe the manner in which a funding portal would register with the Commission.518 Securities Act Section 4A(a)(12) requires intermediaries to comply with requirements as the Commission may, by rule, prescribe for the protection of investors and in the public interest. Exchange Act Section 3(h)(1)(C) also permits us to impose, as
   part of our authority to exempt funding
   portals from broker registration, ‘‘such other requirements under [the Exchange Act] as the Commission determines appropriate.’’ Some commenters asked specifically for clarification on the nature of a funding portal’s registration requirements.519 One commenter suggested that we permit a funding portal to have multiple intermediary Web sites under a single registration application.520 The commenter argued that this will permit a registered funding portal to offer issuers the opportunity to offer their securities on a funding portal Web site that is specific as to parameters such as industry, geography, community and affinity group, which would result in a better organized market for both issuers and investors. One commenter asked us to consider the creation of a ‘‘Registered Portal￾Check,’’ similar to the BrokerCheck system maintained by FINRA, to provide greater transparency to participants in Section 4(a)(6) transactions.521 Another commenter

522See Liles Letter 2 (stating that this requirement would strengthen the ability of the Commission and other U.S. authorities to make surprise audits or investigations of, or bring enforcement action against, a funding portal). 523See 158 Cong. Rec. S2230–31 (daily ed. Mar. 29, 2012) (statement of Sen. Scott Brown) (‘‘As the Securities and Exchange Commission works to implement this new law, it is my hope that it will recognize that the funding portal registration process is meant to be more streamlined and less burdensome than traditional broker-dealer registration’’); 158 Cong. Rec. S1817–29 (daily ed. Mar. 20, 2012) (statement of Sen. Jeff Merkley) (‘‘Our amendment provides two pathways: The first pathway is for a portal to register as a broker-dealer. The second is streamlined funding portal registration.’’). 524See proposed Rule 400(a) of Regulation Crowdfunding. We discuss below the information required to be included in the form. 525See proposed Rule 400(b) of Regulation Crowdfunding. A similar process exists for registered broker-dealers under Exchange Act Rule 15b3–1 (17 CFR 240.15b3–1). 526See proposed Rule 400(c) of Regulation Crowdfunding. 527Under the proposed rules, the registration of the predecessor funding portal would be deemed withdrawn 45 days after the notice registration on Form Funding Portal is filed by the successor. A similar process exists for registered broker-dealers under Exchange Act Rule 15b1–3 (17 CFR 240.15b1–3). 528We are proposing to treat funding portal successions in a manner consistent with broker￾dealer successions. See Registration of Successors to Broker-Dealers and Investment Advisers, Release No. 34–31661 (Dec. 28, 1992) [58 FR 7 (Jan. 4, 1993)]. 529We are proposing that a direct and substantial nexus exist between a predecessor and successor funding portal to be consistent with the applicable rules for broker-dealer successions. 530See proposed Rule 400(c)(1) of Regulation Crowdfunding, which requires the predecessor funding portal to file a withdrawal on Form Funding Portal as a condition of the successor registration. 531See proposed Rule 400(c)(2) of Regulation Crowdfunding. 532See proposed Rule 400(d) of Regulation Crowdfunding. 533A similar process exists for registered broker￾dealers under Exchange Act Section 15(b)(5) (15 U.S.C. 78o(b)(5)) and Rule 15b6–1 (17 CFR 240.15b6–1) thereunder. asked us to require that funding portals, like issuers engaged in crowdfunding transactions in reliance on Section 4(a)(6), be organized under and subject to the laws of a State or territory of the United States or the District of Columbia.522 We are proposing to establish a streamlined registration process under which a funding portal would register with the Commission by filing a form with information consistent with, but less extensive than, the information required for broker-dealers on Form BD.523 Under the proposed rules, a funding portal would register by completing a Form Funding Portal, which includes
information concerning the funding portal’s principal place of business, its legal organization and its disciplinary history, if any; business activities, including the types of compensation the funding portal would receive; control affiliates of the funding portal and disclosure of their disciplinary history, if any; FINRA membership or membership with any other registered national securities association; and the funding portal’s Web site address(es) or other means of access.524 We also are proposing, as discussed in greater detail below, not to permit nonresident entities to register as funding portals unless they comply with certain conditions designed to provide the Commission and FINRA (or any other registered national securities association) with appropriate tools for supervising such entities. The funding portal’s registration would become effective the later of: (1) 30 calendar days after the date that the registration is received by the Commission; or (2) the date the funding portal is approved for membership in FINRA or any other registered national securities association. This approach is intended to help ensure that a funding portal is subject to regulation by the Commission and FINRA or any other national securities association before it can engage in business with the public. We also are proposing to require a funding portal to file an amendment to Form Funding Portal within 30 days of any of the information previously submitted on Form Funding Portal becoming inaccurate for any reason.525 The proposed rules would permit a funding portal that succeeds to and continues the business of a registered funding portal to also succeed to the registration of the predecessor on Form Funding Portal.526 The registration would be deemed to remain effective as the registration of the successor, if the successor, within 30 days after such succession, files a registration on Form Funding Portal and the predecessor files a withdrawal on Form Funding Portal.527 The rule would further provide that, if succession is based solely on a change of the predecessor’s date or state of incorporation, form of organization or composition of a partnership, the successor may, within 30 days after the succession, amend the notice registration of the predecessor on Form Funding Portal to reflect these changes. Form Funding Portal would require the successor to provide certain information, such as the name and Commission file number of the predecessor. The successor also would be required to briefly describe details of the succession, including any assets or liabilities not assumed by the successor. The proposed rules are intended to provide an efficient registration mechanism for a person that becomes a successor to a funding portal.528 The provisions on succession are intended to be used only when there is a direct and substantial business nexus between the predecessor and the successor.529 The proposed rules would not be designed for use by a funding portal in
order to sell its registration, eliminate substantial liabilities, spin off personnel or facilitate the transfer of a ‘‘shell’’ organization that does not conduct a funding portal business. To require that there be a legitimate connection between the predecessor and the successor, the instructions to the proposed Form Funding Portal would limit the term ‘‘successor’’ to an entity that assumes or acquires substantially all of the assets and liabilities of the predecessor funding portal’s business. In addition, the proposed rule would not apply where the predecessor funding portal intends to continue to engage in funding portal activities.530 In certain circumstances, the proposed rule would allow the successor to file an amendment to the predecessor’s Form Funding Portal. Successions by amendment would be limited to those successions that result from a formal change in the structure or legal status of the funding portal but do not result in a change in control.531 Assuming that there is no change in control, succession by amendment would be available for changes in the form of organization, in legal status and in composition of a partnership. In all other successions, the successor would be able to operate under the registration of the predecessor for a limited period of time only if it files its own completed application for registration on Form Funding Portal within 30 days after such succession. Examples of the types of successions that would require this type of application filing would include, but not be limited to, acquisitions and consolidations. The proposed rules would require a funding portal to promptly file a withdrawal of registration on Form Funding Portal upon ceasing to operate as a funding portal.532 The withdrawal would be effective on the later of 30 days after receipt by the Commission, after the funding portal is no longer operational, within such longer period of time as to which the funding portal consents or within such period of time as to which the Commission, by order, may determine as necessary or appropriate in the public interest or for the protection of investors.533 This

534See proposed Rule 400(e) of Regulation Crowdfunding. 535We note that brokers are currently required to prominently disclose in any retail communications their name, or the name under which their broker￾dealer business is primarily conducted as disclosed on their registration form. See FINRA Rule 2210(d)(3). 536See CFIRA Letter 2. 537See proposed Rule 400(a) of Regulation Crowdfunding. delaying provision would provide time to evaluate whether a withdrawal is the result of a legitimate winding down of a funding portal’s business or whether there are additional factors to consider in connection with the funding portal’s withdrawal that are relevant to the protection of investors. Based on such information, we would determine whether any actions, including enforcement proceedings, should be taken against the withdrawing funding portal. The proposed rules 534 provide that each application for registration, amendment thereto, successor registration or withdrawal would be considered filed when a complete Form Funding Portal is submitted with the Commission or its designee. The proposed rules also require duplicate originals of the application to be filed with surveillance personnel designated by the registered national securities association of which the funding portal is a member. Under the approach to registration that we are proposing, and as described by the requirements of proposed Form Funding Portal (discussed below), a funding portal would be able to operate multiple Web site addresses under a single funding portal registration, provided the funding portal discloses on Form Funding Portal all the Web sites and names under which it does business. Allowing for multiple Web site addresses might allow a funding portal to customize each address to fit its specific needs, such as appealing to certain industries or investors while reducing regulatory costs. We recognize that permitting multiple Web site addresses by a single registrant could result in investors being confused about the identity of the registrant. We believe, however, that the potential for confusion is justified by the value of the additional flexibility afforded to intermediaries.535 One commenter requested that we implement a system similar to the BrokerCheck system operated by FINRA for registered funding portals.536 We are not proposing that the Commission create such a system at this time because, as discussed below, the information in a funding portal’s completed Form Funding Portal would be available for public viewing through the Commission’s Web site or other such electronic system, as determined by the Commission in the future, subject to the redaction of certain personally identifiable information, or other information with a significant potential for misuse, of the contact person(s) or other identified individuals of the funding portal. Request for Comment
189. Is the proposed method for
registration appropriate? Why or why not? Are there methods that would be less burdensome to potential funding portals while not impairing investor protection? If so, what are those methods?
190. Should we impose other
restrictions or prohibitions on affiliations of the funding portal, such as affiliation with a registered broker￾dealer or registered transfer agent? If so, what are they and why?
191. Should the Commission, as
proposed, permit a funding portal to have multiple intermediary Web sites under a single registration application? Why or why not? b. Form Funding Portal A funding portal seeking to register with the Commission would need to file a completed Form Funding Portal with the Commission.537 We propose to make a blank Form Funding Portal available through the Commission’s Web site or such other electronic database, as determined by the Commission in the future. To access the registration system and enter information on Form Funding Portal, a funding portal would have to first establish an account and obtain credentials (i.e., username and password). We propose that an applicant would need to fill out general user information fields, including name, address, phone number, email address, organization name and employer identification number, and user account information (i.e., username and password), and select and answer a security question. Once accepted by the registration system, the applicant would receive an email notification that the account has been established, and the applicant would be able to access and complete Form Funding Portal. We anticipate that applicants ordinarily would obtain access credentials the same day that they are requested. In order to complete Form Funding Portal, a funding portal would be required to check a box indicating the purpose for which the funding portal is filing the form:

• To register as a funding portal with
  the Commission, through an initial application;
• to amend any part of the funding
  portal’s most recent Form Funding Portal, including a successor registration; or
• to withdraw from registration as a
  funding portal with the Commission. If the funding portal is submitting an amendment or withdrawing from registration, it also would be necessary to provide the Commission file number assigned to the funding portal at the time of its initial application to register. This information would be used to cross-reference amendments and withdrawals to the original registration, thus allowing Form Funding Portal to be used for the initial application to register, amendments to registration and withdrawal from registration. We intend proposed Form Funding Portal to be a streamlined version of Form BD. We believe Form BD is an appropriate model for Form Funding Portal, because funding portals are limited purpose brokers that are conditionally exempt from registration as broker-dealers. There are certain questions on Form BD that we believe are not applicable to funding portals. For example, a funding portal is prohibited from holding or maintaining customer funds or securities; therefore, proposed Form Funding Portal, unlike Form BD, does not include any questions about holding customer funds and securities. Funding portals also are restricted in their activities in ways that broker-dealers are not; thus, proposed Form Funding Portal includes particular questions that address these differences. For example, because a funding portal is prohibited from holding and maintaining customer funds, proposed Form Funding Portal would request information about a funding portal’s escrow arrangements. As funding portals also are subject to certain compensation restrictions, Form Funding Portal would require a description of the funding portal’s compensation arrangements. Form Funding Portal seeks to strike a balance between efficiency in completing the form and requesting sufficient information from funding portals. The proposed form consists of eight sections, including items related to: identifying information, form of organization, successions, control persons, disclosure information, non￾securities related business, escrow, and compensation arrangements, and withdrawal. These items would require an applicant to provide certain basic

538This information would be used to determine whether to approve an application for registration, to decide whether to revoke registration, to place limitations on the applicant’s activities as a funding portal and to identify potential problem areas on which to focus during examinations. If an applicant or its associated person has a disciplinary history, then the applicant could be required to complete the appropriate Disclosure Reporting Page (‘‘DRP’’), either Criminal, Regulatory, Civil Judicial, Bankruptcy, Bond or Judgment. 539See Section II.D.1.c. below. 540See Section II.D.1.d. below. 541See execution statement of proposed Form Funding Portal. 542See id. 543See id. 544See the proposed Instructions to Form Funding Portal. 545A fidelity bond is a type of insurance that aims to protect its holder against certain types of losses, including but not limited to those caused by the malfeasance of the holder’s officers and employees, and the effect of such losses on the holder’s capital. See Release No. 34–63961 (Feb. 24, 2011) [76 FR 11542 (Mar. 2, 2011)]. 546See proposed Rule 400(f) of Regulation Crowdfunding. identifying and contact information concerning its business; list its direct owners and executives; identify persons that directly or indirectly control the funding portal, control the management or policies of the funding portal and persons the funding portal controls; and supply information about its litigation and disciplinary history and the litigation and disciplinary history of its associated persons.538 In addition, an applicant would be required to describe any non-securities related business activities and supply information about its escrow arrangements, compensation arrangements with issuers and fidelity bond.539 Upon a filing to withdraw from registration, a funding portal would be required to provide certain books and records information. In addition, as discussed in detail below,540 applicants that are incorporated in or organized under the laws of a jurisdiction outside of the United States or its territories, or whose principal place of business is not in the United States or its territories, would be required to complete Schedule C to Form Funding Portal, which requires information about the applicant’s arrangements to have an agent for service of process in the United States, as well as an opinion of counsel addressing the ability of the applicant to provide the Commission and the national securities association of which it is a member with prompt access to its books and records and to submit to onsite inspection and examination by the Commission and the national securities association. We propose that a person duly authorized to bind the funding portal be required to sign Form Funding Portal in order to execute the documents.541 A person executing Form Funding Portal and Schedule C (if applicable) would be required to represent that the person has executed the form on behalf of, and is duly authorized to bind, the
funding portal; the information and statements contained in the form and other information filed are current, true and complete; and if the person is filing an amendment, to the extent that any information previously submitted is not amended, such information is currently accurate and complete.542 The funding portal also would be required to consent that service of any civil action brought by, or notice of any proceeding before, the Commission or any national securities association of which it is a member, in connection with the funding portal’s investment-related business, may be given by registered or certified mail to the funding portal’s contact person at the main address, or mailing address, on the form.543 We believe that this information is important for our oversight of funding portals, including, among other things, assessing a funding portal’s application and performing examinations of funding portals, and that it is pertinent to investors and issuers. We propose to make all current Forms Funding Portal, including amendments and registration withdrawal requests, immediately accessible and searchable by the public, with the exception of certain personally identifiable information or other information with significant potential for misuse (including the contact employee’s direct phone number and email address and any IRS Employer Identification Number, social security number, date of birth, or any other similar information).544 Making these documents publicly available and searchable would enhance transparency of the registration process and the funding portal industry as it develops, while the limited redactions would appropriately protect the privacy of the individuals involved. Request for Comment
192. What type of web-based
registration should the Commission use for accessing Form Funding Portal? Would a system like EDGAR be appropriate, or would a different type of system be preferable? Why?
193. Should we consider alternatives
to creating a new form for funding portal registration? Should we amend the existing Form BD to provide for funding portal registration? Why or why not? Which questions on Form BD would be relevant to funding portals and why? Are there other questions we should include for funding portals that are not on the proposed Form Funding Portal or in existing Form BD? If so, which questions and why?
194. Are there types of information
(other than personally identifiable information) required by proposed Form Funding Portal that should not be made readily accessible to the public? If so, what types of information and why?
195. Should we require the
identifying and contact information requested on Form Funding Portal, or should it be modified in any way? Should additional information be required? If so, which information and why?
196. Are the proposed disclosures in
Form Funding Portal unduly burdensome? Are there certain requirements that should be eliminated or modified? Which requirements and why? Would such changes be consistent with investor protection?
197. Should proposed Form Funding
Portal be modified to request from funding portals a narrative description of their compliance programs and due diligence procedures with respect to issues? Would some other form of reporting be more useful? Why or why not?
198. Are the proposed representations
required of a person who executes Form Funding Portal appropriate? Should the Commission require attestations? If so, from whom?
199. Should we require any other
information from a funding portal that is withdrawing from registration?
c. Fidelity Bond
The proposed rules would require, as a condition of registration, that a funding portal have in place, and thereafter maintain for the duration of such registration, a fidelity bond 545 that: (1) Has a minimum coverage of $100,000; (2) covers any associated person of the funding portal unless otherwise excepted in the rules set forth by FINRA or any other registered national securities association of which it is a member; and (3) meets any other applicable requirements, as set forth by FINRA or any other registered national securities association of which it is a member.546 Although not mandated by the statute, we believe that a fidelity bond requirement would help insure against the loss of investor funds that might occur if, for example, a funding portal were to violate the prohibition set forth in Section 304(b) of the JOBS Act on holding, managing, possessing or otherwise handling investor funds or securities. This is a meaningful

547See the Securities Investor Protection Act of 1970, Pub. L. No. 91–598 (1970). 548Membership in SIPC applies only to persons registered as brokers or dealers under Section 15(b) of the Exchange Act. See 15 U.S.C. 78ccc(a)(2). 549See FINRA Rule 4360. Introducing brokers, like funding portals, do not hold customer funds and securities. Introducing brokers are required to maintain a minimum bond of $100,000 under current SRO rules, and we are proposing the same minimum amount for funding portals. 550The exemption under Section 4(a)(6) is not available for a transaction involving the offer or sale of securities by an issuer that is not organized under and subject to the laws of a State or territory of the United States or the District of Columbia. See
Section 4A(f), discussed in Section II.A.3 above.
551See proposed Rule 400(g)(1) of Regulation Crowdfunding. 552See proposed Rule 400(g) of Regulation Crowdfunding. Exchange Act Section 3(h)(1)(C) permits us to impose, as part of our authority to exempt funding portals from broker registration, ‘‘such other requirements under [the Exchange Act] as the Commission determines appropriate.’’ 553See, e.g., Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants, Release No. 34–65543 (Oct. 12, 2011) [76 FR 65784 (Oct. 24, 2011)], at 65799–65801. See also Cross-Border Security-Based Swap Activities; Re-Proposal of Regulation SBSR and Certain Rules and Forms Relating to the Registration of Security￾Based Swap Dealers and Major Security-Based Swap Participants, Release No. 34–69490 (May 1,
2013) [78 FR 30968 (May 23, 2013)].
protection because funding portals would not be members of the Securities Investor Protection Corporation (‘‘SIPC’’). If a firm is a SIPC member and goes out of business, then the cash and securities held for each customer by that firm are generally protected up to $500,000, including a $250,000 limit for cash.547 Because funding portals are non-SIPC members,548 funding portal customers would not receive this SIPC protection. Furthermore, given that we are not proposing to require, pursuant to our discretionary authority, that funding portals be subject to minimum net capital requirements, a fidelity bond would provide a single layer of protection, in the event of such losses. While the proposed rule imposes this requirement as a condition to registration, we anticipate that, like the fidelity bond requirement registered broker-dealers are currently subject to pursuant to SRO rules, specific requirements of the fidelity bond for funding portals would be set forth in rules of FINRA or any other registered national securities association. In recognition of the limits on the amounts investors may invest, and the amounts issuers may raise, through crowdfunding, as provided in Section 4(a)(6), we propose to require that funding portals’ fidelity bonds have an amount of coverage that is equivalent to the minimum amount of coverage registered broker-dealers are required to have under FINRA Rule 4360, which is $100,000.549 Furthermore, we believe that fidelity bond coverage would be most effective if it covers actions by not only the funding portal entity, but also all of its associated persons. Request for Comment
200. Is it appropriate for us to require
a funding portal to have a fidelity bond? Why or why not?
201. With respect to the fidelity bond
requirement, is the proposed coverage of $100,000 appropriate for funding portals? If not, what other amount or formula for calculating the required amount would be more appropriate and why?
202. Is it appropriate to require the
fidelity bond to cover associated persons of the funding portal? Why or why not?
203. Are there other specific terms of
a fidelity bond that we should consider requiring? If so, what terms and why?
204. Apart from requiring a funding
portal to have a fidelity bond, is there some other requirement that could be imposed on funding portals, like insurance or something similar to SIPC, which would further protect investors? If so, what type of requirement and why? d. Requirements for Nonresident Funding Portals Although there is no statutory requirement that funding portals be domestic entities, we are mindful of our ability to effectively oversee this new category of registrants—as well as more generally the development of the new crowdfunding market and role of intermediaries in that market—given the greater challenges entailed in supervising, examining, and enforcing the requirements that would be applicable to activities of intermediaries based outside the United States.550 At the same time, we recognize that the use of funding portals located outside the United States could provide more choices for U.S. issuers seeking to engage an intermediary to facilitate a crowdfunding offering, and potentially expand those issuers’ access to investors located abroad. In seeking to strike an appropriate balance among these considerations, we propose not to permit nonresident entities to register as funding portals unless they comply with certain conditions designed to provide the Commission and FINRA (or any other registered national securities association) with appropriate tools for supervising such entities. Under the proposed rules, registration pursuant to Rule 400 of Regulation Crowdfunding by a nonresident funding portal (a funding portal incorporated in or organized under the laws of any jurisdiction outside of the United States or its territories, or having its principal place of business outside the United States or its territories) 551 would be first conditioned upon there being an information sharing arrangement in place between the Commission and the competent regulator in the jurisdiction under the laws of which the nonresident funding portal is organized or where it has its principal place of business that is applicable to the nonresident funding portal. The proposed rules would further require a nonresident funding portal to (1) obtain a written consent and power of attorney appointing an agent for service of process in the United States (other than the Commission or a Commission member, official or employee), upon whom may be served any process, pleadings, or other papers in any action; (2) furnish the Commission with the name and address of its agent for services of process on Schedule C of Form Funding Portal; (3) certify that it can, as a matter of law, provide the Commission and any national securities association of which it is a member with prompt access to its books and records and can, as a matter of law, submit to onsite inspection and examination by the Commission; and (4) provide the Commission with an opinion of counsel and certify on
Schedule C on Form Funding Portal that
the firm can, as a matter of law, provide the Commission and such national securities association with prompt access to its books and records and can, as a matter of law, submit to onsite inspection and examination by the Commission and the national securities association.552 In general, the requirements for nonresident funding portals that we are proposing are consistent with those we have proposed for other nonresident entities subject to our regulation.553 These requirements aim to ensure that funding portals that are not based in the United States, or that are subject to laws other than those of the United States, would nevertheless be accessible to us and other relevant regulators for purposes of accessing the books and records of, conducting examinations and inspections of, and enforcing U.S. laws and regulations with respect to, these entities. Requirements for a nonresident funding portal to obtain an agent for service of process in the United States, and to furnish the Commission with the name and address of this agent, are important to facilitate enforcement of the federal securities laws and the rules thereunder by the Commission and

554See Exchange Act Section 3(h)(1)(A). 555See comment letter from Sarah A. Miller, Chief Executive Officer, Institute of International Bankers, dated August 21, 2013, available at https://www.sec.gov.edgekey.net/comments/s7-34- 10/s73410.shtml. See also comment letters from Patrick Pearson, European Commission, dated August 21, 2013, and Kenneth E Bentsen, Jr., Executive Vice President, Public Policy and Advocacy, Securities Industry and Financial Markets Association, dated December 16, 2011, available at https://www.sec.gov.edgekey.net/ comments/s7-34-10/s73410.shtml; comment letter from Carlos Tavares, Vice-Chairman, European Securities and Markets Authority, dated January 17, 2011, available at http://www.sec.gov/comments/ s7-35-10/s73510-19.pdf. 556See proposed Rule 401(a) of Regulation Crowdfunding. 557See Exchange Act Section 3(a)(4)(A) [15 U.S.C. 78c(a)(4)(A)] (defining ‘‘broker’’ as ‘‘any person engaged in the business of effecting transactions in securities for the account of others’’). An entity acting as an intermediary in the offer and sale of securities pursuant to Section 4(a)(6), as contemplated in Title III of the JOBS Act, would not come within the meaning of ‘‘dealer,’’ which is defined in Exchange Act Section 3(a)(5)(A) (15 U.S.C. 78c(a)(4)(A)), because it would not be engaging in the business of buying and selling securities for its own account. See also Exchange Act Section 15(a) [15 U.S.C. 15o(a)] and proposed Rule 300(b) of Regulation Crowdfunding. others (e.g., the U.S. Department of Justice and any other agency or entity with law enforcement authority). The proposed rules also would require a registered nonresident funding portal to promptly appoint a successor agent if it discharges its identified agent for service of process or if its agent for service of process is unwilling or unable to accept service on its behalf. A registered funding portal must promptly amend Schedule C to its Form Funding Portal if its agent, or the agent’s name or address, changes. Finally, the proposed rules would require the registered nonresident funding portal to maintain, as part of its books and records, the agreement with the agent for service of process for at least three years after termination of the agreement. The proposed rules would require that each nonresident funding portal provide an opinion of counsel and certify, as a matter of law, that it can provide the Commission, and the national securities association of which it is a member, with prompt access to its books and records and submit to onsite inspections and examinations. We believe that this proposed certification and supporting opinion of counsel are important to confirm that each nonresident funding portal is in the position to provide the Commission and the national securities association with information that is necessary for us and the national securities association to effectively fulfill our regulatory oversight responsibilities.554 Commenters have previously
brought to our attention that it may conflict with the laws of certain jurisdictions to provide such an opinion.555 Failure to make this certification or provide an opinion of counsel would provide a basis to deny an application for registration. The requirement for an information sharing agreement is designed to provide the Commission greater assurance that it will be able to obtain the information about a nonresident funding portal necessary for the Commission’s oversight of the nonresident funding portal. The home country regulator may possess information concerning, for example, the funding portal’s affiliations, contractual relationships with issuers, and the nature and extent of measures taken to protect investors. In this context, particularly in the event that evidence arises of potential fraudulent or other unlawful activity by a nonresident funding portal, the ability to obtain information and secure the cooperation of the home country regulator according to established practices and protocols should help to address the increased challenges that may arise from oversight of entities located outside the United States. A registered nonresident funding portal also would be required to re￾certify, on Schedule C to Form Funding Portal, within 90 days after any relevant changes in its legal or regulatory framework, and provide a revised opinion of counsel confirming that, as a matter of law, the entity will continue to meet its obligations to provide the Commission and the national securities association with prompt access to its books and records and to be subject to inspection and examination. Failure to make this certification or provide an opinion of counsel may be a basis for the Commission to revoke the nonresident funding portal’s registration. Request for Comment
205. Is the term nonresident funding
portal defined appropriately? If not, how should it be modified? Please explain.
206. Should the Commission impose
additional or different conditions for nonresident funding portals than those proposed? If so, what conditions, and why? Should any be eliminated? Why or why not? What effect might such conditions have on the development of the industry and the market, and on issuers and investors? Please explain.
207. If, as a matter of law, it would be
impossible or impractical for a nonresident funding portal to obtain the required opinion of counsel, what other actions or requirements could address our concern that we and the national securities association would be able to have direct access to books and records and adequately examine and inspect the funding portal?
208. Should any of the proposed
requirements be more specific? For example, should only certain types of entities (such as law firms) be allowed to act as U.S. agents for service of process? Please explain.
209. Should a nonresident funding
portal be required to appoint a U.S. agent for purposes of all potential legal proceedings, including those from nongovernmental entities? Why or why not?
210. Should we require the opinion of
counsel if it might contradict the laws of a jurisdiction where an intermediary is incorporated? Why or why not? If not, should we impose an alternative requirement?
211. Should we specify that the
opinion of counsel contain any additional information? For instance, should we require the opinion to reference the applicable local law or, in the case of an amendment, the manner in which the local law was amended? Please explain.
2. Exemption From Broker-Dealer
Registration
Exchange Act Section 3(h)(1) directs the Commission to exempt, conditionally or unconditionally, a registered funding portal from the requirement to register as a broker or dealer under Exchange Act Section 15(a), provided that the funding portal:
(1) Remains subject to the examination, enforcement and other rulemaking authority of the Commission; (2) is a member of a registered national securities association; and (3) is subject to other requirements that the Commission determines appropriate. The proposed rules would exempt a registered funding portal from the broker registration requirements of Exchange Act Section 15(a)(1), in connection with its activities as a funding portal.556 But for the exemption from registration Congress directed, a funding portal would be required to register as a broker under the Exchange Act.557 The obligations imposed under the JOBS Act on an entity acting as an intermediary in a crowdfunding transaction would bring that entity within the definition of ‘‘broker’’ under Exchange Act Section 3(a)(4). A funding portal would be ‘‘effecting transactions in securities for the account of others’’ by, among other things, ensuring that investors comply with the conditions of Securities Act

558At the same time, there are statutory restrictions on the scope of services that a funding portal could provide. Among other things, a funding portal could act as an intermediary only in transactions involving the offer or sale of securities pursuant to Securities Act Section 4(a)(6). Further, a funding portal, by definition, could not offer investment advice or recommendations; solicit purchases, sales, or offers to buy the securities offered or displayed on its Web site or portal; compensate persons for such solicitation or based on the sale of securities displayed or referenced on its Web site or portal; or hold manage, possess or otherwise handle investor funds or securities. See generally Exchange Act Section 3(a)(80). 559See Exchange Act Section 3(h)(1)(C). See also Securities Act Section 20 [15 U.S.C. 77t] and Exchange Act Sections 21 and 21C [15 U.S.C. 78u and 78u–3]. In addition, we highlight that Exchange Act Sections 15(b)(4) and 15(b)(6) (15 U.S.C. 78o(b)(4) and 78o(b)(6)) apply to brokers (including funding portals) regardless of whether or not they are registered with the Commission as brokers. Exchange Act Section 15(b)(4) authorizes the Commission to bring administrative proceedings against a broker when the broker violates the federal securities laws (and for other misconduct) and provides for the imposition of sanctions, up to and including the revocation of a broker’s registration. Exchange Act Section 15(b)(6) provides similar enforcement authority against the persons associated with a broker, including barring persons from associating with any Commission registrant. See Section II.D.3 below for further discussion, in response to commenters’ concerns, about the scope of permissible activities in which funding portals may engage under the safe harbor of proposed Rule 402. 560See proposed Rule 403 of Regulation Crowdfunding. See also discussion in Section II.D.4 below. 561See proposed Rule 404 of Regulation Crowdfunding. See also discussion in Section II.D.5 below. 562See 31 CFR 1010.100(h) and 1023.100(b) (defining broker or dealer for purposes of the applicability of AML requirements). See Currency and Foreign Transactions Reporting Act of 1970 (commonly referred to as the Bank Secrecy Act (‘‘BSA’’)) [12. U.S.C. 1829b, 12 U.S.C. 1951–1959, 31 U.S.C. 5311–5330]. See also proposed Rule 403(b) of Regulation Crowdfunding and discussion in Section II.D.4 below. Securities Act Section 4A(a)(12) requires intermediaries to comply with requirements as the Commission may, by rule, prescribe for the protection of investors and in the public interest. As discussed in Sections II.C.1 and II.D.2 above, a funding portal is a broker that, in the absence of the exemption from the requirement to register as a broker or dealer provided for under the JOBS Act in Exchange Act Section 3(h)(1), would otherwise be required to register as a broker under
Section 15(a) (15 U.S.C. 78o) of the Exchange Act,
and by being so registered, would be subject to the full range of BSA obligations applicable to registered broker-dealers. As discussed further in
Section II.D.4.b below, we believe such obligations
also should be imposed on funding portals. 563See, e.g., NCA Letter; NSBA Letter; CFIRA Letter 2. 564See, e.g., CFIRA Letter 2; NCA Letter; Wright Letter 1; RocketHub Letter 1; Grow VC Letter. 565See CFIRA Letter 2. 566See id. 567See NCA Letter; NSBA Letter. 568See id. 569See id.
Section 4A(a)(4) and (8), making the
securities available for purchase through the funding portal, and ensuring the proper transfer of funds and securities as required by Securities Act Section 4A(a)(7).558 In addition, a funding portal’s receipt of compensation linked to the successful completion of the offering also would be indicative of acting as a broker in connection with these transactions. Pursuant to Exchange Act Section 3(h)(1), as stated above, we are proposing rules that would exempt an intermediary that is registered as a funding portal from the requirement to register as a broker-dealer under Exchange Act 15(a)(1). Consistent with the JOBS Act, the funding portal would remain subject to the full range of our examination and enforcement authority.559 In this regard, the proposed rules would require that a funding portal permit the examination and inspection of all of its business and business operations that relate to its activities as a funding portal, such as its premises, systems, platforms and records, by representatives of the Commission, and of the national securities association of which it is a member.560 The proposed rules also would impose certain recordkeeping requirements.561 The proposed rules would provide that, notwithstanding this exemption from broker registration, for purposes of
Chapter X of Title 31 of the Code of
Federal Regulations, a funding portal would be deemed to be ‘‘required to be registered’’ as a broker with the Commission under the Exchange Act, thereby requiring funding portals to comply with Chapter X, including certain anti-money laundering (‘‘AML’’) provisions thereunder.562 Request for Comment
212. Is the proposed exemption for
funding portals from broker registration appropriate? Why or why not?
213. Should the exemption be
conditioned on the funding portal remaining in compliance with Subpart D of the proposed rules? Why or why not?
214. Is it appropriate to propose to
require funding portals to comply with the same requirements for purposes of
Chapter X of Title 31 of the Code of
Federal Regulations as imposed on a person required to be registered as a broker or a dealer? Why or why not?
215. Should the proposed exemption
from broker registration be conditioned upon a funding portal’s compliance with applicable Subpart C and D rules of proposed Regulation Crowdfunding? Why or why not? Should the failure to comply with certain requirements cause a funding portal to lose its exemption? If so, which requirements and why? Under what circumstances should the Commission consider revoking the exemption of a funding portal that fails to comply with these requirements?
3. Safe Harbor for Certain Activities
Exchange Act Section 3(a)(80) provides that a funding portal may not offer investment advice or make recommendations; solicit purchases, sales or offers to buy the securities offered or displayed on its platform or portal; compensate employees, agents or other persons for such solicitation or based on the sale of securities displayed or referenced on its platform or portal; hold, manage, possess or otherwise handle investor funds or securities; or engage in such other activities as the Commission, by rule, determines appropriate. We received a number of comments concerning the scope and definition of permissible activities for a funding portal. A number of commenters sought guidance on services they might be permitted to provide consistent with the prohibition on offering investment advice or recommendations.563 We also received comments seeking clarification about the prohibitions on funding portals soliciting investors and handling funds and securities.564 One commenter asked us to clarify what activities would constitute prohibited investment advice and suggested that the Commission should establish ‘‘bright lines’’ that would make it clear how a funding portal can avoid being viewed as giving prohibited investment advice.565 This commenter and others provided numerous examples of potential funding portal activities, including:

• Advising issuers on the structure and
  contents of their offerings; 566
• providing access to the portal’s
  platform to certain issuers and rejecting or removing others, based on criteria such as the ‘‘type’’ or ‘‘market characteristics’’ of the offerings (e.g., film production securities, women- or minority-owned businesses or businesses in specific geographical areas); 567
• removing an offering before the end of
  the offering period for lack of investor interest; 568
• removing an issuer for failing to
  provide documents responsive to the funding portal’s due diligence or qualification standards, including standards other than those established by our rules,569 or the portal’s belief

570See CFIRA Letter 3. 571See RocketHub Letter 1; Wright Letter 1. 572See id. 573See CFIRA Letter 3. 574A ‘‘negotiation space’’ would provide some ability for investors to set or influence the price of the securities, which would not necessarily depend on a specific valuation of the securities. See Pearfunds Letter. 575See RocketHub Letter 1; Wright Letter 2. 576See CFIRA Letter 3; Applied Dynamite Letter; Grow VC Letter. 577See Applied Dynamite Letter. 578See Crowdfunding Offerings Ltd. Letter 2. 579See NCA Letter. 580See Cera Technology Letter. 581See Crowdfunding Offerings Ltd. Letter 2; NSBA Letter. 582See Crowdfunding Offerings Ltd. Letter 4. 583See RocketHub Letter 1 (further stating that the intermediary should be permitted to hold investor funds in an escrow account that is segregated from the operating funds of the intermediary and that withdrawals from the account only be permitted for: ‘‘payments to offerings that have successfully closed (having reached or exceeded their funding goals); payments to investors requesting refunds of uncommitted funds; or payment of established intermediary fees’’). 584See Grow VC Letter. 585See proposed Rule 402 of Regulation Crowdfunding. The term ‘‘investment advice’’ is not defined in the crowdfunding provisions of the JOBS Act or otherwise in the federal securities laws, and we do not include a definition of that term in our proposal. In the context of interpreting the term ‘‘investment adviser,’’ the determination of whether a particular communication rises to the level of investment advice depends on the facts and circumstances and is construed broadly. To the extent a funding portal limits its securities activities to those permitted by the proposed rules, including the safe harbor, we preliminarily believe that it would not come within the meaning of the term investment adviser under the Advisers Act. If it conducts other activities, such as advising an issuer concerning the investment of proceeds in securities, however, it would need to consider whether it comes within the meaning of that term under the Advisers Act. See Advisers Act Section 202(a)(11) [15 U.S.C. 80b–2(a)(11)]. See also 2012 SEC Government-Business Forum, note 29 (stating that there is a need for safe harbors that explicitly permit certain activities that may otherwise be seen as indicia of broker-dealer status or activities that are prohibited or otherwise subject to separate regulation). 586See proposed Rule 402(a) of Regulation Crowdfunding. 587See Exchange Act Section 3(a)(80). See also 158 Cong. Rec. S5474–03 (daily ed. July 26, 2012) (statement of Sen. Jeff Merkley) (‘‘The Crowdfund Act is designed so that funding portals will be subject to fewer regulatory requirements than broker-dealers because they will do fewer things than broker-dealers. Among other limits, the law prohibits funding portals from engaging in solicitation, making recommendations, and providing investment advice. Relative passivity and neutrality,
especially with respect to the investing public, are touchstones of the funding portal streamlined treatment.’’). 588See proposed Rule 402 of Regulation Crowdfunding. 589See, e.g., proposed Rules 303(d) and 303(e) of Regulation Crowdfunding. that an offering or the issuer may be fraudulent or abusive; 570

• highlighting, or otherwise making
  more prominent, the offering(s) of one or more issuers; 571
• organizing issuers listed on the
  funding portal’s platform into groups based on the funding portal’s view of the riskiness of the investment; 572
• providing information management
  tools (i.e., search functions and automatic notification mechanisms) on the funding portal’s platform; 573
• providing a ‘‘valuation framework’’
  that could guide investors in determining a fair valuation for securities listed on the funding portal’s platform, while also creating a ‘‘negotiation space’’ for an issuer and its potential investors; 574 and
• hosting on the funding portal’s
  platform:
  Æ third-party market and news updates; 575 Æ third-party opinions (including those of investors) on message boards and other information exchanges moderated by the funding portal; 576 or Æ judgments about issuers made by a funding portal or its vendors or partners.577 With regard to the prohibition on solicitation, one commenter noted that the mere act of having a web platform available to the public on which issuers can list their offerings could be viewed as impermissible solicitation.578 Another commenter asked whether funding portals would be permitted to compensate employees and agents to solicit issuers by commission, referral fee or otherwise.579 Another commenter asked that we preserve the ability of funding portals to pay for search listings or advertisements in online social networks.580 Commenters requested that we identify the kinds of third parties that could hold, manage, possess or otherwise handle investor funds and securities in connection with an offering made in reliance on Section 4(a)(6).581 One commenter stated that a fiduciary would likely hold the funds for disposition as instructed by the funding portal and asked whether this instruction would constitute an impermissible handling of the funds.582 Another commenter stated that an intermediary should be authorized by the issuer and investors to operate as an escrow agent to facilitate transactions.583 One commenter asserted that funding portals need the ability to temporarily hold customer funds to properly clear and settle a securities transaction.584 The commenter further contended that, to ensure issuers are not overwhelmed with thousands of new shareholders, intermediaries, including funding portals, should be able to act as nominees of the investors who are the beneficial owners of the securities. In light of these questions and comments, we are proposing to provide a non-exclusive, conditional safe harbor for funding portals that engage in certain limited activities.585 Failure of a funding portal to meet the conditions of this non-exclusive safe harbor would not create a presumption that the funding portal is in violation of the statutory prohibitions of Exchange Act
  Section 3(a)(80) or the rules in proposed
  Regulation Crowdfunding.586 In proposing the safe harbor, we are mindful that, while Section 304 of the JOBS Act directs us to exempt a registered funding portal, conditionally or unconditionally, from broker-dealer registration and associated regulatory requirements, the statutory provisions also make clear that the activities in which a funding portal may engage are far more limited than those of a registered broker-dealer.587 At the same time, we recognize that the statutory prohibitions could be read so broadly as to limit the utility of funding portals. The proposed rule seeks to strike an appropriate balance by identifying certain limited activities in which a funding portal may engage, consistent with the statutory prohibitions.588 These activities relate to:
• Limiting offerings made on or
  through the funding portal’s platform based on eligibility requirements;
• highlighting and displaying
  offerings on the platform;
• providing communication channels
  for potential investors and issuers;
• providing search functions on the
  platform;
• advising issuers on the structure or
  content of offerings;
• compensating others for referring
  persons to the funding portal and for other services; and
• advertising the funding portal’s
  existence.
  In addition, the proposed rules would clarify that, consistent with other provisions of Regulation Crowdfunding,589 funding portals may deny access to issuers in certain circumstances, accept investment commitments and direct the transmission of funds, in connection with offerings conducted on their platforms. D Limiting Offerings We anticipate that some funding portals may wish to limit, to some extent, the scope of their businesses by, for example, specializing in offerings by issuers in certain industries or geographic locations. In some

590See proposed Rule 402(b)(1) of Regulation Crowdfunding. 591See discussion in Section II.C.3 above. 592See, e.g., CrowdFund Connect Letter (stating that rural communities could build new local based co-operatives similar to the electric and telephone cooperatives for new technologies). 593Of course, a funding portal would be required to deny access to the issuer if the funding portal has a reasonable basis for believing that issuer is subject to a disqualification or if the funding portal believes that the issuer or the offering presents the potential for fraud or otherwise raises concerns regarding investor protection. See proposed Rule 301(c) of Regulation Crowdfunding. 594See CFIRA Letter 3. 595See proposed Rule 301 of Regulation Crowdfunding. 596Consistent with proposed Rule 301, proposed Rule 402(b)(10) of Regulation Crowdfunding would clarify that a funding portal may deny access to an issuer if the funding portal believes that the issuer or its offering has potential for fraud or otherwise raises concerns regarding investor protection. 597See proposed Rule 402(b)(2) of Regulation Crowdfunding. 598See Howe, note 2. 599See proposed Rule 402(b)(2)(iii) of Regulation Crowdfunding. 600See RocketHub Letter 1; Wright Letter 1. circumstances, these limitations could be viewed as providing investment advice. To accommodate reasonable limitations, the proposed safe harbor would permit a funding portal to apply objective criteria to limit the offerings on its platform, without being deemed to be providing investment advice.590 Those criteria would be required to be reasonably designed to result in a broad selection of issuers offering securities through the funding portal’s platform and be applied consistently to all potential issuers and offerings, so as not to recommend or implicitly endorse one issuer or offering over others. The criteria also would be required to be clearly displayed on the funding portal’s platform. The requirements that the objective criteria be reasonably designed to result in a broad selection of issuers, and be applied consistently, are intended to ensure that the funding portal does not provide impermissible investment advice by, for example, applying criteria that would so limit the number of issuers that the funding portal could be viewed as providing an implicit endorsement or recommendation of those issuers’ offerings. An issuer that meets these criteria, and is not otherwise disqualified, would, subject to the funding portal’s measures to reduce the risk of fraud under proposed Rule 301,591 be eligible to list its offering on the funding portal’s platform. One criterion could include the type of security being offered (such as common stock, preferred stock or debt securities). We believe that this criterion would be appropriate because potential investors may be interested in certain types of securities as a consideration separate from the identity of issuers. Other criteria also could include the geographic location
of the issuer or the industry or business segment of the issuer. We believe that these criteria would be appropriate because a funding portal may wish to specialize and focus its efforts on facilitating offerings in particular areas or industries.592 The proposed rule would require funding portals to disclose to investors the criteria they use to limit the offerings available on their platforms. This should help investors better appreciate any niche focus of a funding portal and the scope of the offerings available on the funding portal’s platform. In addition, we recognize that a funding portal may seek to limit the number of issuers or offerings on its platform at any given time, including for resource reasons. The application of the objective criteria could, in practice, result in the number of issuers or offerings displayed on the platform being very small, such as, for example, in the period soon after a funding portal begins operations. Nevertheless, we would not consider the funding portal to be providing investment advice if the objective criteria are designed to result in a broad selection of issuers. To qualify for the safe harbor, a funding portal may not use criteria based on an assessment of the merits or the shortcomings of a particular issuer or offering. In particular, a funding portal may not deny access to an issuer based on the advisability of investing in the issuer or its offering.593 As noted above, one commenter stated that the prohibition on investment advice could potentially preclude a funding portal from denying access to a fraudulent offering or issuer.594 This would place investors at unnecessary risk and would be contrary to the funding portal’s obligation under the proposed rules to deny access to its platform if it believes that the issuer or its offering presents potential for fraud or otherwise raises concerns regarding investor protection.595 Thus, as described above, a funding portal must deny access if it believes that the issuer or its offering has potential for fraud or otherwise raises concerns regarding investor protection.596 D Highlighting Issuers and Offerings Under the proposed rules, a funding portal may highlight particular offerings of securities made in reliance on Section 4(a)(6) on its platform based on objective criteria that may include: the type of securities being offered (e.g., common stock, preferred stock or debt securities); the geographic location of the issuer; the industry or business segment of the issuer; the number or amount of investment commitments made; and the progress in meeting the target offering amount or, if applicable, the maximum offering amount, and minimum or maximum investment amount.597 A potential investor, for example, may have a strong interest in supporting a small issuer that is within the potential investor’s geographic vicinity. Other potential investors may be interested in offerings that are about to close soon, that have particular maximum investment amounts
or that have generated significant interest from users of the funding portal’s platform. Some investors may only be interested in offerings in which a significant percentage of the target amount has been committed.598 We believe that the listed criteria are sufficiently objective, so as to reduce the risk of a funding portal applying them to advance a particular bias or subjective assessment of the issuers or offerings. Consistent with the prohibition on investment advice and recommendations, the criteria must be reasonably designed to highlight a broad selection of issuers, so as not to recommend or implicitly endorse one issuer or offering over another, and must be applied consistently to all potential issuers and offerings. The selection criteria may not be based on an assessment of the merits of a particular issuer or offering and must be clearly displayed on the funding portal’s platform, to permit investors to comprehend on what basis certain issuers are being highlighted, and, thereby, to help prevent them from misconstruing the highlighting as a recommendation or implicit endorsement of any issuer or offering. The funding portal may not highlight an issuer or offering based on the advisability of investing in the issuer or offering. To help prevent conflicts of interest and incentives for funding portals to favor certain issuers over others, the proposed rules would prohibit a funding portal from receiving any special or additional compensation for highlighting (or offering to highlight) one or more issuers or offerings on its platform.599 Some commenters sought clarification whether funding portals could distinguish offerings based on riskiness.600 We are not proposing a safe harbor for this type of distinction at this time, because we preliminarily believe that an assessment of risk necessarily

601See proposed Rule 402(b)(3) Regulation Crowdfunding. See also 158 Cong. Rec. 2231 (daily ed. Mar. 29, 2012) (statement of Sen. Scott Brown) (‘‘Funding portals should be allowed to organize and sort information based on certain criteria. This will make it easier for individuals to find the types of companies in which they can potentially invest. This type of capability—commonly referred to as curation—should not constitute investment advice.’’). 602See proposed Rule 402(b)(3) of Regulation Crowdfunding. 603See proposed Rule 402(b)(2)(ii) of Regulation Crowdfunding. 604See CFIRA Letter 3. 605See proposed Rule 402(b)(4) of Regulation Crowdfunding. 606See discussion in Section II.C.5.c above and proposed Rule 303(c)(2) of Regulation Crowdfunding. 607See, e.g., Bradford, note 1. See also Howe, note 2. 608See 158 Cong. Rec. S2231 (daily ed. Mar. 29,
2012) (statement of Sen. Scott Brown) (‘‘In addition
to facilitating communication between issuers and investors, intermediaries should allow fellow investors to endorse or provide feedback about issuers and offerings, provided that these investors are not employees of the intermediary. Investors’ credentials should be included with their comments to aid the collective wisdom of the crowd.’’) See also discussion in Section II.C.5.c above. 609See Pearfunds Letter; CFIRA Letter 3. 610See proposed Rule 402(b)(5) of Regulation Crowdfunding. 611Compare Registration of Municipal Advisors, Release No. 34–63576 (Dec. 10, 2010) [76 FR 824 (Jan. 6, 2011)] (noting that Commission staff has taken the position that financial advisors that limit their advisory activities to advising municipal issuers as to the structuring of their financings, rather than providing advice for compensation regarding the investment of assets, may not need to register as investment advisers). 612See, e.g., 158 Cong. Rec. S2231 (daily ed. Mar. 29, 2012) (statement of Sen. Scott Brown) (‘‘Similarly, funding portals should be allowed to engage in due diligence services. This would include providing templates and forms, which will enable issuers to comply with the underlying statute. In crafting this law, it was our intent to allow funding portals to provide such services.’’); Continued involves the exercise of judgment indicative of the giving of investment advice. D Providing Search Functions The proposed rules would permit a funding portal to provide, on its platform, search functions or other tools that users could use to search, sort or categorize the offerings available on the funding portal’s platform according to objective criteria.601 Search functions could help potential investors to more efficiently search for offerings that focus on a specific industry, funding goal or other criteria. Under the proposed rules, a funding portal also would be able to categorize offerings into general subject areas, so that a potential investor could readily find those offerings on the funding portal’s platform. The proposed rules would also permit more granular tools that, for example, could provide a potential investor the ability to sort offerings based on a combination of different criteria, such as by the percentage of the target offering amount that has been met, geographic proximity to the investor and number of days remaining before an offering is to close.602 The objective criteria specified in the proposed rules are consistent with those in the proposed safe harbor for highlighting issuers and offerings.603 Consistent with the activities specifically prohibited by statute, funding portals would not be permitted to use criteria that search, sort or categorize offerings based on the advisability of investing in the issuer or its offering or an assessment of any characteristic of the issuer, its business plan, its management, or risks associated with an investment. One commenter questioned whether a funding portal could give potential
investors the ability to create automated email notifications, based on criteria they have provided to identify particular offerings on the funding portal’s platform.604 The proposed rules would permit funding portals to do so. We recognize that there are many potential ways that a tool or mechanism can be used to search, sort or categorize offerings. The proposed rules are intended to be sufficiently broad to cover any number of combinations of implementing tools or mechanisms for a search, while limiting the search parameters to objective criteria. D Providing Communication Channels The proposed rules would permit a funding portal to provide, on its platform, communication channels by which investors could communicate with one another and with representatives of the issuer about offerings of securities displayed on the funding portal’s platform, in accordance with the conditions set out in proposed Rule 303(c).605 The safe harbor would specify that a funding portal (including its associated persons, such as its employees) may not participate in these communications, other than to establish guidelines about communication and to remove abusive or potentially fraudulent communications. For the reasons discussed above, a funding portal would be required to make communication channels available to the general public and to restrict the posting of comments on those channels to those who have accounts.606 In addition, the funding portal would need to require persons posting comments to disclose, in the channel, whether they receive or would receive any compensation for promoting an issuer. Communication channels should facilitate the access to information among members of the public and provide potential investors with the crowd’s insight as to the merits of an issuer or business plan.607 Restricting funding portal participation should help to ensure that funding portals do not provide impermissible recommendations or investment advice. Moreover, requiring potential investors to have accounts with the funding portal before posting a comment should provide a control that could aid in promoting accountability for comments made and help ensure that interested persons, such as those associated with the issuer or receiving compensation to promote the issuer, are properly identified.608 As suggested by commenters, the proposed rule would permit a funding portal to create a ‘‘negotiation space’’ in which those who have opened accounts with the funding portal and issuers could discuss and potentially negotiate certain aspects of the issuer’s offering, including the price of the issuer’s securities.609 D Advising Issuers The proposed rules would permit a funding portal to advise an issuer about the structure or content of the issuer’s offering, including preparing offering documentation.610 This advice is not the type of advice that we believe should be impermissible.611 We also believe that funding portals and brokers could provide certain services to issuers
in order to facilitate the offer and sale of securities in reliance on Section 4(a)(6), and without this kind of advice to issuers, crowdfunding as a method to raise capital would not be viable. In particular, to the extent that the issuers that may choose to conduct offerings in reliance on Section 4(a)(6) would include startups and small businesses, we expect that these issuers would seek in many cases to obtain advice on the structure of the offering from intermediaries. Funding portals would be in a position to provide this type of assistance relatively efficiently, together with the other services under the proposed rules that they would be permitted to provide to issuers. The proposed safe harbor would permit funding portals to advise an issuer about the structure and content of the issuer’s offering in a number of ways. A funding portal could, for example, provide pre-drafted templates or forms for an issuer to use in its offering that would help it comply with its proposed disclosure obligations.612

158 Cong. Rec. S5474–03 (daily ed. July 26, 2012) (statement of Sen. Jeff Merkley) (‘‘Subject to such limits as the SEC determines necessary for the protection of investors and the crowdfunding issuers, funding portals should be able to provide (or make available through service providers) services to assist entrepreneurs utilizing crowdfunding, including, for example, providing basic standardized templates, models, and checklists. Enabling them to help small businesses construct simple, standard deal structures will facilitate quality, low-cost offerings.’’). 613See CFIRA Letter 2. 614See proposed Rule 402(b)(6) of Regulation Crowdfunding. See also discussion in Section II.C.7 above. Proposed Rule 305 of Regulation Crowdfunding would implement the prohibition in
Section 4A(a)(10).
615See note 515.
616See proposed Rules 402(b)(7) and 402(b)(8) of Regulation Crowdfunding. 617Exchange Act Section 3(a)(80) limits the permissible securities activities of a funding portal to those in connection with the offer and sale of securities in reliance on Securities Act Section 4(a)(6). 618See also FINRA, Payments to Unregistered Persons: FINRA Request Comment on Proposed Consolidated FINRA Rule Governing Payments to Unregistered Persons, Regulatory Notice 09–69 (Dec. 2009), available at http://www.finra.org/web/ groups/industry/@ip/@reg/@notice/documents/ notices/p120480.pdf. 619Receipt of transaction-based compensation in connection with such referrals could cause a funding portal to be a broker required to register with us under Exchange Act Section 15(a)(1) (15 U.S.C. 78o(a)(1)). 620See, e.g., FINRA Rule 4311 (‘‘Carrying Agreements’’). 621See proposed Rule 305 of Regulation Crowdfunding and discussion in Section II.C.7 above. 622See proposed Rule 402(b)(9) of Regulation Crowdfunding. 623As a funding portal could be subject to liability for fraud, it would need to consider whether its advertisements are not misleading or otherwise fraudulent, such as by implying that past performance of offerings on its platform is indicative of future results. See Exchange Act Rule 10b–5 [17 CFR 240.10b–5]. Other examples of permissible assistance could include, as commenters have suggested, advice about the types of securities the issuer can offer, the terms of those securities and the procedures and regulations associated with crowdfunding.613 D Paying for Referrals The proposed rules would clarify that, consistent with proposed Rule 305, a funding portal could compensate a third party for referring a person to the funding portal if the third party does not provide the funding portal with personally identifiable information of any potential investor. For example, a third party could provide hyperlinks to a funding portal in order to inform potential investors learn about securities offerings made in reliance on Section 4(a)(6). Any compensation, unless paid to third party that is a registered broker or dealer, could not be based, directly or indirectly, on the purchase or sale of a security offered in reliance on Section 4(a)(6) on or through the funding portal’s platform.614 Otherwise, such transaction-based compensation could trigger broker-dealer registration requirements. We also believe that this prohibition on transaction-based compensation would help to remove the incentive for high-pressure sales tactics and other abusive practices.615 D Compensation Arrangements With Registered Broker-Dealers The proposed rules would specify that a funding portal could enter into certain arrangements with a registered broker-dealer, through which they could compensate each other for services.616 In speaking with industry participants, we understand that because the statute narrowly defines the permissible activities in which funding portals may engage, funding portals may
wish to contract or affiliate with registered broker-dealers, which are not subject to similar constraints.617 For example, a registered broker-dealer could, among other things, recommend securities offered on the funding portal’s platform or provide services involving the handling of investor funds and securities. Conversely, funding portals may wish to offer certain services, including information technology services, to a broker-dealer, for a fee. Each party to this type of arrangement would, because it is a regulated entity, need to comply with all applicable regulations, including the rules of the registered national securities association of which it is a member. Proposed Rule 402(b)(7) would permit a funding portal to pay or offer to pay compensation to a registered broker or dealer for services in connection with the funding portal’s offer or sale of securities in reliance on Section 4(a)(6). Proposed Rule 402(b)(8) would permit a funding portal to provide services to and receive compensation from a registered broker-dealer in connection with the funding portal’s offer or sale of securities in reliance on Section 4(a)(6).618 Compensation could include any monetary form of payment, such as fees, discounts, commissions, concessions, reimbursement of expenses and other allowances. The proposed safe harbor would not, however, permit a funding portal to receive transaction￾based compensation for referrals of potential investors in other types of offerings being effected by a registered broker-dealer, such as a Rule 506 offering.619 The proposed rules would require the funding portal to provide any services pursuant to a written agreement with the registered broker￾dealer, and they also would require the payments to be compliant with, and not prohibited by, the rules of the registered national securities association of which the funding portal is a member.620 The proposed rules would require that a funding portal’s offers to pay, and payments made to, a registered broker￾dealer, as well as a funding portal’s receipt of compensation from a registered broker-dealer, under these arrangements, be compliant with Regulation Crowdfunding. In particular, these arrangements would have to be compliant with proposed Rule 305 which prohibits, with certain exceptions, an intermediary from compensating any person for providing the intermediary with the personally identifiable information of any investor or potential investor.621 These proposed provisions, taken as a whole, are intended to facilitate intermediaries’ cooperation with each other and promote the use of the Section 4(a)(6) exemption to raise capital, while maintaining a clear audit trail. D Advertising The proposed rules would permit a funding portal to advertise its existence and engage in certain other limited advertising activities.622 The proposed rule does not limit the manner in which a funding portal could advertise its existence. A funding portal may, for example, choose to advertise
through social media, internet advertisements or traditional sources of advertising like print media. In addition, funding portals could identify issuers and offerings in the advertisements on the basis of criteria that are reasonably designed to identify a broad selection of issuers (so as not to recommend or implicitly endorse one issuer or offering over others) and are applied consistently to all potential issuers and offerings. The criteria, consistent with those described above with regard to highlighting issuers and offerings on the platform and the ability to provide investors with search functions, could include the type of securities being offered, the geographic location of the issuer, the industry or business segment of the issuer, the number or amount of investment commitments made, the progress in meeting the issuer’s target offering amount and, if applicable, the maximum offering amount and the minimum or maximum investment amount.623 Of course, a funding portal is subject to the statutory prohibition on providing investment advice and recommendations, and soliciting, and so

624 In response to one commenter, we note that this would preserve the ability of funding portals to pay for search listings or advertisements in online social networks. See Cera Technology Letter. 625See proposed Rule 402(b)(10) of Regulation Crowdfunding. See also discussion in Section II.C.3 above. 626See proposed Rule 402(b)(11) of Regulation Crowdfunding. 627As described above, we are proposing other measures that would prescribe the requirements for funding portals with respect to the maintenance and transmission of funds, including the use of a qualified third party to hold and transmit investor funds. See discussion in Section II.C.5.d above. 628See Crowdfunding Offerings Ltd. Letter 4; RocketHub Letter 1. 629Cf. Exchange Act Section 3(a)(23) [15 U.S.C. 78c(a)(23)] (defining ‘‘clearing agency’’ as an intermediary who ‘‘acts as a custodian of securities in connection with a system for the central handling of securities’’ where the securities may be administered ‘‘by bookkeeping entry without physical delivery of securities certificates’’). 630We believe the statutory requirements, and the rules we are proposing to implement such requirements, provide clear requirements for the protection of investor funds. In addition, the requirement for the funding portals to maintain a fidelity bond under proposed Rule 400(f) provides an additional protection with respect to investor funds. See discussion in Section II.D.1 above. See also proposed Rule 400(f) of Regulation Crowdfunding. 631See proposed Rule 402(b)(12) of Regulation Crowdfunding. 632See proposed Rule 402(b)(13) of Regulation Crowdfunding. the safe harbor would not permit a funding portal to advertise in such a way that expresses that any of the offerings offered on its platform are of a higher quality, are safer, or are more worthy investments compared to any others, whether offered on its platform or those of other intermediaries. The proposed rule would also specify that the funding portal could not receive special or additional compensation for identifying an issuer or offering in its advertisement, because this could create an incentive for the funding portal to promote one issuer over another. This prohibition should help to limit the dissemination of information that may be misleading or easily misconstrued.624 D Denying Access Based on Potential Fraud or Investor Protection Concerns In light of the comments received, the proposed rules would require a funding portal to deny access to its platform to, or cancel an offering of, an issuer that the funding portal believes may present the potential for fraud or otherwise raises concerns regarding investor protection, as is required under proposed Rule 301(c).625 D Accepting Investor Commitments The proposed rules would permit a funding portal, on behalf of an issuer, to accept investment commitments from potential investors for securities offered in reliance on Section 4(a)(6) by that issuer on the funding portal’s platform.626 Given
the breadth of the statutory prohibition on holding, managing, possessing or otherwise handling investor funds or securities, we believe that it is important to clarify the activities, in this area, in which a funding portal may permissibly engage, including with regard to accepting investment commitments.627 Although some commenters expressed the view that funding portals should be permitted to handle investor funds and securities in a limited capacity as the issuer’s transfer agent or to be the holder of record,628 we do not believe that these activities would be consistent with the statutory directive in Exchange Act Section 3(a)(80). In our view, a funding portal acting as custodian for securities through a book entry system likely would be engaged in handling or managing securities in violation of the statutory prohibition in
Section 3(a)(80).629
D Directing Transmission of Funds The proposed rules would provide that a funding portal could fulfill its obligations with respect to the maintenance and transmission of funds and securities, as set forth in proposed Rule 303, without violating the prohibition in Exchange Act Section 3(a)(80)(D).630 Thus, subject to other applicable rules, a funding portal could direct investors where to transmit funds or remit payment in connection with the purchase of securities offered and sold in reliance on Section 4(a)(6).631 It also could direct a qualified third party to release the proceeds of an offering to the issuer upon completion of the offering or to return investor proceeds when an investment commitment or offering is cancelled.632 We believe that these discrete activities would facilitate crowdfunding transactions without exceeding the scope of permissible activities, and without unduly raising investor protection concerns. Request for Comment
216. Does the proposed safe harbor
appropriately define the actions in which a funding portal may engage? Are there other activities that should be addressed in the safe harbor? Are there activities included in the proposed safe harbor that should be modified or eliminated? If so, which activities and why?
217. Are there any additional
conditions that should apply to the activities covered under the proposed safe harbor? If so, which conditions, and why?
218. Exchange Act Section 3(a)(80)
provides that a funding portal may not offer investment advice, and the proposed rules would provide a conditional safe harbor for certain activities that funding portals may engage in without violating the statutory prohibition on providing investment advice. Is the safe harbor sufficient, or should we provide additional guidance regarding the status of funding portals under the Investment Advisers Act of 1940? Why or why not? Please discuss.
219. Should the proposed safe harbor
permit a funding portal to limit the offerings on its platform? If so, are the criteria set forth in the proposed rules appropriate? Why or why not? If not, what other criteria or conditions would be appropriate?
220. Are there any additional criteria
that a funding portal should be permitted to use when highlighting issuers and offerings on its platform? If so, which ones and why? Should a funding portal be permitted to highlight issuers and offerings based on criteria that specifically relate to the activities of users on its site, such as offerings that have been viewed by the largest number of visitors to the platform over a particular time period? Why or why not?
221. As a condition of the proposed
safe harbor, should we require funding portals to clearly display, on their platforms, the objective criteria they use in limiting or highlighting offerings? Why or why not?
222. Under the proposed safe harbor,
should we permit a funding portal to post news, such as market news and news about a particular issuer or industry, on its platform? Why or why not? If so, what restrictions, conditions or other safeguards should apply, in particular so that a funding portal would not be providing impermissible investment advice? For example, are there certain types of news or news feeds that should or should not be permitted, or should we restrict a funding portal from posting only positive news coverage? Should a funding portal be able to freely select the news stories it posts, or should there be some objective criteria? Please explain.
223. Are the proposed limitations on
a funding portal advertising its past offerings appropriate? Should we consider other advertising limitations? Should the proposed advertising rules be modified in any other way?
224. Should we permit a funding
portal to receive transaction-based compensation for referring potential investors to a registered broker-dealer? Why or why not? If so, should we

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

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

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

675See RocketHub Letter 1.
676See Bach Letter.
677See proposed Rule 403(c) of Regulation Crowdfunding. 678See Privacy of Consumer Financial Information (Regulation S–P), Release No. 34–42974 (June 22, 2000) [65 FR 40334 (June 29, 2000)]. 679See Regulation S–AM: Limitations on Affiliate Marketing, Release No. 34–60423 (Aug. 4, 2011) [74 FR 40398 (Aug. 11, 2009)]. 680See Identity Theft Red Flags Rules, Release No. 34–69359 (Apr. 10, 2013) [78 FR 23637 (Apr. 19, 2013)] (‘‘Identity Theft Red Flags Rules’’) (adopted jointly with the Commodity Futures Trading Commission). 681See 17 CFR part 248. 682See 17 CFR part 248 subpart A. 683 17 CFR part 248 subpart B. 684See Identity Theft Red Flags Rules, note 680. 685See discussion in Section IV.C.2.l below. 686See Bach Letter. 687See proposed Rule 300(c) of Regulation Crowdfunding. 688See proposed Rule 204 of Regulation Crowdfunding. 689See discussion in Section II.B.4 above. 690See proposed Rules 305 and 402(b)(6) of Regulation Crowdfunding. 691See discussion in Sections II.C.7 and II.D.3 above. 692See RocketHub Letter 1. 693See 17 CFR 240.17a–4(i). 694As a condition to exempting funding portals from the requirement to register as broker-dealers under Exchange Act Section 15(a)(1) (15 U.S.C. 78c(a)(1)), Exchange Act Section 3(h)(1)(A) requires that registered funding portals remain subject to, among other things, our examination authority. See proposed Rule 403(d) of Regulation Crowdfunding. protect the privacy of information collected from investors as the Commission shall, by rule, determine appropriate. One commenter suggested that the responsibility for storing confidential information should rest with the intermediary and that data should not be shared with, or stored by, any other organization.675 The commenter recommended requiring intermediaries to store information in a secure fashion on a dedicated, secure server. The commenter also urged the Commission to identify, by rule or otherwise, an appropriate industry standard for protection of this data, perhaps looking to standards adopted in the legal and banking industries as examples. Another commenter suggested that a procedure should be established to allow the public to control the delivery and the amount of emails soliciting funds for crowdfunding projects.676 The proposed rules would implement the requirements of Section 4A(a)(9) by subjecting funding portals, as brokers, to the same privacy rules applicable to brokers.677 Proposed Rule 403(c), therefore, would require funding portals to comply with Regulation S–P (Privacy of Consumer Financial Information and Safeguarding Personal Information),678 Regulation S–AM (Limitations on Affiliate Marketing) 679 and Regulation S–ID (Identity Theft Red Flags) 680 (collectively, the ‘‘Privacy Rules’’).681 Regulation S–P governs the treatment of nonpublic personal information by brokers, among others.682 It generally requires a broker to provide notice to investors about its privacy policies and practices; describes the conditions under which a broker
may disclose nonpublic personal information about investors to nonaffiliated third parties; and provides a method for investors to prevent a broker from disclosing that information to most nonaffiliated third parties by ‘‘opting out’’ of that disclosure, subject to certain exceptions. Regulation S–AM allows a consumer, in certain limited situations, to block affiliates of covered persons (i.e., brokers, dealers, investment companies and both investment advisers and transfer agents registered with the Commission) from soliciting the consumer based on eligibility information (i.e., certain financial information, such as information regarding the consumer’s transactions or experiences with the covered person) received from the covered person.683 Regulation S–ID generally requires brokers to develop and implement a written identity theft prevention program that is designed to detect, prevent and mitigate identity theft in connection with certain existing accounts or the opening of new accounts.684 While we recognize that crowdfunding activities, like any Internet-based communications, could raise novel issues not already addressed in existing regulations and guidance, we believe that it is unnecessary to repeat identical, existing requirements, in a separate rule proposal only for funding portals, or to propose rules that would apply not only to crowdfunding, but to a broader set of technology-based activity. We believe that the requirements of the Privacy Rules would impose relatively minimal costs on funding portals,685 but provide key investor protections, and that persons who deal with funding portals, as opposed to brokers, should not have to lose the benefit of those protections. Although one commenter suggested the development of a procedure to allow the public to control the delivery and the amount of emails that solicit funds for crowdfunding projects,686 we note that the definition of funding portal in Exchange Act Section 3(a)(80) and the proposed rules 687 prohibit a funding portal from soliciting investors for specific crowdfunding projects. Moreover, Section 4A(b)(2) and the proposed rules 688 prohibit issuers from advertising the terms of an offering, except for directing potential investors to the intermediary.689 The proposed rules 690 also incorporate prohibitions on the transmission of personally identifiable information in connection with intermediaries’ advertisements, referrals and payments to third parties.691 We believe that these provisions, in combination with the Privacy Rules, address the commenter’s concern. Although one commenter urged us not to permit intermediaries to store information with third parties,692 we note that our recordkeeping rules applicable to brokers permit the use of third-party service providers for storing records.693 We are proposing a similar requirement for funding portals, as discussed in Section II.D.5 below. A different requirement for funding portals would not be consistent with the
requirements for brokers and may not be economically feasible for some intermediaries. Request for Comment
236. Is it appropriate to implement
the requirements of Section 4A(a)(9) by applying the requirements of the Privacy Rules to funding portals? Why or why not? Is the nature of a funding portal’s activities such that a different requirement to protect privacy would be more appropriate? Please explain.
237. Are there specific considerations
with respect to privacy and crowdfunding that are not already adequately addressed in the Privacy Rules? If so, what are they and how should we address them?
238. Should we provide additional
guidance concerning the application of the Privacy Rules to funding portals? If so, which parts and why?
239. Under the proposed rules,
funding portals would be required to collect information about their customers in order to comply with anti￾money laundering provisions, as brokers are required to do, as discussed above in relation to proposed Rule 402(b). At the same time, intermediaries would be required to take steps to protect the privacy of information collected from customers, as set forth in Section 4A(a)(9). Do our proposed rules achieve the appropriate balance between these two objectives? What other approaches would achieve an appropriate balance? Please explain. d. Inspections and Examinations Congress specified that funding portals must remain subject to our examination authority.694 Under the

695See proposed Rule 404 of Regulation Crowdfunding. Exchange Act Section 3(h)(1)(C) permits us to impose, as part of our authority to exempt funding portals from broker registration, ‘‘such other requirements under [the Exchange Act] as the Commission determines appropriate.’’ 696 In the release adopting Exchange Act Rule 17a–8 (17 CFR 240.17a–8), which requires broker￾dealers to comply with the reporting, recordkeeping and record retention rules adopted under the BSA, the Commission noted that the ‘‘most effective means of enforcing compliance with the reporting and recordkeeping requirements is through on-site examinations of broker-dealer firms conducted by the Commission and the self-regulatory organizations. . . .’’ See Recordkeeping by Brokers and Dealers, Release No. 34–18321 (Dec. 10, 1981) [46 FR 61454 (Dec. 17, 1981)]. 697See proposed Rules 404(a)(1) through (9) of Regulation Crowdfunding. 698See id. 699See CFIRA Letter 13. 700See proposed Rule 404(a)(3) of Regulation Crowdfunding. 701See proposed Rule 404(a)(5) of Regulation Crowdfunding. 702These would include, but not be limited to: (1) Notices addressing hours of funding portal operations (if any); (2) funding portal malfunctions; (3) changes to funding portal procedures; (4) maintenance of hardware and software; (5) instructions pertaining to access to the funding portal; and (6) denials of, or limitations on, access to the funding portal. See proposed Rule 404(a)(6) of Regulation Crowdfunding. 703See proposed Rule 404(a)(7) of Regulation Crowdfunding. 704These would include: (1) Issuers for which the target offering amount has been reached and funds distributed; and (2) transaction volume, expressed in number of transactions, number of securities involved in a transaction and total amounts raised by and distributed to issuers, as well as total dollar amounts raised across all issuers, expressed in U.S. dollars. See proposed Rule 404(a)(8) of Regulation Crowdfunding. 705See proposed Rule 404(a)(9) of Regulation Crowdfunding. 706See discussion in Section II.B.1 above. See also Section II.C.5 above for a discussion of proposed Rule 303(a) of Regulation Crowdfunding. proposed rules, a funding portal would be required to permit the examination and inspection of all of its business and business operations that relate to its activities as a funding portal, such as its premises, systems, platforms and records, by our representatives and by representatives of the registered national securities association of which it is a member. Request for Comment
240. Are there any additional
provisions that should be incorporated in the proposed rules regarding inspection and examination of funding portals? Please explain.
5. Records To Be Created and
Maintained by Funding Portals The proposed rules would require a funding portal to create and maintain certain records.695 We believe that it is important for funding portals to be subject to a recordkeeping requirement in order to create a meaningful audit trail of the crowdfunding transactions and communications. Without these records, the Commission and any registered national securities association would have difficulty examining a funding portal for compliance with the requirements of Regulation Crowdfunding, the BSA 696 and the federal securities laws. The proposed rules would require a funding portal to make and preserve certain records for five years, with the records retained in a readily accessible place for at least the first two years.697 The records would include those regarding investors who purchase or attempt to purchase securities through the funding portal, such as information relating to educational materials provided to investors, account opening and transactions (including notices of investment commitments and reconfirmations), as required under Subpart C. They also would include records relating to issuers that offer and sell, or attempt to offer and sell, securities through the funding portal and to persons having control with respect to those issuers. This proposed requirement would better enable regulators to gather information about the activities in which the funding portal has been engaged, as well as about the issuers and investors that use the funding portal for their crowdfunding transactions. The proposed rules also would require a funding portal to maintain records of all communications that occur on or through its platform.698 Some commenters expressed concerns about the ability of funding portals to track and store communications that take place outside of their platforms.699 We believe that funding portals should be responsible to keep records of only the communications that occur on or through their platforms, including in the communication channels they are required to provide. We do not believe they should be responsible for keeping records of communications that take place exclusively outside of their platforms, such as on third-party social media sites or elsewhere on the Internet. The proposed rules also would require a funding portal to keep all records related to persons that use communication services provided by a funding portal to promote an issuer’s securities or to communicate with potential investors.700 These proposed requirements would help regulators to examine the funding portal for any potential connection with promoters, including associated persons that act as promoters, whose promotion or communication activities could cause the funding portal to lose its exemption from broker-dealer registration. The proposed rules would require a funding portal to maintain records demonstrating its compliance with requirements of Subparts C (intermediary obligations) and D (funding portal
requirements).701 This proposed requirement would require a funding portal to keep all the records it has created in the course of its business in order to comply with Regulation Crowdfunding. This requirement alone would not, however, require the creation of any records or proscribe the format or manner of any records. This proposed requirement would not only assist in regulators’ compliance examinations, but also should assist funding portals in complying with the rules pertaining to their crowdfunding activities. The proposed rules would require a funding portal to maintain all notices provided by the funding portal to issuers and investors generally through the funding portal’s platform or otherwise.702 This proposed requirement would assist regulatory examination of the funding portal for any communications to issuers or investors that could indicate violations of particular provisions of proposed Regulation Crowdfunding. The proposed rules would require a funding portal to maintain records of all written agreements (or copies thereof) entered into by a funding portal, relating to its business as such.703 This proposed requirement is intended to capture details of any funding portal arrangements and the funding portal’s compliance with applicable requirements. The proposed rules would require a funding portal to create and maintain daily, monthly and quarterly summaries of transactions effected through it.704 The purpose of this proposed requirement is to help ensure that an historical and ongoing record exists of the transactions that have been conducted through the funding portal, especially given the high volume of transactions we expect to occur on funding portals’ platforms. The proposed rules would require a funding portal to make and keep a log of each offering, reflecting the progress of each issuer in meeting the target offering amount.705 This proposed requirement is intended to support, or otherwise be compared against, information included on an issuer’s filing of Form C–U.706 The proposed rules also would require that a funding portal make and

707These would include, but not be limited to: (1) Partnership agreements; (2) articles of incorporation or charter; (3) minute books; and (4) stock certificate books (or other similar type documents). See proposed Rule 404(b) of Regulation Crowdfunding. 708Exchange Act Rule 17a–4 provides more extensive details of the types of records required, and it also specifies different time periods for retention, namely three to six years, depending on the type of record. 17 CFR 240.17a–4(a). 709See proposed Rule 404(c) of Regulation Crowdfunding. Permitted formats would include the use of electronic storage media that otherwise permits the funding portal to comply with its obligations under the proposed rules. 17 CFR 240.17a–4(f). 710See proposed Rule 404(d) of Regulation Crowdfunding. An agreement between a funding portal and a third party would not relieve the funding portal from its responsibility to prepare and maintain records, as required under proposed Rule 404 of Regulation Crowdfunding. The written undertaking would be required to include the following provision: ‘‘With respect to any books and records maintained or preserved on behalf of [name of funding portal], the undersigned hereby acknowledges that the books and records are the property of [name of funding portal], and hereby undertakes to permit examination of such books and records at any time, or from time to time, during business hours by representatives of the Securities and Exchange Commission, the national securities association of which the funding portal is a member, and to promptly furnish to the Commission and national securities association of which the funding portal is a member, a true, correct, complete and current hard copy of any, all, or any part of, such books and records.’’ See proposed Rule 404(d) of Regulation Crowdfunding. This provision is consistent with the recordkeeping provisions applicable to brokers under Exchange Act Rules 17a–4(f) (17 CFR 17a–4(f)) and 17a–4(j) (17 CFR 240.17a–4(j)), but it is somewhat simplified to be more appropriate for funding portals. 711See proposed Rule 404(e) of Regulation Crowdfunding. 712See Exchange Act Section 3(h)(1)(A). See also 158 Cong. Rec. S5474–03 (daily ed. July 26, 2012) (statement of Sen. Jeff Merkley) (‘‘I would encourage the SEC and the relevant national securities association to engage in regular reviews and reports regarding developments in the crowdfunding marketplace. . . . Should problems arise, these authorities should act quickly, including use of their full rulemaking and enforcement authorities. . . . For [crowdfunding] to succeed long-term, it will require careful oversight, especially during the early stages.’’). 713 17 CFR 240.17a–8. 714We note that a funding portal’s proposed obligation, under the BSA, to report suspicious activity includes an obligation to maintain the confidentiality of suspicious activity reports and any information that would reveal the existence of a suspicious activity report. See
generally 31 CFR 1023.320. 715See note 696. preserve its organizational documents, during its operation as a funding portal and of any successor funding portal.707 This proposed requirement is intended to ensure that these key documents are maintained for identification and verification purposes. These recordkeeping requirements are similar to, but in many ways less extensive than, those for registered broker-dealers under Exchange Act Rule 17a–4(a).708 Because funding portals would be engaged in a more limited range of activities than brokers and a relatively high proportion of funding portals would be new market entrants that may not have formal recordkeeping practices in place, the proposed requirements are relatively streamlined, compared to those for brokers. The proposed funding portal recordkeeping requirements would require only those documents that relate to the funding portal’s business and would require the portal to retain them for five years, but in an easily accessible place for the first two years, for purposes of facilitating and ensuring timeliness of inspections. A funding portal would be required to produce, reproduce and maintain the required records in the original, non￾alterable format in which they were created or as permitted under Exchange Act Rule 17a–4(f).709 This flexibility should be appropriate for funding portals, because we believe that many of their documents would already be in electronic form. Thus, funding portals should not incur a significant additional burden for maintenance of those records. This flexibility also is consistent with the broker recordkeeping requirements under Exchange Act Rule 17a–4(f). We recognize that a funding portal may find it cost-effective or otherwise appropriate to use the recordkeeping services of a third party. The proposed rules would allow third parties to prepare or maintain the required records on behalf of the funding portal, provided that there is a written agreement in place between the funding portal and the third party in which the third party states that the required records are the property of the funding portal and would be surrendered promptly on request by the Commission or the national securities association of which the funding portal is a member.710 The funding portal also would be required to file, with the registered national securities association of which it is a member, this written undertaking, signed by a duly authorized representative of the third party. We believe that this provision would help to ensure that records maintained or preserved by a third party would be readily available for examination. Under the proposed rules, all records of a funding portal would be subject at any time, or from time to time, to such reasonable periodic, special or other examination by our representatives and representatives of the registered national securities association of which the funding portal is a member.711 We believe that this requirement would facilitate our
oversight of funding portals and crowdfunding activities, as Congress intended.712 Finally, the proposed rules would require that a funding portal comply with the reporting, recordkeeping and record retention requirements of
Chapter X of Title 31 of the Code of
Federal Regulations, a requirement analogous to that imposed on broker￾dealers under Exchange Act Rule 17a–
8.713 This requirement is intended to
ensure that funding portals create and maintain an accurate record of their compliance with BSA obligations, including the requirement to maintain records of suspicious activity reports.714 As noted above, we believe that it is important for funding portals to be subject to a recordkeeping requirement, along the same lines of the requirement applicable to brokers, to create a meaningful audit trail of the crowdfunding transactions and communications that occur on and through their platforms. Without these records, we, FINRA or any other registered national securities association, would have difficulty examining a funding portal for compliance with the requirements of Regulation Crowdfunding, the BSA 715 and the federal securities laws. Although under the proposed rules funding portals would be required to create and maintain certain records, we believe this particular rule is necessary to achieve consistent application of, and ability to examine and enforce, BSA requirements across all intermediaries, whether brokers or funding portals. Request for Comment
241. We have proposed a variety of
documents and data to be retained by a funding portal. Are these documents and data appropriate? Should other types of documents and data be required to be retained, and if so, which documents and data and why? Are any of the documents and data we propose to require be retained unnecessary, unclear or not sufficiently detailed? If so, which ones? Please explain. Should any of the proposed books and records requirements be modified? If so, please explain why.
242. What burdens or costs would the
retention of such information entail? Is it appropriate to base the books and records requirements of funding portals on the books and records requirements for broker-dealers generally? Have we appropriately tailored the broker-dealer requirements for funding portals? If not, how should they be further modified? Would these tailored requirements create any competitive advantages for funding portals as compared to broker￾mstockstill on DSK4VPTVN1PROD with PROPOSALS2

716See proposed Rule 502 of Regulation Crowdfunding. 717 17 CFR 230.508. 718See proposed Rule 502(b) of Regulation Crowdfunding. 719See 2012 SEC Government-Business Forum, note 29 (recommending that we provide a safe harbor for ‘‘innocent violations of procedural or disclosure requirements’’ in transactions relying on
Section 4(a)(6)). See also 158 Cong. Rec. S2230
(daily ed. Mar. 29, 2012) (statement of Sen. Scott Brown) (‘‘[I]ssuers should not be held liable for misstatements or omissions that were made by mistake’’). 720See proposed Rule 501 of Regulation Crowdfunding. 721 17 CFR 230.501(a). See also note 38. 722 17 CFR 240.16a–1(e). 723See proposed Instruction to paragraph (c) of proposed Rule 501 of Regulation Crowdfunding. dealers engaged solely in the same limited activities in which a funding portal may engage? Are there books and records requirements currently applicable to broker-dealers, but not included in the proposed rules, that should be included? Please provide examples of any such requirements or any suggested alternatives. E. Miscellaneous Provisions

1. Insignificant Deviations From
   Regulation Crowdfunding
   We are proposing to provide issuers a safe harbor for certain insignificant deviations from a term, condition or requirement of Regulation Crowdfunding.716 To qualify for the safe harbor, the issuer relying on the exemption would have to show that: (1) The failure to comply with a term, condition or requirement was insignificant with respect to the offering as a whole; (2) the issuer made a good faith and reasonable attempt to comply with all applicable terms, conditions and requirements of Regulation Crowdfunding; and (3) the issuer did not know of the failure to comply, where the failure to comply with a term, condition or requirement was the result of the failure of the intermediary to comply with the requirements of
   Section 4A(a) and the related rules, or
   such failure by the intermediary occurred solely in offerings other than the issuer’s offering. The first two prongs of the safe harbor provision are modeled after a similar provision in Rule 508 of Regulation D,717 and we believe a similar safe harbor is appropriate for offerings made in reliance on Section 4(a)(6). The offering exemption in Section 4(a)(6) was designed to help alleviate the funding gap and the accompanying regulatory concerns faced by startups and small businesses, many of which may not be familiar with the federal securities laws. We believe that issuers should not lose the Section 4(a)(6) exemption because of a failure to comply that is not significant with respect to the offering as a whole, so long as the issuer, in good faith, attempted to comply with the rules. We also propose to include the third prong of the safe harbor because, under the statute, an issuer could lose the exemption because of the failure of the intermediary to comply with the requirements of Section 4A(a). We believe that an issuer should not lose the offering exemption due to such failure by the intermediary, which likely would be out of the issuer’s control, if the issuer did not know of such failure or such failure related to offerings other than the issuer’s offering. Absent this safe harbor, we believe issuers may be hesitant to participate in offerings in reliance on Section 4(a)(6) due to uncertainty regarding their ability to rely on the exemption, which could undermine the facilitation of capital raising for startups and small businesses. We believe that the potential harm to investors that might result from the applicability of this safe harbor would be minimal because the deviations must be insignificant to the offering as a whole for the safe harbor to apply. In addition, the proposed rules would provide that notwithstanding this safe harbor, any failure to comply with Regulation Crowdfunding would nonetheless be actionable by the Commission.718 We believe that this safe harbor would address concerns raised by one commenter and a member of Congress.719 We also believe it appropriately would protect an issuer who made a diligent attempt to comply with the proposed rules from losing the exemption as a result of insignificant deviations from Regulation Crowdfunding. Request for Comment
2. Is a safe harbor for certain
   insignificant deviations from a term, condition or requirement of Regulation Crowdfunding appropriate? If so, is the proposed safe harbor sufficiently broad or too broad? Are there additional conditions that should apply for an issuer to rely on the safe harbor? If so, what conditions and why?
3. Should we define the term
   ‘‘insignificant’’ or use a different term? Please explain. Should we use a standard requiring something other than ‘‘good faith and reasonable attempt’’ to comply with the requirements? If so, what standard and why? Is it appropriate for the safe harbor to cover the failure of the intermediary to comply with the requirements of
   Section 4A(a) if the issuer did not know
   of such failure or such failure occurred solely in offerings other than the issuer’s offering? Why or why not?
4. Are there certain deviations that
   should never be considered insignificant for purposes of this safe harbor? Why or why not? Should we provide examples of deviations that we would consider significant? If so, what should those be (e.g., failure to file the Form C: Offering Statement on EDGAR)?
5. Restrictions on Resales
   Section 4A(e) provides that securities
   issued in reliance on Section 4(a)(6) may not be transferred by the purchaser for one year after the date of purchase, except when transferred: (1) To the issuer of the securities; (2) to an accredited investor; (3) as part of an offering registered with the Commission; or (4) to a family member of the purchaser or the equivalent, or in connection with certain events, including death or divorce of the purchaser, or other similar circumstances, in the discretion of the Commission. Section 4A(e) further provides that the Commission may establish additional limitations on securities issued in reliance on Section 4(a)(6). The proposed rules track the provisions of Section 4A(e).720 We also are proposing to include instructions in the rules to define ‘‘accredited investor’’ and a ‘‘member of the family of the purchaser or the equivalent.’’ Under the proposed rules, the term ‘‘accredited investor’’ would have the same definition as in Rule 501(a) of Regulation D.721 The statute does not define ‘‘member of the family of the purchaser or the equivalent.’’ We propose to define the phrase to mean a ‘‘child, stepchild, grandchild, parent, stepparent, grandparent, spouse or spousal equivalent, sibling, mother-in-law, father-in-law, son-in-law, daughter-in￾law, brother-in-law, or sister-in-law of the purchaser, and shall include adoptive relationships.’’ This definition tracks the definition of ‘‘immediate family’’ in Exchange Act Rule 16a– 1(e),722 but with the addition of ‘‘spousal equivalent.’’ We propose to include the term spousal equivalent to address the concept in Section 4A(e)(1)(D) of the ‘‘equivalent’’ of a member of the family of the purchaser. The proposed rules would define spousal equivalent to mean a cohabitant occupying a relationship generally equivalent to that of a spouse.723 This is the same definition as in Rule

724 17 CFR 275.202(a)(11)(G)–1(d)(9). See also Family Offices, Release No. IA–3220 (Jun. 22, 2011) [76 FR 37983 (June 29, 2011)] (adopting release); Family Offices, Release No. IA–3098 (Oct. 12, 2010) [75 FR 63753 (Oct. 18, 2010)] (proposing release). 725See Section II.B.2 above for a discussion of the ongoing reporting requirements. 726See proposed Rule 501(b) of Regulation Crowdfunding. 727See Commonwealth of Massachusetts Letter. 728See NASAA Letter. 729See RocketHub Letter 1. 730See Section 501 of the JOBS Act. In the case of an issuer that is a bank or a bank holding company, Exchange Act Section 12(g)(1)(B) (15 U.S.C. 78l(g)(1)(B)) requires, among other things, that the issuer, if it has total assets exceeding $10,000,000 and a class of securities held of record by 2,000 persons, register such class of securities with the Commission. See Section 601 of the JOBS Act. 731See Liles Letter 1; NCA Letter (stating that the time and expense associated with registration of a class of securities could affect an issuer’s working capital and business operations); CFIRA Letter 2 Continued 202(a)(11)(G)–1(d)(9) under the Investment Advisers Act of 1940.724 We believe issuers and investors would benefit from definitions that are consistent with those already used in our rules, rather than creating a new definition, because issuers may be familiar with those terms and should benefit from existing Commission and staff guidance. The proposed rules also would provide that securities offered and sold in reliance on Section 4(a)(6) may be transferred during the initial one-year period to a trust controlled by the initial purchaser or to a trust created for the benefit of a member of the family of the purchaser or the equivalent. We believe allowing transfers in such cases would be consistent with the intent of the provision because the person that controls or benefits from the trust would otherwise be covered by the rules. Request for Comment
246. Are the proposed limitations on
resale appropriate? Why or why not? If not, what approach would be more appropriate and why? Should there be additional limitations on resale, especially after the first year? Why or why not? If so, what should they be and why? If an issuer no longer was in compliance with the ongoing reporting requirements 725 or was no longer in business, should we place restrictions on the resale of the issuer’s securities or otherwise limit the ability of those shares to trade? If so, please describe the appropriate restrictions and explain how we could implement such restrictions.
247. To transfer securities to an
accredited investor during the one-year period beginning when the securities are sold in reliance on Section 4(a)(6), the seller would need to have a reasonable belief that the purchaser is an accredited investor.726 Is this approach appropriate? Why or why not?
248. Is the proposed use of the
definition of ‘‘accredited investor’’ in Rule 501(a) of Regulation D appropriate? Why or why not? Should a different definition be used for purposes of Regulation Crowdfunding? Please explain.
249. Is the proposed definition of
‘‘member of the family of the purchaser or the equivalent’’ appropriate? Is it appropriate to track the definition of ‘‘immediate family’’ under Exchange Act Section 16 (with the addition of ‘‘spousal equivalent’’), or would another definition be more appropriate? Should any persons be included or not included in the definition? Why or why not? Should we use a consistent definition throughout Regulation Crowdfunding even if it differs from similar rules in other Commission regulations? Why or why not?
3. Information Available to States
Under Section 4A(d), the Commission shall make available, or shall cause to be made available by the relevant intermediary, the information required under Section 4A(b) and such other information as the Commission, by rule, determines appropriate to the securities commission (or any agency or office performing like functions) of each State and territory of the United States and the District of Columbia. One commenter suggested that all information filed with the Commission should be made available to state regulators.727 Another commenter questioned whether open Internet access to the crowdfunding platforms would be sufficient, questioning a platform’s ability to maintain or archive records from Web sites that are routinely updated.728 Another commenter suggested that the requirement in Section 4A(d) should create an affirmative obligation for an intermediary only if a state regulator requests information in excess of what is provided to the Commission.729 We are proposing to require issuers to file on EDGAR the information required by Section 4A(b) and the related rules. Information filed on EDGAR is publicly available and would, therefore, be available to each state, territory and the District of Columbia. We believe this approach would satisfy the requirement to make the information available. Accordingly, we do not believe that it is necessary to propose to impose any additional obligations on intermediaries with respect to this requirement. Request for Comment
250. Would the availability of
information on EDGAR satisfy the requirement to make the information available to each state, territory and the District of Columbia? Are there other means of making the information available? Should we impose any additional obligations on intermediaries with respect to this requirement? If so, what are they? For example, should we require issuers or intermediaries to provide this information directly to state regulators? Please explain.
4. Exemption from Section 12(g)
Section 303 of the JOBS Act amended
Exchange Act Section 12(g) to provide that ‘‘the Commission shall, by rule, exempt, conditionally or unconditionally, securities acquired pursuant to an offering made under [S]ection 4(a) of the Securities Act of 1933 from the provisions of this subsection.’’ As amended by the JOBS Act, Section 12(g) requires, among other things, that an issuer with total assets exceeding $10,000,000 and a class of securities held of record by either 2,000 persons, or 500 persons who are not accredited investors, register such class of securities with the Commission.730 Crowdfunding contemplates the issuance of securities to a large number of holders, which could increase the likelihood that Section 4(a)(6) issuers would exceed the thresholds for reporting in Section 12(g). Section 303 could be read to mean that securities acquired in a crowdfunding transaction would be excluded from the record holder count permanently, regardless of whether the securities continue to be held by a person who purchased in the crowdfunding transaction. An alternative reading could provide that securities acquired in a crowdfunding transaction would be excluded from the record holder count only while held by the original purchaser in the Section 4(a)(6) transaction, as a subsequent purchaser of the securities would not be considered to have ‘‘acquired [the securities] pursuant to an offering made under [S]ection 4(a).’’ Commenters expressed concern that once the securities issued pursuant to
Section 4(a)(6) are transferred, the
exemption from Section 12(g) registration could cease to apply and any new holders of those securities would be included in the calculation of holders of record for purposes of
Section 12(g), which could potentially
require an issuer to register its securities with the Commission.731 Another

(stating that the need for additional capital to meet registration requirements would result in an issuer either having to borrow money, thus leveraging its business, or raising additional capital through a subsequent equity offering that would dilute existing stockholders); ABA Letter 2 (stating that a
Section 12(g) exemption limited to the initial
purchaser of securities would undermine the utility of such an exemption and that an initial purchaser should not be able to force an issuer to register under Section 12(g) simply by reselling his or her securities). 732See Liles Letter 1. 733See ABA Letter 2. 734 Id. 735See 158 Cong. Rec. S1829 (daily ed. Mar. 20,
2012) (statement of Sen. Jeff Merkley) (‘‘It also
provides a very important provision so the small investors do not count against the shareholder number that drives companies to have to become a fully public company. That is critical and interrelates with other parts of the [crowdfunding] bill before us.’’). 736See Section II.B.2 above for a discussion of the requirement to file annual reports. 737See ABA Letter 2. 738See id. 739See proposed Rule 100(b)(6) of Regulation Crowdfunding. 740We note, however, that making the issuer ineligible to use the exemption under Section 4(a)(6) if the issuer failed to comply with the ongoing reporting requirements could have a limited impact since it only would impact an issuer that intended to rely on the Section 4(a)(6) exemption for future offers and sales. But see Bradford note 1 (‘‘The need to go back to investors for future funding should constrain self-dealing, opportunistic behavior by the entrepreneur.’’). 741See ABA Letter 2. 742See id. 743See proposed Rules 202 and 203(b) of Regulation Crowdfunding and Section II.B.2 above for a discussion of the ongoing reporting requirements. 744See ABA Letter 2. 745The anti-fraud and civil liability provisions of the Securities Act, such as Sections 12(a)(2) and 17, apply to exempted transactions, including those transactions that will be conducted in reliance on
Section 4(a)(6).
commenter noted that the prospect that resales could trigger registration requirements under the Exchange Act might provide an incentive for issuers to attempt in some way to restrict resale and transfer of the securities issued in the offering made in reliance on Section 4(a)(6), even after the lapse of the one year transfer limitation, which would be to the detriment of small crowdfunding investors seeking liquidity.732 One commenter suggested that the exemption from Section 12(g) registration should attach to different securities issued in a subsequent restructuring, recapitalization or similar transaction that is exempt from, or otherwise not subject to, the registration requirements of Section 5, so long as the parties to the transaction are affiliates of the original issuer.733 The same commenter suggested that the availability of the exemption be conditioned on the issuer complying with the ongoing reporting requirements and not having total assets at the last day of the fiscal year in excess of $25 million.734 Proposed Rule 12g–6 provides that securities issued pursuant to an offering made under Section 4(a)(6) would be permanently exempted from the record holder count under Section 12(g). An issuer seeking to exclude a person from the record holder count would have the responsibility for demonstrating that the securities held by the person were initially issued in an offering made under Section 4(a)(6). We believe that allowing issuers to sell securities pursuant to Section 4(a)(6) without becoming Exchange Act reporting issuers is consistent with the intent of Title III.735 In this regard, we note that Title III provides for an alternative reporting system under which issuers would be required to file annual reports with the Commission.736 We believe this is consistent with the proposal to permanently exempt securities issued in reliance on Section 4(a)(6) from the record holder count under Section 12(g).
Section 303 of the JOBS Act does not
extend the exemption from Section 12(g) to different securities issued in a subsequent restructuring, recapitalization or similar transaction, so we are not proposing to exempt such securities at this time, as one commenter suggested.737 We also are not proposing to condition the exemption on the issuer’s compliance with the ongoing reporting requirements or on the issuer not having total assets in excess of a certain amount, as the same commenter suggested.738 We believe that the size of the issuer should not affect the availability of the exemption because conditioning the exemption on the issuer not exceeding a certain amount of total assets would impose an additional burden on successful issuers that unsuccessful issuers would not face, which in turn would discourage growth. We also believe that failure to comply with the ongoing reporting requirements could be better addressed as proposed by making the issuer ineligible to use the exemption under Section 4(a)(6),739 rather than by requiring such issuer to register a class of securities under
Section 12(g).740
Request for Comment
251. Should the Commission
permanently exempt securities issued pursuant to an offering under Section 4(a)(6) from the record holder count under Section 12(g), as proposed? Why or why not? Should the Commission exempt securities issued under Section 4(a)(6) only when held of record by the original purchaser in the Section 4(a)(6) transaction, an affiliate of the original purchaser, a member of the original purchaser’s family or a trust for the benefit of the original purchaser or the original purchaser’s family? Why or why not? Are there other ways to implement Section 303 that may be more appropriate? Please explain.
252. One commenter suggested 741
that the Section 4(a)(6) exemption should survive and attach to different securities issued in a subsequent restructuring, recapitalization or similar transaction that is exempt from, or otherwise not subject to, the registration requirements of Section 5, if the parties to the transaction are affiliates of the original issuer. While we are not proposing to implement this suggestion at this time, we invite commenters to discuss the advantages and disadvantages of this approach.
253. The same commenter
suggested 742 that the availability of the exemption under Section 12(g)(6) should be conditioned on the issuer not having total assets, at the last day of the fiscal year with respect to which the
Section 12(g) compliance determination
is made (or a reasonable time before or after such date), in excess of $25 million. Should we condition the availability of the exemption under
Section 12(g)(6) on the issuer not having
total assets in excess of $25 million? If not $25 million, should the availability of the exemption be conditioned on total assets not exceeding some other amount (e.g., $10 million, $50 million, etc.)? Should this determination be made as of the last day of the fiscal year or a different date? Please explain.
254. Should issuers that fail to
comply with the ongoing reporting requirements743 of Regulation Crowdfunding be disqualified from relying on the exemption under Section 12(g)(6), as suggested by one commenter? 744 Why or why not?
255. How would issuers be able to
distinguish securities issued in a transaction exempt under Section 4(a)(6) from securities issued in other offerings? What would be the costs associated with making such a determination?
5. Scope of Statutory Liability
As noted above, Securities Act
Section 4A(c) sets forth a liability
provision for crowdfunding transactions under Section 4(a)(6).745 Section 4A(c) provides that an issuer will be liable to a purchaser of its securities in a

746With respect to intermediaries that are funding portals, see proposed Rule 403(a) of Regulation Crowdfunding and the discussion in Section II.D.4 above. 747 17 CFR 230.262. 748See Securities Act Rule 506(d) [17 CFR 230.506(d)]. See also Disqualification Adopting Release, note 101. 749See NASAA Letter (stating that an offering made pursuant to Section 4(a)(6) also should be subject to disqualification based on the prior bad acts of the funding portal and its management). 750See Applied Dynamite Letter (stating that certain disqualifying events have open-ended definitions that would make it difficult to satisfy with confidence: ‘‘any court of competent jurisdiction’’ having entered an order because there is no limit to the number of courts which may have, at some time, been competent to enter an order regarding an issuer; being ‘‘subject to’’ certain unpublished orders or injunctions such as a United States Postal Service false representation order; and the extension of disqualification events to predecessors and affiliated issuers because of the innumerable ways in which two companies might be deemed to be affiliated). 751See Landon Letter 1. transaction exempted by Section 4(a)(6) if the issuer, in the offer or sale of the securities, makes an untrue statement of a material fact or omits to state a material fact required to be stated or necessary in order to make the statements, in light of the circumstances under which they were made, not misleading, provided that the purchaser did not know of the untruth or omission, and the issuer does not sustain the burden of proof that such issuer did not know, and in the exercise of reasonable care could not have known, of the untruth or omission.
Section 4A(c)(3) defines, for purposes of
the liability provisions of Section 4A, an issuer as including ‘‘any person who offers or sells the security in such offering.’’ On the basis of this definition, it appears likely that intermediaries, including funding portals, would be considered issuers for purposes of this liability provision. We believe that steps intermediaries could take in exercising reasonable care in light of this liability provision would include establishing policies and procedures 746 that are reasonably designed to achieve compliance with the requirements of Regulation Crowdfunding, and that include the intermediary conducting a review of the issuer’s offering documents, before posting them to the platform, to evaluate whether they contain materially false or misleading information. Under this liability provision, an investor who purchases securities in a crowdfunding transaction may bring an action against the issuer to recover the consideration paid for the security, with interest, or damages if the person no longer holds the security. The statute further provides that actions brought under Section 4A(c) will be subject to the provisions of Securities Act Sections 12(b) and 13, as though the liability were created under Securities Act
Section 12(a)(2).
6. Disqualification
Section 302(d) of the JOBS Act
requires the Commission to establish disqualification provisions under which an issuer would not be eligible to offer securities pursuant to Section 4(a)(6) and an intermediary would not be eligible to effect or participate in transactions pursuant to Section 4(a)(6).
Section 302(d)(2) specifies that the
disqualification provisions must be ‘‘substantially similar’’ to the disqualification provisions contained in Rule 262 of Regulation A,747 and they also must cover certain actions by state regulators enumerated in Section 302(d)(2). The disqualifying events listed in Rule 262 apply to the issuer and certain other persons associated with the issuer or the offering, including the issuer’s predecessors and affiliated issuers; directors, officers and general partners of the issuer; beneficial owners of 10 percent or more of any class of the issuer’s equity securities; promoters connected with the issuer; and underwriters and their directors, officers and partners. Rule 262 disqualifying events include:

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

752See SEC Government-Business Forum, note 29. 753See Dodd-Frank Act, note 38. 754See Disqualification Adopting Release, note 101. 755See proposed Rules 503(a)–(c) of Regulation Crowdfunding. 756Under Securities Act Rule 405, the term ‘‘officer’’ is defined as ‘‘a president, vice president, secretary, treasurer or principal financial officer, comptroller or principal accounting officer, and any person routinely performing corresponding functions with respect to any organization.’’ 17 CFR 230.405. 757Under Securities Act Rule 405, the term ‘‘executive officer’’ is defined as a ‘‘president [of the registrant], any vice president of the registrant in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy making function or any other person who performs similar policy making functions for the registrant.’’ 17 CFR 230.405. 758There is no cap on the amount of proceeds that may be raised in an offering relying on Rule 506, and Regulation A limits offerings to $5 million. 759See discussion in Section II.B.1.a.i(a) above. 760See proposed Rule 503(a) of Regulation Crowdfunding. 761See Section 4A(b)(3) and proposed Rule 205 of Regulation Crowdfunding. See also Section II.B.5 above. 762We note that the receipt of transaction-based compensation in connection with the offer and sale of a security could cause a person to be a broker required to register with us under Exchange Act
Section 15(a)(1) (15 U.S.C. 78c(a)(1)).
763See proposed Rule 503(c) of Regulation Crowdfunding. (including offerings made in reliance on Regulation A).752 a. Issuers and Certain Other Associated Persons The disqualification provisions included in Section 302(d) of the JOBS Act are modeled on the disqualification provisions included in Section 926 of the Dodd-Frank Act, which required the Commission to adopt rules, ‘‘substantially similar’’ to Rule 262, that disqualify securities offerings involving certain ‘‘felons and other ‘bad actors’ ’’ from reliance on Rule 506 of Regulation D.753 On July 10, 2013, we adopted rules to implement Section 926 of the Dodd￾Frank Act to disqualify certain securities offerings from reliance on Rule 506 of Regulation D.754 The proposed disqualification rules,755 as they relate to issuers and certain other associated persons, are modeled on the Rule 506 disqualification rules, which, in turn, are substantially similar to the disqualification provisions in Rule 262.
i. Covered Persons
The proposed rules would apply the disqualification provisions to:

• the issuer and any predecessor of
  the issuer or affiliated issuer;
• any director, officer, general partner
  or managing member of the issuer;
• any 20 percent Beneficial Owner;
• any promoter connected with the
  issuer in any capacity at the time of the sale;
• any person that has been or will be
  paid (directly or indirectly) remuneration for solicitation of purchasers in connection with sales of securities in the offering (which we refer to as a ‘‘compensated solicitor’’); and
• any director, officer, general partner
  or managing member of any such compensated solicitor. These covered persons are substantially similar to those currently covered by the disqualification rules for Rules 262 and 506. The proposed rules would cover any ‘‘officer’’ 756 of the issuer, mirroring the coverage in Rule 262, rather than any ‘‘executive officer [and] other officer participating in the offering’’ 757 as it is currently covered in Rule 506. In adopting the Rule 506 disqualification rules, we noted that an ‘‘officer’’ test would be unduly burdensome and overly restrictive due to the larger and more complex organizations that are involved in many Rule 506 transactions as compared to the smaller entities that use Regulation A. We also noted that limiting the coverage of the Rule 506 disqualification rules to executive officers and officers who participate in the offering would lessen the potential compliance burden by limiting the number of covered persons. In contrast, we believe that the startups and small businesses that may seek to raise capital in reliance on Section 4(a)(6) generally will be smaller than the entities involved in Rule 506 transactions and, likely, smaller than the issuers of securities relying on Regulation A.758 We also believe that the ‘‘officers’’ of many issuers relying on Section 4(a)(6) may be only a few individuals, with or without formal titles. As a result, we do not believe that an ‘‘officer’’ test would be more burdensome than the test used for Regulation A purposes, so we do not see a need to deviate from Rule 262 in this context. The proposed rules also would cover persons who are 20 Percent Beneficial Owners. This threshold differs from the 10 percent threshold specified in Rule 262, but it is the same as the threshold in the Rule 506 disqualification rules. We believe that a 10 percent ownership threshold could impose an undue burden on participants in the Section 4(a)(6) marketplace. In this regard, the potential administrative complexity of monitoring the fluctuating ownership levels and the issuer’s inability to control the actions of a shareholder who does not disclose disqualification would be greater under a 10 percent threshold scheme than under a 20 percent threshold scheme. This is the same concern that led us to change the 10 percent threshold in the Rule 506 disqualification rules. A 20 percent threshold would provide greater certainty and ease of compliance than a 10 percent threshold, and it also would be consistent with both the threshold specified in the Rule 506 disqualification rules and the disclosure requirements of Sections 4A(b)(1)(B) and 4A(b)(1)(H)(iii), which require certain disclosures about shareholders based on a 20 percent threshold.759 The proposed rules would include the category of compensated solicitor and any director, officer, general partner or managing member of any such compensated solicitor, currently in the Rule 506 disqualification rules.760 Regulation A offerings may involve traditional underwritten
  offerings, but offers and sales made in reliance on
  Section 4(a)(6), similar to transactions
  under Rule 506, would not involve underwriters. Thus, the proposed disqualification rules would not apply to underwriters, but would substitute underwriters with the concept of compensated solicitor. The statute and the proposed rules would permit issuers offering and selling securities in reliance on Section 4(a)(6) to compensate persons to promote the issuer’s offering through communication channels provided by the intermediary, subject to certain conditions.761 We believe those individuals receiving compensation to promote the issuer’s offering should be covered by the disqualification provisions because they would be subject to conflicts of interest in transactions pursuant to Section 4(a)(6), which would be substantially similar to those of underwriters in Regulation A transactions.762 Moreover, the proposed rules would provide that events relating to certain affiliated issuers are not disqualifying if they pre-date the affiliate relationship.763 Rule 262(a)(5) currently provides that orders, judgments and decrees entered against affiliated issuers before the affiliation arose do not disqualify an issuer from reliance on Regulation A if the affiliated issuer is not: (1) In control of the issuer; or (2) under the common control of a third party that controlled the affiliated issuer at the time such order, judgment or decree was entered. The proposed rules would include a substantially similar provision but would clarify that it applies to all potentially disqualifying events that pre-date affiliation. We believe this is appropriate because the

764See Disqualification Adopting Release, note 101 (declining to provide different treatment for entities that have undergone a change of control or other remedial measures, such as a change of policy whereby an issuer would have implemented policies and procedures, designed to prevent the occurrence of the kinds of activities that gave rise to disqualification, and such policies and procedures would have been approved by a regulator or a court). 765Entities that have undergone a change of control or a change of policy could, however, seek a waiver of the disqualification upon a proper showing that there has been a change of control and the persons responsible for the activities resulting in a disqualification are no longer employed by the entity or exercise influence over such entity. See
Section II.E.6.a.iv below for a discussion of waivers.
766See proposed Rule 503(a)(1) of Regulation Crowdfunding. 767See Disqualification of Felons and Other ‘‘Bad Actors’’ from Rule 506 Offerings, Release No. 33– 9211 (proposed May 25, 2011) at 18 [76 FR 31518, 31523 (June 1, 2011)]. 768See also Disqualification Adopting Release, note 101. 769See Sections II.B.1 and II.B.3 above for a discussion of the disclosure and filing requirements. 770The look-back period means that disqualification no longer arises from a permanent injunction or restraining order after the requisite amount of time has passed, even though the injunction or order may still be in effect. In addition, because disqualification is triggered only when a person ‘‘is subject to’’ a relevant injunction or order, injunctions and orders that have expired or are otherwise no longer in effect are not disqualifying, even if they were issued within the relevant look-back period. 771See proposed Rule 503(a)(2) of Regulation Crowdfunding. current placement of this language within paragraph (5) of Rule 262(a) may incorrectly suggest that it applies only to Postal Service false representation orders. This is the same approach we took in the Rule 506 disqualification rules. As in Rule 506(d), the proposed rules would not treat entities differently if they have undergone a change of control or other remedial measures.764 This should avoid undue complexity in applying the proposed rules, while also avoiding potential abuse by bad actors that may falsely claim to have undergone a change of control.765 Request for Comment
256. Should we eliminate or modify
any of the proposed categories of covered persons? If so, which ones and why? Would doing so still result in a rule substantially similar to Rule 262? Should we disqualify additional categories of covered persons? If so, which ones and why?
257. The proposed rules would apply
to officers of the issuer, mirroring Rule 262, rather than executive officers and other officers participating in the offering, as in Securities Act Rule 506(d). Is this approach appropriate? Why or why not?
258. Should persons compensated to
promote the issuer’s offering through communication channels provided by the intermediary be covered persons, as is the case for the Rule 506 disqualification rules? Why or why not? Would doing so result in a rule substantially similar to Rule 262?
259. The proposed disqualification
rules would cover persons who are 20 Percent Beneficial Owners. Is the 20 percent beneficial ownership threshold appropriate? Why or why not? Should the proposed disqualification rules cover persons based on a 10 percent ownership threshold, as in Rule 262? Why or why not?
260. Should orders, judgments and
decrees entered against affiliated issuers not be disqualifying if they pre-date the affiliate relationship, as proposed? Should we, as proposed, expand this treatment to entities that have undergone a change of control or a change of policy? Why or why not?
ii. Disqualifying Events
(a) Criminal Convictions
Section 302(d)(2)(B)(ii) provides for
disqualification if any covered person ‘‘has been convicted of any felony or misdemeanor in connection with the purchase or sale of any security or involving the making of any false filing with the Commission.’’ This essentially mirrors Rule 262(a)(3), which covers criminal convictions of issuers, and Rule 262(b)(1), which covers criminal convictions of other covered persons. There are, however, two differences between the felony and misdemeanor conviction provisions of Section 302(d)(2)(B)(ii) and Rule 262. First,
Section 302(d)(2)(B)(ii) does not include
a specific time limit (or ‘‘look-back period’’) on convictions that trigger disqualification, while Rule 262 provides a five-year look-back period for criminal convictions of issuers and a 10- year look-back period for criminal convictions of other covered persons. In light of the time limits on criminal convictions under Rule 262, we are proposing the same five-year and 10- year look-back periods so the proposed rules would be substantially similar to the existing rules. Second, unlike Rule 262(b)(1), Section 302(d) does not include a reference to criminal convictions ‘‘arising out of the conduct of the business of an underwriter, broker, dealer, municipal securities dealer or investment adviser.’’ We are not aware of any legislative history that explains why this type of conviction was not mentioned in Section 302(d). However, because such convictions are covered in Rule 262, we believe that rules substantially similar to the existing rules should cover them. The proposed rules are based on Rule 262 and differ from the Rule 506 disqualification rules in that the look￾back period would be measured from the date of the requisite filing with the Commission, rather than the date of the relevant sale.766 We noted in the proposing release for the Rule 506 disqualification rules 767 that measuring from the date of the requisite filing, as in Rule 262, would not be appropriate in the context of Rule 506 because no filing is required to be made with the Commission before an offer or sale is made in reliance on Regulation D.768 Because the proposed rules would require issuers offering securities in reliance on Section 4(a)(6) to file with the Commission the information required by Section 4A(b),769 the proposed rules would measure the look￾back period based on the filing date, similar to Rule 262, rather than the date of sale. (b) Court Injunctions and Restraining Orders Under Rule 262(a)(4), an issuer is disqualified from reliance on Regulation A if it, or any predecessor or affiliated issuer, is subject to a court injunction or restraining order against ‘‘engaging in or continuing any conduct or practice in connection with the purchase or sale of any security or involving the making of any false filing with the Commission.’’ Similarly, under Rule 262(b)(2), an issuer is disqualified from reliance on Regulation A if any other covered person is subject to such a court injunction or restraining order or to one ‘‘arising out of the conduct of the business of an underwriter, broker, dealer, municipal securities dealer or investment adviser.’’ Disqualification is triggered by temporary or preliminary injunctions and restraining orders that are currently in effect, as well as by permanent injunctions and restraining orders entered within the last five years.770 The proposed rules are substantially similar to these two provisions, but in a simplified, combined format.771 The proposed rules would include the same coverage and look-back periods that apply under
the disqualification provisions for Rules 262 and 506, except that the look-back period would be measured from the date of the requisite filing with the Commission, consistent with the approach in Rule 262. The proposed rules also would not impose due process requirements (such as notice and an opportunity to appear) or require that all appeals be exhausted or

772See Section II.E.6.a.iv below for a discussion of the waiver process. 773See proposed Rule 503(a)(3) of Regulation Crowdfunding. 774 Disqualification Adopting Release, note 101. 775See, e.g., Exchange Act Section 15(b)(4)(D) [15 U.S.C. 78o(b)(4)(D)] and Advisers Act Section 203(e)(5) [15 U.S.C. 80b–3(e)(5)]. 776 7 U.S.C. 1 et seq. 777Orders that do not have any of those effects are not bars, although they may be disqualifying ‘‘final orders.’’ 778See proposed Rule 503(a)(3) of Regulation Crowdfunding. 779See proposed Rule 503(a)(2) of Regulation Crowdfunding. the time for appeal be expired, as a condition to disqualification. This is the same approach as under the disqualification provisions for Rules 262 and 506. We believe that the risk that disqualification may arise from ex parte proceedings could be better addressed through the waiver process,772 rather than through additional requirements for factual inquiry that would affect all offerings. As for appealable orders, we believe that suspending disqualification during the pendency of a potentially lengthy appeals process could significantly undermine the intended protections in the rules, and therefore, the proposed rules would disqualify covered persons during the pendency of the appeals. With regard to who would be viewed as subject to an order, we believe the proposed rules should be applied consistently with the way the staff has applied Rule 262. For disqualification purposes, the staff has interpreted Rule 262 to limit those considered ‘‘subject to’’ an order to only the persons specifically named in the order. Others who are not specifically named but who come within the scope of an order (such as, for example, agents, attorneys and persons acting in concert with the named person) would not be treated as ‘‘subject to’’ the order for purposes of disqualification. (c) Final Orders of Certain Regulators
Section 302(d)(2)(B) provides that the
disqualification rules for transactions made in reliance on Section 4(a)(6) must disqualify any covered person that:
(i) is subject to a final order of a State securities commission (or an agency or officer of a State performing like functions), a State authority that supervises or examines banks, savings associations, or credit unions, a State insurance commission (or an agency or officer of a State performing like functions), an appropriate Federal banking agency, or the National Credit Union Administration, that— (I) bars the person from— (aa) association with an entity regulated by such commission, authority, agency, or officer; (bb) engaging in the business of securities, insurance, or banking; or (cc) engaging in savings association or credit union activities; or (II) constitutes a final order based on a violation of any law or regulation that prohibits fraudulent, manipulative, or deceptive conduct within the 10-year period ending on the date of filing of the offer or sale.
Section 302(d)(2)(B) is substantively
identical to Exchange Act Section 15(b)(4)(H) and Section 203(e)(9) of the Investment Advisers Act of 1940 (‘‘Advisers Act’’). Section 302(d)(2)(B) contains a 10-year look-back period for final orders based on violations of laws and regulations that prohibit fraudulent, manipulative and deceptive conduct, while the Exchange Act and Advisers Act provisions have no time limit for such orders. The proposed rules would reflect the text of Section 302(d)(2)(B) with two clarifications.773 First, the proposed rules would specify that an order must bar the covered person ‘‘at the time of the filing of the information required by
Section 4A(b) of the Securities Act of
1933,’’ to clarify that a bar would be disqualifying only for as long as it has continuing effect. Second, the proposed rules would require that orders must have been ‘‘entered’’ within the look￾back period, to clarify that the date of the order, and not the date of the underlying conduct, was relevant for that determination. We believe these clarifications would eliminate potential ambiguities and allow for more appropriate application of the rules. These clarifications also are consistent with the approach in the Rule 506 disqualification rules, except that under Securities Act Rule 506(d), the order must bar the covered person at the time of the relevant sale, rather than at the time of the filing, because no filing is required to be made with the Commission prior to the time of a sale made pursuant to Rule 506. The proposed rules also would include the U.S. Commodity Futures Trading Commission (‘‘CFTC’’) in the list of regulators whose regulatory bars and other final orders will trigger disqualification. This is consistent with the approach in the Rule 506 disqualification rules. As we noted in the adopting release for Securities Act Rule 506(d),774 the conduct that would typically give rise to CFTC sanctions is similar to the type of conduct that would result in disqualification if it were the subject of sanctions by another financial regulator. For that reason, CFTC orders trigger consequences under other Commission statutes 775 (for example, both registered broker-dealers and investment advisers may be subject to Commission disciplinary action based on violations of the Commodity Exchange Act 776). We believe that including CFTC orders would make the disqualification rules for transactions made in reliance on Section 4(a)(6) more internally consistent, treating relevant sanctions similarly for disqualification purposes, which should enhance the effectiveness of the disqualification rules to screen out felons and bad actors. In our view, bars are orders issued by one of the specified regulators that have the effect of barring a person from: (1) Associating with certain regulated entities; (2) engaging in the business of securities, insurance or banking; or (3) engaging in savings association or credit union activities. We believe that any such order that has one of those effects would be a bar, regardless of whether it uses the term ‘‘bar.’’ 777 Under the proposed rules, a disqualifying order is one that bars the person ‘‘at the time of the filing of the information required by
Section 4A(b) of the Securities Act of
1933’’ from one or more of the specified activities. Thus, for example, a person who was barred permanently, with the right to apply to reassociate after three years, would be disqualified until such time as he or she successfully applied to reassociate, assuming that the bar had no continuing effect after reassociation. Bars would be disqualifying for as long as they are in effect but no longer, matching the period of disqualification to the duration of the regulatory sanction. The treatment of regulatory bars and orders 778 is different in one relevant respect from court injunctions and restraining orders.779 Court injunctions and restraining orders would be subject to a five-year look￾back period, which would function as a cut-off (i.e., injunctions and restraining orders issued more than five years before the filing required by Section 4A(b) would no longer be disqualifying, even if they are still in effect or permanent). This is the same approach as under the Rules 262 and 506 disqualification rules, and we do not believe that the shift from Regulation A and Rule 506 offerings to offerings pursuant to Section 4(a)(6) justifies extending the time period for disqualifications associated with court injunctions and restraining orders. The proposed rules would define a ‘‘final order’’ as ‘‘a written directive or declaratory statement issued by a

780The federal or state agencies described in proposed Rule 503(a)(3) of Regulation Crowdfunding are the ones identified in Section 302(d)(2)(B)(i), with the addition of the CFTC. 781Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff’d on other grounds, 450 U.S. 91 (1981). 782See In the Matter of Mitchell M. Maynard and Dorice A. Maynard, Release No. IA–2875 (May 15, 2009). 783See proposed Rule 503(a)(4) of Regulation Crowdfunding. 784 In cease-and-desist proceedings, the Commission can issue orders against ‘‘any person,’’ including entities and individuals outside the securities industry, imposing sanctions such as penalties, accounting and disgorgement or officer and director bars. In contrast, administrative proceedings generally are limited to regulated entities and their associated persons. 785The disqualification provisions under Rule 262 also do not cover other types of Commission actions. For example, the Commission has authority under Section 9(b) of the Investment Company Act to bring proceedings against ‘‘any person’’ and may impose investment company bars, civil penalties and disgorgement under Sections 9(d) and (e) of the Investment Company Act. 15 U.S.C. 80a–9(b), (d) and (e). The Commission also has authority under Rule 102(e) of its Rules of Practice to censure persons (such as accountants and attorneys) who appear or practice before it, or to deny them the privilege of appearing before the Commission temporarily or permanently. 17 CFR 201.102(e). Orders under these sections are not disqualifying under Rule 262. 786See proposed Rule 503(a)(5) of Regulation Crowdfunding. 787 15 U.S.C. 77q(a)(1). 788 15 U.S.C. 78j(b). 789 17 CFR 240.10b–5. 790 15 U.S.C. 78o(c)(1). 791 15 U.S.C. 80b–6(1). federal or state agency, described in proposed Rule 503(a)(3) of Regulation Crowdfunding, under applicable statutory authority that provides for notice and an opportunity for hearing, which constitutes a final disposition or action by that federal or state agency.’’ 780 This definition is based on the definition that FINRA uses in forms related to Exchange Act Section 15(b)(4)(H), which is identical to provisions of Section 302(d). Section 302(d) provides that disqualification must result from final orders of the relevant regulators that are ‘‘based on a violation of any law or regulation that prohibits fraudulent, manipulative, or deceptive conduct.’’ The proposed rules would not, similar to the Rule 506 disqualification rules, limit ‘‘fraudulent, manipulative or deceptive conduct’’ to matters involving scienter. Scienter is not a requirement under Exchange Act
Section 15(b)(4)(H) or Advisers Act
Section 203(e)(9). Commission orders
are issued under these sections based only on the existence of a relevant state or federal regulatory order. The Commission has stated that, while the degree of scienter involved is a factor in determining what sanction is appropriate,781 the Commission can order sanctions even where scienter is not an element of the underlying state antifraud law violation.782 We do not believe it would be appropriate to limit the provision to matters involving scienter absent a clear statutory directive to do so, particularly when the relevant language has been construed in other contexts not to be so limited. Moreover, imposing such a limitation may result in excluding regulatory orders that are explicitly mandated to be covered by the new rules. (d) Commission Disciplinary Orders Rule 262(b)(3) of Regulation A disqualifies an issuer if any covered person is subject to a Commission order ‘‘entered pursuant to [S]ection 15(b), 15B(a), or 15B(c) of the Exchange Act, or [S]ection 203(e) or (f) of the Investment Advisers Act.’’ Under these provisions (other than Section 15B(a), discussed below), the Commission has authority to order a variety of sanctions against registered brokers, dealers, municipal securities dealers and investment advisers and their associated persons, including suspension or revocation of registration, censure, limiting their activities, imposing civil money penalties and barring individuals from being associated with specified entities and from participating in the offering of any penny stock. The proposed rules are based on Rule 262(b)(3) but would not include the reference to Section 15B(a) (the basic registration requirements for municipal securities dealers).783 Section 15B(a) is not generally a source of sanctioning authority, and we do not believe it is appropriate to refer to it in the context of the proposed disqualification rules. This is consistent with the approach in the Rule 506 disqualification rules. Under the proposed rules, the disqualification would continue only for as long as some act is prohibited or required to be performed pursuant to the order (with the consequence that censures and orders to pay civil money penalties, assuming the penalties are paid in accordance with the order, would not be disqualifying, and a disqualification based on a suspension or limitation of activities would expire when the suspension or limitation expires). (e) Certain Commission Cease-and￾Desist Orders
Section 302(d) mandates that
disqualification result from final orders issued within a 10-year period by the state and federal regulators identified in
Section 302(d)(2)(B)(i). These regulators
include state authorities that supervise banks, savings associations or credit unions; state insurance regulators; appropriate federal banking agencies; and the National Credit Union Administration. The Commission is not included in the list of regulators, and orders issued in stand-alone Commission cease-and-desist proceedings 784 are not disqualifying under Rule 262.785 The reason for this omission appears to be largely historical: the Commission did not have authority to bring cease-and-desist proceedings when Rule 262 was originally adopted, and the rule has not been amended to take that authority into account. We believe that adding certain Commission cease-and-desist orders to the disqualification provisions would further enhance the investor protection intent of the disqualification provisions. This approach also would be consistent with the disqualification provisions for Rule 506. We believe an injunctive or restraining order issued by a federal court and a Commission cease-and￾desist order arising out of the same legal violation demonstrate equally disqualifying conduct and should have the same consequences under our proposed disqualification rules. We believe that the determination of disqualification should not depend on whether a particular enforcement action is brought in court or through a Commission cease-and-desist proceeding. Commission cease-and￾desist orders would be an additional disqualification trigger not provided for in Section 302(d). In our view, Section 302(d) does not limit the existing authority we previously used to create other bad actor provisions, and based on the foregoing reasons, we believe it would be appropriate to add Commission cease-and-desist orders to the disqualification triggers. The proposed rules, consistent with the approach for the Rule 506 disqualification rules, would not include administrative cease-and-desist orders that do not require any showing or finding of scienter, with one exception.786 The proposed disqualification trigger only would cover Commission orders to cease and desist from violations and future violations of the scienter-based anti￾fraud provisions of the federal securities laws (including, without limitation, Securities Act Section 17(a)(1),787 Exchange Act Section 10(b) 788 and Rule 10b–5 thereunder,789 Exchange Act
Section 15(c)(1) 790 and Advisers Act
Section 206(1) 791). The only additional
disqualification trigger not requiring scienter would be Section 5