You are on page 1of 229

Vol.

80 Monday,
No. 220 November 16, 2015

Book 2 of 2 Books
Pages 71387–71680

Part III

Securities and Exchange Commission

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


Crowdfunding; Final Rule
mstockstill on DSK4VPTVN1PROD with RULES3

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00001 Fmt 4717 Sfmt 4717 E:\FR\FM\16NOR3.SGM 16NOR3
71388 Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations

SECURITIES AND EXCHANGE B. Issuer Requirements A. Need for the Rule


COMMISSION 1. Disclosure Requirements B. Significant Issues Raised by Public
2. Ongoing Reporting Requirements Comments
17 CFR Parts 200, 227, 232, 239, 240, 3. Form C and Filing Requirements C. Small Entities Subject to the Rules
4. Prohibition on Advertising Terms of the D. Projected Reporting, Recordkeeping and
249, 269, and 274
Offering Other Compliance Requirements
[Release Nos. 33–9974; 34–76324; File No. 5. Compensation of Persons Promoting the E. Agency Action To Minimize Effect on
S7–09–13] Offering Small Entities
6. Other Issuer Requirements 1. Issuers
RIN 3235–AL37 C. Intermediary Requirements 2. Intermediaries
1. Definitions of Funding Portals and VI. Statutory Authority
Crowdfunding Associated Persons Exhibit A
AGENCY: Securities and Exchange 2. General Requirements for Intermediaries
3. Measures To Reduce Risk of Fraud I. Introduction
Commission. 4. Account Opening
ACTION: Final rule. 5. Requirements With Respect to
A. Background
Transactions Crowdfunding is a relatively new and
SUMMARY: The Securities and Exchange 6. Completion of Offerings, Cancellations evolving method of using the Internet to
Commission is adopting new Regulation and Reconfirmations raise capital to support a wide range of
Crowdfunding under the Securities Act 7. Payments to Third Parties ideas and ventures. An entity or
of 1933 and the Securities Exchange Act D. Additional Funding Portal
individual raising funds through
of 1934 to implement the requirements Requirements
1. Registration Requirement crowdfunding typically seeks small
of Title III of the Jumpstart Our Business
2. Exemption From Broker-Dealer individual contributions from a large
Startups Act. Regulation Crowdfunding
prescribes rules governing the offer and Registration number of people. Individuals
sale of securities under new Section 3. Safe Harbor for Certain Activities interested in the crowdfunding
4(a)(6) of the Securities Act of 1933.
4. Compliance campaign—members of the ‘‘crowd’’—
5. Records To Be Created and Maintained may share information about the project,
Regulation Crowdfunding also provides by Funding Portals
a framework for the regulation of cause, idea or business with each other
E. Miscellaneous Provisions and use the information to decide
registered funding portals and broker- 1. Insignificant Deviations From Regulation
dealers that issuers are required to use Crowdfunding
whether to fund the campaign based on
as intermediaries in the offer and sale of 2. Restrictions on Resales the collective ‘‘wisdom of the crowd.’’
securities in reliance on Section 4(a)(6). 3. Information Available to States The Jumpstart Our Business Startups
In addition, Regulation Crowdfunding 4. Exemption From Section 12(g) Act (the ‘‘JOBS Act’’),1 enacted on April
conditionally exempts securities sold 5. Scope of Statutory Liability 5, 2012, establishes a regulatory
pursuant to Section 4(a)(6) from the 6. Disqualification Provisions structure for startups and small
7. Secondary Market Trading businesses to raise capital through
registration requirements of Section III. Economic Analysis
12(g) of the Securities Exchange Act of securities offerings using the Internet
A. Baseline through crowdfunding. The
1934. 1. Current Methods of Raising Up to $1
crowdfunding provisions of the JOBS
DATES: The final rules and forms are Million of Capital
Act were intended to help provide
effective May 16, 2016, except that 2. Current Sources of Funding for Startups
and Small Businesses That Could Be startups and small businesses with
instruction 3 adding part 227 and
instruction 15 amending Form ID are Substitutes or Complements To capital by making relatively low dollar
effective January 29, 2016. Crowdfunding offerings of securities, featuring
3. Current Crowdfunding Practices relatively low dollar investments by the
FOR FURTHER INFORMATION CONTACT: 4. Survival Rates for Startups and Small ‘‘crowd,’’ less costly.2 Congress
With regard to requirements for issuers, Businesses included a number of provisions
Eduardo Aleman, Julie Davis, or Amy 5. Market Participants intended to protect investors who
Reischauer, Division of Corporation B. Analysis of Final Rules
engage in these transactions,3 including
Finance, at (202) 551–3460, and with 1. Broad Economic Considerations
regard to requirements for 2. Crowdfunding Exemption 1 Pub. L. 112–106, 126 Stat. 306 (2012).
intermediaries, Joseph Furey, Joanne 3. Issuer Requirements 2 See, e.g., congressional statements regarding
Rutkowski, Timothy White, Devin Ryan, 4. Intermediary Requirements crowdfunding bills that were precursors to the JOBS
5. Additional Funding Portal Requirements
or Erin Galipeau, Division of Trading Act: 157 Cong. Rec. S8458–02 (daily ed. Dec. 8,
6. Insignificant Deviations 2011) (statement of Sen. Jeff Merkley) (‘‘Low-dollar
and Markets, at (202) 551–5550, 7. Relationship With State Law investments from ordinary Americans may help fill
Securities and Exchange Commission, 8. Exemption From Section 12(g) the void, providing a new avenue of funding to the
100 F Street NE., Washington, DC 9. Disqualification small businesses that are the engine of job creation.
20549. IV. Paperwork Reduction Act The CROWDFUND Act would provide startup
A. Background companies and other small businesses with a new
SUPPLEMENTARY INFORMATION: way to raise capital from ordinary investors in a
B. Estimate of Issuers and Intermediaries more transparent and regulated marketplace.’’); 157
Table of Contents 1. Issuers Cong. Rec. H7295–01 (daily ed. Nov. 3, 2011)
I. Introduction 2. Intermediaries That Are Registered (statement of Rep. Patrick McHenry) (‘‘[H]igh net
A. Background Brokers worth individuals can invest in businesses before
B. Title III of the JOBS Act 3. Funding Portals the average family can. And that small business is
II. Final Rules Implementing Regulation C. Estimate of Burdens limited on the amount of equity stakes they can
mstockstill on DSK4VPTVN1PROD with RULES3

Crowdfunding 1. Issuers provide investors and limited in the number of


2. Brokers and Funding Portals investors they can get. So, clearly, something has
A. Crowdfunding Exemption to be done to open these capital markets to the
1. Limit on Capital Raised D. Collections of Information Are average investor[.]’’).
2. Investment Limits Mandatory 3 See, e.g., congressional statements regarding
3. Transaction Conducted Through an E. Confidentiality crowdfunding bills that were precursors to the JOBS
Intermediary F. Retention Period of Recordkeeping Act: 158 Cong. Rec. S1781 (daily ed. Mar. 19, 2012)
4. Exclusion of Certain Issuers From Requirements (statement of Sen. Carl Levin) (‘‘Our bill creates
Eligibility Under Section 4(a)(6) V. Final Regulatory Flexibility Act Analysis new opportunities for crowdfunding but establishes

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations 71389

investment limits, required disclosures of securities for the account of others actions and provide notices and other
by issuers, and a requirement to use generally would, under pre-existing information to the Commission;
regulated intermediaries. The provisions regulations, be required to register with • adds Exchange Act Section 3(h),10
also permit Internet-based platforms to the Commission as a broker-dealer and which requires the Commission to adopt
facilitate the offer and sale of securities comply with the laws and regulations rules to exempt, either conditionally or
in crowdfunding transactions without applicable to broker-dealers.6 A person unconditionally, ‘‘funding portals’’ from
having to register with the Commission that operates such a Web site only for having to register as a broker-dealer
as brokers. the purchase of securities of startups pursuant to Exchange Act Section
In the United States, crowdfunding and small businesses, however, may 15(a)(1); 11
generally has not involved the offer of find it impractical in view of the limited • mandates that the Commission
a share in any financial returns or nature of that person’s activities and establish disqualification provisions
profits that the fundraiser may expect to business to register as a broker-dealer under which an issuer would not be
generate from business activities and operate under the full set of able to avail itself of the Section 4(a)(6)
financed through crowdfunding. Such a regulatory obligations that apply to exemption if the issuer or an
profit or revenue-sharing model— broker-dealers. intermediary was subject to a
sometimes referred to as the ‘‘equity disqualifying event; and
model’’ of crowdfunding—could trigger B. Title III of the JOBS Act • adds Exchange Act Section
the application of the federal securities Title III of the JOBS Act (‘‘Title III’’) 12(g)(6),12 which requires the
laws because it likely would involve the added new Securities Act Section Commission to adopt rules to exempt
offer and sale of a security. Under the 4(a)(6),7 which provides an exemption from the registration requirements of
Securities Act of 1933 (‘‘Securities from the registration requirements of Section 12(g),13 either conditionally or
Act’’), the offer and sale of securities is Securities Act Section 5 8 for certain unconditionally, securities acquired
required to be registered unless an crowdfunding transactions. To qualify pursuant to an offering made in reliance
exemption is available. Some observers for the exemption under Section 4(a)(6), on Section 4(a)(6).
have stated that registered offerings are crowdfunding transactions by an issuer On October 23, 2013, we proposed
not feasible for raising smaller amounts (including all entities controlled by or new rules and forms to implement Title
of capital, as is done in a typical under common control with the issuer) III of the JOBS Act.14 We received over
crowdfunding transaction, because of must meet specified requirements, 485 comment letters on the Proposing
the costs of conducting a registered including the following: Release, including from professional
offering and the resulting ongoing • The amount raised must not exceed and trade associations, investor
reporting obligations under the $1 million in a 12-month period; organizations, law firms, investment
Securities Exchange Act of 1934 • individual investments in all companies and investment advisers,
(‘‘Exchange Act’’) that may arise as a crowdfunding issuers in a 12-month broker-dealers, potential funding
result of the offering. Limitations under period are limited to: portals, members of Congress, the
existing regulations, including Æ The greater of $2,000 or 5 percent Commission’s Investor Advisory
purchaser qualification requirements for of annual income or net worth, if annual Committee,15 state securities regulators,
offering exemptions that permit general income or net worth of the investor is government agencies, potential issuers,
solicitation and general advertising, less than $100,000; and accountants, individuals and other
have made private placement Æ 10 percent of annual income or net interested parties. We have reviewed
exemptions generally unavailable for worth (not to exceed an amount sold of and considered all of the comments that
crowdfunding transactions, which are $100,000), if annual income or net we received on the Proposing Release
intended to involve a large number of worth of the investor is $100,000 or and on Title III of the JOBS Act.16 In this
investors 4 and not be limited to more; and
investors that meet specific • transactions must be conducted 10 15 U.S.C. 78c(h).
qualifications.5 through an intermediary that either is 11 15 U.S.C. 78o(a)(1).
Moreover, someone who operates a registered as a broker-dealer or is 12 15 U.S.C. 78l(g)(6).

Web site to effect the purchase and sale registered as a new type of entity called
13 15 U.S.C. 78l(g).
14 See Rel. No. 33–9470 (Oct. 23, 2013) [78 FR
a ‘‘funding portal.’’ 66427 (Nov. 5, 2013)] (the ‘‘Proposing Release’’),
basic regulatory oversight, liability, and disclosure In addition, Title III:
rules that will give investors the confidence to available at: http://www.sec.gov/rules/proposed/
participate in this promising emerging source of • Adds Securities Act Section 4A,9 2013/33-9470.pdf.
money for growing companies.’’). which requires, among other things, that 15 The SEC Investor Advisory Committee

4 In this release, ‘‘investors’’ includes investors issuers and intermediaries that facilitate (‘‘Investor Advisory Committee’’) was established in
and potential investors, as the context requires. See April 2012 pursuant to Section 911 of the Dodd-
transactions between issuers and Frank Wall Street Reform and Consumer Protection
Rule 100(d) of Regulation Crowdfunding.
5 See Eliminating the Prohibition Against General
investors in reliance on Section 4(a)(6) Act [Pub. L. 111–203, sec. 911, 124 Stat. 1376, 1822
Solicitation and General Advertising in Rule 506 provide certain information to investors (July 21, 2010)] (the ‘‘Dodd-Frank Act’’) to advise
and Rule 144A Offerings, Release No. 33–9415 (July and potential investors, take other the Commission on regulatory priorities, the
10, 2013) [78 FR 44771 (July 24, 2013)] (adopting regulation of securities products, trading strategies,
rules to implement Title II of the Jumpstart Our fee structures, the effectiveness of disclosure,
6 Exchange Act Section 15(a)(1) generally makes
Business Startups Act) (‘‘Rule 506(c) Adopting initiatives to protect investor interests and to
it unlawful for a broker or dealer to effect any promote investor confidence and the integrity of the
Release’’). Title II of the JOBS Act directed the
transactions in, or induce the purchase or sale of, securities marketplace. The Dodd-Frank Act
Commission to amend Rule 506 of Regulation D to
any security unless that broker or dealer is authorizes the Investor Advisory Committee to
permit general solicitation or general advertising in
registered with the Commission pursuant to submit findings and recommendations for review
offerings made under Rule 506, provided that all
mstockstill on DSK4VPTVN1PROD with RULES3

Exchange Act Section 15(b). 15 U.S.C. 78o(a). See and consideration by the Commission.
purchasers of the securities are accredited investors.
discussion in Section II.D.2. Because brokers and 16 To facilitate public input on JOBS Act
Accredited investors include natural persons who
dealers both register as broker-dealers (i.e., there is rulemaking before the issuance of rule proposals,
meet certain income or net worth thresholds.
no separate ‘‘broker’’ or ‘‘dealer’’ registration under the Commission invited members of the public to
Although this rule facilitates the type of broad
solicitation emblematic of crowdfunding, Exchange Act Section 15(b)), we use the term make their views known on various JOBS Act
crowdfunding is premised on permitting sales of ‘‘broker-dealer’’ in this release. initiatives in advance of any rulemaking by
7 15 U.S.C. 77d(a)(6).
securities to any interested person, not just to submitting comment letters to the Commission’s
8 15 U.S.C. 77e.
investors who meet specific qualifications, such as Web site at http://www.sec.gov/spotlight/
accredited investors. 9 15 U.S.C. 77a. Continued

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
71390 Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations

release, we are adopting new rules and cannot be resold for a period of one platform operated by a registered broker
forms to implement Sections 4(a)(6) and year. Holders of these securities do not or a funding portal, which is a new type
4A and Exchange Act Sections 3(h) and count toward the threshold that requires of SEC registrant. The rules require
12(g)(6). The rules are described in an issuer to register its securities with these intermediaries to:
detail below. the Commission under Section 12(g) of • Provide investors with educational
the Exchange Act if the issuer is current materials;
II. Final Rules Implementing • Take measures to reduce the risk of
in its annual reporting obligation,
Regulation Crowdfunding fraud;
retains the services of a registered
Regulation Crowdfunding, among transfer agent and has less than $25 • Make available information about
other things, permits individuals to million in assets. the issuer and the offering;
invest in securities-based crowdfunding Disclosure by Issuers. The final rules • Provide communication channels to
transactions subject to certain require issuers conducting an offering permit discussions about offerings on
thresholds, limits the amount of money pursuant to Regulation Crowdfunding to the platform; and
an issuer can raise under the file certain information with the • Facilitate the offer and sale of
crowdfunding exemption, requires Commission and provide this crowdfunded securities.
issuers to disclose certain information information to investors and the The rules prohibit funding portals
about their offers, and creates a relevant intermediary facilitating the from:
regulatory framework for the crowdfunding offering. Among other • Offering investment advice or
intermediaries that facilitate the things, in its offering documents, the making recommendations;
crowdfunding transactions. As an issuer is required to disclose: • Soliciting purchases, sales or offers
overview, under the final rules: • Information about officers and to buy securities offered or displayed on
• An issuer is permitted to raise a directors as well as owners of 20 percent its platform;
maximum aggregate amount of $1 or more of the issuer; • Compensating promoters and others
million through crowdfunding offerings • A description of the issuer’s for solicitations or based on the sale of
in a 12-month period; business and the use of proceeds from securities; and
• Individual investors, over the the offering; • Holding, possessing, or handling
course of a 12-month period, are • The price to the public of the investor funds or securities.
permitted to invest in the aggregate securities or the method for determining The rules provide a safe harbor under
across all crowdfunding offerings up to: the price, the target offering amount, the which funding portals can engage in
Æ If either their annual income or net deadline to reach the target offering certain activities consistent with these
worth is less than $100,000, then the amount, and whether the issuer will restrictions.
greater of: accept investments in excess of the The staff will undertake to study and
D $2,000 or target offering amount; submit a report to the Commission no
D 5 percent of the lesser of their • Certain related-party transactions; later than three years following the
annual income or net worth. • A discussion of the issuer’s effective date of Regulation
Æ If both their annual income and net financial condition; and Crowdfunding on the impact of the
worth are equal to or more than • Financial statements of the issuer regulation on capital formation and
$100,000, then 10 percent of the lesser that are, depending on the amount investor protection. The report will
of their annual income or net worth; and offered and sold during a 12-month include, but not be limited to, a review
• During the 12-month period, the period, accompanied by information of: (1) Issuer and intermediary
aggregate amount of securities sold to an from the issuer’s tax returns, reviewed compliance; (2) issuer offering limits
investor through all crowdfunding by an independent public accountant, or and investor investment limits; (3)
offerings may not exceed $100,000. audited by an independent auditor. An incidence of fraud, investor losses, and
Certain companies are not eligible to issuer relying on these rules for the first compliance with investor aggregates; (4)
use the Regulation Crowdfunding time would be permitted to provide intermediary fee and compensation
exemption. Ineligible companies reviewed rather than audited financial structures; (5) measures intermediaries
include non-U.S. companies, companies statements, unless financial statements have taken to reduce the risk of fraud,
that already are Exchange Act reporting of the issuer are available that have been including reliance on issuer and
companies, certain investment audited by an independent auditor. investor representations; (6) the concept
companies, companies that are Issuers are required to amend the of a centralized database of investor
disqualified under Regulation offering document during the offering contributions; (7) intermediary policies
Crowdfunding’s disqualification rules, period to reflect material changes and and procedures; (8) intermediary
companies that have failed to comply provide updates on the issuer’s progress recordkeeping practices; and (9)
with the annual reporting requirements toward reaching the target offering secondary market trading practices.
under Regulation Crowdfunding during amount.
the two years immediately preceding In addition, issuers relying on the A. Crowdfunding Exemption
the filing of the offering statement, and Regulation Crowdfunding exemption Section 4(a)(6) provides an exemption
companies that have no specific are required to file an annual report from the registration requirements of
business plan or have indicated their with the Commission and provide it to Securities Act Section 5 for certain
business plan is to engage in a merger investors. crowdfunding transactions. To qualify
or acquisition with an unidentified Crowdfunding Platforms. One of the for this exemption, crowdfunding
company or companies. key investor protections of Title III of transactions by an issuer must meet
mstockstill on DSK4VPTVN1PROD with RULES3

Securities purchased in a the JOBS Act is the requirement that specified requirements, including limits
crowdfunding transaction generally Regulation Crowdfunding transactions on the dollar amount of the securities
take place through an SEC-registered that may be sold by an issuer and the
jobsactcomments.shtml. The comment letters intermediary, either a broker-dealer or a dollar amount that may be invested by
relating to Title III of the JOBS Act submitted in
response to this invitation are located at http://
funding portal. Under Regulation an individual in a 12-month period. The
www.sec.gov/comments/jobs-title-ii/jobs-title- Crowdfunding, offerings must be crowdfunding transaction also must be
iii.shtml. conducted exclusively through a conducted through a registered

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations 71391

intermediary that complies with by the issuer in the current offering to supporting this approach,24 and others
specified requirements.17 Title III also determine the aggregate amount sold in opposing it.25
provides limitations on who may rely reliance on Section 4(a)(6) during the
on the exemption and establishes c. Final Rules
preceding 12-month period. Under the
specific liability provisions for material proposed rules, for purposes of We are adopting as proposed rules
misstatements or omissions in determining whether an entity is that limit to $1 million the aggregate
connection with Section 4(a)(6) exempt ‘‘controlled by or under common amount that may be sold to all investors
transactions. As discussed below, the control with’’ the issuer, an issuer by the issuer in a 12-month period in
rules we are adopting are designed to would be required to consider whether reliance on the new exemption.26 We
aid issuers, investors and intermediaries continue to believe this approach is
it has ‘‘control’’ based on the definition
in complying with these various
in Securities Act Rule 405.19 As consistent with the statute and will
limitations and requirements.
proposed, the amount of securities sold provide for a meaningful addition to the
1. Limit on Capital Raised in reliance on Section 4(a)(6) also would existing capital formation options for
a. Proposed Rules include securities sold by any smaller companies while maintaining
predecessor of the issuer in reliance on important investor protections.
The exemption from registration Moreover, Regulation Crowdfunding is a
Section 4(a)(6) during the preceding 12-
provided by Section 4(a)(6) is available novel method of raising capital for
to a U.S. issuer provided that ‘‘the month period.
smaller companies, and we are
aggregate amount sold to all investors by b. Comments on the Proposed Rules concerned about expanding the offering
the issuer, including any amount sold in limit of the exemption beyond the level
reliance on the exemption provided A few commenters supported a $1
specified in Section 4(a)(6) at the outset
under [Section 4(a)(6)] during the 12- million limit on capital raised by an of the adoption of final rules. Some
month period preceding the date of such issuer in reliance on Section 4(a)(6),20 commenters suggested that the $1
transaction, is not more than while many other commenters believed million limit be net of fees charged by
$1,000,000.’’ Under Securities Act that the proposed $1 million limit was the intermediary to host the offering on
Section 4A(h), the Commission is too low and, in some instances, the intermediary’s platform,27 which
required to adjust the dollar amounts in recommended higher limits.21 Several would be an indirect way of increasing
Section 4(a)(6) ‘‘not less frequently than commenters urged that the $1 million the $1 million limit. We are concerned
once every five years, by notice limit be net of fees charged by the that expanding the offering limit in this
published in the Federal Register, to intermediary to host the offering on the way would provide less certainty and
reflect any change in the Consumer intermediary’s platform,22 while other could raise interpretive questions,
Price Index for All Urban Consumers
commenters generally opposed this which would make the exemption more
published by the Bureau of Labor
idea.23 costly for issuers to comply with. If a
Statistics.’’
Consistent with the statute, we Commenters were divided on the funding portal’s fees are not known in
proposed in Rule 100(a) of Regulation proposed guidance that other exempt advance, for example, this may create
Crowdfunding to limit the aggregate offerings should not be integrated when uncertainty for issuers about how much
amount sold to all investors by the capital they would be able to raise.
determining the amount sold during the
issuer in reliance on the new exemption Therefore, we are adopting as proposed
preceding 12-month period for purposes
to $1 million during a 12-month period. the limit on the aggregate amount sold.
of the $1 million limit, with some
Capital raised through other exempt
24 See, e.g., AngelList Letter; Arctic Island Letter
transactions would not be counted in 19 See 17 CFR 230.405 (‘‘The term control 4; Campbell R. Letter; CFA Institute Letter; CFIRA
determining the aggregate amount sold (including the terms controlling, controlled by and Letter 11; EarlyShares Letter; EMKF Letter; Farnkoff
in reliance on Section 4(a)(6). under common control with) means the possession, Letter; Feinstein Letter; Growthfountain Letter;
We also provided guidance clarifying direct or indirect, of the power to direct or cause Hackers/Founders Letter; Heritage Letter; NSBA
our view that offerings made in reliance the direction of the management and policies of a Letter; Parsont Letter; Perfect Circle Solutions
person, whether through the ownership of voting Letter; Public Startup Letter 2; RoC Letter;
on Section 4(a)(6) will not be securities, by contract, or otherwise.’’). Exchange RocketHub Letter; Wales Capital Letter 1; Wefunder
integrated 18 with other exempt offerings Act Rule 12b–2 contains the same definition. See Letter; Whitaker Chalk Letter; Wilson Letter.
made by the issuer, provided that each 17 CFR 240.12b–2. 25 See, e.g., AFL–CIO Letter (not integrating other

offering complies with the requirements 20 See, e.g., Leverage PR Letter; StartEngine Letter exempt offerings will make crowdfunding available
of the applicable exemption that is 1; StartEngine Letter 2; Wilson Letter. to larger companies and ‘‘crowd out’’ smaller
21 See, e.g., Advanced Hydro Letter; Bushroe companies that lack other options for raising
being relied upon for the particular capital); AFR Letter; Brown J. Letter; Consumer
offering. Letter; Cole D. Letter; Concerned Capital Letter;
Hamman Letter; Harrison Letter; Hillside Letter; Federation Letter (not integrating other exempt
Under Section 4(a)(6), the amount of Jazz Letter; Kickstarter Coaching Letter; McCulley offerings will allow issuers to evade regulatory
securities sold in reliance on Section Letter; McGladrey Letter; Meling Letter; Miami requirements); Fund Democracy Letter (not
4(a)(6) by entities controlled by or under integrating other exempt offerings will give issuers
Nation Enterprises Letter; Multistate Tax Service
an incentive to engage in advertising in concurrent
common control with the issuer must be Letter; Peers Letter; Pioneer Realty Letter; Public
private offerings to indirectly publicly advertise
aggregated with the amount to be sold Startup Letter 2; Qizilbash Letter; Rosenthal O.
their crowdfunding offering); IAC
Letter; Sarles Letter; SBM Letter; Taylor R. Letter;
Recommendation; MCS Letter; NASAA Letter.
17 See Section II.C for a discussion of the
Taylor T. Letter; Wales Capital Letter 1; Wales 26 See Rule 100(a)(1) of Regulation Crowdfunding.
Capital Letter 3; WealthForge Letter; Wear Letter;
intermediary requirements. See also Section II.D for There is a technical change to the rule text (‘‘offer
Wilhelm Letter; Winters Letter; Yudek Letter.
a discussion of the additional funding portal and sell securities’’ is changed to ‘‘offer or sell
mstockstill on DSK4VPTVN1PROD with RULES3

22 See, e.g., Benjamin Letter; FundHub Letter 1;


requirements. securities’’) to clarify that an issuer does not have
18 The integration doctrine seeks to prevent an Hackers/Founders Letter; Joinvestor Letter; Odhner to complete a sale in order to rely on the Section
issuer from improperly avoiding registration by Letter; Omara Letter; Public Startup Letter 2; RFPIA 4(a)(6) exemption for an offering.
artificially dividing a single offering into multiple Letter; RoC Letter; RocketHub Letter; Seed&Spark 27 See, e.g., Benjamin Letter; FundHub Letter 1;

offerings such that Securities Act exemptions Letter; Thomas Letter 1; Wales Capital Letter 1; Hackers/Founders Letter; Joinvestor Letter; Odhner
would apply to multiple offerings that would not Whitaker Chalk Letter; Wilson Letter. Letter; Omara Letter; Public Startup Letter 2; RFPIA
23 See, e.g., Arctic Island Letter 4; ASSOB Letter;
be available for the combined offering. See, e.g., Letter; RoC Letter; RocketHub Letter; Seed&Spark
Final Rule: Nonpublic Offering Exemption, Release Commonwealth of Massachusetts Letter; MCS Letter; Thomas Letter 1; Wales Capital Letter 1;
No. 33–4552 (Nov. 6, 1962). Letter; PeoplePowerFund Letter. Whitaker Chalk Letter; Wilson Letter.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
71392 Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations

Title III provides that the $1 million Further, in light of Section 4A(g) and the definition of ‘‘control’’ in Securities
limit applies to the ‘‘aggregate amount for the reasons discussed above, we Act Rule 405.30
sold to all investors by the issuer, continue to believe that an offering Under the final rules, the amount of
including any amount sold in reliance made in reliance on Section 4(a)(6) securities sold in reliance on Section
on the exemption provided under should not be integrated with another 4(a)(6) also includes securities sold by
[Section 4(a)(6)].’’ Securities Act Section exempt offering made by the issuer, any predecessor of the issuer in reliance
4A(g), however, provides that ‘‘[n]othing provided that each offering complies on Section 4(a)(6) during the preceding
in the exemption shall be construed as with the requirements of the applicable 12-month period.31 We believe this
preventing an issuer from raising capital exemption that is being relied upon for approach is necessary to prevent an
through means other than [S]ection the particular offering. For example, an issuer from exceeding the $1 million
4[(a)](6).’’ Considered together, these issuer conducting a concurrent exempt limit by reorganizing into a new entity
two provisions create statutory offering for which general solicitation is that would otherwise not be limited by
ambiguity because the first provision not permitted will need to be satisfied previous sales made by its predecessor.
could be read to provide for the that purchasers in that offering were not 2. Investment Limits
aggregation of amounts raised in all solicited by means of the offering made
exempt transactions, even those that do in reliance on Section 4(a)(6).28 As a. Proposed Rules
not involve crowdfunding, while the another example, an issuer conducting a Under the exemption from
second provision could be read to concurrent exempt offering for which registration set forth in Securities Act
provide that nothing in the Section general solicitation is permitted, for Section 4(a)(6)(B), the aggregate amount
4(a)(6) exemption should limit an example, under Securities Act Rule of securities sold to any investor by an
issuer’s capital raising through other 506(c), could not include in any such issuer, including any amount sold in
methods. We believe that the overall general solicitation an advertisement of reliance on the exemption during the
intent of providing the exemption under the terms of an offering made in reliance 12-month period preceding the date of
Section 4(a)(6) was to provide an on Section 4(a)(6), unless that such transaction, cannot exceed: ‘‘(i) the
additional mechanism for capital raising advertisement otherwise complied with greater of $2,000 or 5 percent of the
for startup and small businesses and not Section 4(a)(6) and the final rules. As annual income or net worth of such
to affect the amount an issuer could such, a concurrent offering would be investor, as applicable, if either the
raise outside of that exemption. Thus, bound by the more restrictive annual income or the net worth of the
we believe that only the capital raised solicitation requirements of Regulation investor is less than $100,000; and (ii)
in reliance on the exemption provided Crowdfunding, unless the issuer can 10 percent of the annual income or net
by Section 4(a)(6) should be counted conclude that the purchasers in the worth of such investor, as applicable,
toward the limit. Capital raised through Regulation Crowdfunding offering were not to exceed a maximum aggregate
other means should not be counted in not solicited by means of the offering amount sold of $100,000, if either the
determining the aggregate amount sold annual income or net worth of the
made in reliance on Rule 506(c).
in reliance on Section 4(a)(6). The investor is equal to or more than
opposite approach—requiring The amount of securities sold in
$100,000.’’
aggregation of amounts raised in any reliance on Section 4(a)(6) by entities
In the Proposing Release, we noted
exempt transaction—would be controlled by or under common control
that this statutory language may present
inconsistent with the goal of alleviating with the issuer must be aggregated with
ambiguity in some cases about which of
the funding gap for startups and small the amount to be sold by the issuer in
the two investment limits governs,
businesses because, by electing the current offering to determine the
because paragraph (i) applies if ‘‘either’’
crowdfunding, such issuers would be aggregate amount sold in reliance on
annual income or net worth is less than
placing a cap on the amount of capital Section 4(a)(6) during the preceding 12-
$100,000 and paragraph (ii) applies if
they could raise. An issuer that already month period. The statute does not ‘‘either’’ annual income or net worth is
sold $1 million in reliance on the define the term ‘‘controlled by or under equal to or more than $100,000.
exemption provided under Section common control with’’ the issuer; Accordingly, in a situation in which
4(a)(6), for example, would be prevented however, the term ‘‘control’’ is defined annual income is less than $100,000 and
from raising capital through other in Securities Act Rule 405.29 Under the net worth is equal to or more than
exempt methods and, conversely, an final rules, for purposes of determining $100,000 (or vice versa), the language of
issuer that sold $1 million through other whether an entity is ‘‘controlled by or the statute may be read to cause both
exempt methods would be prevented under common control with’’ the issuer, paragraphs to apply. Paragraph (i) also
from raising capital under Section an issuer will be required to consider fixes the maximum annual investment
4(a)(6). whether it possesses, directly or by an investor at 5 percent of ‘‘the
In determining the amount that may indirectly, the power to direct or cause annual income or net worth of such
be sold in reliance on Section 4(a)(6), an the direction of the management and investor, as applicable’’ and paragraph
issuer should aggregate amounts it sold policies of the entity, whether through (ii) fixes the maximum annual
(including amounts sold by entities the ownership of voting securities, by investment by an investor at 10 percent
controlled by, or under common control contract or otherwise, consistent with of ‘‘the annual income or net worth of
with, the issuer, as well as any amounts such investor, as applicable,’’ but
sold by any predecessor of the issuer) in 28 For a concurrent offering under Rule 506(b), an
neither states when that percentage
reliance on Section 4(a)(6) during the issuer will have to conclude that purchasers in the
should be applied against the investor’s
mstockstill on DSK4VPTVN1PROD with RULES3

Rule 506(b) offering were not solicited by means of


12-month period preceding the expected the offering made in reliance on Section 4(a)(6). For
date of sale and the amount the issuer example, the issuer may have had a preexisting 30 See Instruction to paragraph (c) of Rule 100 of

intends to raise in reliance on the substantive relationship with such purchasers. Regulation Crowdfunding.
exemption. An issuer should not Otherwise, the solicitation conducted in connection 31 See Rule 100(c) of Regulation Crowdfunding
with the crowdfunding offering may preclude (defining issuer, in certain circumstances, to
include amounts sold in other exempt reliance on Rule 506(b). See also Rel. No. 33–8828 include all entities controlled by or under common
offerings during the preceding 12-month (Aug. 3, 2007) [72 FR 45116]. control with the issuer and any predecessor of the
period. 29 See note 19. issuer).

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations 71393

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

the proposal to apply the higher Consumer Federation Letter; Fund Democracy Letter; Fund Democracy Letter; Jacobson Letter;
investment limit (10 percent, as set forth Letter; Fryer Letter; Growthfountain Letter; IAC Projectheureka Letter; Public Startup Letter 2.
44 See, e.g., Brown, J. Letter; Consumer Federation
in Section 4(a)(6)(B)(ii)) if only one of Recommendation (stating that the ‘‘greater of’’
approach would be appropriate for accredited Letter; Fund Democracy Letter; Jacobson Letter.
the annual income or net worth of the investors); Merkley Letter; NASAA Letter; Schwartz 45 See, e.g., ASSOB Letter; Crowdstockz Letter;
investor is equal to or more than Letter; Zhang Letter (recommending that net worth Crowley Letter; EMKF Letter; FundHub Letter 1;
not be used to calculate the investment limit). Gibb Letter; Heritage Letter; Joinvestor Letter;
32 See, e.g., Accredify Letter; Ahmad Letter; 39 See, e.g., Consumer Federation Letter; Fund Public Startup Letter 2; RoC Letter; RocketHub
Crowley Letter; Farnkoff Letter; Merkley Letter; Democracy Letter; Jacobson Letter. Letter; Vann Letter; Wales Capital Letter 1;
mstockstill on DSK4VPTVN1PROD with RULES3

Milken Institute Letter; Patel Letter; Saunders 40 See, e.g., Arctic Island Letter 4; CFA Institute WealthForge Letter; Wefunder Letter.
46 See, e.g., CFA Institute Letter; FundDemocracy
Letter; StartEngine Letter 1; Wales Capital Letter 1. Letter; Consumer Federation Letter; CrowdBouncer
33 See, e.g., ASSOB Letter; Crowdstockz Letter; Letter; EarlyShares Letter; EMKF Letter; Finkelstein Letter; Hackers/Founders Letter; Jacobson Letter;
Hamman Letter; Holland Letter; McCulley Letter; Letter; Fund Democracy Letter; Heritage Letter; PeoplePowerFund Letter; Projectheureka Letter;
Meling Letter; Qizilbash Letter; Ramsey Letter; SBM Joinvestor Letter; Public Startup Letter 2; RoC Whitaker Chalk Letter; Wilson Letter.
47 See, e.g., Growthfountain Letter; RFPIA Letter;
Letter; Taylor R Letter. Letter; RocketHub Letter; Vann Letter; Wefunder
34 See, e.g., Crowdstockz Letter; Gill Letter; Letter; Whitaker Chalk Letter. WealthForge Letter.
48 17 CFR 230.506.
Johnston Letter; Morse Letter; Qizilbash Letter; 41 See, e.g., FundHub Letter 1; Public Startup

Vossberg Letter; Winters Letter. Letter 2; RocketHub Letter. 49 See Arctic Island Letter 4.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
71394 Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations

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

Investor Investor Investment


annual Calculation
net worth limit 52
income

$30,000 ....... $105,000 Greater of $2,000 or 5% of $30,000 ($1,500) ............................................................................... $2,000


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

A number of commenters expressed the aggregate amount of securities with this recommendation, the final
concerns about investors potentially purchased by an investor does not cause rules add an instruction to explain that
incurring unaffordable losses under the the investor to exceed the investment when such a joint calculation is used,
proposed rule,53 and we find these limits, provided that the issuer does not the aggregate investment of the spouses
comments persuasive given the risks have knowledge that the investor had may not exceed the limit that would
involved. The startups and small exceeded, or would exceed, the apply to an individual investor at that
businesses that we expect will rely on investment limits as a result of income and net worth level.59 We
the crowdfunding exemption are likely purchasing securities in the issuer’s believe this approach is necessary to
to experience a higher failure rate than offering.55 preserve the intended protections of the
more seasoned companies.54 Applying We are adopting, as proposed, final investment limits.
the lower limit ($2,000 or 5%, rather rules that allow an investor’s annual While a number of commenters
than 10%) for investors whose annual income and net worth to be calculated supported the creation of a different
income or net worth is below $100,000 as those values are calculated for investment limit for accredited or
and applying that formula to the lesser purposes of determining accredited institutional investors, or exempting
of annual income or net worth will investor status.56 Securities Act Rule them altogether, we are not making such
potentially limit investment losses in 501 specifies the manner in which a change. As noted above, crowdfunding
crowdfunding offerings for investors annual income and net worth are is an innovative approach to raising
who may be less able to bear the risk of calculated for purposes of determining capital in which the entity or individual
loss. We are concerned about the accredited investor status.57 As in the raising capital typically seeks small
number of households where there is a proposal, the final rules allow spouses individual contributions from a large
sizeable gap between net worth and to calculate their net worth or annual number of people. As such, we believe
annual income, and the ability of these income jointly. Although some that crowdfunding transactions were
households to withstand the risk of loss. commenters opposed permitting net intended under Section 4(a)(6) to be
According to Commission staff analysis worth or annual income to be calculated available equally to all types of
of the data in the 2013 Survey of jointly, we believe this approach is investors.60 The statute provides
Consumer Finances, approximately 20% appropriate in light of the stricter specific investment limits, and the only
of U.S. households with net worth over investment limits being adopted in the reference in the statute to changing
$100,000 have annual income under final rules. Several commenters those investment limits is the
$50,000. recommended that, if the final rules requirement that we update the
Consistent with the proposed rules, permit net worth and annual income to investment limits not less frequently
the final rules allow an issuer to rely on be calculated jointly, we should than every five years based on the
efforts that an intermediary is required establish an aggregate investment limit Consumer Price Index. Further, issuers
to undertake in order to determine that applicable to both spouses.58 Consistent can rely on other exemptions to offer
50 See paragraph (a)(2) of Rule 100 of Regulation 55 See Instruction 3 to paragraph (a)(2) of Rule 100 up to an aggregate of 10% of their joint income of
Crowdfunding. of Regulation Crowdfunding. $150,000, the same investment limit that would
51 See Instruction 2 to paragraph (a)(2) of Rule 100 56 See Instruction 1 to paragraph (a)(2) of Rule 100
apply for an individual investor with income of
of Regulation Crowdfunding. of Regulation Crowdfunding. $150,000. See Instruction 2 to paragraph (a)(2) of
52 This ‘‘Investment Limit’’ column reflects the 57 17 CFR 230.501. Thus, for example, a natural
Rule 100 of Regulation Crowdfunding.
aggregate investment limit across all offerings under person’s primary residence shall not be included as 60 See 158 CONG. REC. S1689 (daily ed. Mar. 15,
mstockstill on DSK4VPTVN1PROD with RULES3

Section 4(a)(6) within a 12-month period. an asset in the calculation of net worth. 17 CFR
2012) (statement of Sen. Mark Warner (‘‘There is
53 See, e.g., AFL–CIO Letter; BetterInvesting 230.501(a)(5)(i)(A).
now the ability to use the Internet as a way for
Letter; Consumer Federation Letter; Fund 58 See Brown J. Letter; Consumer Federation

Democracy Letter; IAC Recommendation; Jacobson Letter; Fund Democracy Letter; Jacobs Letter. small investors to get the same kind of deals that
Letter; Merkley Letter; NASAA Letter; Schwartz 59 For example, if each spouse’s annual income is up to this point only select investors have gotten
Letter. $30,000, the spouses jointly may invest up to an that have been customers of some of the best known
54 For a more detailed discussion of survival rates aggregate of 5% of their joint income of $60,000. If investment banking firms, where we can now use
for startups and small businesses see Section III.A, one spouse’s annual income is $120,000 and the the power of the Internet, through a term called
below. other’s is $30,000, the spouses jointly may invest crowdfunding.’’).

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations 71395

and sell securities to accredited noted that increasing the number of One commenter suggested deleting the
investors and institutional investors. As platforms used per transaction would phrase ‘‘an Internet Web site or other
discussed above, concurrent offerings to both increase the likelihood of investors similar electronic medium’’ and
these types of investors are possible if becoming informed that a transaction is replacing the phrase with ‘‘a software
the conditions of each applicable taking place, as well as elicit program accessible via TCP/IP enabled
exemption are met.61 Therefore, we are information from a more diverse applications’’ or to more commonly
not altering the investment limits for crowd.65 define ‘‘platform’’ as ‘‘a software
any particular type of investor or to Commenters were generally divided program accessible via the Internet.’’ 75
create a different exemption based on about the proposed requirement that
different investment limits. Thus, as transactions made in reliance on Section c. Final Rules
proposed, the investment limits will 4(a)(6) be conducted exclusively After considering the comments, we
apply equally to all investors, including through the intermediary’s platform. are adopting as proposed Rule 100(a)(3).
retail, institutional and accredited Commenters who supported 66 the We also are adopting the definition of
investors. proposed requirement cited concerns ‘‘platform’’ with one clarifying
that allowing the transactions to be amendment and with a change in
3. Transaction Conducted Through an effected through means other than the
Intermediary location to Rule 300(c).
intermediary’s platform could increase As stated in the Proposing Release, we
a. Proposed Rules the potential for fraudulent activity 67 believe that requiring an issuer to use
Section 4(a)(6)(C) requires that a and prevent the leveraging of only one intermediary to conduct an
transaction in reliance on Section 4(a)(6) information sharing and crowdsourced offering or concurrent offerings in
be conducted through a broker or review that are intended through reliance on Section 4(a)(6) would help
funding portal that complies with the crowdfunding.68 Commenters who foster the creation of a ‘‘crowd’’ and
requirements of Securities Act Section opposed 69 the proposed requirement better accomplish the purpose of the
4A(a). To implement this provision, we expressed their view that permitting statute. In order for a crowd to
proposed in Rule 100(a)(3) of Regulation other means would allow persons who effectively share information, we believe
Crowdfunding that for any transaction lack Internet access to invest through it would be most beneficial to have one
conducted in reliance on Section 4(a)(6), crowdfunding,70 and also would foster meeting place for the crowd to obtain
an issuer use only one intermediary different types of in-person and share information, thus avoiding
(that complies with the requirements of communication that are not possible to dilution or dispersement of the
Section 4A(a) and the related achieve online.71 One commenter ‘‘crowd.’’ We also believe that limiting
requirements in Regulation expressed a preference for issuers to be a crowdfunding transaction to a single
Crowdfunding) and that the transaction able to host their own offerings subject intermediary’s online platform helps to
be conducted exclusively on the to certain conditions.72 One commenter minimize the risk that issuers and
intermediary’s platform. We also also suggested that intermediaries intermediaries would circumvent the
proposed to permit the intermediary to should be able to engage in certain requirements of Regulation
engage in back office 62 or other activities other than on their platforms, Crowdfunding. For example, allowing
administrative functions other than on such as physically meeting with an issuer to conduct an offering using
the intermediary’s platform, and to representatives of issuers and investors, more than one intermediary would
define ‘‘platform’’ as ‘‘an Internet Web and hosting launch parties. 73 make it more difficult for intermediaries
site or other similar electronic medium A few commenters supported, but to determine whether an issuer is
through which a registered broker or a suggested technical revisions to, our exceeding the $1 million aggregate
registered funding portal acts as an proposed definition of ‘‘platform.’’ 74 offering limit.
intermediary in a transaction involving 65 See,
We continue to believe that
e.g., Graves Letter.
the offer or sale of securities in reliance 66 See, crowdfunding transactions made in
e.g., Joinvestor Letter; RoC Letter;
on Section 4(a)(6).’’ RocketHub Letter; Wilson Letter. reliance on Section 4(a)(6) and activities
b. Comments on the Proposed Rules
67 See, e.g., StartupValley Letter. associated with these transactions
68 See, e.g., RocketHub Letter.
should occur over the Internet or other
Commenters were divided about the 69 See, e.g., Benjamin Letter; Omara Letter; Public
similar electronic medium that is
proposed prohibition on an issuer using Startup Letter 2.
accessible to the public. Such an
more than one intermediary for any 70 See, e.g., Projecteureka Letter.
‘‘online-only’’ requirement enables the
71 See, e.g., Benjamin Letter (‘‘Without doubt, the
transaction conducted pursuant to public to access offering information
web fosters a crowd and a convenient forum to
Section 4(a)(6). Supporters of the express ideas and learn about the Issuer. However, and share information publicly in a way
proposed prohibition expressed the small community gatherings provide similar that will allow members of the crowd to
view that the prohibition would benefit feedback loops and often times serve the
share their views on whether to
communication between issuers and community and some investors better by fostering
nuanced forms of communication that can never be participate in the offering and fund the
investors.63 One commenter stated that achieved. Further, some SEC concerns can be business or idea. While we
the prohibition also would assist in assuaged regarding the loss of creating a ‘crowd’ acknowledge, as one commenter
assessing whether investors are within online because some investors that may rely on the
observed, that there are forms of
their investment limits.64 Commenters Web site to educate themselves may not be inclined
to contribute to the ‘crowd intelligence’ online, yet communication that cannot be achieved
who opposed the proposed prohibition would be vocal in a community gathering.’’).
72 See Public Startup Letter 2. We note that
programmable interfaces (APIs) and other electronic
mstockstill on DSK4VPTVN1PROD with RULES3

61 For a discussion of integration, see Section


Section 4(a)(6) of the Securities Act requires that, media are generally only the means to access a
II.A.1.c. as a condition of the exemption, the transaction be platform, which itself is an Internet-accessible
62 Back office personnel typically perform ‘‘conducted through a broker or funding portal that software program).
functions such as, but not limited to, recordkeeping, complies with the requirements of section 4A(b).’’ 75 See Arctic Island Letter 1; Arctic Island Letter
trade confirmations, internal accounting, and 15 U.S.C. 77d(a)(6). 4 (noting that a ‘‘platform’’ is actually a software
account maintenance. 73 See Wilson Letter.
program that is accessible via the Internet and that
63 See, e.g., CFA Institute Letter; Rockethub 74 See, e.g., Arctic Island Letter 1, Arctic Island a ‘‘Web site or other electronic medium’’ is merely
Letter. Letter 3; Arctic Island Letter 4; and Startup Valley a way to access the platform, not the platform
64 See CFA Institute Letter. Letter (explaining that Web sites, application itself).

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
71396 Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations

online,76 we nevertheless believe that organized under the laws of a state or Act.83 Some commenters recommended
the requirement that the transaction be territory of the United States or the that, despite the exclusion of investment
conducted exclusively through the District of Columbia; (2) issuers that are companies, the Commission allow a
intermediary’s platform will help to subject to Exchange Act reporting single purpose fund, including LLCs
ensure transparency, provide for ready requirements; 79 (3) investment and LPs, to conduct an offering in
availability of information in one place companies as defined in the Investment reliance on Section 4(a)(6) if such fund
to all investors, and promote greater Company Act of 1940 (the ‘‘Investment were organized to invest in, or lend
uniformity in the distribution of Company Act’’) 80 or companies that are money to, a single company.84
information among investors. We also excluded from the definition of Delinquent in Ongoing Reporting. A
do not believe that funding portals investment company under Section 3(b) number of commenters supported the
should be permitted to physically meet or 3(c) of the Investment Company exclusion of issuers that are delinquent
with investors to solicit investments and Act; 81 and (4) any other issuer that the in their reporting obligations,85
offerings on its platform, or host launch Commission, by rule or regulation, although others opposed the exclusion
parties, as one commenter determines appropriate. of delinquent issuers.86 Some
recommended, because these activities commenters suggested options such as
likely violate the statutory prohibition a. Proposed Rules disclosure of the issuer’s reporting
on funding portals soliciting and Rule 100(b) of Regulation delinquency in its offering documents
providing investment advice and Crowdfunding, as proposed, would or on its Web site or a cure provision.87
recommendations. However, we exclude the categories of issuers We also received comments about
continue to believe that intermediaries specifically identified in Section 4A(f). whether the exclusion should extend to
should be able to engage in back office In addition, the proposed rules would issuers that are delinquent in other
and other administrative functions other exclude: (1) Issuers that are disqualified reporting requirements (e.g., updates on
than on their platforms. from relying on Section 4(a)(6) pursuant the progress of the issuer in meeting the
In a change from the proposed rules, to the disqualification provision in Rule target offering amount, issuers whose
and consistent with the suggestions of 503(a) of Regulation Crowdfunding; (2) affiliates have failed to comply with the
commenters, the final rules define issuers that have sold securities in ongoing reporting requirements, and
‘‘platform’’ as ‘‘a program or application reliance on Section 4(a)(6) if they have issuers with an officer, director, or
accessible via the Internet or other not filed with the Commission and controlling shareholder who served in a
similar electronic communication provided to investors, to the extent similar capacity with another issuer that
medium through which a registered required, the ongoing annual reports failed to file its ongoing reports).
broker or a registered funding portal acts required by Regulation Crowdfunding Commenters generally opposed
as an intermediary in a transaction during the two years immediately extending the exclusion beyond issuers
involving the offer or sale of securities delinquent in their ongoing annual
preceding the filing of the required new
in reliance on Section 4(a)(6) of the reports during the two years
offering statement; and (3) issuers that
Securities Act (15 U.S.C. 77d(a)(6))’’ immediately preceding the filing of the
have no specific business plan or that
[emphasis added].77 We believe that this required new offering statement.88
have indicated that their business plan
definition is more technically accurate is to engage in a merger or acquisition 83 See, e.g., Commonwealth of Massachusetts
and also will accommodate innovation with an unidentified company or Letter; PeoplePowerFund Letter.
in the event of technological companies. 84 See, e.g., EMKF Letter (stating that having
advancements. We are moving the hundreds of direct shareholders can give startups
definition of ‘‘platform’’ from Rule 100 b. Comments on the Proposed Rules ‘‘messy cap tables’’ that deter follow-on financing
to Rule 300(c) so that it will be located and alternatively recommending the Commission
Foreign Issuers, Exchange Act permit an intermediary, including a funding portal,
alongside the other Regulation Reporting Companies, and Investment to act as a holder of record); Fryer Letter;
Crowdfunding definitions related to Companies. Several commenters Growthfountain Letter; Martin Letter
intermediaries. Also, in a change from opposed the exclusion of foreign (recommending that crowdfunding be operated
through a trust fund mechanism that would own
the proposed rule, we are moving to the issuers, Exchange Act reporting shares of the entity seeking capital); Propellr Letter
definition of platform an instruction companies, and investment 2; Ritter Letter; Wefunder Letter.
stating that an intermediary through companies.82 Other commenters, 85 See, e.g., ASSOB Letter; Commonwealth of

which a crowdfunding transaction is however, supported the exclusion of Massachusetts Letter; Consumer Federation Letter;
conducted may engage in back office or Fund Democracy Letter; Grassi Letter; Joinvestor
investment companies or companies Letter; NASAA Letter; Wefunder Letter.
other administrative functions other that are excluded from the definition of 86 See, e.g., ABA Letter; Parsont Letter;
than on the intermediary’s platform.78 investment company under Section 3(b) Projectheureka Letter; Public Startup Letter 2;
or 3(c) of the Investment Company RocketHub Letter.
4. Exclusion of Certain Issuers From 87 See, e.g., ABA Letter (suggesting a reasonable
Eligibility Under Section 4(a)(6) cure period and limiting the ‘‘look-back’’ period to
79 These are issuers who are required to file
one year); Grassi Letter (recommending that a
Securities Act Section 4A(f) excludes reports with the Commission pursuant to Exchange delinquent issuer be required to file a form with the
certain categories of issuers from Act Sections 13(a) (15 U.S.C. 78m(a)) or 15(d) (15 Commission and publish on its Web site and the
eligibility to rely on Section 4(a)(6) to U.S.C. 78o(d)). relevant intermediary’s platform a notice to
80 15 U.S.C 80a–1 et seq.
engage in crowdfunding transactions. potential investors that it has not met its reporting
81 15 U.S.C. 80a–3(b) or (c). obligations); Parsont Letter (recommending the
These are: (1) Issuers that are not 82 See, e.g., M.A.V. Letter (opposing the exclusion Commission treat the ongoing reporting
of public companies from eligibility to rely on requirements as a condition to the Section 4(a)(6)
mstockstill on DSK4VPTVN1PROD with RULES3

76 See Benjamin Letter (in-person gatherings may


Section 4(a)(6)); Ritter Letter (asking for clarification exemption and create a notice and cure provision
foster more ‘‘nuanced forms of communication’’). regarding companies that are excluded from the in the proposed insignificant deviation safe harbor);
77 Rule 300(c) of Regulation Crowdfunding. RocketHub Letter (suggesting delinquent issuers be
definition of investment company pursuant to 3(b)
78 In the final rule, this is an instruction to Rule of the Investment Company Act); TAN Letter required to disclose their delinquent status in their
300(c)(4). The instruction was proposed under (opposing the exclusion of foreign issuers over offering documents); Vann Letter (recommending a
proposed Rule 100(a)(3), but we believe it is more concerns that investors would not have Title III grace period for curing the deficiency).
appropriate under the definition of platform protections when investing in foreign issuers and 88 See, e.g., Grassi Letter (stating that further

because the instruction explains that back office that investors’ ability to invest in early exclusions would impose a more onerous burden
activities can happen off the platform. opportunities would be reduced). on issuers under Section 4(a)(6) than that placed on

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations 71397

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

4(a)(6), thus exposing that issuer to a potential Growthfountain Letter; Martin Letter; Propellr Crowdfunding.
Section 5 violation); FundHub Letter 1; Letter 2; Wefunder Letter. 99 We note that even if an issuer has regained
Projectheureka Letter; Public Startup Letter 2; RoC 95 See Rule 100(b)(4) of Regulation
eligibility to rely on Regulation Crowdfunding, the
Letter; RocketHub Letter; SBM Letter; Wilson Letter. Crowdfunding. See also Rule 503 of Regulation Commission could still bring an enforcement action
mstockstill on DSK4VPTVN1PROD with RULES3

91 See, e.g., ABA Letter; CFA Institute Letter; Crowdfunding and Section II.E.6 for a discussion of under the federal securities laws based on the
Commonwealth of Massachusetts Letter; Consumer the disqualification provisions. issuer’s failure to make the required filings. In
Federation Letter; Grassi Letter; ODS Letter; RFPIA 96 See, e.g., ASSOB Letter; Commonwealth of addition, as discussed in Section II.E.4., new Rule
Letter. Massachusetts Letter; Consumer Federation Letter; 12g–6 provides an exemption from Section 12(g)
92 See, e.g., 158 Cong. Rec. S1765 (daily ed. Mar. Fund Democracy Letter; Grassi Letter; Joinvestor conditioned, among other things, on the issuer’s
29, 2012) (statement of Sen. Jack Reed) Letter; NASAA Letter; Wefunder Letter. compliance with the annual reporting requirements
(‘‘[Crowdfunding] is the place where we envision 97 See Rules 202 and 203(b) of Regulation of Rule 202 of Regulation Crowdfunding.
the smallest entrepreneurs could obtain much Crowdfunding and Section II.B.2 for a discussion of 100 See, e.g., Consumer Federation Letter; Fund

needed seed capital for their good ideas.’’); 158 the ongoing reporting requirements. Democracy Letter; NASAA Letter.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
71398 Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations

of the required offering statement, the we continue to believe that the rules • a description of the ownership and
issuer will be able to rely on the Section should exclude issuers that have no capital structure of the issuer.114
4(a)(6) exemption. The final rule text specific business plan or whose In addition, Section 4A(b)(1)(I)
includes an instruction to clarify this business plan is to engage in a merger specifies that the Commission may
requirement.101 or acquisition with an unidentified require additional disclosures for the
Consistent with the proposal and the company or companies. We understand protection of investors and in the public
recommendations of commenters,102 we that issuers engaging in crowdfunding interest.
are not extending the exclusion to transactions may have businesses at As discussed further in Section II.B.3
issuers that are delinquent in the various stages of development in below, we are requiring issuers to file
progress update or termination of differing industries, and therefore, we these disclosures with the Commission
reporting requirements, nor are we believe that a specific ‘‘business plan’’ on Form C.115 Unless otherwise
excluding issuers whose officer, for such issuers could encompass a indicated in the form, Form C must be
director, or controlling shareholder wide range of project descriptions, filed in the standard format of
served in a similar capacity with articulated ideas, and business models. eXtensible Markup Language (XML).
another issuer that failed to file its Overall, we believe that the The XML-based fillable portion of Form
annual reports. Extending the exclusion exclusions in the final rules C will enable issuers to provide
to those issuers would impose more appropriately consider the need to limit information in a convenient medium
stringent requirements than those faced the potential risks to investors that without requiring the issuer to purchase
by current reporting companies and could result from extending issuer or maintain additional software or
issuers under Regulation A. eligibility to certain types of entities technology. This will provide the
Business Plans. The final rules also without unduly limiting the benefits of Commission and the public with readily
exclude an issuer that has no specific the exemption as a tool for capital available data about offerings made in
business plan or has indicated that its formation. reliance on Section 4(a)(6). Other
business plan is to engage in a merger required disclosure that is not required
or acquisition with an unidentified B. Issuer Requirements to be provided in the XML-based text
company or companies.103 We believe 1. Disclosure Requirements boxes will be filed as attachments to
that the exemption under Section 4(a)(6) Form C. We are not mandating a specific
is intended to provide an issuer with an Securities Act Section 4A(b)(1) sets presentation format for the attachments
early stage project, idea or business an forth specific disclosures that an issuer to Form C; however, the final Form C
opportunity to share it publicly with a offering or selling securities in reliance does include an optional Q&A format
wider range of investors. Those on Section 4(a)(6) must ‘‘file with the that crowdfunding issuers may use to
investors may then share information Commission and provide to investors provide disclosures that are not required
with each other about the opportunity and the relevant broker or funding to be filed in XML format.116 We believe
and use that information to decide portal, and make available to potential that this optional format should help
whether or not to invest. Thus, we investors’’. These disclosures include: reduce the burden on crowdfunding
believe that an issuer engaging in • The name, legal status, physical issuers of preparing disclosures.
crowdfunding under the exemption address and Web site address of the By filing Form C with the
should give the public sufficient issuer; 107 Commission and providing it to the
information about a particular proposed • the names of the directors and relevant intermediary, issuers will
project or business to allow investors to officers (and any persons occupying a satisfy the requirement of Securities Act
make an informed investment similar status or performing a similar Section 4A(b) that issuers relying on
decision.104 function), and each person holding Section 4(a)(6) must ‘‘file with the
As discussed in the proposal, we are more than 20 percent of the shares of Commission and provide to investors
cognizant of the challenges noted by the issuer; 108 and the relevant broker of funding
some commenters 105 in distinguishing • a description of the business of the portal, and make available to potential
between early-stage proposals that have issuer and the anticipated business plan investors’’ certain information. In a
information sufficient to support the of the issuer; 109 clarifying change from the proposal, we
crowdfunding mechanism and those • a description of the financial have moved the definition of ‘‘investor’’
that cannot by their terms do so. After condition of the issuer; 110 from proposed Rule 300(c)(4) to Rule
considering the comments received,106 • a description of the stated purpose
114 Section 4A(b)(1)(H). Specifically, Section
and intended use of the proceeds of the
4A(b)(1)(H) requires a description of: ‘‘(i) terms of
101 See instruction to paragraph (b)(5) of Rule 100 offering sought by the issuer with the securities of the issuer being offered and each
of Regulation Crowdfunding. respect to the target offering amount; 111 other class of security of the issuer . . .; (ii) a
• the target offering amount, the
102 See, e.g., Grassi Letter; Projectheureka Letter;
description of how the exercise of the rights held
Whitaker Chalk Letter. by the principal shareholders of the issuer could
103 See Rule 101(b)(6) of Regulation
deadline to reach the target offering
negatively impact the purchasers of the securities
Crowdfunding. amount and regular updates about the being offered; (iii) the name and ownership level of
104 See, e.g., Section 4A(b)(1)(C) (requiring a progress of the issuer in meeting the each existing shareholder who owns more than 20
description of the business of the issuer and the target offering amount; 112 percent of any class of the securities of the issuer;
anticipated business plan of the issuer). • the price to the public of the (iv) how the securities being offered are being
105 See, e.g., ABA Letter; FundHub Letter 1; valued . . .; and (v) the risks to purchasers of the
Projectheureka Letter; Public Startup Letter 2; RoC
securities or the method for determining securities relating to minority ownership in the
Letter; RocketHub Letter; SBM Letter; Wilson Letter. the price; 113 and issuer, the risks associated with corporate actions,
mstockstill on DSK4VPTVN1PROD with RULES3

106 See, e.g., ABA Letter; Anonymous Letter 2; including additional issuances of shares, a sale of
CFA Institute Letter; CFIRA Letter 7; 107 Section the issuer or of assets of the issuer, or transactions
4A(b)(1)(A).
Commonwealth of Massachusetts Letter; Consumer 108 Section
with related parties.’’
4A(b)(1)(B). 115 Issuers will use Form C to provide the
Federation Letter; FundHub Letter 1; Grassi Letter; 109 Section 4A(b)(1)(C).
Hackers/Founders Letter; NASAA Letter; ODS required disclosures about the crowdfunding
110 Section 4A(b)(1)(D).
Letter; Projectheureka Letter; Public Startup Letter transaction and the information required to be filed
111 Section 4A(b)(1)(E).
2; RFPIA Letter; RoC Letter; RocketHub Letter; SBM annually. See Section II.B.3.
112 Section 4A(b)(1)(F).
Letter; Traklight Letter; Whitaker Chalk Letter; 116 See Item 1 of General Instruction III to Form

Wilson Letter. 113 Section 4A(b)(1)(G). C of Regulation Crowdfunding.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations 71399

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

years.125 Some commenters candidates for the board of directors); Denlinger


and employment, including whether Letter 1(educational background of the officers and
recommended we require additional
any officer is employed by another directors); Mollick Letter (online identities of the
disclosures about an issuer’s officers, officers and directors); ODS Letter (educational
employer; and
Æ the name and principal business of directors and persons occupying a background of the officers and directors); Wilson
Letter (technical and business skills of the officers
any corporation or other organization in 119 See, e.g., Angel Letter 1; CCI Letter; Denlinger and directors); Zeman Letter (any officer and
which such occupation and Letter 1; Mollick Letter; Wefunder Letter; Wilson director positions held by the officers and directors
employment took place. Letter. or their family members, as well as any 10 percent
We proposed to define ‘‘officer’’ 120 See Vann Letter (recommending that the beneficial holdings they may have with other SEC
registrants; and disputes the officers and directors
consistent with the definition in disclosure requirement be optional or only required
had with other employers).
Securities Act Rule 405 and in Exchange for businesses that have a Web site). 127 See RocketHub Letter.
121 See, e.g., Public Startup Letter 2; RocketHub
Act Rule 3b–2. We further proposed to Letter; Schwartz Letter; Zhang Letter.
128 See Public Startup Letter 2.

require disclosure of the business 122 See RocketHub Letter (stating that only
129 See NASAA Letter.

experience of directors and officers of relevant officers for most companies using
130 See RocketHub Letter.
mstockstill on DSK4VPTVN1PROD with RULES3

131 See Rule 201(a)–(c) of Regulation


the issuer during the past three years. Regulation Crowdfunding would be the principal
executive officer and the principal financial officer, Crowdfunding.
Section 4A(b)(1)(B) requires
which may be the same person.) 132 See RocketHub Letter.
disclosure of ‘‘the names of . . . each 123 See, e.g., FundHub Letter 1; RocketHub Letter; 133 See Instruction to paragraph (b) of Rule 201 of
person holding more than 20 percent of Wefunder Letter. Regulation Crowdfunding.
124 See, e.g., Denlinger Letter 1; Joinvestor Letter; 134 See Rule 201(b) of Regulation Crowdfunding.
117 See
Rule 100(d) of Regulation Crowdfunding. Wefunder Letter. 135 See, e.g., Denlinger 1 Letter (educational
118 See
Rules 201 and 203(a) of Regulation 125 See, e.g., Commonwealth of Massachusetts background of officers); ODS Letter (educational
Crowdfunding. Letter; NASAA Letter. Continued

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
71400 Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations

believe that additional disclosures about a Web site or be able to create one at a disclose a description of its business
an issuer’s officers, directors and minimal cost. and business plan,146 most commenters
persons occupying a similar status or We also are adopting the 20 Percent supported this proposed requirement.147
performing a similar function would be Beneficial Owner disclosure Some commenters recommended that
unduly burdensome and generally not requirement as proposed with one the disclosure include specific items,
necessary for investors to be in a modification.142 Instead of requiring such as disclosure of any material
position to make an informed issuers to disclose the name of each 20 contracts of the issuer, any material
investment decision. Given the diverse Percent Beneficial Owner as of the most litigation or any outstanding court order
nature of the startups and small recent practicable date, we are requiring or judgment affecting the issuer or its
businesses that we anticipate will seek such disclosure as of the most recent property; 148 the issuer’s business value
to raise capital in reliance on Section practicable date, but no earlier than 120 proposition, revenue model, team,
4(a)(6), additional disclosures such as days prior to the date the offering regulatory issues and executive
those recommended by some statement or report is filed. We believe compensation; 149 how the issuer will
commenters may not be relevant in all that this change should address build value for the shareholders; 150 and
instances. commenter concerns 143 about the plans for implementation, concrete next
discretion afforded by the proposed steps, outside recommendations about
The required disclosure about the
‘‘most recent practicable date.’’ While the validity of the business,
business experience of the directors and
we are not adding to Rule 201(c) a backgrounds of the individuals involved
officers (and any persons occupying a
specific requirement that the disclosure and prototypes or concept drawings.151
similar status or performing a similar be updated when there are significant One commenter recommended that the
function) must cover the past three changes in beneficial ownership, as disclosure requirement be scaled to
years,136 which, as some commenters requested by one commenter,144 to the match the size of the offering.152
noted,137 is shorter than the five-year extent a material change in beneficial Some commenters recommended that
period that applies to issuers ownership takes place during the the Commission provide a non-
conducting registered offerings 138 or offering, an issuer would be required to exclusive list of the types of information
exempt offerings pursuant to Regulation file an amended offering statement on an issuer should consider disclosing,
A.139 We believe that startups and small Form C/A: Amendment. templates, examples or other guidance
businesses that may seek to raise capital As stated in the Proposing Release, we to assist the issuer in complying with
in reliance on Section 4(a)(6) generally believe that the universe of 20 Percent this disclosure requirement.153 One
will be smaller than the issuers Beneficial Owners should be the same commenter recommended that the
conducting registered offerings or for the disclosure requirements and the Commission not specify the information
exempt offerings pursuant to Regulation disqualification provisions 145 because to be included in the description of the
A, and generally are likely to have a this would ease the burden on issuers business or the business plan.154
more limited operating history.140 by requiring them to identify only one Commenters also opposed revising the
Therefore, in comparison to registered set of persons who would be the subject proposed business description
offerings and Regulation A, we believe of these rules. We continue to believe requirement to require the description
the three-year period is more relevant that assessing beneficial ownership to include the information requirements
given the stage of development of these based on total outstanding voting of Items 101(a)(2) and 101(h) 155 of
issuers and should help to reduce securities is consistent with Section Regulation S–K.156
compliance costs for issuers conducting 4A(b)(1)(B). Section 4A(b)(1)(B) is not
offerings pursuant to Section 4(a)(6) limited to voting equity securities, but (iii) Final Rules
while still providing investors with we believe the limitation is necessary to Consistent with the proposal, Rule
sufficient information about the clarify how beneficial ownership should 201(d) requires an issuer to disclose
business experience of directors and be calculated since issuers could information about its business and
officers of the issuer to make an potentially have multiple classes of business plan. We are not modifying the
informed investment decision. securities with different voting powers. proposed rule, as some commenters
Notwithstanding the suggestion of one
(b) Description of the Business
commenter, and consistent with the 146 See, e.g., ABA Letter; ASSOB Letter; Public

statute, the final rules require disclosure (i) Proposed Rules Startup Letter 2; Traklight Letter.
147 See, e.g., Anonymous Letter 2; Arctic Island
of an issuer’s Web site.141 Given the Consistent with Section 4A(b)(1)(C), Letter 5; Benjamin Letter; CFIRA Letter 7; Consumer
Internet-based nature of Crowdfunding, we proposed in Rule 201(d) of Federation Letter; EMKF Letter; Hackers/Founders
we anticipate that every issuer will have Regulation Crowdfunding to require an Letter; Mollick Letter; NFIB Letter; RocketHub
issuer to disclose information about its Letter; Saunders Letter; Wefunder Letter.
148 See, e.g., Arctic Island Letter 4 (referencing
background of officers, directors and similar business and business plan. The
persons); Zeman Letter (proposing that officers and only pending litigation); Arctic Island Letter 5
proposed rules did not specify the (referencing only threatened or pending litigation);
directors of an issuer be required to disclose their
(or family members) officer and director positions disclosures that an issuer would need to FundHub Letter 1; Wilson Letter.
with other SEC registrants, and disclose material include in the description of the 149 See, e.g., Arctic Island Letter 5.

holdings of more than 10% with other SEC business and the business plan. 150 See, e.g., Hackers/Founders Letter.

registrants). 151 See, e.g., Mollick Letter.


136 See Rule 201(b) of Regulation Crowdfunding. (ii) Comments on the Proposed Rules 152 See Consumer Federation Letter.
137 See, e.g., Commonwealth of Massachusetts 153 See, e.g., ABA Letter; Benjamin Letter; CFIRA
While several commenters expressed
mstockstill on DSK4VPTVN1PROD with RULES3

Letter; NASAA Letter. Letter 7; Commonwealth of Massachusetts Letter;


138 See Item 401(e) of Regulation S–K [17 CFR concerns about requiring an issuer to FundHub Letter 1 (recommending a safe harbor list
229.401(e)]. of requirements); Traklight Letter; Wilson Letter
139 See Item 8(c) of Form 1–A [17 CFR 239.90]. 142 See Rule 201(c) of Regulation Crowdfunding. (recommending a checklist or prescribed list of
140 There is no limit on the amount of proceeds 143 See NASAA Letter. questions).
154 See RocketHub Letter.
that may be raised in a registered offering, and 144 Id.

Regulation A permits offerings of up to $50 million 145 See Rule 503 of Regulation Crowdfunding and 155 17 CFR 229.101.

of securities annually. Section II.E.6 for a discussion of the disqualification 156 See, e.g., Hamilton Letter; Public Startup
141 See Rule 201(a) of Regulation Crowdfunding. provisions. Letter 2; RocketHub Letter.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations 71401

recommended,157 to specify the intended use of the offering proceeds.160 applicable. If the issuer will repurchase
disclosures that an issuer must include One commenter recommended that we outstanding issuer securities, it should
in the description of the business and prescribe the use of proceeds disclosure consider disclosing its plans, terms and
the business plan or to provide a non- or provide a list of examples that issuers purpose for repurchasing the securities.
exclusive list of the types of information should consider when providing such An issuer also should consider
an issuer should consider disclosing. disclosures.161 Others recommended a disclosing how long the proceeds will
We anticipate that issuers engaging in variety of circumstances under which satisfy the operational needs of the
crowdfunding transactions may have an issuer should be required to update business. If an issuer does not have
businesses at various stages of the use of proceeds disclosure.162 definitive plans for the proceeds, but
development in different industries, and (iii) Final Rules instead has identified a range of
therefore, we believe that the rules possible uses, then the issuer should
should provide flexibility for these We are adopting the use of proceeds identify and describe each probable use
issuers regarding what information they disclosure requirement substantially as and the factors the issuer may consider
disclose about their businesses. This proposed in Rule 201(i). An issuer will in allocating proceeds among the
flexible approach is consistent with the be required to provide a reasonably potential uses.165 If an issuer indicates
suggestion of one commenter that the detailed description of the purpose of that it will accept proceeds in excess of
business plan requirements be scaled to the offering, such that investors are the target offering amount, the issuer
match the size of the offering.158 We provided with enough information to must provide a reasonably detailed
also are concerned that a non-exclusive understand how the offering proceeds description of the purpose, method for
will be used.163 While one allocating oversubscriptions, and
list of the types of information an issuer
commenter 164 recommended that we intended use of any excess proceeds
should consider providing would be
prescribe this disclosure or provide a with similar specificity.166
viewed as a de facto disclosure
list of examples, we believe a more
requirement that all issuers would feel (d) Target Offering Amount and
prescriptive rule would not best
compelled to meet and would, therefore, Deadline
accommodate a diverse range of issuers.
undermine the intended flexibility of
Instead, below we provide several (i) Proposed Rules
the final rules.
examples of the disclosures issuers
Consistent with Section 4A(b)(1)(F),
(c) Use of Proceeds should consider making with respect to
we proposed in Rule 201(g) of
various uses of proceeds.
(i) Proposed Rules The disclosure requirement is Regulation Crowdfunding to require
designed to provide investors with issuers to disclose the target offering
Consistent with Section 4A(b)(1)(E), amount and the deadline to reach the
we proposed in Rule 201(i) of sufficient information to evaluate the
investment. For example, an issuer may target offering amount. In addition, we
Regulation Crowdfunding to require an proposed in Rule 201(h) to require an
issuer to provide a description of the intend to use the proceeds of an offering
to acquire assets or businesses, issuer to disclose whether it would
purpose of the offering and intended use accept investments in excess of the
of the offering proceeds. We expected compensate the intermediary or its own
employees or repurchase outstanding target offering amount, and, if it would,
that such disclosure would provide a we proposed to require the issuer to
sufficiently detailed description of the securities of the issuer. In providing its
description, an issuer would need to disclose, at the commencement of the
intended use of proceeds to permit offering, the maximum amount it would
consider the appropriate level of detail
investors to evaluate the investment. accept. The issuer also, under proposed
to provide investors about the assets or
Under the proposed rules, if an issuer Rule 201(h), would be required to
businesses that the issuer anticipates
did not have definitive plans for the disclose, at the commencement of the
acquiring, based on its particular facts
proceeds, but instead had identified a offering, how shares in oversubscribed
and circumstances, so that the investors
range of possible uses, then the issuer offerings would be allocated. We further
could make informed decisions. If the
would be required to identify and proposed in Rule 201(j) to require
proceeds will be used to compensate
describe each probable use and factors issuers to describe the process to cancel
existing employees or to hire new
affecting the selection of each particular an investment commitment or to
employees, the issuer should consider
use. In addition, if an issuer indicated complete the transaction once the target
disclosing whether the proceeds will be
that it would accept proceeds in excess amount is met, including a statement
used for salaries or bonuses and how
of the target offering amount,159 the that:
many employees it plans to hire, as
issuer would be required to provide a • Investors may cancel an investment
separate, reasonably detailed 160 See, e.g., ABA Letter; ASSOB Letter;
commitment until 48 hours prior to the
description of the purpose and intended Consumer Federation Letter; Joinvestor Letter; deadline identified in the issuer’s
use of any excess proceeds with similar Saunders Letter; Traklight Letter; Whitaker Chalk offering materials; 167
specificity. Letter; Wilson Letter. But see, Public Startup Letter • the intermediary will notify
2. investors when the target offering
(ii) Comments on the Proposed Rules 161 See Commonwealth of Massachusetts Letter.
amount has been met;
162 See, e.g., ASSOB Letter (five percent change);
• if an issuer reaches the target
Most commenters supported the CFIRA Letter 7 (material deviations in the offering
statement and any deviations in the annual report); offering amount prior to the deadline
requirement that issuers disclose the
Commonwealth of Massachusetts Letter (material identified in its offering materials, it
change); Joinvestor Letter (substantial change); may close the offering early if it
mstockstill on DSK4VPTVN1PROD with RULES3

157 See, e.g., ABA Letter; Arctic Island Letter 4; RocketHub Letter (significant change); Traklight
Arctic Island Letter 5; Benjamin Letter; CFIRA Letter (material deviations); Whitaker Chalk Letter provides at least five business days’
Letter 7; Commonwealth of Massachusetts Letter; (material change); Wilson Letter (any deviation).
FundHub Letter 1; Hackers/Founders Letter; See also Section II.B.3 for discussion of when an 165 See Instruction to paragraph (i) of Rule 201 of

Mollick Letter; Traklight Letter; Wilson Letter. amendment to the offering statement may be Regulation Crowdfunding.
158 See Consumer Federation Letter. required. 166 See Instruction to paragraph (i) of Rule 201 of
159 See Section II.B(1)(d) below for a description 163 See Instruction to paragraph (i) of Rule 201 of Regulation Crowdfunding.
of the final rule’s disclosure requirements with Regulation Crowdfunding. 167 Section II.C.6 further discusses the

respect to target amounts. 164 See Commonwealth of Massachusetts Letter. cancellation provisions.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
71402 Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations

notice prior to that new deadline (absent deadline would not require an extension (f) Ownership and Capital Structure
a material change that would require an of the offering and reconfirmation of the (i) Proposed Rules
extension of the offering and investment commitment; however,
reconfirmation of the investment issuers would need to consider whether Consistent with Section 4A(b)(1)(H),
commitment); 168 and we proposed in Rule 201(m) of
any material change occurred that
• if an investor does not cancel an would require an extension and
Regulation Crowdfunding to require an
investment commitment before the 48- issuer to provide a description of its
reconfirmation from investors.172 ownership and capital structure. This
hour period prior to the offering
deadline, the funds will be released to We do not believe it is necessary for disclosure would include:
the issuer upon closing of the offering us to prescribe how oversubscribed • The terms of the securities being
and the investor will receive securities offerings must be allocated if the issuer offered and each other class of security
in exchange for his or her investment. is required to disclose, at the of the issuer, including the number of
In addition, proposed Rule 201(k) commencement of the offering, how securities being offered and those
would require issuers to disclose that if shares in oversubscribed offerings will outstanding, whether or not such
an investor does not reconfirm his or be allocated. Commenters were securities have voting rights, any
her investment commitment after a supportive of this approach,173 and we limitations on such voting rights, how
material change is made to the offering, believe this disclosure should provide the terms of the securities being offered
the investor’s investment commitment investors with important information may be modified and a summary of the
will be cancelled and committed funds differences between such securities and
while maintaining flexibility for issuers
will be returned. Proposed Rule 201(g) each other class of security of the issuer,
to structure the offering as they believe
also would require issuers to disclose and how the rights of the securities
appropriate. being offered may be materially limited,
that if the sum of the investment
commitments does not equal or exceed We believe that investors in a diluted or qualified by the rights of any
the target offering amount at the time of crowdfunding transaction will benefit other class of security of the issuer;
the offering deadline, no securities will from clear disclosure about their right to • a description of how the exercise of
be sold in the offering, investment cancel, the circumstances under which the rights held by the principal
commitments will be cancelled and an issuer may close an offering early shareholders of the issuer could affect
committed funds will be returned.169 and the need to reconfirm the the purchasers of the securities;
investment commitment under certain • the name and ownership level of
(ii) Final Rules persons who are 20 Percent Beneficial
circumstances, as they will be more
Commenters were supportive of the Owners;
aware of their rights to rescind an
proposed rules, and we are adopting the • how the securities being offered are
investment commitment. Therefore, we being valued, and examples of methods
target offering amount and deadline are adopting disclosure requirements
disclosure rules as proposed.170 As an for how such securities may be valued
covering these points, as proposed. by the issuer in the future, including
example of how the final rules will
apply, if an issuer sets a target offering (e) Offering Price during subsequent corporate actions;
amount of $80,000 but is willing to • the risks to purchasers of the
accept up to $650,000, the issuer will be Consistent with Section 4A(b)(1)(G), securities relating to minority
required to disclose both the $80,000 we proposed in Rule 201(l) of ownership in the issuer and the risks
target offering amount and the $650,000 Regulation Crowdfunding to require an associated with corporate actions
maximum offering amount that it will issuer to disclose the offering price of including additional issuances of
accept.171 In an instance where an the securities or, in the alternative, the securities, issuer repurchases of
issuer reaches the target offering amount method for determining the price, so securities, a sale of the issuer or of
prior to the deadline identified in its long as before the sale each investor is assets of the issuer or transactions with
offering materials, it may close the provided in writing the final price and related parties; and
offering early if it provides at least five • a description of the restrictions on
all required disclosures. the transfer of the securities.
business days’ notice about the new
Commenters were supportive of the As proposed, the rules would require
offering deadline as set forth in Rules
201(j) and 302(d) of Regulation proposed disclosure 174 and we are disclosure of the number of securities
Crowdfunding. Accelerating the adopting the offering price disclosure being offered and those outstanding,
rules as proposed.175 We believe that whether or not such securities have
168 Id. disclosure of the price or the methods voting rights, any limitations on such
169 See Section 4A(a)(7) (requiring intermediaries used for determining the price, coupled voting rights and a description of the
to ‘‘ensure that all offering proceeds are only with investors’ rights to cancel their restrictions on the transfer of the
provided to the issuer when the aggregate capital
investment upon determination of the securities.
raised from all investors is equal to or greater than
a target offering amount. . . .’’) and discussion in final price, provide sufficient (ii) Comments on the Proposed Rules
Section II.C.6. opportunity for investors to evaluate the A number of commenters supported
170 See Rules 201(g), 201(h), 201(j) and 201(k) of
price. the proposed ownership and capital
Regulation Crowdfunding.
171 The issuer in this case also will need to structure disclosure rules,176 while two
172 Section II.B.1.c discusses the amendment and
disclose the intended use of the additional commenters opposed them as
proceeds. See Instruction to paragraph (i) of Rule reconfirmation requirements.
201 of Regulation Crowdfunding. See also Section 173 See, e.g., CFA Institute Letter; RoC Letter;
burdensome.177 One of these
mstockstill on DSK4VPTVN1PROD with RULES3

II.B.1.a.i(c) above. In addition, the issuer in this RocketHub Letter; Wilson Letter.
176 See, e.g., CFA Institute Letter; Commonwealth
case will be required to provide financial 174 See, e.g., CFA Institute Letter; Wilson Letter.
statements reviewed by an independent public of Massachusetts Letter; Hackers/Founders Letter;
As discussed below, however, a few commenters Joinvestor Letter; NASAA Letter; RocketHub
accountant (rather than certain tax return
information for the most recently completed fiscal recommended that the Commission require a fixed (supporting only to the extent that such disclosures
year and financial statements certified by the price at the commencement of an offering. See, e.g., do not require additional form submission or
principal executive officer). See Section II.B.1.a.ii Joinvestor Letter; RocketHub Letter. We address accountant or legal work); Saunders Letter; Wilson
for a discussion of the financial statement those comments in Section II.B.6. Letter.
requirements. 175 See Rule 201(l) of Regulation Crowdfunding. 177 See Campbell R. Letter; Schatz Letter.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations 71403

commenters suggested that issuers the amount of any referral or other fees Legends. Comments were mixed as to
should only be required to disclose the associated with the offering; the proposed requirement that issuers
price of a share and the percentage • certain legends in the offering include specified legends in the offering
ownership represented by a share, and statement; statement about the risks of investing in
noted that the principals of an issuer • disclosure of the current number of a crowdfunding transaction and the
conducting a crowdfunding offering employees of the issuer; required ongoing reports. Some
may not consider the issuer’s capital • a discussion of the material factors commenters supported such a
structure or whether its shareholders that make an investment in the issuer requirement,190 while others opposed
will have voting rights.178 speculative or risky; the requirement.191
• a description of the material terms Current Number of Employees. While
(iii) Final Rules of any indebtedness of the issuer, several commenters supported the
We are adopting the ownership and including the amount, interest rate, proposed requirement that issuers
capital structure disclosure rules as maturity date and any other material disclose their current number of
proposed, with the addition of language terms; employees,192 two commenters opposed
specifying that beneficial ownership • disclosure of any exempt offerings such a requirement.193 One commenter
must be calculated no earlier than 120 conducted within the past three years; opposed this requirement, noting that
days prior to the date of the filing of the and the number of employees is not useful
offering statement or report,179 • disclosure of related-party for investors in evaluating early-stage
consistent with the treatment of transactions since the beginning of the startups, and is likely to increase during
beneficial ownership elsewhere in the issuer’s last fiscal year in excess of five the course of a crowdfunding offering
rule.180 Investors in crowdfunding percent of the aggregate amount of conducted concurrently with an offering
transactions will benefit from clear capital raised by the issuer in reliance pursuant to Rule 506(c).194 This
disclosure about the terms of the on Section 4(a)(6) during the preceding commenter also noted that many early-
securities being offered and each other 12-month period, inclusive of the stage startups spend the majority of
class of security of the issuer. The final amount the issuer seeks to raise in the their initial funds on consultants.195
rules require disclosure of the number current offering. Another commenter noted that it may be
of securities being offered and those unreasonably costly, relative to the
outstanding, whether or not such (ii) Comments on the Proposed Rules
benefit gained, to accurately count the
securities have voting rights, any Identity of the Intermediary. Several number of employees in instances
limitations on such voting rights 181 and commenters supported the proposed where businesses engage many contract
a description of the restrictions on the requirement that issuers identify the workers, or have workers on
transfer of securities.182 Although intermediary through which the offering arrangements such as ‘‘flex-time’’ or
Section 4A(b)(1)(H) does not specifically is being conducted.185 Two commenters ‘‘half-time.’’ 196
call for all aspects of this disclosure, we opposed such a requirement as Risk Factors. Commenters were
believe that such disclosure is necessary unnecessary.186 divided as to the proposed requirement
to provide investors with a more Compensation Paid to the that issuers discuss the material factors
complete picture of the issuer’s capital Intermediary. Some commenters that make an investment in the issuer
structure than would be obtained solely supported the proposed requirement speculative or risky. A number of
pursuant to the statutory requirements. that issuers disclose the amount of commenters supported this proposed
This should help investors better compensation paid to the intermediary requirement,197 while a number of
evaluate the terms of the offer before for conducting the offering, including others opposed it.198 Some commenters
making an investment decision. the amount of any referral or other fees
(g) Additional Disclosure Requirements associated with the offering.187 One 190 See, e.g., ABA Letter; CFA Institute Letter;

commenter noted that to the extent Commonwealth of Massachusetts Letter; Jacobson


(i) Proposed Rules components of the intermediary’s fee Letter; Schwartz Letter; Wilson Letter.
191 See, e.g., Grassi Letter (recommending that
We also proposed to require the are percentage based, the exact amount general risks be disclosed on the intermediaries’
following additional disclosures: 183 of the compensation may not be platforms rather than in each issuer’s offering
• Disclosure of the name, SEC file calculable at the onset of an offering.188 statement); Hackers/Founders Letter (noting that
number and Central Registration A few commenters recommended that crowdfunding issuers will tend to be smaller and
lack the resources of large companies, and
Depository number (‘‘CRD number’’) (as issuers also should disclose all intermediaries should be required to provide
applicable) 184 of the intermediary payments and fees, if any, they make to examples of risks associated with crowdfunding
through which the offering is being the intermediary.189 offerings); Public Startup Letter 2; Startup Valley
conducted; Letter (stating that a legend by the issuer about the
• disclosure of the amount of 185 See, e.g., Commonwealth of Massachusetts risks of investing in a crowdfunding transaction is
Letter; Joinvestor Letter; Schwartz Letter; Wilson not needed because it is the responsibility of the
compensation paid to the intermediary intermediary to educate the public about this
Letter (recommending that issuers also disclose
for conducting the offering, including whether the intermediary specializes in offerings information).
192 See, e.g., NASAA Letter; Wilson Letter; Zhang
based on criteria such as industry size or type).
178 Schatz Letter. 186 See Public Startup Letter 2; RocketHub. Letter.
179 See 193 See Schwartz Letter; Wefunder Letter.
Rule 201(m) of Regulation Crowdfunding. 187 See, e.g., ASSOB Letter; Commonwealth of
180 See Rule 201(c) of Regulation Crowdfunding. 194 See Wefunder Letter.
Massachusetts Letter; RocketHub Letter; Startup
181 Id. 195 Id.
Valley Letter; Wilson Letter. But see, e.g., Grassi
182 See Rule 501 of Regulation Crowdfunding and Letter (opposing the requirement unless offering 196 See Schwartz Letter.
mstockstill on DSK4VPTVN1PROD with RULES3

Section II.E.2 for a discussion of restrictions on proceeds will be used to compensate the 197 See, e.g., ASSOB Letter; CFA Institute Letter;

resales. intermediary); Public Startup Letter 2; Schwartz Commonwealth of Massachusetts Letter; Consumer
183 Section 4A(b)(1)(I) provides us with discretion Letter. Federation Letter; EMKF Letter; Jacobson Letter;
to require crowdfunding issuers to provide 188 See RocketHub Letter. McGladrey Letter; STA Letter; StartupValley Letter;
additional information for the protection of 189 See, e.g., ASSOB Letter (recommending Wilson Letter.
investors and in the public interest. disclosure of all payments); RocketHub Letter 198 See, e.g., ABA Letter; Campbell R. Letter; Cole
184 The Financial Industry Regulatory Authority, (recommending disclosure of fees paid for A. Letter; Grassi Letter; Hackers/Founders Letter;
Inc. (‘‘FINRA’’) issues CRD numbers to registered compliance and overhead to enhance transparency RocketHub Letter (recommending that a generic
broker-dealers. for investors). Continued

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
71404 Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations

recommended that we provide examples the definition of ‘‘immediate family issues with the Environmental
of, or develop standard disclosures for, member’’ contained in Item 404 of Protection Agency or Food and Drug
issuer risk factor discussions.199 Regulation S–K,207 one commenter Administration; 217 a copy of their
Indebtedness. Commenters supported recommended that we use a common articles of incorporation; 218 the extent
the proposed requirement that issuers definition for ‘‘immediate family to which they are affected by market
describe the material terms of any member’’ in the related-party risk, material contracts, business
indebtedness of the issuer.200 Two transactions context and ‘‘member of the backlogs and the names of, and number
commenters recommended that we family of the purchaser or the of shares being sold by, existing
clarify that this disclosure requirement equivalent’’ in the resale restrictions shareholders; 219 and the credit history
could be satisfied if the issuer includes context.208 of the business and the business
such disclosure in its financial One commenter supported the owners.220
statements.201 Another recommended proposal to limit the disclosure of As discussed in Section II.B.2 below
that we require issuers to disclose the related-party transactions to in connection with ongoing annual
identities of their creditors.202 transactions since the beginning of the reports, a number of commenters
Prior Exempt Offerings. Commenters issuer’s last fiscal year.209 Other recommended ways to make it easier for
supported the proposed requirement commenters recommended that the investors to locate an issuer’s annual
that issuers disclose their prior exempt related-party transaction disclosure reports.221
offerings.203 One commenter cover the period for which financial
recommended that we require (iii) Final Rules
statements are required.210 In addition,
additional disclosure to help non- one commenter supported the proposal We are adopting the additional
accredited investors understand how to limit disclosure of related-party disclosure requirements as proposed in
well aligned their interests are with transactions based on the size of the Rule 201 with several modifications. As
earlier accredited investors,204 while offering,211 while a few commenters discussed below, we have added a
other commenters suggested scaling suggested alternatives to such requirement to disclose any material
back this disclosure in order to contain proposal.212 information necessary in order to make
costs.205 Other Disclosures. Several the statements made, in light of the
Related-Party Transactions. commenters specifically recommended circumstances under which they were
Commenters generally supported our that we not require any additional made, not misleading.222 We also have
proposal to require disclosure of certain disclosures.213 One commenter pointed modified the rule to require disclosure
related-party transactions between the out that there was no ‘‘catch-all’’ clause of the compensation to be paid to the
issuer and any director or officer of the requiring any other material information intermediary so that it could be
issuer, any person who is a 20 Percent not specifically enumerated in Rule 201 disclosed either as a dollar amount or
Beneficial Owner, any promoter of the of Regulation Crowdfunding.214 percentage of the offering amount or as
issuer (if the issuer was incorporated or Other commenters recommended that a good faith estimate if the exact amount
organized within the past three years) or we require issuers to disclose general is not available at the time of the
immediate family members of the information; 215 executive filing.223 We also have added a
foregoing persons.206 Rather than using compensation; 216 zoning issues and requirement to disclose the location on
the issuer’s Web site where investors
500-word statement suffice); Schwartz Letter; percent beneficial owners); Commonwealth of will be able to find the issuer’s annual
Scruggs Letter. Massachusetts Letter; Grassi Letter (also report and the date by which such
199 See, e.g., Commonwealth of Massachusetts recommending disclosure of transactions between
Letter; EMKF Letter; Heritage Letter (recommending the issuer and employees or affiliated entities with
report will be available on the issuer’s
also that the Commission define ‘‘material’’); common ownership or control); NASAA Letter; Web site.224 In addition, we have added
Jacobson Letter; SBA Office of Advocacy Letter. But RocketHub Letter; Wilson Letter. But see, Public a requirement to disclose whether the
see, StartupValley Letter (opposing such a Startup Letter 2; Schwartz Letter. issuer or any of its predecessors
recommendation). 207 17 CFR 229.404.
200 See, e.g., Consumer Federation Letter; ODS
previously has failed to comply with the
208 See Brown J. Letter. See also, Section II.E.2 for
Letter; Schwartz Letter; Wilson Letter. ongoing reporting requirements of
a discussion of the restrictions on resales.
201 See Grassi Letter; EY Letter. 209 See RocketHub Letter. Regulation Crowdfunding.225
202 See ODS Letter.
210 See AICPA Letter; Grassi Letter. We agree with the suggestion by some
203 See, e.g., CFA Institute Letter (recommending
211 See AICPA Letter. commenters that issuers should not be
a brief statement about prior capital raising 212 See, e.g., Grassi Letter (recommending required to disclose in multiple places
transactions); Commonwealth of Massachusetts
Letter; Grassi Letter; Joinvestor Letter; ODS Letter;
disclosure of all related-party transactions not the information required to be provided
deemed de minimis); NASAA Letter
Parsont Letter; RoC Letter (supporting the
disclosure covering the past three years); (recommending a lower percentage threshold); contingent payments for services, shareholder and
RocketHub Letter (recommending disclosure of RocketHub Letter (recommending a fixed other related-party loans and contingent liabilities);
successful prior offerings only); Whitaker Chalk threshold). Grassi Letter (recommending separate amounts for
213 See, e.g., ABA Letter; Public Startup Letter 2;
Letter (recommending that the disclosure exclude base salary, bonus and an ‘‘other’’ category for the
the target amount of any offerings made in reliance RocketHub Letter; Schwartz Letter. three highest paid individuals and the number and
214 See CrowdCheck Letter 1.
on Section 4(a)(6) and whether such target was type of equity instruments granted); NASAA Letter;
reached); Wilson Letter. But see, e.g., Heritage 215 See, e.g., ODS Letter; STA Letter; Tiny Cat RFPIA Letter (recommending inclusion of owners’
Letter; Public Startup Letter 2; Schwartz Letter; Letter. Such general information may include the compensation).
Wefunder Letter. issuer’s contact information; agent for service; 217 See, e.g., Arctic Island Letter 4.
204 See Parsont Letter. information about the manner in which ownership 218 See, e.g., Hackers/Founders Letter.
205 See, e.g., Grassi Letter (recommending interests will be evidenced; who will be providing 219 See, e.g., CFA Institute Letter.
disclosure of only the date, amount raised, type of record keeping services; where records of
mstockstill on DSK4VPTVN1PROD with RULES3

220 See, e.g., SBM Letter.


securities sold and a link to a Web site where more ownership will be maintained; and/or statements 221 See, e.g., Arctic Island Letter 5; CFA Institute
information on such prior offerings can be found); that the issuer may not provide account statements
and that investors will have the responsibility of Letter (recommending advance notice as to when
Wefunder Letter (recommending disclosure of only
monitoring their investments, communicating with and where annual reports will be available);
the aggregate capital raised in all prior exempt
transactions, as well as the date, terms, valuation the record keeper and updating their information RocketHub Letter.
222 See Rule 201(y) of Regulation Crowdfunding.
of and types of securities issued in the most recent with the record keeper.
223 See Rule 201(o) of Regulation Crowdfunding.
exempt offering). 216 See, e.g., Arctic Island Letter 4; Denlinger
224 See Rule 201(w) of Regulation Crowdfunding.
206 See, e.g., AICPA Letter (recommending Letter 1 (recommending disclosure of deferred
disclosure of transactions between the issuer and 10 compensation, stock options or warrants, 225 See Rule 201(x) of Regulation Crowdfunding.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations 71405

to investors.226 As a result, to avoid or to be paid is not available at the time evaluating a crowdfunding transaction
duplicative disclosure, an issuer will of the filing, issuers are permitted to because it will give investors a sense of
not be required to repeat what is already provide a good faith estimate.233 the size of the issuers using the
provided elsewhere in the issuer’s In addition, we are modifying the rule exemption. We expect that the early-
disclosure, including the financial text from the proposal to require issuers stage issuers who are likely to use
statements.227 Issuers may cross- to disclose any other direct or indirect securities-based crowdfunding will not
reference within the offering statement interest in the issuer held by the have many employees, so we do not
or report, including to the location of intermediary, or any arrangement for the believe this requirement will be
the information in the financial intermediary to acquire such an unreasonably burdensome.
statements.228 interest.234 The proposed rules would Risk Factors. We are adopting this
Identity of the Intermediary. Despite have prohibited an intermediary from disclosure requirement as proposed.239
the suggestion of one commenter that holding any financial interest in the While some commenters expressed
this disclosure is unnecessary,229 we issuers conducting offerings on its concerns about potential expenses or
believe requiring an issuer to identify platforms. However, as discussed in confusion associated with risk
the name, SEC file number and CRD Section II.C.2.b below, the final rules disclosure,240 we agree with those
number (as applicable) of the permit intermediaries to hold such commenters who indicated that
intermediary through which the offering interests. We believe that, similar to the disclosure of the material factors that
is being conducted should assist amount of compensation paid to the make an investment in the issuer
investors and regulators in obtaining intermediary, an intermediary’s speculative or risky is important to help
information about the offering and use interests in an issuer and the issuer’s investors understand the risks of
of the exemption.230 It also could help transaction could be material to an investing in a specific issuer’s
investors obtain background investment decision in the issuer. offering.241 To help investors to better
information on the intermediary, for Therefore, we believe that issuers understand these risks, we believe that
instance, through filings made by the should disclose such interests to risk factor disclosure should be tailored
intermediary with the Commission, as investors. to the issuer’s business and the offering
well as through the Financial Industry Legends. We are adopting this and should not repeat the factors
Regulatory Authority’s (‘‘FINRA’’) requirement as proposed.235 The addressed in the required legends.242
BrokerCheck system for broker- requirement for an issuer to include in For similar reasons, we are not
dealers 231 or a similar system, if the offering statement specified legends providing examples of, or developing
created, for funding portals. about the risks of investing in a standard disclosure for, issuer risk
Compensation Paid to the crowdfunding transaction is intended to factor discussions, as we believe issuers
Intermediary. Requiring an issuer to help investors understand the general will be in the best positions to articulate
disclose the amount of compensation risks of investing in a crowdfunding the risks associated with their business
paid to the intermediary for conducting transaction. We continue to believe, and offerings in light of their particular
the offering, including the amount of despite the suggestions of some facts and circumstances.
any referral or other fees associated with commenters,236 that requiring legends Indebtedness. Consistent with the
the offering, will permit investors and in each issuer’s offering statement, proposal, we are adopting the
regulators to determine how much of regardless of any general warnings requirement to provide a description of
the proceeds of the offering is used to available on an intermediary’s platform, the material terms of any indebtedness
compensate the intermediary. Based on will provide additional investor of the issuer.243 We believe disclosure of
a comment received,232 we understand protection with minimal costs. For the material terms of any indebtedness
that in some instances the exact amount example, the requirement that an issuer of the issuer, including, among other
of compensation and fees to be paid to include in the offering statement certain items, the amount, interest rate and
the intermediary will not be known at legends about the required ongoing maturity date of the indebtedness, is
the time the Form C is filed, and we reports, including how those reports important to investors because servicing
have modified the rule from the will be made available to investors and debt could place additional pressures on
proposal to address this issue. how an issuer may terminate its ongoing an issuer in the early stages of
Consistent with this understanding, and reporting obligations, will help development. We expect that for many
to avoid suggesting that only amounts investors understand an issuer’s issuers this information will be
certain and paid to date must be ongoing reporting obligations and how included in the financial statements,
disclosed, the final rules require they will be able to access those reports. which will satisfy this reporting
disclosure of all compensation paid or Current Number of Employees.
requirement.244
to be paid to the intermediary for Consistent with the proposal and the
conducting the offering, which may be recommendation of several While one commenter recommended
disclosed as a dollar amount or as a commenters,237 the final rules require that we require issuers to disclose the
percentage of the offering amount. If the disclosure of the current number of
239 See Rule 201(f) of Regulation Crowdfunding.
exact amount of the compensation paid employees.238 We believe this
240 See, e.g., Campbell R. Letter; Cole A. Letter;
disclosure is important to investors in Grassi Letter; Hackers/Founders Letter; RocketHub
226 See, e.g., EY Letter (noting that certain
Letter; Schwartz Letter; Scruggs Letter.
required disclosure would be included in an 233 See Rule 201(o)(1) of Regulation 241 See, e.g., ASSOB Letter; CFA Institute Letter;
issuer’s financial statements); Grassi Letter (same). Crowdfunding. Commonwealth of Massachusetts Letter; Consumer
mstockstill on DSK4VPTVN1PROD with RULES3

227 See Instruction to Item 201 of Regulation 234 See Rule 201(o)(2) of Regulation
Federation Letter; EMKF Letter; Jacobson Letter;
Crowdfunding. Crowdfunding. McGladrey Letter; STA Letter; StartupValley Letter;
228 Id. 235 See Item 2 of General Instruction III to Form Wilson Letter.
229 See RocketHub Letter. C. 242 See Item 2 of General Instruction III to Form
230 See Rule 201(n) of Regulation Crowdfunding. 236 See, e.g., Grassi Letter; Hackers/Founders C.
231 See FINRA, FINRA BrokerCheck, available at Letter; Public Startup Letter 2; Startup Valley Letter. 243 See Rule 201(p) of Regulation Crowdfunding.

http://www.finra.org/Investors/ToolsCalculators/ 237 See, e.g., NASAA Letter; Wilson Letter; Zhang 244 See Instruction to Rule 201 of Regulation
BrokerCheck/P015175. Letter. Crowdfunding; Items 1 and 3 of General Instruction
232 See RocketHub Letter. 238 See Rule 201(e) of Regulation Crowdfunding. III to Form C.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
71406 Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations

identities of their creditors,245 we do not of Rule 201(r), a transaction includes, percent, we believe this threshold
believe, as a general matter, that such but is not limited to, any financial appropriately takes into consideration
disclosure would provide meaningful transaction, arrangement or relationship the need to provide investors with
information to investors. Accordingly, (including any indebtedness or relevant information about the issuer’s
under the final rules, such disclosure is guarantee of indebtedness) or any series activities involving related parties
required only to the extent the creditor’s of similar transactions, arrangements or during this crucial early stage of
identity is a material aspect of the relationships.251 This instruction is development.
indebtedness.246 consistent with Item 404 of Regulation As suggested by one commenter,257 in
Prior Exempt Offerings. Consistent S–K.252 a change from the proposal, we are
with the proposal and with commenters’ Given the early stage of development adopting a definition for ‘‘member of the
recommendations, we are requiring of the small businesses and startups that family’’ in the related-party transactions
issuers to provide disclosure about the we expect will seek to raise capital context that is consistent with the
exempt offerings that they conducted pursuant to Section 4(a)(6), as well as definition of ‘‘member of the family of
within the past three years.247 For each the investment limits prescribed by the the purchaser or the equivalent’’ in the
exempt offering within the past three rules, we believe that limiting the resale restrictions context.258 The final
years, issuers must describe the date of disclosure of related-party transactions rule defines ‘‘member of the family’’ as
the offering, the offering exemption to transactions occurring since the a ‘‘child, stepchild, grandchild, parent,
relied upon, the type of securities beginning of the issuer’s last fiscal year, stepparent, grandparent, spouse or
offered and the amount of securities as proposed, will help to limit spousal equivalent, sibling, mother-in-
sold and the use of proceeds.248 We compliance costs for issuers while still law, father-in-law, son-in-law, daughter-
believe that information about prior providing investors with sufficient in-law, brother-in-law, or sister-in-law,
offerings will better inform investors information to evaluate the relationship [including] adoptive relationships’’ of
about the capital structure of the issuer between related parties and the any of the persons identified in Rules
and will provide information about how issuer.253 In addition, we are requiring 201(r)(1), (r)(2) or (r)(3).259 This
prior offerings were valued. issuers to disclose only related-party definition tracks the definition of
Related-Party Transactions. We are transactions that, in the aggregate, are in ‘‘immediate family’’ in Exchange Act
adopting this disclosure requirement excess of five percent of the aggregate Rule 16a–1(e),260 but with the addition
substantially as proposed.249 Related- amount of capital raised by the issuer in of ‘‘spousal equivalent,’’ which the final
party transactions create potential reliance on Section 4(a)(6) during the rule defines to mean ‘‘a cohabitant
conflicts of interest that may result in preceding 12-month period, inclusive of occupying a relationship generally
actions that benefit the related parties at the amount the issuer seeks to raise in equivalent to that of a spouse.’’ 261 We
the expense of the issuer or the the current offering under Section believe a common definition of
investors. After considering the 4(a)(6). We also have added an ‘‘member of the family’’ that is
comments received, we continue to instruction to clarify that any series of consistent with our disclosure rules in
believe the related-party transactions similar transactions, arrangements or other contexts 262 will provide certainty
disclosure will assist investors in relationships should be aggregated for for issuers in identifying the persons
obtaining a more complete picture of the purposes of determining whether covered by the rule.
financial relationships between certain related-party transactions should be Other Disclosures. We are adopting
related parties and the issuer and disclosed.254 For example, an issuer this provision as proposed but with the
provide additional insight as to seeking to raise $1 million will be addition of three issuer disclosure
potential uses of the issuer’s resources, required to disclose related-party requirements in response to comments
including the proceeds of the offering. transactions that, in the aggregate, are in received.
The final rule differs from the proposal excess of $50,000, which is the same The first is a requirement that an
in that an issuer is required to disclose dollar threshold required in Form 1– issuer disclose the location on its Web
transactions with any person who is, as A 255 for offerings of any size made site where investors will be able to find
of the most recent practicable date but pursuant to Tier 1 of Regulation A,256 the issuer’s annual report and the date
no earlier than 120 days prior to the and an issuer that raises $250,000 will by which such report will be available
date the offering statement or report is be required to disclose such transactions on its Web site.263 We believe this
filed, the beneficial owner of 20 percent in excess of $12,500. We believe that, in requirement addresses the concern
or more of the issuer’s outstanding light of the sizes and varieties of issuers expressed by commenters that investors
voting equity securities. Limiting the that may make offerings in reliance on may not know where to find an issuer’s
relevant period to 120 days prior to the Section 4(a)(6), this approach could annual report. We do not believe
date of the offering statement or report mitigate the potential for the physical delivery of the annual report is
is consistent with the treatment of requirement to be disproportionate to necessary due to the electronic nature of
beneficial ownership elsewhere in the size of certain offerings and issuers.
the crowdfunding marketplace, nor do
Regulation Crowdfunding.250 We also While one commenter suggested we use
we believe that email delivery of the
believe this limitation and the a percentage threshold less than five
consistency it provides will help limit annual report is practical because the
compliance costs for issuers. 251 See Instruction 2 to Rule 201(r) of Regulation
257 See Brown J. Letter.
The final rule also includes an Crowdfunding.
258 See
252 See Instruction 2 to Item 404(a) of Regulation Rule 501(a) of Regulation Crowdfunding;
instruction to clarify that, for purposes 259 See Rule 201(r)(4) of Regulation
S–K [17 CFR 229.404(a)].
mstockstill on DSK4VPTVN1PROD with RULES3

253 We note, however, that financial statements Crowdfunding.


245 See ODS Letter. 260 17 CFR 240.16a–1(e).
covering the two most recently completed fiscal
246 See Rule 201(y) of Regulation Crowdfunding. years will include disclosure of related-party 261 See Rule 201(r)(4) of Regulation
247 See Rule 201(q) of Regulation Crowdfunding.
transactions, as required by U.S. GAAP, for each of Crowdfunding.
248 See Instruction to paragraph (q) of Rule 201 of the years presented. 262 See, e.g., Exchange Act Rule 16a–1(e).
Regulation Crowdfunding. 254 See Instruction 1 to Rule 201(r) of Regulation 263 See Rule 201(w) of Regulation Crowdfunding.
249 See Rule 201(r) of Regulation Crowdfunding. Crowdfunding. See also, Section II.B.2 for a discussion of the
250 See, e.g., Rules 201(c) and 201(m) of 255 17 CFR 239.900
requirement on issuers to post their annual reports
Regulation Crowdfunding. 256 17 CFR 230.251 through 230.263 on their Web sites.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations 71407

issuer may not have access to email requirements based on aggregate target financial condition. In addition, another
addresses of its investors. Instead, we offering amounts of the offering and all instruction clarifies that references to
are requiring issuers to disclose this other offerings made in reliance on the issuer in Rule 201(s) refer to the
information in the offering statement, Section 4(a)(6) within the preceding 12- issuer and its predecessors, if any.273
which will assist investors in locating month period. We expect that the discussion
the information while limiting the required by the final rule and
(a) Financial Condition Discussion instructions will inform investors about
compliance costs for issuers.
The second additional disclosure (i) Proposed Rules the financial condition and results of
requirement, as suggested by a Consistent with Section 4A(b)(1)(D), operations of the issuer by providing
commenter,264 is a requirement that the we proposed in Rule 201(s) of management’s perspective on the
disclosure include any material Regulation Crowdfunding to require an issuer’s operations and financial results,
information necessary in order to make issuer to provide a narrative discussion including information about the issuer’s
the statements made, in light of the of its financial condition. liquidity and capital resources and any
circumstances under which they were known trends or uncertainties that
made, not misleading.265 This provision (ii) Comments on the Proposed Rules could materially affect the company’s
should help ensure that investors have Commenters generally supported the results. Because issuers seeking to
all of the material information they need proposed requirement that issuers engage in crowdfunding transactions
on which to base their investment provide a narrative discussion of their will likely be smaller, less complex and
decisions. financial condition.268 One commenter at an earlier stage of development than
The third additional requirement, expressed concern that the requirement issuers conducting registered offerings
similar to suggestions from some could be challenging for issuers at an or Exchange Act reporting companies,
commenters,266 requires the issuer to early stage of development and result in we expect that the discussion generally
disclose whether it or any of its duplicative disclosure.269 The same will not, contrary to the concern of at
predecessors previously failed to commenter suggested that issuers be least one commenter,274 need to be as
comply with the ongoing reporting encouraged, rather than mandated, to lengthy or detailed as the management’s
requirements of Regulation discuss material historical operating discussion and analysis of financial
Crowdfunding.267 While we continue to results.270 condition and results of operations of
believe, and the final rules provide, that those issuers. Accordingly, we are not
(iii) Final Rules
only those issuers that have failed to file prescribing a specific content or format
their two most recent annual reports We are adopting this requirement as for this information, but instead set
should be prohibited from relying on proposed, with a few technical forth general principles for making this
the exemption available under Section modifications.271 Rule 201(s) clarifies disclosure.275 The discussion should
4A(6), we also believe that any history that the description must include, to the address, to the extent material, the
of non-compliance with ongoing extent material, a discussion of issuer’s historical results of operations
reporting obligations would provide liquidity, capital resources and in addition to its liquidity and capital
important information to investors historical results of operations. Rule resources. If an issuer does not have a
about the issuer. 201(s) also includes an instruction prior operating history, the discussion
Although we appreciate that noting that issuers will be required to should focus on financial milestones
commenters made various suggestions include a discussion of each period for and operational, liquidity and other
for additional issuer disclosure which financial statements are provided challenges. If an issuer has a prior
requirements, such as those relating to and a discussion of any material operating history, the discussion should
executive compensation, market risk changes or trends known to focus on whether historical earnings
and material contracts, we are not management in the financial condition and cash flows are representative of
mandating further disclosures. In and results of operations of the issuer what investors should expect in the
adopting issuer requirements for subsequent to the period for which future. An issuer’s discussion of its
Regulation Crowdfunding, we have been financial statements are provided.272 In financial condition should take into
mindful of the limited resources and connection with this instruction, an account the proceeds of the offering and
start-up operations of issuers likely to issuer will need to consider whether any other known or pending sources of
use security-based crowdfunding and more recent financial information is capital. Issuers also should discuss how
have sought to consider the need to necessary to make the disclosure in the the proceeds from the offering will
provide investors with relevant offering document not misleading. The affect their liquidity, whether these
information to make an informed instruction in final Rule 201(s) was funds and any other additional funds
investment decision while limiting the included in proposed Rule 201(t) as an are necessary to the viability of the
compliance costs for issuers. We believe instruction to the financial statement business and how quickly the issuer
the issuer disclosure requirements we requirements, but we have moved this anticipates using its available cash. In
are adopting along with other instruction to Rule 201(s) because it addition, issuers should describe the
protections, such as investment limits, elicits narrative disclosure that we other available sources of capital to the
achieve this goal. believe is more appropriately presented business, such as lines of credit or
as part of the discussion of the issuer’s required contributions by principal
(2) Financial Disclosure
shareholders. To the extent these items
Section 4A(b)(1)(D) requires ‘‘a 268 See, e.g., ABA Letter; CFA Institute Letter;
of disclosure overlap with the issuer’s
mstockstill on DSK4VPTVN1PROD with RULES3

description of the financial condition of CFIRA Letter 5; Commonwealth of Massachusetts


Letter; Grassi Letter; Jacobson Letter; Joinvestor discussion of its business or business
the issuer.’’ It also establishes a Letter; Saunders Letter. But see, e.g., EY Letter; plan, issuers are not required to make
framework of tiered financial disclosure Public Startup Letter 2; RocketHub Letter.
269 See EY Letter. 273 See Instruction 4 to Rule 201(s) of Regulation
264 See CrowdCheck Letter 1. 270 Id. Crowdfunding.
265 See Rule 201(y) of Regulation Crowdfunding. 271 See Rule 201(s) of Regulation Crowdfunding. 274 See EY Letter.
266 See Grassi Letter; RocketHub Letter. 272 See Instruction 1 to Rule 201(s) of Regulation 275 See Instructions 1 and 2 to Rule 201(s) of
267 See Rule 201(x) of Regulation Crowdfunding. Crowdfunding. Regulation Crowdfunding.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
71408 Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations

duplicate disclosures.276 While we are independence rules, which are set forth generally supported allowing issuers to
not mandating a specific presentation, in Rule 2–01 of Regulation S–X.277 voluntarily provide financial statements
we expect issuers to present the • Periods Covered in the Financial that meet the requirements for a higher
required disclosures, including any Statements. The financial statements aggregate target offering amount.279
other information that is material to an would be required to cover the shorter Offerings of $100,000 or less. In
investor, in a clear and understandable of the two most recently completed general, commenters supported
manner. fiscal years or the period since inception requiring issuers to provide financial
of the business. statements certified by the principal
(b) Financial Disclosures • Age of Financial Statements. executive officer to be true and
(i) Proposed Rules During the first 120 days of the issuer’s complete in all material respects.280
fiscal year, an issuer would be able to Further, several recommended that all
Proposed Rule 201(t) of Regulation issuers relying on the Section 4(a)(6)
conduct an offering in reliance on
Crowdfunding would have established exemption be required to provide such
Section 4(a)(6) and the related rules
financial statement disclosure certification.281
using financial statements for the fiscal
requirements that are based on aggregate Commenters were divided on the
year prior to the most recently
target offering amounts within the requirement that issuers offering
completed fiscal year if the financial
preceding 12-month period: $100,000 or less file and provide to
statements for the most recently
• Issuers offering $100,000 or less completed fiscal year are not otherwise investors their federal income tax
would be required to file with the available or required to be filed. returns. Supporters of the tax return
Commission and provide to investors • Review and Audit Standards. requirement noted that income tax
and the relevant intermediary income Reviewed financial statements would be returns would be a source of credible
tax returns filed by the issuer for the required to be reviewed in accordance information for investors that should be
most recently completed year (if any) with the Statements on Standards for readily available without requiring
and financial statements that are Accounting and Review Services issuers to bear significant additional
certified by the principal executive (‘‘SSARS’’) issued by the American preparation expenses.282 On the other
officer to be true and complete in all Institute of Certified Public Accountants hand, opponents of the tax return
material respects; (‘‘AICPA’’). Audited financial requirement raised concerns about
• issuers offering more than $100,000, statements would be required to be privacy,283 identity theft and tax
but not more than $500,000, would be audited in accordance with the auditing fraud.284 One commenter expressed
required to file with the Commission standards issued by either the AICPA or concern that small issuers may not be
and provide to investors and the the Public Company Accounting adequately prepared to consider the
relevant intermediary financial Oversight Board (‘‘PCAOB’’). patchwork of state and federal privacy
statements reviewed by a public • Review and Audit Reports. Issuers laws that might apply to the disclosure
accountant that is independent of the would be required to file with the of tax returns.285
issuer; and Commission and provide to investors Several commenters suggested
• issuers offering more than $500,000 and the relevant intermediary a copy of approaches to allow access by investors
would be required to file with the the public accountant’s review or audit to the information available from a tax
Commission and provide to investors report. An issuer that received an return,286 including permitting issuers
and the relevant intermediary financial adverse opinion or disclaimer of to digitally submit the data from their
statements audited by a public opinion in its audit report would not be
a limited review engagement on the use of proceeds
accountant that is independent of the in compliance with the audited after the raise); Zhang Letter.
issuer. financial statement requirements. 279 See, e.g., AICPA Letter; Denlinger Letter 1;

Under proposed Rule 201(t), issuers • Exemptions from the Financial Grassi Letter; Heritage Letter; RocketHub Letter;
would be permitted to voluntarily Statement Requirements. The proposed Wilson Letter. But see Public Startup Letter 2.
280 See, e.g., AICPA Letter; Zeman Letter.
provide financial statements that meet rules would not exempt any issuers 281 See, e.g., AICPA Letter; Denlinger Letter 1;
the requirements for a higher aggregate from the financial statement Grassi Letter; Jacobson Letter. But see Public
target offering amount. requirements. Startup Letter 2.
282 See, e.g., Angel Letter 1 (‘‘tax returns are even
The proposed rules also would have (ii) Comments on the Proposed Rules more credible than audited financial statements, as
set forth the following requirements for companies are highly unlikely to exaggerate
the financial statements: Commenters were divided on the
profitability to the IRS.’’); Fund Democracy Letter;
proposed financial statement
• Basis of Accounting. All issuers NPCM Letter; Zeman Letter (‘‘the small risk for
requirements,278 although commenters these investors does not meet the consideration of
would be required to file with the audited financial statements.’’).
Commission and provide to investors 277 17 CFR 210.2–01. 283 See, e.g., AICPA Letter (disclosing an issuer’s
and the relevant intermediary a 278 For an example of those who generally tax return ‘‘. . . has the potential to cause serious
complete set of their financial supported the proposed financial disclosure problems. Tax returns are intended to be
statements (balance sheets, income requirements, see, e.g., ABA Letter (recommending confidential and should remain so.’’); Public
Startup Letter 2; RocketHub Letter; SBM Letter;
statements, statements of cash flows and some modifications); CFA Institute Letter; Wilson Letter (personal income tax information
Commonwealth of Massachusetts Letter; Consumer
statements of changes in owners’ Federation Letter (the financial information is should be on a voluntary basis only); Zhang Letter.
equity), prepared in accordance with critical to an informed evaluation of the investment 284 See AICPA Letter.

U.S. generally accepted accounting opportunity); Denlinger Letter 1; Funderbuddies 285 See AICPA Letter.

principles (‘‘U.S. GAAP’’). Letter; NASAA Letter. 286 See, e.g., Arctic Island Letter 5 (recommending
mstockstill on DSK4VPTVN1PROD with RULES3

For an example of those who generally opposed, that only the two primary pages and not the
• Public Accountant Requirements. see, e.g., AEO Letter; Joinvestor Letter schedules be made public); CrowdBouncer Letter
To qualify as independent of the issuer, (recommending that only issuer-generated (recommending the Commission allow issuers to
a public accountant would be required documents produced in good faith be required); disclose electronic transcripts of filed tax returns to
to comply with the Commission’s Marsala Letter; RocketHub (stating that investors through the intermediary platforms);
‘‘requirements are excessive in cost and misguided NPCM (expressing concern that unless tax returns
in intent’’); Traklight Letter (recommending that are filed as a PDF stamped by the IRS, there is no
276 See Instruction to Rule 201 of Regulation instead of pre-raise and ongoing financial statement way to know if the posted document is a true
Crowdfunding. reviews or audits, issuers only be required to have reflection of the tax return); RocketHub Letter.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations 71409

tax return in a standardized format.287 offering amount for issuers that provide and others recommended that we
Supporters of digital submission this level of financial information.297 consider additional criteria for
suggested that approach would provide Offerings of more than $100,000 but determining when an issuer would be
a standardized format and protect not more than $500,000. Some required to provide audited financial
issuers from accidental disclosure of commenters supported the requirement statements.304 A number of commenters
confidential information. Commenters in the proposed rules that offerings of opposed the proposed $500,000
generally supported the proposal to more than $100,000 but not more than threshold as being too low,305 and a
require issuers to redact personally $500,000 include financial statements number recommended alternative
identifiable information from their tax reviewed by an independent public thresholds.306 A number of commenters
returns,288 although some requested accountant,298 while other commenters stated that funding the upfront cost of
clarifications.289 opposed such requirement.299 A number an audit would be particularly difficult
Two commenters recommended that of commenters recommended a different for issuers raising capital for the first
the timing of financial statement range of offering amounts or methods time.307
disclosures correspond to any extended for determining when an issuer is
tax filing deadlines,290 while two other required to file and provide reviewed Letter (for issuers less than two years old); Woods
financial statements.300 Letter.
commenters opposed such 304 See, e.g., Angel Letter 1 (only if such financial
application.291 Further, a few Offerings of more than $500,000. We statements are available); Arctic Island Letter 5
commenters supported the proposal to received extensive comments on our (only apply to issuers that have greater than $15
permit an issuer that has not yet filed its proposal that issuers offering more than million in revenue); EY Letter (only if issuer has
tax return for the most recently $500,000 be required to file with the raised $5 million in equity securities in
crowdfunding transactions unless audited financial
completed fiscal year to use the tax Commission and provide to investors statements are otherwise available); McGladrey
return filed for the prior year and and the relevant intermediary financial Letter (eliminate the audit requirements until the
update the information after filing the statements audited by an independent issuer meets certain revenue and operational
public accountant. A significant number thresholds); Reed Letter (if an audit is required, the
tax return for the most recently requirement only apply to issuers that reach a
completed fiscal year.292 One of those commenters opposed the certain size in investment or investors); RocketHub
commenter recommended that at least proposed requirement,301 although Letter ($5 million offering amount and the issuer
one tax return be available,293 and some commenters expressed support.302 has been in operation for more than two years). But
Some commenters recommended the see AICPA Letter (additional criteria would add
another recommended that the complexity without any additional benefit).
Commission provide guidance for elimination of the audit requirement,303 305 See, e.g., ABA Letter; CCA Letter; CFIRA

issuers who have not filed a U.S. tax Letter 5; CfPA Letter; CrowdFundConnect Letter;
297 See, e.g., Hackers/Founders Letter ($500,000); EarlyShares Letter; EMKF Letter; EY Letter;
return.294 One commenter supported
Kickstarter Coaching Letter ($250,000); RocketHub FundHub Letter 1; Generation Enterprise Letter;
requiring issuers to describe any Letter ($500,000); Zeman Letter (recommending that Grassi Letter; Graves Letter; Guzik Letter 1;
material changes that are expected in offerings under $500,000 require two years of tax Kickstarter Coaching Letter; Milken Institute Letter;
the tax returns for the most recently returns and unaudited balance sheets). NFIB Letter; PBA Letter; RocketHub Letter; SBA
completed fiscal year,295 while another 298 See, e.g., Denlinger Letter 1; Leverage PR Office of Advocacy Letter; SBM Letter; Seyfarth
Letter (stating that the industry will evolve to Letter; WealthForge Letter; Wefunder Letter; Woods
recommended that such disclosure be Letter. But see AICPA Letter; Denlinger Letter 1;
provide lower cost reviews); StartEngine Letter 1
permitted, but not required.296 (stating that the industry will evolve to provide Fund Democracy Letter; Zeman Letter.
A number of commenters lower cost reviews, such as in the $1,500–$10,000 306 See, e.g., ABA Letter ($750,000); EarlyShares

recommended raising the maximum range for smaller, newer companies). Letter ($1 million); EMKF Letter ($800,000); EY
299 See, e.g., Angel Letter 1 (recommending Letter ($5 million, unless audited financial
287 See, e.g., RocketHub Letter (suggesting digital requiring audited financial statements if they are statements are otherwise available); Grassi Letter
available and tax returns if they are not); Arctic ($700,000); Graves Letter ($900,000); Guzik Letter 1
submission ‘‘will protect the issuers from accidental ($700,000); Kickstarter Coaching Letter ($1 million);
disclosure of confidential information, and will Island Letter 5 (recommending only for issuers that
have greater than $15 million in annual revenue); PBA Letter ($1 million); RocketHub Letter ($5
allow investors to view the information in a million and the issuer has been in operation for
structured and consistent manner. For example, if Johnston Letter; McGladrey Letter (recommending
only after the issuer meets certain revenue and more than two years); Seyfarth Letter ($1 million);
each issuer were to upload their version of a WealthForge Letter ($1 million).
financial statement, the responsibility of learning to operational thresholds); NACVA Letter; Public
307 See, e.g., AEO Letter (expressing concern that
understand each format would fall to the investor. Startup Letter 2; Zeman Letter.
300 See, e.g., ABA Letter; CIFRA Letter 5 (noting start-up businesses with no revenue to date, and
Standardized formats for financial projections, raising capital for the first time, would find it
financial statements, and business plans will allow the financial disclosure standards of the SBA’s
Section 8(a) program require reviewed financial difficult or impossible to fund the cost of an audit);
investors to quickly compare issuances and more AWBC Letter; CFIRA Letter 5 (stating that the
readily evaluate investment opportunities.’’); Zhang statements for companies with gross annual receipts
for $2 million to $10 million); Grassi Letter proposed level of financial disclosure for capital
Letter. raises over $500,000 would be an impediment for
288 See, e.g., ABA Letter; AICPA Letter; Fund ($300,000 to $700,000); Kickstarter Coaching Letter
($250,000 to $1 million). small business when many will have limited
Democracy Letter; Whitaker Chalk Letter. financial resources to absorb the expense prior to
301 See, e.g., AEO Letter; Angel Letter 1; AWBC
289 See, e.g., ABA Letter (recommending the
raising capital using crowdfunding); CfPA Letter
Commission provide a non-exhaustive list of the Letter; CFIRA Letter 5; CfPA Letter; (suggesting the Commission determine an alternate
specific types of information that may be redacted); CrowdFundConnect Letter; EarlyShares Letter; audit threshold because ‘‘the costs of an audit must
AICPA Letter (recommending that if the tax return EMKF Letter; EY Letter; Finkelstein Letter; necessarily be incurred prior to an offering, and in
requirement is adopted, the Commission define FundHub Letter 1; Generation Enterprise Letter; the numerous expected cases of unsuccessful
‘‘personally identifiable information’’ and clarify Fryer Letter; Grassi Letter; Graves Letter; Guzik offerings, would lead to substantial net losses to the
that the redaction includes third-party information). Letter 1; Hakanson Letter; Holland Letter; Johnston businesses that Crowdfunding is supposed to
290 See EY Letter; Grassi Letter. Letter; Kickstarter Coaching Letter; McGladrey help’’); EMKF Letter (stating that many of the
291 See, e.g., ASSOB Letter (recommending that
Letter; Milken Institute Letter; NACVA Letter; NFIB issuers looking to raise capital through
Letter; NPCM Letter; NSBA Letter; PBA Letter; Reed crowdfunding will be startups with little or no
issuers should provide their tax accounts within Letter; RocketHub Letter; Saunders Letter; SBA revenue to afford audited financial statements);
mstockstill on DSK4VPTVN1PROD with RULES3

three months of the end of the reporting period); Office of Advocacy Letter; SBEC Letter; SBM Letter;
Fund Democracy Letter. Generation Enterprise Letter; Grassi Letter; Graves
Seyfarth Letter; WealthForge Letter; Wefunder Letter; Holland Letter; McGladrey Letter; NSBA
292 See, e.g., Grassi Letter; RocketHub Letter.
Letter; Woods Letter; Zeman Letter. Letter; Reed Letter (noting that few start-ups could
293 See Fund Democracy Letter. 302 See, e.g., AICPA Letter; Consumer Federation
afford auditing fees); RocketHub Letter (stating that
294 See AICPA Letter.
Letter; CSTTC Letter; Denlinger Letter 2; the filing and audit requirements establish an
295 See Grassi Letter. FundDemocracy Letter; Leverage PR; NASAA upfront cost that is too high for small businesses to
296 See RocketHub Letter (also recommending that Letter; StartEngine Letter 1. accept); SBM Letter (noting that many startups do
the Commission define what qualifies as a material 303 See, e.g., CrowdFundConnect Letter; FundHub not have the resources to obtain audited financials);
change). Letter 1; Johnston Letter; SBEC Letter; StartupValley Continued

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
71410 Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations

We received a number of comments requiring U.S. GAAP noted the benefit A few commenters recommended that
expressing concern about the to investors of having a single standard issuers relying on Section 4(a)(6) be
anticipated costs associated with to facilitate comparison of different permitted to take advantage of the
audited financial statements.308 Other issuers,311 and also that U.S. GAAP extended transition period applicable to
commenters noted that costs would be would be more likely to provide private companies for complying with
lower than those estimated in the investors with a fair representation of an new or revised accounting standards.315
Proposing Release or in other comment issuer’s financial position and results of A few commenters expressed concern
letters.309 operations than financial statements that Section 4(a)(6) issuers may be
Basis of Accounting. Commenters using a comprehensive basis of viewed as ‘‘public business entities’’ by
generally were divided on whether accounting other than U.S. GAAP.312 FASB.316 One commenter
issuers relying on Section 4(a)(6) should A number of commenters recommended that the Commission
be required to prepare financial recommended that, as a less expensive provide an exemption from this
statements in accordance with U.S. alternative to requiring U.S. GAAP, the definition for such issuers.317
GAAP.310 Commenters in support of Commission allow financial statements Periods Covered in the Financial
prepared in accordance with a Statements. While two commenters
Seyfarth Letter (stating that the audit requirement comprehensive basis of accounting generally supported requiring two years
will deny access to issuers who do not have the other than U.S. GAAP.313 Other
necessary upfront capital); WealthForge Letter; of financial statements,318 a number of
Wefunder Letter. commenters recommended that if commenters generally opposed the
308 See, e.g., AEO Letter; CfPA Letter; CFIRA financial statements prepared in proposal, recommending one year of
Letter 5; CrowdCheck Letter 4; ErrandRunner Letter; accordance with U.S. GAAP are financial statements instead.319 Many
Finkelstein Letter; FundHub Letter 1 (stating that required, they only be required in
the difference in cost for reviewed versus audited commenters opposed requiring interim
financial statements could easily run into tens of certain circumstances.314 financial statements,320 while several
thousands of dollars); Graves Letter (stating that a supported such a requirement.321
partner from a leading accounting firm predicted financial statements do not outweigh the burdens
the cost to small businesses of providing audited
Several commenters recommended that
that mandatory application of GAAP would
financial statements could be upwards of $18,000 impose); CrowdCheck Letter 4; EarlyShares Letter; if interim financial statements are
to $25,000); Grassi Letter (stating that audits take Graves Letter (recommending that U.S. GAAP only required, they not be subject to audit or
more time than companies seeking capital may be required for issuers with $5 million in revenue); review,322 while another commenter
have); NFIB Letter; RocketHub Letter; SBA Office of Milken Institute Letter (recommending that U.S.
Advocacy Letter; SBEC Letter; SBM Letter; Seyfarth recommended that they not be filed
GAAP only be required for issuers with $5 million
Letter; StartupValley Letter (stating that audits for in revenue, the threshold at which the IRS requires with the Commission, but only be
small startups with no financials can cost $10,000 a switch to accrual accounting); Public Startup provided to investors.323
and that GAAP audits typically cost 25–50% more Letter 2; SBEC Letter (noting the AICPA’s release of Age of Financial Statements. Several
than other comprehensive basis of accounting new guidelines in June 2013 for small and mid-size
audits); Stephenson Letter; Traklight Letter (stating commenters opposed our proposal that
businesses); Tiny Cat Letter; U.S. Chamber of
that audit costs have been cited as low as $5,000 Commerce Letter; Wilson Letter (recommending financial statements be dated within 120
and as high as $20,000 for a startup; also stating that that the Commission consider the stage of the days of the start of the offering,324 while
review costs are estimated at about 60% of the cost
of an audit); WealthForge Letter.
business in determining whether to require one commenter supported it.325 Some
compliance with U.S. GAAP); Zhang Letter. commenters opposed our proposal to
309 See, e.g., CCA Letter (analyzing regulatory
311 See, e.g., NASAA Letter.
costs borne by Title II issuers); CrowdFranchise 312 See, e.g., EY Letter.
permit an issuer, during the first 120
Letter 1; CrowdFunding Network (stating that 313 See, e.g., ABA Letter (for offerings of $100,000 days of the issuer’s fiscal year, to
projected costs are already decreasing through conduct an offering in reliance on
market forces); D’Amore Letter; ddbmckennon or less, but stating that the Commission could
Letter (noting that the majority of issuers will be require providing U.S. GAAP financial statements Section 4(a)(6) using financial
newly formed with limited historical operations if available); AICPA Letter; CFIRA Letter 5; CFIRA statements for the fiscal year prior to the
and that an audit for such companies may range Letter 7; CrowdCheck Letter 4; EarlyShares Letter;
from $4,000–$9,000 in year one); Denlinger Letter EY Letter (for offerings of $100,000 or less, unless
315 See, e.g., EY Letter; U.S. Chamber of
1 (citing a study that found that about half of the U.S. GAAP financial statements are available);
cost of an audit is made up for in interest rate Grassi Letter; Graves Letter (for issuers with less Commerce Letter.
savings on bank loans); Denlinger Letter 2 (the than $5 million in revenue); Mahurin Letter (stating 316 See, e.g., ABA Letter; EY Letter (noting also

market will evolve for small issuers such that audit that simple Excel spreadsheets accompanied by the definition of ‘‘public entity’’ under the
costs may be in the range of $2,000–$4,000); bank records should meet the financial statement Accounting Standards Codification).
FundHub Letter 2 (noting the emergence of CPA requirements); Milken Institute Letter (for early- 317 See EY Letter.

firms willing to do a complete audit for a startup stage issuers); NFIB Letter; SBEC Letter; 318 See ASSOB Letter; Zeman Letter.

business for $2,500 or less); Holm Letter (stating StartupValley Letter; Tiny Cat Letter (for offerings 319 See, e.g., Denlinger Letter 1; EY Letter; Grassi
that new providers are offering compliance services of less than $500,000); Whitaker Chalk Letter (for Letter; Joinvestor Letter; Public Startup Letter 2;
at much lower costs than anticipated); JumperCard offerings of less than $500,000 if the issuer has an RFPIA Letter (as it relates to audited financial
Letter; Kemp Letter; Leverage PR Letter; asset or income level below a certain level). statements); RocketHub Letter; Verrill Dana Letter.
Sfinarolakis Letter; StartEngine Letter 1 (noting that 314 See, e.g., ABA Letter (suggesting that: (i) In
320 See, e.g., CFIRA Letter 7; EMKF Letter; EY
reviews and audits will be in the range of $1,500– offerings of $100,000 or less, the certifying principal Letter; FundHub Letter 1; Grassi Letter; Public
$10,000 for smaller, newer companies); StartEngine executive officer could be required to represent that Startup Letter 2; RocketHub Letter; Traklight Letter;
Letter 2 (noting the emergence of third-party service the issuer is unable to prepare financial statements Wefunder Letter; Whitaker Chalk Letter.
providers); tempCFO Letter; Upchurch Letter in accordance with U.S. GAAP without 321 See, e.g., AICPA Letter; Consumer Federation
(stating that the market will adjust for costs). unreasonable effort or expense; (ii) in offerings of
Letter (recommending supplementing the proposed
310 For supporters, see, e.g., AICPA Letter (for more than $100,000, but not more than $500,000,
financial statement requirements with unaudited
offerings over $100,000); CFA Institute Letter; EY the exception could also require the principal
CEO-certified financial statements through the end
Letter (for offerings over $100,000 for only the most executive officer representation and be limited to
of the month ending no more than two months
recent year); Hackers/Founders Letter; Heritage issuers that have not prepared U.S. GAAP-
before the offering begins); Denlinger Letter 1
Letter (recommending for issuers with assets over compliant financial statements for any other
(recommending quarterly basic financial reporting,
$100,000, that if financial statements are not purpose and who have no operating history, no
mstockstill on DSK4VPTVN1PROD with RULES3

including a balance sheet, income statement and


prepared in accordance with U.S. GAAP, the issuer revenues and/or a minimal amount of assets (e.g.,
statement of cash flows); Fund Democracy Letter.
be required to note any variance from U.S. GAAP $500,000); and (iii) in offerings of more than 322 See, e.g., CFIRA Letter 7; Consumer Federation
and state the reason for such variance); NASAA $500,000, the exception could require the principal
Letter; RocketHub Letter; Whitaker Chalk Letter (for executive officer representation, including a Letter; Denlinger Letter 1; Fund Democracy Letter;
offerings over $500,000 until such time as the representation that the other comprehensive basis Traklight Letter.
323 See, RocketHub Letter.
Commission accepts IFRS for U.S. domestic of accounting methodology selected is acceptable
issuers). 324 See, e.g., Grassi Letter; Public Startup Letter 2;
under AICPA standards, and be limited to issuers
For opponents, see, e.g., ABA Letter (noting that with no operating history or revenue and minimal RocketHub Letter.
the benefits associated with GAAP-compliant assets). 325 See Denlinger Letter 1.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations 71411

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

report under, the AICPA peer review standards); 346 See EY Letter.
ASSOB Letter (recommending the rules not place Letter 1; EY Letter; Fund Democracy Letter; Grassi 347 See, e.g., Arctic Island Letter 5 (supporting
restrictions on the type of accountant an issuer is Letter. But see Public Startup Letter 2.
336 See, e.g., AICPA Letter; Denlinger Letter 1;
only an exemption from the audit requirement);
required to use to review or audit its financial CFIRA Letter 5; CFIRA Letter 7;
statements); Multistate Tax Letter (an issuer should Grassi Letter; Traklight Letter.
337 See, e.g. AICPA Letter; Denlinger Letter 1; EY
CrowdFundConnect Letter; Crowdpassage Letter 2;
not be required to obtain accounting services). EY Letter; Grassi Letter; Hackers/Founders Letter;
330 See, e.g., AICPA Letter; ASSOB Letter Letter; Grassi Letter. Joinvestor Letter; McGladrey Letter; PBA Letter;
338 See, e.g., Consumer Federation Letter; Fund
(recommending the rules not place restrictions on PeoplePowerFund Letter; RocketHub Letter
the type of accountant an issuer is required to use Democracy Letter; Public Startup Letter 2; (recommending that the audit requirements should
to review or audit its financial statements); RocketHub Letter; Rucker Letter (stating that GAAS only apply to issuers that have been in operation
Denlinger Letter 1; Funderbuddies Letter; EY Letter; fit poorly with the kinds of businesses Title III is for more than two years and are raising more than
Grassi Letter; Heritage Letter; Multistate Tax Letter intended to accommodate). $5 million); StartupValley Letter (supporting an
(an issuer should not be required to obtain 339 See Consumer Federation Letter; Fund exemption from the audit requirements); Wefunder
mstockstill on DSK4VPTVN1PROD with RULES3

accounting services); Public Startup Letter 2; Democracy Letter. Letter; Whitaker Chalk Letter.
RocketHub Letter; Traklight Letter. See also RFPIA 340 See, e.g., AICPA Letter; Grassi Letter 348 See, e.g., AICPA Letter; Denlinger Letter 1;

Letter (recommending the public accountants (recommending that the Commission require issuers Wilson Letter.
conducting an audit be required to be members of to use the same standards used in the offering or 349 See, e.g., ASSOB Letter; CFIRA Letter 5;
the AICPA or the PCAOB for one year.). higher standards, with the PCAOB standards Denlinger Letter 1; Grassi Letter; McGladrey Letter;
331 See, e.g., ABA Letter; Commonwealth of deemed to be the higher standard, when complying PBA Letter; PeoplePowerFund Letter; RocketHub
Massachusetts Letter; RocketHub Letter. with the ongoing reporting requirements); Heritage Letter; Wefunder Letter; Whitaker Chalk Letter;
332 See, e.g., AICPA Letter; Denlinger Letter 1; EY Letter; Traklight Letter. Zhang Letter.
Letter; Grassi Letter; McGladrey Letter. 341 RocketHub Letter. 350 See EY Letter; PBA Letter.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
71412 Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations

201(t) with a number of changes from the requirement that all issuers file with statements have not been reviewed or
the proposal. As described in more the Commission and provide to audited by an independent public
detail below, the final requirements are investors and the relevant intermediary accountant, there has been senior
based on the amount offered and sold in a complete set of their financial executive attention paid to the financial
reliance on Section 4(a)(6) within the statements, which includes balance statements. We are not requiring this
preceding 12-month period, as follows: sheets, statements of comprehensive certification for reviewed or audited
• For issuers offering $100,000 or income, statements of cash flows, financial statements, as some
less: Disclosure of the amount of total statements of changes in stockholders’ commenters suggested, because we
income, taxable income and total tax as equity and notes to the financial believe the certification is intended as
reflected in the issuer’s federal income statements.354 In order to avoid an added measure of assurance that is
tax returns certified by the principal potential confusion as to the not needed in offerings of this size when
executive officer to reflect accurately the presentation of financial statements, and an independent accountant reviews or
information in the issuer’s federal consistent with Tier 1 offerings under audits the financial statements. We also
income tax returns (in lieu of filing a Regulation A,355 the final rule adds an are adopting the form of the certification
copy of the tax returns), and financial instruction that financial statements that that must be provided by the issuer’s
statements certified by the principal are not audited must be labeled as principal executive officer as proposed
executive officer to be true and unaudited.356 Consistent with the with one change relating to the
complete in all material respects.351 If, proposal, the final rules do not exempt information from the issuer’s tax
however, financial statements of the any issuers from the financial statement return.359
issuer are available that have either been requirements. Although some Instead of mandating that issuers
reviewed or audited by a public commenters expressed concerns about offering $100,000 or less provide copies
accountant that is independent of the the costs of the financial statement of their federal income tax returns as
issuer, the issuer must provide those requirements for issuers with no proposed, the final rules require an
financial statements instead and need operating history or issuers that have issuer to disclose the amount of total
not include the information reported on been in existence for fewer than 12 income, taxable income and total tax, or
the federal income tax returns or the months,357 we believe that financial the equivalent line items from the
certification of the principal executive statements are important information for applicable form, exactly as reflected in
officer. investors and that the changes from the its filed federal income tax returns, and
• Issuers offering more than $100,000 proposed rules described below will to have the principal executive officer
but not more than $500,000: Financial help reduce the costs associated with certify that those amounts reflect
statements reviewed by a public preparing financial statements for many accurately the information in the
accountant that is independent of the of those issuers. issuer’s federal income tax returns.360
issuer.352 If, however, financial The final rule also includes an As noted by commenters,361 requiring
statements of the issuer are available instruction to clarify that references to that issuers provide tax returns may
that have been audited by a public the issuer in Rule 201(t) refer to the present a significant risk of disclosure of
accountant that is independent of the issuer and its predecessors, if any. private information. While the proposed
issuer, the issuer must provide those Offerings of $100,000 or less. rule would require personally
financial statements instead and need Consistent with Securities Act Section identifiable information to be redacted,
not include the reviewed financial 4A(b)(1)(D)(i), we are adopting as we are persuaded by commenters that
statements. proposed the requirement in Rule such a requirement might not provide
• Issuers offering more than $500,000: 201(t)(1) that an issuer offering $100,000 an adequate safeguard against
Æ For issuers offering more than or less provide financial statements of inadvertent disclosure of this type of
$500,000 but not more than $1 million the issuer that are certified by the information in some instances. The
of securities in reliance on Regulation principal executive officer of the issuer consequences for an issuer and an
Crowdfunding for the first time: to be true and complete in all material intermediary of such disclosure,
Financial statements reviewed by a respects.358 While we believe it will be including the potential violation of
public accountant that is independent of beneficial for investors to have an applicable privacy laws, could be
the issuer. If, however, financial independent accountant review severe. Specifying the information from
statements of the issuer are available financial statements in offerings over the tax return that is required without
that have been audited by a public $100,000, we believe that for offerings of requiring submission of the tax return
accountant that is independent of the $100,000 or less this certification is itself will provide standardized
issuer, the issuer must provide those sufficient and will contribute to the disclosure for investors and help protect
financial statements instead and need integrity of the issuer’s financial against the accidental disclosure of
not include the reviewed financial reporting process. It will affirm for personally identifiable or confidential
statements. investors that, although the financial information. Requiring that these
Æ For issuers that have previously amounts be certified by the principal
sold securities in reliance on Regulation 354 See Instruction 3 to paragraph (t) of Rule 201 executive officer will provide investors
Crowdfunding: Financial statements of Regulation Crowdfunding. additional assurance of the accuracy of
audited by a public accountant that is 355 See Paragraph (b) of Part F/S of Form 1–A.
those amounts in lieu of providing the
independent of the issuer.353 356 See Instruction 3 to paragraph (t) of Rule 201
underlying tax returns.362 At the same
Content of Financial Statements. We of Regulation Crowdfunding.
357 See, e.g., Arctic Island Letter 5; CFIRA Letter
are adopting substantially as proposed
mstockstill on DSK4VPTVN1PROD with RULES3

359 See Instruction 7 to paragraph (t) of Rule 201


5; CFIRA Letter 7; CrowdFundConnect Letter;
Crowdpassage Letter 2; EY Letter; Grassi Letter; of Regulation Crowdfunding.
351 See Rule 201(t)(1) of Regulation 360 See Rule 201(t)(1) of Regulation
Hackers/Founders Letter; Joinvestor Letter;
Crowdfunding. McGladrey Letter; PBA Letter; PeoplePowerFund Crowdfunding.
352 See Rule 201(t)(2) of Regulation Letter; RocketHub Letter; StartupValley Letter; 361 See, e.g., AICPA Letter; Public Startup Letter

Crowdfunding. Wefunder Letter; Whitaker Chalk Letter. But see 2; RocketHub Letter; SBM Letter; Wilson Letter;
353 See Rule 201(t)(3) of Regulation AICPA Letter; Denlinger Letter 1; Wilson Letter. Zhang Letter.
Crowdfunding. See also discussion below under 358 See Rule 201(t)(1) of Regulation 362 We note that any intentional misstatements or

‘‘Offerings of more than $500,000.’’ Crowdfunding. omissions of facts may constitute federal criminal

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations 71413

time, because the principal executive of the issuer are available that have issuers offering more than $500,000 are
officer will be certifying only that the either been reviewed or audited by a required to provide audited financial
amounts are as reported on the public accountant that is independent of statements. In a change from the
applicable income tax return, we do not the issuer, the issuer must provide those proposal, the final rule includes an
expect this requirement to impose any financial statements instead, and need accommodation for issuers offering
significant new burdens on principal not include the information reported on more than $500,000 but not more than
executive officers, who will already be the federal income tax returns or the $1 million that have not previously sold
certifying as to the truth and certification of the principal executive securities in reliance on Section
completeness of the financial statements officer.365 This approach was suggested 4(a)(6).372 Under Rule 201(t)(3), those
themselves. We believe the alternative by two commenters,366 and we believe first-time issuers are permitted to
approach we are adopting provides a it will benefit investors by providing provide reviewed rather than audited
similar benefit to investors as the access to audited or reviewed financial financial statements, unless audited
proposal while addressing the privacy statements that were already prepared financial statements are otherwise
concerns raised by commenters. for other purposes. Unlike audit reports available.
As we stated in the Proposing Release, in a registered offering,367 we are not We are adding this accommodation
it remains unclear to us to what extent requiring that review or audit reports be for first-time issuers in response to
all of the information presented in a tax accompanied by a formal consent or commenters’ concerns about the
return would be useful for an investor acknowledgment letter. Rather, the final expense of obtaining audited financial
evaluating whether to purchase rules clarify that review and audit statements. While some commenters
securities from the issuer. We believe, reports must be signed and that the expressed support for the proposed
however, that certain information such issuers must notify the public audit requirement,373 many others noted
as total income, taxable income and accountants of their intended use in an that the proposed audit requirement
total tax could be informative and offering in reliance on Section 4(a)(6).368 would be too costly and burdensome for
would likely be available to the issuer Offerings of more than $100,000 but issuers in comparison to the size of the
in tax documentation. The final rules, not more than $500,000. Consistent offering proceeds.374 A number of
therefore, provide that an issuer must with Section 4A(b)(1)(D)(iii) and the commenters expressed particular
disclose its total income, taxable income proposed rules, issuers must file and concern that issuers would need to
and total tax, or the equivalent line provide reviewed financial statements incur the expense of an audit before
items from its federal income tax when offering more than $100,000 but having proceeds or even an assurance of
documentation and have the principal not more than $500,000.369 Similar to proceeds from the offering.375 After
executive officer certify that those the addition to Rule 201(t)(1) discussed considering the comments, we are
amounts reflect accurately the above, we have added to Rule 201(t)(2) persuaded that for issuers undertaking a
information in the issuer’s federal a requirement that if financial first-time crowdfunding offering of more
income tax returns.363 statements of the issuer are available than $500,000 but not more than $1
Under the final rules, an issuer that that have been audited by a public million, the benefits of requiring
offers securities in reliance on Section accountant that is independent of the audited financial statements are not
4(a)(6) before filing its tax return for the issuer, the issuer must provide those likely to justify the costs. Accordingly,
most recently completed fiscal year will financial statements instead.370 The consistent with applicable standards,376
be allowed to use information from the approach of providing audited financial for these first-time issuers, we are
tax return filed for the prior year. An statements that are otherwise available adopting instead a requirement that
issuer that uses information from the is consistent with what the Commission those selling securities in reliance on
prior year’s tax return will be required adopted for issuers undertaking Tier 1 Section 4(a)(6) in these circumstances
to provide tax return information for the offerings under Regulation A.371 We
most recently completed fiscal year believe the benefits to investors of 372 For purposes of determining whether an issuer

when filed with the U.S. Internal having access to these audited financial has previously sold securities in reliance on Section
4(a)(6), ‘‘issuer’’ includes all entities controlled by
Revenue Service (if the tax return is statements justify any additional burden or under common control with the issuer and any
filed during the offering period). An imposed on issuers to provide these predecessors of the issuer. See Rule 100(c) of
issuer that has requested an extension statements, which were already Regulation Crowdfunding.
from the U.S. Internal Revenue Service prepared for other purposes.
373 See, e.g., AICPA Letter; Consumer Federation

Letter; CSTTC Letter; Denlinger Letter 2;


would not be required to provide the Offerings of more than $500,000. As FundDemocracy Letter; Leverage PR; NASAA
information until the date when the proposed, Rule 201(t)(3) provides that Letter; StartEngine Letter 1.
return is filed, which is consistent with 374 See, e.g., AEO Letter; Angel Letter 1; AWBC

the concept of not requiring tax 365 See Rule 201(t)(1) of Regulation Letter; CFIRA Letter 5; CfPA Letter;
information until that information has Crowdfunding. CrowdFundConnect Letter; EarlyShares Letter;
366 See Angel Letter 1; EY letter. EMKF Letter; EY Letter; Finkelstein Letter;
been filed with the U.S. Internal FundHub Letter 1; Generation Enterprise Letter;
367 See Securities Act Rule 436; Item 601 of
Revenue Service. If an issuer has not yet Grassi Letter; Graves Letter; Guzik Letter 1;
Regulation S–K. Hakanson Letter; Holland Letter; Johnston Letter;
filed a tax return and is not required to 368 See Instructions 8 and 9 to paragraph (t) of
Kickstarter Coaching Letter; McGladrey Letter;
file a tax return before the end of the Rule 201 of Regulation Crowdfunding. Milken Institute Letter; NACVA Letter; NFIB Letter;
offering period, then the tax return 369 See Rule 201(t)(2) of Regulation
NPCM Letter; NSBA Letter; PBA Letter; Reed Letter;
information does not need to be Crowdfunding. RocketHub Letter; Saunders Letter; SBA Office of
370 Id. Advocacy Letter; SBEC Letter; SBM Letter; Seyfarth
provided.364
We are adding to Rule 201(t)(1) a 371 See Paragraph (b) of Part F/S of Form 1–A. Letter; Verrill Dana Letter; WealthForge Letter;
mstockstill on DSK4VPTVN1PROD with RULES3

While Regulation Crowdfunding incorporates a Wefunder Letter; Woods Letter; Zeman Letter.
requirement that if financial statements number of requirements that are consistent with 375 See, e.g., AEO Letter; AWBC Letter; CFIRA

Regulation A, it is important to note that Regulation Letter 5; CfPA Letter; EMKF Letter; Generation
violations by the certifying principal executive Crowdfunding and Regulation A are different Enterprise Letter; Grassi Letter; Graves Letter;
officer. See 18 U.S.C. 1001. exemptions with distinct requirements. For Holland Letter; McGladrey Letter; NSBA Letter;
363 See Rule 201(t)(1) of Regulation example, unlike offerings under Regulation Reed Letter; RocketHub Letter; SBM Letter; Seyfarth
Crowdfunding. Crowdfunding, Tier 1 offerings under Regulation A Letter; WealthForge Letter; Wefunder Letter.
364 See Instruction 6 to paragraph (t) of Rule 201 are subject to state registration requirements and are 376 See Securities Act Section 28 [15 U.S.C. 77z–

of Regulation Crowdfunding. required to be ‘‘qualified’’ by Commission staff. 3].

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
71414 Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations

provide reviewed financial statements. provide for delayed implementation by ineligible to rely on any alternative
Commenters stated that reviewed non-public business entities.384 In this accounting or reporting standards for
financial statements would cost less regard, if the issuer chooses to take non-public business entities.390 Even
than audited financial statements,377 advantage of this extended transition though issuers of securities in a
and one commenter noted that the cost period, the issuer: Regulation Crowdfunding offering fit
of an accounting review is • Must disclose such choice at the within the definition of ‘‘public
approximately 60% of the cost of an time the issuer files the offering business entity,’’ the Commission
audit.378 statement; and retains the authority to determine
Basis of Accounting. We are adopting • May not take advantage of the whether or not such issuers would be
as proposed the requirement that all extended transition period for some permitted to rely on the developing non-
issuers provide financial statements standards and not others, but must public business entity standards.391
prepared in accordance with U.S. apply the same choice to all standards. Commenters generally expressed
GAAP.379 As discussed in the Proposing However, consistent with the concern about the costs associated with
Release, financial statements prepared treatment of emerging growth requiring issuers relying on Section
in accordance with U.S. GAAP are companies and offerings relying on 4(a)(6) to follow public company U.S.
generally self-scaling to the size and Regulation A,385 issuers electing not to GAAP accounting standards.392
complexity of the issuer, which we use this accommodation must forgo this The final rules do not allow
believe can reduce the costs of accommodation for all financial Regulation Crowdfunding issuers to use
preparing financial statements for many accounting standards and may not elect the alternatives available to non-public
early stage issuers. We would not expect to rely on this accommodation in any business entities under U.S. GAAP in
that the required financial statements future filings.386 the preparation of their financial
would be long or complicated for On December 23, 2013, after we statements. One of the significant factors
issuers that are recently formed and proposed rules for Regulation considered by the FASB in developing
have limited operating histories. Crowdfunding, the Financial its definition of ‘‘public business entity’’
Although we acknowledge, as some Accounting Standards Board (FASB) was the number of primary users of the
commenters observed, that other bases and Private Company Council (PCC) financial statements and their access to
of accounting may be less expensive issued a guide for evaluating financial management.393 As the FASB noted,
than U.S. GAAP, we believe the benefit accounting and reporting for non-public ‘‘users of private company financial
of a single standard that will facilitate business entities.387 The PCC was statements have continuous access to
comparison among issuers relying on created in 2012 by the FASB and the management and the ability to obtain
Section 4(a)(6) justifies any incremental Financial Accounting Foundation to financial information throughout the
expenses associated with U.S. GAAP. In improve the standard-setting process, year.’’ 394 As the number of investors
addition, we are concerned that it may and provide for accounting and increases and their ability individually
be difficult for investors to determine reporting alternatives, for non-public to influence management decreases, it is
whether the issuer complied with business entities under U.S. GAAP.388 important that all investors receive or
another comprehensive basis of As the standards for non-public have timely access to comprehensive
accounting. For these reasons, we business entities are new, there are financial information. As a result,
continue to believe that financial currently very few distinctions between although commenters generally
statements prepared in accordance with U.S. GAAP for public and non-public expressed concern about the costs
U.S. GAAP will be the most useful for business entities. Over time, however, associated with requiring issuers relying
investors in securities-based more distinctions between non-public on Section 4(a)(6) to follow public
crowdfunding transactions, particularly business entity and public company company U.S. GAAP accounting
when presented along with the required accounting standards could develop. standards,395 because crowdfunding
description of the issuer’s financial Issuers that offer securities pursuant investors will likely not have the access
condition.380 to Regulation Crowdfunding will be to management that the FASB envisions,
Additionally, as suggested by one considered ‘‘public business entities’’ as the Commission believes that investor
commenter,381 in order to be consistent defined by the FASB 389 and, therefore, protection will be enhanced by
with the treatment of emerging growth requiring Regulation Crowdfunding
384 See Instruction 5 to paragraph (t) of Rule 201
companies 382 and offerings relying on issuers to provide financial statements
of Regulation Crowdfunding.
Regulation A,383 Rule 201(t) permits 385 See paragraph (a)(3) of Part F/S of Form 1–A.
prepared in the same manner as other
issuers, where applicable, to delay the See also JOBS Act, Section 107(b)(1) and (3). entities meeting the FASB’s definition
implementation of new accounting 386 See Instruction 5 to paragraph (t) of Rule 201 of ‘‘public business entity.’’
standards to the extent such standards of Regulation Crowdfunding. Periods Covered in the Financial
387 The Private Company Decision-Making
Statements. We are adopting
377 See, e.g., Crowdcheck Letter 4; CfPA Letter Framework: A Guide for Evaluating Financial substantially as proposed the
Accounting and Reporting for Private Companies
(noting that many offerings made in reliance on
(the ‘‘PCC Guide’’), available at: http://www.fasb. requirement that financial statements
Rule 506 that involve companies further along in cover the shorter of the two most
org/cs/ContentServer?c=Document_C&pagename=
their business development include reviewed but
not audited financial statements); Graves Letter
FASB%2FDocument_C%2FDocumentPage& recently completed fiscal years or the
cid=1176163703583.
(discussing the ‘‘thorough’’ nature of a CPA review 388 For a brief history behind the creation of the
and the cost differential between reviewed and required to be or are included in a filing)’’ is a
audited financial statements); NFIB Letter; Traklight PCC, see: http://www.fasb.org/cs/ContentServer?c= Public Business Entity.
Letter. Page&pagename=FASB%2FPage%2FSectionPage&
mstockstill on DSK4VPTVN1PROD with RULES3

390 See numbered paragraph 12 of the PCC Guide,


378 See Traklight Letter. cid=1351027243391.
389 Criterion (a) of FASB’s Accounting Standards
p. 3.
379 See Instruction 3 to paragraph (t) of Rule 201 391 Id.
Update 2013–12, Definition of a Public Business
of Regulation Crowdfunding. 392 See, e.g., ABA Letter; CFIRA Letter 5; Grassi;
380 See Rule 201(s) of Regulation Crowdfunding.
Entity, states that an entity that ‘‘is required by the
U.S. Securities and Exchange Commission (SEC) to EY Letter; U.S. Chamber of Commerce Letter.
381 See EY Letter. 393 See PCC Guide, p. 6.
file or furnish financial statements, or does file or
382 See Securities Act of 1933 Section 7(a)(2)(B) 394 Id.
furnish financial statements (including voluntary
[15 U.S.C. 77g(a)(2)(B)]. filers), with the SEC (including other entities whose 395 See, e.g., ABA Letter; CFIRA Letter 5; Grassi;
383 See paragraph (a)(3) of Part F/S of Form 1–A. financial statements or financial information are EY Letter; U.S. Chamber of Commerce Letter.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations 71415

period since the issuer’s inception.396 the narrative discussion of its financial comply with the independence
While a number of commenters condition a discussion of any material standards of the AICPA.408 Allowing the
recommended only one year of financial changes or trends known to AICPA independence standards as an
statements,397 we believe that requiring management in the financial condition alternative to the Commission’s
a second year will provide investors and results of operations of the issuer independence standards is consistent
with a basis for comparison against the during any time period subsequent to with the recommendations of a number
most recently completed period, the period for which financial of commenters 409 and the treatment of
without substantially increasing the statements are provided to inform Tier 1 issuers under Regulation A.410
costs for the issuer. investors of more recent We believe that providing issuers with
In addition, consistent with the developments.402 this flexibility is appropriate in light of
proposal and with the views of many While some commenters expressed the potential costs to issuers that would
commenters,398 the final rules do not concern that this accommodation would otherwise be required to engage an
require interim financial statements. not provide investors with sufficiently accountant who was independent under
While we recognize the needs of current financial information,403 we Rule 2–01 of Regulation S–X.
investors for current financial believe that this risk will be mitigated
information, we are also cognizant of by the requirement that the issuer Consistent with the recommendation
the anticipated costs of obtaining include a narrative discussion of any of one commenter,411 in addition to
interim financial statements. We believe material changes or trends known to meeting the independence standards of
that the required discussion of any management in the financial condition Rule 2–01 of Regulation S–X or the
material changes or trends known to and results of operations during any AICPA, we are requiring that a public
management in the financial condition time period subsequent to the period for accountant that audits or reviews the
and results of operations of the issuer which financial statements are financial statements provided by an
since the period for which financial provided.404 Further, we believe this issuer must meet the standards for
statements are provided will help accommodation is needed because public accountants of Rule 2–01(a) of
provide investors with the necessary otherwise issuers would not be able to Regulation S–X. The Commission will
information.399 conduct offerings for a period of time not recognize as a public accountant any
Age of Financial Statements. We are between the end of their fiscal year and person who: (1) Is not duly registered
adopting substantially as proposed rules the date when the financial statements and in good standing as a certified
providing that during the first 120 days for that period are available. public accountant under the laws of the
of the issuer’s fiscal year, an issuer may We are not adopting the alternative place of his residence or principal
conduct an offering in reliance on proposed by one commenter to require office; or (2) is not in good standing and
Section 4(a)(6) using financial unaudited financial statements through entitled to practice as a public
statements for the fiscal year prior to the the end of the month that ends no more accountant under the laws of the place
most recently completed fiscal year if than two months before the month in of his residence or principal office.412
the financial statements for the most which the offering began.405 Such a We believe these standards will promote
recently completed fiscal year are not requirement would require an issuer to the use of qualified accountants that are
otherwise available.400 For example, if prepare a set of financial statements at in compliance with the requirements for
an issuer that has a calendar fiscal year a time when it would not otherwise be their profession for the review or audit
end conducts an offering in April 2016, doing so and would be a more onerous of the financial statements with respect
it would be permitted to include requirement than applies to registered to all offerings, including offerings in
financial statements for the fiscal year or Regulation A offerings.406 reliance on Section 4(a)(6).
ended December 31, 2014 if the Public Accountant Requirements. In a
financial statements for the fiscal year Consistent with the proposal and
change from proposed Rule 201(t), in recommendations in response to our
ended December 31, 2015 are not yet response to commenters’ suggestions,
available. Once more than 120 days request for comments, we are not
the final rules provide that to qualify as requiring audits to be conducted by a
have passed since the end of the issuer’s independent of the issuer, a public
most recently completed fiscal year, the PCAOB-registered firm. We believe the
accountant would be required to either: final rules will result in a greater
issuer would be required to include (1) Comply with the Commission’s
financial statements for its most recently number of public accountants being
independence rules, which are set forth
completed fiscal year.401 Regardless of eligible to audit the issuers’ financial
in Rule 2–01 of Regulation S–X,407 or (2)
the age of the financial statements, an statements, which may reduce issuers’
issuer would be required to include in 402 See Rule 201(s) of Regulation Crowdfunding
costs.
and Instruction 1 to paragraph (s) of Rule 201. Review and Audit Standards. In line
396 See Instruction 3 to paragraph (t) of Rule 201 403 See, e.g., Consumer Federation Letter; Fund
with the general support received from
of Regulation Crowdfunding. Democracy Letter; Merkley Letter.
397 See, e.g., Denlinger Letter 1; EY Letter; Fryer 404 See Rule 201(s) of Regulation Crowdfunding
commenters,413 we are adopting as
Letter; Grassi Letter; Joinvestor Letter; Public and instruction 1 to paragraph(s) of Rule 201. proposed the requirement that reviewed
Startup Letter 2; RFPIA Letter; RocketHub Letter. 405 See Fund Democracy Letter. financial statements be reviewed in
But see, e.g., ASSOB Letter; Zeman Letter. 406 See Rule 3–12(a) of Regulation S–X [17 CFR accordance with the SSARS issued by
398 See, e.g., CFIRA Letter 7; EMKF Letter; EY
210.3–12(a)] (requires that the latest balance sheet
Letter; FundHub Letter 1; Grassi Letter; Public be as of a date no more than 134 days for non- 408 See Instruction 9 to paragraph (t) of Rule 201
Startup Letter 2; RocketHub Letter; Traklight Letter; accelerated filers (or 129 days for accelerated and
Wefunder Letter; Whitaker Chalk Letter. of Regulation Crowdfunding.
large accelerated filers) before the effective date of
mstockstill on DSK4VPTVN1PROD with RULES3

399 See Instruction 1 to paragraph (s) of Rule 201 409 See, e.g., AICPA Letter; Denlinger Letter 1; EY
a registration statement (or date a proxy statement
of Regulation Crowdfunding. is mailed)); Paragraph (b) of Part F/S of Form 1–A Letter; Grassi Letter; McGladrey Letter.
400 See Instruction 4 to paragraph (t) of Rule 201 410 See Paragraph (b)(2) of Part F/S of Form 1–A.
(Tier 1 and Tier 2 issuers are required to include
of Regulation Crowdfunding. The final rule financial statements in Form 1–A that are dated not See also, supra, note 371.
411 See AICPA Letter.
incorporates instructions consistent with other SEC more than nine months before the date of non-
rules explaining that if the 120th day falls on a public submission, filing, or qualification, with the 412 See 17 CFR 210.2–01(a).

Saturday, Sunday, or holiday, the next business day most recent annual or interim balance sheet not 413 See, e.g., ABA Letter; AICPA Letter; Denlinger
shall be considered the 120th day. older than nine months). Letter 1; EY Letter; Fund Democracy Letter; Grassi
401 Id. 407 17 CFR 210.2–01. Letter.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
71416 Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations

the AICPA.414 We also are adopting as auditing standards for situations when report with modifications should be
proposed the requirement that audited the auditor plans to refer to the sufficient to satisfy the reviewed
financial statements, to the extent they standards of the PCAOB in addition to financial statement requirement,424 one
are otherwise available, be audited in U.S. GAAS in the auditor’s report. To commenter opposed permitting
accordance with either the auditing comply with the reporting requirements modifications to review reports, noting
standards of the AICPA (referred to as of both sets of standards in those that it considers certain departures from
U.S. Generally Accepted Auditing situations, the proposed amendment U.S. GAAP to be ‘‘unacceptable’’ and
Standards or GAAS) or the standards of would require the auditor to use the that it would not be feasible to develop
the PCAOB.415 We expect that this report layout and wording specified by a model of all allowable and
provision will provide issuers with the auditing standards of the PCAOB, disallowable modifications.425 After
more flexibility to file audited financial amended to indicate that the audit was considering the comments, we are
statements that may have been prepared also conducted in accordance with U.S. persuaded that permitting modifications
for other purposes. GAAS. could result in financial statements that
We believe that audits conducted in Review and Audit Reports. We are depart materially from U.S. GAAP, and,
accordance with U.S. GAAS will adopting, with changes from the therefore, are not permitting
provide sufficient protection for proposal, the requirement that issuers modifications to review reports under
investors in these offerings, especially file with the Commission and provide to the final rules. In response to concerns
in light of the requirement that auditors investors and the relevant intermediary expressed by some commenters,
must be independent under Rule 2–01 a signed review or audit report on the however, we note that a review report
of Regulation S–X or AICPA issuer’s financial statements by an or audit opinion that includes
independence standards. Moreover, we independent public accountant.418 The explanatory language pertaining to the
believe that the flexibility adopted in issuer must notify the public accountant entity’s ability to continue as a going
the final rules is appropriately tailored of the issuer’s intended use of the report concern is not, under current auditing
for the different types of issuers that are in the offering.419 standards, a modified report or a
likely to conduct offerings under We are adopting as proposed the qualified opinion.426
Regulation Crowdfunding. provision that an audit report that Exemptions from Financial Statement
Because issuers under Regulation includes an adverse opinion or Requirements. Consistent with the
Crowdfunding are not ‘‘issuers’’ as disclaimer of opinion will not be in proposal, the final rules do not exempt
defined by Section 2(a)(7) of the compliance with the audited financial any issuers from the financial statement
Sarbanes-Oxley Act of 2002 nor broker- statement requirements.420 In a change requirements. While we appreciate the
dealers registered with the Commission from the proposal, as suggested by one concerns identified by commenters
under Section 15(b) of the Securities commenter,421 the final rules do not about the costs of the financial
Exchange Act of 1934, AICPA rules permit a qualified audit report.422 As statement requirements for issuers with
would require the audit to be compliant noted above, under the final rules an no operating history or issuers that have
with U.S. GAAS even if the auditor has issuer is not required to provide audited been in existence for fewer than 12
conducted the audit in accordance with financial statements for first-time months,427 we believe that financial
PCAOB standards. Staff of the crowdfunding offerings of more than statements are important information for
Commission consulted with the AICPA $500,000 but not more than $1 million all issuers and that other changes from
on this issue and has been advised that unless otherwise available. We believe the proposed rules such as raising the
an audit performed by its members of an that this change reduces the cost and threshold at which audited financial
issuer conducting an offering under burden for issuers generally of statements are required will help reduce
Regulation Crowdfunding would be providing audited financial statements, those costs.
required to comply with U.S. GAAS in and that an accommodation to permit
accordance with the AICPA’s Code of qualified audit reports is not necessary. b. Progress Updates
Professional Conduct.416 As a result, an The final rules also provide that a (1) Proposed Rules
auditor for such an issuer who is review report that includes
Consistent with Securities Act Section
conducting its audit in accordance with modifications will not satisfy the
4A(b)(1)(F), proposed Rule 201(v) and
PCAOB standards also will be required requirement for reviewed financial
Rule 203(a)(3) of Regulation
to comply with U.S. GAAS, and the statements.423 Although two
Crowdfunding would require an issuer
auditor will be required to comply with commenters expressed that a review
to file with the Commission and provide
the reporting requirements of both the investors and the relevant intermediary
AICPA standards and the PCAOB Clarification and Recodification, section 700,
Forming an Opinion and Reporting on Financial regular updates on the issuer’s progress
standards. Commission staff also Statements. The proposed amendment would be in meeting the target offering amount no
consulted with the AICPA on whether effective for audits of financial statements for later than five business days after each
an auditor can currently comply with periods ending on or after December 15, 2015.
of the dates that the issuer reaches
both sets of standards when issuing its 418 See Instructions 8 and 9 to paragraph (t) of
particular intervals—i.e., 50 percent and
auditor’s report. In August 2015, the Rule 201 of Regulation Crowdfunding.
419 Id. 100 percent—of the target offering
Auditing Standards Board of the AICPA 420 See Instruction 9 to paragraph (t) of Rule 201
proposed an amendment 417 to its of Regulation Crowdfunding. 424 See AICPA Letter; Heritage Letter.
421 See Grassi Letter. 425 See Grassi Letter.
414 See Instruction 8 to paragraph (t) of Rule 201 422 See Instruction 9 to paragraph (t) of Rule 201 426 See, e.g., Public Company Accounting
mstockstill on DSK4VPTVN1PROD with RULES3

of Regulation Crowdfunding. of Regulation Crowdfunding. Accordingly, a Oversight Board AU sec. 508, Reports on Audited
415 See Instruction 9 to paragraph (t) of Rule 201
qualified audit opinion would not be considered an Financial Statements.
of Regulation Crowdfunding. audit opinion that is ‘‘available’’ for purposes of 427 See, e.g., Arctic Island Letter 5; CFIRA Letter
416 The AICPA Code of Professional Conduct is Rule 201(t) and 202(a). 5; CFIRA Letter 7; CrowdFundConnect Letter;
available at: http://pub.aicpa.org/codeofconduct/ 423 See Instruction 8 to paragraph (t) of Rule 201 Crowdpassage Letter 2; EY Letter; Grassi Letter;
ethicsresources/et-cod.pdf. of Regulation Crowdfunding. Accordingly, a Hackers/Founders Letter; Joinvestor Letter;
417 Proposed Statement on Auditing Standards, modified review report would not be considered an McGladrey Letter; PBA Letter; PeoplePowerFund
Amendment to Statement on Auditing Standards audit opinion that is ‘‘available’’ for purposes of Letter; RocketHub Letter; StartupValley Letter;
No. 122, Statement on Auditing Standards: Rule 201(t) and 202(a). Wefunder Letter; Whitaker Chalk Letter.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations 71417

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

Letter. But see CFIRA Letter 7. evaluate the effects of the Section 4(a)(6) Letter; Grassi Letter; Hackers/Founders Letter;
RocketHub Letter.
429 See, e.g., Arctic Island Letter 5 (stating that exemption on capital formation. 436 See, e.g., Arctic Island Letter 5; CFA Institute
intermediaries can display both text (e.g. ‘‘$125,000
mstockstill on DSK4VPTVN1PROD with RULES3

of $500,000 raised thus far’’) and graphics (e.g. a Letter; Grassi Letter; Joinvestor Letter; RoC Letter;
430 See Rules 201(v) and 203(a)(3) of Regulation RocketHub Letter. But see Public Startup Letter 2.
status bar graph) of the offering progress); ASSOB
Letter; PeoplePowerFund Letter; RFPIA Letter; Crowdfunding. 437 See Grassi Letter (recommending that
431 See Rule 203(a)(3)(iii) of Regulation reconfirmation not be required if the initial price is
RocketHub Letter (noting that portals already list
progress for perks-based crowdfunding); Wefunder Crowdfunding. established in the offering documents and does not
Letter. But see CFIRA Letter 7 (stating that the 432 See Rule 203(a)(3)(i) of Regulation vary more than within a reasonable range
issuer should file progress updates with the Crowdfunding. established in such documents); Joinvestor Letter.
438 See Public Startup Letter 2.
Commission on a regular basis to allow for 433 See Rule 203(a)(3)(ii) of Regulation

consistency across all issuers and intermediaries.). Crowdfunding. 439 See ODS Letter.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
71418 Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations

proposed. The final rules require that an In addition, as discussed further in report to investors, we proposed in Rule
issuer amend its disclosure for any Section II.C.6 below, if any change, 202(a) to require issuers to post the
material change in the offer terms or addition or update constitutes a material annual report on their Web sites. Under
disclosure previously provided to change to information previously proposed Rule 202(a), the issuer would
investors.440 While we recognize disclosed, the issuer must check the box be required to disclose information
commenters’ concerns about the costs on the cover of Form C indicating that similar to that required in the offering
that requiring one or more additional investors must reconfirm their statement, including disclosure about its
filings may impose on issuers, we note investment commitments. financial condition that meets the
that an amendment will be required A number of commenters highest financial statement
only in instances in which there was a recommended that we specify a filing requirements that were applicable to its
material change. In such circumstances, deadline for amendments reflecting a offering statement.
we believe the additional efforts material change,444 and that we require
We also proposed in Rule 202(b) to
required of an issuer to file an investors be notified in some manner of
require issuers to file the annual report
amendment will be justified in order to the amendment.445 We are not,
until one of the following events occurs:
provide investors with the information however, amending the requirement as
(1) The issuer becomes a reporting
they need to make an informed suggested by those commenters. We
company required to file reports under
investment decision. appreciate the need for investors to
Exchange Act Sections 13(a) or 15(d); (2)
know this information in a timely
The amended disclosure must be filed the issuer or another party purchases or
fashion, but we believe that with the
with the Commission on Form C and requirement that investors reconfirm repurchases all of the securities issued
provided to investors and the relevant their commitments, it will be in an pursuant to Section 4(a)(6), including
intermediary. Under the final rules, the issuer’s interest to file an amendment as any payment in full of debt securities or
issuer is required to check the box for soon as practicable and to notify any complete redemption of redeemable
‘‘Form C/A: Amendment’’ on the cover investors so that it will be in a position securities; or (3) the issuer liquidates or
of the Form C and explain, in summary to close the offering. Therefore, we do dissolves in accordance with state law.
manner, the nature of the changes, not believe further procedural b. Comments on the Proposed Rules
additions or updates in the space requirements are necessary.
provided.441 Issuers will be permitted, but not Commenters expressed a range of
With respect to what constitutes a required, to amend the Form C to views on the proposed ongoing
‘‘material change,’’ as we stated in the provide information with respect to reporting requirements.447
Proposing Release, information is other changes that are made to the Frequency. With respect to frequency,
material if there is a substantial information presented on the a number of commenters supported the
likelihood that a reasonable investor intermediary’s platform and provided to proposed requirement of annual
would consider it important in deciding investors.446 If an issuer amends the reporting,448 while a few recommended
whether or not to purchase the Form C to provide such information, it quarterly reporting.449 Some
securities.442 For example, we believe is not required to check the box commenters supported requiring issuers
that a material change in the financial indicating that investors must reconfirm to file reports to disclose the occurrence
condition or the intended use of their investment commitments. of material events on an ongoing
proceeds requires an amendment to an 2. Ongoing Reporting Requirements basis,450 and several recommended that
issuer’s disclosure. Also, in those the Commission provide a list of events
instances in which an issuer has a. Proposed Rules
that would trigger such disclosure.451
previously disclosed only the method Securities Act Section 4A(b)(4)
for determining the price, and not the requires, ‘‘not less than annually, [the 447 For commenters generally supporting the
final price, of the securities offered, we issuer to] file with the Commission and proposed ongoing reporting requirements, see, e.g.,
believe that determination of the final provide to investors reports of the CfPA Letter; Commonwealth of Massachusetts
price is a material change to the terms results of operations and financial Letter; Grassi Letter; Jacobson Letter; Leverage PR
Letter; StartEngine Letter 1.
of the offer and must be disclosed. statements of the issuer, as the For commenters generally opposing the proposed
These are not, however, the only Commission shall, by rule, determine ongoing reporting requirements, see, e.g., ABA
possible material changes that require appropriate, subject to such exceptions Letter; Campbell R. Letter; EMKF Letter; Guzik
amended disclosure. We are not and termination dates as the Letter 1; NFIB Letter; Public Startup Letter 2;
RocketHub Letter; SeedInvest Letter 1; Stephenson,
providing additional guidance on what Commission may establish, by rule.’’ et al. Letter.; Traklight Letter; WealthForge Letter;
constitutes a ‘‘material change,’’ as To implement the ongoing reporting Winters Letter.
requested by one commenter,443 requirement in Section 4A(b)(4), we 448 See, e.g., AICPA Letter; CFIRA Letter 7; EY

because, consistent with our historical proposed in Rules 202 and 203 of Letter; Grassi Letter; RoC Letter; RocketHub Letter;
approach to materiality determinations, Regulation Crowdfunding to require an Traklight Letter.
449 See, e.g., ASSOB Letter; CCI Letter; Denlinger
we believe that an issuer should issuer that sold securities in reliance on
Letter 1 (recommending quarterly reporting to
determine whether changes in the offer Section 4(a)(6) to file a report annually, provide investors and the secondary market timely
terms or disclosure are material based no later than 120 days after the end of information).
on the facts and circumstances. the most recently completed fiscal year 450 See, e.g., ABA Letter (recommending

covered by the report. To implement the amending Form C–AR within 15 calendar days of
the material event); Angel Letter 1 (recommending
440 See Rule 203(a)(2) of Regulation requirement that issuers provide the prompt disclosure through postings on the issuer’s
mstockstill on DSK4VPTVN1PROD with RULES3

Crowdfunding. See also Section II.C.6 for Web site or social media); Denlinger Letter 1; EY
discussion of the requirement that investors 444 See, e.g., Commonwealth of Massachusetts
Letter (recommending disclosure within 30 days of
reconfirm their investment commitments following Letter; Grassi Letter; Hackers/Founders Letter; the end of the month in which the material event
a material change. RocketHub Letter. occurred, with such disclosure scaled for different
441 See Form C. 445 See, e.g., Arctic Island Letter 5; CFA Institute tiers of issuers); Hackers/Founders Letter
442 See Basic Inc. v. Levinson, 485 U.S. 224 (1988) Letter; Grassi Letter; Joinvestor Letter; RoC Letter; (recommending quarterly updates); RocketHub
(quoting TSC Indus., Inc. v. Northway, Inc., 426 RocketHub Letter. But see Public Startup Letter 2. Letter (recommending quarterly updates).
U.S. 438 (1976)). 446 See Instruction to paragraph (a)(2) of Rule 203 451 See, e.g., Denlinger Letter 1; EY Letter; Grassi
443 See ODS Letter. of Regulation Crowdfunding. Letter; RocketHub Letter.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations 71419

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

availability of ongoing financial statements); Public ongoing reporting obligations were an ‘‘obstacle to 469 See, e.g., Parsont Letter (with a notice and cure

Startup Letter 2. making crowdfunding a viable option for startups provision); RocketHub Letter (recommending the
457 See, e.g., CFIRA Letter 7; CFIRA Letter 8; CfPA and small businesses’’ as the cost structure would ongoing reporting requirements be a condition for
Letter; Crowdpassage Letter 3; Grassi Letter; be ‘‘out of proportion with the amounts proposed a minimum of three years).
Jacobson Letter; Public Startup Letter 2; Traklight to be raised.’’) 470 See, e.g., Public Startup Letter 2; Wefunder

Letter. 466 See, e.g., Commonwealth of Massachusetts Letter; Whitaker Chalk Letter (recommending that
458 See, e.g., Arctic Island Letter 5; CCI Letter; Letter; Denlinger Letter 1; Grassi Letter; Public (i) a condition, if any, apply only to the first annual
RocketHub Letter. Startup Letter 2. report; (ii) that the failure to file the annual report
459 See, e.g., Arctic Island Letter 5; CFA Institute 467 See, e.g., Grassi Letter; Whitaker Chalk Letter. restrict an issuer’s ability to raise capital in the
Letter (recommending advance notice as to when 468 See, e.g., ABA Letter; EY Letter future; or (iii) issuers, certain officers, directors and
and where annual reports will be available); (recommending the ongoing reporting obligations shareholders have the option to escrow their shares
RocketHub Letter. terminate after a certain amount of time if the issuer for up to 24 months, with certain penalties for
460 See, e.g., ABA Letter; Denlinger Letter 1; has 300 or fewer security holders); Grassi Letter; failure to file the annual report).
mstockstill on DSK4VPTVN1PROD with RULES3

471 See Rule 202(a) of Regulation Crowdfunding.


Grassi Letter. PBA Letter (recommending the reporting
472 See, e.g., ABA Letter; Angel Letter 1; Denlinger
461 See, e.g., AEO Letter; Arctic Island Letter 5; obligations terminate after three consecutive annual
AWBC Letter; CrowdCheck Letter 4; EarlyShares reports or after an issuer repurchases two-thirds of Letter 1; EY Letter; Grassi Letter; Hackers/Founders
Letter; EMKF Letter; Frutkin Letter; Graves Letter; the outstanding securities issued in reliance on Letter; RocketHub Letter.
473 See, e.g., ASSOB Letter; CCI Letter; Denlinger
Guzik Letter 1; iCrowd Letter; McGladrey Letter; Section 4(a)(6), so long as the issuer made a bona
Milken Institute Letter; NFIB Letter; PBA Letter; fide offer to repurchase all of such securities); Letter 1.
Peers Letter; RocketHub Letter; SeedInvest Letter 1; Public Startup Letter 2; RocketHub Letter 474 See, e.g., AICPA Letter; CFIRA Letter 7; EY

Seyfarth Letter; StartupValley Letter; Stephenson, et (recommending the reporting obligations terminate Letter; Grassi Letter; RoC Letter; RocketHub Letter;
al. Letter; Traklight Letter; WealthForge Letter. after three annual reports). Traklight Letter.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
71420 Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations

major events occur. Nor do our rules opposed requiring that an audit or financial information about the issuer
prevent intermediaries from requiring review of the financial statements be under the final rules.
more frequent reporting. However, we included in the annual report.479 Other Content. With the exception of
do not believe that it is necessary in the Therefore, instead of requiring financial the financial statement requirement
final rules to require reporting on a statements in the annual report that described above, the final rule adopts as
more frequent basis than the annual meet the highest standard previously proposed the requirement that the
ongoing reporting directly contemplated provided, the final rules require annual report include the information
by the statute. financial statements of the issuer required in the offering statement.
Provision of Reports. We also are Although an issuer will not be required
certified by the principal executive
adopting as proposed the requirement to provide the offering-specific
officer of the issuer to be true and
that an issuer post the annual report on information that it filed at the time of
complete in all material respects.480 the offering (because the issuer will not
its Web site.475 Consistent with the However, issuers that have available
proposal, the final rules do not require be offering or selling securities),484 it
financial statements that have been will be required to disclose information
delivery of a physical copy of the
reviewed or audited by an independent about the company and its financial
annual report. As discussed in the
certified public accountant because they condition, as required in connection
Proposing Release and as supported by
a number of commenters, we believe prepare them for other purposes must with the offer and sale of the
that investors in this type of Internet- provide them and will not be required securities.485 While we appreciate the
based offering will be familiar with to have the principal executive officer recommendations of commenters for a
obtaining information on the Internet certification.481 more limited set of disclosure in the
and that providing information in this Many commenters expressed annual report, we believe that the
manner will be cost efficient. While concerns with the costs associated with disclosure costs of ongoing reporting for
some commenters 476 suggested that preparing reviewed and audited issuers will be less than in the initial
limiting distribution of the annual financial statements on an ongoing offering statement, because they will be
report to investors through use of a basis. Commenters also noted the able to use the offering materials as a
password-protected Web site would absence of comparable ongoing basis to prepare the annual reports. We
help protect an issuer’s commercially- believe investors will benefit from the
reporting requirements under Tier 1 of
sensitive information, we believe such a availability of annual updates to the
Regulation A and other offering
requirement would add complexity for information they received when making
exemptions.482 While we recognize that the decision to invest in the issuer’s
issuers and investors without providing Regulation Crowdfunding is different in
significant protection of commercially- securities, since these updates will
many respects from Regulation A, we allow them to be informed about issuer
sensitive information since the reports believe that crowdfunding issuers
could still be accessed by the public on developments as they decide whether to
should not have more onerous ongoing continue to hold or sell, or how to vote,
EDGAR. reporting compliance costs than issuers
Consistent with the proposal, the final the securities. Under the statute and the
that use another public offering final rules, the securities will be freely
rule does not require an issuer to exemption that permits higher
provide direct notification via email or tradable after one year. Therefore, this
maximum offering amounts. The information also will benefit potential
otherwise of the posting of the report, as
changes to the ongoing reporting future holders of the issuer’s securities
was suggested by some commenters.477
requirements in the rules we are and help them to make more informed
As discussed above in Section
adopting today will alleviate some of investment decisions.
II.B.1.a.(i)(g), however, we are revising
the costs on crowdfunding issuers. At Exceptions/Termination of Ongoing
the final rules to require an issuer to Reporting Requirement. After
disclose in the offering statement where the same time, we also believe,
consistent with the views of at least one considering the comments, we are
on the issuer’s Web site investors will providing for termination of the ongoing
be able to find the issuer’s annual report commenter,483 that investors still will
be provided with sufficient ongoing reporting obligation in the three
and the date by which the annual report
will be available on the issuer’s Web 484 See Rule 202(a) of Regulation Crowdfunding.
479 See, e.g., AEO Letter; Arctic Island Letter 5;
site.478 We believe these changes will An issuer will not be required to provide
AWBC Letter; CrowdCheck Letter 4 (‘‘ongoing audit
help investors to locate the annual requirement will create an unpredictable on-going
information about: (1) The stated purpose and
report. As discussed in the Proposing intended use of the proceeds of the offering; (2) the
burden’’); EarlyShares Letter; EMKF Letter target offering amount and the deadline to reach the
Release, we believe that many issuers (‘‘audited financial statements, particularly for target offering amount; (3) whether the issuer will
may not have email addresses for ongoing reporting requirements, are so cost- accept investments in excess of the target offering
prohibitive for startups that they make absolutely
investors, especially after the shares no sense as an appropriate use of funds.’’); Frutkin
amount; (4) whether, in the event that the offer is
issued pursuant to Section 4(a)(6) are oversubscribed, shares will be allocated on a pro-
Letter; Graves Letter; Guzik Letter 1; iCrowd Letter; rata basis, first come-first served basis, or other
traded by the original purchasers. McGladrey Letter; Milken Institute Letter; NFIB basis; (5) the process to complete the transaction or
Nonetheless, to the extent email Letter; PBA Letter; Peers Letter; RocketHub Letter; cancel an investment commitment once the target
SeedInvest Letter 1; Seyfarth Letter; StartupValley
addresses for investors are available, an Letter; Stephenson, et al. Letter; Traklight Letter;
amount is met; (6) the price to the public of the
issuer could refer investors to the posted securities being offered; (7) the terms of the
WealthForge Letter. securities being offered; (8) the name, SEC file
report via email. 480 See Rule 202(a) of Regulation Crowdfunding.
number and CRD number (as applicable) of the
Financial Statements. After 481 Id.
intermediary through which the offering is being
considering the comments, we are 482 See, e.g., CrowdCheck Letter 4; EMKF Letter; conducted; and (9) the amount of compensation
mstockstill on DSK4VPTVN1PROD with RULES3

persuaded by the commenters that EY Letter. paid to the intermediary.


483 See CrowdCheck Letter 4 (‘‘While the on-going 485 See Rule 202(a) of Regulation Crowdfunding.

475 See
audit requirement is designed to provide investors Issuers will be required to provide disclosure about
Rule 202(a) of Regulation Crowdfunding. and potential secondary purchasers of the its directors and officers, business, current number
476 See, e.g., Crowdpassage Letter 3; Frutkin company’s securities with updated information of employees, financial condition (including
Letter. about the company, it is unnecessary given the financial statements), capital structure, significant
477 See, e.g., Arctic Island Letter 5 (intermediary
other, less burdensome, on-going disclosure factors that make an investment in the issuer
should notify); Frutkin Letter; RocketHub Letter. requirements contained in the statute and proposed speculative or risky, material indebtedness and
478 See Rule 201(w) of Regulation Crowdfunding. regulation.’’). certain related-party transactions.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations 71421

circumstances that we proposed as well number of persons must register that to ‘‘file with the Commission and
as the following two additional class of securities with the Commission. provide to investors and the relevant
circumstances: (1) When the issuer has As proposed, Rule 203(b)(3) provides broker or funding portal, and make
filed at least one annual report and has that any issuer terminating its annual available to potential investors’’ certain
fewer than 300 holders of record; and reporting obligations will be required to disclosures. The statute does not specify
(2) when the issuer has filed at least file with the Commission, within five a format that issuers must use to present
three annual reports and has total assets business days from the date on which the required disclosures and file these
that do not exceed $10 million. the issuer becomes eligible to terminate disclosures with the Commission. We
Accordingly, under Rule 202(b), issuers its reporting obligation, a notice that it proposed in Rule 203 of Regulation
will be required to file the annual report will no longer file and provide annual Crowdfunding to require issuers to file
until the earliest of the following events reports pursuant to the requirements of the mandated disclosure using new
occurs: Regulation Crowdfunding. The issuer Form C, which would require certain
(1) The issuer is required to file also must check the box for ‘‘Form C– disclosures to be presented in a
reports under Exchange Act Sections TR: Termination of Reporting’’ on the specified format, while allowing the
13(a) or 15(d); cover of Form C.490 issuer to customize the presentation of
(2) the issuer has filed at least one We are not persuaded by the other disclosures required by Section
annual report and has fewer than 300 suggestion of one commenter 491 that 4A(b)(1) and the related rules.
holders of record; ongoing reports should be a condition to We proposed to require issuers to use
(3) the issuer has filed at least three the Section 4(a)(6) exemption. As two an XML-based fillable form to input
annual reports and has total assets that commenters noted at the pre-proposal certain information. Information not
do not exceed $10 million; stage, under such an approach, required to be provided in text boxes in
(4) the issuer or another party compliance with the exemption would the XML-based fillable form would be
purchases or repurchases all of the not be known at the time of the filed as attachments to Form C.
securities issued pursuant to Section transaction.492 This, in turn, would Under the proposed rules, Form C
4(a)(6), including any payment in full of create substantial uncertainty for issuers would be used for all of an issuer’s
debt securities or any complete because there would be an indefinite filings with the Commission related to
redemption of redeemable securities; or possibility of a potential future violation the offering made in reliance on Section
(5) the issuer liquidates or dissolves of the exemption. We have modified the 4(a)(6). The issuer would check one of
in accordance with state law. final rules from the proposal to clarify the following boxes on the cover of the
We believe the addition of the two that the availability of the crowdfunding Form C to indicate the purpose of the
termination events, which are generally exemption is not conditioned on Form C filing:
consistent with the suggestions of compliance with the annual reporting, • ‘‘Form C: Offering Statement’’ for
commenters,486 should help alleviate progress update or termination of issuers filing the initial disclosures
commenters’ concerns about related reporting obligations.493 Nevertheless, required for an offering made in reliance
costs for certain issuers that may not issuers offering and selling securities in on Section 4(a)(6);
have achieved a level of financial reliance on Section 4(a)(6) remain • ‘‘Form C–A: Amendment’’ for
success that would sustain an ongoing obligated to comply with these reporting issuers seeking to amend a previously-
reporting obligation. The 300 requirements. Moreover, as discussed in filed Form C for an offering;
shareholder threshold reflected in Rule Section II.A.4 above, the final rules • ‘‘Form C–U: Progress Update’’ for
202(b)(2) is consistent with the deny issuers the benefit of relying on issuers filing a progress update required
threshold used to determine whether an the exemption under Section 4(a)(6) for by Section 4A(b)(1)(H) and the related
Exchange Act reporting company is future offerings until they file, to the rules;
eligible to suspend its Section 15(d) 487 extent required, the two most recently • ‘‘Form C–AR: Annual Report’’ for
or terminate its Section 13 488 reporting required annual reports.494 In addition, issuers filing the annual report required
obligations. The option for an issuer to the final rules require the issuer to by Section 4A(b)(4) and the related
conclude ongoing reporting after three disclose in its offering statement and rules; and
annual reports as reflected in Rule annual report if it, or any of its • ‘‘Form C–TR: Termination of
202(b)(3) should help address concerns predecessors, previously failed to Reporting’’ for issuers terminating their
raised by some commenters that the comply with the ongoing reporting reporting obligations pursuant to
reporting obligation could potentially requirements of Regulation Section 4A(b)(4) and the related rules.
extend indefinitely, while still requiring Crowdfunding. EDGAR would automatically provide
larger issuers with more than $10 each filing with an appropriate tag
million in total assets to continue 3. Form C and Filing Requirements depending on which box the issuer
reporting. We chose the $10 million a. Proposed Rules checks so that investors could
threshold in order to be consistent with distinguish among the different
Securities Act Section 4A(b)(1)
the total asset threshold in Section filings.495
requires issuers who offer or sell
12(g)(1) of the Exchange Act.489 Under Section 4A(b)(1) requires issuers to
securities in reliance on Section 4(a)(6)
that provision, a company that has total file the offering information with the
assets exceeding $10 million and a class 490 See cover page of Form C.
Commission, provide it to investors and
of securities held of record by a certain 491 See Parsont Letter. the relevant intermediary and make it
492 See Letter from Andrea L. Seidt, Comm’r, Ohio available to potential investors.496
mstockstill on DSK4VPTVN1PROD with RULES3

486 See, e.g., ABA Letter; EY Letter


Div. of Sec. available at http://www.sec.gov/
(recommending the reporting obligations terminate comments/jobs-title-iii/jobstitleiii-199.pdf; Letter 495 EDGAR would tag the offering statement as
after a certain amount of time if the issuer has 300 from John R. Fahy, Partner, Whitaker Chalk ‘‘Form C,’’ any amendments to the offering
or fewer security holders); PBA Letter; RocketHub Swindle Schwartz, available at http://www.sec.gov/ statement as ‘‘Form C–A,’’ progress updates as
Letter (recommending the reporting obligations comments/jobs-title-iii/jobstitleiii-175.htm. ‘‘Form C–U,’’ annual reports as ‘‘Form C–AR’’ and
terminate after three consecutive annual reports). 493 See Rule 100(b)(4) of Regulation termination reports as ‘‘Form C–TR.’’
487 See 17 CFR 240.12h–3.
Crowdfunding. 496 Section 4A(b)(4) requires issuers to file with
488 15 U.S.C. 78m. 494 See Rule 100(b)(5) of Regulation the Commission and provide to investors, not less
489 15 U.S.C. 78l(g)(1). Crowdfunding. Continued

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
71422 Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations

Under the proposed rules, issuers would generally opposed the filing to information on the intermediary’s
satisfy the requirement to file the requirements or opposed specific platform.507 With respect to the
information with the Commission by aspects of the requirements.502 proposed methods (Web site posting or
filing the Form C: Offering Statement, A few commenters requested email), one commenter stated that
including any amendments and progress clarification whether all offering issuers would not have investors’ email
updates, on EDGAR. To satisfy the material made available on the addresses,508 and another commenter
requirement to provide the disclosures intermediary’s platform must be filed on noted that maintaining investors’ email
to the relevant intermediary, we Form C.503 Two commenters addresses would require significant
proposed that issuers provide to the recommended that not all materials be resources.509
relevant intermediary a copy of the required to be filed as exhibits.504 A
number of commenters noted that c. Final Rules
disclosures filed with the Commission.
To satisfy the requirement to provide issuers would likely use various types of We are adopting Form C and the
the disclosures, or make them available, media for their offerings, some of which related filing requirements 510 with a
as applicable, to investors, we proposed cannot be filed on EDGAR.505 A number few modifications from the proposed
that issuers provide the information to of commenters recommended that the rules.511
investors electronically by referring Commission adopt other disclosure First, the final rules will amend
investors, such as through a posting on formats, such as a question-and-answer Regulation S–T to permit an issuer to
the issuer’s Web site or by email, to the format.506 submit exhibits to Form C in Portable
information on the intermediary’s A number of commenters generally Document Format (‘‘PDF’’) as official
platform. The proposed rules would not supported the proposal to refer investors filings.512 We appreciate the views of
require issuers to provide physical commenters that issuers would likely
copies of the information to investors. 502 See, e.g., Angel Letter 1; CFIRA Letter 1; use various types of media for their
CrowdCheck Letter 1; Mollick Letter; Public Startup offerings,513 and believe that permitting
b. Comments on the Proposed Rules Letter 2; RocketHub Letter; WealthForge Letter
these materials to be filed in PDF format
(recommending that the Commission require the
Commenters generally supported the filing of a Form C within 15 days of the offering will allow for more diverse
proposed Form C requirement.497 Two first receiving an investment and at the completion presentations of information to be
commenters supported the proposal to of the offering).
503 See, e.g., CrowdCheck Letter 1; Grassi Letter;
reasonably available to investors
use one form with different EDGAR tags Stephenson Letter. through a standardized, commonly
for each type of filing,498 while another 504 See, e.g., CFIRA Letter 1 (recommending that available media. Under the final rules,
commenter recommended creating only ‘‘those documents most suited to police issuers may customize the presentation
multiple forms in order to minimize the against fraud’’ be filed with the Commission
because the intermediary serves as the primary
length of the form.499 Two commenters repository of the offering materials); CrowdCheck
507 See, e.g., Grassi Letter; Joinvestor Letter;

recommended that the Commission Letter 1 (recommending the Commission permit PeoplePowerFund Letter; Public Startup Letter 2;
modify Form C and its variants to issuers to use ‘‘free writing’’ disclosure materials in Wefunder Letter; Wilson Letter.
508 See Wefunder Letter.
require an issuer to indicate the certain circumstances without having to file them
509 See Grassi Letter.
with the Commission).
jurisdictions in which the securities will 505 See, e.g., CFIRA Letter 6; CFIRA Letter 7; 510 An issuer that does not already have EDGAR
be or are sold, with one of those CrowdCheck Letter 1; Grassi Letter; Hackers/ filing codes, and to which the Commission has not
commenters recommending ongoing Founders Letter; RocketHub Letter; Wefunder previously assigned a user identification number,
disclosure of the amount sold in each Letter; Wilson Letter. which we call a ‘‘Central Index Key (CIK)’’ code,
state.500
506 See, e.g., Guzik Letter 1; Guzik Letter 2; Guzik will need to obtain the codes by filing electronically
Letter 3 (encouraging the Commission to provide an a Form ID [17 CFR 239.63; 249.446; 269.7 and
Commenters were divided on the optional simplified disclosure format, perhaps in a 274.402] at https://www.filermanagement.
EDGAR filing requirement. Some question and answer format); Hackers/Founders edgarfiling.sec.gov. The applicant also will be
commenters supported the filing Letter (encouraging the Commission to require a required to submit a notarized authenticating
requirement, with a few of those standard format and to allow issuers to provide document as a Portable Document Format (PDF)
additional information); Hamilton Letter (suggesting attachment to the electronic filing. The
specifically supporting the proposal that the Commission provide prototypes of Form C and authenticating document will need to be manually
issuers file the Form C in electronic sample disclosures); RocketHub (seeking a simple, signed by the applicant over the applicant’s typed
format only.501 Some commenters standardized general form other than U–7 or A–1 signature, to include the information contained in
to provide legal certainty); Saunders Letter the Form ID and to confirm the authenticity of the
(proposing that Form C be completed by selecting Form ID. See 17 CFR 232.10(b)(2).
than annually, reports of the results of operations from a database of stock responses); SBA Office of 511 See Rule 203 of Regulation Crowdfunding. We
and financial statements of the issuer. As discussed Advocacy Letter (describing recommendations from
above in Section II.B.2, to satisfy this requirement, have made some technical changes in the final rules
its roundtable attendees to adopt a simple question that do not affect their substantive requirements. To
the rules require an issuer to post the annual report and answer format similar to that previously used
on its Web site and file it with the Commission. maintain consistency with other Commission rules
in Regulation A or to provide ‘‘standard boilerplate and to keep electronic filing requirements
497 See, e.g., Angel Letter 1 (specifically
disclosures for some of the more complicated
supporting the XML requirements); CFIRA Letter 7; consolidated in Regulation S–T, we have deleted
nonfinancial disclosures, such as risk factors,’’ that
Consumer Federation Letter; Grassi Letter; Hackers/ from proposed Rules 201, 202 and 203 the phrase
are not required by the JOBS Act).
Founders Letter; Traklight Letter; RocketHub Letter. ‘‘on EDGAR’’ where it appeared after ‘‘file with the
We also received several comments prior to the Commission.’’ We also have deleted the instruction
498 See Grassi Letter; RocketHub Letter.
Proposing Release on whether the Commission to proposed Rule 203(a)(1) as the list of information
499 See CFIRA Letter 7.
should require a specific format for the required
500 See, Commonwealth of Massachusetts Letter set forth in that instruction was duplicative of the
disclosure. Several commenters recommended that
XML-based portion of Form C itself.
(recommending Form C require an issuer to check the Commission require the disclosure on a form 512 See Rule 101(a)(1)(xvii) of Regulation S–T.
boxes indicating the jurisdictions in which modeled after, or require the use of NASAA’s Small
securities will be sold); NASAA Letter Company Offering Registration Form (U–7). See, Regulation S–T generally allows PDF documents to
(recommending Form C–U (offering update form) e.g., Coan Letter; Liles Letter 1; Vim Funding Letter; be filed only as unofficial copies. See Rule 104 of
and Form C–AR (annual report form) require NASAA Letter. One commenter suggested modeling Regulation S–T. However, Rule 101 provides for
mstockstill on DSK4VPTVN1PROD with RULES3

disclosure of the states where interests in the the required disclosure format after then-current certain exceptions to this restriction. See, e.g., Rule
offering have been sold and the amount sold in each Form 1–A, which is used for securities offerings 101(ix) (allowing a PDF attachment to Form ID);
state). made pursuant to Regulation A, but which has Rule 101(a)(xiv) (requiring the filing of Form
501 For commenters supporting the EDGAR filings since been modified as a result of recently adopted NRSRO and related exhibits in PDF as official
requirement generally, see, e.g., CFIRA Letter 7; amendments to Regulation A. See 17 CFR 230.251 filings).
et seq.; Amendments to Regulation A, Release No. 513 See, e.g., CFIRA Letter 6; CFIRA Letter 7;
Traklight Letter. For those specifically supporting
the electronic filing proposal, see, e.g., Arctic Island 33–9741 (March 25, 2015) [80 FR 21805 (April 20, CrowdCheck Letter 1; Grassi Letter; Hackers/
Letter 5; CFIRA Letter 7; RocketHub Letter; Wilson 2015)] Regulation A Adopting Release’’); Founders Letter; RocketHub Letter; Wefunder
Letter. Commonwealth of Massachusetts Letter. Letter; Wilson Letter.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations 71423

of their non-XML disclosures and file certain other field names and the forms, will not result in unduly lengthy
those disclosures as exhibits to the Form General Instructions to Form C to clarify forms, and will simplify the filing
C. For example, an issuer may provide them or to reflect applicable changes to process for issuers and their preparers.
the required disclosures by uploading to the disclosure requirements discussed EDGAR will automatically provide each
EDGAR, as an exhibit to Form C, a PDF above. filing with an appropriate tag depending
version of the relevant information We believe that requiring certain on which box the issuer checks so that
presented on the intermediary’s information to be submitted in XML investors can distinguish among the
platform, including charts, graphs, and format will support the assembly and different filings.
a transcript or description of any video transmission of those required We also are adopting, largely as
presentation or any other media not disclosures to EDGAR on Form C.516 It proposed, the requirements to provide
reflected in the PDF. This approach also will make certain key information the offering information to investors and
should provide key offering information about each offering available to the relevant intermediary and make it
in a standardized format and give investors and market observers in
issuers flexibility in the presentation of available to potential investors under
electronic format and allow the Section 4A(b)(1).520 In addition, as
other required disclosures. We believe Commission to observe the
this flexibility is important given that discussed above in Section II.B., we
implementation of the crowdfunding
we expect that issuers engaged in moved the definition of ‘‘investor’’ from
exemption under Section 4(a)(6).
offerings in reliance on Section 4(a)(6) proposed Rule 300(c)(4) to Rule 100(d)
Information will be available about the
would encompass a wide variety of to clarify that for purposes of all of
types of issuers using the exemption,
industries at different stages of business Regulation Crowdfunding, ‘‘investor’’
including the issuers’ size, location,
development. includes any investor or any potential
securities offered and offering amounts
We are adopting the XML-based investor, as the context requires.521 In
and the intermediaries through which
fillable form as proposed with a few connection with this clarifying change,
the offerings are taking place. We
modifications.514 As suggested by some we have deleted the phrase ‘‘and make
believe the addition of the requirement
commenters,515 the XML-based portion available to potential investors’’ each
to indicate the jurisdictions in which
of Form C will require issuers to time it appeared in the rule text to avoid
the issuer intends to offer the securities,
indicate by checkbox the jurisdictions redundancy.522
as suggested by several commenters,
in which securities are intended to be will facilitate oversight by state The final rules provide that issuers
offered. We also are changing the name regulators, who retain antifraud will satisfy the requirement to file the
of proposed Form C–A to Form C/A to authority over crowdfunding offering information with the
be consistent with the naming transactions, while imposing only Commission and provide it to the
convention of our other amendment minimal costs on issuers. relevant intermediary by filing the Form
forms and adding Form C–AR/A to In addition, in a change from the C: Offering Statement and any
allow, and facilitate identification of, proposed rules, the final Form C amendments and progress updates and
the amendment of an issuer’s Form C– includes an optional Question and providing to the relevant intermediary a
AR annual report. In addition, we are Answer (‘‘Q&A’’) format that issuers copy of the disclosures filed with the
adding an instruction to clarify that the may elect to use to provide the Commission.523 The initial offering
issuer should mark the appropriate box disclosures that are not required to be statement should include all of the
on the cover of Form C to indicate filed in XML format.517 Issuers opting to information that is provided on the
which form it is filing. We also are use this format would prepare their intermediary’s Web site.524 We also are
splitting the ‘‘Form, jurisdiction and disclosures by answering the questions adopting as proposed the requirements
date of organization’’ field into three provided and filing that disclosure as an to file with the Commission and
fields to facilitate more accurate exhibit to the Form C. A number of provide, or make available, as
tracking of this data. We also inserted commenters noted that an optional applicable, to investors and the relevant
the statement required by paragraph (g) format such as this would be less intermediary an amendment to the
of Rule 201 immediately following the burdensome for small issuers while still offering statement to disclose any
data required by that paragraph, so that providing the Commission and investors material changes, additions or updates
statement appears together with the with the required information.518 We to information provided to investors
relevant data. Finally, we are modifying through the intermediary’s platform.525
believe that this option may help to
facilitate compliance and ease burdens Issuers may, but are not required to, file
514 As discussed in Section II.B.1, issuers will
on by providing a mechanism by which an amendment to reflect other changes,
input in the proposed XML-based filing the
following information: Name, legal status and issuers can easily confirm that they have additions or updates to information
contact information of the issuer; name, SEC file provided all required information. provided to investors through the
number and CRD number (as applicable) of the Consistent with the proposal, we are
intermediary through which the offering will be
conducted; the amount of compensation paid to the adopting a single Form C for all filings 520 See Rule 203(a) of Regulation Crowdfunding.
521 See Rule 100(d) of Regulation Crowdfunding.
intermediary to conduct the offering, including the under Regulation Crowdfunding.519 We
522 See Rule 203(a) of Regulation Crowdfunding.
amount of referral and other fees associated with believe that the use of one form will be 523 See Instructions 1 and 2 to paragraph (a) of
the offering; any other direct or indirect interest in more efficient than requiring multiple
the issuer held by the intermediary, or any Rule 203 of Regulation Crowdfunding. We
arrangement for the intermediary to acquire such an anticipate that issuers seeking to engage in an
516 The Commission will make the information
interest; number of securities offered; offering price; offering in reliance on Section 4(a)(6) may likely
target offering amount; whether oversubscriptions available via EDGAR both in a traditional text-based work with an intermediary to prepare the disclosure
mstockstill on DSK4VPTVN1PROD with RULES3

will be accepted and, if so, how they will be format for reading and as downloadable XML- that would be provided on the intermediary’s
allocated; maximum offering amount (if different tagged data for analysis. platform and filed with the Commission. In some
517 See Item 1 of General Instruction III to Form cases, intermediaries may offer, as part of their
from the target offering amount); deadline to reach
the target offering amount; current number of C of Regulation Crowdfunding. service, to file the disclosure with the Commission
employees of the issuer; selected financial data for 518 See, e.g., Guzik Letter 1; Guzik Letter 2; Guzik on behalf of the issuer.
the prior two fiscal years; and the jurisdictions in Letter 3; Hackers/Founders Letter; Hamilton Letter; 524 See Rule 203(a)(1) of Regulation

which the issuer intends to offer the securities. RocketHub Letter; Saunders Letter; SBA Office of Crowdfunding.
515 See, e.g., Commonwealth of Massachusetts Advocacy Letter. 525 See Rule 203(a)(2) of Regulation

Letter; NASAA Letter. 519 See Rule 203 of Regulation Crowdfunding. Crowdfunding.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00037 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
71424 Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations

intermediary’s platform that it considers and the offering may be found. The notices,533 with some pointing to the
not material. proposal did not impose limitations on changing nature of social media and
To satisfy the requirement to provide how the issuer distributes the notices. potential new user interfaces.534 Two
the disclosures, or make them available, As proposed, the notice could include commenters, however, stated that
as applicable, to investors, the final no more than: (1) A statement that the communications about the offering
rules allow issuers to provide the issuer is conducting an offering, the should always be conducted through the
information to investors electronically name of the intermediary through which intermediary.535 A number of
by referring investors to the information the offering is being conducted and a commenters also supported allowing an
on the intermediary’s platform through link directing the investor to the issuer to communicate with investors
a posting on the issuer’s Web site or by intermediary’s platform; (2) the terms of about the terms of the offering through
email.526 As discussed in the proposal the offering; and (3) factual information communication channels provided by
and noted by commenters, many issuers about the legal identity and business the intermediary on the intermediary’s
may not have email addresses for location of the issuer, limited to the platform, so long as the issuer identifies
investors. Accordingly, the final rules name of the issuer of the security, the itself in all communications.536
permit issuers to provide this address, phone number and Web site of Some commenters opposed the
information to investors through a Web the issuer, the email address of a proposed advertising rules, with some
site posting.527 However, to the extent representative of the issuer and a brief stating that the advertising restrictions
email addresses for investors are description of the business of the issuer. are unnecessary because sales must
available to issuers, issuers may contact Under the proposed rules, ‘‘terms of the occur through an intermediary’s
investors via email to direct them to the offering’’ would include: (1) The platform, which would contain all of the
posted information. We continue to amount of securities offered; (2) the relevant disclosures and investor
believe that investors in this type of nature of the securities; (3) the price of acknowledgments.537 One commenter
Internet-based offering will be familiar the securities; and (4) the closing date asked that an issuer be given broader
with obtaining information on the of the offering period. The proposed leeway to publicize its business or
Internet and that providing the rules would not, however, restrict an offering on its own Web site or social
information in this manner will be cost- issuer’s ability to communicate other media platform so long as the specific
effective for issuers. As discussed in the information that does not refer to the terms of the offering can be found only
Proposing Release, we believe Congress terms of the offering. through the intermediary’s platform.538
contemplated that crowdfunding would, The proposed rules also would allow One commenter recommended allowing
by its very nature, occur over the an issuer to communicate with investors advertising notices to have a section for
Internet or other similar electronic about the terms of the offering through supplemental information highlighting
media that is accessible to the public.528 communication channels provided by certain intangible purposes such as a
Therefore, consistent with the proposed the intermediary on the intermediary’s particular social cause.539
rules, the final rules do not require platform, so long as the issuer identifies Two other commenters recommended
issuers to provide physical copies of the itself as the issuer in all that any advertising notices be filed
information to investors. communications. with the Commission and/or the
4. Prohibition on Advertising Terms of b. Comments Received relevant intermediary.540 Several other
the Offering commenters supported the proposed
Commenters were mostly supportive approach of not having advertising
a. Proposed Rules of these provisions. Several commenters notices filed with the Commission or
Securities Act Section 4A(b)(2) expressed support for the proposed the intermediary, citing concerns about
provides that an issuer shall ‘‘not content of advertising notices 529 and various formats of the communications,
advertise the terms of the offering, the definition of ‘‘terms of the inability to capture all third-party
except for notices which direct investors offering.’’ 530 A number of commenters communications, and the costs
to the funding portal or broker.’’ also supported the proposal’s absence of
Consistent with the statute, proposed a restriction on an issuer’s ability to 533 See, e.g., Arctic Island Letter 5; Joinvestor

Rule 204 of Regulation Crowdfunding communicate information that does not Letter; Public Startup Letter 2; RoC Letter;
would allow an issuer to publish a refer to the terms of the offering.531 RocketHub Letter.
534 See, e.g., Arctic Island Letter 5; Public Startup
notice advertising the terms of an Several commenters requested Letter 2; RocketHub Letter.
offering in reliance on Section 4(a)(6) so clarification on various aspects of the 535 See Hackers/Founders Letter (supporting the
long as the notice includes the address proposal.532 issuer being able to repost the communications
of the intermediary’s platform on which Several commenters recommended elsewhere so long as it first appeared through the
additional information about the issuer that, consistent with the proposal, the intermediary); Joinvestor Letter.
536 See, e.g., ASSOB Letter; CFIRA Letter 6;
Commission not restrict the media or Commonwealth of Massachusetts Letter; Consumer
526 See Instruction 2 to Rule 203(a) of Regulation
format that may be used for advertising Federation Letter; Hackers/Founders Letter; Odhner
Crowdfunding.
527 See, e.g., Grassi Letter; Wefunder Letter.
Letter; Public Startup Letter 2; RoC Letter;
529 See, e.g., CFIRA Letter 6; Commonwealth of RocketHub Letter; Wefunder Letter. Some of these
528 We note that Section 301 of the JOBS Act
Massachusetts Letter; RocketHub Letter. commenters also recommended that all interested
states that ‘‘[Title III] may be cited as the ‘Capital 530 See, e.g., Arctic Island Letter 5; CFIRA Letter persons, such as officers, directors and other agents,
Raising Online While Deterring Fraud and should identify themselves in all communications
Unethical Non-Disclosure Act of 2012’.’’ See 6; Heritage Letter; Joinvestor Letter; RocketHub
Letter. on the intermediary’s platform. See CIFRA Letter 6;
Section 301 of the JOBS Act. See also 158 Cong. Hackers/Founders Letter.
531 See, e.g., ABA Letter; CFIRA Letter 6;
Rec. S1689 (daily ed. March 15, 2012) (statement of
mstockstill on DSK4VPTVN1PROD with RULES3

537 See, e.g., FundHub Letter 1; Seed&Spark Letter


Sen. Mark Warner) (‘‘There is now the ability to use Consumer Federation Letter; Hackers/Founders
Letter; Public Startup Letter 2; RocketHub Letter. (noting the proposed advertising restrictions will
the Internet as a way for small investors to get the
532 See, e.g., ABA Letter (recommending the rule restrict the ability of filmmakers to market and raise
same kind of deals that up to this point only select
text include a safe harbor for regularly released money for their films); Arctic Island Letter 5;
investors have gotten . . . , where we can now use
the power of the Internet, through a term called factual business information so long as it does not PeoplePowerFund Letter.
538 See Fryer Letter.
crowdfunding.’’); id. at S–1717 (Statement of Sen. refer to the terms of the offering); CIFRA Letter 6
539 See RocketHub Letter.
Mary Landrieu) (‘‘this crowdfunding bill—which is, (requesting more guidance on advertising formats
in essence, a way for the Internet to be used to raise and content and the definition of ‘‘terms of the 540 See, e.g., Commonwealth of Massachusetts

capital . . .’’). offering’’). Letter; CFIRA Letter 6.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00038 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations 71425

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

information with each other. As part of Letter.


541 See, e.g., Arctic Island Letter 5; ASSOB Letter; 551 See Rule 204 of Regulation Crowdfunding.
Public Startup Letter 2; RocketHub Letter. those communications, we believe it is 552 See also Section II.B.5 for disclosures required
important for the issuer to be able to
mstockstill on DSK4VPTVN1PROD with RULES3

542 See Rule 204 of Regulation Crowdfunding.


by persons promoting the offering.
543 See Instruction to Rule 204 of Regulation respond to questions about the terms of 553 Securities Offering Reform, Release No. 33–
Crowdfunding. 8591 (July 19, 2005) [70 FR 44722 (Aug. 3, 2005)]
544 17 CFR 230.134. 547 See, e.g., Arctic Island Letter 5; Joinvestor at 44731. The term ‘‘offer’’ has been interpreted
545 See RocketHub Letter. Letter; Public Startup Letter 2; RoC Letter; broadly and goes beyond the common law concept
546 See FundHub Letter 1; Fryer Letter (‘‘a rigid RocketHub Letter. of an offer. See, e.g., Diskin v. Lomasney & Co., 452
tombstone approach is inconsistent with the 548 See, e.g., Hackers/Founders Letter; Joinvestor F.2d 871 (2d. Cir. 1971).
Letter. 554 17 CFR 230.169.
structure and informality of modern social media
communication tools.’’) 549 See, e.g., ASSOB Letter; RocketHub Letter. 555 See ABA Letter.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00039 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
71426 Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations

issuers may generally look to the channels provided by the intermediary, the objectives of this provision without
provisions of Rule 169 for guidance in unless the promotion is limited to being overly prescriptive. There are a
making this determination in the notices that comply with the proposed number of reasonable steps the issuer
Regulation Crowdfunding context. advertising rules.559 can take to ensure compliance. An
issuer could, for example, contractually
5. Compensation of Persons Promoting c. Final Rules
require any promoter to include the
the Offering We are adopting, as proposed, final required statement about receipt of
a. Proposed Rules rules about the compensation of persons compensation, confirm that the
Consistent with Securities Act Section promoting the offering, with one promoter is adhering to the
4A(b)(3), proposed Rule 205 of clarifying change.560 We anticipate that intermediary’s terms of use that require
Regulation Crowdfunding would communication channels provided by promoters to affirm whether or not they
prohibit an issuer from compensating, the intermediary will provide a forum are compensated by the issuer, monitor
or committing to compensate, directly through which investors could share communications made by such persons
or indirectly, any person to promote the information to help the members of the and take the necessary steps to have any
issuer’s offering through communication crowd decide whether or not to fund the communications that do not have the
channels provided by the intermediary, issuer. We believe that it will be required statement removed promptly
unless the issuer takes reasonable steps important for investors to know whether from the communication channels, or
to ensure that the person clearly persons using those communication retain a person specifically identified by
discloses the receipt (both past and channels are persons acting on behalf of the intermediary to promote all issuers
prospective) of compensation each time the issuer or persons receiving on its platform.
the person makes a promotional compensation from the issuer (or from As proposed, the final rules also
communication. Further, a founder or persons acting on behalf of the issuer), specify that the issuer shall not
an employee of the issuer that engages to promote the issuer’s offering because compensate or commit to compensate,
in promotional activities on behalf of of the potential for self-interest or bias directly or indirectly, any person to
the issuer through the communication in communications by these persons. promote its offerings outside of the
channels provided by the intermediary A number of commenters supported communication channels provided by
would be required to disclose, with each the broad applicability of the proposed the intermediary, unless the promotion
posting, that he or she is engaging in rules to persons acting on behalf of the is limited to notices that comply with
those activities on behalf of the issuer. issuer.561 The text of the proposed rule the advertising rules discussed above in
Under the proposed rules, an issuer included a sentence stating that the Section II.B.4.562 This prohibition
would not be able to compensate or disclosure obligation would apply to ‘‘a should prevent issuers from
commit to compensate, directly or founder or an employee of the issuer circumventing the restrictions on
indirectly, any person to promote its that engages in promotional activities on advertising by compensating a third
offerings outside of the communication behalf of the issuer through the party to do what the issuer cannot do
channels provided by the intermediary, communication channels.’’ Based on directly.
unless the promotion is limited to comments received, we are removing
that sentence and adding an instruction 6. Other Issuer Requirements
notices that comply with the proposed
advertising rules. to clarify that the requirement applies a. Oversubscriptions
broadly to all persons acting on behalf
b. Comments Received The proposed rules would not limit
of the issuer, regardless of whether or
an issuer’s ability to accept investments
Commenters were generally not the compensation they receive is
in excess of the target offering amount,
supportive of promoter disclosure and specifically for the promotional
subject to the $1 million annual limit.563
the proposed rule.556 A number of activities. The change is intended to
Issuers would be required to disclose
commenters supported the broad clarify that the disclosure requirement
how much they would be willing to
applicability of the proposed rules to applies to persons hired specifically to
accept in oversubscriptions, how the
persons acting on behalf of the issuer.557 promote the offering as well as to
oversubscriptions would be allocated,
Some commenters recommended that persons (including, but not limited to,
and the intended purpose of those
the issuer or intermediary bear more founders, employees and directors) who
additional funds.
responsibility for ensuring that the are otherwise employed by the issuer or Commenters were generally
identity of the promoters be who undertake promotional activities supportive of this approach to
prominently disclosed.558 on behalf of the issuer. oversubscriptions.564 Some commenters
A number of commenters also While we appreciate the views of
supported the proposed flexibility to
supported the requirement in the commenters who suggested that we
allow issuers to determine how to
proposal that an issuer not compensate impose additional requirements on
allocate oversubscribed offerings,565
or commit to compensate, directly or issuers or intermediaries to ensure that
while other commenters recommended
indirectly, any person to promote its the identity of promoters is prominently
that the Commission require issuers to
offerings outside of the communication disclosed, we believe the requirement
allocate oversubscriptions using a
that the issuer take reasonable steps to
prescribed method.566 Two commenters
556 See, e.g., CFA Institute Letter; Consumer
ensure that promoters clearly disclose
Federation Letter (supporting proposal but the receipt of compensation for 562 See Rule 205(b) of Regulation Crowdfunding.
generally questioning the wisdom of allowing paid
promoters to participate in the communication communications is sufficient to achieve 563 See proposed Rule 201(h) and Instruction to
mstockstill on DSK4VPTVN1PROD with RULES3

channels at all); NASAA Letter; NFIB Letter; Public paragraph (i) of Rule 201 of Regulation
Startup Letter 2. 559 See, e.g., ASSOB Letter; Consumer Federation Crowdfunding, and cover page of Form C.
557 See, e.g., CFA Institute Letter; CFIRA Letter 6; Letter; Joinvestor Letter; Public Startup Letter 2; 564 See, e.g., CFA Institute letter; EMKF letter;

Commonwealth of Massachusetts Letter; Consumer RoC Letter; RocketHub Letter. Jacobson letter; Wefunder letter.
Federation Letter; Hackers/Founders Letter; 560 See Rule 205 of Regulation Crowdfunding. 565 See, e.g., ASSOB Letter; CFA Institute Letter;

Joinvestor Letter; RocketHub Letter; MCS Letter. 561 See, e.g., CFA Institute Letter; CFIRA Letter 6; EMKF Letter; Public Startup Letter 2; RocketHub
558 See, e.g., ASSOB Letter; Commonwealth of Commonwealth of Massachusetts Letter; Consumer Letter; Wefunder letter.
Massachusetts Letter; Joinvestor Letter; MCS Letter; Federation Letter; Hackers/Founders Letter; 566 See, e.g., Fund Democracy Letter (pro-rata);

RoC Letter; RocketHub Letter. Joinvestor Letter; RocketHub Letter; MCS Letter. Consumer Federation Letter (same as Fund

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00040 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations 71427

recommended that the Commission suggested the Commission require fairly valued and that approaches to
limit the maximum oversubscription issuers to set a fixed price.573 valuation that put investors at a
amount to a certain percentage of the We are adopting the final rules as disadvantage be prohibited.581 One
target offering amount,567 while two proposed.574 While we appreciate the commenter generally supported
other commenters opposed such a view of at least one commenter 575 that requiring issuers to describe how
limit.568 One commenter recommended a fixed price may be simpler for securities being offered are being
that the Commission revise the investors to understand, we believe that valued,582 while another commenter
proposed rules to clarify that issuers the statute contemplated flexible pricing generally opposed such requirement.583
would be required to disclose the by providing that issuers may disclose We are adopting, as proposed, final
‘‘other’’ basis upon which the method for determining the price, rules that neither limit the type of
oversubscriptions would be provided that the final price and securities that may be offered in reliance
allocated.569 required disclosures are provided to on Section 4(a)(6) nor prescribe a
each investor prior to any sales. We also method for valuing the securities.584 We
We are adopting the rule relating to believe the cancellation rights in the noted in the proposal that the statute
oversubscriptions as proposed, with one final rules 576 will provide investors a refers to ‘‘securities’’ and does not limit
clarifying change.570 We do not believe, reasonable opportunity to cancel their the type of securities that could be
as some commenters suggested, that it is investment commitment if they wish to offered pursuant to the exemption.
necessary to limit the maximum do so after the price is fixed. Issuers are required to describe the
oversubscription amount. Nor do we terms of the securities and the valuation
believe it is necessary to prescribe how c. Types of Securities Offered and
method in their offering materials.585
to allocate oversubscribed offerings so Valuation
We believe this approach is consistent
long as the issuer discloses, at the The proposed rules would not limit with the statute and will provide
commencement of the offering, how the type of securities that may be offered flexibility to issuers to determine the
securities in such offerings will be in reliance on Section 4(a)(6) nor types of securities that they offer to
allocated, and the intended purpose of prescribe a method for valuing the investors and how those securities are
those additional funds. This disclosure securities. Issuers would be required to valued, while providing investors with
should provide investors with describe the terms of the securities and the information they need to make an
information they need to make informed the valuation method in their offering informed investment decision.
investment decisions while providing materials. While some commenters suggested
issuers flexibility to structure the A number of commenters generally that the Commission should provide
offering as they believe appropriate. In supported not limiting the types of specific valuation methods or standards
response to a comment received,571 we securities that may be offered and sold for securities-based crowdfunding
are clarifying in the final rules that, in reliance of Section 4(a)(6).577 transactions, we are not persuaded that
regardless of the structure, the issuer Comments were more varied on there would be sufficient benefits to
must describe how securities in valuation methodology. Some being prescriptive in this regard.
oversubscribed offerings will be commenters recommended that the Methods and valuations of early stage
allocated. Commission neither require nor prohibit companies vary significantly, and any
a specific valuation methodology,578 attempt to choose a particular valuation
b. Offering Price while others recommended that the methodology could limit flexibility and
As discussed above in Section Commission prescribe a set of valuation have the result of endorsing one
II.B.1.a.i.(e), proposed Rule 201(l) would standards that have universal approach over another without
require an issuer to disclose the offering application for startups.579 Two necessarily having a sound basis for
price of the securities or, in the commenters recommended that the doing so. We believe the requirement
alternative, the method for determining Commission require issuers to base the that issuers describe the methods they
the price, provided that prior to any sale valuation of their securities on the price use to value their securities in their
of securities, each investor is provided at which the issuer previously sold offering materials, including the
in writing the final price and all securities,580 and another commenter requirement that they describe examples
required disclosure. The proposed rules recommended that the Commission of methods for how such securities may
would not require issuers to set a fixed consider whether additional standards be valued by the issuer in the future,
price or prohibit dynamic pricing. are needed to ensure that securities are will provide investors with the
information they need to make an
We received a few comments 573 See RocketHub Letter. informed investment decision.
supporting the proposed approach or 574 See Rule 201(l) of Regulation Crowdfunding. The final rules do not limit the types
expressing opposition to requiring a See also Section II.C.6 for a discussion of
of securities that may be offered in
fixed price,572 while another commenter cancellation provisions.
575 See RocketHub Letter. reliance on Section 4(a)(6), and thus
576 See Rules 201(j) and 201(k) of Regulation debt securities may be offered and sold
Democracy); Joinvestor letter (first-come, first- Crowdfunding. in crowdfunding transactions. As we
served or algorithmic random selection); 577 See, e.g., CFA Institute Letter; Concerned
PeoplePowerFund Letter (first-come, first-served). stated in the Proposing Release, in
Capital Letter; Crowdstockz Letter; Hackers/
567 See Joinvestor Letter (10%); RFPIA Letter
Founders Letter; Joinvestor Letter; Public Startup
general, the issuance of a debt security
(20%). Letter 2; RocketHub Letter; Tiny Cat Letter; Wilson
568 See Jacobson Letter; Public Startup Letter 2. 581 See Consumer Federation Letter.
Letter.
mstockstill on DSK4VPTVN1PROD with RULES3

569 See Fund Democracy Letter. 578 See, e.g., Hackers/Founders Letter; Heritage 582 See CFIRA Letter 7.
570 See Rule 201(h) to Regulation Crowdfunding. Letter; PeoplePowerFund Letter; Public Startup 583 See Thomas Letter 2 (recommending that if
571 See Fund Democracy Letter. Letter 2; RocketHub Letter; Wilson Letter. issuers are required to describe the valuation
572 See, e.g., CFA Institute Letter (stating that 579 See, e.g., 11 Wells Letter; Active Agenda method in their offering materials, the rule should
disclosure of changes and methods used to Letter; Borrell Letter; Ellenbogen Letter; Greer provide ‘‘safe harbor’’ language that issuers can use
determine share prices, along with investors’ rights Letter; Mountain Hardwear Letter; Moyer Letter; in providing such description.)
to cancel their investment commitments, provide NaviGantt Letter; Vidal Letter. 584 See Rule 201(m) of Regulation Crowdfunding.

reasonable safeguards); Wilson Letter; Public 580 See, e.g., Public Startup Letter 3; Wefunder 585 See Rule 201(m)(1) and (4) of Regulation

Startup Letter 2. Letter. Crowdfunding.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00041 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
71428 Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations

raises questions about the applicability would be engaged in the business of b. Comments on the Proposed Rules
of the Trust Indenture Act of 1939 effecting securities transactions for the The Proposing Release requested
(‘‘Trust Indenture Act’’).586 Although accounts of others through comments on whether there were
the Trust Indenture Act applies to any crowdfunding, it would be a ‘‘broker’’ funding portal activities, other than
debt security sold through the use of the within the meaning of Section 3(a)(4) of those in Exchange Act Section 3(a)(80),
mails or interstate commerce, including the Exchange Act.590 Accordingly, that we should prohibit, and whether
debt securities sold in transactions that proposed Rule 300(c)(2) of Regulation any prohibitions should be modified or
are exempt from Securities Act Crowdfunding would define ‘‘funding removed. We also requested comments
registration, Trust Indenture Act Section portal’’ consistent with the statutory about whether further guidance was
304(b) provides an exemption for any definition of ‘‘funding portal,’’ with the necessary on the provisions of the
transaction that is exempted by substitution of the word ‘‘broker’’ for the Exchange Act and the rules and
Securities Act Section 4 from the word ‘‘person.’’ regulations thereunder that would apply
provisions of Section 5 of the Act.587 An to funding portals.
issuer offering debt securities in reliance We also stated in the Proposing
Some commenters stated that the
on Section 4(a)(6), therefore, would be Release that the proposed rules would
Commission should not provide any
able to rely on this exemption.588 Based apply not only to funding portals, but
further guidance or prohibitions on
on the availability of this exemption, we also to their associated persons in many
funding portal activity in addition to
are not adopting a specific exemption instances. The terms ‘‘person associated those required by statute.594 One of
from the requirements of the Trust with a broker or dealer’’ and ‘‘associated these commenters stated that the
Indenture Act for offerings of debt person of a broker or dealer’’ are defined proposed regulations for funding portal
securities made in reliance on Section in Exchange Act Section 3(a)(18).591 activities are ‘‘sufficient for investor
4(a)(6). Proposed Rule 300(c)(1) of Regulation protection and proper regulatory
Crowdfunding would similarly define oversight.’’ 595 Another commenter
C. Intermediary Requirements
the term ‘‘person associated with a opposed removing or modifying the
1. Definitions of Funding Portals and funding portal or associated person of a statutory limitations on funding portal
Associated Persons funding portal’’ to mean any partner, activities, stating that if funding portals
a. Proposed Rules officer, director or manager of a funding wish to engage in the prohibited
portal (or any person occupying a activities, they could do so by
Securities Act Section 4(a)(6)(C) similar status or performing similar
requires a crowdfunding transaction to registering, and being appropriately
functions), any person directly or regulated as, broker-dealers.596
be conducted through a broker or
indirectly controlling or controlled by a
funding portal that complies with the c. Final Rules
funding portal, or any employee of a
requirements of Securities Act Section After considering the comments, we
4A(a). The term ‘‘broker’’ is generally funding portal, other than persons
whose functions are solely clerical or are adopting, as proposed, the
defined in Exchange Act Section 3(a)(4) definitions of ‘‘associated person of a
as any person that effects transactions in ministerial. The proposed rules would
provide, however, that persons who are funding portal or person associated with
securities for the account of others. a funding portal’’ and ‘‘funding portal’’
Exchange Act Section 3(a)(80) defines excluded from the definition of
associated person of a funding portal in Rules 300(c)(1) and(2), respectively.
the term ‘‘funding portal’’ as any person In particular, we believe that, at the
acting as an intermediary in a because their functions are solely
clerical or ministerial would remain present time, the statutory prohibitions
transaction involving the offer or sale of on a funding portal in Exchange Act
securities for the account of others, subject to our sanctioning authority
Section 3(a)(80), as reflected in the final
solely pursuant to Securities Act under Exchange Act Sections 15(b)(4)
rule definition of a funding portal,
Section 4(a)(6), that does not: (1) Offer and 15(b)(6).592 This definition is
provide appropriate investor
investment advice or recommendations; consistent with, and modeled on, the
protections.
(2) solicit purchases, sales or offers to language of Exchange Act Section We also are adopting the definition of
buy the securities offered or displayed 3(a)(18).593 ‘‘investor’’ from the proposed rules but
on its Web site or portal; (3) compensate In proposed Rule 300(c)(4), we also have moved the definition to Rule
employees, agents or other persons for defined ‘‘investor’’ as any investor or 100(d), and made a modification to
such solicitation or based on the sale of any potential investor, as the context clarify that the definition applies to all
securities displayed or referenced on its requires. of Regulation Crowdfunding.597
Web site or portal; (4) hold, manage, Although commenters did not address
possess or otherwise handle investor 590 See Proposing Release at 78 FR 66458. See
funds or securities; or (5) engage in such also discussion in Section II.D.2. 594 See, e.g., RocketHub Letter; Tiny Cat Letter

other activities as the Commission, by 591 15 U.S.C. 78c(a)(18). (stating that the proposed regulations provide a
rule, determines appropriate.589 592 Section 15(b)(4) (15 U.S.C. 78o(b)(4)) ‘‘healthy level of investor protection, but are not
In the Proposing Release, we authorizes the Commission to bring administrative overly burdensome and we wholeheartedly
proceedings for the imposition of sanctions, up to appreciate the [C]ommission’s general attitude of
explained that because a funding portal restraint’’). Another commenter also opposed
and including the revocation of a broker’s
registration, when the broker violates the federal additional prohibitions, stating that ‘‘to add
586 15 U.S.C. 77aaa et seq. prohibitions would be an illegal Rule not
securities laws (and for other misconduct). Section
587 15 U.S.C. 77ddd(b). 15(b)(6) (15 U.S.C. 78o(b)(6)) provides similar authorized by the JOBS Act legislation.’’ See Public
588 Trust Indenture Act Section 304(a)(8) [15 sanctioning authority with respect to persons Startup Letter 2. This commenter made a similar
mstockstill on DSK4VPTVN1PROD with RULES3

U.S.C. 77ddd(a)(8)] and Rule 4a–1 [17 CFR 260.4a– associated with a broker, including the ability to bar argument with respect to various aspects of the rule.
1] also provide an exemption to issue up to $5 such persons from associating with any We note, however, that the JOBS Act provides the
million of debt securities without an indenture in Commission registrant. Commission the authority to provide other
any 12-month period. 593 We note, however, that the definition in requirements for the protection of investors and in
589 Congress in the JOBS Act inadvertently proposed Rule 300(c)(1) does not include persons the public interest. See, e.g., Securities Act Section
created two Sections 3(a)(80) in the Exchange Act, under common control with the funding portal, 4A(a)(12); 4A(b)(5).
595 See Tiny Cat Letter.
the other being the definition of ‘‘emerging growth unlike the definition in Exchange Act Section
596 See Consumer Federation Letter.
company’’ (added by Section 101(b) of Title I of the 3(a)(18) which includes such persons as associated
JOBS Act). persons of broker-dealers. 597 See Section II.B.1.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00042 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations 71429

the definition of ‘‘investor,’’ we are the only registered national securities minimum qualification, testing and
making this change to address any association. licensure requirements for funding
potential confusion about whether the We also proposed definitions for the portals and their associated persons.606
definition is applicable to all of terms ‘‘intermediary’’ and ‘‘SRO’’ in
proposed Rules 300(c)(3) and 300(c)(5) (3) Final Rules
Regulation Crowdfunding.
of Regulation Crowdfunding, After considering the comments, we
2. General Requirements for respectively. As proposed, intermediary are adopting Rule 300(a) generally as
Intermediaries would mean a broker registered under proposed but deleting specific
a. Registration and SRO Membership Section 15(b) of the Exchange Act or a references to FINRA in the final rule, as
(1) Proposed Rules funding portal registered under well as the rest of Regulation
proposed Rule 400 of Regulation Crowdfunding and Form Funding
Securities Act Section 4A(a)(1) Crowdfunding and would include, Portal, when referring to a registered
requires that a person acting as an where relevant, an associated person of national securities association.
intermediary in a crowdfunding the registered broker or registered Although we recognize that FINRA is
transaction register with the funding portal. SRO was proposed to currently the only registered national
Commission as a broker or as a funding have the same meaning as in Section securities, we believe it is redundant to
portal.598 Proposed Rule 300(a)(1) of 3(a)(26) of the Exchange Act. specifically include its name when
Regulation Crowdfunding would referring to registered national securities
implement this requirement by (2) Comments on the Proposed Rules associations in the rule text and Form
providing that a person acting as an Commenters generally supported Funding Portal.
intermediary in a transaction involving FINRA being the appropriate SRO and We are cognizant of the fact that
the offer or sale of securities made in national securities association for funding portals must register with the
reliance on Section 4(a)(6) must be intermediaries.601 In the Proposing Commission and become compliant
registered with the Commission as a Release, we asked if we were to approve with an entirely new set of rules. The
broker under Exchange Act Section the registration of another national effective date for the final rules (which
15(b), or as a funding portal pursuant to securities association under Exchange is 180 days after publication in the
Section 4A(a)(1) and proposed Rule 400 Act Section 15A in the future, in Federal Register, except for § 227.400,
of Regulation Crowdfunding. As addition to FINRA, whether it would it Form Funding Portal, and the
discussed below, we also proposed to be appropriate for us to require amendments to Form ID, which are
make the information that a funding membership in both the existing and effective January 29, 2016) is designed
portal provides on the proposed new association. Commenters urged that to provide a sufficient amount of time
registration form (i.e., Form Funding intermediaries be required to register for funding portals to register and
Portal), other than personally with only one such national securities establish the necessary infrastructure to
identifiable information or other association.602 comply with other requirements being
information with a significant potential Certain commenters expressed imposed in Regulation Crowdfunding
for misuse, accessible to the public.599 concern about potential competitive before any intermediaries—either
Securities Act Section 4A(a)(2) advantages of registered broker-dealers broker-dealers or funding portals—may
requires an intermediary to register with over funding portals, suggesting that the engage in crowdfunding activities. We
any applicable self-regulatory Commission should prohibit brokers believe this should address commenters’
organization (‘‘SRO’’), as defined in from engaging in transactions conducted concerns that broker-dealers otherwise
Exchange Act Section 3(a)(26).600 pursuant to Section 4(a)(6) until funding may gain a competitive advantage if
Exchange Act Section 3(h)(1)(B) portals can become registered,603 or they were able to engage in
separately requires, as a condition of the provide funding portals a grace period crowdfunding activities before funding
exemption from broker registration, that so they may be able to operate before portals are able to comply with the
a funding portal be a member of a their registration becomes effective.604 requirements needed to begin
national securities association that is Another commenter, however, operation.607
registered with the Commission under suggested that licensed broker-dealers While FINRA is the only registered
Exchange Act Section 15A. Proposed should be immediately authorized to national securities association at
Rule 300(a)(2) would implement these provide services associated with a present, we recognize that a new
provisions by requiring an intermediary ‘‘registered crowdfunding portal’’ to any national securities association or
in a transaction involving the offer or issuer looking to self-host or to an issuer associations could register with us in
sale of securities made in reliance on that has ‘‘an offline mechanism the future. At that time, a funding portal
Section 4(a)(6) to be a member of FINRA available for crowdfunding.’’ 605 could choose to become a member of the
or any other national securities In response to our requests for new association(s) instead of, or in
association registered under Exchange comment in the Proposing Release,
Act Section 15A. Currently, FINRA is commenters were also divided on 606 Comments in support included Hakanson

whether the Commission should require Letter; Reichman Letter; RocketHub Letter. See also
598 As we noted in the Proposing Release, CrowdCorp Letter (stating that the Commission
facilitating crowdfunded transactions (which 601 See, e.g., Joinvestor Letter; RocketHub Letter.
should establish a separate licensing scheme for
involve the offer or sale of securities by an issuer persons who help prepare issuer disclosure
and not secondary market activity) alone would not One commenter stated that funding portals should documents and advise issuers, but who are not
require an intermediary to register as an exchange not be required to register with the Commission or brokers or funding portals). Comments opposed
or as an alternative trading system (i.e., registration become FINRA members because, unlike brokers, included Public Startup Letter 2; Startup Valley
mstockstill on DSK4VPTVN1PROD with RULES3

as a broker-dealer subject to Regulation ATS). See they serve only as an ‘‘information delivery Letter.
Proposing Release at 78 FR 66459 (discussing service.’’ See Perfect Circle Letter. We note, 607 We note that broker-dealers may nonetheless
secondary market activity and exchange or ATS however, that registration is a statutory requirement
have a competitive advantage to the extent that they
registration). under Securities Act Section 4A(a)(1).
602 See, e.g., Joinvestor Letter; Public Startup
are able to provide a wider range of services than
599 See Section II.D.1 (discussing registration
those permitted funding portals under the statute.
requirements). Letter 2; RocketHub Letter; Vann Letter. However, we believe this competitive advantage is
603 See, e.g., RocketHub Letter.
600 15 U.S.C. 78c(a)(26). Exchange Act Section balanced to a significant degree by a strong
604 See, e.g., Joinvestor Letter.
3(a)(26) defines an ‘‘SRO’’ to include, among other regulatory regime tailored to that wider range of
things, a ‘‘registered securities association.’’ Id. 605 Public Startup Letter 2. services.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00043 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
71430 Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations

addition to, its FINRA membership. As officers or partners (or any person Several commenters who opposed the
we noted above, we requested comment occupying a similar status or performing prohibition on an intermediary having a
on whether we should require a similar function), from having: (1) A financial interest in the issuer suggested
membership in both the existing financial interest in an issuer using its that the prohibition would reduce the
national securities association (FINRA) services; and (2) from receiving a number and types of intermediaries that
and a new national securities financial interest in the issuer as might otherwise participate in
association, if we were to approve compensation for services provided to, crowdfunding activities.615 These
another national securities association or for the benefit of, the issuer, in commenters asserted that allowing an
in the future. We have considered connection with the offer and sale of its intermediary to take this financial
commenters’ views and have securities. Proposed Rule 300(b) defined interest would provide an option
determined not to require that funding ‘‘a financial interest in an issuer’’ to through which issuers could provide
portals be members of multiple mean a direct or indirect ownership of, payment to the intermediary for its
securities associations (should new or economic interest in, any class of the services, and also permit co-
associations be registered in the future). issuer’s securities. investments, which would ultimately
Because all registered national securities benefit investors.616 These commenters
associations must satisfy the same (2) Comments on the Proposed Rules
also asserted that such a financial
statutory standards set forth in In general, commenters supported the interest could align the interests of
Exchange Act Section 15A, we do not Commission’s proposed financial intermediaries with those of
believe at this time that requiring interest prohibition as it applies to an investors.617 One commenter suggested
membership in additional associations intermediary’s directors, officers or that ‘‘by removing an upfront cost and
would add significant investor partners (or any person occupying a incentivizing an ongoing relationship
protections. similar status or performing a similar between the intermediary and the
After considering comments, we have function),609 as well as the proposed issuer, equity compensation for
determined not to impose any licensing, definition of financial interest.610 In intermediaries fulfils the Commission’s
testing or qualification requirements for contrast, however, many commenters twin aims of efficient capital markets
associated persons of funding portals. opposed the Commission’s proposed and investor protection.’’ 618 Another
We believe that a registered national prohibition on an intermediary itself commenter noted that permitting the
securities association is well-positioned, having or receiving a financial interest intermediary to take a financial interest
given the requirements for registration in the issuer,611 while some supported in the issuer would encourage the
as a national securities association, as this proposed prohibition.612 development of funding portals that are
well as the statutory and regulatory sponsored by or affiliated with
requirements that apply to such a Commenters who supported our
proposal to extend the prohibition on Community Development Financial
registered entity, to determine whether Institutions (‘‘CDFIs’’).619 Yet another
to propose additional requirements such financial interests to the intermediary
as licensing, testing or qualification suggested that such prohibitions may
615 See, e.g., Hackers/Founders Letter
requirements for associated persons of help to mitigate conflicts of interests.613
(‘‘Furthermore, rules that preclude the
funding portals.608 One commenter stated that an [i]ntermediary from holding any financial interest
We also are adopting as proposed the intermediary having a financial interest would overly restrict the [i]ntermediary
definitions for the terms ‘‘intermediary’’ in the issuer would skew the incentives environment; for example, such restrictions might
of the intermediary toward its own prevent a diverse set of platforms from developing
in Rule 300(c)(3). However, we are that serve the specific needs of different
removing the definition of ‘‘self- interests rather than the integrity of the communities. The impact of which might
regulatory organization’’ and ‘‘SRO’’ transaction, and also stated its view that disproportionately impact certain communities,
from the final rules because the term is disclosure of this interest could not cure such as the not-for-profit community.’’).
616 See, e.g., EMKF Letter (‘‘The current proposed
already defined in Exchange Act Section this problem.614
rules with a fee-based system is a recipe for
3(a)(26). disaster. No credible startups that have viable
609 See, e.g., CFA Institute Letter; Consumer
alternatives would choose to pay 5–15% of their
b. Financial Interests Federation Letter; Jacobson Letter. fundraising round in cash to an intermediary.’’).
610 See, e.g., Hackers/Founders Letter; Joinvestor 617 See, e.g., AngelList Letter (‘‘So long as the
(1) Proposed Rules
Letter; Tiny Cat Letter. See also Consumer program was consistently applied without judgment
Securities Act Section 4A(a)(11) Federation Letter (stating that the Commission by the intermediary, the net effect would purely be
requires an intermediary to prohibit its should ‘‘monitor practices in this area once rules to align the interests of the intermediary with the
are adopted to ensure that the intended limits investor.’’). See also EMKF Letter; Hackers/
directors, officers or partners (or any appropriate to intermediaries’ gatekeeper functions Founders Letter; Heritage Letter; Milken Institute
person occupying a similar status or are not being circumvented through the use of other Letter; RoC Letter; Thomas Letter 1.
performing a similar function) from types of payments or financial arrangements’’). 618 Seyfarth Letter.
611 See, e.g., AngelList Letter; Anonymous Letter
having any financial interest in an 619 See Concerned Capital Letter (suggesting the
3; Arctic Island Letter 6; EMKF Letter; Commission broaden the definition of
issuer using its services. In the Growthfountain Letter; Guzik Letter 1; Hackers/ intermediaries to encourage portals sponsored by
Proposing Release, we proposed to use Founders Letter; Heritage Letter; Milken Institute and/or affiliated with U.S. Treasury-recognized
our discretion to extend the prohibition Letter; Propellr Letter 1; Public Startup Letter 2; CDFIs and exempt such portals from the
to the intermediary itself. Thus, RoC Letter; RocketHub Letter; Seyfarth Letter; prohibitions against having a financial interest in
Thomas Letter 1. issuers). See also City First Letter (suggesting that
proposed Rule 300(b) of Regulation 612 See, e.g., CFA Institute Letter; Clapman Letter;
the Commission allow CDFIs to act as co-lenders).
Crowdfunding would prohibit the Consumer Federation Letter; Jacobson Letter; The Community Development Financial
intermediary, as well as its directors, Joinvestor Letter. Institutions Fund, which was established by the
mstockstill on DSK4VPTVN1PROD with RULES3

613 See, e.g., CFA Institute Letter; Consumer


Riegle Community Development and Regulatory
608 All SROs are required to file proposed rules Federation Letter (‘‘An intermediary that is Improvement Act of 1994, is a government program
and rule changes with us under Exchange Act compensated through receipt of a financial interest that promoted access to capital and local economic
Section 19(b) and Rule 19b–4. In general, the in an issuer may have an incentive to take steps to growth by, among other things, investing in,
Commission reviews proposed SRO rules and rule ensure that the issuer reaches its funding target so supporting and training CDFIs that provide loans,
changes and publishes them for comment. The that the offering can move forward or engage in investments, financial services and technical
Commission then approves or disapproves them, or other practices designed to artificially inflate the assistance to underserved populations and
the rules become effective immediately or by value of its securities.’’); Jacobson Letter. communities. See generally http://www.cdfifund.
operation of law. 614 See Jacobson Letter. gov/what_we_do/programs_id.asp?programID=9. A

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00044 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations 71431

commenter suggested that permitting We are not adopting, however, the at this time the interest of promoting
the intermediary to take a financial proposed complete prohibition on the capital formation for small businesses,
interest in the issuer would incentivize intermediary itself having or receiving a and developing a workable framework
intermediaries to screen potential financial interest in an issuer using its for securities-based crowdfunding,
issuers for possible fraud or services. Although intermediaries are counsels against extending the
wrongdoing.620 Other commenters generally prohibited under the rule as prohibition on financial interests to the
supported permitting the intermediary adopted from having such a financial intermediary itself.
to take a financial interest in the issuer interest, as discussed below, in response
so long as the terms of the financial to comments, we have amended the rule However, we are cognizant of the
interests taken by the intermediary are to permit an intermediary to have a potential conflicts of interest that may
the same as or not more favorable than financial interest in an issuer that is arise, and therefore we are placing
those taken by investors in the offering or selling securities in reliance certain conditions on the ability of
offering.621 Commenters suggested on Section 4(a)(6) through the intermediaries to have a financial
additional measures, such as adequate intermediary’s platform, provided that: interest in an issuer that is offering or
disclosure,622 a five percent interest (1) The intermediary receives the selling securities in reliance on Section
limitation,623 and restrictions on the financial interest from the issuer as 4(a)(6) through the intermediary’s
ability of an intermediary to transfer its compensation for the services provided platform.627 First, the intermediary must
interests in the issuer, could help to to, or for the benefit of, the issuer in receive the financial interest from the
address any conflicts of interest connection with the offer or sale of such issuer as compensation for the services
concerns.624 securities being offered or sold in provided to, or for the benefit of, the
reliance on Section 4(a)(6) through the issuer in connection with the offer or
(3) Final Rules intermediary’s platform; and (2) the sale of such securities being offered or
After considering the comments, we financial interest consists of securities sold in reliance on Section 4(a)(6).628
are adopting Rule 300(b), as proposed, of the same class and having the same We believe that this limitation, which
with respect to an intermediary’s terms, conditions and rights as the will allow intermediaries to receive
directors, officers or partners (or any securities being offered or sold in securities as payment for services but
person occupying a similar status or reliance on Section 4(a)(6) through the not otherwise permit them to invest in
performing a similar function). Rule intermediary’s platform. the offering, addresses commenters’
300(b), as adopted, prohibits an We are mindful of concerns raised by concerns that a prohibition could have
intermediary’s directors, officers or commenters that a prohibition could a ‘‘chilling effect’’ on the ability of small
partners (or any person occupying a have a chilling effect on the ability of issuers to use the crowdfunding
similar status or performing a similar small issuers to use the crowdfunding exemption, while serving to mitigate
function) from having any financial exemption. These issuers may be small
concerns relating to intermediaries
interest in an issuer using its services. businesses or neighborhood
taking steps to ‘‘artificially inflate’’ the
Rule 300(b) also specifically prohibits establishments that may not have the
these persons from receiving a financial value of securities in the offerings.629
liquid capital to compensate
interest in the issuer as compensation intermediaries for services. As Second, we have considered the
for services provided to, or for the commenters noted, allowing an comments in support of limiting an
benefit of, the issuer, in connection with intermediary to have or receive a intermediary’s financial interest by
the offer and sale of its securities. financial interest in the issuer could requiring that such interest be the same
Consistent with the proposal, Rule provide a method for the issuer to pay as or not more favorable than those
300(b), as adopted, defines ‘‘a financial an intermediary for its services, which taken by investors in the offering,630 and
interest in an issuer’’ to mean a direct may facilitate capital formation. This have determined to prohibit
or indirect ownership of, or economic may, in turn, encourage the intermediaries from receiving a
interest in, any class of the issuer’s development of funding portals that are, financial interest unless it is in
securities.625 for example, affiliated with CDFIs, as securities that are of the same class, and
one commenter suggested.626 As that have the same terms, conditions
certified Community Development Financial commenters further noted, permitting and rights as the securities in the
Institution (‘‘CDFI’’) is a specialized financial offering. We believe that this limitation
institution that works in market niches that are
such a financial interest may also help
underserved by traditional financial institutions. to align the interests of intermediaries will further serve to mitigate any
CDFIs provide a unique range of financial products and investors, and provide an additional potential conflicts by helping to align
and services in economically distressed target incentive to screen for fraud. We believe
markets, such as mortgage financing for low-income 627 See notes 613–614 and accompanying text.
and first-time homebuyers and not-for-profit 628 As
conflicts of interest that may arise when the persons noted above in Section II.C.2, an
developers, flexible underwriting and risk capital
facilitating a crowdfunding transaction have a intermediary must be either a registered funding
for needed community facilities, and technical
financial stake in the outcome. 78 FR at 66461. The portal or a registered broker-dealer, and must be a
assistance, commercial loans and investments to
prohibition extends to ‘‘any person occupying a member of a registered national securities
small start-up or expanding businesses in low-
similar status or performing a similar function,’’ association. FINRA rules currently require that its
income areas. CDFIs include regulated institutions
and applies with respect to both direct or indirect broker-dealer members charge reasonable fees for
such as community development banks and credit
ownership of, or economic interest in, any class of their services and observe just and equitable
unions, and non-regulated institutions such as loan
the issuer’s securities. In addition, we note that principles of trade in the conduct of their business.
and venture capital funds.
620 See Anonymous Letter 3. Section 15(b) of the Securities Act creates liability FINRA has also filed a proposed rule change with
for persons who aid and abet violations of the the Commission to apply certain rules to funding
mstockstill on DSK4VPTVN1PROD with RULES3

621 See, e.g., Hackers/Founders Letter; Propellr 1


Securities Act or the rules and regulations portals, including requiring them to observe high
Letter; Public Startup Letter 2; RocketHub Letter. thereunder, such as would occur if a third person standards of commercial honor and just and
622 See, e.g., Growthfountain Letter; Hackers/
knowingly or recklessly provided substantial equitable principles of trade in the conduct of their
Founders Letter; Propellr Letter 1; RoC Letter; assistance to a director, officer or partner (or any businesses. See Proposed Rule Change to Adopt the
RocketHub Letter. person occupying a similar status or position), for Funding Portal Rules and Related Forms and
623 See RocketHub Letter. FINRA Rule 4518, SR–FINRA–2015–040 (Oct. 9,
example, by accepting and holding, on the officer’s
624 See Hackers/Founders Letter. behalf, a financial interest in the issuer in 2015).
625 As we explained in the Proposing Release, the circumvention of the prohibition. 629 See Consumer Federation Letter.

prohibition is intended to protect investors from the 626 See Concerned Capital Letter. 630 See note 621.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00045 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
71432 Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations

the interests of the intermediary with Commission staff expects to review higher.635 Others commenters supported
those of the investors in the offering.631 the compensation structure of the standard.636
We are persuaded that the disclosures intermediaries during the study of the A number of commenters expressed
otherwise required by Regulation federal crowdfunding exemption it concern about the proposed reliance on
Crowdfunding also will help to address plans to undertake no later than three issuer representations.637 Some
any potential conflicts of interest arising years following the effective date of commenters suggested an intermediary
from an intermediary having or Regulation Crowdfunding.634 should be required to conduct some
receiving a financial interest in an type of due diligence on the issuer, as
issuer. Among other things, Rule 302(d) 3. Measures To Reduce Risk of Fraud opposed to relying on issuer
requires an intermediary to clearly representations.638 Another commenter
disclose the manner in which it will be Securities Act Section 4A(a)(5) went further by suggesting that an
compensated in connection with requires an intermediary to ‘‘take such intermediary should also have an
offerings and sales of securities made in measures to reduce the risk of fraud ongoing obligation to monitor
reliance on Section 4(a)(6) at account with respect to [transactions made in communications by issuers during the
opening and Rule 303(f) requires reliance on Section 4(a)(6)], as course of the offering to detect and
disclosure of remuneration received by established by the Commission, by rule, prevent violations of the securities laws
an intermediary (including securities including obtaining a background and and the regulations thereunder.639
received as remuneration) on securities enforcement regulatory Another commenter stated that an
confirmations.632 We believe that these history check on each officer, director, issuer’s representation should not
disclosures will provide investors with and person holding more than 20 suffice unless it is detailed enough to
relevant information concerning any percent of the outstanding equity of evidence a reasonable awareness by the
intermediary’s financial interests every issuer whose securities are offered issuer of its key obligations and the
(including whether such interest was by such person.’’ As discussed below, ability to comply with those
acquired on the same terms that are after considering the comments, we are obligations.640
available to investors), which, in turn, adopting Rule 301 of Regulation One commenter argued that the
will help investors to make better Crowdfunding substantially as language of the proposed rule was
informed investment decisions. In contradictory because relying on
proposed, with a few changes to Rule
addition, the intermediary must comply representations made by the issuer is
301(c)(2).
with all other applicable requirements not the same as establishing a
of Regulation Crowdfunding, including a. Issuer Compliance reasonable basis for believing the issuer
the statutory limitations on a funding is in compliance.641
portal’s activities.633 (1) Proposed Rule
One commenter recommended that
We proposed in Rule 301(a) of the Commission ‘‘consider a tiered
631 The rule does not preclude an intermediary
Regulation Crowdfunding to require that approach to compliance obligations’’
from receiving securities as compensation for
services from the same issuer for a subsequent an intermediary have a reasonable basis where, as the size of the offering or
offering conducted by the issuer in reliance on for believing that an issuer seeking to other risk factors increased,
Section 4(a)(6) as long as the securities received are
offer or sell securities though the intermediaries would be required to
compensation for services provided during the conduct more rigorous compliance
subsequent offering and are of the same class and intermediary’s platform complies with
reviews.642 Under such an approach,
have the same terms, conditions and rights as the the requirements of Section 4(a)(6) and
securities being offered in the subsequent offering. this commenter stated that for small
the related requirements of Regulation
632 See Sections II.C.4.d and II.C.5.f. See also Rule offerings that cap investments at a low
302(c) of Regulation Crowdfunding (requiring
Crowdfunding. For this requirement, we level, $500 for example, and where
intermediaries to inform investors, at the time of proposed that an intermediary may there is no participation by individuals
account opening, that promoters must clearly reasonably rely on an issuer’s with a history of security law violations,
disclose in all communications on the platform the
receipt of compensation and the fact that he or she
representations about compliance the intermediary would be permitted to
is engaging in promotional activities on behalf of unless the intermediary has reason to
the issuer). question the reliability of those 635 See, e.g., AFR Letter; ASTTC Letter;
633 See Exchange Act Section 3(a)(80) (defining
representations. Computershare Letter; Consumer Federation Letter;
‘‘funding portal’’ and establishing certain CSTTC Letter; Grassi Letter; Merkley Letter;
limitations on their activities consistent with the (2) Comments on Proposed Rule NYSSCPA Letter.
statute, such as prohibiting a funding portal from 636 See, e.g., RocketHub Letter; STA Letter.
offering investment advice or recommendation; Commenters generally agreed that 637 See, e.g., AFR Letter; Computershare Letter;
soliciting purchases, sales or offers to buy securities Consumer Federation Letter; Merkley Letter.
offered or displayed on its Web site or portal; or intermediaries play a significant role in
638 See, e.g., CSTTC Letter; Grassi Letter;
holding, managing, possessing, or otherwise preventing and detecting fraud and NYSSCPA Letter; Consumer Federation Letter
handling investor funds or securities). In this should take measures to reduce (stating that an intermediary’s responsibility is
regard, compliance with disclosures required by
Regulation Crowdfunding generally would not
potential fraud. Some commenters, rendered meaningless without establishing specific
however, expressed concerns about the standards that require due diligence in order to
cause a funding portal to provide investment advice
reasonably conclude the issuer is in compliance).
or recommendations. Nonetheless, a funding portal proposed ‘‘reasonable basis’’ standard 639 See AFR Letter (‘‘[T]he Commission’s proposal
should seek to ensure that disclosure of its financial
interest(s) in an issuer is not inconsistent with the
for an intermediary’s belief about an to allow intermediaries to rely on self-certification
statutory prohibition on providing investment issuer’s compliance with applicable by issuers makes a mockery of its proposed
advice or recommendations. For example, a funding laws stating that the standard should be requirement that intermediaries have ‘a reasonable
portal must not present its financial interest in an basis for believing that an issuer seeking to offer
mstockstill on DSK4VPTVN1PROD with RULES3

issuer as a recommendation or endorsement of that and sell securities in reliance on Section 4(a)(6),
issuer. See Section II.D.3. We also note that if a under Section 3(a)(1)(C) of the Investment Company through the intermediary’s platform, complies with
funding portal holds, owns or proposes to acquire Act. We generally would expect, however, that such the requirements in Securities Act Section 4A(b)
securities issued by an issuer, or multiple issuers, funding portal would seek to rely on the exclusion and the related requirements in Regulation
that individually or in aggregate exceed more than from the definition of investment company in Crowdfunding.’ ’’).
Section 3(c)(2) of the Investment Company Act for 640 See STA Letter.
40% of the value of the funding portal’s total assets
(excluding government securities and cash items) (among other things) a person primarily engaged in 641 See ABA Letter.

on an unconsolidated basis, the funding portal may the business of acting as a broker. 642 See IAC Recommendation; see also

fall within the definition of investment company 634 See Section II. BetterInvesting Letter.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00046 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations 71433

rely on representations by issuers to determine whether it can rely on an between those who supported 649 and
satisfy its obligation to ensure issuer representation may vary, but those who opposed 650 any requirement
compliance. As the size of the offering, should be influenced by and tailored mandating the use of a registered
the size of permitted investments, or according to the intermediary’s transfer agent. Commenters supporting
other risk factors increase, the knowledge and comfort with each the required use of registered transfer
commenter stated that the Commission particular issuer. We believe this agents cited potential benefits,
should consider requiring approach is generally consistent with including reducing internal costs and
intermediaries to conduct more rigorous the view of one commenter that providing corporate transparency; 651
compliance reviews. suggested a tiered approach to having the transfer agent serve as the
(3) Final Rule compliance obligations where issuer’s paying agent, proxy agent,
intermediaries should conduct more exchange agent, tender agent and
Rule 301(a), as adopted, requires that rigorous compliance reviews and mailing agent for ongoing reports; 652
an intermediary have a reasonable basis background checks as risk factors providing a back-up and recovery
for believing that an issuer seeking to increase.644 system for records; 653 and conducting
offer and sell securities in reliance on internal audits to protect against
Section 4(a)(6) through the b. Records of Securities Holders
theft.654 Some commenters also
intermediary’s platform complies with (1) Proposed Rule highlighted potential problems when
the requirements in Securities Act non-registered transfer agents or the
Section 4A(b) and the related We proposed in Rule 301(b) of
issuer maintains records, including
requirements in Regulation Regulation Crowdfunding a requirement
improper registration of multiple
Crowdfunding. While some commenters that an intermediary have a reasonable
owners, duplicate records, missing
argued for higher or different standards, basis for believing that an issuer has
certificate numbers, inability to trace
such as requiring intermediaries to established means to keep accurate
ownership, and inability to maintain
conduct due diligence on issuers or records of the holders of the securities
records; 655 and incorrect handling of
monitor communications by issuers it would offer and sell through the
intermediary’s platform. We proposed corporate actions, failure to observe
during the course of the offering, we restrictions on transfers, and failure to
believe that a reasonable basis standard that an intermediary may reasonably
rely on an issuer’s representations about follow abandoned property reporting
is appropriate, particularly in view of requirements.656 One commenter
the issuer’s own obligation to comply compliance unless the intermediary has
reason to question the reliability of suggested that the Commission should
with the requirements in Section 4A(b)
those representations. We did not identify specific areas for an
and the related requirements in
propose a particular form or method of intermediary to consider about an
Regulation Crowdfunding. We are
recordkeeping of securities, nor did we issuer’s recordkeeping capabilities when
mindful as well of the associated costs
propose to require that an issuer use a determining whether or not to provide
of a potentially higher standard.
transfer agent or other third party.645 We access to that issuer.657 This commenter
Consistent with the proposal, Rule
noted, however, that requiring a also urged the Commission to create a
301(a) also permits intermediaries to
registered transfer agent to be involved safe harbor whereby an intermediary
reasonably rely on representations of the
after the offering could introduce a would be deemed to have met the
issuer, unless the intermediary has
recordkeeping requirement if the issuer
reason to question the reliability of regulated entity with experience in
those representations. maintaining accurate shareholder has retained a registered transfer agent
In satisfying the requirements of Rule records,646 and we asked in the or registered broker-dealer.658
301(a), we emphasize that an Proposing Release whether we should Commenters that opposed the
intermediary has a responsibility to require an issuer to use a regulated mandatory use of a registered transfer
assess whether it may reasonably rely transfer agent to keep such records and
649 See, e.g., ASTTC Letter; ClearTrust Letter; CST
on an issuer’s representation of whether there were less costly means by Letter; CSTTC Letter; Empire Stock Letter; Equity
compliance through the course of its which an issuer could rely on a third Stock Letter; FAST Letter; Sharewave Letter; Stalt
interactions with potential issuers.643 party to assist with the Letter.
We agree with comments that an recordkeeping.647 650 See, e.g., Arctic Island Letter 5; CapSchedule

intermediary seeking to rely on an Letter; CFIRA Letter 8; Computershare Letter; Grassi


issuer representation should consider (2) Comments on Proposed Rule Letter; Joinvestor Letter; NYSSCPA Letter; Public
Startup Letter 2; RocketHub Letter; Tiny Cat Letter.
whether the representation is detailed Commenters agreed that an 651 See CST Letter.
enough to evidence a reasonable intermediary should have a basis for 652 See Empire Stock Letter.
awareness by the issuer of its believing that an issuer has established 653 See FAST Letter.

obligations and its ability to comply a means to keep accurate records.648 654 Id.

with those obligations. The specific Commenters were divided, however, 655 See, e.g., ClearTrust Letter; STA Letter; Stalt

steps an intermediary should take to Letter.


656 See STA Letter.
644 We also emphasize that when an intermediary
657 Id.
643 In addition, an intermediary’s potential seeks to rely on the representations of others to 658 Id. The commenter also stated that such a safe
liability under Securities Act Section 4A(c), as form a reasonable basis, the intermediary should
added by the JOBS Act, may encourage harbor would encourage third-party recordkeepers
have policies and procedures regarding under what
intermediaries to develop adequate procedures to to register as transfer agents and thereby enhance
circumstances it can reasonably rely on such
fully assess whether reliance on an issuer’s protection to investors. The commenter further
representations and when additional investigative
representation is reasonable. We also note that stated that the safe harbor should not apply if a
mstockstill on DSK4VPTVN1PROD with RULES3

steps may be appropriate. See Section II.D.4.


Congress provided a defense to any such liability 645 Proposing Release, 78 FR at 66462.
community bank is utilized because it would not
if an intermediary did not know, and in the exercise have similar recordkeeping experience. See also
646 Id.
of reasonable care could not have known, of the Computershare Letter (stating that a safe harbor
647 Id. at 66464.
untruth or omission. Therefore, and as identified in should apply if another regulated entity, such as a
the Proposing Release, we continue to believe that 648 See, e.g., Arctic Island Letter 5; ASTTC Letter; broker-dealer or a bank, is engaged to perform the
there are appropriate steps that intermediaries CFIRA Letter 8; Computershare Letter; CST Letter; services, which in turn may encourage the use of
might take in exercising reasonable care in light of CSTTC Letter; FAST Letter; Grassi Letter; Joinvestor professional regulated recordkeepers, thus
this liability provision. See Section II.E.5 Letter; Public Startup Letter 2; RocketHub Letter; enhancing overall protection in the crowdfunding
(discussing scope of statutory liability). STA Letter; Tiny Cat Letter. market).

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00047 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
71434 Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations

agent pointed to cost concerns.659 Some a transfer journal or other such log 503.666 In satisfying this requirement,
of these commenters stated that recording any transfer of ownership, (4) we proposed to require an intermediary
alternatives to transfer agents will effect the exchange or conversion of any to, at a minimum, conduct a background
develop, including CPA firms,660 applicable securities, (5) maintain a and securities enforcement regulatory
registered broker-dealers 661 and control book demonstrating the history check on each issuer whose
software applications or other potential historical registration of those securities, securities are to be offered by the
low-cost alternatives.662 Some and (6) countersign or legend physical intermediary and on each officer,
commenters stated that intermediaries certificates of those securities. While the director or 20 Percent Beneficial Owner.
should be permitted to provide the We further proposed in Rule 301(c)(2)
use of a registered transfer agent could
relevant recording services to issuers.663 to require an intermediary to deny
introduce a regulated entity with
One commenter suggested funding access to its platform if the intermediary
experience in maintaining accurate believes the issuer or offering presents
portals should only be permitted to do
so with respect to securities purchased shareholder records, as noted in the the potential for fraud or otherwise
on their platform or transferred among Proposing Release, we believe the issuer raises concerns about investor
platforms, such that they would not be should have flexibility in establishing protection. In satisfying this
permitted to act as ‘‘full-fledged such means, and that such flexibility requirement, the proposed rule would
[b]rokerage firms or transfer agents.’’ 664 may allow for competition among require that an intermediary deny access
service providers that could reduce if it believes that it is unable to
(3) Final Rules operating costs for funding portals. We adequately or effectively assess the risk
After considering the comments, we continue to believe that accurate of fraud of the issuer or its potential
are adopting Rule 301(b), as proposed, recordkeeping can be accomplished by offering. In addition, we proposed in
with one modification. Rule 301(b) as diligent issuers or through a variety of Rule 301(c)(2) that if an intermediary
adopted requires an intermediary to third parties. We note also that, for becomes aware of information after it
have a reasonable basis for believing investors to have confidence in has granted access that causes it to
that an issuer has established means to crowdfunding, issuers and believe the issuer or the offering
keep accurate records of the holders of intermediaries must have a shared presents the potential for fraud or
the securities it would offer and sell interest in ensuring stability and otherwise raises concerns about investor
through the intermediary’s platform, accuracy of records. Therefore, protection, the intermediary would be
and provides that in satisfying this intermediaries should consider the required to promptly remove the
requirement, an intermediary may rely numerous obligations required of a offering from its platform, cancel the
on the representations of the issuer offering, and return (or, for funding
record holder when determining
concerning its means of recordkeeping portals, direct the return of) any funds
whether an issuer has established a
unless the intermediary has reason to that have been committed by investors
question the reliability of those reasonable means to keep accurate
in the offering.
representations. We also are adding a records of the security holders being
provision to Rule 301(b) as adopted offered and sold securities through the (2) Comments on Proposed Rule
stating that an intermediary will be intermediary’s platform. Commenters generally supported
deemed to have satisfied this At the same time, mindful of the role proposed Rule 301(c).667 Commenters
requirement if the issuer has engaged that may be played by registered transfer noted with approval the discretion the
the services of a transfer agent that is agents in maintaining accurate proposed rules would provide
registered under Section 17A of the shareholder records, we are providing a intermediaries.668 The ‘‘reasonable
Exchange Act.665 As we noted in the safe harbor for compliance with Rule basis’’ standard in proposed Rule
Proposing Release, we believe that the 301(b) for those issuers that use a 301(c)(1) also garnered comments. One
recordkeeping function may be registered transfer agent. While we do commenter suggested that the
provided by the issuer, a broker, a not intend to provide regulated entities reasonable basis standard was not strong
transfer agent or some other (registered with a competitive advantage over other enough.669 One commenter stated that
or unregistered) person. We recognize recordkeeping options that comply with having a reasonable basis standard in
that, as a commenter explained, the rule’s requirements, we believe it is the disqualification determination
recordkeeping functions can be would be ‘‘difficult to imagine’’ unless
appropriate to provide certainty as to
extensive and could include, for the Commission maintains a database
Rule 301(b) compliance in instances in
example, the ability to (1) monitor the for intermediaries to search.670
which an issuer has engaged the Commenters had varied views on the
issuance of the securities the issuer
offers and sells through the services of a transfer agent that is proposed requirement in Rule 301(c)(1)
intermediary’s platform, (2) maintain a registered under Section 17A of the for an intermediary to perform a
master security holder list reflecting the Exchange Act. background check on the issuer and
owners of those securities, (3) maintain c. Denial of Platform Access certain of its affiliated persons. Several
commenters supported the requirement,
659 See, e.g., AICPA Letter; Arctic Island Letter 5; (1) Proposed Rule
CapSchedule Letter; CFIRA Letter 8; Computershare 666 See Section II.E.6 (discussing Rule 503 of
Letter; Grassi Letter; Joinvestor Letter; RocketHub We also proposed in Rule 301(c)(1) of Regulation Crowdfunding, which describes
Letter; STA Letter; Tiny Cat Letter. Regulation Crowdfunding a requirement disqualification).
660 See, e.g., Grassi Letter; NYSSCPA Letter.
that an intermediary deny access by an 667 See, e.g., CFA Institute Letter; StartupValley
mstockstill on DSK4VPTVN1PROD with RULES3

661 See Public Startup Letter 2.


issuer to its platform if it has a Letter.
662 See Arctic Island Letter 5. 668 Id.
663 See, e.g., Joinvestor Letter; RocketHub Letter. reasonable basis for believing that an 669 See NYSSCPA Letter (opposing the use of two
664 See RocketHub Letter. issuer, or any of its officers, directors or different standards within Rule 301(c) as it could
665 15 U.S.C. 78q–1(c). We also note that an any person occupying a similar status or lead to confusion and presents vulnerability for
issuer’s exemption from Section 12(g) is performing a similar function, or any 20 fraud to occur through the ‘‘weakest link,’’ and
conditioned on, among other things, that issuer suggesting instead that a ‘‘prudent care’’ standard
engaging a registered transfer agent. See Section
Percent Beneficial Owner is subject to a should be used for both requirements).
II.E.4. disqualification under proposed Rule 670 See Public Startup Letter 2.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00048 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations 71435

but a few commenters suggested ways to it.681 Another commenter stated its view would not only help prevent fraud but
decrease costs.671 One commenter stated that the results should not be made also assist other intermediaries in
that only low-cost, minimum public unless a regulator called them excluding issuers already discovered to
requirements should be into question.682 Another commenter be disqualified.690 Other commenters
implemented,672 while another explained that issuers should be able to disagreed with this suggestion,691 while
commenter suggested that the publish the results if they choose, but one commenter stated that reporting
background checks be required only no such requirement should be placed should be required only if the
after an issuer has met its target offering on intermediaries.683 One commenter Commission or another agency created a
amount so as to prevent unnecessary urged us to ‘‘require that a summary of database for such information.692 One of
expense to the intermediary.673 the sources consulted as part of the these commenters suggested that
Representing a different view, one background check be posted on the intermediaries should be required to
commenter opposed a requirement for [portal’s] Web site.’’ 684 notify a potential issuer when the
background checks to be conducted on As to proposed Rule 301(c)(2) intermediary uses information from a
requiring a funding portal to deny third party to deny the issuer.693
all persons related to an issuer.674
access if the intermediary believes the
Another commenter noted that the (3) Final Rules
issuer or offering presents the potential
checks would be appropriate, but did After considering the comments, we
for fraud or otherwise raises concerns
not support the requirement.675 are adopting Rule 301(c)(1) as proposed.
regarding investor protection, one
Commenters were divided as to commenter stated that the proposed Rule 301(c)(1) requires an intermediary
whether we should set specific requirement conflicts with the to deny access to its platform if the
requirements for background checks. restrictions on a funding portal’s ability intermediary has a reasonable basis for
One commenter stated that the proposal to limit the offerings on its platform in believing that an issuer, or any of its
‘‘fails to set even the most general of proposed Rule 402(b)(1).685 officers, directors (or any person
standards for these checks’’ and Regarding the standard for denial occupying a similar status or performing
‘‘instead relies on intermediaries to use based on potential fraud or investor a similar function), or any 20 Percent
their experience and judgment to reduce protection concerns in the proposed Beneficial Owner is subject to a
the risk of fraud.’’ 676 The same rule, one commenter suggested a disqualification under Rule 503 of
commenter stated that the proposed stronger standard,686 while another Regulation Crowdfunding. We believe
approach is flawed and as such the suggested a weaker standard.687 Other that a ‘‘reasonable basis’’ standard for
checks are likely to be ineffective, commenters suggested that the standard denying access is an appropriate
especially because many intermediaries for an intermediary to deny access to its standard for Rule 301(c)(1), in part
are likely to be inexperienced.677 platform is unclear.688 One commenter because this requirement on an
Several commenters requested further urged the Commission to require that a intermediary is buttressed by the fact
clarification and specification about funding portal post on its Web site a that an issuer independently is subject
required checks.678 However, other description of its standards for to the disqualification provisions under
commenters stated that the Commission determining which offerings present a Rule 503, as discussed below.694 In
should not specify steps for an risk of fraud.’’ 689 addition, Rule 301(c)(1) implements the
intermediary to take in conducting One commenter stated the requirement of Section 4A(a)(5) that an
checks.679 intermediaries should be required to intermediary conduct a background and
report denied issuers, noting that it securities enforcement regulatory
With respect to our request for history check on each issuer whose
comment on whether intermediaries 681 See, e.g., AFR Letter; Consumer Federation
securities are to be offered by the
should be required to make the results Letter.
intermediary, as well as on each of its
682 See Joinvestor Letter.
of background checks public, several officers, directors (or any person
683 See Public Startup Letter 2.
commenters opposed the 684 IAC Recommendation (suggesting that occupying a similar status or performing
requirement,680 while some supported ‘‘[r]equiring posting of information about the a similar function) and 20 Percent
sources consulted in compiling the reports would Beneficial Owners.
671 See, e.g., AFR Letter; CFA Institute Letter; better enable investors to evaluate the thoroughness While we understand commenters’
Grassi Letter; Joinvestor Letter; NYSSCPA Letter. of the background check, thus creating an incentive
672 See RocketHub Letter. for intermediaries to conduct thorough reviews in concerns about the cost of the
673 See Anonymous Letter 4. the absence of clear Commission guidelines’’); see requirement that intermediaries conduct
674 See Zhang Letter.
also BetterInvesting Letter. background checks on issuers and
685 See Guzik Letter 1 (noting that under the
675 See Public Startup Letter 2. certain affiliated persons, we are not
proposed rules, an intermediary which is not a
676 See Consumer Federation Letter.
broker-dealer is prohibited from, at least in that eliminating or limiting the requirement
677 Id.
commenter’s view, ‘‘curating,’’ that is, ‘‘excluding as suggested by commenters because we
678 See, e.g., BetterInvesting Letter; Heritage companies from its platform based upon qualitative believe the requirement is an important
Letter; IAC Recommendation; Jacobson Letter; factors, such as quality of management, valuation of tool for intermediaries to employ when
NSBA Letter. See also RocketHub Letter (stating the company, market size, need for additional
that intermediaries ‘‘should be allowed to satisfy capital, pending litigation, or other qualitative determining whether or not they have a
their obligations by checking commonly used factors which increase the risk to an investor’’). reasonable basis to allow issuers on
databases for criminal background, bankruptcy 686 See note 669 (discussing the NYSSCPA Letter, their platforms. Even though a number
filings, and tax liens, as well as cross check against which suggested a ‘‘prudent care’’ standard for of commenters requested that the
the Office of Foreign Assets Control (OFAC) denying issuers under Rule 301(c)).
sanctions lists, and Specially Designated Nationals 687 See Grassi Letter (stating that an intermediary
mstockstill on DSK4VPTVN1PROD with RULES3

690 See Joinvestor Letter. See also ASSOB Letter


(SDN) and Blocked Persons lists’’); Bullock Letter ‘‘should not be required to vet issuers for potential
(recommending fingerprinting for key issuer fraud other than would be done through the normal and Vann Letter.
691 See, e.g., Public Startup Letter 2 (opposing the
personnel and noting that most sheriff’s course of assessing whether they wish to do
departments in most U.S. counties can take business with a particular issuer’’). requirement but suggesting that the Commission
fingerprints for a small fee). 688 See, e.g., BetterInvesting Letter; Heritage maintain a database of known bad actors).
679 See, e.g., StartupValley Letter; Vann Letter. 692 See StartupValley Letter.
Letter; IAC Recommendation; Jacobson Letter;
680 See, e.g., Grassi Letter; Joinvestor Letter; NSBA Letter. 693 See Vann Letter.

NYSSCPA Letter; Public Startup Letter 2; 689 See IAC Recommendation; see also 694 See Section II.E.6 (discussing issuer

StartupValley Letter. BetterInvesting Letter. disqualification).

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00049 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
71436 Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations

Commission provide specific could expose the individuals at the measures likely will promote
requirements for background and issuer that are subject to a background compliance and help to reduce the risk
securities enforcement regulatory check to harm, for example, if there of fraud with respect to crowdfunding
history checks, we are not establishing were errors in the information made transactions, as required by Section
specific procedures in the final rules. As publicly available. 4A(a)(5). This standard also will provide
we indicated in the Proposing Release, We are adopting Rule 301(c)(2) the Commission with a clear basis to
we believe that the better approach is to substantially as proposed, but with review whether an intermediary’s
allow an intermediary to be guided by certain revisions. As adopted, Rule decision not to deny access to its
its experience and judgment to design 301(c)(2) now contains a ‘‘reasonable platform or cancel an offering was
systems and processes to help reduce basis’’ standard as opposed to the reasonable given the facts and
the risk of fraud in securities-based initially proposed ‘‘believes’’ standard. circumstances.
crowdfunding.695 We also believe that Rule 301(c)(2) requires denial of access
such flexibility could mitigate cost to its platform when the intermediary We are not requiring that an
concerns related to conducting the has a reasonable basis for believing that intermediary report the issuers that have
background and securities enforcement the issuer or offering presents the been denied access to its platforms, as
regulatory history checks. potential for fraud or otherwise raises some commenters suggested, or that the
We are not developing a database of concerns about investor protection.696 intermediary post a summary of the
denied issuers as suggested by some In a conforming change, Rule 301(c)(2) sources consulted as part of the
commenters because we do not believe also requires (i) an intermediary deny background check on its platform along
it would significantly increase investor access to an issuer if it reasonably with a description of the intermediary’s
protection. The requirement to deny an believes that it is unable to adequately standards for determining which
issuer access to a crowdfunding or effectively assess the risk of fraud of offerings present a risk of fraud. We also
platform under the final rules based on the issuer or its potential offering, and are not adopting a requirement, as
fraud or other investor protection (ii) if the intermediary becomes aware of suggested by a commenter, that an
concerns is important to the viability of information after it has granted the intermediary notify a potential issuer
crowdfunding, and the legitimacy of the issuer access to its platform that causes when the intermediary utilizes third-
intermediary. This obligation is the it to reasonably believe that the issuer party information to deny access to the
responsibility of each intermediary, or the offering presents the potential for issuer. As with background checks,
which must make a determination about fraud or otherwise raises concerns discussed above, we believe that the
whether to deny access to an issuer. regarding investor protection, the investor protection goal is sufficiently
While a third party may decide to create intermediary must promptly remove the served by the exclusion of an issuer
a database of denied issuers at some offering from its platform, cancel the from the intermediary’s platform. In
point and an intermediary could use offering and return to investors any addition, we are concerned that such
such a database to help make its funds they may have committed. requirements could add to the cost of
determination as to whether it was We believe that a ‘‘reasonable basis’’ administration and could expose the
required to deny access to an issuer, standard is appropriate for Rule issuers in question to harm, for
such a database could not be used as a 301(c)(2) because it is a more objective example, if there were errors in the
substitute for an intermediary making standard.697 Under this standard, an information made publicly available.
its own determination. intermediary may not ignore facts about
We also are not requiring an Likewise, we do not believe that
an issuer that indicate fraud or investor requiring an intermediary to post to its
intermediary to make publicly available protection concerns such that a
the results of the background checks or Web site a summary of the sources
reasonable person would have denied consulted as part of the background
the sources consulted. We believe that access to the platform or cancelled the
the goal of the background check is check and a description of the
offering. Rule 301(c)(2) is intended to intermediary’s standards for
sufficiently served by the exclusion of give an intermediary an objective
an issuer from the intermediary’s determining which offerings present a
standard regarding the circumstances in risk of fraud would sufficiently increase
platform. We do not believe that making which it must act to protect its investors
the results or sources publicly available investor protection to justify the
from potentially fraudulent issuers or
adds a significant degree of investor burdens, such as those outlined above,
ones that otherwise present red flags
protection under these circumstances, that would be associated with imposing
concerning investor protection. This
given the potential problems that could such requirements. We also note that
objective standard also will make it
arise from such public disclosure of the providing this information on an
easier for an intermediary to assess
results, such as the risk of disclosing intermediary’s Web site may give
whether it would be compliant with
personally identifiable information or potentially fraudulent issuers or those
Rule 301(c)(2) when deciding if it
other information with significant that otherwise present investor
should deny an issuer access or cancel
potential for misuse. In addition, we are protection concerns a roadmap to an
its offering.698 Thus, we believe these
concerned that such requirements could intermediary’s proprietary procedures
add to the cost of administration and 696 See Section II.D.2. (discussing modified Rule for screening for fraud that could assist
402(b)(1), which relates to a funding portal’s ability such issuers with impeding or
695 We disagree with the commenter that to deny access to an issuer). obstructing intermediaries from
697 Adding the reasonable basis standard to Rule
suggested that this method is ineffective because detecting offerings that present a risk of
intermediaries lack experience. See Consumer 301(c)(2) also provides a consistent standard across
fraud.
mstockstill on DSK4VPTVN1PROD with RULES3

Federation Letter. Crowdfunding is a new form of Rule 301, including Rules 301(a), (b) and (c)(1).
capital formation. We believe broker-dealers and 698 Aside from the requirement to deny access to

funding portals will gain the relevant experience issuers under Rule 302(c)(2), it is important to note 301(c)(2) also helps to clarify that a funding portal
that will appropriately position them to develop that intermediaries are permitted to determine would not be providing investment advice or
requirements for conducting background checks whether and under what terms to allow an issuer recommendations, if it denies access to or cancels
required by the rule. In addition, we believe that an to offer and sell securities in reliance on Section an offering because it has a reasonable basis for
intermediary’s interest in developing a successful 4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6)) believing that there is a potential for fraud or other
platform will motivate it to conduct rigorous through their platforms. See Rule 402(b)(1) and investor protection concerns. See Rule 402(b)(10) of
background checks. Section II.D.3. The objective standard under Rule Regulation Crowdfunding and Section II.D.3.i.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00050 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations 71437

4. Account Opening obtain particular information from digitally and that there should be no
investors.702 exemption to allow paper delivery as a
a. Accounts and Electronic Delivery With respect to electronic delivery, substitute.710 Another commenter stated
(1) Proposed Rule some commenters urged that it should that investors should be allowed to
be sufficient for the intermediary simply waive these delivery requirements
Proposed Rule 302(a)(1) of Regulation to make Subpart C materials, such as entirely.711
Crowdfunding would prohibit an educational materials, notices and
intermediary or its associated persons (3) Final Rules
confirmations, available on the
from accepting an investment intermediary’s platform for investors to After considering the comments, we
commitment in a transaction involving access.703 Other commenters broadly are adopting as proposed the account
the offer or sale of securities in reliance opposed permitting intermediaries to opening and electronic delivery
on Section 4(a)(6) unless the investor satisfy their information delivery requirements in Rule 302(a). We are not
has opened an account with the requirement by providing an electronic prescribing particular requirements for
intermediary, and the intermediary has message that informs an investor that account opening. Rather, we believe that
obtained from the investor consent to information can be found on the the final rule provides flexibility to
electronic delivery of materials. intermediary’s platform or an issuer’s intermediaries given that intermediaries
Proposed Rule 302(a)(2) would require Web site.704 One commenter suggested are better positioned than the
an intermediary to provide all that investors may not actually receive Commission to determine what
information required by Subpart C of required disclosures because they will information and processes it will
Regulation Crowdfunding, including, not spend the time to find the require, both as a business decision and
but not limited to, educational information.705 Another commenter to ensure compliance with all
materials, notices and confirmations, suggested that the Commission should applicable regulatory requirements.
through electronic means. ‘‘continue to rely instead on the strong Therefore, for example, an intermediary
and effective policy for electronic can decide whether or not to open a
Proposed Rule 302(a)(2) also would new account for an existing customer.
require an intermediary to provide such delivery of disclosure adopted by the
Commission in the mid-1990s.’’ 706 The We also are not prescribing under the
information through an electronic final rule, as a commenter suggested,
message that either contains the same commenter noted that it would be
‘‘a simple matter to require that any that an intermediary be required to
information, includes a specific link to collect identifying information that
the information as posted on the electronic message through which
disclosures are delivered include, at a could help prevent duplicative or
intermediary’s platform, or provides fraudulent accounts. We believe that
notice of what the information is and minimum, the specific URL where the
required disclosures can be found.’’ 707 even without prescribing particular
that it is located on the intermediary’s account opening requirements
platform or the issuer’s Web site. As One commenter stated it was
concerned that earlier Commission intermediaries should be able to
proposed, Rule 302(a)(2) stated that identify, by collecting basic account
electronic messages would include, but policies on electronic delivery might be
read as implying that paper delivery opening information, those accounts
not be limited to, messages sent via that appear to be duplicative or present
might be permitted in certain
email. red flags of potential fraud.
circumstances.708 This commenter did
However, the final rules do not permit
(2) Comments on the Proposed Rule agree, however, that any electronic
investors to waive the electronic
message through which disclosures are
One commenter suggested that delivery requirements entirely, as one
delivered include, at a minimum, the
intermediaries who are brokers should commenter suggested.712 We believe
specific URL where the required
not be required to open new accounts that electronic delivery of materials in
disclosures can be found.709
for persons who are existing customers In response to our request for connection with crowdfunding offerings
of the broker.699 In response to our comments on whether exceptions to the serves an important and basic investor
request for comments on whether an consent to electronic delivery should be protection function by conveying
intermediary should be required to allowed, one commenter stated that information, such as offering materials,
obtain specific information from that will help investors to make better
account creation and delivery of
investors, and if so what type of informed investment decisions and by a
communication should be completed
information should be required, some method that is appropriately suited to
commenters generally supported 702 See Public Startup Letter 3.
the electronic and Internet-based nature
requiring an intermediary to gather 703 See, e.g., ASSOB Letter; CrowdCheck Letter 1; of crowdfunding transactions.
RocketHub Letter; Wefunder Letter; Vann Letter. As explained in Section II.A.3, Rule
specific information from investors, 704 See, e.g., BetterInvesting Letter; AFR Letter; 100(a)(3) of Regulation Crowdfunding
particularly identifying information that IAC Recommendation; Consumer Federation Letter requires that crowdfunding transactions
could help prevent duplicate or (‘‘The definition of electronic delivery must be be conducted exclusively through an
fraudulent accounts and information revised to ensure the disclosures themselves, and
not just notices of the availability of disclosures, are intermediary’s platform. Rule 302(a)
about other intermediary accounts and
delivered to investors.’’). implements this requirement by
investments.700 A few of these 705 See Consumer Federation Letter. See also requiring that investors consent to
commenters supported the Commission Clapman Letter (suggesting that all issuers and their electronic delivery of materials in
requiring intermediaries to collect materials must be ‘‘publicly accessible for all
connection with crowdfunding
investors’ social security numbers.701 investors to have the same opportunity to invest’’
offerings.713 This requirement applies to
mstockstill on DSK4VPTVN1PROD with RULES3

One commenter opposed the and stating that ‘‘no clubs, or paid to view
investment style platforms would therefore be
Commission requiring intermediaries to allowed’’). 710 See RocketHub Letter.
706 IAC Recommendation; see also BetterInvesting 711 See Public Startup Letter 3.
699 See Arctic Island Letter 2. Letter. 712 Id.
700 See, 707 IAC Recommendation; see also BetterInvesting
e.g., Consumer Federation Letter; 713 Certain requirements of Regulation
Jacobson Letter; RocketHub Letter. Letter. Crowdfunding that require timely actions by issuers
701 See, e.g., Consumer Federation Letter; 708 See CFIRA Letter 12.
and investors will be facilitated by requiring
RocketHub Letter. 709 Id. Continued

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00051 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
71438 Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations

all investors, including an existing specifically text, instant messages, and effecting any further transactions in
customer of a registered broker that has messages sent using social media. securities offered and sold in reliance
not already consented to electronic on Section 4(a)(6).
b. Educational Materials
delivery of materials. Therefore, this (2) Comments on Proposed Rules
requirement will prohibit intermediaries (1) Proposed Rules
from accepting an investment Commenters generally supported
Securities Act Section 4A(a)(3) states
commitment in a Section 4(a)(6) offering distribution of educational materials
that an intermediary must ‘‘provide
from any investor that has not through intermediaries.717 Some stated
such disclosures, including disclosures
consented to electronic delivery. that intermediaries should be required
related to risks and other investor
to submit educational materials to the
We are adopting substantially as education materials, as the Commission Commission or to FINRA because
proposed Rule 302(a)(2), which requires shall, by rule, determine appropriate,’’ oversight and review is needed for
that all information required to be but it does not elaborate on the scope of materials that will be used by
provided by an intermediary under this requirement. As described in unsophisticated investors,718 while
Subpart C be provided through further detail below, proposed Rule others stated that intermediaries should
electronic means. We have considered 302(b)(1) of Regulation Crowdfunding not be required to submit educational
the comments but do not believe that it would require intermediaries to deliver materials to the Commission or to
would be sufficient—or consistent with to investors, at account opening, FINRA because it would be cumbersome
our previous statements about electronic educational materials that are in plain and expensive.719 One commenter
media—for the intermediary simply to language and otherwise designed to stated that the proposed requirements
make Subpart C materials, such as communicate effectively and accurately should be modified to state that
educational materials, notices and certain specified information. Proposed education must be done prior to an
confirmations, available on the Rules 302(b)(1)(i)–(viii) would require investor’s first investment in a Section
intermediary’s platform for investors to the materials to include: 4(a)(6) offering, not at account
• The process for the offer, purchase opening.720
access.714 Rather, unless otherwise
and issuance of securities through the Some commenters suggested that
indicated in the relevant rules of
intermediary; additions be made to the scope of
Subpart C,715 the intermediary must
• the risks associated with investing information proposed to be required in
provide the information either through in securities offered and sold in reliance
(1) an electronic message that contains an intermediary’s educational
on Section 4(a)(6); materials,721 to include information
the information, (2) an electronic • the types of securities that may be
message that includes a specific link to about exit strategies; 722 principles of
offered on the intermediary’s platform investing in crowdfunding and how to
the information as posted on the and the risks associated with each type evaluate investment opportunities in
intermediary’s platform, or (3) an of security, including the risk of having privately held companies; 723 the risks
electronic message that provides notice limited voting power as a result of associated with crowdfunding
of what the information is and notifies dilution; investments; 724 and reasons for
investors that this information is located • the restrictions on the resale of investors to maintain their own personal
on the intermediary’s platform or on the securities offered and sold in reliance records concerning crowdfunding
issuer’s Web site.716 We have added to on Section 4(a)(6); investments.725 One commenter
the rule text other examples of • the types of information that an
electronic messages that are permissible issuer is required to provide in annual 717 See, e.g., Arctic Island Letter 6; CFA Institute
in addition to email messages— reports, the frequency of the delivery of Letter; Cole Letter; Consumer Federation Letter;
that information, and the possibility that Gimpelson Letter 2; Heritage Letter; Jacobson Letter;
NSBA Letter; Patel Letter; RocketHub Letter; STA
consent to electronic delivery of documents. See, the issuer’s obligation to file annual Letter; StartupValley Letter; Wefunder Letter.
e.g., Section II.C.6 (discussing the five-day periods reports may terminate in the future; 718 See, e.g., Consumer Federation Letter;
for investor reconfirmations based on material
changes and issuer cancellation notices). • the limits on the amounts investors Gimpelson Letter 2; Jacobson Letter. See also
714 See Use of Electronic Media, Release No. 34– may invest, as set forth in Section RocketHub Letter (stating that ‘‘if educational
materials are submitted to the Commission for
42728 (Apr. 28, 2000) [65 FR 25843, 25853 (May 4, 4(a)(6)(B); approval, such approval should act to limit liability
2000)] (discussing the ‘‘access equals delivery’’ • the circumstances in which the of the Portal under the Act’’).
concept and citing Use of Electronic Media for
Delivery Purposes, Release No. 34–36345 (Oct. 6,
issuer may cancel an investment 719 See, e.g., Arctic Island Letter 6; Joinvestor

commitment; Letter; StartupValley Letter; Wefunder Letter.


1995) [60 FR 53548, 53454 (Oct. 13, 1995)]).
• the limitations on an investor’s
720 See Arctic Island Letter 6. The commenter also
715 For example, Rule 303(a) separately requires
stated that the educational material requirements
that an intermediary must make issuer information right to cancel an investment should only apply to unaccredited investors, but we
publicly available on its platform, and so we do not commitment; note that the requirement under Section 4A(a)(4)
believe that it is necessary to further require
intermediaries to send an electronic message • the need for the investor to consider runs to ‘‘each investor.’’ As discussed above, we
whether investing in a security offered believe that Congress intended for crowdfunding
regarding the posting of issuer materials.
transactions under Section 4(a)(6) to be available
716 As noted above, this electronic message could and sold in reliance on Section 4(a)(6) equally to all types of investors. Consistent with
include a specific link to the information as posted is appropriate for him or her; and that approach, we do not believe at this time it
on the intermediary’s platform. However, we are
not requiring intermediaries to provide a link to
• that following completion of an would be appropriate to tailor the educational
offering, there may or may not be any requirements for any particular type of investor or
direct investors to the intermediary’s platform or to create an exemption for accredited investors.
the issuer’s Web site where the information is ongoing relationship between the issuer Further, issuers can rely on other exemptions to
located. We believe that the final rule provides and intermediary.
mstockstill on DSK4VPTVN1PROD with RULES3

offer and sell securities to accredited investors or


some flexibility to intermediaries when providing
required information through electronic messages
Proposed Rule 302(b)(2) would institutional investors.
721 See, e.g., Anonymous Letter 1; Gimpelson
given that intermediaries are well-positioned to further require intermediaries to make
Letter 2; RocketHub Letter; STA Letter; Angel Letter
determine how best to ensure compliance with all the current version of the educational 1.
applicable regulatory requirements. We also believe materials available on their platforms, 722 See Anonymous Letter 1.
that, because of the widespread use of the Internet,
as well as advances in technology that allow
and to make revised materials available 723 See Gimpelson Letter 2.

funding portals to send various electronic messages, to all investors before accepting any 724 See RocketHub Letter.

our final rule requires sufficient notice to investors. additional investment commitments or 725 See STA Letter.

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00052 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations 71439

suggested that educational materials commenter also stated that regulators and issuer reporting.736 The
‘‘should include an industry standard should test the materials with investors circumstances in which an investor can
disclosure document on the benefits and to ensure their effectiveness.733 cancel an investment commitment and
risks of crowdfunding investments.’’ 726 One commenter stated that we should obtain a return of his or her funds are
This commenter indicated that ‘‘having not limit or specify the type of particularly important to an investor’s
these generic risk factors in the industry electronic media being used to understanding of the investment process
standard educational materials will help communicate educational material.734 and may affect an investor’s decision to
focus the company specific disclosure Finally, one commenter opposed all the consider any offerings made pursuant to
on the factors that are most educational requirements for Section 4(a)(6). The items required to be
important.’’ 727 intermediaries, and suggested instead included, pursuant to Rule 302(b)(1)(i)
Some commenters suggested that that the Commission itself, rather than through (viii), in the educational
intermediaries should be required to intermediaries, should provide investor materials are basic terms, relevant to
design questionnaires to increase educational materials to both investors transactions conducted in reliance on
investor knowledge and to monitor and issuers with funding portals linking Section 4(a)(6), of which all investors
whether investors actually access to, for example, the SEC Web page or an should be aware before making an
materials.728 One commenter suggested open source Web site containing any investment commitment. Furthermore,
that in addition to an ‘‘interactive Commission drafted educational information on the various types of
questionnaire,’’ the Commission should materials.735 securities that can be available for
also ‘‘require that investors reaffirm purchase on the intermediary’s
each time they invest that they (3) Final Rules platform, any applicable resale
understand the risks associated with After considering the comments, we restrictions, and the risks associated
crowdfunding, can afford to lose their are adopting Rule 302(b) relating to with each type of security, including the
entire investment, and do not expect to educational materials substantially as risk of having limited voting power as
need the funds being invested in the proposed, but adding one further a result of dilution can affect an
near term.’’ 729 requirement as to the content of the investor’s decision to consider any
Some commenters stated that we materials. We believe that, consistent offerings made pursuant to Section
should develop model educational with Section 4A(a)(3) it is appropriate 4(a)(6). In addition, we are adding Rule
materials for investors or specify the that intermediaries, rather than the 302(b)(1)(ix) to require the educational
content for intermediaries.730 One Commission (as a commenter materials to indicate that under certain
commenter suggested that the suggested), be required to provide such circumstances an issuer may cease to
Commission, state securities regulators, disclosures, including disclosures publish annual reports and, therefore,
and FINRA, together, should develop ‘‘a related to risks and other investor an investor may not continually have
sample guide’’ designed to alert education materials as the Commission current financial information about the
investors to the risks of crowdfunding determines to be appropriate. We issuer. We are adding this requirement
including, among other things, ‘‘the believe that intermediaries are better because we believe that it is important
high failure rate of small startup equipped and positioned, as compared for investors to be able to consider the
companies, the fact that shares will not to the Commission, to provide ongoing availability of information
be set based on market data and may educational materials to investors that about an issuer’s financial condition
therefore be mispriced, the lack of are reasonably tailored to an when they assess whether to invest in
liquidity, and the risk that, absent intermediary’s offerings and investors, that issuer.
appropriate protections, the value of The final rule provides each
particularly in light of their access to
their shares could be diluted.’’ 731 This intermediary with sufficient flexibility
and interactions with investors.
commenter also suggested that the guide to determine: (1) The content of the
We further believe that the scope of educational materials, outside of the
‘‘should include explicit warnings that information that we are requiring to be
investors should not invest in minimum specified information
included in an intermediary’s required to be included under Rule
crowdfunding unless they can afford to educational materials is appropriate. In
lose the entire amount of their 302(b)(1)(i)–(viii), and (2) the overall
the Proposing Release we discussed our format and manner of presentation of
investment or if they expect to have an rationales for requiring the different
immediate need for the funds.’’ 732 This the materials. We believe this flexibility
types of disclosures in the educational will allow the intermediary to prepare
materials. As we noted in the Proposing and present educational materials in a
726 See Angel Letter 1.
727 Id.
Release, we generally drew upon the manner reasonably tailored to the types
(suggesting an issuer-specific disclosure
document).
statutory provisions when including of offerings on the intermediary’s
728 See, e.g., AFR Letter; BetterInvesting Letter; disclosures required in the educational platform and the types of investors
Consumer Federation Letter; IAC Recommendation. materials relating to the risks of accessing its platform. While we have
One commenter also suggested requiring investing in securities offered and sold determined not to provide model
intermediaries to post a list of previous offerings on in reliance on Section 4(a)(6), investors’
their Web sites with information about the educational materials, impose
offerings. See Angel Letter 1. cancellation rights, resale restrictions additional content (beyond those
729 IAC Recommendation; see also BetterInvesting
proposed) or format requirements,
Letter. 733 Id. (suggesting that the Commission should
730 See, e.g., CFA Institute Letter; Guzik Letter 1;
mandate particular language or manner
take additional steps ‘‘to strengthen requirements
Heritage Letter; Jacobson Letter; Joinvestor Letter; with regard to content and delivery of educational of presentation, or require that an
mstockstill on DSK4VPTVN1PROD with RULES3

NSBA Letter; STA Letter. See also CfPA Letter materials in order to increase the likelihood both intermediary design an investor
(stating that guidance on the requirements for that they will be read and that they will clearly questionnaire, as suggested by
educational materials and certification of convey the essential information’’); see also CFIRA commenters, the final rules do not
compliance should be created and administered by Letter 12 (agreeing with IAC’s suggestion that the
an industry-related body with approval and Commission ‘‘could establish a set of standard prohibit an intermediary from providing
oversight by the Commission). educational requirements for the industry that additional educational materials if they
731 IAC Recommendation; see also BetterInvesting could be adopted by intermediaries’’).
Letter. 734 See Gimpelson Letter 2. 736 See Securities Act Sections 4A(a)(4), 4A(a)(7),
732 Id. 735 See Public Startup Letter 3. 4A(e), and 4A(b)(4).

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00053 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
71440 Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations

choose. For example, because the final Rule 302(b)(2) requires an investors, at the account opening stage,
rules do not require an intermediary to intermediary to keep its educational that any person who promotes an
design a questionnaire, intermediaries materials accurate. Accordingly, an issuer’s offering for compensation,
maintain the flexibility in meeting the intermediary must update the materials whether past or prospective, or who is
rule’s requirements to determine as needed to keep them current. In a founder or an employee of an issuer
whether such a disclosure format would addition, if an intermediary makes a that engages in promotional activities on
be cost effective and appropriate material revision to its educational behalf of the issuer on the
particularly in light of that materials, the rule requires that the intermediary’s platform, must clearly
intermediary’s particular business intermediary make the revised disclose in all communications on the
model. We further note the suggestion educational materials available to all platform the receipt of the
by some commenters that we require investors before accepting any compensation and the fact that he or she
additional information in the additional investment commitments or is engaging in promotional activities on
educational materials, including, for effecting any further crowdfunding behalf of the issuer.
example, requiring an intermediary to transactions. An intermediary will also
(2) Comments on Proposed Rules
discuss exit strategies, how to evaluate be required to obtain a representation
investment opportunities in privately that an investor has reviewed the Some commenters suggested that the
held companies, and the reasons for intermediary’s most recent educational promoter disclosures should not be
investors to maintain their own personal materials before accepting an made at account opening where they
records concerning crowdfunding investment commitment from the may be ignored.741 One commenter
investments. Although these suggestions investor.739 proposed that the disclosures should be
may provide investors with some useful We believe that these requirements made ‘‘prior to any participant on the
will benefit investors by helping to platform being able to post comments,
information, we are not persuaded that
ensure that they receive information reviews, ratings, or other promotional
imposing such additional requirements
about key aspects of investing through activities.’’ 742
in the final rule is necessary at this time
as it is unclear that those suggestions the intermediary’s platform, including (3) Final Rules
would significantly strengthen the aspects that may have changed since the
last time they received the materials, We are adopting, as proposed, Rule
investor protections that will result from 302(c) requiring intermediaries to
Rule 302(b) as adopted. We also believe prior to making investment
commitments, as that information can inform investors, at the time of account
that adding such requirements may opening, that promoters must clearly
overly complicate these educational influence their investment decisions.
We also believe that requiring disclose in all communications on the
materials and increase the costs platform the receipt of the
associated with preparing them. intermediaries to update materials on an
ongoing basis, rather than at certain compensation and the fact that he or she
Therefore, we have determined to allow is engaging in promotional activities on
intermediaries the flexibility to prepare specified intervals, will help to ensure
that those materials are updated as behalf of the issuer. As noted in the
educational materials reasonably Proposing Release, in addition to the
tailored to their offerings and investors, circumstances warrant, which, in turn,
will provide investors with more information required under Rule 302(c),
provided the materials meet the promoters will also be required to
standards and include the information current information and increase
investor protection. comply with Section 17(b) of the
required to be provided under Rule Securities Act, which requires
302(b).737 c. Promoters promoters to fully disclose to investors
We also recognize that FINRA or any (1) Proposed Rule the receipt, whether past or prospective,
other registered national securities of consideration and the amount of that
Securities Act Section 4A(b)(3) compensation.743 We believe that the
association may implement additional provides that an issuer shall ‘‘not
educational materials requirements. We disclosures required by Rule 302(c) will
compensate or commit to compensate, help alert investors at the outset, rather
are not, however, as one commenter directly or indirectly, any person to
suggested,738 requiring at this time that than after the account is opened, of the
promote its offerings through fact that information about the
intermediaries submit their educational communication channels provided by a
materials to the Commission or to a promotional activities of issuers or
broker or funding portal, without taking representatives of issuers will be
registered national securities association such steps as the Commission shall, by
for review and approval. We note, disclosed at a later time on the platform,
rule, require to ensure that such person pursuant to Rule 303(c)(4). We believe
however, that a registered national clearly discloses the receipt, past or
securities association could propose that the account opening is the
prospective, of such compensation, appropriate time for this disclosure
such a requirement as its oversight of upon each instance of such promotional
intermediaries in this new market because it gives investors notice of
communication.’’ Under Rule 205 of potential promotional activities by
evolves. Any such proposed Regulation Crowdfunding, as discussed
requirement would be considered by the issuers and their representatives prior to
above, an issuer can compensate making investment commitments. As
Commission, and subject to public persons to promote its offerings through
notice and opportunity for comment, discussed below, Rule 303(c)(4)
communications channels provided by separately mandates that intermediaries
pursuant to Exchange Act Section 19(b) the intermediary on its platform, where
and Rule 19b–4. require any person, when posting a
certain conditions are met.740 comment in the communication
mstockstill on DSK4VPTVN1PROD with RULES3

We separately proposed in Rule channels, to clearly disclose with each


737 We note that educational materials may be
302(c) of Regulation Crowdfunding to
subject to examination and inspection. See Section
II.D.5. (describing the recordkeeping obligations of require the intermediary to inform 741 See, e.g., Arctic Island Letter 6; Wefunder

funding portals). Letter.


738 See RocketHub Letter (stating that ‘‘if 739 See Rule 303(b)(2)(i) of Regulation 742 See Arctic Island Letter 6.

educational materials are submitted to the Crowdfunding. 743 See Proposing Release at 78 FR 66467–68. See

Commission for approval, such approval should act 740 See Rule 205 of Regulation Crowdfunding and also Section 17(b) of the Securities Act (15 U.S.C.
to limit liability of the Portal under the Act’’). the discussion in Section II.B.5. 77q(b)).

VerDate Sep<11>2014 00:05 Nov 14, 2015 Jkt 238001 PO 00000 Frm 00054 Fmt 4701 Sfmt 4700 E:\FR\FM\16NOR3.SGM 16NOR3
Federal Register / Vol. 80, No. 220 / Monday, November 16, 2015 / Rules and Regulations 71441

posting whether he or she is a founder (3) Final Rules implement this provision by requiring
or an employee of an issuer engaging in We are adopting Rule 302(d) as each intermediary in a transaction
promotional activities on behalf of the proposed. We believe that requiring involving the offer or sale of securities
issuer, or receives compensation, intermediaries to provide information to in reliance on Section 4(a)(6) to make
whether in the past or prospectively, to investors about the manner in which available to the Commission and to
promote an issuer’s offering. We believe they will be compensated at account investors any information required to be
that the disclosure requirements of Rule opening, rather than at a subsequent provided by the issuer under Rules 201
302(c), when coupled with the time, will provide investors with notice and 203(a) of proposed Regulation
additional disclosure requirements in of how the intermediary is being Crowdfunding. As proposed, Rule
Rule 303(c)(4), will promote a compensated at a threshold stage in the 303(a) would require that this
transparent information sharing process relationship (i.e., account opening), information: (1) Be publicly available on
whereby investors are able to discern which, in turn, will help investors make the intermediary’s platform, in a manner
the sources of information that they are better-informed decisions. We note that that reasonably permits a person
receiving and any potential conflicts of the final rules—unlike the proposed accessing the platform to save,
interest by those sources. download or otherwise store the
rules—allow intermediaries to receive a
information; (2) be made publicly
d. Compensation Disclosure financial interest in the issuer as
available on the intermediary’s platform
compensation, subject to certain
(1) Proposed Rule for a minimum of 21 days before any
limitations.748 Therefore, an
securities are sold in the offering, during
Proposed Rule 302(d) of Regulation intermediary that receives or may
which time the intermediary may accept
Crowdfunding would require that receive a financial interest in an issuer
investment commitments; and (3)
intermediaries, when establishing an in the future as compensation for its
remain publicly available on the
account for an investor, clearly disclose services is required to disclose that
intermediary’s platform until the offer
the manner in which they will be compensation at account opening. We
and sale of securities is completed or
compensated in connection with also note that Rule 201(o), which is cancelled (including any additional
offerings and sales of securities made in discussed in Section II.B.1 and information provided by the issuer). In
reliance on Section 4(a)(6). This separately requires an issuer to disclose addition, under Proposed Rule
requirement would help to ensure in its offering materials a description of 303(a)(4), an intermediary would be
investors are aware of any potential the intermediary’s interests in the prohibited from requiring any person to
conflicts of interest that may arise from issuer’s transaction, including the establish an account with the
the manner in which the intermediary is amount of compensation paid or to be intermediary in order to access this