# Crowdfunding > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2015-28220 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** November 16, 2015 - **Citation:** 80 FR 71388 ## Text SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 200, 227, 232, 239, 240, 249, 269, and 274 [Release Nos. 33-9974; 34-76324; File No. S7-09-13] RIN 3235-AL37 Crowdfunding AGENCY: Securities and Exchange Commission. ACTION: Final rule. SUMMARY: The Securities and Exchange Commission is adopting new Regulation Crowdfunding under the Securities Act of 1933 and the Securities Exchange Act of 1934 to implement the requirements of Title III of the Jumpstart Our Business Startups Act. Regulation Crowdfunding prescribes rules governing the offer and sale of securities under new Section 4(a)(6) of the Securities Act of 1933. Regulation Crowdfunding also provides a framework for the regulation of registered funding portals and broker-dealers that issuers are required to use as intermediaries in the offer and sale of securities in reliance on Section 4(a)(6). In addition, Regulation Crowdfunding conditionally exempts securities sold pursuant to Section 4(a)(6) from the registration requirements of Section 12(g) of the Securities Exchange Act of 1934. DATES: The final rules and forms are effective May 16, 2016, except that instruction 3 adding part 227 and instruction 15 amending Form ID are effective January 29, 2016. FOR FURTHER INFORMATION CONTACT: With regard to requirements for issuers, Eduardo Aleman, Julie Davis, or Amy Reischauer, Division of Corporation Finance, at (202) 551-3460, and with regard to requirements for intermediaries, Joseph Furey, Joanne Rutkowski, Timothy White, Devin Ryan, or Erin Galipeau, Division of Trading and Markets, at (202) 551-5550, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549. SUPPLEMENTARY INFORMATION: Table of Contents I. Introduction A. Background B. Title III of the JOBS Act II. Final Rules Implementing Regulation Crowdfunding A. Crowdfunding Exemption 1. Limit on Capital Raised 2. Investment Limits 3. Transaction Conducted Through an Intermediary 4. Exclusion of Certain Issuers From Eligibility Under Section 4(a)(6) B. Issuer Requirements 1. Disclosure Requirements 2. Ongoing Reporting Requirements 3. Form C and Filing Requirements 4. Prohibition on Advertising Terms of the Offering 5. Compensation of Persons Promoting the Offering 6. Other Issuer Requirements C. Intermediary Requirements 1. Definitions of Funding Portals and Associated Persons 2. General Requirements for Intermediaries 3. Measures To Reduce Risk of Fraud 4. Account Opening 5. Requirements With Respect to Transactions 6. Completion of Offerings, Cancellations and Reconfirmations 7. Payments to Third Parties D. Additional Funding Portal Requirements 1. Registration Requirement 2. Exemption From Broker-Dealer Registration 3. Safe Harbor for Certain Activities 4. Compliance 5. Records To Be Created and Maintained by Funding Portals E. Miscellaneous Provisions 1. Insignificant Deviations From Regulation Crowdfunding 2. Restrictions on Resales 3. Information Available to States 4. Exemption From Section 12(g) 5. Scope of Statutory Liability 6. Disqualification Provisions 7. Secondary Market Trading III. Economic Analysis A. Baseline 1. Current Methods of Raising Up to $1 Million of Capital 2. Current Sources of Funding for Startups and Small Businesses That Could Be Substitutes or Complements To Crowdfunding 3. Current Crowdfunding Practices 4. Survival Rates for Startups and Small Businesses 5. Market Participants B. Analysis of Final Rules 1. Broad Economic Considerations 2. Crowdfunding Exemption 3. Issuer Requirements 4. Intermediary Requirements 5. Additional Funding Portal Requirements 6. Insignificant Deviations 7. Relationship With State Law 8. Exemption From Section 12(g) 9. Disqualification IV. Paperwork Reduction Act A. Background B. Estimate of Issuers and Intermediaries 1. Issuers 2. Intermediaries That Are Registered Brokers 3. Funding Portals C. Estimate of Burdens 1. Issuers 2. Brokers and Funding Portals D. Collections of Information Are Mandatory E. Confidentiality F. Retention Period of Recordkeeping Requirements V. Final Regulatory Flexibility Act Analysis A. Need for the Rule B. Significant Issues Raised by Public Comments C. Small Entities Subject to the Rules D. Projected Reporting, Recordkeeping and Other Compliance Requirements E. Agency Action To Minimize Effect on Small Entities 1. Issuers 2. Intermediaries VI. Statutory Authority Exhibit A I. Introduction A. Background Crowdfunding is a relatively new and evolving method of using the Internet to raise capital to support a wide range of ideas and ventures. An entity or individual raising funds through crowdfunding typically seeks small individual contributions from a large number of people. Individuals interested in the crowdfunding campaign—members of the “crowd”—may share information about the project, cause, idea or business with each other and use the information to decide whether to fund the campaign based on the collective “wisdom of the crowd.” The Jumpstart Our Business Startups Act (the “JOBS Act”), 1 enacted on April 5, 2012, establishes a regulatory structure for startups and small businesses to raise capital through securities offerings using the Internet through crowdfunding. The crowdfunding provisions of the JOBS Act were intended to help provide startups and small businesses with capital by making relatively low dollar offerings of securities, featuring relatively low dollar investments by the “crowd,” less costly. 2 Congress included a number of provisions intended to protect investors who engage in these transactions, 3 including investment limits, required disclosures by issuers, and a requirement to use regulated intermediaries. The provisions also permit Internet-based platforms to facilitate the offer and sale of securities in crowdfunding transactions without having to register with the Commission as brokers. 1 Pub. L. 112-106, 126 Stat. 306 (2012). 2 See, e.g., congressional statements regarding crowdfunding bills that were precursors to the JOBS Act: 157 Cong. Rec. S8458-02 (daily ed. Dec. 8, 2011) (statement of Sen. Jeff Merkley) (“Low-dollar investments from ordinary Americans may help fill the void, providing a new avenue of funding to the small businesses that are the engine of job creation. The CROWDFUND Act would provide startup companies and other small businesses with a new way to raise capital from ordinary investors in a more transparent and regulated marketplace.”); 157 Cong. Rec. H7295-01 (daily ed. Nov. 3, 2011) (statement of Rep. Patrick McHenry) (“[H]igh net worth individuals can invest in businesses before the average family can. And that small business is limited on the amount of equity stakes they can provide investors and limited in the number of investors they can get. So, clearly, something has to be done to open these capital markets to the average investor[.]”). 3 See, e.g., congressional statements regarding crowdfunding bills that were precursors to the JOBS Act: 158 Cong. Rec. S1781 (daily ed. Mar. 19, 2012) (statement of Sen. Carl Levin) (“Our bill creates new opportunities for crowdfunding but establishes basic regulatory oversight, liability, and disclosure rules that will give investors the confidence to participate in this promising emerging source of money for growing companies.”). In the United States, crowdfunding generally has not involved the offer of a share in any financial returns or profits that the fundraiser may expect to generate from business activities financed through crowdfunding. Such a profit or revenue-sharing model—sometimes referred to as the “equity model” of crowdfunding—could trigger the application of the federal securities laws because it likely would involve the offer and sale of a security. Under the Securities Act of 1933 (“Securities Act”), the offer and sale of securities is required to be registered unless an exemption is available. Some observers have stated that registered offerings are not feasible for raising smaller amounts of capital, as is done in a typical crowdfunding transaction, because of the costs of conducting a registered offering and the resulting ongoing reporting obligations under the Securities Exchange Act of 1934 (“Exchange Act”) that may arise as a result of the offering. Limitations under existing regulations, including purchaser qualification requirements for offering exemptions that permit general solicitation and general advertising, have made private placement exemptions generally unavailable for crowdfunding transactions, which are intended to involve a large number of investors 4 and not be limited to investors that meet specific qualifications. 5 4 In this release, “investors” includes investors and potential investors, as the context requires. See Rule 100(d) of Regulation Crowdfunding. 5 See Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings, Release No. 33-9415 (July 10, 2013) [78 FR 44771 (July 24, 2013)] (adopting rules to implement Title II of the Jumpstart Our Business Startups Act) (“Rule 506(c) Adopting Release”). Title II of the JOBS Act directed the Commission to amend Rule 506 of Regulation D to permit general solicitation or general advertising in offerings made under Rule 506, provided that all purchasers of the securities are accredited investors. Accredited investors include natural persons who meet certain income or net worth thresholds. Although this rule facilitates the type of broad solicitation emblematic of crowdfunding, crowdfunding is premised on permitting sales of securities to any interested person, not just to investors who meet specific qualifications, such as accredited investors. Moreover, someone who operates a Web site to effect the purchase and sale of securities for the account of others generally would, under pre-existing regulations, be required to register with the Commission as a broker-dealer and comply with the laws and regulations applicable to broker-dealers. 6 A person that operates such a Web site only for the purchase of securities of startups and small businesses, however, may find it impractical in view of the limited nature of that person's activities and business to register as a broker-dealer and operate under the full set of regulatory obligations that apply to broker-dealers. 6 Exchange Act Section 15(a)(1) generally makes it unlawful for a broker or dealer to effect any transactions in, or induce the purchase or sale of, any security unless that broker or dealer is registered with the Commission pursuant to Exchange Act Section 15(b). 15 U.S.C. 78o(a). See discussion in Section II.D.2. Because brokers and dealers both register as broker-dealers ( i.e., there is no separate “broker” or “dealer” registration under Exchange Act Section 15(b)), we use the term “broker-dealer” in this release. B. Title III of the JOBS Act Title III of the JOBS Act (“Title III”) added new Securities Act Section 4(a)(6), 7 which provides an exemption from the registration requirements of Securities Act Section 5 8 for certain crowdfunding transactions. To qualify for the exemption under Section 4(a)(6), crowdfunding transactions by an issuer (including all entities controlled by or under common control with the issuer) must meet specified requirements, including the following: 7 15 U.S.C. 77d(a)(6). 8 15 U.S.C. 77e. • The amount raised must not exceed $1 million in a 12-month period; • individual investments in all crowdfunding issuers in a 12-month period are limited to: ○ The greater of $2,000 or 5 percent of annual income or net worth, if annual income or net worth of the investor is less than $100,000; and ○ 10 percent of annual income or net worth (not to exceed an amount sold of $100,000), if annual income or net worth of the investor is $100,000 or more; and • transactions must be conducted through an intermediary that either is registered as a broker-dealer or is registered as a new type of entity called a “funding portal.” In addition, Title III: • Adds Securities Act Section 4A, 9 which requires, among other things, that issuers and intermediaries that facilitate transactions between issuers and investors in reliance on Section 4(a)(6) provide certain information to investors and potential investors, take other actions and provide notices and other information to the Commission; 9 15 U.S.C. 77a. • adds Exchange Act Section 3(h), 10 which requires the Commission to adopt rules to exempt, either conditionally or unconditionally, “funding portals” from having to register as a broker-dealer pursuant to Exchange Act Section 15(a)(1); 11 10 15 U.S.C. 78c(h). 11 15 U.S.C. 78o(a)(1). • mandates that the Commission establish disqualification provisions under which an issuer would not be able to avail itself of the Section 4(a)(6) exemption if the issuer or an intermediary was subject to a disqualifying event; and • adds Exchange Act Section 12(g)(6), 12 which requires the Commission to adopt rules to exempt from the registration requirements of Section 12(g), 13 either conditionally or unconditionally, securities acquired pursuant to an offering made in reliance on Section 4(a)(6). 12 15 U.S.C. 78l(g)(6). 13 15 U.S.C. 78l(g). On October 23, 2013, we proposed new rules and forms to implement Title III of the JOBS Act. 14 We received over 485 comment letters on the Proposing Release, including from professional and trade associations, investor organizations, law firms, investment companies and investment advisers, broker-dealers, potential funding portals, members of Congress, the Commission's Investor Advisory Committee, 15 state securities regulators, government agencies, potential issuers, accountants, individuals and other interested parties. We have reviewed and considered all of the comments that we received on the Proposing Release and on Title III of the JOBS Act. 16 In this release, we are adopting new rules and forms to implement Sections 4(a)(6) and 4A and Exchange Act Sections 3(h) and 12(g)(6). The rules are described in detail below. 14 See Rel. No. 33-9470 (Oct. 23, 2013) [78 FR 66427 (Nov. 5, 2013)] (the “Proposing Release”), available at: http://www.sec.gov/rules/proposed/2013/33-9470.pdf. 15 The SEC Investor Advisory Committee (“Investor Advisory Committee”) was established in April 2012 pursuant to Section 911 of the Dodd-Frank Wall Street Reform and Consumer Protection Act [Pub. L. 111-203, sec. 911, 124 Stat. 1376, 1822 (July 21, 2010)] (the “Dodd-Frank Act”) to advise the Commission on regulatory priorities, the regulation of securities products, trading strategies, fee structures, the effectiveness of disclosure, initiatives to protect investor interests and to promote investor confidence and the integrity of the securities marketplace. The Dodd-Frank Act authorizes the Investor Advisory Committee to submit findings and recommendations for review and consideration by the Commission. 16 To facilitate public input on JOBS Act rulemaking before the issuance of rule proposals, the Commission invited members of the public to make their views known on various JOBS Act initiatives in advance of any rulemaking by submitting comment letters to the Commission's Web site at http://www.sec.gov/spotlight/ jobsactcomments.shtml. The comment letters relating to Title III of the JOBS Act submitted in response to this invitation are located at http://www.sec.gov/comments/jobs-title-ii/jobs-title-iii.shtml. II. Final Rules Implementing Regulation Crowdfunding Regulation Crowdfunding, among other things, permits individuals to invest in securities-based crowdfunding transactions subject to certain thresholds, limits the amount of money an issuer can raise under the crowdfunding exemption, requires issuers to disclose certain information about their offers, and creates a regulatory framework for the intermediaries that facilitate the crowdfunding transactions. As an overview, under the final rules: • An issuer is permitted to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period; • Individual investors, over the course of a 12-month period, are permitted to invest in the aggregate across all crowdfunding offerings up to: ○ If either their annual income or net worth is less than $100,000, then the greater of: $2,000 or 5 percent of the lesser of their annual income or net worth. ○ If both their annual income and net worth are equal to or more than $100,000, then 10 percent of the lesser of their annual income or net worth; and • During the 12-month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000. Certain companies are not eligible to use the Regulation Crowdfunding exemption. Ineligible companies include non-U.S. companies, companies that already are Exchange Act reporting companies, certain investment companies, companies that are disqualified under Regulation Crowdfunding's disqualification rules, companies that have failed to comply with the annual reporting requirements under Regulation Crowdfunding during the two years immediately preceding the filing of the offering statement, and companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies. Securities purchased in a crowdfunding transaction generally cannot be resold for a period of one year. Holders of these securities do not count toward the threshold that requires an issuer to register its securities with the Commission under Section 12(g) of the Exchange Act if the issuer is current in its annual reporting obligation, retains the services of a registered transfer agent and has less than $25 million in assets. Disclosure by Issuers. The final rules require issuers conducting an offering pursuant to Regulation Crowdfunding to file certain information with the Commission and provide this information to investors and the relevant intermediary facilitating the crowdfunding offering. Among other things, in its offering documents, the issuer is required to disclose: • Information about officers and directors as well as owners of 20 percent or more of the issuer; • A description of the issuer's business and the use of proceeds from the offering; • The price to the public of the securities or the method for determining the price, the target offering amount, the deadline to reach the target offering amount, and whether the issuer will accept investments in excess of the target offering amount; • Certain related-party transactions; • A discussion of the issuer's financial condition; and • Financial statements of the issuer that are, depending on the amount offered and sold during a 12-month period, accompanied by information from the issuer's tax returns, reviewed by an independent public accountant, or audited by an independent auditor. An issuer relying on these rules for the first time would be permitted to provide reviewed rather than audited financial statements, unless financial statements of the issuer are available that have been audited by an independent auditor. Issuers are required to amend the offering document during the offering period to reflect material changes and provide updates on the issuer's progress toward reaching the target offering amount. In addition, issuers relying on the Regulation Crowdfunding exemption are required to file an annual report with the Commission and provide it to investors. Crowdfunding Platforms. One of the key investor protections of Title III of the JOBS Act is the requirement that Regulation Crowdfunding transactions take place through an SEC-registered intermediary, either a broker-dealer or a funding portal. Under Regulation Crowdfunding, offerings must be conducted exclusively through a platform operated by a registered broker or a funding portal, which is a new type of SEC registrant. The rules require these intermediaries to: • Provide investors with educational materials; • Take measures to reduce the risk of fraud; • Make available information about the issuer and the offering; • Provide communication channels to permit discussions about offerings on the platform; and • Facilitate the offer and sale of crowdfunded securities. The rules prohibit funding portals from: • Offering investment advice or making recommendations; • Soliciting purchases, sales or offers to buy securities offered or displayed on its platform; • Compensating promoters and others for solicitations or based on the sale of securities; and • Holding, possessing, or handling investor funds or securities. The rules provide a safe harbor under which funding portals can engage in certain activities consistent with these restrictions. The staff will undertake to study and submit a report to the Commission no later than three years following the effective date of Regulation Crowdfunding on the impact of the regulation on capital formation and investor protection. The report will include, but not be limited to, a review of: (1) Issuer and intermediary compliance; (2) issuer offering limits and investor investment limits; (3) incidence of fraud, investor losses, and compliance with investor aggregates; (4) intermediary fee and compensation structures; (5) measures intermediaries have taken to reduce the risk of fraud, including reliance on issuer and investor representations; (6) the concept of a centralized database of investor contributions; (7) intermediary policies and procedures; (8) intermediary recordkeeping practices; and (9) secondary market trading practices. A. Crowdfunding Exemption Section 4(a)(6) provides an exemption from the registration requirements of Securities Act Section 5 for certain crowdfunding transactions. To qualify for this exemption, crowdfunding transactions by an issuer must meet specified requirements, including limits on the dollar amount of the securities that may be sold by an issuer and the dollar amount that may be invested by an individual in a 12-month period. The crowdfunding transaction also must be conducted through a registered intermediary that complies with specified requirements. 17 Title III also provides limitations on who may rely on the exemption and establishes specific liability provisions for material misstatements or omissions in connection with Section 4(a)(6) exempt transactions. As discussed below, the rules we are adopting are designed to aid issuers, investors and intermediaries in complying with these various limitations and requirements. 17 See Section II.C for a discussion of the intermediary requirements. See also Section II.D for a discussion of the additional funding portal requirements. 1. Limit on Capital Raised a. Proposed Rules The exemption from registration provided by Section 4(a)(6) is available to a U.S. issuer provided that “the aggregate amount sold to all investors by the issuer, including any amount sold in reliance on the exemption provided under [Section 4(a)(6)] during the 12-month period preceding the date of such transaction, is not more than $1,000,000.” Under Securities Act Section 4A(h), the Commission is required to adjust the dollar amounts in Section 4(a)(6) “not less frequently than once every five years, by notice published in the Federal Register , to reflect any change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics.” Consistent with the statute, we proposed in Rule 100(a) of Regulation Crowdfunding to limit the aggregate amount sold to all investors by the issuer in reliance on the new exemption to $1 million during a 12-month period. Capital raised through other exempt transactions would not be counted in determining the aggregate amount sold in reliance on Section 4(a)(6). We also provided guidance clarifying our view that offerings made in reliance on Section 4(a)(6) will not be integrated 18 with other exempt offerings made by the issuer, provided that each offering complies with the requirements of the applicable exemption that is being relied upon for the particular offering. 18 The integration doctrine seeks to prevent an issuer from improperly avoiding registration by artificially dividing a single offering into multiple offerings such that Securities Act exemptions would apply to multiple offerings that would not be available for the combined offering. See, e.g., Final Rule: Nonpublic Offering Exemption, Release No. 33-4552 (Nov. 6, 1962). Under Section 4(a)(6), the amount of securities sold in reliance on Section 4(a)(6) by entities controlled by or under common control with the issuer must be aggregated with the amount to be sold by the issuer in the current offering to determine the aggregate amount sold in reliance on Section 4(a)(6) during the preceding 12-month period. Under the proposed rules, for purposes of determining whether an entity is “controlled by or under common control with” the issuer, an issuer would be required to consider whether it has “control” based on the definition in Securities Act Rule 405. 19 As proposed, the amount of securities sold in reliance on Section 4(a)(6) also would include securities sold by any predecessor of the issuer in reliance on Section 4(a)(6) during the preceding 12-month period. 19 See 17 CFR 230.405 (“The term control (including the terms controlling, controlled by and under common control with) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.”). Exchange Act Rule 12b-2 contains the same definition. See 17 CFR 240.12b-2. b. Comments on the Proposed Rules A few commenters supported a $1 million limit on capital raised by an issuer in reliance on Section 4(a)(6), 20 while many other commenters believed that the proposed $1 million limit was too low and, in some instances, recommended higher limits. 21 Several commenters urged that the $1 million limit be net of fees charged by the intermediary to host the offering on the intermediary's platform, 22 while other commenters generally opposed this idea. 23 20 See, e.g., Leverage PR Letter; StartEngine Letter 1; StartEngine Letter 2; Wilson Letter. 21 See, e.g., Advanced Hydro Letter; Bushroe Letter; Cole D. Letter; Concerned Capital Letter; Hamman Letter; Harrison Letter; Hillside Letter; Jazz Letter; Kickstarter Coaching Letter; McCulley Letter; McGladrey Letter; Meling Letter; Miami Nation Enterprises Letter; Multistate Tax Service Letter; Peers Letter; Pioneer Realty Letter; Public Startup Letter 2; Qizilbash Letter; Rosenthal O. Letter; Sarles Letter; SBM Letter; Taylor R. Letter; Taylor T. Letter; Wales Capital Letter 1; Wales Capital Letter 3; WealthForge Letter; Wear Letter; Wilhelm Letter; Winters Letter; Yudek Letter. 22 See, e.g., Benjamin Letter; FundHub Letter 1; Hackers/Founders Letter; Joinvestor Letter; Odhner Letter; Omara Letter; Public Startup Letter 2; RFPIA Letter; RoC Letter; RocketHub Letter; Seed&Spark Letter; Thomas Letter 1; Wales Capital Letter 1; Whitaker Chalk Letter; Wilson Letter. 23 See, e.g., Arctic Island Letter 4; ASSOB Letter; Commonwealth of Massachusetts Letter; MCS Letter; PeoplePowerFund Letter. Commenters were divided on the proposed guidance that other exempt offerings should not be integrated when determining the amount sold during the preceding 12-month period for purposes of the $1 million limit, with some supporting this approach, 24 and others opposing it. 25 24 See, e.g., AngelList Letter; Arctic Island Letter 4; Campbell R. Letter; CFA Institute Letter; CFIRA Letter 11; EarlyShares Letter; EMKF Letter; Farnkoff Letter; Feinstein Letter; Growthfountain Letter; Hackers/Founders Letter; Heritage Letter; NSBA Letter; Parsont Letter; Perfect Circle Solutions Letter; Public Startup Letter 2; RoC Letter; RocketHub Letter; Wales Capital Letter 1; Wefunder Letter; Whitaker Chalk Letter; Wilson Letter. 25 See, e.g., AFL-CIO Letter (not integrating other exempt offerings will make crowdfunding available to larger companies and “crowd out” smaller companies that lack other options for raising capital); AFR Letter; Brown J. Letter; Consumer Federation Letter (not integrating other exempt offerings will allow issuers to evade regulatory requirements); Fund Democracy Letter (not integrating other exempt offerings will give issuers an incentive to engage in advertising in concurrent private offerings to indirectly publicly advertise their crowdfunding offering); IAC Recommendation; MCS Letter; NASAA Letter. c. Final Rules We are adopting as proposed rules that limit to $1 million the aggregate amount that may be sold to all investors by the issuer in a 12-month period in reliance on the new exemption. 26 We continue to believe this approach is consistent with the statute and will provide for a meaningful addition to the existing capital formation options for smaller companies while maintaining important investor protections. Moreover, Regulation Crowdfunding is a novel method of raising capital for smaller companies, and we are concerned about expanding the offering limit of the exemption beyond the level specified in Section 4(a)(6) at the outset of the adoption of final rules. Some commenters suggested that the $1 million limit be net of fees charged by the intermediary to host the offering on the intermediary's platform, 27 which would be an indirect way of increasing the $1 million limit. We are concerned that expanding the offering limit in this way would provide less certainty and could raise interpretive questions, which would make the exemption more costly for issuers to comply with. If a funding portal's fees are not known in advance, for example, this may create uncertainty for issuers about how much capital they would be able to raise. Therefore, we are adopting as proposed the limit on the aggregate amount sold. 26 See Rule 100(a)(1) of Regulation Crowdfunding. There is a technical change to the rule text (“offer and sell securities” is changed to “offer or sell securities”) to clarify that an issuer does not have to complete a sale in order to rely on the Section 4(a)(6) exemption for an offering. 27 See, e.g., Benjamin Letter; FundHub Letter 1; Hackers/Founders Letter; Joinvestor Letter; Odhner Letter; Omara Letter; Public Startup Letter 2; RFPIA Letter; RoC Letter; RocketHub Letter; Seed&Spark Letter; Thomas Letter 1; Wales Capital Letter 1; Whitaker Chalk Letter; Wilson Letter. Title III provides that the $1 million limit applies to the “aggregate amount sold to all investors by the issuer, including any amount sold in reliance on the exemption provided under [Section 4(a)(6)].” Securities Act Section 4A(g), however, provides that “[n]othing in the exemption shall be construed as preventing an issuer from raising capital through means other than [S]ection 4[(a)](6).” Considered together, these two provisions create statutory ambiguity because the first provision could be read to provide for the aggregation of amounts raised in all exempt transactions, even those that do not involve crowdfunding, while the second provision could be read to provide that nothing in the Section 4(a)(6) exemption should limit an issuer's capital raising through other methods. We believe that the overall intent of providing the exemption under Section 4(a)(6) was to provide an additional mechanism for capital raising for startup and small businesses and not to affect the amount an issuer could raise outside of that exemption. Thus, we believe that only the capital raised in reliance on the exemption provided by Section 4(a)(6) should be counted toward the limit. Capital raised through other means should not be counted in determining the aggregate amount sold in reliance on Section 4(a)(6). The opposite approach—requiring aggregation of amounts raised in any exempt transaction—would be inconsistent with the goal of alleviating the funding gap for startups and small businesses because, by electing crowdfunding, such issuers would be placing a cap on the amount of capital they could raise. An issuer that already sold $1 million in reliance on the exemption provided under Section 4(a)(6), for example, would be prevented from raising capital through other exempt methods and, conversely, an issuer that sold $1 million through other exempt methods would be prevented from raising capital under Section 4(a)(6). In determining the amount that may be sold in reliance on Section 4(a)(6), an issuer should aggregate amounts it sold (including amounts sold by entities controlled by, or under common control with, the issuer, as well as any amounts sold by any predecessor of the issuer) in reliance on Section 4(a)(6) during the 12-month period preceding the expected date of sale and the amount the issuer intends to raise in reliance on the exemption. An issuer should not include amounts sold in other exempt offerings during the preceding 12-month period. Further, in light of Section 4A(g) and for the reasons discussed above, we continue to believe that an offering made in reliance on Section 4(a)(6) should not be integrated with another exempt offering made by the issuer, provided that each offering complies with the requirements of the applicable exemption that is being relied upon for the particular offering. For example, an issuer conducting a concurrent exempt offering for which general solicitation is not permitted will need to be satisfied that purchasers in that offering were not solicited by means of the offering made in reliance on Section 4(a)(6). 28 As another example, an issuer conducting a concurrent exempt offering for which general solicitation is permitted, for example, under Securities Act Rule 506(c), could not include in any such general solicitation an advertisement of the terms of an offering made in reliance on Section 4(a)(6), unless that advertisement otherwise complied with Section 4(a)(6) and the final rules. As such, a concurrent offering would be bound by the more restrictive solicitation requirements of Regulation Crowdfunding, unless the issuer can conclude that the purchasers in the Regulation Crowdfunding offering were not solicited by means of the offering made in reliance on Rule 506(c). 28 For a concurrent offering under Rule 506(b), an issuer will have to conclude that purchasers in the Rule 506(b) offering were not solicited by means of the offering made in reliance on Section 4(a)(6). For example, the issuer may have had a preexisting substantive relationship with such purchasers. Otherwise, the solicitation conducted in connection with the crowdfunding offering may preclude reliance on Rule 506(b). See also Rel. No. 33-8828 (Aug. 3, 2007) [72 FR 45116]. The amount of securities sold in reliance on Section 4(a)(6) by entities controlled by or under common control with the issuer must be aggregated with the amount to be sold by the issuer in the current offering to determine the aggregate amount sold in reliance on Section 4(a)(6) during the preceding 12-month period. The statute does not define the term “controlled by or under common control with” the issuer; however, the term “control” is defined in Securities Act Rule 405. 29 Under the final rules, for purposes of determining whether an entity is “controlled by or under common control with” the issuer, an issuer will be required to consider whether it possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the entity, whether through the ownership of voting securities, by contract or otherwise, consistent with the definition of “control” in Securities Act Rule 405. 30 29 See note 19. 30 See Instruction to paragraph (c) of Rule 100 of Regulation Crowdfunding. Under the final rules, the amount of securities sold in reliance on Section 4(a)(6) also includes securities sold by any predecessor of the issuer in reliance on Section 4(a)(6) during the preceding 12-month period. 31 We believe this approach is necessary to prevent an issuer from exceeding the $1 million limit by reorganizing into a new entity that would otherwise not be limited by previous sales made by its predecessor. 31 See Rule 100(c) of Regulation Crowdfunding (defining issuer, in certain circumstances, to include all entities controlled by or under common control with the issuer and any predecessor of the issuer). 2. Investment Limits a. Proposed Rules Under the exemption from registration set forth in Securities Act Section 4(a)(6)(B), the aggregate amount of securities sold to any investor by an issuer, including any amount sold in reliance on the exemption during the 12-month period preceding the date of such transaction, cannot exceed: “(i) the greater of $2,000 or 5 percent of the annual income or net worth of such investor, as applicable, if either the annual income or the net worth of the investor is less than $100,000; and (ii) 10 percent of the annual income or net worth of such investor, as applicable, not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000.” In the Proposing Release, we noted that this statutory language may present ambiguity in some cases about which of the two investment limits governs, because paragraph (i) applies if “either” annual income or net worth is less than $100,000 and paragraph (ii) applies if “either” annual income or net worth is equal to or more than $100,000. Accordingly, in a situation in which annual income is less than $100,000 and net worth is equal to or more than $100,000 (or vice versa), the language of the statute may be read to cause both paragraphs to apply. Paragraph (i) also fixes the maximum annual investment by an investor at 5 percent of “the annual income or net worth of such investor, as applicable” and paragraph (ii) fixes the maximum annual investment by an investor at 10 percent of “the annual income or net worth of such investor, as applicable,” but neither states when that percentage should be applied against the investor's annual income and when it should be applied against the investor's net worth. Under proposed Rule 100(a) of Regulation Crowdfunding, the aggregate amount of securities sold to any investor by any issuer in reliance on Section 4(a)(6) during the 12-month period preceding the date of such transaction, including the securities sold to such investor in such transaction, could not exceed the greater of: (i) $2,000 or 5 percent of the annual income or net worth of the investor, whichever is greater, if both annual income and net worth are less than $100,000; or (ii) 10 percent of the annual income or net worth of the investor, whichever is greater, not to exceed an amount sold of $100,000, if either annual income or net worth is equal to or more than $100,000. We did not propose to alter these investment limits for any particular type of investor or create a different exemption based on different investment limits. Under the proposal, the annual income and net worth of a natural person would be calculated in accordance with the Commission's rules for the calculation of annual income and net worth of an accredited investor, and an investor's annual income or net worth could be calculated jointly with the annual income or net worth of the investor's spouse. An issuer would be able to rely on the efforts of an intermediary to determine that the aggregate amount of securities purchased by an investor will not cause the investor to exceed the investment limits, provided the issuer does not have knowledge to the contrary. b. Comments on the Proposed Rules Commenters were divided on the proposed investment limits. Many commenters supported some type of investment limit without necessarily expressing a specific opinion on the proposed investment limits, 32 while many others generally opposed any type of investment limit. 33 A number of commenters recommended changes to the proposed limits. 34 32 See, e.g., Accredify Letter; Ahmad Letter; Crowley Letter; Farnkoff Letter; Merkley Letter; Milken Institute Letter; Patel Letter; Saunders Letter; StartEngine Letter 1; Wales Capital Letter 1. 33 See, e.g., ASSOB Letter; Crowdstockz Letter; Hamman Letter; Holland Letter; McCulley Letter; Meling Letter; Qizilbash Letter; Ramsey Letter; SBM Letter; Taylor R Letter. 34 See, e.g., Crowdstockz Letter; Gill Letter; Johnston Letter; Morse Letter; Qizilbash Letter; Vossberg Letter; Winters Letter. While some commenters supported the proposal to apply the higher investment limit (10 percent, as set forth in Section 4(a)(6)(B)(ii)) if only one of the annual income or net worth of the investor is equal to or more than $100,000, 35 some commenters also supported the lower investment limit ($2,000 or 5 percent, as set forth in Section 4(a)(6)(B)(i)) unless both the annual income and net worth of the investor are equal to or more than $100,000. 36 35 See, e.g., ABA Letter; CFA Institute Letter; CFIRA Letter 12; Craw Letter; Finkelstein Letter; RocketHub Letter; Wilson Letter. 36 See, e.g., AFL-CIO Letter; BetterInvesting Letter; Consumer Federation Letter; Fund Democracy Letter; IAC Recommendation; Jacobson Letter; NASAA Letter; Schwartz Letter. A number of commenters supported the proposal that within each of the two levels of investment limits, the limits would be calculated based on the “greater of” an investor's annual income or net worth, 37 while a number of other commenters preferred a “lesser of” approach. 38 A few commenters suggested a combination of the approaches ( e.g., if either annual income or net worth is below $100,000, the lower investment limit level ($2,000 or 5 percent) would apply, but within that level, the limit would be based on the greater of annual income or net worth). 39 37 See, e.g., ABA Letter; Anonymous Letter 6; CFIRA Letter 12; Craw Letter; EarlyShares Letter; Jacobson Letter; Omara Letter; RocketHub Letter; Wilson Letter. 38 See, e.g., AFR Letter; BetterInvesting Letter; Consumer Federation Letter; Fund Democracy Letter; Fryer Letter; Growthfountain Letter; IAC Recommendation (stating that the “greater of” approach would be appropriate for accredited investors); Merkley Letter; NASAA Letter; Schwartz Letter; Zhang Letter (recommending that net worth not be used to calculate the investment limit). 39 See, e.g., Consumer Federation Letter; Fund Democracy Letter; Jacobson Letter. Many commenters supported the proposal that an issuer may rely on the efforts of an intermediary to determine that the aggregate amount of securities purchased by an investor will not cause the investor to exceed the investment limits, provided that the issuer does not have knowledge that the investor had exceeded, or would exceed, the investment limits as a result of purchasing securities in the issuer's offering. 40 A few commenters recommended that an issuer be required to obtain a written representation from the investor that the investor has not and will not exceed the limits by purchasing from the issuer. 41 40 See, e.g., Arctic Island Letter 4; CFA Institute Letter; Consumer Federation Letter; CrowdBouncer Letter; EarlyShares Letter; EMKF Letter; Finkelstein Letter; Fund Democracy Letter; Heritage Letter; Joinvestor Letter; Public Startup Letter 2; RoC Letter; RocketHub Letter; Vann Letter; Wefunder Letter; Whitaker Chalk Letter. 41 See, e.g., FundHub Letter 1; Public Startup Letter 2; RocketHub Letter. Commenters were divided about the joint calculation of annual income and net worth with the investor's spouse. Several commenters supported the proposal that an investor's annual income and net worth be calculated jointly with that of the investor's spouse, 42 while other commenters generally opposed that aspect of the proposal. 43 Several commenters recommended that if an investor's annual income and net worth are to be calculated jointly, the Commission should establish higher thresholds or an aggregate investment limit applicable to both spouses. 44 42 See, e.g., Arctic Island Letter 4; Heritage Letter; Joinvestor Letter; NSBA Letter; Omara Letter; RocketHub Letter; Wilson Letter. 43 See, e.g., Brown J. Letter; Consumer Federation Letter; Fund Democracy Letter; Jacobson Letter; Projectheureka Letter; Public Startup Letter 2. 44 See, e.g., Brown, J. Letter; Consumer Federation Letter; Fund Democracy Letter; Jacobson Letter. A number of commenters favored different or no investment limits for accredited and institutional investors. Many commenters supported exempting accredited and institutional investors from the investment limits, 45 although a number of other commenters opposed such an exemption. 46 A few commenters recommended allowing higher investment limits for accredited and institutional investors. 47 One commenter stated that applying the investment limits to accredited and institutional investors would deter those investors from participating, but noted that allowing concurrent offerings under Securities Act Rule 506(c) 48 may mitigate this problem. 49 45 See, e.g., ASSOB Letter; Crowdstockz Letter; Crowley Letter; EMKF Letter; FundHub Letter 1; Gibb Letter; Heritage Letter; Joinvestor Letter; Public Startup Letter 2; RoC Letter; RocketHub Letter; Vann Letter; Wales Capital Letter 1; WealthForge Letter; Wefunder Letter. 46 See, e.g., CFA Institute Letter; FundDemocracy Letter; Hackers/Founders Letter; Jacobson Letter; PeoplePowerFund Letter; Projectheureka Letter; Whitaker Chalk Letter; Wilson Letter. 47 See, e.g., Growthfountain Letter; RFPIA Letter; WealthForge Letter. 48 17 CFR 230.506. 49 See Arctic Island Letter 4. c. Final Rules Consistent with the statute, we are adopting investment limits for securities-based crowdfunding transactions, but with some modifications from the proposed rules. We have modified the final rules from the proposal to clarify that the investment limit reflects the aggregate amount an investor may invest in all offerings under Section 4(a)(6) in a 12-month period across all issuers. In addition, as noted above, some commenters supported a “greater of” approach to implementing the two statutory investment limits, while others supported a “lesser of” approach. After considering the comments received, we have decided to adopt a “lesser of” approach. Thus, under the final rules, an investor will be limited to investing: (1) The greater of: $2,000 or 5 percent of the lesser of the investor's annual income or net worth if either annual income or net worth is less than $100,000; or (2) 10 percent of the lesser of the investor's annual income or net worth, not to exceed an amount sold of $100,000, if both annual income and net worth are $100,000 or more. 50 50 See paragraph (a)(2) of Rule 100 of Regulation Crowdfunding. Under this approach, an investor with annual income of $50,000 a year and $105,000 in net worth would be subject to an investment limit of $2,500, in contrast to the proposed rules in which that same investor would have been eligible for an investment limit of $10,500. 51 We recognize that this change from the proposed rules could place constraints on capital formation. Nevertheless, we believe that the investment limits in the final rules appropriately take into consideration the need to give issuers access to capital while minimizing an investor's exposure to risk in a crowdfunding transaction. 51 See Instruction 2 to paragraph (a)(2) of Rule 100 of Regulation Crowdfunding. The chart below illustrates a few examples: Investor annual income Investor net worth Calculation Investment limit 52 $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 concerns about investors potentially incurring unaffordable losses under the proposed rule, 53 and we find these comments persuasive given the risks involved. The startups and small businesses that we expect will rely on the crowdfunding exemption are likely to experience a higher failure rate than more seasoned companies. 54 Applying the lower limit ($2,000 or 5%, rather than 10%) for investors whose annual income or net worth is below $100,000 and applying that formula to the lesser of annual income or net worth will potentially limit investment losses in crowdfunding offerings for investors who may be less able to bear the risk of loss. We are concerned about the number of households where there is a sizeable gap between net worth and annual income, and the ability of these households to withstand the risk of loss. According to Commission staff analysis of the data in the 2013 Survey of Consumer Finances, approximately 20% of U.S. households with net worth over $100,000 have annual income under $50,000. 52 This “Investment Limit” column reflects the aggregate investment limit across all offerings under Section 4(a)(6) within a 12-month period. 53 See, e.g., AFL-CIO Letter; BetterInvesting Letter; Consumer Federation Letter; Fund Democracy Letter; IAC Recommendation; Jacobson Letter; Merkley Letter; NASAA Letter; Schwartz Letter. 54 For a more detailed discussion of survival rates for startups and small businesses see Section III.A, below. Consistent with the proposed rules, the final rules allow an issuer to rely on efforts that an intermediary is required to undertake in order to determine that the aggregate amount of securities purchased by an investor does not cause the investor to exceed the investment limits, provided that the issuer does not have knowledge that the investor had exceeded, or would exceed, the investment limits as a result of purchasing securities in the issuer's offering. 55 55 See Instruction 3 to paragraph (a)(2) of Rule 100 of Regulation Crowdfunding. We are adopting, as proposed, final rules that allow an investor's annual income and net worth to be calculated as those values are calculated for purposes of determining accredited investor status. 56 Securities Act Rule 501 specifies the manner in which annual income and net worth are calculated for purposes of determining accredited investor status. 57 As in the proposal, the final rules allow spouses to calculate their net worth or annual income jointly. Although some commenters opposed permitting net worth or annual income to be calculated jointly, we believe this approach is appropriate in light of the stricter investment limits being adopted in the final rules. Several commenters recommended that, if the final rules permit net worth and annual income to be calculated jointly, we should establish an aggregate investment limit applicable to both spouses. 58 Consistent with this recommendation, the final rules add an instruction to explain that when such a joint calculation is used, the aggregate investment of the spouses may not exceed the limit that would apply to an individual investor at that income and net worth level. 59 We believe this approach is necessary to preserve the intended protections of the investment limits. 56 See Instruction 1 to paragraph (a)(2) of Rule 100 of Regulation Crowdfunding. 57 17 CFR 230.501. Thus, for example, a natural person's primary residence shall not be included as an asset in the calculation of net worth. 17 CFR 230.501(a)(5)(i)(A). 58 See Brown J. Letter; Consumer Federation Letter; Fund Democracy Letter; Jacobs Letter. 59 For example, if each spouse's annual income is $30,000, the spouses jointly may invest up to an aggregate of 5% of their joint income of $60,000. If one spouse's annual income is $120,000 and the other's is $30,000, the spouses jointly may invest up to an aggregate of 10% of their joint income of $150,000, the same investment limit that would apply for an individual investor with income of $150,000. See Instruction 2 to paragraph (a)(2) of Rule 100 of Regulation Crowdfunding. While a number of commenters supported the creation of a different investment limit for accredited or institutional investors, or exempting them altogether, we are not making such a change. As noted above, crowdfunding is an innovative approach to raising capital in which the entity or individual raising capital typically seeks small individual contributions from a large number of people. As such, we believe that crowdfunding transactions were intended under Section 4(a)(6) to be available equally to all types of investors. 60 The statute provides specific investment limits, and the only reference in the statute to changing those investment limits is the requirement that we update the investment limits not less frequently than every five years based on the Consumer Price Index. Further, issuers can rely on other exemptions to offer and sell securities to accredited investors and institutional investors. As discussed above, concurrent offerings to these types of investors are possible if the conditions of each applicable exemption are met. 61 Therefore, we are not altering the investment limits for any particular type of investor or to create a different exemption based on different investment limits. Thus, as proposed, the investment limits will apply equally to all investors, including retail, institutional and accredited investors. 60 See 158 CONG. REC. S1689 (daily ed. Mar. 15, 2012) (statement of Sen. Mark Warner (“There is now the ability to use the Internet as a way for small investors to get the same kind of deals that up to this point only select investors have gotten that have been customers of some of the best known investment banking firms, where we can now use the power of the Internet, through a term called crowdfunding.”). 61 For a discussion of integration, see Section II.A.1.c. 3. Transaction Conducted Through an Intermediary a. Proposed Rules Section 4(a)(6)(C) requires that a transaction in reliance on Section 4(a)(6) be conducted through a broker or funding portal that complies with the requirements of Securities Act Section 4A(a). To implement this provision, we proposed in Rule 100(a)(3) of Regulation Crowdfunding that for any transaction conducted in reliance on Section 4(a)(6), an issuer use only one intermediary (that complies with the requirements of Section 4A(a) and the related requirements in Regulation Crowdfunding) and that the transaction be conducted exclusively on the intermediary's platform. We also proposed to permit the intermediary to engage in back office 62 or other administrative functions other than on the intermediary's platform, and to define “platform” as “an Internet Web site or other similar electronic medium through which a registered broker or a registered funding portal acts as an intermediary in a transaction involving the offer or sale of securities in reliance on Section 4(a)(6).” 62 Back office personnel typically perform functions such as, but not limited to, recordkeeping, trade confirmations, internal accounting, and account maintenance. b. Comments on the Proposed Rules Commenters were divided about the proposed prohibition on an issuer using more than one intermediary for any transaction conducted pursuant to Section 4(a)(6). Supporters of the proposed prohibition expressed the view that the prohibition would benefit communication between issuers and investors. 63 One commenter stated that the prohibition also would assist in assessing whether investors are within their investment limits. 64 Commenters who opposed the proposed prohibition noted that increasing the number of platforms used per transaction would both increase the likelihood of investors becoming informed that a transaction is taking place, as well as elicit information from a more diverse crowd. 65 63 See, e.g., CFA Institute Letter; Rockethub Letter. 64 See CFA Institute Letter. 65 See, e.g., Graves Letter. Commenters were generally divided about the proposed requirement that transactions made in reliance on Section 4(a)(6) be conducted exclusively through the intermediary's platform. Commenters who supported 66 the proposed requirement cited concerns that allowing the transactions to be effected through means other than the intermediary's platform could increase the potential for fraudulent activity 67 and prevent the leveraging of information sharing and crowdsourced review that are intended through crowdfunding. 68 Commenters who opposed 69 the proposed requirement expressed their view that permitting other means would allow persons who lack Internet access to invest through crowdfunding, 70 and also would foster different types of in-person communication that are not possible to achieve online. 71 One commenter expressed a preference for issuers to be able to host their own offerings subject to certain conditions. 72 One commenter also suggested that intermediaries should be able to engage in certain activities other than on their platforms, such as physically meeting with representatives of issuers and investors, and hosting launch parties. 73 66 See, e.g., Joinvestor Letter; RoC Letter; RocketHub Letter; Wilson Letter. 67 See, e.g., StartupValley Letter. 68 See, e.g., RocketHub Letter. 69 See, e.g., Benjamin Letter; Omara Letter; Public Startup Letter 2. 70 See, e.g., Projecteureka Letter. 71 See, e.g., Benjamin Letter (“Without doubt, the web fosters a crowd and a convenient forum to express ideas and learn about the Issuer. However, small community gatherings provide similar feedback loops and often times serve the community and some investors better by fostering nuanced forms of communication that can never be achieved. Further, some SEC concerns can be assuaged regarding the loss of creating a `crowd' online because some investors that may rely on the Web site to educate themselves may not be inclined to contribute to the `crowd intelligence' online, yet would be vocal in a community gathering.”). 72 See Public Startup Letter 2. We note that Section 4(a)(6) of the Securities Act requires that, as a condition of the exemption, the transaction be “conducted through a broker or funding portal that complies with the requirements of section 4A(b).” 15 U.S.C. 77d(a)(6). 73 See Wilson Letter. A few commenters supported, but suggested technical revisions to, our proposed definition of “platform.” 74 One commenter suggested deleting the phrase “an Internet Web site or other similar electronic medium” and replacing the phrase with “a software program accessible via TCP/IP enabled applications” or to more commonly define “platform” as “a software program accessible via the Internet.” 75 74 See, e.g., Arctic Island Letter 1, Arctic Island Letter 3; Arctic Island Letter 4; and Startup Valley Letter (explaining that Web sites, application programmable interfaces (APIs) and other electronic media are generally only the means to access a platform, which itself is an Internet-accessible software program). 75 See Arctic Island Letter 1; Arctic Island Letter 4 (noting that a “platform” is actually a software program that is accessible via the Internet and that a “Web site or other electronic medium” is merely a way to access the platform, not the platform itself). c. Final Rules After considering the comments, we are adopting as proposed Rule 100(a)(3). We also are adopting the definition of “platform” with one clarifying amendment and with a change in location to Rule 300(c). As stated in the Proposing Release, we believe that requiring an issuer to use only one intermediary to conduct an offering or concurrent offerings in reliance on Section 4(a)(6) would help foster the creation of a “crowd” and better accomplish the purpose of the statute. In order for a crowd to effectively share information, we believe it would be most beneficial to have one meeting place for the crowd to obtain and share information, thus avoiding dilution or dispersement of the “crowd.” We also believe that limiting a crowdfunding transaction to a single intermediary's online platform helps to minimize the risk that issuers and intermediaries would circumvent the requirements of Regulation Crowdfunding. For example, allowing an issuer to conduct an offering using more than one intermediary would make it more difficult for intermediaries to determine whether an issuer is exceeding the $1 million aggregate offering limit. We continue to believe that crowdfunding transactions made in reliance on Section 4(a)(6) and activities associated with these transactions should occur over the Internet or other similar electronic medium that is accessible to the public. Such an “online-only” requirement enables the public to access offering information and share information publicly in a way that will allow members of the crowd to share their views on whether to participate in the offering and fund the business or idea. While we acknowledge, as one commenter observed, that there are forms of communication that cannot be achieved online, 76 we nevertheless believe that the requirement that the transaction be conducted exclusively through the intermediary's platform will help to ensure transparency, provide for ready availability of information in one place to all investors, and promote greater uniformity in the distribution of information among investors. We also do not believe that funding portals should be permitted to physically meet with investors to solicit investments and offerings on its platform, or host launch parties, as one commenter recommended, because these activities likely violate the statutory prohibition on funding portals soliciting and providing investment advice and recommendations. However, we continue to believe that intermediaries should be able to engage in back office and other administrative functions other than on their platforms. 76 See Benjamin Letter (in-person gatherings may foster more “nuanced forms of communication”). In a change from the proposed rules, and consistent with the suggestions of commenters, the final rules define “platform” as “ a program or application accessible via the Internet or other similar electronic communication medium through which a registered broker or a registered funding portal acts as an intermediary in a transaction involving the offer or sale of securities in reliance on Section 4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6))” [emphasis added]. 77 We believe that this definition is more technically accurate and also will accommodate innovation in the event of technological advancements. We are moving the definition of “platform” from Rule 100 to Rule 300(c) so that it will be located alongside the other Regulation Crowdfunding definitions related to intermediaries. Also, in a change from the proposed rule, we are moving to the definition of platform an instruction stating that an intermediary through which a crowdfunding transaction is conducted may engage in back office or other administrative functions other than on the intermediary's platform. 78 77 Rule 300(c) of Regulation Crowdfunding. 78 In the final rule, this is an instruction to Rule 300(c)(4). The instruction was proposed under proposed Rule 100(a)(3), but we believe it is more appropriate under the definition of platform because the instruction explains that back office activities can happen off the platform. 4. Exclusion of Certain Issuers From Eligibility Under Section 4(a)(6) Securities Act Section 4A(f) excludes certain categories of issuers from eligibility to rely on Section 4(a)(6) to engage in crowdfunding transactions. These are: (1) Issuers that are not organized under the laws of a state or territory of the United States or the District of Columbia; (2) issuers that are subject to Exchange Act reporting requirements; 79 (3) investment companies as defined in the Investment Company Act of 1940 (the “Investment Company Act”) 80 or companies that are excluded from the definition of investment company under Section 3(b) or 3(c) of the Investment Company Act; 81 and (4) any other issuer that the Commission, by rule or regulation, determines appropriate. 79 These are issuers who are required to file reports with the Commission pursuant to Exchange Act Sections 13(a) (15 U.S.C. 78m(a)) or 15(d) (15 U.S.C. 78 o (d)). 80 15 U.S.C 80a-1 et seq. 81 15 U.S.C. 80a-3(b) or (c). a. Proposed Rules Rule 100(b) of Regulation Crowdfunding, as proposed, would exclude the categories of issuers specifically identified in Section 4A(f). In addition, the proposed rules would exclude: (1) Issuers that are disqualified from relying on Section 4(a)(6) pursuant to the disqualification provision in Rule 503(a) of Regulation Crowdfunding; (2) issuers that have sold securities in reliance on Section 4(a)(6) if they have not filed with the Commission and provided to investors, to the extent required, the ongoing annual reports required by Regulation Crowdfunding during the two years immediately preceding the filing of the required new offering statement; and (3) issuers that have no specific business plan or that have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies. b. Comments on the Proposed Rules Foreign Issuers, Exchange Act Reporting Companies, and Investment Companies. Several commenters opposed the exclusion of foreign issuers, Exchange Act reporting companies, and investment companies. 82 Other commenters, however, supported the exclusion of investment companies or companies that are excluded from the definition of investment company under Section 3(b) or 3(c) of the Investment Company Act. 83 Some commenters recommended that, despite the exclusion of investment companies, the Commission allow a single purpose fund, including LLCs and LPs, to conduct an offering in reliance on Section 4(a)(6) if such fund were organized to invest in, or lend money to, a single company. 84 82 See, e.g., M.A.V. Letter (opposing the exclusion of public companies from eligibility to rely on Section 4(a)(6)); Ritter Letter (asking for clarification regarding companies that are excluded from the definition of investment company pursuant to 3(b) of the Investment Company Act); TAN Letter (opposing the exclusion of foreign issuers over concerns that investors would not have Title III protections when investing in foreign issuers and that investors' ability to invest in early opportunities would be reduced). 83 See, e.g., Commonwealth of Massachusetts Letter; PeoplePowerFund Letter. 84 See, e.g., EMKF Letter (stating that having hundreds of direct shareholders can give startups “messy cap tables” that deter follow-on financing and alternatively recommending the Commission permit an intermediary, including a funding portal, to act as a holder of record); Fryer Letter; Growthfountain Letter; Martin Letter (recommending that crowdfunding be operated through a trust fund mechanism that would own shares of the entity seeking capital); Propellr Letter 2; Ritter Letter; Wefunder Letter. Delinquent in Ongoing Reporting. A number of commenters supported the exclusion of issuers that are delinquent in their reporting obligations, 85 although others opposed the exclusion of delinquent issuers. 86 Some commenters suggested options such as disclosure of the issuer's reporting delinquency in its offering documents or on its Web site or a cure provision. 87 85 See, e.g., ASSOB Letter; Commonwealth of Massachusetts Letter; Consumer Federation Letter; Fund Democracy Letter; Grassi Letter; Joinvestor Letter; NASAA Letter; Wefunder Letter. 86 See, e.g., ABA Letter; Parsont Letter; Projectheureka Letter; Public Startup Letter 2; RocketHub Letter. 87 See, e.g., ABA Letter (suggesting a reasonable cure period and limiting the “look-back” period to one year); Grassi Letter (recommending that a delinquent issuer be required to file a form with the Commission and publish on its Web site and the relevant intermediary's platform a notice to potential investors that it has not met its reporting obligations); Parsont Letter (recommending the Commission treat the ongoing reporting requirements as a condition to the Section 4(a)(6) exemption and create a notice and cure provision in the proposed insignificant deviation safe harbor); RocketHub Letter (suggesting delinquent issuers be required to disclose their delinquent status in their offering documents); Vann Letter (recommending a grace period for curing the deficiency). We also received comments about whether the exclusion should extend to issuers that are delinquent in other reporting requirements ( e.g., updates on the progress of the issuer in meeting the target offering amount, issuers whose affiliates have failed to comply with the ongoing reporting requirements, and issuers with an officer, director, or controlling shareholder who served in a similar capacity with another issuer that failed to file its ongoing reports). Commenters generally opposed extending the exclusion beyond issuers delinquent in their ongoing annual reports during the two years immediately preceding the filing of the required new offering statement. 88 Further, two commenters opposed the idea of excluding an issuer whose officer, director, or controlling shareholder served in a similar capacity with another issuer that failed to file its annual reports. 89 88 See, e.g., Grassi Letter (stating that further exclusions would impose a more onerous burden on issuers under Section 4(a)(6) than that placed on current registrants filing under Exchange Act Sections 13(a) or 15(d) or emerging growth companies); Projectheureka Letter. 89 See Grassi Letter (stating that these persons may not have the authority or responsibility to file an annual report); Whitaker Chalk Letter. Business Plans. Commenters were divided on excluding issuers that have no specific business plan from eligibility to rely on Section 4(a)(6). 90 Commenters, however, supported the exclusion of issuers that have business plans to engage in a merger or acquisition with an unidentified company. 91 90 For commenters who expressed support, see, e.g., Anonymous Letter 2; CFA Institute Letter; CFIRA Letter 7; Commonwealth of Massachusetts Letter; Consumer Federation Letter; Hackers/Founders Letter; NASAA Letter; ODS Letter; Traklight Letter; Whitaker Chalk Letter. For commenters who expressed opposition, see, e.g., ABA Letter (expressing concern that a particular business idea disclosed by a crowdfunding issuer might be deemed after-the-fact to be too non-specific to have permitted reliance on Section 4(a)(6), thus exposing that issuer to a potential Section 5 violation); FundHub Letter 1; Projectheureka Letter; Public Startup Letter 2; RoC Letter; RocketHub Letter; SBM Letter; Wilson Letter. 91 See, e.g., ABA Letter; CFA Institute Letter; Commonwealth of Massachusetts Letter; Consumer Federation Letter; Grassi Letter; ODS Letter; RFPIA Letter. c. Final Rules We are adopting the issuer eligibility requirements as proposed, with the addition of two clarifications. As noted above, Section 4A(f) expressly excludes foreign issuers, Exchange Act reporting companies and companies that are investment companies as defined in the Investment Company Act or companies that are excluded from the definition of investment company under Section 3(b) or 3(c) of the Investment Company Act from the exemption for crowdfunding transactions provided by Section 4(a)(6). Although some commenters expressed concerns about these statutory exclusions, including that such exclusions could limit the investment choices of crowdfunding investors, we are not creating additional exemptions for these categories of issuers. In reaching this determination, we have considered that the primary purpose of Section 4(a)(6), as we understand it, is to facilitate capital formation by early stage companies that might not otherwise have access to capital. 92 As a general matter, we do not believe that Exchange Act reporting companies, investment companies and foreign issuers accessing the U.S. capital markets constitute the types of issuers that Section 4(a)(6) and Regulation Crowdfunding are intended to benefit. Moreover, we believe that certain of these issuers, such as foreign issuers or investment companies, may present unique risks that would make them unsuitable for the scaled regulatory regime associated with securities-based crowdfunding transactions. Accordingly, the final rules exclude these categories of issuers from Regulation Crowdfunding. 93 92 See, e.g., 158 Cong. Rec. S1765 (daily ed. Mar. 29, 2012) (statement of Sen. Jack Reed) (“[Crowdfunding] is the place where we envision the smallest entrepreneurs could obtain much needed seed capital for their good ideas.”); 158 Cong. Rec. H1581 (daily ed. Mar. 27, 2012) (statement of Rep. Patrick McHenry (“Crowdfunding is the best of microfinancing and crowdsourcing. You use a wide network of individuals and you can raise capital for your new business, your start-up, or your small business.”). 93 See Rule 100(b) of Regulation Crowdfunding. We are not creating, as suggested by some commenters, 94 an exception to this exclusion for a single purpose fund organized to invest in, or lend money to, a single company. The statute specifically excludes investment funds from eligibility to rely on Section 4(a)(6) and investment fund issuers present considerations different from those for non-fund issuers. 94 See, e.g., EMKF Letter; Fryer Letter; Growthfountain Letter; Martin Letter; Propellr Letter 2; Wefunder Letter. In addition to these statutorily excluded categories of issuers, the final rules also exclude, as proposed, several additional categories of issuers. Below we discuss each of these additional categories: Disqualification Provisions. As discussed further in Section II.E.6 below, the final rules also exclude issuers that are disqualified from relying on Section 4(a)(6). 95 95 See Rule 100(b)(4) of Regulation Crowdfunding. See also Rule 503 of Regulation Crowdfunding and Section II.E.6 for a discussion of the disqualification provisions. Delinquent in Ongoing Reporting. Consistent with the proposed rules and the views of a number of commenters, 96 the final rules exclude an issuer that has sold securities in reliance on Section 4(a)(6) if the issuer has not filed with the Commission and provided to investors, to the extent required, the ongoing annual reports required by Regulation Crowdfunding 97 during the two years immediately preceding the filing of the required new offering statement. 98 As discussed further in Section II.B.2 below, we believe that the annual ongoing reporting requirement will benefit investors by enabling them to consider updated information about the issuer, thereby allowing them to make more informed investment decisions. If issuers fail to comply with this requirement, we do not believe that they should have the benefit of relying on the exemption under Section 4(a)(6) again until they file, to the extent required, the two most recent annual reports. 99 In addition, as discussed further in Section II.B.1 below, in a modification to the proposed rules, the final rules require an issuer to disclose in its offering statement and annual report if it, or any of its predecessors, previously failed to comply with the ongoing reporting requirements of Regulation Crowdfunding. 96 See, e.g. , ASSOB Letter; Commonwealth of Massachusetts Letter; Consumer Federation Letter; Fund Democracy Letter; Grassi Letter; Joinvestor Letter; NASAA Letter; Wefunder Letter. 97 See Rules 202 and 203(b) of Regulation Crowdfunding and Section II.B.2 for a discussion of the ongoing reporting requirements. 98 See Rule 100(b)(5) of Regulation Crowdfunding. 99 We note that even if an issuer has regained eligibility to rely on Regulation Crowdfunding, the Commission could still bring an enforcement action under the federal securities laws based on the issuer's failure to make the required filings. In addition, as discussed in Section II.E.4., new Rule 12g-6 provides an exemption from Section 12(g) conditioned, among other things, on the issuer's compliance with the annual reporting requirements of Rule 202 of Regulation Crowdfunding. We note that some commenters read the provision requiring issuers to have filed their two most recent annual reports to mean that the disqualification would be triggered only after the issuer was delinquent for two consecutive years or that an issuer would be disqualified for two years. 100 Instead, the final rule requires that any ongoing annual report that was due during the two years immediately preceding the currently contemplated offering must be filed before an issuer may rely on the Section 4(a)(6) exemption. For example, if more than 120 days have passed since the issuer's fiscal year end and the issuer has not filed the required annual report for that most recently ended fiscal year, the issuer will not be able to conduct a new offering of securities in reliance on the Section 4(a)(6) exemption until the delinquent annual report has been filed. Similarly, if an issuer did file an annual report for the most recently ended fiscal year but did not file an annual report for the fiscal year prior to that, the issuer will not be able to rely on the Section 4(a)(6) exemption until the missing report has been filed. In both cases, as soon as the issuer has filed with the Commission and provided to investors both of the annual reports required during the two years immediately preceding the filing of the required offering statement, the issuer will be able to rely on the Section 4(a)(6) exemption. The final rule text includes an instruction to clarify this requirement. 101 100 See, e.g. , Consumer Federation Letter; Fund Democracy Letter; NASAA Letter. 101 See instruction to paragraph (b)(5) of Rule 100 of Regulation Crowdfunding. Consistent with the proposal and the recommendations of commenters, 102 we are not extending the exclusion to issuers that are delinquent in the progress update or termination of reporting requirements, nor are we excluding issuers whose officer, director, or controlling shareholder served in a similar capacity with another issuer that failed to file its annual reports. Extending the exclusion to those issuers would impose more stringent requirements than those faced by current reporting companies and issuers under Regulation A. 102 See, e.g. , Grassi Letter; Projectheureka Letter; Whitaker Chalk Letter. Business Plans. The final rules also exclude an issuer that has no specific business plan or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies. 103 We believe that the exemption under Section 4(a)(6) is intended to provide an issuer with an early stage project, idea or business an opportunity to share it publicly with a wider range of investors. Those investors may then share information with each other about the opportunity and use that information to decide whether or not to invest. Thus, we believe that an issuer engaging in crowdfunding under the exemption should give the public sufficient information about a particular proposed project or business to allow investors to make an informed investment decision. 104 103 See Rule 101(b)(6) of Regulation Crowdfunding. 104 See, e.g. , Section 4A(b)(1)(C) (requiring a description of the business of the issuer and the anticipated business plan of the issuer). As discussed in the proposal, we are cognizant of the challenges noted by some commenters 105 in distinguishing between early-stage proposals that have information sufficient to support the crowdfunding mechanism and those that cannot by their terms do so. After considering the comments received, 106 we continue to believe that the rules should exclude issuers that have no specific business plan or whose business plan is to engage in a merger or acquisition with an unidentified company or companies. We understand that issuers engaging in crowdfunding transactions may have businesses at various stages of development in differing industries, and therefore, we believe that a specific “business plan” for such issuers could encompass a wide range of project descriptions, articulated ideas, and business models. 105 S ee, e.g. , ABA Letter; FundHub Letter 1; Projectheureka Letter; Public Startup Letter 2; RoC Letter; RocketHub Letter; SBM Letter; Wilson Letter. 106 See, e.g. , ABA Letter; Anonymous Letter 2; CFA Institute Letter; CFIRA Letter 7; Commonwealth of Massachusetts Letter; Consumer Federation Letter; FundHub Letter 1; Grassi Letter; Hackers/Founders Letter; NASAA Letter; ODS Letter; Projectheureka Letter; Public Startup Letter 2; RFPIA Letter; RoC Letter; RocketHub Letter; SBM Letter; Traklight Letter; Whitaker Chalk Letter; Wilson Letter. Overall, we believe that the exclusions in the final rules appropriately consider the need to limit the potential risks to investors that could result from extending issuer eligibility to certain types of entities without unduly limiting the benefits of the exemption as a tool for capital formation. B. Issuer Requirements 1. Disclosure Requirements Securities Act Section 4A(b)(1) sets forth specific disclosures that an issuer offering or selling securities in reliance on Section 4(a)(6) must “file with the Commission and provide to investors and the relevant broker or funding portal, and make available to potential investors”. These disclosures include: • The name, legal status, physical address and Web site address of the issuer; 107 107 Section 4A(b)(1)(A). • the names of the directors and officers (and any persons occupying a similar status or performing a similar function), and each person holding more than 20 percent of the shares of the issuer; 108 108 Section 4A(b)(1)(B). • a description of the business of the issuer and the anticipated business plan of the issuer; 109 109 Section 4A(b)(1)(C). • a description of the financial condition of the issuer; 110 110 Section 4A(b)(1)(D). • a description of the stated purpose and intended use of the proceeds of the offering sought by the issuer with respect to the target offering amount; 111 111 Section 4A(b)(1)(E). • the target offering amount, the deadline to reach the target offering amount and regular updates about the progress of the issuer in meeting the target offering amount; 112 112 Section 4A(b)(1)(F). • the price to the public of the securities or the method for determining the price; 113 and 113 Section 4A(b)(1)(G). • a description of the ownership and capital structure of the issuer. 114 114 Section 4A(b)(1)(H). Specifically, Section 4A(b)(1)(H) requires a description of: “(i) terms of the securities of the issuer being offered and each other class of security of the issuer . . .; (ii) a description of how the exercise of the rights held by the principal shareholders of the issuer could negatively impact the purchasers of the securities being offered; (iii) the name and ownership level of each existing shareholder who owns more than 20 percent of any class of the securities of the issuer; (iv) how the securities being offered are being valued . . .; and (v) the risks to purchasers of the securities relating to minority ownership in the issuer, the risks associated with corporate actions, including additional issuances of shares, a sale of the issuer or of assets of the issuer, or transactions with related parties.” In addition, Section 4A(b)(1)(I) specifies that the Commission may require additional disclosures for the protection of investors and in the public interest. As discussed further in Section II.B.3 below, we are requiring issuers to file these disclosures with the Commission on Form C. 115 Unless otherwise indicated in the form, Form C must be filed in the standard format of eXtensible Markup Language (XML). The XML-based fillable portion of Form C will enable issuers to provide information in a convenient medium without requiring the issuer to purchase or maintain additional software or technology. This will provide the Commission and the public with readily available data about offerings made in reliance on Section 4(a)(6). Other required disclosure that is not required to be provided in the XML-based text boxes will be filed as attachments to Form C. We are not mandating a specific presentation format for the attachments to Form C; however, the final Form C does include an optional Q&A format that crowdfunding issuers may use to provide disclosures that are not required to be filed in XML format. 116 We believe that this optional format should help reduce the burden on crowdfunding issuers of preparing disclosures. 115 Issuers will use Form C to provide the required disclosures about the crowdfunding transaction and the information required to be filed annually. See Section II.B.3. 116 See Item 1 of General Instruction III to Form C of Regulation Crowdfunding. By filing Form C with the Commission and providing it to the relevant intermediary, issuers will satisfy the requirement of Securities Act Section 4A(b) that issuers relying on Section 4(a)(6) must “file with the Commission and provide to investors and the relevant broker of funding portal, and make available to potential investors” certain information. In a clarifying change from the proposal, we have moved the definition of “investor” from proposed Rule 300(c)(4) to Rule 100(d) to clarify that for purposes of all of Regulation Crowdfunding, “investor” includes any investor or any potential investor, as the context requires. 117 In connection with this clarifying move we have deleted the phrase “and make available to potential investors” each time it appeared in the proposed Rules 201 and 203 to avoid redundancy. 118 117 See Rule 100(d) of Regulation Crowdfunding. 118 See Rules 201 and 203(a) of Regulation Crowdfunding. Additionally, as we clarify in the final rules, to the extent that some of the required disclosures overlap, issuers are not required to duplicate disclosures. a. Offering Statement Disclosure Requirements (1) Information About the Issuer and the Offering (a) General Information About the Issuer, Officers and Directors, and Certain Shareholders (i) Proposed Rules To implement Sections 4A(b)(1)(A) and (B), we proposed in Rule 201 of Regulation Crowdfunding to require an issuer to disclose information about its legal status, directors, officers and certain shareholders and how interested parties may contact the issuer. Specifically, we proposed to require that an issuer disclose: • Its name and legal status, including its form of organization, jurisdiction in which it is organized and date of organization; • its physical address and its Web site address; and • the names of the directors and officers, including any persons occupying a similar status or performing a similar function, all positions and offices with the issuer held by such persons, the period of time in which such persons served in the positions or offices and their business experience during the past three years, including: ○ Each person's principal occupation and employment, including whether any officer is employed by another employer; and ○ the name and principal business of any corporation or other organization in which such occupation and employment took place. We proposed to define “officer” consistent with the definition in Securities Act Rule 405 and in Exchange Act Rule 3b-2. We further proposed to require disclosure of the business experience of directors and officers of the issuer during the past three years. Section 4A(b)(1)(B) requires disclosure of “the names of . . . each person holding more than 20 percent of the shares of the issuer.” In contrast, Section 4A(b)(1)(H)(iii) requires disclosure of the “name and ownership level of each existing shareholder who owns more than 20 percent of any class of the securities of the issuer” (emphasis added). We proposed in Rule 201(c) to require disclosure of the names of persons, as of the most recent practicable date, who are the beneficial owners of 20 percent or more of the issuer's outstanding voting equity securities, calculated on the basis of voting power (“20 Percent Beneficial Owners”). Neither Section 4A(b)(1)(B) nor Section 4A(b)(1)(H)(iii) states as of what date the beneficial ownership should be calculated. We proposed in Rule 201(c) to require issuers to calculate beneficial ownership as of the most recent practicable date. (ii) Comments on the Proposed Rules Of the commenters that addressed the proposed issuer, officer and director disclosure rules, some generally supported them, 119 while others opposed specific disclosure requirements. For example, one commenter opposed requiring issuers to disclose a Web site address. 120 Other commenters opposed requiring issuers to disclose the business experience of their officers and directors, 121 while one commenter suggested narrowing the definition of the term “officer.” 122 Some commenters expressed opposition to any revision to the proposed rules that would require disclosure of any court orders, judgments or civil litigation involving any directors and officers. 123 119 See, e.g., Angel Letter 1; CCI Letter; Denlinger Letter 1; Mollick Letter; Wefunder Letter; Wilson Letter. 120 See Vann Letter (recommending that the disclosure requirement be optional or only required for businesses that have a Web site). 121 See, e.g., Public Startup Letter 2; RocketHub Letter; Schwartz Letter; Zhang Letter. 122 See RocketHub Letter (stating that only relevant officers for most companies using Regulation Crowdfunding would be the principal executive officer and the principal financial officer, which may be the same person.) 123 See, e.g., FundHub Letter 1; RocketHub Letter; Wefunder Letter. Some commenters supported the proposed three-year time period to be covered by the officer and director disclosure rules, 124 while others recommended that officer and director disclosure cover the previous five years. 125 Some commenters recommended we require additional disclosures about an issuer's officers, directors and persons occupying a similar status or performing a similar function. 126 124 See, e.g., Denlinger Letter 1; Joinvestor Letter; Wefunder Letter. 125 See, e.g., Commonwealth of Massachusetts Letter; NASAA Letter. 126 See, e.g., Angel Letter 1 (qualifications of candidates for the board of directors); Denlinger Letter 1(educational background of the officers and directors); Mollick Letter (online identities of the officers and directors); ODS Letter (educational background of the officers and directors); Wilson Letter (technical and business skills of the officers and directors); Zeman Letter (any officer and director positions held by the officers and directors or their family members, as well as any 10 percent beneficial holdings they may have with other SEC registrants; and disputes the officers and directors had with other employers). A few commenters commented on the proposed 20 Percent Beneficial Owner rules. One commenter supported the requirement to disclose the names of persons who are the 20 Percent Beneficial Owners, 127 while one commenter opposed the requirement. 128 One commenter recommended that, to provide greater certainty for investors and more guidance for issuers, the beneficial ownership be calculated as of a specific date, rather than the most recent practicable date, and that the disclosure be updated when there are significant changes in beneficial ownership. 129 Finally, one commenter recommended that the Commission keep the requirement as simple as possible. 130 127 See RocketHub Letter. 128 See Public Startup Letter 2. 129 See NASAA Letter. 130 See RocketHub Letter. (iii) Final Rules We are adopting the issuer, officer and director, and 20 Percent Beneficial Owners disclosure requirements largely as proposed. 131 An issuer will be required to disclose information about its president, vice president, secretary, treasurer or principal financial officer, comptroller or principal accounting officer and any person routinely performing similar functions. As noted by at least one commenter, 132 an issuer may not have officers serving in each of these roles. Accordingly, the final rules require the disclosure only to the extent an issuer has individuals serving in these capacities or performing similar functions. 133 The required information includes all positions and offices held with the issuer, the period of time in which such persons served in the position or office and their prior business experience. 134 Contrary to the views of some commenters, 135 we believe that additional disclosures about an issuer's officers, directors and persons occupying a similar status or performing a similar function would be unduly burdensome and generally not necessary for investors to be in a position to make an informed investment decision. Given the diverse nature of the startups and small businesses that we anticipate will seek to raise capital in reliance on Section 4(a)(6), additional disclosures such as those recommended by some commenters may not be relevant in all instances. 131 See Rule 201(a)-(c) of Regulation Crowdfunding. 132 See RocketHub Letter. 133 See Instruction to paragraph (b) of Rule 201 of Regulation Crowdfunding. 134 See Rule 201(b) of Regulation Crowdfunding. 135 See, e.g. , Denlinger 1 Letter (educational background of officers); ODS Letter (educational background of officers, directors and similar persons); Zeman Letter (proposing that officers and directors of an issuer be required to disclose their (or family members) officer and director positions with other SEC registrants, and disclose material holdings of more than 10% with other SEC registrants). The required disclosure about the business experience of the directors and officers (and any persons occupying a similar status or performing a similar function) must cover the past three years, 136 which, as some commenters noted, 137 is shorter than the five-year period that applies to issuers conducting registered offerings 138 or exempt offerings pursuant to Regulation A. 139 We believe that startups and small businesses that may seek to raise capital in reliance on Section 4(a)(6) generally will be smaller than the issuers conducting registered offerings or exempt offerings pursuant to Regulation A, and generally are likely to have a more limited operating history. 140 Therefore, in comparison to registered offerings and Regulation A, we believe the three-year period is more relevant given the stage of development of these issuers and should help to reduce compliance costs for issuers conducting offerings pursuant to Section 4(a)(6) while still providing investors with sufficient information about the business experience of directors and officers of the issuer to make an informed investment decision. 136 See Rule 201(b) of Regulation Crowdfunding. 137 See, e.g., Commonwealth of Massachusetts Letter; NASAA Letter. 138 See Item 401(e) of Regulation S-K [17 CFR 229.401(e)]. 139 See Item 8(c) of Form 1-A [17 CFR 239.90]. 140 There is no limit on the amount of proceeds that may be raised in a registered offering, and Regulation A permits offerings of up to $50 million of securities annually. Notwithstanding the suggestion of one commenter, and consistent with the statute, the final rules require disclosure of an issuer's Web site. 141 Given the Internet-based nature of Crowdfunding, we anticipate that every issuer will have a Web site or be able to create one at a minimal cost. 141 See Rule 201(a) of Regulation Crowdfunding. We also are adopting the 20 Percent Beneficial Owner disclosure requirement as proposed with one modification. 142 Instead of requiring issuers to disclose the name of each 20 Percent Beneficial Owner as of the most recent practicable date, we are requiring such disclosure as of the most recent practicable date, but no earlier than 120 days prior to the date the offering statement or report is filed. We believe that this change should address commenter concerns 143 about the discretion afforded by the proposed “most recent practicable date.” While we are not adding to Rule 201(c) a specific requirement that the disclosure be updated when there are significant changes in beneficial ownership, as requested by one commenter, 144 to the extent a material change in beneficial ownership takes place during the offering, an issuer would be required to file an amended offering statement on Form C/A: Amendment. 142 See Rule 201(c) of Regulation Crowdfunding. 143 See NASAA Letter. 144 Id. As stated in the Proposing Release, we believe that the universe of 20 Percent Beneficial Owners should be the same for the disclosure requirements and the disqualification provisions 145 because this would ease the burden on issuers by requiring them to identify only one set of persons who would be the subject of these rules. We continue to believe that assessing beneficial ownership based on total outstanding voting securities is consistent with Section 4A(b)(1)(B). Section 4A(b)(1)(B) is not limited to voting equity securities, but we believe the limitation is necessary to clarify how beneficial ownership should be calculated since issuers could potentially have multiple classes of securities with different voting powers. 145 See Rule 503 of Regulation Crowdfunding and Section II.E.6 for a discussion of the disqualification provisions. (b) Description of the Business (i) Proposed Rules Consistent with Section 4A(b)(1)(C), we proposed in Rule 201(d) of Regulation Crowdfunding to require an issuer to disclose information about its business and business plan. The proposed rules did not specify the disclosures that an issuer would need to include in the description of the business and the business plan. (ii) Comments on the Proposed Rules While several commenters expressed concerns about requiring an issuer to disclose a description of its business and business plan, 146 most commenters supported this proposed requirement. 147 Some commenters recommended that the disclosure include specific items, such as disclosure of any material contracts of the issuer, any material litigation or any outstanding court order or judgment affecting the issuer or its property; 148 the issuer's business value proposition, revenue model, team, regulatory issues and executive compensation; 149 how the issuer will build value for the shareholders; 150 and plans for implementation, concrete next steps, outside recommendations about the validity of the business, backgrounds of the individuals involved and prototypes or concept drawings. 151 One commenter recommended that the disclosure requirement be scaled to match the size of the offering. 152 146 See, e.g., ABA Letter; ASSOB Letter; Public Startup Letter 2; Traklight Letter. 147 See, e.g., Anonymous Letter 2; Arctic Island Letter 5; Benjamin Letter; CFIRA Letter 7; Consumer Federation Letter; EMKF Letter; Hackers/Founders Letter; Mollick Letter; NFIB Letter; RocketHub Letter; Saunders Letter; Wefunder Letter. 148 See, e.g., Arctic Island Letter 4 (referencing only pending litigation); Arctic Island Letter 5 (referencing only threatened or pending litigation); FundHub Letter 1; Wilson Letter. 149 See, e.g., Arctic Island Letter 5. 150 See, e.g., Hackers/Founders Letter. 151 See, e.g., Mollick Letter. 152 See Consumer Federation Letter. Some commenters recommended that the Commission provide a non-exclusive list of the types of information an issuer should consider disclosing, templates, examples or other guidance to assist the issuer in complying with this disclosure requirement. 153 One commenter recommended that the Commission not specify the information to be included in the description of the business or the business plan. 154 Commenters also opposed revising the proposed business description requirement to require the description to include the information requirements of Items 101(a)(2) and 101(h) 155 of Regulation S-K. 156 153 See, e.g., ABA Letter; Benjamin Letter; CFIRA Letter 7; Commonwealth of Massachusetts Letter; FundHub Letter 1 (recommending a safe harbor list of requirements); Traklight Letter; Wilson Letter (recommending a checklist or prescribed list of questions). 154 See RocketHub Letter. 155 17 CFR 229.101. 156 See, e.g., Hamilton Letter; Public Startup Letter 2; RocketHub Letter. (iii) Final Rules Consistent with the proposal, Rule 201(d) requires an issuer to disclose information about its business and business plan. We are not modifying the proposed rule, as some commenters recommended, 157 to specify the disclosures that an issuer must include in the description of the business and the business plan or to provide a non-exclusive list of the types of information an issuer should consider disclosing. We anticipate that issuers engaging in crowdfunding transactions may have businesses at various stages of development in different industries, and therefore, we believe that the rules should provide flexibility for these issuers regarding what information they disclose about their businesses. This flexible approach is consistent with the suggestion of one commenter that the business plan requirements be scaled to match the size of the offering. 158 We also are concerned that a non-exclusive list of the types of information an issuer should consider providing would be viewed as a de facto disclosure requirement that all issuers would feel compelled to meet and would, therefore, undermine the intended flexibility of the final rules. 157 See, e.g., ABA Letter; Arctic Island Letter 4; Arctic Island Letter 5; Benjamin Letter; CFIRA Letter 7; Commonwealth of Massachusetts Letter; FundHub Letter 1; Hackers/Founders Letter; Mollick Letter; Traklight Letter; Wilson Letter. 158 See Consumer Federation Letter. (c) Use of Proceeds (i) Proposed Rules Consistent with Section 4A(b)(1)(E), we proposed in Rule 201(i) of Regulation Crowdfunding to require an issuer to provide a description of the purpose of the offering and intended use of the offering proceeds. We expected that such disclosure would provide a sufficiently detailed description of the intended use of proceeds to permit investors to evaluate the investment. Under the proposed rules, if an issuer did not have definitive plans for the proceeds, but instead had identified a range of possible uses, then the issuer would be required to identify and describe each probable use and factors affecting the selection of each particular use. In addition, if an issuer indicated that it would accept proceeds in excess of the target offering amount, 159 the issuer would be required to provide a separate, reasonably detailed description of the purpose and intended use of any excess proceeds with similar specificity. 159 See Section II.B(1)(d) below for a description of the final rule's disclosure requirements with respect to target amounts. (ii) Comments on the Proposed Rules Most commenters supported the requirement that issuers disclose the intended use of the offering proceeds. 160 One commenter recommended that we prescribe the use of proceeds disclosure or provide a list of examples that issuers should consider when providing such disclosures. 161 Others recommended a variety of circumstances under which an issuer should be required to update the use of proceeds disclosure. 162 160 See, e.g., ABA Letter; ASSOB Letter; Consumer Federation Letter; Joinvestor Letter; Saunders Letter; Traklight Letter; Whitaker Chalk Letter; Wilson Letter. But see, Public Startup Letter 2. 161 See Commonwealth of Massachusetts Letter. 162 See, e.g., ASSOB Letter (five percent change); CFIRA Letter 7 (material deviations in the offering statement and any deviations in the annual report); Commonwealth of Massachusetts Letter (material change); Joinvestor Letter (substantial change); RocketHub Letter (significant change); Traklight Letter (material deviations); Whitaker Chalk Letter (material change); Wilson Letter (any deviation). See also Section II.B.3 for discussion of when an amendment to the offering statement may be required. (iii) Final Rules We are adopting the use of proceeds disclosure requirement substantially as proposed in Rule 201(i). An issuer will be required to provide a reasonably detailed description of the purpose of the offering, such that investors are provided with enough information to understand how the offering proceeds will be used. 163 While one commenter 164 recommended that we prescribe this disclosure or provide a list of examples, we believe a more prescriptive rule would not best accommodate a diverse range of issuers. Instead, below we provide several examples of the disclosures issuers should consider making with respect to various uses of proceeds. 163 See Instruction to paragraph (i) of Rule 201 of Regulation Crowdfunding. 164 See Commonwealth of Massachusetts Letter. The disclosure requirement is designed to provide investors with sufficient information to evaluate the investment. For example, an issuer may intend to use the proceeds of an offering to acquire assets or businesses, compensate the intermediary or its own employees or repurchase outstanding securities of the issuer. In providing its description, an issuer would need to consider the appropriate level of detail to provide investors about the assets or businesses that the issuer anticipates acquiring, based on its particular facts and circumstances, so that the investors could make informed decisions. If the proceeds will be used to compensate existing employees or to hire new employees, the issuer should consider disclosing whether the proceeds will be used for salaries or bonuses and how many employees it plans to hire, as applicable. If the issuer will repurchase outstanding issuer securities, it should consider disclosing its plans, terms and purpose for repurchasing the securities. An issuer also should consider disclosing how long the proceeds will satisfy the operational needs of the business. If an issuer does not have definitive plans for the proceeds, but instead has identified a range of possible uses, then the issuer should identify and describe each probable use and the factors the issuer may consider in allocating proceeds among the potential uses. 165 If an issuer indicates that it will accept proceeds in excess of the target offering amount, the issuer must provide a reasonably detailed description of the purpose, method for allocating oversubscriptions, and intended use of any excess proceeds with similar specificity. 166 165 See Instruction to paragraph (i) of Rule 201 of Regulation Crowdfunding. 166 See Instruction to paragraph (i) of Rule 201 of Regulation Crowdfunding. (d) Target Offering Amount and Deadline (i) Proposed Rules Consistent with Section 4A(b)(1)(F), we proposed in Rule 201(g) of Regulation Crowdfunding to require issuers to disclose the target offering amount and the deadline to reach the target offering amount. In addition, we proposed in Rule 201(h) to require an issuer to disclose whether it would accept investments in excess of the target offering amount, and, if it would, we proposed to require the issuer to disclose, at the commencement of the offering, the maximum amount it would accept. The issuer also, under proposed Rule 201(h), would be required to disclose, at the commencement of the offering, how shares in oversubscribed offerings would be allocated. We further proposed in Rule 201(j) to require issuers to describe the process to cancel an investment commitment or to complete the transaction once the target amount is met, including a statement that: • Investors may cancel an investment commitment until 48 hours prior to the deadline identified in the issuer's offering materials; 167 167 Section II.C.6 further discusses the cancellation provisions. • the intermediary will notify investors when the target offering amount has been met; • if an issuer reaches the target offering amount prior to the deadline identified in its offering materials, it may close the offering early if it provides at least five business days' notice prior to that new deadline (absent a material change that would require an extension of the offering and reconfirmation of the investment commitment); 168 and 168 Id. • if an investor does not cancel an investment commitment before the 48-hour period prior to the offering deadline, the funds will be released to the issuer upon closing of the offering and the investor will receive securities in exchange for his or her investment. In addition, proposed Rule 201(k) would require issuers to disclose that if an investor does not reconfirm his or her investment commitment after a material change is made to the offering, the investor's investment commitment will be cancelled and committed funds will be returned. Proposed Rule 201(g) also would require issuers to disclose that if the sum of the investment commitments does not equal or exceed the target offering amount at the time of the offering deadline, no securities will be sold in the offering, investment commitments will be cancelled and committed funds will be returned. 169 169 See Section 4A(a)(7) (requiring intermediaries to “ensure that all offering proceeds are only provided to the issuer when the aggregate capital raised from all investors is equal to or greater than a target offering amount. . . .”) and discussion in Section II.C.6. (ii) Final Rules Commenters were supportive of the proposed rules, and we are adopting the target offering amount and deadline disclosure rules as proposed. 170 As an example of how the final rules will apply, if an issuer sets a target offering amount of $80,000 but is willing to accept up to $650,000, the issuer will be required to disclose both the $80,000 target offering amount and the $650,000 maximum offering amount that it will accept. 171 In an instance where an issuer reaches the target offering amount prior to the deadline identified in its offering materials, it may close the offering early if it provides at least five business days' notice about the new offering deadline as set forth in Rules 201(j) and 302(d) of Regulation Crowdfunding. Accelerating the deadline would not require an extension of the offering and reconfirmation of the investment commitment; however, issuers would need to consider whether any material change occurred that would require an extension and reconfirmation from investors. 172 170 See Rules 201(g), 201(h), 201(j) and 201(k) of Regulation Crowdfunding. 171 The issuer in this case also will need to disclose the intended use of the additional proceeds. See Instruction to paragraph (i) of Rule 201 of Regulation Crowdfunding. See also Section II.B.1.a.i(c) above. In addition, the issuer in this case will be required to provide financial statements reviewed by an independent public accountant (rather than certain tax return information for the most recently completed fiscal year and financial statements certified by the principal executive officer). See Section II.B.1.a.ii for a discussion of the financial statement requirements. 172 Section II.B.1.c discusses the amendment and reconfirmation requirements. We do not believe it is necessary for us to prescribe how oversubscribed offerings must be allocated if the issuer is required to disclose, at the commencement of the offering, how shares in oversubscribed offerings will be allocated. Commenters were supportive of this approach, 173 and we believe this disclosure should provide investors with important information while maintaining flexibility for issuers to structure the offering as they believe appropriate. 173 See, e.g., CFA Institute Letter; RoC Letter; RocketHub Letter; Wilson Letter. We believe that investors in a crowdfunding transaction will benefit from clear disclosure about their right to cancel, the circumstances under which an issuer may close an offering early and the need to reconfirm the investment commitment under certain circumstances, as they will be more aware of their rights to rescind an investment commitment. Therefore, we are adopting disclosure requirements covering these points, as proposed. (e) Offering Price Consistent with Section 4A(b)(1)(G), we proposed in Rule 201(l) of Regulation Crowdfunding to require an issuer to disclose the offering price of the securities or, in the alternative, the method for determining the price, so long as before the sale each investor is provided in writing the final price and all required disclosures. Commenters were supportive of the proposed disclosure 174 and we are adopting the offering price disclosure rules as proposed. 175 We believe that disclosure of the price or the methods used for determining the price, coupled with investors' rights to cancel their investment upon determination of the final price, provide sufficient opportunity for investors to evaluate the price. 174 See, e.g., CFA Institute Letter; Wilson Letter. As discussed below, however, a few commenters recommended that the Commission require a fixed price at the commencement of an offering. See, e.g., Joinvestor Letter; RocketHub Letter. We address those comments in Section II.B.6. 175 See Rule 201(l) of Regulation Crowdfunding. (f) Ownership and Capital Structure (i) Proposed Rules Consistent with Section 4A(b)(1)(H), we proposed in Rule 201(m) of Regulation Crowdfunding to require an issuer to provide a description of its ownership and capital structure. This disclosure would include: • The terms of the securities being offered and each other class of security of the issuer, including the number of securities being offered and those outstanding, whether or not such securities have voting rights, any limitations on such voting rights, how the terms of the securities being offered may be modified and a summary of the differences between such securities and each other class of security of the issuer, and how the rights of the securities being offered may be materially limited, diluted or qualified by the rights of any other class of security of the issuer; • a description of how the exercise of the rights held by the principal shareholders of the issuer could affect the purchasers of the securities; • the name and ownership level of persons who are 20 Percent Beneficial Owners; • how the securities being offered are being valued, and examples of methods for how such securities may be valued by the issuer in the future, including during subsequent corporate actions; • the risks to purchasers of the securities relating to minority ownership in the issuer and the risks associated with corporate actions including additional issuances of securities, issuer repurchases of securities, a sale of the issuer or of assets of the issuer or transactions with related parties; and • a description of the restrictions on the transfer of the securities. As proposed, the rules would require disclosure of the number of securities being offered and those outstanding, whether or not such securities have voting rights, any limitations on such voting rights and a description of the restrictions on the transfer of the securities. (ii) Comments on the Proposed Rules A number of commenters supported the proposed ownership and capital structure disclosure rules, 176 while two commenters opposed them as burdensome. 177 One of these commenters suggested that issuers should only be required to disclose the price of a share and the percentage ownership represented by a share, and noted that the principals of an issuer conducting a crowdfunding offering may not consider the issuer's capital structure or whether its shareholders will have voting rights. 178 176 See, e.g., CFA Institute Letter; Commonwealth of Massachusetts Letter; Hackers/Founders Letter; Joinvestor Letter; NASAA Letter; RocketHub (supporting only to the extent that such disclosures do not require additional form submission or accountant or legal work); Saunders Letter; Wilson Letter. 177 See Campbell R. Letter; Schatz Letter. 178 Schatz Letter. (iii) Final Rules We are adopting the ownership and capital structure disclosure rules as proposed, with the addition of language specifying that beneficial ownership must be calculated no earlier than 120 days prior to the date of the filing of the offering statement or report, 179 consistent with the treatment of beneficial ownership elsewhere in the rule. 180 Investors in crowdfunding transactions will benefit from clear disclosure about the terms of the securities being offered and each other class of security of the issuer. The final rules require disclosure of the number of securities being offered and those outstanding, whether or not such securities have voting rights, any limitations on such voting rights 181 and a description of the restrictions on the transfer of securities. 182 Although Section 4A(b)(1)(H) does not specifically call for all aspects of this disclosure, we believe that such disclosure is necessary to provide investors with a more complete picture of the issuer's capital structure than would be obtained solely pursuant to the statutory requirements. This should help investors better evaluate the terms of the offer before making an investment decision. 179 See Rule 201(m) of Regulation Crowdfunding. 180 See Rule 201(c) of Regulation Crowdfunding. 181 Id. 182 See Rule 501 of Regulation Crowdfunding and Section II.E.2 for a discussion of restrictions on resales. (g) Additional Disclosure Requirements (i) Proposed Rules We also proposed to require the following additional disclosures: 183 183 Section 4A(b)(1)(I) provides us with discretion to require crowdfunding issuers to provide additional information for the protection of investors and in the public interest. • Disclosure of the name, SEC file number and Central Registration Depository number (“CRD number”) (as applicable) 184 of the intermediary through which the offering is being conducted; 184 The Financial Industry Regulatory Authority, Inc. (“FINRA”) issues CRD numbers to registered broker-dealers. • disclosure of the amount of compensation paid to the intermediary for conducting the offering, including the amount of any referral or other fees associated with the offering; • certain legends in the offering statement; • disclosure of the current number of employees of the issuer; • a discussion of the material factors that make an investment in the issuer speculative or risky; • a description of the material terms of any indebtedness of the issuer, including the amount, interest rate, maturity date and any other material terms; • disclosure of any exempt offerings conducted within the past three years; and • disclosure of related-party transactions since the beginning of the issuer's last fiscal year in excess of five percent of the aggregate amount of capital raised by the issuer in reliance on Section 4(a)(6) during the preceding 12-month period, inclusive of the amount the issuer seeks to raise in the current offering. (ii) Comments on the Proposed Rules Identity of the Intermediary. Several commenters supported [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2015-28220. Public record. Not legal advice.