We also recognize that permitting an intermediary to rely on an
issuer's representations unless the intermediary has reason to question
the reliability of the representations could potentially lessen the
incentive for an intermediary to thoroughly investigate the issuers and
securities to be offered on its platform. Such an outcome could result
in a higher levels of fraud compared to a requirement that
intermediaries perform a thorough investigation to ensure that the
issuer complied with all the requirements. A higher level of fraud
would negatively affect both investors in crowdfunding offerings and
non-fraudulent issuers. Based on comments and conversations with
industry participants,\1009\ however, we believe it is likely that
investors and interested participants would provide relevant adverse
information about an issuer or an offering through postings on chat
sites, message boards, and other communication channels, including, but
not limited to, the communication channels to be provided by the
intermediary. These media would provide a potential source of
information for intermediaries who may be subject to liability as
``issuers.''
---------------------------------------------------------------------------

    \1009\ See note 888.
---------------------------------------------------------------------------

    The proposed rules also would require an intermediary to have a
reasonable basis for believing that an investor has not exceeded the
investment limits discussed above before accepting an investment
commitment from that investor.\1010\ Under the proposed rules, an
intermediary may rely on an investor's representations concerning
compliance with the investment limits unless the intermediary has
reason to question the reliability of the representations. We believe
that this requirement would help to ensure that the investor protection
benefits associated with the investment limits are realized. This
ability to rely on investor representations should help mitigate the
potential cost that intermediaries could incur in relation to this
requirement. At the same time, we realize that investors might make
inaccurate representations, whether intentionally or not. Although some
of these concerns could be addressed by the use of a central data
repository, for example, the statute does not mandate the use of such a
central

data repository and we are not proposing to require one because, as we
consider this alternative to the proposed standard, we believe that the
benefits of establishing such a repository would not at this time
justify the potentially significant costs. Accordingly, we believe that
the standard proposed represents a reasonable approach to implement the
statutory requirement, achieving an appropriate balance between
competing concerns.
---------------------------------------------------------------------------

    \1010\ See proposed Rule 303(b)(1) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We expect that because system functionality to obtain user
acknowledgments is standard on many online trading and electronic
commerce Web sites, the market to build such system functionality is
highly commoditized and the average cost to both develop and maintain
systems that allow an investor to represent that he or she has not
exceeded allowable investment limits would not be unduly high. As noted
in the table above, we estimate that the cost to comply with this
requirement would be incorporated into the costs to develop a platform
and that the ongoing burden to comply would be minimal.
    As noted above, the statute and the proposed rules would also
prohibit an issuer from compensating, or committing to compensate,
directly or indirectly, any person to promote the issuer's offering
through communication channels provided by the intermediary unless the
issuer takes reasonable steps to ensure that such person clearly
discloses the receipt (both past and prospective) of such compensation
each time a promotional communication is made. We also are proposing to
require that an intermediary take certain steps to ensure that
investors are made aware of such compensation, and that such
compensation is disclosed in the communication channels, so that
investors can gauge the promoter's communications appropriately.\1011\
We believe that intermediaries would be in an appropriate position to
take such steps. As part of the account opening, the intermediary would
be required disclose to persons opening accounts that any person who
receives compensation to promote an issuer's offering, or who is a
founder or an employee of an issuer that engages in promotional
activities on behalf of the issuer on the intermediary's platform, must
clearly disclose on the platform the receipt of the compensation and
that he or she is engaging in promotional activities on behalf of the
issuer. In addition, under the proposed rules, the intermediary must
require that any person posting a comment in the communication channels
clearly disclose with each posting whether he or she is a founder or an
employee of an issuer engaging in promotional activities on behalf of
the issuer, or is otherwise compensated, whether in the past or
prospectively, to promote the issuer's offering.
---------------------------------------------------------------------------

    \1011\ See proposed Rules 302(c) and 303(c)(4) of Regulation
Crowdfunding.
---------------------------------------------------------------------------

    Under the proposed rules, intermediaries might incur direct costs
in complying with the requirements to disclose compensation to
promoters, and certain additional costs from time to time to ensure
continued compliance, as outlined in the table above. In addition, if
this proposed requirement discourages the use of promoters by issuers,
it could limit the investor pool for a securities-based offering made
in reliance on Section 4(a)(6), thus limiting the ability of an issuer
to raise capital.
    Additionally, the statute prohibits the directors, officers or
partners of an intermediary, or any person occupying a similar status
or performing a similar function, from having any financial interest in
an issuer that uses the services of the intermediary. The proposed
rules would implement this statutory requirement but extend the
prohibition to the intermediary as well.\1012\ Such a prohibition would
be beneficial to investors and issuers because if an intermediary were
to have a financial interest in one or more issuers that plan to use
its services, the intermediary could have an incentive not based solely
on merit to promote that issuer's offering, potentially to the
detriment of investors and other issuers. The prohibition would,
however, impose a cost on an issuer who might otherwise seek to
compensate an intermediary with an interest in the issuer, rather than
cash, for its services. It is thus possible that the prohibition could
make securities-based crowdfunding unavailable to an issuer that does
not have the ability to otherwise compensate an intermediary.
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    \1012\ See proposed Rule 300(b) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The statute requires that intermediaries ensure that all offering
proceeds are provided to the issuer only when the aggregate capital
raised from all investors is equal to or greater than a target offering
amount. The proposed rules would implement this requirement by
requiring intermediaries that are registered as brokers to comply with
the existing requirements of Exchange Act Rule 15c2-4.\1013\
Intermediaries registered as funding portals would be required to
direct investors to transmit the funds or other consideration directly
to a qualified third party, which is a bank, that has agreed in writing
to hold the funds or maintain a bank account (or accounts) for the
exclusive benefit of, and to promptly transmit the funds to, the issuer
or the investors, depending on circumstances such as whether the
offering was completed or was cancelled, and whether the investment
commitment was cancelled. The proposed rules also would require a
funding portal to direct the qualified third party to transmit funds to
the issuer once the target offering amount is reached and the
cancellation period has elapsed; to return funds to an investor when an
investment commitment has been cancelled; and to return funds to
investors when the offering has not been completed.
---------------------------------------------------------------------------

    \1013\ See proposed Rule 303(e) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    These requirements would benefit investors and issuers by helping
to ensure that funds are appropriately refunded or transmitted in
accordance with the terms of the offering. In particular, the
requirement that the account in which funds are deposited be
exclusively for the benefit of investors and the issuer would help
prevent the intermediary or other parties from claiming or otherwise
unlawfully taking funds from that account.
    Under the statute, intermediaries also may not compensate
promoters, finders or lead generators for providing brokers or funding
portals with the personally identifiable information of any potential
investor. We propose to implement this statutory requirement by
prohibiting an intermediary from compensating any person for providing
the personally identifiable information of any crowdfunding investor or
potential investor to intermediaries.\1014\ We anticipate that
intermediaries would have some need for referrals to the intermediary's
platform and, therefore, we are proposing to permit an intermediary to
compensate a person for directing issuers or potential investors to the
intermediary's platform in certain situations.\1015\ These requirements
would benefit intermediaries by providing them with a means to attract
more investors to their crowdfunding portals, without allowing the
sharing of personally identifiable information. Investors would
meanwhile benefit from the additional privacy protection.
Intermediaries might incur a cost because the proposed requirement
would not allow them to use personally identifiable information to
target and

seek out specific investors, thus reducing the potential investor pool
for certain offerings.
---------------------------------------------------------------------------

    \1014\ See proposed Rule 305(a) of Regulation Crowdfunding.
    \1015\ See proposed Rule 305(b) of Regulation Crowdfunding.
---------------------------------------------------------------------------

5. Additional Funding Portal Requirements
    Under the proposed rules, a funding portal would register with the
Commission by filing a complete Form Funding Portal with information
concerning the funding portal's operation.\1016\ In the table above, we
estimate the costs that intermediaries would incur related to
registering as a funding portal on Form Funding Portal.
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    \1016\ See proposed Rule 400(a) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules would include the statutory requirement that a
funding portal be a member of a registered national securities
association. As explained above, we believe that the statute
effectively mandates that an intermediary be a FINRA member or any
other registered national securities association (as applicable). The
proposed requirement that funding portals register with the Commission
and a registered national securities association benefits investors by
providing oversight to reduce the risk for fraud. Although we estimate
that there are costs associated with this requirement, we believe that
the reduction in fraud risk deriving from this requirement might
benefit portals by helping to create a marketplace in which investors
are more willing to participate and issuers are more comfortable using
this method of capital formation.
    The proposed rules also would require that funding portals use
proposed Form Funding Portal to provide updates whenever information on
file becomes inaccurate for any reason, to register successor funding
portals and to withdraw from funding portal registration. Although
funding portals would incur time and compliance costs to update Form
Funding Portal, we expect funding portals would have navigated the
filing process for Form Funding Portal when they register and would be
familiar with the process by the time they update the form.
    We propose to allow nonresident funding portals to register with
us, provided that certain conditions are met. One condition is that an
information sharing agreement is in place between the Commission and a
competent regulatory authority in the relevant jurisdiction. The
proposed rules would also require a nonresident funding portal to
appoint an agent for service of process in the United States, and to
certify and provide opinion of counsel that as a matter of law, the
funding portal can provide the Commission and any national securities
association of which it is a member with prompt access to its books and
records and can, as a matter of law, submit to onsite inspection and
examination by the Commission and the national securities association.
    Compared to an alternative that we could have selected, i.e., that
of not allowing nonresident entities to operate as funding portals in
the U.S. crowdfunding market, the proposed rules would increase
competition among crowdfunding intermediaries, which in turn is likely
to reduce the fees that intermediaries charge issuers. The lack of data
does not allow us to estimate the magnitude of this potential fee
reduction. Lower costs of raising capital could also attract more
potential issuers to use the crowdfunding exemption, thus enhancing
capital formation. Conditioning the nonresident funding portal
registration on the presence of an information sharing agreement as
mentioned above would provide regulators and market participants with
more information about the nonresident funding portals, thus reducing
the likelihood of fraud.
    Although the requirements we propose with respect to appointment of
an agent for service of process, and a certification and legal opinion
would impose costs on nonresident funding portals, these requirements
are consistent with regulations we have proposed to impose on other
nonresident entities subject to our regulation. The proposed
regulations would enhance investor protection by requiring steps to
ensure that funding portals that were not based in the United States,
or that were subject to laws other than those of the United States,
would nevertheless be accessible to the Commission and other relevant
regulators for purposes of conducting examinations of, and enforcing
U.S. laws and regulations against these entities. While the JOBS Act
does not distinguish between resident and nonresident funding portals,
it clearly contemplates Commission oversight of registered funding
portals and the tailoring of such requirements to varied circumstances.
    The statute also provides an exemption from broker-dealer
registration for funding portals. The proposed rules would implement
the statutory requirement by stating that a registered funding portal
is exempt from the broker registration requirements of Exchange Act
Section 15(a)(1) in connection with its activities as a funding
portal.\1017\ This proposed rule would benefit funding portals because
it would specify the scope of the limited exemption in the statute,
thus providing clarity to the funding portals regarding their
activities. We believe this approach of exempting funding portals from
broker registration and its accompanying regulations would benefit the
market and its participants. The activities of funding portals would be
more limited than those of brokers. Thus, the proposed rules would
require funding portals to comply with a registration requirement and
set of regulations more appropriate for their activities, rather than
the more extensive and higher cost requirements that accompany broker-
dealer registration. Lower registration costs of funding portals could
translate into lower fees they charge issuers that use these portals,
thus benefiting issuers of crowdfunding securities and potentially
increasing capital formation. We are unable to quantify these potential
benefits. We do not expect any significant benefits to registered
broker-dealers from this limited exemption for funding portals.
Registered broker-dealers could be put at a competitive disadvantage
because of the higher registration cost. They, however, will be allowed
a wider variety of activities compared to funding portals, the benefits
of which could more than compensate for the higher registration costs.
---------------------------------------------------------------------------

    \1017\ See proposed Rule 401(a) of Regulation Crowdfunding. See
also Section IV.C.2.j below.
---------------------------------------------------------------------------

    The proposed rules would also require a funding portal to obtain a
fidelity bond, and maintain fidelity bond coverage for the duration of
its registration as a funding portal.\1018\ This requirement would
benefit investors by protecting them to some extent from potential
losses caused by fraud. Investors and issuers that used funding portals
for their offerings would likewise benefit from the added stability
that the fidelity bond protection would provide.
---------------------------------------------------------------------------

    \1018\ See proposed Rule 400(f) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We estimated the costs of maintaining fidelity bond coverage based
on conversations with insurance service companies for FINRA-registered
firms and note that the actual cost of coverage for funding portals
would vary depending on particular circumstances, such as the size of
the firm. For instance, according to these sources, funding portals
with fewer employees (e.g., up to 30 employees) might incur lower
fidelity bond costs than funding portals with more employees.

a. Safe Harbor for Certain Activities
    Exchange Act Section 3(a)(80) prohibits funding portals from (1)
offering investment advice or recommendations, (2) soliciting
purchases, sales or offers to buy securities offered or displayed on
the funding portal's platform, (3) compensating employees, agents or
other such persons for solicitation or based on the sale of securities
displayed or referenced on the funding portal's platform, or (4)
holding, managing, possessing or otherwise handling investor funds or
securities. The proposed rules would give funding portals, their
associated persons, affiliates and business associates, a measure of
clarity regarding activities that would be permissible without
violating these statutory prohibitions, while also helping to protect
investors from activities that would create potential conflicts of
interest.\1019\ Thus, compared with the alternative that we could have
chosen, that of not providing the safe harbor, the proposed rules will
likely reduce funding portals' regulatory burden (e.g., it will be
easier for funding portals to advertise their activities and attract
issuers and investors, thus potentially increasing their revenue). The
legal certainty provided by the safe harbors, for example proposed Rule
402(b)(4) which permits a funding portal to provide on its platform
communication channels, would help ensure that the benefits of the
substantive rule provisions are realized. Such measures have the
potential to attract greater numbers of investors to crowdfunding
through funding portals than would otherwise participate, thereby
encouraging capital formation.
---------------------------------------------------------------------------

    \1019\ See proposed Rule 402 of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules would permit a funding portal to apply objective
criteria to limit the crowdfunding securities offered on its
platform.\1020\ Investors would benefit by being able to search, sort
or categorize offerings on a funding portal's platform in an organized
manner, which would allow them to find investment opportunities meeting
specific criteria. This functionality would more efficiently match
investors with investment opportunities. These proposed rules would
benefit funding portals by providing them with the flexibility to limit
the use of their platform to certain types of issuers and to highlight
certain offerings on their platforms which investors may find of
interest.
---------------------------------------------------------------------------

    \1020\ See proposed Rule 402(b)(1) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Under the proposed rules, funding portals would be permitted to
provide advice to an issuer on the structure and content of its
offerings, including assistance to the issuer in preparing
documentation.\1021\ This proposed rule would allow issuers to obtain
guidance that may not typically be available to them and lower funding
costs. Many potential issuers seeking to offer and sell crowdfunding
securities are unlikely to be familiar with how to best structure
offerings so as to raise capital in the most cost effective manner, and
they might not have the capital, knowledge or resources to hire outside
advisors. Given that an issuer would be required to effect offerings
through an intermediary, we believe that permitting funding portals to
provide these services to issuers would lower overall transaction costs
for issuers, as they would not need to engage another party to provide
these services. This effect would in turn help to enhance market
efficiency.
---------------------------------------------------------------------------

    \1021\ See proposed Rule 402(b)(5) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules would also permit a funding portal to compensate
a third party for referring a person to the funding portal in certain
circumstances.\1022\ As discussed above, this proposed safe harbor
would benefit funding portals by providing them with a means to attract
more investors to their crowdfunding platforms, while protecting
investors' personally identifiable information. Investors also would
benefit from the prohibition on transaction-based compensation (other
than to registered broker-dealers), which would help to reduce the
incentive for abusive practices.
---------------------------------------------------------------------------

    \1022\ See proposed Rule 402(b)(6) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules would permit a funding portal to pay or offer to
pay compensation to a registered broker or dealer for services provided
in connection with the offer or sale of securities in reliance on
Section 4(a)(6), subject to certain conditions set forth in the
rule.\1023\ Similarly, a funding portal could, subject to certain
conditions, receive compensation from a registered broker or dealer for
services provided by the funding portal.\1024\ Under these proposed
rules, funding portals would benefit from being able to enter into
these types of arrangements with registered broker-dealers who could
provide services that the funding portals otherwise would be prohibited
from providing. Brokers also would benefit from the additional business
that funding portals might be able to attract through their platforms
and online presence generally, as well as from services, such as those
related to technology, which funding portals could provide. Issuers and
investors might benefit from such arrangements by having more readily-
available services provided to them by entities subject to the
applicable regulatory oversight.
---------------------------------------------------------------------------

    \1023\ See proposed Rule 402(b)(7) of Regulation Crowdfunding.
    \1024\ See proposed Rule 402(b)(8) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules would permit a funding portal to advertise its
existence, subject to certain conditions.\1025\ These requirements
would benefit funding portals by allowing them to advertise publicly to
attract more investors to their crowdfunding platforms; however, they
might bear costs associated with ensuring compliance with the rule's
conditions. The proposed rule also would enhance market efficiency as
investors become more aware of available offerings through
advertisements by funding portals and are thus able to better match
their investments with projects that are most suitable for their risk
preferences.
---------------------------------------------------------------------------

    \1025\ See proposed Rule 402(b)(9) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The statute requires intermediaries to take measures to reduce the
risk of fraud, and we propose to implement this requirement by
requiring a funding portal to deny access to its platform to an issuer
that the funding portal believes presents the potential for fraud or
otherwise raises concerns regarding investor protection.\1026\ The
requirement would further enhance investor protection by giving funding
portals the flexibility to deny access to potential bad actors. Funding
portals also would benefit from the ability to deny access to certain
issuers to protect the integrity of the offering process and the market
reputation of the crowdfunding platforms without fear of violating the
prohibition on providing investment advice.
---------------------------------------------------------------------------

    \1026\ See proposed Rules 301(c) and 402(b)(10) of Regulation
Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules would clarify that a funding portal would not be
in violation of the statutory prohibitions on holding, managing,
possessing or otherwise handling investor funds or securities by
accepting investment commitments from potential investors.\1027\ Under
the proposed rules funding portals could direct investors where to
transmit funds or remit payment in connection with the purchase of
securities offered and sold

in reliance on Section 4(a)(6).\1028\ Similarly, a funding portal could
direct a qualified third party to release proceeds of a successful
offering to the issuer upon completion of the offering or to return
investor proceeds when an investment commitment or offering is
cancelled.\1029\ These proposed rules would give both funding portals
and entities with which they do business a measure of legal certainty
that funding portals providing direction for funds to and from
qualified third parties in compliance with the proposed rules would not
constitute activity in violation of the statutory prohibitions on
holding, managing, possessing or otherwise handling investor funds or
securities.
---------------------------------------------------------------------------

    \1027\ See proposed Rule 402(b)(11) of Regulation Crowdfunding.
    \1028\ See proposed Rule 402(b)(12) of Regulation Crowdfunding.
    \1029\ See proposed Rule 402(b)(13) of Regulation Crowdfunding.
---------------------------------------------------------------------------

b. Compliance Requirements
    We are proposing to require that a funding portal implement written
policies and procedures, reasonably designed to achieve compliance with
proposed Regulation Crowdfunding and the rules and regulations
thereunder, relating to its business as a funding portal.\1030\ This
requirement would provide a benefit to investors and funding portals
alike, as written policies and procedures would aid, enhance and help
to ensure consistent compliance with the proposed rules. Funding
portals would incur costs associated with the requirement to develop
their own procedures and implement written policies and procedures, as
well as to update and enforce them, as set forth in the table above.
---------------------------------------------------------------------------

    \1030\ See proposed Rule 403(a) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We are also proposing to require registered funding portals to
comply with the requirements of the Bank Secrecy Act (BSA), including
the reporting, recordkeeping and record retention requirements that
apply to brokers.\1031\ We recognize that the proposed rules would
impose costs on funding portals to implement anti-money laundering
(AML) procedures, as set forth in the table above; however, we believe
that the proposed requirements provide important benefits. As discussed
above,\1032\ low-priced and privately-placed securities pose a money
laundering risk because they are susceptible to market manipulation and
fraud.\1033\ Requiring funding portals to follow these AML procedures,
in particular the requirement to file SARs, would help identify to law
enforcement and regulators potentially fraudulent activity. These AML
requirements would help therefore to protect market participants from
illegal activity that could potentially infiltrate new online
investment opportunities. Requiring the implementation of AML
procedures would, in turn, provide potential investors with some degree
of confidence that adequate protections against illegal activity exist
for this new fundraising approach and would encourage more investors to
participate, thus facilitating capital formation.
---------------------------------------------------------------------------

    \1031\ See proposed Rules 401(b), 403(b) and 404(f) of
Regulation Crowdfunding. See also Section II.D.4 above.
    \1032\ See Section II.D.4.b above.
    \1033\ See FATF Typology, note 641.
---------------------------------------------------------------------------

    Additionally, the statute requires that intermediaries take such
steps to protect the privacy of information collected from investors as
we determine appropriate. We are proposing to implement this statutory
provision by requiring a funding portal to comply with Regulation S-P,
S-ID and Regulation S-AM, which are applicable to brokers.\1034\ We
believe that requiring a funding portal to comply with privacy
obligations would help protect the personally identifiable information
of investors and potential investors, consistent with how it is
protected by other financial intermediaries. Compared with an
alternative that we could have selected, that of developing a new
privacy regime applicable only to funding portals, the proposed rules
would introduce consistency between funding portals and broker-dealers
with respect to privacy obligations. That will benefit investors by
lowering their information search costs and reducing investor
confusion. We recognize that the requirement would impose costs on
funding portals to comply with the privacy requirements, as set forth
in the table above; however, these additional privacy protections could
give potential investors the confidence to participate in offerings
made in reliance on Section 4(a)(6), which would facilitate capital
formation and benefit the markets generally.
---------------------------------------------------------------------------

    \1034\ See proposed Rule 403(c) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    As a condition to exempting funding portals from the requirement to
register as broker-dealers under Exchange Act Section 15(a)(1),
Exchange Act Section 3(h)(1)(A) requires that registered funding
portals remain subject to, among other things, the Commission's
examination authority. Under the proposed rules, a funding portal would
be required to permit the examination and inspection of all its
business and business operations relating to its activities as a
funding portal, including its premises, systems, platforms and records
by Commission representatives and by representatives of the registered
national securities association of which it is a member.\1035\ Although
funding portals would face time and compliance costs in submitting to
Commission and registered national securities association examinations,
inspections or investigations, and potentially responding to any issues
identified, funding portals, investors and issuers would benefit from
the enhanced compliance with regulations due to the oversight, as well
as the sanctions or other disciplinary actions that may follow upon
findings of violations through such inspections, examinations or
investigations.
---------------------------------------------------------------------------

    \1035\ See proposed Rule 403(d) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We are proposing to require a registered funding portal to maintain
and preserve certain records relating to its business.\1036\ The
proposed rules would require, among other things, that the funding
portal maintain and preserve certain books and records for a period of
not less than five years and in an easily-accessible place for the
first two years. Recordkeeping requirements help registrants with their
compliance. They are a familiar and important element of the approach
to broker-dealer regulation, as well as the regulation of investment
advisers and others, and are designed to maintain the effectiveness of
our inspection program for regulated entities, facilitating our review
of their compliance with statutory mandates and with our rules. The
proposed rule would assist us in evaluating a funding portal's
compliance with the Securities Act Sections 4(a)(6) and 4A and the
rules issued thereunder. Regulators would benefit from standardized
recordkeeping practices for intermediaries because they would be able
to perform more efficient, targeted inspections and examinations, and
have an increased likelihood of identifying improper conduct at earlier
stages of the inspection or examination.
---------------------------------------------------------------------------

    \1036\ See proposed Rule 404 of Regulation Crowdfunding. We note
that registered brokers already are expected to comply with the
books and records requirements in Exchange Act Rules 17a-3, 17a-4
and 17a-5 (17 CFR 240.17a-3, 17a-4 and 17a-5). Thus, all
intermediaries, whether registered as brokers or as funding portals,
would be required to make and preserve books and records.
---------------------------------------------------------------------------

    Funding portals may incur one-time costs in establishing the
systems necessary to comply with the proposed books and records
requirements. We note, however, that the records required to be made
and preserved under the proposed rules are those that would ordinarily
be made and preserved in the

ordinary course of business by a regulated broker engaging in these
activities. We recognize that there may be a slight competitive
advantage for funding portals over brokers to the extent that the
proposed recordkeeping rule for funding portals is less burdensome for
than the requirements applicable to brokers. At the same time, we
believe that the proposed recordkeeping rule for funding portals is
consistent with the narrow range of their activities. Our estimates of
the costs associated with this requirement are set forth in the table
above.
6. Insignificant Deviations
    We are proposing to provide a safe harbor for issuers for certain
insignificant deviations from a term, condition or requirement of
Regulation Crowdfunding.\1037\ The proposed safe harbor would provide
that insignificant deviations from a term, condition or requirement of
Regulation Crowdfunding would not result in a loss of the exemption, so
long as the issuer relying on the exemption can show that: (1) The
failure to comply was insignificant with respect to the offering as a
whole; (2) the issuer made a good faith and reasonable attempt to
comply with all applicable terms, conditions and requirements of
Regulation Crowdfunding; and (3) the issuer did not know of the failure
to comply, where the failure to comply with a term, condition or
requirement was the result of the failure of the intermediary to comply
with the requirements of Section 4A(a) and the related rules, or such
failure by the intermediary occurred solely in offerings other than the
issuer's offering.
---------------------------------------------------------------------------

    \1037\ See proposed Rule 502(a) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Providing a safe harbor could impose costs on investors, issuers,
funding portals and regulators, compared with the alternative of not
providing a safe harbor, to the extent that issuers lessen the vigor
with which they develop and implement systems and controls to achieve
compliance with the requirements of Regulation Crowdfunding. We believe
that limiting the proposed safe harbor to insignificant instances of
non-compliance and requiring a good faith and reasonable attempt to
comply with the requirements would mitigate these potential costs and
would benefit issuers and funding portals by providing greater
certainty regarding their reliance on the exemption. In the absence of
a safe harbor, issuers may extend significantly more effort and more
resources to satisfy the requirements of Regulation Crowdfunding or
they may face greater uncertainty regarding their reliance on the
exemption, which could discourage participation in this market,
impacting efficiency and capital formation.
7. Relationship With State Law
    Section 305 of the JOBS Act amended Securities Act Section 18(b)(4)
\1038\ to preempt the ability of states to regulate certain aspects of
crowdfunding conducted pursuant to Section 4(a)(6). This statutory
amendment would benefit issuers by making transactions made in reliance
on Section 4(a)(6) less costly, because an issuer would not be required
to register transactions with each state where it offers and sells
securities in reliance on Section 4(a)(6). It also could benefit
investors because these cost savings ultimately may be passed on to
investors. Absent preemption of the states' registration requirements,
an offering made through the Internet in reliance on Section 4(a)(6)
and the proposed rules could result in an issuer potentially violating
state securities laws. Recent evidence in donation-based and reward-
based crowdfunding campaigns suggests that contributions are not
exclusively local.\1039\ The statutory preemption of state registration
laws would reduce issuer uncertainty regarding the necessity of state
registration, and it would eliminate the costs that would be associated
with state registration. On the other hand, state registration laws may
provide an additional layer of investor protection, and their
preemption will remove a potential layer of review and may lead to
increased levels of fraud. This potential negative effect of state law
preemption, however, could be offset by some of the statutory
requirements and the proposed rules that are designed to deter fraud,
such as public disclosure, investment limits and the use of a
registered intermediary.
---------------------------------------------------------------------------

    \1038\ 15 U.S.C. 77r(b)(4).
    \1039\ For example, in crowdfunding campaigns for early stage
musical projects, the average distance between artist-entrepreneurs
and contributors was 3,000 miles. See Ajay Agrawal, Christian
Catalini and Avi Goldfarb, The Geography of Crowdfunding, NET
Institute Working Paper No. 10-08 (Oct. 29, 2010), available at
http://ssrn.com/abstract=1692661.
---------------------------------------------------------------------------

8. Exemption From Section 12(g)
    Proposed Rule 12g-6 provides that securities issued pursuant to an
offering made under Section 4(a)(6) would be permanently exempted from
the record holder count under Section 12(g). This proposal delays the
more extensive Exchange Act reporting requirements until the issuer
either sells securities in a registered transaction or registers a
class of securities under the Exchange Act to reach a trading market.
This allows an issuer to time the decision to become a reporting
company without forcing it to become a reporting company through
actions outside of its control (e.g., secondary market trading). By
conditioning the more burdensome reporting requirements on the decision
to raise new capital or to actively seek a liquid trading market, the
benefits of increased disclosure would scale with the scope of
investment in the issuer, thus improving efficiency.
    This proposal could, however, result in an unintended and
potentially costly outcome. It is possible that an issuer that sells
securities in reliance on Section 4(a)(6) could become an Exchange Act
reporting company, but then deregister and go dark with potentially
thousands of investors. For example, in an attempt to provide
additional liquidity to its shareholders, an issuer could voluntarily
register a class of securities under Exchange Act Section 12(g) so that
the securities could be quoted in the over-the-counter market. The
issuer would become subject to Exchange Act reporting requirements and
would no longer be subject to the ongoing reporting requirements of
Regulation Crowdfunding. If the issuer does not sell securities in a
registered offering or trigger the asset and holder of record
thresholds for mandatory Exchange Act registration in Section 12(g),
the issuer could deregister its securities and stop all ongoing
reporting obligations even if all the securities sold in reliance on
Section 4(a)(6) remain outstanding.\1040\ Given that securities-based
crowdfunding could attract thousands of potential issuers, this is a
possible outcome for some of these issuers. Under such an outcome, a
significant number of investors in an issuer might be unable to obtain
important information about that issuer, which could affect the
liquidity and pricing of the securities these investors hold.
---------------------------------------------------------------------------

    \1040\ Although less likely, the same could happen if an issuer
sells securities in reliance on Section 4(a)(6) and subsequently
registers a class of securities under Exchange Act Section 12(b) in
order to list its securities on a national securities exchange.
---------------------------------------------------------------------------

9. Disqualification
    The statute and the proposed rules impose disqualification
provisions under which an issuer would not be eligible to offer
securities pursuant to Section 4(a)(6) and an intermediary would not be
eligible to effect or participate in transactions pursuant to

Section 4(a)(6).\1041\ The proposed disqualification provisions for
issuers are substantially similar to those imposed under Rules 262 of
Regulation A and 506 of Regulation D,\1042\ while the proposed
disqualification provisions for intermediaries under Section 3(a)(39)
are substantially similar to, while somewhat broader than, the
provisions of Rule 262.
---------------------------------------------------------------------------

    \1041\ See Section 302(d) of the JOBS Act; proposed Rule 503 of
Regulation Crowdfunding. See also discussion in Section II.E.6
above.
    \1042\ See Disqualification Adopting Release, note 101.
---------------------------------------------------------------------------

a. Issuers
    The proposed rules should induce issuers to implement measures to
restrict bad actor participation in offerings made in reliance on
Section 4(a)(6). This should help reduce the potential for fraud in the
market for such offerings, which should help reduce the cost of raising
capital to issuers that rely on Section 4(a)(6), to the extent that
disqualification standards lower the risk premium associated with the
presence of bad actors in securities offerings. In addition, the
requirement that issuers determine whether any covered persons are
subject to disqualification might obviate the need for investors to do
their own investigations and eliminate redundancies that might exist in
otherwise separate investigations. This should help reduce information-
gathering costs to investors, to the extent that issuers are at an
advantage in accessing much of the relevant information and to the
extent that issuers could do so at a lower cost than investors.
    The proposed rules still would, however, impose costs on issuers,
other covered persons and investors. If issuers are disqualified from
relying on Section 4(a)(6) to make their offerings, they might
experience increased costs in raising capital through alternative
methods that do not require bad actor disqualification, if available,
or alternative methods might be altogether unavailable. This could
hinder potential investment opportunities for such issuers, with
possible negative effects on capital formation. In addition, issuers
and other covered persons may incur costs in connection with internal
personnel changes that issuers may make to avoid the participation of
those covered persons who are subject to disqualifying events. Issuers
also might incur costs associated with restructuring share ownership
positions to avoid having 20 Percent Beneficial Owners who are subject
to disqualifying events. Finally, issuers might incur costs in
connection with seeking waivers of disqualification from the Commission
or determinations by other authorities that existing orders should not
give rise to disqualification.
    We anticipate that the reasonable care exception \1043\ also would
impose costs and benefits. In this regard, a reasonable care exception
might encourage capital formation by eliminating any hesitation issuers
might otherwise experience under a strict liability standard. However,
such an exception also might encourage issuers to take fewer steps to
inquire about offering participants than they would if a strict
liability standard applied, increasing the potential for fraud in the
market for offerings made in reliance on Section 4(a)(6). Nevertheless,
some issuers, with regard to the exercise of reasonable care, might
incur costs associated with conducting and documenting their factual
inquiry into possible disqualifications. The lack of specificity in the
rule, while providing flexibility to the issuer to tailor its factual
inquiry as appropriate to a particular offering, might increase these
costs because uncertainty could drive issuers to do more than necessary
under the rule. Alternatively, it might reduce these costs because
uncertainty might drive issuers to exert minimum effort in conducting
and documenting a factual inquiry.
---------------------------------------------------------------------------

    \1043\ See proposed Rule 503(b)(4) of Regulation Crowdfunding.
See also Section II.E.6.a.iii above.
---------------------------------------------------------------------------

    The requirement that issuers disclose matters that would have
triggered disqualification, had they occurred after the effective date
of proposed Regulation Crowdfunding,\1044\ also would impose costs and
benefits. The disclosure requirement would reduce costs associated with
covered persons who would be disqualified under the proposed rules but
for the fact that the disqualifying event occurred prior to the
effective date of the rules. However, this approach would allow the
participation of past bad actors, whose disqualifying events occurred
prior to the effective date of the proposed rules, which could expose
investors to the risks that arise when bad actors are associated with
an offering. Nevertheless, investors would benefit by having access to
such information that could inform their investment decisions. Issuers
also may incur costs associated with the factual inquiry, preparing the
required disclosure and making any internal or share ownership changes
they may decide to make to avoid the participation of covered persons
that trigger the disclosure requirement. Disclosure of triggering
events also may make it more difficult for issuers to attract
investors, and issuers may experience some or all of the impact of
disqualification as a result.
---------------------------------------------------------------------------

    \1044\ See proposed Rule 201(u) of Regulation Crowdfunding. See
also Section II.E.6.a.v above.
---------------------------------------------------------------------------

    We believe the inclusion of Commission cease-and-desist orders in
the list of disqualifying events would not impose a significant,
incremental cost on issuers and other covered persons because many of
these groups might already be subject to disqualifying orders issued by
the states, federal banking regulators and the National Credit Union
Administration.\1045\ The inclusion of such orders in the list of
disqualifying events might change how settlement negotiations are
conducted between respondents and the Commission, and the Commission
could grant an appropriate waiver from disqualification.
---------------------------------------------------------------------------

    \1045\ See Disqualification Adopting Release, note 101.
---------------------------------------------------------------------------

    Under the proposed rules, orders issued by the CFTC would trigger
disqualification to the same extent as orders of the regulators
enumerated in Section 302(d)(2)(B)(i) of the JOBS Act (e.g., state
securities, insurance and banking regulators, federal banking agencies
and the National Credit Union Administration). We believe that
including orders of the CFTC would result in the similar treatment, for
disqualification purposes, of comparable sanctions. In this regard, we
note that the conduct that would typically give rise to CFTC sanctions
is similar to the type of conduct that would result in disqualification
if it were the subject of sanctions by another financial services
industry regulator. This should enable the disqualification rules to
more effectively screen out bad actors.
    As discussed above, the baseline for our economic analysis of
proposed Regulation Crowdfunding, including the baseline for our
consideration of the effects of the proposed rules on efficiency,
competition and capital formation, is the situation in existence today,
in which startups and small businesses seeking to raise capital through
securities offerings must register the offer and sale of securities
under the Securities Act unless they can comply with an existing
exemption from registration under the federal securities laws. Relative
to the current baseline, we believe that the disqualification
provisions may not impose significant incremental costs on issuers and
other covered persons because the proposed rules are substantially
similar to the

disqualification provisions under existing exemptions.
b. Intermediaries
    In implementing the statute, we are proposing to apply to
intermediaries the disqualification provisions under Section 3(a)(39),
rather than Rule 262 or the disqualification rules we are proposing for
issuers. We believe that the standard of Section 3(a)(39) is already an
established one among broker-dealers and their regulators and that,
despite the differences, Section 3(a)(39) and Rule 262 are
substantially similar in particular with regard to the persons and
events they cover, their scope and their purpose.\1046\ We believe that
imposing any new or different standard, including Rule 262, only for
those intermediaries that engage in crowdfunding transactions would
likely create confusion and unnecessary burdens, as currently-
registered broker-dealers and their associated persons would become
subject to two distinct standards for disqualification. Consistent
standards for all brokers and funding portals also would assist a
registered national securities association in monitoring compliance and
enforcing its rules.
---------------------------------------------------------------------------

    \1046\ See discussion in Section II.E.6.b above.
---------------------------------------------------------------------------

    The proposed rules would implement the statutory requirement for
intermediaries by providing that a person subject to a statutory
disqualification, as defined in Exchange Act Section 3(a)(39), may not
act as, or be an associated person of, an intermediary in a transaction
involving the offer or sale of securities in reliance on Section
4(a)(6) unless so permitted by Commission rule or order. While this
requirement would potentially reduce the number of intermediaries, we
expect that it would strengthen investor protection by preventing bad
actors from entering the securities-based crowdfunding market and by
reducing the potential for fraud and other abuse.
    As discussed above, the baseline for our economic analysis of
proposed Regulation Crowdfunding, including the baseline for our
consideration of the effects of the proposed rules on efficiency,
competition and capital formation, is the situation in existence today,
in which intermediaries intending to facilitate securities transactions
are required to register with the Commission as broker-dealers under
Exchange Act Section 15(a). Relative to the current baseline, we
believe that the disqualification provisions might not impose
significant incremental costs to brokers because the proposed rules are
the same as the disqualification provisions that are already imposed on
broker-dealers.

C. Request for Comment

    Throughout this release, we have discussed the anticipated costs
and benefits of the proposed rules and their potential impact on
efficiency, competition and capital formation. We request and encourage
any interested person to submit comments regarding the proposed rules,
our analysis of the potential effects of the rules and other matters
that may have an effect on the proposed rules. We request comment from
the point of view of issuers, investors and other market participants.
With regard to any comments, we note that such comments are of
particular assistance to us if accompanied by supporting data and
analysis of the issues addressed in those comments. We also are
interested in comments on the qualitative benefits and costs we have
identified and any benefits and costs we may have overlooked. We urge
commenters to be as specific as possible.
    Comments on the following questions are of particular interest.
    285. How similar or different is a securities-based crowdfunding
offering from a non-securities-based crowdfunding offering? To what
extent should we base the anticipated effects of the proposed rules on
the experience of current crowdfunding platforms and their
participants, including those based on rewards and donations? Should we
expect the same incidence of success, failure, fraud and other outcomes
when crowdfunding involves participants providing financing with an
expectation of a monetary return on their investments? Would
securities-based crowdfunding attract similar projects, ventures and
capital seekers as other forms of crowdfunding? If not, why not, and
what differences in the types of ventures, participants and outcomes
might be expected?
    286. How would securities issued in reliance on Section 4(a)(6) be
valued? Would issuers and/or investors have sufficient financial
sophistication or methods available to accurately assess the intrinsic
risks associated with the issuance? If so, what mechanisms would help
assure accurate pricing? If not, what specific challenges or issues
would prevent issuers and/or investors from arriving at a price that
reflects the intrinsic value of the offering?
    287. How would investors who purchase securities in an offering in
reliance on Section 4(a)(6) exit their investment? Once the securities
are issued, investors would have to wait, except in certain
circumstances, for one year before selling a security sold in a Section
4(a)(6) offering. At that time, how would existing security holders
liquidate their positions? What is the likelihood that there would be a
ready market for mature securities issued in reliance on Section
4(a)(6)? What entities or investors are likely to supply the liquidity,
and what discounts, if any, are investors likely to face when exiting
their investments? To what extent would, or should, liquidity
provisions be built into the design of the security issues (e.g., call
provisions or self-liquidation features)?
    288. How, and to what extent, would the collective knowledge of
crowdfunding investors (i.e., the ``wisdom of the crowd'') provide
investor protections and mitigate potential fraud or unspecified
offering risks at the time of issuance? Would ``the wisdom of the
crowd'' provide ongoing investor protections to the community of
securities-based crowdfunding investors? If so, how and to what extent?
    289. Do the proposed rules require sufficient disclosure and
educational requirements to help ensure that investors have a
reasonable understanding of the risks and costs of investing in
crowdfunding securities? Are the proposed disclosure and educational
requirements sufficient for investors to understand: (1) The methods
used for valuing securities issued in reliance on Section 4(a)(6), (2)
potential complexity in the security design, or (3) risks of subsequent
dilution of their investment? If not, what additional requirements
would further mitigate the associated risks?
    290. Should intermediaries be required to systematically collect
and report information--to the Commission and/or publicly--about the
progress, success and failures of issuers that relied on Section
4(a)(6) to offer and sell securities subsequent to initial financing?
Would collecting and reporting such statistics help investors better
understand the risks associated with securities-based crowdfunding
investments with the passage of time? If so, what information should be
reported, and to whom and in what manner should it be reported? Would a
requirement to collect and maintain information about issuers that
relied on Section 4(a)(6) after the completion of the offering be too
burdensome for intermediaries?
    291. Other than averting potential losses, what are the potential
economic effects of limiting the investment size for any single
investor to a maximum aggregate amount of $100,000? Would this reduce
the incentive for some

investors to participate in offerings in reliance on Section 4(a)(6),
and if so, would this impede potential capital formation or the
efficiency with which offerings can be made? Would this limit the
ability of investors to appropriately diversify their securities-based
crowdfunding investments? Please explain.
    292. Would the permanent exemption of securities-based crowdfunding
securities from the record holder count under Section 12(g) of the
Exchange Act pose any significant risks to investors of successful
ventures? For example, is it likely or possible that an issuers that
offers and sells securities in reliance on Section 4(a)(6) could became
subject to Exchange Act reporting, but then subsequently delist and go
dark without regard to the number of record holders?
    293. We estimated the costs for a broker to act as an intermediary
in transactions conducted pursuant to Section 4(a)(6), and to engage in
related broker activities, to be approximately $770,000 in the first
year and approximately $270,000 each year thereafter. In making these
estimates, we assumed that brokers would engage in particular
activities in connection with these transactions, namely providing
investment advice and recommendations, soliciting investors, and
managing and handling customer funds and securities. Are our
assumptions correct? If not, please explain. Are our estimates of the
cost of doing business as a broker, in general, accurate? If not,
please explain and provide relevant data.
    294. We estimated the costs for a funding portal to act as an
intermediary in transactions pursuant to Section 4(a)(6) to be
approximately $417,000 in the first year, and approximately $90,000
each year thereafter. Are our estimates of the costs of doing business
as a funding portal, and the assumptions behind these estimates, in
general, accurate? If not, please explain and provide relevant data.
    295. The Commission is interested in receiving comments, views,
estimates and data concerning the following:
    [cir] Expected size of the securities-based crowdfunding market
(e.g., number of offerings, number of issuers, number for funding
portals, size of offerings, number of investors, etc., as well as
information comparing these estimates to the current baseline);
    [cir] Overall economic impact of the proposed rules;
    [cir] Competitive effects on brokers of the development of funding
portals; and
    [cir] Any other aspect of the economic analysis.

IV. Paperwork Reduction Act

A. Background

    Certain provisions of the proposed rules contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\1047\ We are submitting the proposal
to the Office of Management and Budget (``OMB'') for review in
accordance with the PRA.\1048\ The titles for the collections of
information are:
---------------------------------------------------------------------------

    \1047\ 44 U.S.C. 3501 et seq.
    \1048\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
---------------------------------------------------------------------------

    (1) ``Form ID'' (OMB Control Number 3235-0328);
    (2) ``Form C'' (a proposed new collection of information);
    (3) ``Form BD'' (OMB Control Number 3235-0012); and
    (4) ``Regulation Crowdfunding--Intermediaries and Funding Portals''
(a proposed new collection of information).
    In addition, the collections of information included under OMB
Control Numbers 1506-0034 and 1506-0019, regarding the CIP and SAR
requirements of the Department of Treasury, would be amended to reflect
related burdens under proposed Rule 403(b) of Regulation Crowdfunding.
An agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless it displays a currently
valid OMB control number. We are applying for OMB control numbers for
the proposed new collections of information in accordance with 44
U.S.C. 3507(j) and 5 CFR 1320.13, and OMB has not yet assigned a
control number to each new collection. Responses to these new
collections of information would be mandatory.

B. Estimate of Issuers and Intermediaries

1. Issuers
    The number, type and size of the issuers that would participate in
securities-based crowdfunding transactions are uncertain, but data
regarding current market practices may help identify the number and
characteristics of potential issuers that may offer and sell securities
in reliance on Section 4(a)(6).\1049\ While it is not possible to
predict the number of future offerings made in reliance on Section
4(a)(6), particularly because rules governing the process are not yet
in place, for purposes of this analysis, we estimate that the number
would be 2,300 offerings per year. We base this estimate on the number
of issuers that conducted a Regulation D offering that had no revenues
or less than $1 million in revenues.\1050\ We believe those issuers
would be similar in size to the potential issuers that may participate
in securities-based crowdfunding, and we assume that each issuer would
conduct one offering per year, raising an average of $100,000 per
offering.
---------------------------------------------------------------------------

    \1049\ See Section III.A.4.a above for a discussion of the data
regarding current market practices.
    \1050\ See id.
---------------------------------------------------------------------------

2. Intermediaries That Are Registered Brokers
    We estimate that the proposed collections of information would
apply to approximately 10 intermediaries per year that are not
currently registered with the Commission and would choose to register
as brokers to act as intermediaries for transactions made in reliance
on Section 4(a)(6). However, we believe that, given the high cost that
an unregistered entity would incur to register as a broker with us,
compared with the lower cost of becoming a funding portal, unregistered
entities generally would have less incentive to register as brokers
than as funding portals.
    We further estimate that approximately 50 intermediaries per year
that are already registered as brokers with the Commission would choose
to add to their current service offerings by also becoming crowdfunding
intermediaries. These entities would not have to register anew with us,
and if doing business with the public, would already be members of
FINRA (the applicable national securities association registered under
Exchange Act Section 15A). Because we do not have any data indicating
the number of currently-registered brokers that would be interested in
becoming crowdfunding intermediaries, we cannot estimate how many would
choose to enter the crowdfunding market.\1051\
---------------------------------------------------------------------------

    \1051\ Similarly, we cannot estimate with any degree of
certainty how many unregistered ``finders'' would potentially choose
to enter the securities-based crowdfunding market. See, e.g., Task
Force on Private Placement Broker-Dealers, note 894 (stating that
quantifying the number of ``finders'' that help small businesses to
obtain sources of capital ``is an impossibility, since there is no
effective measuring device.'').
---------------------------------------------------------------------------

3. Funding Portals
    We estimate that approximately 50 intermediaries per year would
choose to register as funding portals during the first three years
following effectiveness of the proposed rules. This estimate assumes
that, upon effectiveness of the proposed rules, about 15% of the
approximately 200 U.S.-based

crowdfunding portals \1052\ currently in existence would participate in
securities-based crowdfunding and that the number of crowdfunding
portals would grow at 60% per year over the next three years.\1053\
Therefore, we estimate that an average of approximately 50 respondents
would register as funding portals annually.\1054\ Of those 50 funding
portals, we estimate that two would be nonresident funding portals.
These estimates are based in part on current indications of interest
expressed in responses to FINRA's voluntary interim form for funding
portals.\1055\
---------------------------------------------------------------------------

    \1052\ This estimate is based in part on an industry estimate
that, as of April 2012, there were approximately 200 non-securities-
based crowdfunding portals operating in the United States. See
Massolution, note 861 at 16.
    \1053\ A worldwide survey of crowdfunding portals indicated
that, in 2011, approximately 14.8% of the surveyed crowdfunding
portals (mostly based in Europe) participated in ``equity-based''
crowdfunding. Id. Also, the total number of crowdfunding portals
worldwide grew by an estimated 60% from 2011 to 2012. Id. at 13.
    \1054\ 200 U.S.-based crowdfunding portals x 15% (estimated
percentage of crowdfunding portals that would participate in
securities-based crowdfunding) = 30 funding portals that would
participate in securities-based crowdfunding. Assuming 60% growth
over three years, the number of registered funding portals would be
30 during the first year, 48 during the second year and 77 during
the third year. The average number of registered funding portals
over three years is (30 + 48 + 77)/3 = 52 funding portals (or
approximately 50 funding portals per year).
    \1055\ See note 980.
---------------------------------------------------------------------------

C. Estimate of Burdens

1. Issuers
a. Form C: Offering Statement and Progress Update
    Under the proposed rules, an issuer conducting a transaction in
reliance on Section 4(a)(6) would file with us specified disclosures on
a Form C: Offering Statement.\1056\ An issuer also would file with us
amendments to Form C to disclose any material change in the offer terms
or disclosure previously provided to investors.\1057\ Form C is similar
to the Form 1-A offering statement under Regulation A, but it would
require fewer disclosure items (e.g., it would not require disclosure
about the plan of distribution, the compensation of officers and
directors, litigation or a discussion of federal tax aspects). We note
that offerings made in reliance on Regulation A allow issuers to offer
up to $5 million, involve review by the staff and require filings at
the state level. In light of these factors, we expect that issuers
seeking to raise capital pursuant to a Regulation A offering generally
would be at a more advanced stage of development than issuers likely to
raise capital pursuant to Section 4(a)(6), so the complexity of the
required disclosure and, in turn, the burden of compliance with the
requirements of proposed Form C would be significantly less than for
Form 1-A.\1058\ We estimate that the total burden to prepare and file
the Form C, including any amendment to disclose any material change,
would be approximately 60.00 hours, which is approximately 10 percent
of the burden to prepare a Form 1-A for a Regulation A offering. We
estimate that 75 percent of the burden of preparation would be carried
by the issuer internally and that 25 percent would be carried by
outside professionals\1059\ retained by the issuer at an average cost
of $400 per hour.\1060\
---------------------------------------------------------------------------

    \1056\ See proposed Rule 203(a)(1) of Regulation Crowdfunding.
    \1057\ See proposed Rule 203(a)(2) of Regulation Crowdfunding.
    \1058\ We estimate the burden per response for preparing a Form
1-A to be 608.00 hours. See Form 1-A at 1.
    \1059\ For example, an issuer could retain an outside
professional to assist in the preparation of the financial
statements, but could decide to address the remaining disclosure
requirements internally.
    \1060\ We recognize that the costs of retaining outside
professionals may vary depending on the nature of the professional
services, but for purposes of this PRA analysis, we estimate that
such costs would be an average of $400 per hour. This is the rate we
typically estimate for outside legal services used in connection
with public company reporting.
---------------------------------------------------------------------------

    Under the proposed rules, the issuer also would be required to file
with us regular updates regarding the progress of the issuer in meeting
the target offering amount.\1061\ The issuer would make the filing
under cover of a Form C-U: Progress Update. The issuer would be
required to disclose its progress in meeting the target offering
amount. Form C-U is similar to a Form D Notice of Exempt Offering of
Securities under Regulation D \1062\ and a Form 2-A Report of Sales and
Uses of Proceeds Pursuant to Rule 257 of Regulation A.\1063\ Form C-U
would require significantly less disclosure than the Form D and the
Form 2-A, however, as it would only require disclosure of the issuer's
progress in meeting the target offering amount, rather than
compensation and use of proceeds disclosures or other information about
the issuer and the offering. Thus, the complexity of the required
disclosure and the burden to prepare and file Form C-U would be
significantly less than for either Form D or Form 2-A. We estimate that
the burden to prepare and file each progress update, which only has one
disclosure requirement, would be 0.50 hours. We further estimate that
an issuer would be required to file an average of two progress updates
during each offering.\1064\ Therefore, we estimate that an issuer's
compliance with proposed Form C-U would result in an aggregate burden
of 1.00 hours per issuer.\1065\
---------------------------------------------------------------------------

    \1061\ See proposed Rule 203(a)(3) of Regulation Crowdfunding.
    \1062\ We estimate the burden per response for preparing a Form
D to be 4.00 hours. See Form D at 1.
    \1063\ We estimate the burden per response for preparing a Form
2-A to be 12.00 hours. See Form 2-A at 1.
    \1064\ See proposed Rule 203(a)(3) of Regulation Crowdfunding.
The proposed rules would require an issuer to file a progress update
after reaching one-half and 100 percent of the target offering
amount.
    \1065\ We estimate that the burden of preparing Form C-U would
be approximately 1/8 of the burden for Form D. Therefore, the
aggregate burden per issuer would be 100 hour (2 progress updates x
0.50 hours/update).
---------------------------------------------------------------------------

    We estimate that compliance with the requirements of a Form C
submitted in connection with transactions made in reliance on Section
4(a)(6) would require 138,000 burden hours (2,300 offering statements x
60.00 hours/offering statement) in aggregate each year, which
corresponds to 103,500 hours carried by the issuer internally (2,300
offering statements x 60.00 hours/offering statement x 0.75) and costs
of $13,800,000 (2,300 offering statements x 60.00 hours/offering
statement x 0.25 x $400) for the services of outside professionals. We
also estimate that compliance with the requirements of Form C-U
submitted during an offering would require 2,300 burden hours (2,300
offering statements x 2 progress updates per offering x 0.50 hours per
progress update) in aggregate each year. These estimates include the
time and cost of collecting the information, preparing and reviewing
disclosure, filing documents and retaining records. We derived the
above estimates by estimating the average number of hours it would take
an issuer to prepare and review the proposed disclosure requirements.
In deriving our estimates, we recognize that the burdens likely would
vary among individual issuers based on a number of factors, including
the stage of development of the business and the number of years since
inception of the business. We believe that some issuers would
experience costs in excess of this average and some issuers may
experience less than these average costs.
b. Form C-AR: Annual Report
    Under the proposed rules, any issuer that sells securities in a
transaction made pursuant to Section 4(a)(6) would be required to file
annually with us an annual report on Form C-AR: Annual Report.\1066\
Form C-AR would require

disclosure substantially similar to the disclosure provided in the Form
C: Offering Statement, except that offering-specific disclosure would
not be required. Therefore, we estimate that the burden to prepare and
file Form C-AR would be less than that required to prepare and file
Form C. We estimate that compliance with proposed Form C-AR would
result in a burden of 40.00 hours per response.\1067\ We further
estimate that 75 percent of the burden of preparation would be carried
by the issuer internally and that 25 percent would be carried by
outside professionals \1068\ retained by the issuer at an average cost
of $400 per hour.\1069\
---------------------------------------------------------------------------

    \1066\ See proposed Rule 202 of Regulation Crowdfunding.
    \1067\ We estimate that the burden of preparing the information
required by Form C-AR would be approximately 2/3 of the burden for
the Form C: Offering Statement in light of the fact that offering-
specific disclosure would not be required and that the issuer may be
able to update disclosure previously provided in the Form C:
Offering Statement.
    \1068\ See note 1059.
    \1069\ See note 1060.
---------------------------------------------------------------------------

    We estimate that compliance with the requirements of Form C-AR
after issuers sell securities pursuant to Section 4(a)(6) would require
92,000 burden hours (2,300 issuers x 40.00 hours/issuer) in the
aggregate each year, which corresponds to 69,000 hours carried by the
issuer internally (2,300 issuers x 40.00 hours/issuer x 0.75) and costs
of $9,200,000 (2,300 issuers x 40.00 hours/issuer x 0.25 x $400) for
the services of outside professionals.
c. Form C-TR: Termination of Reporting
    Under the proposed rules, any issuer terminating its annual
reporting obligations would be required to file a notice under cover of
Form C-TR: Termination of Reporting to notify investors and the
Commission that it no longer will file and provide annual reports
pursuant to the requirements of Regulation Crowdfunding.\1070\ We
estimate that eight percent of the issuers that sell securities
pursuant to Section 4(a)(6) would file a notice under cover of Form C-
TR during the first year.\1071\ The Form C-TR would be similar to the
Form 15 that issuers file to provide notice of termination of the
registration of a class of securities under Exchange Act Section 12(g)
or to provide notice of the suspension of the duty to file reports
required by Exchange Act Sections 13(a) or 15(d).\1072\ Therefore, we
estimate that compliance with the proposed Form C-TR would result in a
similar burden as compliance with Form 15, a burden of 1.50 hours per
response. We estimate that compliance with proposed Form C-TR would
result in a burden of 276 hours (2,300 issuers x 0.08 issuers filing
Form C-TR x 1.50 hours/issuer) in the aggregate during the first year
for issuers terminating their reporting obligations.
---------------------------------------------------------------------------

    \1070\ See proposed Rule 203(b)(2) of Regulation Crowdfunding.
    \1071\ For purposes of the PRA, we estimate that eight percent
of issuers will not survive past their first year, based on a recent
study that found that of a random sample of 4,022 new high-
technology businesses started in 2004, 92.3% survived past their
first year. See Kauffman Firm Survey, note 869 at 13.
    \1072\ We currently estimate the burden per response for
preparing a Form 15 to be 1.50 hours. See Form 15 at 1.
---------------------------------------------------------------------------

d. Form ID Filings
    Under the proposed rules, an issuer would be required to file
specified disclosures with us on EDGAR.\1073\ We anticipate that the
majority of first-time issuers seeking to offer and sell securities in
reliance on Section 4(a)(6) would not previously have filed an
electronic submission with us and so would need to file a Form ID. Form
ID is the application form for access codes to permit filing on EDGAR.
The proposed rules would not change the form itself, but we anticipate
that the number of Form ID filings would increase due to new issuers
seeking to offer and sell securities in reliance on Section 4(a)(6).
For purposes of this PRA discussion, we estimate that all of the
issuers who would seek to offer and sell securities in reliance on
Section 4(a)(6) would not have filed an electronic submission with us
previously and would, therefore, be required to file a Form ID. As
noted above, we estimate that approximately 2,300 issuers per year
would seek to offer and sell securities in reliance on Section 4(a)(6),
which would correspond to 2,300 additional Form ID filings. As a
result, we estimate the additional annual burden would be approximately
345 hours (2,300 filings x 0.15 hours/filing).\1074\
---------------------------------------------------------------------------

    \1073\ See proposed Rules 201-203 of Regulation Crowdfunding.
    \1074\ We currently estimate the burden associated with Form ID
is 0.15 hours per response. See Form ID at 1.
---------------------------------------------------------------------------

2. Brokers and Funding Portals
a. Registration Requirements
i. Time Burden
    The proposed rules would require intermediaries to register with us
as either a broker or funding portal. We believe that some entities
that may engage in crowdfunding pursuant to Section 4(a)(6) and the
proposed regulation would already be registered as brokers. Therefore,
this registration requirement would impose no new requirement on these
entities and no additional burden for purposes of this PRA discussion.
Entities that are not already registered as brokers may decide to
register as brokers or as funding portals and to become members of a
registered national securities association, pursuant to the proposed
rules. We estimate that each year, approximately 10 entities may decide
to register as brokers, and on average, approximately 50 entities may
decide to register as funding portals by filing Form Funding Portal. In
addition, we estimate that of those 50 entities that register as
funding portals, two would be nonresident funding portals and subject
to the additional requirements of completing Schedule C, hiring an
agent for service of process in the United States and providing an
opinion of counsel.
    We estimate the burden for registering as a broker with us based
upon the existing burdens for completing and filing Form BD.\1075\
Consequently, we estimate that total annual burden hours required for
all intermediaries, including brokers and funding portals, to register
with us under the proposed rules would be approximately 165 hours (2.75
hours/respondent x (10 brokers + 50 funding portals)). In addition,
those entities that register as nonresident funding portals would face
an additional burden of half an hour to complete Schedule C, half an
hour to hire an agent for the service of process, and one hour to
provide an opinion of counsel. Consequently, we estimate that of the 50
registered funding portals, two would face the burden of an additional
two hours to register.
---------------------------------------------------------------------------

    \1075\ While it is likely that the time necessary to complete
Form BD varies depending on the nature and complexity of the
entity's business, we previously estimated that the average time
necessary for a broker-dealer to complete and file an application
for broker-dealer registration on Form BD would be approximately
2.75 hours. We also estimate that the time burden to register as a
funding portal on Form Funding Portal would be, for purposes of this
PRA discussion, the same, based upon the time required to complete
and file Form BD because the information required for that form is
similar.
---------------------------------------------------------------------------

    We take into consideration that brokers that register to engage in
crowdfunding transactions conducted in reliance on Section 4(a)(6) may
eventually decide to withdraw their registration. Withdrawal requires
the entity to complete and file with us a Form BDW.\1076\ We further
estimate that

approximately 500 broker-dealers withdraw from Commission registration
annually \1077\ and, therefore, file a Form BDW. Of them, we estimate
that approximately one broker who had registered in order to facilitate
crowdfunding transactions made in reliance on Section 4(a)(6) may
decide to withdraw in each year following adoption of the rules.\1078\
Therefore, the one broker-dealer that withdraws from registration by
filing Form BDW would incur an aggregate annual reporting burden of
approximately one hour (one hour/respondent x one broker). Similarly,
we estimate that approximately six funding portals may choose to
withdraw from registration each year \1079\ and that each withdrawal,
as with Form BDW, would take one hour. This would result in an
aggregate annual reporting burden of approximately six hours (one hour/
respondent x 6 funding portals).
---------------------------------------------------------------------------

    \1076\ The time necessary to complete Form BDW varies depending
on the nature and complexity of the applicant's securities business.
We previously estimated that it would take a broker-dealer
approximately one hour to complete and file a Form BDW to withdraw
from Commission registration, as required by Exchange Act Rule 15b6-
1 (17 CFR 240.15b6-1).
    \1077\ This estimate is based on Form BDW data collected over
the past five years and may be skewed as a result of the impact of
the financial crisis on broker-dealers. For the past five fiscal
years (from 10/1 through 9/30), the number of broker-dealers that
withdrew from registration were as follows: 503 in 2008, 533 in
2009, 510 in 2010, 524 in 2011 and 428 in 2012. (503 + 533 + 510 +
524 + 428)/5 = 500.
    \1078\ As of September 30, 2012, there were 4,653 broker-dealers
registered with the Commission. An average of 500 broker-dealers per
year withdraw from registration, or 11% of the number of registered
broker-dealers (500 withdrawing broker-dealers/4,653 registered
broker-dealers). We are assuming that the same percentage of broker-
dealers that withdraw from registration would apply to the
population of registered broker-dealers participating in offerings
in reliance on Section 4(a)(6). Of our estimate of 10 registered
broker-dealers per year registering to participate in crowdfunding
transactions in reliance on Section 4(a)(6), we estimate that
approximately one broker-dealer per year (10 registered broker-
dealers x 11%) would withdraw from registration.
    \1079\ We estimate that the percentage of registered funding
portals participating in crowdfunding transactions in reliance on
Section 4(a)(6) that would withdraw from registration annually would
be the same as the percentage of broker dealers that withdraw from
registration annually because of the similarity of the businesses.
Of our estimate of 50 registered funding portals participating in
crowdfunding transactions in reliance on Section 4(a)(6), we
estimate that approximately six funding portals per year (50
registered funding portals x 11%) would withdraw from registration.
For funding portals, a decision to withdraw registration would be
required to be reported to us in the same way an amendment would;
however, for brokers, withdrawal requires the fling of Form BDW.
---------------------------------------------------------------------------

    Newly-registered intermediaries would be required to also become
members of FINRA or any other registered national securities
association. Based on discussions with industry participants, we
estimate that the burden associated with this requirement would be
approximately 220 hours per intermediary that registers as a broker-
dealer. We also assume that approximately one-half of that amount or
110 hours would be required of an intermediary registering as a funding
portal. Consequently, we estimate that total annual burden hours
required for all intermediaries, including brokers and funding portals,
to register with FINRA or any other registered national securities
association would be approximately 6,600 hours (220 hours/broker-dealer
respondent x 10 brokers + 110 hours/funding portal respondent x 50
funding portals). For intermediaries who choose to hire a third party
to assist in the membership process, we assume that the hours would be
further reduced by at least one-half for a total of 3,300 hours.
    Once registered, a broker must promptly file an amended Form BD
when information it originally reported on Form BD changes or becomes
inaccurate. Similarly, a registered funding portal must report to us
amendments relating to its Form Funding Portal filing.\1080\ Based on
the number of amended Forms BD that we received from October 1, 2007
through September 30, 2012, we estimate that the total number of
amendments that we would receive on Form BD from the 10 brokers that
register under this proposed system would be approximately 34.\1081\
Therefore, we estimate that the total additional annual burden hours
necessary for broker-dealers to complete and file amended Forms BD
would be approximately 11.2 hours (34 amended Forms BD per year x 0.33
hours, i.e., 20 minutes, per amendment). Similarly, we estimate that
the total annual burden hours for funding portals to complete and file
amended Forms Funding Portal would be approximately 56.1 hours (50
funding portals x 3.4 amendments per year x 0.33 hours per amendment).
---------------------------------------------------------------------------

    \1080\ We previously estimated that the average time necessary
to complete an amended Form BD would be approximately 20 minutes. We
estimate that an amendment to Form Funding Portal would take the
same amount of time as an amendment to Form BD because the forms are
similar.
    \1081\ We received 16,365, 17,247, 15,638, 15,491 and 13,271
amended Forms BD during the fiscal years ending 2008, 2009, 2010,
2011 and 2012, respectively, reflecting an average of 15,602
amendment filings per year (16,365 + 17,247 + 15,638 + 15,491 +
13,271)/5 years). As of September 30, 2012, there were 4,653 broker-
dealers registered with the Commission. Therefore, we estimate that
there are approximately 3.4 amendments (15,602 amended Forms BD/
4,653 broker-dealers) per registered broker-dealer per year. We
estimate that the 10 broker-dealers who register under this proposed
regulation would submit, on aggregate, approximately 34 amendments
per year.
---------------------------------------------------------------------------

ii. Cost
    We estimate that the initial registration cost for an intermediary
to register with a national securities association would be
approximately $10,000. This estimate is based on FINRA's current member
application fee structure, which assesses fees depending on the size of
the new member applicant. The current member application fee for
broker-dealers with 1 to 10 associated registered persons is $7,500,
and the fee for broker-dealers with 11 to 100 associated registered
persons is $12,500.\1082\ We expect that the size of funding portals
that would register with FINRA would be similar, and therefore, our
preliminary estimate of FINRA's application fee for funding portals is
based on the above fees. The average of the two fees is ($7,500 +
$12,500)/2 = $10,000. The total cost across all intermediaries would be
approximately ($10,000/intermediary x (10 brokers + 50 funding portals)
= $600,000. In addition, two intermediaries would face an additional
cost of $25,130 to complete Schedule C, retain an agent for the service
of process and provide an opinion of counsel to register as a
nonresident funding portal.
---------------------------------------------------------------------------

    \1082\ See FINRA, Revised Fees: Changes to Advertising,
Corporate Financing, New Membership and Continuing Membership
Application, Central Registration Depository and Branch Office
Annual Registration Fees, FINRA Regulatory Notice 12-32 (June 2012),
available at http://www.finra.org/web/groups/industry/@ip/<EMAIL_ADDRESS>---------------------------------------------------------------------------

    In addition to the initial registration cost, we estimate that
costs associated with completing a membership process with FINRA or any
other registered national securities association would be approximately
$3,450,000 across all intermediaries. Discussions with industry
participants have indicated that most broker-dealers currently hire a
third party consultant or attorney to assist in the membership process.
Assuming that 90% of intermediaries (9 brokers and 45 funding portals)
would employ an outside party, we estimate total costs charged by the
outside party to be $1,575,000 ($50,000/third party assisting broker-
dealers x 9 brokers + $25,0000/third party assisting funding portals x
45 funding portals).\1083\ As indicated above, we assume that the
intermediary's Chief Compliance Officer or person in a similar position
would spend approximately 110 hours assisting in broker-dealer
registration and 55 hours assisting in funding portal registration for
a total approximate cost of $1,530,000 (110 hours/broker-dealer
respondent x 9 brokers + 55 hours/funding portal respondent x 45
funding

portals) x $441/hour.\1084\ For the remaining 10% of intermediaries (1
broker and 5 funding portals) that would not employ an outside party to
assist in the process, we estimate the total cost to be $340,000 ((220
hours/broker-dealer respondent x 1 broker + 110 hours/funding portal
respondent x 45 funding portals) x $441/hour).
---------------------------------------------------------------------------

    \1083\ Discussions with industry participants indicated that
third parties charge between $25,000 and $75,000, for an average of
$50,000, to assist applicants seeking to register as broker-dealers.
We assume that charges for intermediaries registering as funding
portals would be approximately one-half of these costs, for an
average of $25,000.
    \1084\ The hourly rate estimate for a Chief Compliance Officer
is taken from SIFMA Management Data.
---------------------------------------------------------------------------

    Intermediaries would face an ongoing cost to remain registered with
a national securities association. We expect these costs would vary
based on the size and profitability of the intermediary. The current
FINRA annual assessment fee for members that are brokers having annual
revenue of up to $1,000,000 is $1,200. In addition, FINRA members
currently pay $150.00 for each principal and each representative of the
member entity, up to five principals and representatives, and also pay
$175 for the first 250 branch offices registered by the member. For
purposes of the PRA, we assume that brokers acting as intermediaries as
well as funding portals would have on average a total of five
principals or representatives (or their equivalent), would maintain
fewer than 250 branch offices, and would have annual revenues less than
$1,000,000. Also for purpose of these estimates, we assume that the
fees the national securities association would set for funding portals
would be the same as those FINRA currently has set for members that are
brokers. We do recognize, however, that the national securities
association fees for funding portals may be lower than those currently
in place for brokers, proportionate to funding portals' more limited
scope of activity compared to brokers.\1085\ Thus, we estimate that on
average intermediaries would pay ongoing annual fees to a national
securities association of $2,130, after the year they become members
((5 x $150.00) + $175 + $1,200 = $2,125). Nonresident funding portals,
would also be subject to an annual cost of $130 to maintain an agent
for service of process in the United States
---------------------------------------------------------------------------

    \1085\ See note 994.
---------------------------------------------------------------------------

b. Development of Intermediary Platform
i. Time Burden
    The proposed rules are based on an intermediary developing an
electronic platform to offer securities in reliance on Section 4(a)(6)
to the public. A broker or funding portal that creates its initial
platform in-house would incur an initial time burden associated with
setting up systems functionality to comply with our proposed rules, and
developing other platform capabilities and operations. Based on our
discussions with potential intermediaries, we initially estimate that
intermediaries would typically hire a team of approximately 4 to 6
developers that would work on all aspects of platform development,
including, but not limited to, front-end programming, data management,
systems analysis, communication channels, document delivery, and
Internet security. To develop a platform, we estimate, based on our
discussions with potential intermediaries, that intermediaries would
spend an average of 1,500 hours for planning, programming and
implementation.
    As discussed above, we anticipate that 10 intermediaries would
newly register as brokers, 50 intermediaries would be brokers that are
already registered and 50 intermediaries would register as funding
portals. It is difficult to estimate the number of intermediaries that
would develop their platforms in-house, but if we assume that half of
the 110 newly-registered intermediaries were to do so, then the total
initial time burden would be 82,500 hours (55 intermediaries x 1,500
hours = 82,500 hours).
    We estimate that annually updating the features and functionality
of an intermediary's platform would require approximately 20% of the
hours required to initially develop the platform, for an average burden
of 300 hours per year. If we assume that half of the 110 newly-
registered intermediaries updated their systems accordingly, the total
ongoing time burden would be 16,500 hours per year (55 intermediaries x
300 hours = 16,500 hours).
ii. Cost
    There would be a cost to developing a platform. Based on our
discussions with potential intermediaries, we initially estimate that
it would cost an intermediary approximately $250,000 to $600,000 to
build an Internet-based crowdfunding portal and all of its basic
functionality. Assuming that half of the 110 newly-registered
intermediaries were to hire outside developers to build their
platforms, the total initial cost would be $13,750,000 to $33,000,000
(55 intermediaries x $250,000 = $13,750,000; 55 intermediaries x
$600,000 = $33,000,000). For purposes of the PRA, we are estimating the
cost at $23,375,000.
    We estimate that it would typically cost an intermediary
approximately one-fifth of the initial development cost per year to use
a third-party developer to update an Internet-based crowdfunding portal
and all of its basic functionality, or $85,000 per year on
average.\1086\ If we assume that half of the 110 newly-registered
intermediaries updated their systems accordingly, the total ongoing
cost would be $4,675,000 per year (55 intermediaries x $85,000 =
$4,675,000).
---------------------------------------------------------------------------

    \1086\ Our estimate of the average initial external cost per
intermediary to develop a crowdfunding platform is the average of
the cited range of $250,000 to $600,000, or (($250,000 + $600,000)/
)/)/2) = $425,000. One-fifth of the cost of $425,000 is ($425,000//
5) = $85,000.
---------------------------------------------------------------------------

c. Measures to Reduce the Risk of Fraud
i. Time Burden
    The proposed rules would require intermediaries to have a
reasonable basis for believing that an issuer seeking to offer and sell
securities in reliance on Section 4(a)(6) through the intermediary's
platform complies with the requirements in Section 4A(b) and the
related requirements in Regulation Crowdfunding.\1087\ The proposed
rules would require intermediaries to have a reasonable basis for
believing that an issuer has established means to keep accurate records
of the holders of the securities it would offer and sell through the
intermediary's platform. For both requirements, an intermediary may
reasonably rely on the representations of the issuer. For the purposes
of the PRA, we expect that 100% of intermediaries would rely on the
representations of issuers. This would impose an estimated time burden
in the first year of five hours per intermediary to establish standard
representations it would request from issuers, and 6 minutes per
intermediary per issuer to obtain the issuer representation, which is
consistent with estimates we have used for other regulated entities to
obtain similar documentation, such as consents, from customers. Based
on our estimate that there would be approximately 2,300 offerings per
year, that each issuer would conduct one offering per year, and that
there would be 110 intermediaries, we calculate that each intermediary
would facilitate approximately 20 offerings per year (2,300 offerings/
(10 newly registered broker-dealers + 50 previously registered broker-
dealers + 50 funding portals) = 20.9). Therefore, we estimate that the
total initial burden hours would be approximately 770 hours ((5 hours/
intermediary x (10 newly-registered broker-dealers + 50 previously-
registered broker-dealers + 50 funding portals) + (6 minutes/issuer x
20 issuers/intermediary x (10 newly-

registered broker-dealers + 50 previously-registered broker-dealers +
50 funding portals)).
---------------------------------------------------------------------------

    \1087\ See proposed Rule 301(a) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We believe that the ongoing time burdens for this requirement would
be approximately one hour per intermediary per year to review and check
that the standard representations it requests from issuers remain
appropriate, and 6 minutes per intermediary per issuer to obtain the
representation. Therefore, we estimate that the ongoing total burden
hours necessary for intermediaries to rely on the representations of
the issuers would be approximately 330 hours per year ((1 hour/
intermediary x (10 newly-registered broker-dealers + 50 previously-
registered broker-dealers + 50 funding portals)) + (6 minutes/issuer x
20 issuers/intermediary x (10 newly-registered broker-dealers + 50
previously-registered broker-dealers + 50 funding portals))).
ii. Cost
    The proposed rules would require intermediaries to conduct a
background and securities enforcement regulatory history check on each
issuer and each officer, director or 20 Percent Beneficial Owner to
determine whether the issuer or such person is subject to a
disqualification. We anticipate that most intermediaries would employ
third-parties that perform background checks, and for the purposes of
this PRA discussion, we assume that 100% of intermediaries would use
these third-party services rather than develop the capability to
conduct background and securities enforcement regulatory history checks
in-house. The cost to perform a background check is estimated to be
between $200 and $500, depending on the nature and extent of the
information provided.\1088\ We recognize that some issuers would
require more than one background check (e.g., for officers or directors
of the issuer), and we estimate that intermediaries would perform four
background checks per issuer, on average. We base this number on that
assumption that most crowdfunding issuers will be startups and small
businesses with small management teams and few owners. Assuming that
there is an average of approximately 2,300 offerings made in reliance
on Section 4(a)(6) per year,\1089\ the total estimated initial cost for
all intermediaries to fulfill the required background and securities
enforcement regulatory history checks would range from approximately
$1,840,000 to $4,600,000 per year,\1090\or approximately $16,700 to
$41,800 per intermediary per year.\1091\ For purposes of the PRA, we
will average the cost to $29,250 per intermediary per year.
---------------------------------------------------------------------------

    \1088\ See, e.g., A Matter of Fact, Background Check FAQ:
Frequently Asked Questions, available at http://www.amof.info/faq.htm (Matter of Fact is a background check provider accredited by
the National Association of Professional Background Screeners and
the Background Screening Credentialing Council and states that the
cost for a comprehensive background check is $200 to $500).
    \1089\ Because crowdfunding transactions in reliance on Section
4(a)(6) are a new approach to capital formation, it is difficult for
us to accurately estimate an average number of offerings per year.
As stated above, we assume that there would be approximately 2,300
offerings made in reliance on Section 4(a)(6) per year.
    \1090\ 2,300 securities-based offerings made in reliance on
Section 4(a)(6) per year x ($200 to $500 per background and
securities enforcement regulatory history check) x 4 checks per
offering = $1,840,000 to $4,600,000 per year.
    \1091\ $1,840,000/110 intermediaries = approx. $16,700 per
intermediary; $4,600,000/110 intermediaries = approx. $41,800 per
intermediary.
---------------------------------------------------------------------------

    We believe that, on an ongoing basis, intermediaries would continue
to use third-party services to conduct background and securities
enforcement regulatory history checks. We also believe that the total
estimated ongoing cost for all intermediaries to fulfill the required
background and securities enforcement regulatory history checks would
be the same as the estimated initial cost, ranging from approximately
$1,840,000 to $4,600,000 per year, or approximately $16,700 to $41,800
per intermediary per year. For purposes of the PRA, we will average the
cost to $29,250 per intermediary per year.
d. Account Opening: Accounts and Electronic Delivery
i. Time Burden
    The proposed rules would provide that no intermediary or associated
person of an intermediary could accept an investment commitment in a
transaction involving the offer or sale of securities made in reliance
on Section 4(a)(6) until the investor has opened an account with the
intermediary and consented to electronic delivery of materials.\1092\
For the purposes of the PRA, we expect that the functionality required
to require an investor to open an account with an intermediary and
obtain consents would result in an initial time burden of approximately
10 hours per intermediary in the first year. Therefore, we estimate
that the total initial burden hours necessary for this functionality
would be approximately 1,100 hours (10 hours/intermediary x (10 newly-
registered broker-dealers + 50 previously-registered broker-dealers +
50 funding portals)).
---------------------------------------------------------------------------

    \1092\ See proposed Rule 302(a) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We believe that the ongoing time burdens for this requirement would
be significantly less than the initial time burden, and thus we are
estimating approximately two hours per intermediary per year, to review
and check the related processes. Therefore, we estimate that the
ongoing total burden hours necessary for this functionality would be
approximately 220 hours per year (2 hours/intermediary x (10 newly-
registered broker-dealers + 50 previously-registered broker-dealers +
50 funding portals)).
ii. Cost
    To the extent an intermediary uses a third party to establish
account opening functionality, the initial costs relevant to this
requirement would be incorporated into the cost of hiring a third party
to develop the platform, discussed below in Section IV.C.2.f.
    We do not believe that there are any ongoing costs relevant to this
requirement.
e. Account Opening: Educational Materials
i. Time Burden
    The proposed rules would require intermediaries to provide
educational materials to investors,\1093\ to help ensure that investors
have a baseline understanding of the risks and costs of investing in
securities offered and sold in reliance on Section 4(a)(6). Given that
the intermediary would determine what electronic format is effective in
communicating the requisite contents of the educational material, the
expected cost for intermediaries to develop the educational material is
expected to vary widely and are difficult to estimate. For the purposes
of the PRA, we are assuming that half of the intermediaries would
develop their educational materials in-house, which would include
online presentations and written documents, and that the other half
would employ third-parties to produce professional-quality online video
presentations. We estimate that, to develop their non-video educational
materials in-house, each intermediary would incur an initial time
burden of approximately 20 hours. Therefore, the total initial burden
would be approximately 2,200 hours (110 intermediaries x 20 hours/
intermediary).
---------------------------------------------------------------------------

    \1093\ See proposed Rule 302(b) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Assuming that half of the intermediaries would develop their

educational materials in-house, we expect that these intermediaries
also would update their educational materials in-house, as needed. We
estimate that to update their educational materials in-house, each
intermediary would incur an ongoing time burden of approximately 10
hours per year. Therefore, the total ongoing burden would be
approximately 1,100 hours per year (110 intermediaries x 10 hours/
intermediary).
ii. Cost
    As stated above, for the purposes of this PRA discussion, we assume
that half of the intermediaries would employ third-party companies to
produce professional-quality video materials instead of developing
materials in-house. Public sources indicate that the typical cost to
produce a professional corporate training video ranges from
approximately $1,000 to $3,000 per production minute.\1094\ Based on
discussions with industry participants, we assume that, on average,
each intermediary would produce a series of short educational videos
that would cover all of the requirements of the proposed rules, and the
video material would be 10 minutes long in total. Based on this
assumption, we estimate that the average initial cost for an
intermediary to develop and produce educational materials would range
from approximately $10,000 to $30,000. The total initial cost across
all 110 intermediaries per year would be $1,100,000 to $3,300,000. For
purposes of the PRA, we will average the cost to $20,000 per
intermediary per year. We note that the estimated initial cost may be
significantly lower, because not all intermediaries that outsource the
development of educational materials may choose to produce educational
videos, while others may produce videos of shorter length.
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    \1094\ See, e.g., Lee W. Frederiksen, What Is the Cost of Video
Production for the Web?, Hinge Marketing, available at http://www.hingemarketing.com/library/article/what-is-the-cost-of-video-production-for-the-web.
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    We estimate that, on an ongoing basis, when using a third-party
company to update their video educational materials, each intermediary
would spend approximately half of the initial average cost. We
estimate, therefore, that the average ongoing annual cost for an issuer
to update its video educational materials would range from
approximately $5,000 to $15,000 and that the total ongoing annual cost
across all intermediaries would range from approximately $550,000 to
$1,650,000 per year. For purposes of the PRA, we will average the cost
to $10,000 per intermediary per year.
f. Account Opening: Promoters
i. Time Burden
    The proposed rules would require an intermediary, at the account
opening stage, to disclose to investors that any person who receives
compensation to promote an issuer's offering, or who is a founder or
employee of an issuer engaging in promotional activities on behalf of
the issuer, must clearly disclose the receipt of compensation and his
or her engagement in promotional activities on the platform.\1095\ For
purposes of the PRA, we expect that this requirement would result in an
estimated time burden of five hours per intermediary in the first year,
to prepare this particular disclosure and incorporate it into the
account opening process. Therefore, we estimate that the total initial
burden hours necessary for intermediaries to comply with this
requirement would be approximately 550 hours (5 hours/intermediary x
(10 newly-registered broker-dealers + 50 previously-registered broker-
dealers + 50 funding portals)).
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    \1095\ See proposed Rule 302(c) of Regulation Crowdfunding.
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    We believe that the ongoing time burdens for this requirement would
be approximately one hour per intermediary per year to review and check
that the disclosures remain appropriate. Therefore, we estimate that
the ongoing total burden hours necessary for intermediaries to comply
with this requirement would be approximately 110 hours per year (1
hour/intermediary x (10 newly-registered broker-dealers + 50
previously-registered broker-dealers + 50 funding portals)).
ii. Cost
    To the extent an intermediary uses a third party to develop the
functionality for this requirement, the initial costs relevant to this
requirement would be incorporated into the cost of hiring a third party
to develop the platform, discussed below in subsection IV.C.2.f.
    We do not believe that there are any ongoing costs relevant to this
requirement.
g. Issuer Disclosures To Be Made Available
i. Time Burden
    The proposed rules would require an intermediary to make publicly
available on its platform the information that an issuer of
crowdfunding securities is required to provide to potential investors,
in a manner that reasonably permits a person accessing the platform to
save, download or otherwise store the information, until the offer and
sale of securities is completed or cancelled.\1096\
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    \1096\ See proposed Rule 303(a) of Regulation Crowdfunding.
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    For purposes of the PRA, our estimate of the hourly burdens related
to the public availability of the issuer information is included as
part of our estimate of the hourly burdens associated with overall
platform development, as discussed above in Section IV.C.2.b. The
platform functionality would include not only the ability to display,
upload and download issuer information as required under the proposed
rules, but also the ability to provide users with required online
disclosures, as discussed below.
    We recognize that, over time, intermediaries may need to update
their systems that allow issuer information to be uploaded to their
platforms. We do not expect a significant ongoing burden for providing
issuer disclosures, primarily because the functionality required for
required issuer disclosure information to be uploaded is a standard
feature offered on many Web sites and would not require frequent or
significant updates.
ii. Cost
    We do not expect a significant ongoing cost for providing issuer
disclosures, primarily because the functionality required to upload
required issuer disclosure information is a standard feature offered on
many Web sites and would not require frequent updates. Because we are
including the burdens that are associated with providing issuer
disclosures as part of our estimates for overall platform development,
we discuss our cost estimates for ongoing platform development and
updates there.
h. Other Disclosures to Investors and Potential Investors
i. Time Burden
    Intermediaries would be required to implement and maintain systems
to comply with the information disclosure, communication channels, and
investor notification requirements, including providing disclosure
about compensation at account opening, obtaining investor
acknowledgements to confirm investor qualifications and review of
educational materials, providing investor questionnaires, providing
communication channels with third parties and among investors,

notifying investors of investment commitments, confirming completed
transactions and confirming or reconfirming offering cancellations.
Based on our discussions with industry participants, these
functionalities would generally be part of the overall platform
development process and costs. We discuss platform development costs
above, which would include developing the functionality that would
allow intermediaries to comply with disclosure and notification
requirements.\1097\
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    \1097\ See Section IV.C.2.b.i above.
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    We do not expect a significant ongoing burden for providing
disclosures, as required by the proposed rules, because the
functionality required to provide information and communication
channels would likely not require frequent updates. We incorporate the
total burden to update the required functionality for processing issuer
disclosure and investor acknowledgment information in the total burden
estimates discussed above relating to platform development.\1098\
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    \1098\ See Section IV.C.2.b.i above.
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ii. Cost
    We recognize that some intermediaries may add the required
functionality for processing issuer disclosure and investor
acknowledgments by using a third-party developer. We also do not expect
there to be a significant ongoing cost for developing the functionality
to process these disclosures and acknowledgments, primarily because
this functionality would likely not require frequent updates by third-
party developers. The total cost to add the required functionality for
processing issuer disclosure and investor acknowledgments, as well as
to update the required functionality for processing issuer disclosure
and investor acknowledgments, is incorporated into the total cost
estimates discussed above relating to platform development.\1099\
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    \1099\ See Section IV.C.2.b above.
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i. Maintenance and Transmission of Funds
i. Time Burden
    Intermediaries would be required to comply with the requirements
related to the maintenance and transmission of funds. A registered
broker would be required to comply with the requirements of Rule 15c2-4
of the Exchange Act (Transmission or Maintenance of Payments Received
in Connection with Underwritings).\1100\ A registered funding portal
would be required to enter into a written agreement with a qualified
third party to hold its client funds, or to open a bank account for the
exclusive benefit of the investors and issuer, and it also would be
required to send directions to the qualified third party depending on
whether an investing target is met or an investment commitment or
offering is cancelled. For purposes of the PRA, we are providing an
estimate for the time that a funding portal would need to enter into on
an initial basis, and review and update on an ongoing basis, a written
agreement with the qualified third party. We expect that the burden
associated with the Web site functionality required to send directions
to third parties would be included as part of the platform development
discussed above. Based on discussion with industry participants, we
estimate that funding portals would incur an initial burden of
approximately 20 hours each to comply with these requirements, or 1,000
hours total (20 hours per funding portal x 50 funding portals = 1,000
hours).
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    \1100\ 17 CFR 240.15c2-4. For purposes of this PRA discussion,
the burdens associated with this rule, as well as for any other rule
to which brokers are subject regardless of whether they engage in
transactions pursuant to Section 4(a)(6), are not addressed here;
rather, they are included in any OMB approvals for the relevant
rule. Rule 15c2-4, however, does not include any information
collection requests for purposes of the PRA, and so there is no
relevant approval or control number from OMB for this rule.
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    We expect that, on an ongoing basis, a registered funding portal
would have to periodically review and update its written agreement with
a bank or other third party to hold its client funds. A registered
funding portal also would be required to send directions on an ongoing
basis to a third party depending on whether an investing target is met
or an investment commitment or offering is cancelled. Based on
discussion with industry participants, we estimate that funding portals
would incur an ongoing annual burden of approximately 5 hours each to
comply with these requirements, or 250 hours total (5 hours per funding
portal x 50 funding portals = 2,500 hours).
ii. Cost
    For purposes of the PRA, we are not providing any cost estimate for
this requirement, because we expect that the cost associated with
developing the functionality required to send instructions to third
parties would be included as part of the platform development discussed
above.\1101\
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    \1101\ See Section IV.C.2.f above.
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j. Fidelity Bond
i. Time Burden
    Funding portals would be required to comply with the requirements
in proposed Rule 400(f) related to obtaining and maintaining fidelity
bond coverage. A registered funding portal would be required to enter
into a written agreement with a fidelity bond provider to obtain the
required coverage. Based on discussion with industry participants, we
estimate that funding portals would incur an initial burden of
approximately 15 hours each to comply with these requirements, or 750
hours total (15 hours per funding portal x 50 funding portals = 750
hours).
    We expect that, on an ongoing basis, a registered funding portal
would have to periodically review and update its fidelity bond
coverage. We estimate that funding portals would incur an ongoing
burden of approximately 5 hours each to comply with these requirements,
or 250 hours total (5 hours per funding portal x 50 funding portals =
2,500 hours).
ii. Cost
    We estimate the initial costs for the fidelity bond to be $825. We
estimate that on an ongoing basis, the costs would be $825.
k. Compliance: Policies and Procedures
i. Time Burden
    Based on discussion with industry participants, we estimate that a
funding portal would spend approximately 40 hours to establish written
policies and procedures to achieve compliance with the JOBS Act and the
rules and regulations thereunder, as required under the proposed rules.
This would result in an aggregate initial recordkeeping burden of 2,000
hours (40 hours x 50 funding portals).
    We estimate that, on an ongoing basis, funding portals would spend
approximately 5 hours per year updating, as necessary, the policies and
procedures required by the proposed rules. This would result in an
aggregate ongoing recordkeeping burden of 250 hours (5 hours x 50
funding portals).
ii. Cost
    As we anticipate that funding portals would comply with this
requirement by using internal personnel and internal information
technology resources integrated into their platforms, we estimate that
there would be no costs related to this requirement. To the extent a
funding portal employs a consultant or attorney to establish written
policies and procedures, these costs would be incorporated into the

cost of hiring a third party to assist in the membership process.
l. Compliance: Anti-Money Laundering
    While the proposed CIP and the SAR Requirements, and other BSA
requirements, impose burdens on relevant entities, the proposed rules
do not impose any burden on funding portals in addition to that already
imposed on broker-dealers by those requirements. The burden on funding
portals, would be the same as broker-dealers, and would be included
within those estimates provided by Treasury,\1102\ so we do not discuss
those burdens here, and we would not be requesting any separate
approval from OMB to impose the burdens associated with the information
collection requirements to comply with the CIP and SAR Requirements.
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    \1102\ See OMB File No. 1506-0034 for the CIP requirement and
OMB File No. 1506-0019 for the SAR requirement.
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m. Compliance: Privacy
i. Time Burden
    We estimate that the initial time burden of the requirement related
to the proposed Privacy Rules, including Regulation S-P, S-AM and S-ID,
would be negligible in light of the limited activities of funding
portals, so we discuss it below only in relation to ongoing time
burdens.
    Regulation S-P would require a funding portal to provide notice to
investors about its privacy policies and practices; describes the
conditions under which a broker may disclose nonpublic personal
information about investors to nonaffiliated third parties; and
provides a method for investors to prevent a funding portal from
disclosing that information to most nonaffiliated third parties by
``opting out'' of that disclosure, subject to certain exceptions. For
funding portals, we expect that the privacy and opt-out notices would
be delivered electronically, which reduces the delivery burden compared
to paper delivery.
    Based on the proposed requirements, we estimate that all 50 funding