[Federal Register Volume 78, Number 214 (Tuesday, November 5, 2013)]
[Proposed Rules]
[Pages 66427-66602]
[FR Doc No: 2013-25355]

Vol. 78

Tuesday,

No. 214

November 5, 2013

Part II

Securities and Exchange Commission

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17 CFR Parts 200, 227, 232 et al.

Crowdfunding; Proposed Rule

Federal Register / Vol. 78 , No. 214 / Tuesday, November 5, 2013 /
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200, 227, 232, 239, 240 and 249

[Release Nos. 33-9470; 34-70741; File No. S7-09-13]
RIN 3235-AL37

Crowdfunding

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rules.

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SUMMARY: The Securities and Exchange Commission is proposing for
comment new Regulation Crowdfunding under the Securities Act of 1933
and the Securities Exchange Act of 1934 to implement the requirements
of Title III of the Jumpstart Our Business Startups Act. Regulation
Crowdfunding would prescribe rules governing the offer and sale of
securities under new Section 4(a)(6) of the Securities Act of 1933. The
proposal also would provide a framework for the regulation of
registered funding portals and brokers that issuers are required to use
as intermediaries in the offer and sale of securities in reliance on
Section 4(a)(6). In addition, the proposal would exempt securities sold
pursuant to Section 4(a)(6) from the registration requirements of
Section 12(g) of the Securities Exchange Act of 1934.

DATES: Comments should be received on or before February 3, 2014.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml);
     Send an email to<EMAIL_ADDRESS>Please include
File Number S7-09-13 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number S7-09-13. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://sec.gov/rules/proposed.shtml). Comments also
are available for Web site viewing and printing in the Commission's
Public Reference Room, 100 F Street NE., Washington, DC 20549, on
official business days between the hours of 10:00 a.m. and 3:00 p.m.
All comments received will be posted without change; we do not edit
personal identifying information from submissions. You should submit
only information that you would like to make publicly available.

FOR FURTHER INFORMATION CONTACT: With regard to requirements for
issuers, Sebastian Gomez Abero or Jessica Dickerson, Division of
Corporation Finance, at<PHONE_NUMBER>, and with regard to requirements
for intermediaries, Joseph Furey, Joanne Rutkowski, Leila Bham, Timothy
White or Carla Carriveau, Division of Trading and Markets, at (202)
551-5550, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction and Background
    A. Overview of Crowdfunding
    B. Title III of the JOBS Act
    C. Approach to Proposed Rules
II. Discussion of Proposed Regulation Crowdfunding
    A. Crowdfunding Exemption
    1. Limitation on Capital Raised
    2. Investment Limitation
    3. Transaction Conducted Through an Intermediary
    4. Exclusion of Certain Issuers From Eligibility Under Section
4(a)(6)
    B. Requirements on Issuers
    1. Disclosure Requirements
    2. Ongoing Reporting Requirements
    3. Form C and Filing Requirements
    4. Prohibition on Advertising Terms of the Offering
    5. Compensation of Persons Promoting the Offering
    6. Other Issuer Requirements
    C. Requirements on Intermediaries
    1. Brokers and Funding Portals
    2. Requirements and Prohibitions
    3. Measures To Reduce Risk of Fraud
    4. Account Opening
    5. Requirements With Respect to Transactions
    6. Completion of Offerings, Cancellations and Reconfirmations
    7. Payments to Third Parties
    D. Additional Requirements on Funding Portals
    1. Registration Requirement
    2. Exemption From Broker-Dealer Registration
    3. Safe Harbor for Certain Activities
    4. Compliance
    5. Records To Be Created and Maintained by Funding Portals
    E. Miscellaneous Provisions
    1. Insignificant Deviations From Regulation Crowdfunding
    2. Restrictions on Resales
    3. Information Available to States
    4. Exemption From Section 12(g)
    5. Scope of Statutory Liability
    6. Disqualification
    F. General Request for Comment
III. Economic Analysis
    A. Economic Baseline
    1. Existing Funding Sources Available to Startups and Small
Businesses
    2. Current Sources of Funding for Startups and Small Businesses
That Could Be Substitutes or Complements to Crowdfunding
    3. Survival Rates for Startups and Small Businesses
    4. Market Participants
    B. Analysis of Proposed Rules
    1. Broad Economic Considerations
    2. Crowdfunding Exemption
    3. Issuer Requirements
    4. Intermediary Requirements
    5. Additional Funding Portal Requirements
    6. Insignificant Deviations
    7. Relationship With State Law
    8. Exemption From Section 12(g)
    9. Disqualification
    C. Request for Comment
IV. Paperwork Reduction Act
    A. Background
    B. Estimate of Issuers and Intermediaries
    C. Estimate of Burdens
    D. Collections of Information Are Mandatory
    E. Confidentiality
    F. Retention Period of Recordkeeping Requirements
    G. Request for Comment
V. Small Business Regulatory Enforcement Fairness Act
VI. Initial Regulatory Flexibility Act Analysis
    A. Reasons for the Proposed Actions
    B. Objectives
    C. Small Entities Subject to the Proposed Rules
    D. Projected Reporting, Recordkeeping and Other Compliance
Requirements
    E. Duplicative, Overlapping or Conflicting Federal Rules
    F. Significant Alternatives
    1. Issuers
    2. Intermediaries
    G. Request for Comment
VII. Statutory Authority and Text of Proposed Regulation
Exhibit A

I. Introduction and Background

A. Overview of Crowdfunding

    Crowdfunding is a new and evolving method to raise money using the
Internet. Crowdfunding serves as an alternative source of capital to
support a wide range of ideas and ventures. An entity or individual
raising funds through crowdfunding typically seeks small individual
contributions from a large number of people.\1\ A

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

    Title III of the JOBS Act (``Title III'') added new Securities Act
Section

4(a)(6),\14\ which provides an exemption from the registration
requirements of Securities Act Section 5 for certain crowdfunding
transactions. To qualify for the exemption under Section 4(a)(6),
crowdfunding transactions by an issuer (including all entities
controlled by or under common control with the issuer) must meet
specified requirements, including the following:
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    \14\ Title III amended Securities Act Section 4 to add Section
4(6); however, Title II of the JOBS Act also amended Securities Act
Section 4 and inserted subsections (a) and (b). The U.S. Code
implemented the amendment by adding paragraph (6) at the end of
subsection (a).
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     The amount raised must not exceed $1 million in a 12-month
period (this amount is to be adjusted for inflation at least every five
years);
     individual investments in a 12-month period are limited
to:
    [cir] the greater of $2,000 or 5 percent of annual income or net
worth, if annual income or net worth of the investor is less than
$100,000; and
    [cir] 10 percent of annual income or net worth (not to exceed an
amount sold of $100,000), if annual income or net worth of the investor
is $100,000 or more (these amounts are to be adjusted for inflation at
least every five years); and
     transactions must be conducted through an intermediary
that either is registered as a broker or is registered as a new type of
entity called a ``funding portal.''
    In addition, Title III:
     adds Securities Act Section 4A, which requires, among
other things, that issuers and intermediaries that facilitate
transactions between issuers and investors in reliance on Section
4(a)(6) provide certain information to investors and potential
investors, take certain other actions and provide notices and other
information to the Commission;
     adds Exchange Act Section 3(h), which requires the
Commission to adopt rules to exempt, either conditionally or
unconditionally, ``funding portals'' from having to register as brokers
or dealers pursuant to Exchange Act Section 15(a)(1);
     includes disqualification provisions under which an issuer
would not be able to avail itself of the Section 4(a)(6) exemption if
the issuer or other related parties, including an intermediary, was
subject to a disqualifying event; and
     adds Exchange Act Section 12(g)(6), which requires the
Commission to adopt rules to exempt from the registration requirements
of Section 12(g), either conditionally or unconditionally, securities
acquired pursuant to an offering made in reliance on Section 4(a)(6).
    In this release, we are proposing new rules and forms to implement
Securities Act Sections 4(a)(6) and 4A and Exchange Act Sections 3(h)
and 12(g)(6). The proposed rules are described in detail below. Until
we adopt rules relating to crowdfunding transactions and such rules
become effective, issuers and intermediaries may not rely on the
exemption provided under Section 4(a)(6).

C. Approach to Proposed Rules

    We understand that Title III was designed to help alleviate the
funding gap and accompanying regulatory concerns faced by startups and
small businesses in connection with raising capital in relatively low
dollar amounts.\15\ The proposed rules are intended to align
crowdfunding transactions under Section 4(a)(6) with the central tenets
of the original concept of crowdfunding, in which the public--or the
crowd--is presented with an opportunity to invest in an idea or
business and individuals decide whether or not to invest after sharing
information about the idea or business with, and learning from, other
members of the crowd.\16\ In this role, members of the crowd are not
only sharing information about the idea or business, but also are
expected to help evaluate the idea or business before deciding whether
or not to invest.\17\
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    \15\ See note 7.
    \16\ See notes 1 and 2. As discussed in Section II.C.5.c below,
the proposed rules would require a person to open an account with an
intermediary before posting comments on the intermediary's platform.
However, as discussed in Section II.C.5.a below, a person would not
need to open an account with the intermediary in order to view the
issuer's disclosure materials.
    \17\ See Hazen, note 8.
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    At the same time, Congress provided important investor protections
for crowdfunding transactions under Section 4(a)(6), including
individual investment limits, required disclosures by issuers and the
use of intermediaries. The proposed rules would require that all
crowdfunding transactions under Section 4(a)(6) be conducted through a
registered intermediary on an Internet Web site or other similar
electronic medium to help ensure that the offering is accessible to the
public and that members of the crowd can share information and
opinions. Registered intermediaries are necessary to bring the issuer
and potential investors together and to provide safeguards to potential
investors.\18\ The proposed rules also would require that
intermediaries provide communication channels to facilitate the sharing
of information that will allow the crowd to decide whether or not to
fund the idea or business.\19\ The proposed rules further provide
intermediaries a means by which to facilitate the offer and sale of
securities without registering as brokers. We are mindful of the timing
and presentation of information required to be disclosed to investors
pursuant to the terms of the statute. The proposed rules would require
that this information be provided to investors at various points in
time in connection with an offering and through various electronic
means, such as through filings with the Commission and disclosures
provided on the intermediary's platform. We believe this approach would
be most practical and useful to investors in the crowdfunding context.
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    \18\ See 158 Cong. Rec. S1829 (daily ed. Mar. 20, 2012)
(statement of Sen. Jeff Merkley) (``The Web sites are subject to
oversight by the SEC and security regulators of their principal
States . . . This is a key predatory protection to prevent pump-and-
dump schemes.'').
    \19\ See Mollick Letter (stating that allowing ongoing
discussions between potential investors, community members and
issuers is a vital aspect of avoiding fraud and improving proposed
projects).
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    We understand that these proposed rules, if adopted, could
significantly affect the viability of crowdfunding as a capital-raising
method for startups and small businesses. Rules that are unduly
burdensome could discourage participation in crowdfunding. Rules that
are too permissive, however, may increase the risks for individual
investors, thereby undermining the facilitation of capital raising for
startups and small businesses.\20\ We have directed the Commission
staff, accordingly, to develop a comprehensive work plan to review and
monitor the use of the crowdfunding

exemption under Section 4(a)(6) and the rules the Commission adopts to
implement crowdfunding. Upon adoption of final rules, the Commission
staff will monitor the market for offerings made in reliance on Section
4(a)(6), focusing in particular on the types of issuers using the
exemption, the level of compliance with Regulation Crowdfunding by
issuers and intermediaries and whether the exemption is promoting new
capital formation while at the same time providing key protections for
investors. These efforts will assist the Commission in evaluating the
development of market practices in offerings made in reliance on
Section 4(a)(6). These efforts also will facilitate future Commission
consideration of any potential amendments to the rules implementing
crowdfunding that would be consistent with the Commission's mission of
protecting investors, maintaining fair, orderly and efficient markets
and facilitating capital formation. We urge commenters, as they review
the proposed rules, to consider and address the role that our
oversight, enforcement and regulation should play once a crowdfunding
market under Section 4(a)(6) begins to develop.
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    \20\ One press article, for example, described non-securities-
based crowdfunding campaigns that successfully raised funds but have
had problems manufacturing and delivering the ``perks'' or products
that were promised in exchange for contributions. See Matt Krantz,
Crowd-funding dark side: Sometimes investments go down drain, USA
Today at B1 (Aug. 15, 2012). Investor confidence in crowdfunding
could be eroded if such delays occur with regularity in securities-
based crowdfunding and compounded by any prevalence of fraud. See,
e.g., Laws Provide Con Artists with Personal Economic Growth Plan,
North American Securities Administrators Association (Aug. 21, 2012)
(identifying crowdfunding and Internet-based offers of securities as
a threat to investors), available at http://www.nasaa.org/14679/laws-provide-con-artists-with-personal-economic-growth-plan/. See
also Adrianne Jeffries, This is What a Kickstarter Scam Looks Like,
BetaBeat (Apr. 30, 2012), available at http://betabeat.com/2012/04/this-is-what-a-kickstarter-scam-looks-like/. But see Olga Khazan,
Kickstarter spies a sunglass start-up, Washington Post at A14 (May
28, 2012) (discussing a successful sunglasses company that used
crowdfunding for startup funds); Crowdfunding: Invested Central
raises $120,000, Washington Post at A10 (Jul. 23, 2012) (mentioning
a company that was able to raise capital through crowdfunding when
it could not otherwise secure traditional financing for an expansion
of its business).
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II. Discussion of Proposed Regulation Crowdfunding

A. Crowdfunding Exemption

    New Securities Act Section 4(a)(6) provides an exemption from the
registration requirements of Securities Act Section 5 for certain
crowdfunding transactions. To qualify for the exemption under Section
4(a)(6), crowdfunding transactions by an issuer must meet specified
requirements, including requirements with regard to the dollar amount
of the securities that may be sold by an issuer and the dollar amount
that may be invested by an individual in a 12-month period. The
crowdfunding transaction also must be conducted through a registered
intermediary that complies with specified requirements.\21\ Title III
also provides limitations on who may rely on the exemption and
establishes a liability scheme for improper use of the exemption. As
discussed below, the rules we are proposing are designed to aid issuers
and investors in determining the applicable limitations on capital
raised and individual investments.
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    \21\ See Section II.C below for a discussion of the requirements
on intermediaries. See also Section II.D below for a discussion of
the additional requirements on funding portals.
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1. Limitation on Capital Raised
    The exemption from registration provided by Section 4(a)(6) is
available to a U.S. issuer provided that ``the aggregate amount sold to
all investors by the issuer, including any amount sold in reliance on
the exemption provided under [Section 4(a)(6)] during the 12-month
period preceding the date of such transaction, is not more than
$1,000,000.'' \22\ Under Section 4A(h), the Commission is required to
adjust the dollar amounts in Section 4(a)(6) ``not less frequently than
once every five years, by notice published in the Federal Register, to
reflect any change in the Consumer Price Index for All Urban Consumers
published by the Bureau of Labor Statistics.''
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    \22\ Securities Act Section 4(a)(6)(A).
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    Several commenters indicated that the $1 million maximum aggregate
amount is too low.\23\ Several commenters requested that the Commission
state that the $1 million aggregate limit pertains only to offerings
under Section 4(a)(6) and does not include all exempt offerings.\24\
Two commenters suggested, however, that the calculation of the $1
million aggregate limit should include all issuer transactions that
were exempt under Securities Act Section 4(a) during the preceding 12-
month period.\25\ Another commenter requested clarification that the
limitations and requirements of the offering exemption under Section
4(a)(6) would not affect other methods of raising capital that do not
involve the sale of securities, such as contributions from friends and
family, donation crowdfunding, gifts, grants or loans.\26\ Several
commenters had concerns about the possible integration \27\ of an
offering under Section 4(a)(6) with other exempt offerings and
suggested that the Commission should allow for simultaneous or
sequential offerings under Regulation D \28\ and Section 4(a)(6)
without integration.\29\
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    \23\ See High Tide Letter; TechnologyCrowdfund Letter 3 (stating
that a minimum of $5 million to $10 million is necessary to start
any business other than a software business); EnVironmental Letter
(stating that the upper limit should be increased to $5 million or
higher); VTNGLOBAL Letter (stating that Rule 506 of Regulation D
permits an unlimited capital raise from accredited investors and
that the same should apply to crowdfunding).
    \24\ See NSBA Letter (stating that the $1 million limitation
should pertain only to offerings made in reliance on Section
4(a)(6)); ABA Letter 1; NCA Letter.
    \25\ See CommunityLeader Letter; Ohio Division of Securities
Letter.
    \26\ See Crowdfunding Offerings Ltd. Letter 6.
    \27\ The integration doctrine seeks to prevent an issuer from
improperly avoiding registration by artificially dividing a single
offering into multiple offerings such that Securities Act exemptions
would apply to multiple offerings that would not be available for
the combined offering.
    \28\ 17 CFR 230.501 through 230.508.
    \29\ See ABA Letter 1; Lingam Letter 2 (stating that offerings
under Regulation D and Section 4(a)(6) should not be integrated if:
(1) No general solicitation takes place; (2) the Section 4(a)(6)
offering closes prior to any general solicitation related to a
Regulation D offering; or (3) the Regulation D and the Section
4(a)(6) offerings occur simultaneously and the offerings have the
same economic terms, but the size of the Regulation D offering is
greater than the size of the Section 4(a)(6) offering); CFIRA Letter
8 (stating that CFIRA's members have opposing views on whether the
integration doctrine should be applied to crowdfunded offerings);
Liles Letter 1; CFIRA Letter 2; CommunityLeader Letter. See also
Final Report of the 2012 SEC Government-Business Forum on Small
Business Capital Formation (April 2013) (``2012 SEC Government-
Business Forum''), available at http://www.sec.gov/info/smallbus/sbforumreps.htm (recommending that we consider permitting concurrent
offerings to be made to accredited investors in excess of the $1
million limit).
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    Section 4(a)(6) specifically provides for a maximum aggregate
amount of $1 million sold in reliance on the exemption in any 12-month
period. The only reference in the statute to changing that amount is
the requirement that the Commission update the amount not less
frequently than every five years based on the Consumer Price Index.
Additionally, statements in the Congressional Record indicate that
Congress believed that $1 million was a substantial amount for a small
business.\30\ We do not believe that Congress intended for us to modify
the maximum aggregate amount permitted to be sold under the exemption
when promulgating rules to implement the statute.\31\ Therefore, we are
not proposing to increase the limitation on the aggregate amount sold.
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    \30\ 158 Cong. Rec. S1829 (daily ed. Mar. 20, 2012) (statement
of Sen. Jeff Merkley) (``[T]he amendment allows existing small
businesses and startup companies to raise up to $1 million per year.
That is a substantial amount for a small business.'').
    \31\ Cf. Securities Act Section 4A(b)(1)(D)(iii) (giving the
Commission discretion to increase the aggregate target offering
amount that requires audited financial statements).
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    Title III provides that the $1 million limitation applies to the
``aggregate amount sold to all investors by the issuer, including any
amount sold in reliance on the exemption provided under [Section
4(a)(6)].'' Section 4A(g), however, provides that ``[n]othing in the
exemption shall be construed as preventing an issuer from raising
capital through means other than [S]ection 4[(a)](6).'' These two
provisions create statutory ambiguity because the first provision could
be read to provide for the aggregation of amounts raised in all exempt
transactions, even those that do not involve crowdfunding, while the
second provision could be read to provide that nothing in the Section

4(a)(6) exemption should limit an issuer's capital raising through
other methods. We believe that the overall intent of providing the
exemption under Section 4(a)(6) was to provide an additional mechanism
for capital raising for startup and small businesses and not to affect
the amount an issuer could raise outside of that exemption. Thus, we
believe the capital raised in reliance on the exemption provided by
Section 4(a)(6) should be counted toward the limitation. Capital raised
through other means should not be counted in determining the aggregate
amount sold in reliance on Section 4(a)(6). The opposite approach--
requiring aggregation of amounts raised in any exempt transaction--
would be inconsistent with the goal of alleviating the funding gap
faced by startups and small businesses because it would place a cap on
the amount of capital startups and small business could raise. An
issuer that already sold $1 million in reliance on the exemption
provided under Section 4(a)(6), for example, would be prevented from
raising capital through other exempt methods and, conversely, an issuer
that sold $1 million through other exempt methods would be prevented
from raising capital under Section 4(a)(6).
    In determining the amount that may be available to be offered and
sold in reliance on Section 4(a)(6) in light of the $1 million
aggregate amount limitation, an issuer would include amounts sold by
the issuer (including amounts sold by entities controlled by the issuer
or under common control with the issuer, as well as any amounts sold by
any predecessor of the issuer) in reliance on Section 4(a)(6) during
the preceding 12-month period. The issuer would aggregate any amounts
previously sold with the amount the issuer intends to raise in reliance
on the exemption, and under the proposed rules, the combined amount
could not exceed $1 million. An issuer would not include amounts sold
in other exempt offerings during the preceding 12-month period. For
example, if an issuer sold $800,000 pursuant to the exemption provided
in Regulation D during the preceding 12 months, this amount would not
be aggregated in an issuer's calculation to determine whether it had
reached the maximum amount for purposes of Section 4(a)(6).\32\ In
addition, in determining the amount sold in reliance on Section 4(a)(6)
during the preceding 12-month period, an issuer would not need to
consider amounts received through methods that do not involve the offer
or sale of securities (such as donations it received from a separate
non-securities-based crowdfunding effort, contributions from friends
and family, gifts, grants or loans).
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    \32\ In contrast, if an issuer sold $800,000 in a crowdfunding
transaction pursuant to Section 4(a)(6) during the preceding 12
months, the issuer would be required to count that amount toward the
$1 million aggregate amount and, thus, could only offer and sell
$200,000 more in reliance on Section 4(a)(6).
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    Further, in light of Section 4A(g) and the reasons discussed above,
we believe that an offering made in reliance on Section 4(a)(6) should
not be integrated with another exempt offering made by the issuer,
provided that each offering complies with the requirements of the
applicable exemption that is being relied upon for the particular
offering. An issuer could complete an offering made in reliance on
Section 4(a)(6) that occurs simultaneously with, or is preceded or
followed by, another exempt offering. An issuer conducting a concurrent
exempt offering for which general solicitation is not permitted,
however, would need to be satisfied that purchasers in that offering
were not solicited by means of the offering made in reliance on Section
4(a)(6).\33\ Similarly, any concurrent exempt offering for which
general solicitation is permitted could not include an advertisement of
the terms of an offering made in reliance on Section 4(a)(6) that would
not be permitted under Section 4(a)(6) and the proposed rules.\34\
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    \33\ For example, if the prospective investor in a concurrent
private placement for which general solicitation is not permitted
became interested in that private placement through some means other
than the offering made in reliance on Section 4(a)(6), such as
through a substantive, pre-existing relationship with the issuer or
direct contact by the issuer or its agents outside of the offering
made in reliance on Section 4(a)(6), then the fact that the offering
made in reliance on Section 4(a)(6) was posted publicly on the
intermediary's platform would not affect the availability of the
other private placement exemption. On the other hand, if an investor
first discovers the issuer through a solicitation in a Section
4(a)(6) offering, that investor would likely not be eligible to
participate in a concurrent private placement in which general
solicitation is not permitted.
    \34\ See proposed Rule 204 of Regulation Crowdfunding. See also
discussion in Section II.B.4 below.
---------------------------------------------------------------------------

    Under Section 4(a)(6), the amount of securities sold in reliance on
Section 4(a)(6) by entities controlled by or under common control with
the issuer must be aggregated with the amount to be sold by the issuer
in the current offering to determine the aggregate amount sold in
reliance on Section 4(a)(6) during the preceding 12-month period. The
statute does not define the term ``controlled by or under common
control with'' the issuer; however, the term ``control'' is defined in
Securities Act Rule 405.\35\ For purposes of determining whether an
entity is ``controlled by or under common control with'' the issuer, an
issuer would be required to consider whether it has ``control'' based
on this definition.\36\
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    \35\ See 17 CFR 230.405 (``The term control (including the terms
controlling, controlled by and under common control with) means the
possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of a person, whether
through the ownership of voting securities, by contract, or
otherwise.''). Exchange Act Rule 12b-2 similarly defines the term
``control.'' See 17 CFR 240.12b-2.
    \36\ See proposed Instruction to paragraph (c) of proposed Rule
100 of Regulation Crowdfunding.
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    Under the proposed rules, the amount of securities sold in reliance
on Section 4(a)(6) also would include securities sold by any
predecessor of the issuer in reliance on Section 4(a)(6) during the
preceding 12-month period.\37\ We believe this approach is necessary to
prevent an issuer from exceeding the $1 million limit by reorganizing
the issuer into a new entity that would otherwise not be limited by
previous sales made by its predecessor. For example, if an issuer
reaches the $1 million limit under Section 4(a)(6), we do not believe
the reorganization of the issuer into a new entity should permit the
successor to make additional offers and sales in reliance on Section
4(a)(6) during the relevant 12-month period.
---------------------------------------------------------------------------

    \37\ See proposed Rule 100(c) of Regulation Crowdfunding
(proposing to define issuer to include all entities controlled by or
under common control with the issuer and any predecessor of the
issuer).
---------------------------------------------------------------------------

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

efforts be included in the calculation of the $1 million limit? Why or
why not?
    3. As described above, we believe that offerings made in reliance
on Section 4(a)(6) should not necessarily be integrated with other
exempt offerings if the conditions to the applicable exemptions are
met. How would an alternative interpretation affect the utility of
crowdfunding as a capital raising mechanism? Are there circumstances
under which other exempt offers should be integrated with an offer made
in reliance on Section 4(a)(6)? If so, what are those circumstances?
Should we prohibit an issuer from concurrently offering securities in
reliance on Section 4(a)(6) and another exemption? Why or why not?
Should we prohibit an issuer from offering securities in reliance on
Section 4(a)(6) within a specified period of time after or concurrently
with a Rule 506(c) offering under Regulation D involving general
solicitation? Why or why not? Should we prohibit an issuer from using
general solicitation or general advertising under Rule 506(c) in a
manner that is intended, or could reasonably be expected, to condition
the market for a Section 4(a)(6) offering or generate referrals to a
crowdfunding intermediary? Why or why not? Should issuers that began an
offering under Section 4(a)(6) be permitted to convert the offering to
a Rule 506(c) offering? Why or why not?
    4. Under the proposed rules, whether an entity is controlled by or
under common control with the issuer would be determined based on
whether the issuer possesses, directly or indirectly, the power to
direct or cause the direction of the management and policies of the
entity, whether through the ownership of voting securities, by contract
or otherwise. This standard is based on the definition of ``control''
in Securities Act Rule 405. Is this approach appropriate? Why or why
not? Should we define control differently? If so, how?
    5. Under the proposed rules, the definition of issuer would include
any predecessor of the issuer. Is this approach appropriate? Why or why
not? Should an issuer aggregate amounts sold by an affiliate of the
issuer when determining the aggregate amount sold in reliance on
Section 4(a)(6) during the preceding 12-month period? Why or why not?
If so, how should we define affiliate?
2. Investment Limitation
    Under Section 4(a)(6)(B), the aggregate amount sold to any investor
by an issuer, including any amount sold in reliance on the exemption
during the 12-month period preceding the date of such transaction,
cannot exceed: ``(i) The greater of $2,000 or 5 percent of the annual
income or net worth of such investor, as applicable, if either the
annual income or the net worth of the investor is less than $100,000;
and (ii) 10 percent of the annual income or net worth of such investor,
as applicable, not to exceed a maximum aggregate amount sold of
$100,000, if either the annual income or net worth of the investor is
equal to or more than $100,000.'' Section 4A(h) further provides that
these dollar amounts shall be adjusted by the Commission not less
frequently than once every five years based on the Consumer Price
Index. As discussed in more detail below, Section 4A(h) also provides
that the income and net worth of a natural person who is investing in a
crowdfunding transaction pursuant to Section 4(a)(6) shall be
calculated in accordance with the Commission's rules regarding the
calculation of income and net worth of an accredited investor.\38\
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    \38\ The definition of the term ``accredited investor'' is set
forth in Rule 501(a) of Regulation D [17 CFR 230.501(a)] and
includes any person who comes within one of the definition's
enumerated categories of persons, or whom the issuer ``reasonably
believes'' comes within any of the enumerated categories, at the
time of the sale of the securities to that person. For natural
persons, Rule 501(a) defines an accredited investor as a person: (1)
Whose individual net worth, or joint net worth with that person's
spouse, exceeds $1 million, excluding the value of the person's
primary residence (the ``net worth test''); or (2) who had an
individual income in excess of $200,000 in each of the two most
recent years, or joint income with that person's spouse in excess of
$300,000 in each of those years, and has a reasonable expectation of
reaching the same income level in the current year (the ``income
test''). Although the Dodd-Frank Wall Street Reform and Consumer
Protection Act, Public Law 111-203, 124 Stat. 1376, 1577 (July 21,
2010), (the ``Dodd-Frank Act'') did not change the amount of the $1
million net worth test, it did change how that amount is
calculated--by excluding the value of a person's primary residence.
This change took effect upon the enactment of the Dodd-Frank Act. In
December 2011, we amended Rule 501 to incorporate this change into
the definition of accredited investor. See Net Worth Standard for
Accredited Investors, Release No. 33-9287 (Dec. 21, 2011) [76 FR
81793 (Dec. 29, 2011)]. In addition, Section 413(b) of the Dodd-
Frank Act specifically authorizes us to undertake a review of the
definition of the term ``accredited investor'' as it applies to
natural persons, it and requires us to undertake a review of the
definition in its entirety every four years, beginning four years
after enactment of the Dodd-Frank Act. Release No. 33-9416 (July 10,
2013) requests public comments on the definition of ``accredited
investor.''
---------------------------------------------------------------------------

    Several commenters noted that Sections 4(a)(6)(B)(i) and (ii)
technically subject some investors to two potential investment
limits.\39\ The language of the statute may be read to create potential
conflicts or ambiguity between the two investment limits because
paragraph (i) applies if ``either'' annual income or net worth is less
than $100,000 and paragraph (ii) applies if ``either'' annual income or
net worth is equal to or more than $100,000. Accordingly, in any
situation in which annual income is less than $100,000 and net worth is
equal to or more than $100,000 (or vice versa), the language of the
statute may be read to cause both paragraphs to apply. Paragraph (i)
also fixes the maximum annual investment by an investor at 5 percent of
``the annual income or net worth of such investor, as applicable'' and
paragraph (ii) fixes the maximum annual investment by an investor at 10
percent of ``the annual income or net worth of such investor, as
applicable'', but neither paragraph (i) nor paragraph (ii) explicitly
states when that percentage should be applied against the investor's
annual income and when the percentage should be applied against the
investor's net worth. Finally, paragraph (i) sets a floor for the
investment limit of $2,000 per year and paragraph (ii) sets a ceiling
for the investment limit of $100,000 per year, but the statutory
language does not explicitly state whether the floor applies if the
maximum is calculated under paragraph (ii) or whether the ceiling
applies if the maximum is calculated under paragraph (i). Accordingly,
discretion is required in interpreting and applying this provision of
the statute.
---------------------------------------------------------------------------

    \39\ See RocketHub Letter 1 (stating that the Commission should
clarify that the greater of income or net worth will be used to
determine the investment limit); NASAA Letter (stating that the
Commission should resolve the ambiguity by requiring the lesser of
the two investment limits); Ohio Division of Securities Letter
(stating that the Commission should apply the stricter investment
limitation); ABA Letter 1; Friedman Letter.
---------------------------------------------------------------------------

    We believe that the appropriate approach to the investment limit
provision is to provide for an overall investment limit of $100,000,
but within that overall limit, to provide for a ``greater of''
limitation based on annual income and net worth. Under the proposed
rules, therefore, if both annual income and net worth are less than
$100,000, then a limit of $2,000 or 5 percent of annual income or net
worth, whichever is greater, would apply. If either annual income or
net worth exceeds $100,000, then a limit of 10 percent of annual income
or net worth, whichever is greater, but not to exceed $100,000, would
apply. We believe that this clarification would give effect to the
provision and would be consistent with Congressional intent in
providing investment limitations; however, we request comment below on
whether to calculate the investment limit based on

the lesser of annual income or net worth.
    As required by Section 4A(h), the proposed rules would require a
natural person's annual income and net worth to be calculated in
accordance with the Commission's rules for determining accredited
investor status.\40\ Securities Act Rule 501 specifies the manner in
which annual income and net worth are calculated for purposes of
determining accredited investor status.\41\ One commenter stated that
Section 4(a)(6)(B) is unclear in regard to how to address the joint net
worth of spouses.\42\ The proposed rules would clarify that an
investor's annual income and net worth may be calculated jointly with
the income and net worth of the investor's spouse.\43\ We believe that
this approach is consistent with the rules for determining accredited
investor status because the accredited investor definition contemplates
both individual and joint income and net worth with a spouse as methods
of calculating annual income and net worth.
---------------------------------------------------------------------------

    \40\ See proposed Instruction 1 to paragraph (a)(2) of proposed
Rule 100 of Regulation Crowdfunding. See also note 9.
    \41\ See Securities Act Rule 501(a)(5) [17 CFR 230.501(a)(5)]
(net worth) and Securities Act Rule 501(a)(6) [17 CFR 230.501(a)(6)]
(income). Consistent with these rules, the calculation of a natural
person's net worth for purposes of the investment limit would
exclude the value of the primary residence of such person. A natural
person's income for purposes of the investment limit calculation
would be the lower of such person's income for each of the two most
recent years as long as such person has a reasonable expectation of
the same income level in the current year.
    \42\ See Friedman Letter.
    \43\ See proposed Instruction 2 to paragraph (a)(2) of proposed
Rule 100 of Regulation Crowdfunding.
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    We also are proposing to allow an issuer to rely on efforts that an
intermediary takes in order to determine that the aggregate amount of
securities purchased by an investor will not cause the investor to
exceed the investor limits,\44\ provided that the issuer does not have
knowledge that the investor had exceeded, or would exceed, the investor
limits as a result of purchasing securities in the issuer's
offering.\45\
---------------------------------------------------------------------------

    \44\ See discussion in Section II.C.5.b.i below.
    \45\ See proposed Instruction 3 to paragraph (a)(2) of proposed
Rule 100 of Regulation Crowdfunding.
---------------------------------------------------------------------------

    In discussing the investment limitations, one commenter requested
that the Commission distinguish between retail investors and
institutional or accredited investors and allow institutional and
accredited investors to invest in excess of the investment limitations
included in the statute.\46\ Another commenter asked that the
Commission clarify whether non-U.S. citizens or non-U.S. residents are
bound by the same investment limits.\47\ Three commenters proposed that
the Commission create a two-tier regulatory system based on different
investment limits to reduce the regulatory burden for small, local
offerings.\48\ One of the commenters suggested that one of the tiers
could consist of a ``small local offering'' in which investment limits
would be up to $250 per investor.\49\ The commenter asserted that
smaller investments could be subject to significantly reduced
regulation because a $250 investment is unlikely to pose significant
risk to an investor. The second commenter suggested reducing the
anticipated personal disclosure requirements for investors who invest
less than $500 through an intermediary that is a community development
financial institution.\50\
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    \46\ See CFIRA Letter 2.
    \47\ See TechnologyCrowdFund Letter 5.
    \48\ See ASBC Letter; City First Letter. See also Spinrad Letter
1 (supporting the two-tier approach described in the ASBC Letter).
    \49\ See ASBC Letter.
    \50\ See City First Letter.
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    The limitations in Section 4(a)(6)(B) apply to any investor seeking
to participate in a crowdfunding transaction. We believe that Congress
intended for investment opportunities through crowdfunding transactions
relying on Section 4(a)(6) to be available to all types of investors
and established the investment limitations accordingly.\51\ The statute
provides specific investment limits, and the only reference in the
statute regarding changing those investment limits is the requirement
that the Commission update the investment limits not less frequently
than every five years based on the Consumer Price Index. Therefore, we
do not believe it would be appropriate to alter those limits for any
particular type of investor or, at this time, to create a different
exemption based on different investment limits. Issuers can rely on
other exemptions to offer and sell securities to accredited investors
and institutional investors (and, in some cases, investors that do not
meet the definition of accredited investor). As discussed above,
concurrent offerings to these types of investors are possible if the
conditions of the applicable exemption are met. Therefore, as proposed,
the limitations would apply to all investors, including retail,
institutional or accredited investors and both U.S. and non-U.S.
citizens or residents.
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    \51\ See 158 Cong. Rec. S1689 (daily ed. Mar. 15, 2012)
(statement of Sen. Mark Warner) (``There is now the ability to use
the Internet as a way for small investors to get the same kind of
deals that up to this point only select investors have gotten that
have been customers of some of the best known investment banking
firms, where we can now use the power of the Internet, through a
term called crowdfunding.'').
---------------------------------------------------------------------------

Request for Comment
    6. While we acknowledge that there is ambiguity in the statutory
language and there is some comment regarding a contrary reading, we
believe that the appropriate approach to the investment limitations in
Section 4(a)(6)(B) is to provide for an overall investment limit of
$100,000 and, within that limit, to provide for a ``greater of''
limitation based on an investor's annual income or net worth. In light
of ambiguity in the statutory language, we are specifically asking for
comment as to the question of whether we should instead require
investors to calculate the investment limitation based on the
investor's annual income or net worth at the five percent threshold of
Section 4(a)(6)(B)(i) if either annual income or net worth is less than
$100,000? Similarly, for those investors falling within the Section
4(a)(6)(B)(i) framework, should we require them to calculate the five
percent investment limit based on the lower of annual income or net
worth? Should we require the same for the calculation of the 10 percent
investment limit within the Section 4(a)(6)(B)(ii) framework? If we
were to pursue any of these calculations, would we unnecessarily impede
capital formation?
    7. The statute does not address how joint annual income or joint
net worth should be treated for purposes of the investment limit
calculation. The proposed rules clarify that annual income and net
worth may be calculated jointly with the annual income and net worth of
the investor's spouse. Is this approach appropriate? Should we
distinguish between annual income and net worth and allow only one or
the other to be calculated jointly for purposes of calculating the
investment limit? Why or why not? Should the investment limit be
calculated differently if it is based on the spouses' joint income,
rather than each spouse's annual income? Why or why not?
    8. We are proposing to permit an issuer to rely on the efforts that
an intermediary takes in order to determine that the aggregate amount
of securities purchased by an investor will not cause the investor to
exceed the investor limits, provided that the issuer does not have
knowledge that the investor had exceeded, or would exceed, the investor
limits as a result of purchasing securities in the issuer's offering.
Is this approach appropriate? Why or why not? Should an issuer be
required to obtain a written representation from the investor that the
investor has not and

will not exceed the limit by purchasing from the issuer? Why or why
not?
    9. Should institutional and accredited investors be subject to the
investment limits, as proposed? Why or why not? Should we adopt rules
providing for another crowdfunding exemption with a higher investment
limit for institutional and accredited investors? If so, how high
should the limit be? Are there categories of persons that should not be
subject to the investment limits? If yes, please identify those
categories of persons. If the offering amount for an offering made in
reliance on Section 4(a)(6) is not aggregated with the offering amount
for a concurrent offering made pursuant to another exemption, as
proposed, is it necessary to exclude institutional and accredited
investors from the investment limits since they would be able to invest
pursuant to another exemption in excess of the investment limits in
Section 4(a)(6)?
    10. Should we adopt rules providing for another crowdfunding
exemption with different investment limits (e.g., an exemption with a
$250 investment limit and fewer issuer requirements), as one commenter
suggested,\52\ or apply different requirements with respect to
individual investments under a certain amount, such as $500, as another
commenter suggested?\53\ Why or why not? If so, should the requirements
for issuers and intermediaries also change? What investment limits and
requirements would be appropriate? Would adopting such an exemption be
consistent with the purposes of Section 4(a)(6)?
---------------------------------------------------------------------------

    \52\ See ASBC Letter.
    \53\ See City First Letter.
---------------------------------------------------------------------------

    11. Should we consider additional investment limits on transactions
made in reliance on Section 4(a)(6) where the purchaser's annual income
and net worth are both below a particular threshold? If so, what should
such threshold be and why?
3. Transaction Conducted Through an Intermediary
    Under Section 4(a)(6)(C), a transaction in reliance on Section
4(a)(6) must be ``conducted through a broker or funding portal that
complies with the requirements of [S]ection 4A(a).'' We believe that
requiring an issuer to use only one intermediary, rather than allowing
the issuer to use multiple intermediaries, to conduct an offering or
concurrent offerings in reliance on Section 4(a)(6) would help foster
the creation of a crowd and better accomplish the purpose of the
statute. As discussed above, a central tenet of the concept of
crowdfunding is presenting members of the crowd with an idea or
business so members of the crowd can share information and evaluate the
idea or business. Allowing an issuer to conduct a single offering or
simultaneous offerings in reliance on Section 4(a)(6) through more than
one intermediary would diminish the ability of the members of the crowd
to effectively share information, because essentially, there would be
multiple ``crowds.'' Also, because practices among intermediaries may
differ, were multiple intermediaries to conduct a single offering or
simultaneous offerings, this could result in significant differences
among such offerings. Finally, allowing an issuer to conduct an
offering using more than one intermediary would make it more difficult
for intermediaries to determine whether an issuer is exceeding the $1
million aggregate offering limit. Therefore, in addition to requiring
the use of an intermediary in connection with an offering made in
reliance on Section 4(a)(6), the proposed rules would prohibit an
issuer from using more than one intermediary to conduct an offering or
concurrent offerings made in reliance on Section 4(a)(6).\54\
---------------------------------------------------------------------------

    \54\ See proposed Instruction 1 to paragraph (a)(3) of proposed
Rule 100 of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Although the statute does not expressly require it, we also believe
that in enacting Section 4(a)(6)(C), Congress contemplated that
crowdfunding transactions made in reliance on Section 4(a)(6) and
activities associated with these transactions would occur over the
Internet or other similar electronic medium that is accessible to the
public.\55\ We believe that an ``online-only'' requirement enables the
public to access offering information and share information publicly in
a way that will allow members of the crowd to decide whether or not to
participate in the offering and fund the business or idea.\56\ We
believe that other mechanisms would not offer this opportunity. The
proposed rules would require that an intermediary, in a transaction
involving the offer or sale of securities in reliance on Section
4(a)(6), effect such transactions exclusively through an intermediary's
platform.\57\ We propose to define the term ``platform'' to mean an
Internet Web site or other similar electronic medium through which a
registered broker or a registered funding portal acts as an
intermediary in a transaction involving the offer or sale of securities
in reliance on Section 4(a)(6).\58\ The requirement that a transaction
be conducted exclusively through a platform does not preclude an
intermediary from performing back office and other administrative
functions offline. Therefore, we propose to state that intermediaries
may engage in back office and other administrative functions other than
on their platforms.\59\ Examples of such functions include document
maintenance, preparation of notices and confirmations, preparing
internal policies and procedures, defining and approving business
security requirements and policies for information technology, and
preparing information required to be filed or otherwise provided to
regulators.
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    \55\ In this regard, we note that Section 301 of the JOBS Act
states that ``[Title III] may be cited as the `Capital Raising
Online While Deterring Fraud and Unethical Non-Disclosure Act of
2012' ''. See Section 301 of the JOBS Act. See also 158 Cong. Rec.
S1689 (daily ed. March 15, 2012) (statement of Sen. Mark Warner)
(``There is now the ability to use the Internet as a way for small
investors to get the same kind of deals that up to this point only
select investors have gotten . . ., where we can now use the power
of the Internet, through a term called crowdfunding.''); id. at
S1717 (Statement of Sen. Mary Landrieu) (``this crowdfunding bill--
which is, in essence, a way for the Internet to be used to raise
capital. . . .'').
    \56\ See note 2 and accompanying text. The Internet is
considered to be a ``perfect technology capable of aggregating
millions of disparate, independent ideas in the way markets and
intelligent voting systems do, without the dangers of `too much
communication' and compromise.'' Brabham, note 1 (citing James
Surowiecki, The Wisdom of Crowds xix (2004)).
    \57\ See proposed Rule 100(a)(3) of Regulation Crowdfunding.
    \58\ See proposed Rule 100(d) of Regulation Crowdfunding.
    \59\ See proposed Instruction 2 to paragraph (a)(3) of proposed
Rule 100 of Regulation Crowdfunding.
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    The proposed rules would accommodate other electronic media that
currently exist or may develop in the future. For instance,
applications for mobile communication devices, such as cell phones or
smart phones, could be used to display offerings and to permit
investors to make investment commitments. In our releases concerning
the use of electronic media for delivery purposes, we discussed so-
called ``electronic-only'' offerings as those in which investors are
permitted to participate only if they agree to accept electronic
delivery of all documents and other information in connection with the
offering.\60\ As discussed below, the proposed rules would require that
an intermediary, in its standard account opening materials,

obtain from investors consent for such electronic delivery.\61\
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    \60\ See, e.g., Use of Electronic Media by Broker-Dealers,
Transfer Agents and Investment Advisers for Delivery of Information,
Release No. 34-37182 (May 9, 1996) [61 FR 24644 (May 15, 1996)]; Use
of Electronic Media, Release No. 34-42728 (Apr. 28, 2000) [65 FR
25843 (May 4, 2000)] (``Use of Electronic Media'').
    \61\ See proposed Rule 302(a) of Regulation Crowdfunding. The
proposed rules would require consent to electronic delivery because
we believe Congress contemplated that crowdfunding would, by its
very nature, occur exclusively through electronic media.
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    Some commenters appear to assume that all offers and sales made in
reliance on Section 4(a)(6) would be conducted online.\62\ One
commenter recommended that the Commission expressly require that all
disclosure and affirmations required for crowdfunding transactions take
place online.\63\ In contrast, another commenter requested that we
permit some crowdfunding elements to take place offline to encourage
local community investments through entities such as community banks,
community development companies and business development companies.\64\
This commenter stated that permitting crowdfunding to take place
offline also will help persons without Internet access to invest. The
proposed rules would, subject to certain conditions, separately permit
outreach by third parties and a third party's promotion of an issuer's
offering through communication channels provided by an
intermediary.\65\ In addition, an issuer may provide a notice, subject
to the conditions in the proposed rules, that directs potential
investors to the intermediary's platform through which the issuer will
conduct its offering.\66\ Finally, we are not proposing to permit
offerings to be conducted through means other than the Internet or
similar electronic medium because we believe that allowing other non-
electronic means would be inconsistent with the underlying principles
of crowdfunding and the statute. Offerings made by other means would
not be widely accessible by the public, which would defeat the benefit
of the collective wisdom of the members of the crowd. We also believe
that Internet access may be available to the public, such as through
local public libraries, alleviating one commenter's concern about some
persons not being able to invest unless the offerings also take place
offline.
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    \62\ See, e.g., MacDonald Letter (stating that readily-available
information on the Internet already provides a safeguard for
crowdfunding investors); NAASA Letter (stating that NASAA is
considering whether open Internet access to funding portals would
provide sufficient and updated information to state regulators).
    \63\ See Cera Technology Letter.
    \64\ See Tally Letter.
    \65\ See proposed Rule 205 of Regulation Crowdfunding (promoter
compensation), proposed Rule 305 of Regulation Crowdfunding
(payments to third parties) and proposed Rule 402(b)(6) of
Regulation Crowdfunding (conditional safe harbor), discussed below
in Sections II.B.5, II.C.7 and II.D.3, respectively.
    \66\ See proposed Rule 204 of Regulation Crowdfunding
(advertising) discussed below in Section II.B.4.
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Request for Comment
    12. The proposed rules would prohibit an issuer from conducting an
offering or concurrent offerings in reliance on Section 4(a)(6) using
more than one intermediary. Is this proposed approach appropriate? Why
or why not? If issuers were permitted to use more than one
intermediary, what requirements and other safeguards should or could be
employed?
    13. Should we define the term ``platform'' in a way that limits
crowdfunding in reliance on Section 4(a)(6) to transactions conducted
through an Internet Web site or other similar electronic medium? Why or
why not?
    14. Should we permit crowdfunding transactions made in reliance on
Section 4(a)(6) to be conducted through means other than an
intermediary's electronic platform? If so, what other means should we
permit? For example, should we permit community-based funding in
reliance on Section 4(a)(6) to occur other than on an electronic
platform? \67\ To foster the creation and development of a crowd, to
what extent would such other means need to provide members of the crowd
with the ability to observe and comment (e.g., through discussion
boards or similar functionalities) on the issuer, its business or
statements made in the offering materials?
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    \67\ See City First Letter and note 355.
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    15. Should we allow intermediaries to restrict who can access their
platforms? For example, should we permit intermediaries to provide
access by invitation only or only to certain categories of investors?
Why or why not? Would restrictions such as these negatively impact the
ability of investors to get the benefit of the crowd and its assessment
of an issuer, business or potential investment? Would these kinds of
restrictions affect the ability of small investors to access the
capital markets? If so, how?
    16. As noted above, the proposed rules would not require
intermediaries' back office or other administrative functions to be
conducted exclusively on their platforms. Do the proposed rules require
any clarification? Are there other activities in which an intermediary
may engage that would not be considered back office or administrative
functions and that should be permitted to occur other than on a
platform? If so, what activities are they, and why should they be
permitted to occur other than on a platform?
4. Exclusion of Certain Issuers From Eligibility Under Section 4(a)(6)
    Section 4A(f) excludes certain categories of issuers from
eligibility to rely on Section 4(a)(6) to engage in crowdfunding
transactions. These issuers are: (1) Issuers that are not organized
under the laws of a state or territory of the United States or the
District of Columbia; (2) issuers that are subject to Exchange Act
reporting requirements; \68\ (3) investment companies as defined in the
Investment Company Act of 1940 (the ``Investment Company Act'') \69\ or
companies that are excluded from the definition of investment company
under Section 3(b) or 3(c) of the Investment Company Act; \70\ and (4)
any other issuer that the Commission, by rule or regulation, determines
appropriate.
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    \68\ These are issuers who are required to file reports with the
Commission pursuant to Exchange Act Sections 13(a) (15 U.S.C.
78m(a)) or 15(d) (15 U.S.C. 78o(d)).
    \69\ 15 U.S.C 80a-1 et seq.
    \70\ 15 U.S.C. 80a-3(b) or (c).
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    One commenter suggested that the Commission's rules should specify
that the crowdfunding exemption under Section 4(a)(6) is not available
for blank check companies or hedge funds and noted that ``permitting
these kinds of high-risk and often complex entities to use the
exemption is not consistent with the statutory goal of deterring fraud
and unethical non-disclosure in crowdfunding offerings.'' \71\
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    \71\ Commonwealth of Massachusetts Letter.
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    The proposed rules would exclude the categories of issuers
identified in the statute,\72\ as well as issuers that are disqualified
from relying on Section 4(a)(6) pursuant to the disqualification
provisions of Section 302(d) of the JOBS Act.\73\ The proposed rules
also would exclude an issuer that has sold securities in reliance on
Section 4(a)(6) if the issuer has not filed with the Commission and
provided to investors, to the extent required, the ongoing annual
reports required by Regulation Crowdfunding\74\ during the two years
immediately preceding the filing of the required new offering
statement.\75\ We believe that the ongoing reporting requirement should
benefit investors by enabling them to consider updated

information about the issuer, thereby allowing them to make more
informed investment decisions. If issuers fail to comply with this
requirement, we do not believe that they should have the benefit of
relying on the exemption under Section 4(a)(6) again until they file,
to the extent required, the two most recent annual reports.
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    \72\ See proposed Rules 100(b)(1)-(3) of Regulation
Crowdfunding.
    \73\ See proposed Rule 100(b)(4) of Regulation Crowdfunding. See
also proposed Rule 503 of Regulation Crowdfunding and Section II.E.6
below for a discussion of the disqualification provisions.
    \74\ See proposed Rules 202 and 203(b) of Regulation
Crowdfunding and Section II.B.2 below for a discussion of the
ongoing reporting requirements.
    \75\ See proposed Rule 100(b)(5) of Regulation Crowdfunding.
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    The proposed rules also would exclude an issuer that has no
specific business plan or has indicated that its business plan is to
engage in a merger or acquisition with an unidentified company or
companies. As described above, crowdfunding is a new and evolving
method to raise money that serves as an alternative source of capital
to support a wide range of ideas and ventures. We believe that the
exemption under Section 4(a)(6) is intended to provide an issuer with
an early stage project, idea or business an opportunity to share it
publicly with a wider range of potential investors. Those potential
investors may then share information with each other about the early
stage proposal and use that information to decide whether or not to
provide funding based on the ``wisdom of the crowd.'' Under such
circumstances, this mechanism requires the public to have sufficient
information about the issuer's proposal to discuss its merit and
flaws.\76\
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    \76\ See, e.g., Section 4A(b)(1)(C) (requiring a description of
the business of the issuer and the anticipated business plan of the
issuer).
---------------------------------------------------------------------------

    At the same time, an early stage proposal may not allow the
crowdfunding mechanism to work appropriately if the issuer does not
describe a specific project, idea, or business, or is seeking funding
for unspecified corporate transactions. In such cases, individuals
reviewing the proposal may not have sufficient information to formulate
a considered view of the proposal, or the proposal may be less likely
to attract enough perspectives to inform a crowd decision. Investors
who nonetheless choose to participate may therefore be more likely to
be participating in an issuance that has not been reviewed by the crowd
in the manner contemplated by the exemption under Section 4(a)(6).
    We are cognizant of the challenges associated with distinguishing
between early stage proposals that should provide information
sufficient to support the crowdfunding mechanism and those that cannot
by their terms do so. We preliminarily believe that an appropriate
balance can be struck by excluding an issuer that has no specific
business plan or that has indicated that its business plan is to engage
in a merger or acquisition with an unidentified company or companies.
As described below, we do not expect that a specific ``business plan''
requires a formal document prepared by management or used for marketing
to investors.\77\ We understand that issuers engaging in crowdfunding
transactions may have businesses at various stages of development in
differing industries, and therefore, we believe that a specific
``business plan'' could encompass a wide range of project descriptions,
articulated ideas, and business models. In particular, we recognize
that the business plan for startups or small businesses seeking to rely
on Section 4(a)(6) may not be fully developed or highly specific and
that for many it may be less defined or detailed than the plan
associated with larger issuers.
---------------------------------------------------------------------------

    \77\ See discussion below in Section II.B.1.a.i.(b) below.
---------------------------------------------------------------------------

    With respect to hedge funds, we believe that under Section
4A(f)(3), hedge funds would be excluded from eligibility to rely on
Section 4(a)(6) because hedge funds and other private funds typically
rely on one of the exclusions from the definition of investment company
under Section 3(c) of the Investment Company Act.\78\
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    \78\ Investment Advisers Act (``Advisers Act'') Form PF defines
a ``hedge fund'' generally as any ``private fund'' (other than a
securitized asset fund) that: (1) Pays a performance fee or
allocation calculated by taking into account unrealized gains (other
than a fee or allocation the calculation of which may take into
account unrealized gains solely for the purpose of reducing such fee
or allocation to reflect net unrealized losses); (2) may borrow an
amount in excess of one-half of its net asset value (including any
committed capital) or may have gross notional exposure in excess of
twice its net asset value (including any committed capital); or (3)
may sell securities or other assets short or enter into similar
transactions (other than for the purpose of hedging currency
exposure or managing duration). See Form PF: Glossary of Terms at 4,
available at http://www.sec.gov/rules/final/2011/ia-3308-formpf.pdf.
A ``private fund'' is defined as any issuer that would be an
investment company as defined in Section 3 of the Investment Company
Act but for Section 3(c)(1) or 3(c)(7) of that Act. Id. at 7.
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Request for Comment
    17. Section 4A(b)(4) requires that, ``not less than annually, [the
issuer] file with the Commission and provide to investors reports of
the results of operations and financial statements of the issuer. . .
.'' Should an issuer be excluded from engaging in a crowdfunding
transaction in reliance on Section 4(a)(6), as proposed, if it has not
filed with the Commission and provided to investors, to the extent
required, the ongoing annual reports required by proposed Regulation
Crowdfunding during the two years immediately preceding the filing of
the required offering statement? Why or why not? Should an issuer be
eligible to engage in a crowdfunding transaction in reliance on Section
4(a)(6) if it is delinquent in other reporting requirements (e.g.,
updates regarding the progress of the issuer in meeting the target
offering amount)? \79\ Why or why not? Should the exclusion be limited
to a different timeframe (e.g., filings required during the five years
or one year immediately preceding the filing of the required offering
statement)?
---------------------------------------------------------------------------

    \79\ See Section II.B.1.b below for a discussion of progress
updates.
---------------------------------------------------------------------------

    18. Is the proposed exclusion of issuers who fail to comply with
certain ongoing annual reporting requirements too broad? If so, how
should it be narrowed and why? Should the exclusion cover issuers whose
affiliates have sold securities in reliance on Section 4(a)(6) if the
affiliates have not complied with the ongoing annual reporting
requirements? If so, should this encompass all affiliates? If not,
which affiliates should it cover? Should we exclude any issuer with an
officer, director or controlling shareholder who served in a similar
capacity with another issuer that failed to file its annual reports?
Why or why not?
    19. What specific risks do investors face with ``idea-only''
companies and ventures? Please explain. Do the proposed rules provide
sufficient protection against the inherent risks of such ventures? Why
or why not?
    20. Does the exclusion of issuers that do not have a specific idea
or business plan from eligibility to rely on Section 4(a)(6) strike the
appropriate balance between the funding needs of small issuers and the
information requirements of the crowd? Why or why not? Are there other
approaches that would strike a better balance among those
considerations? If the proposed approach is appropriate, should we
define ``specific business plan'' or what criteria could be used to
identify them? How would any such criteria comport with the disclosure
obligations described in Section II.B.1.a.i.(b) (description of the
business) below?
    21. Are there other categories of issuers that should be precluded
from relying on Section 4(a)(6)? If so, what categories of issuers and
why?

B. Requirements on Issuers

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

funding portal and make these disclosures available to potential
investors. These disclosures include:
     The name, legal status, physical address and Web site
address of the issuer \80\;
---------------------------------------------------------------------------

    \80\ Section 4A(b)(1)(A).
---------------------------------------------------------------------------

     The names of the directors and officers (and any persons
occupying a similar status or performing a similar function), and each
person holding more than 20 percent of the shares of the issuer \81\;
---------------------------------------------------------------------------

    \81\ Section 4A(b)(1)(B).
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     a description of the business of the issuer and the
anticipated business plan of the issuer \82\;
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    \82\ Section 4A(b)(1)(C).
---------------------------------------------------------------------------

     a description of the financial condition of the
issuer\83\;
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    \83\ Section 4A(b)(1)(D). This provision also establishes a
framework of tiered financial disclosure requirements based on
aggregate offering amounts for offerings under Section 4(a)(6)
within the preceding 12-month period.
---------------------------------------------------------------------------

     a description of the stated purpose and intended use of
the proceeds of the offering sought by the issuer with respect to the
target offering amount \84\;
---------------------------------------------------------------------------

    \84\ Section 4A(b)(1)(E).
---------------------------------------------------------------------------

     the target offering amount, the deadline to reach the
target offering amount and regular updates regarding the progress of
the issuer in meeting the target offering amount \85\;
---------------------------------------------------------------------------

    \85\ Section 4A(b)(1)(F).
---------------------------------------------------------------------------

     the price to the public of the securities or the method
for determining the price \86\; and
---------------------------------------------------------------------------

    \86\ Section 4A(b)(1)(G). This provision also requires that
``prior to sale, each investor shall be provided in writing the
final price and all required disclosures, with a reasonable
opportunity to rescind the commitment to purchase the securities.''
This provision is addressed in Sections II.C.5 and II.C.6 below.
---------------------------------------------------------------------------

     a description of the ownership and capital structure of
the issuer.\87\ In addition, Section 4A(b)(1)(I) specifies that the
Commission may require additional disclosures for the protection of
investors and in the public interest.
---------------------------------------------------------------------------

    \87\ Section 4A(b)(1)(H). Specifically, Section 4A(b)(1)(H)
requires a description of: ``(i) Terms of the securities of the
issuer being offered and each other class of security of the issuer
. . .; (ii) a description of how the exercise of the rights held by
the principal shareholders of the issuer could negatively impact the
purchasers of the securities being offered; (iii) the name and
ownership level of each existing shareholder who owns more than 20
percent of any class of the securities of the issuer; (iv) how the
securities being offered are being valued . . .; and (v) the risks
to purchasers of the securities relating to minority ownership in
the issuer, the risks associated with corporate actions, including
additional issuances of shares, a sale of the issuer or of assets of
the issuer, or transactions with related parties.''
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    Commenters expressed concerns about the extent of the disclosure
requirements and stated that overly burdensome rules would make offers
and sales in reliance on Section 4(a)(6) prohibitively expensive.\88\
We recognize these concerns and have considered them in determining the
disclosure requirements that we should propose in this release.
---------------------------------------------------------------------------

    \88\ See Vim Funding Letter; ExpertBeacon Letter; CrowdFund
Connect Letter.
---------------------------------------------------------------------------

    The proposed rules generally describe the type of information that
issuers would be required to disclose. We expect, however, that an
issuer, along with the intermediary, would determine the format that
best conveys the required disclosures and any other information the
issuer determines is material to investors.\89\ We recognize that there
are numerous ways to achieve that goal and, as such, we are not
proposing to mandate a specific disclosure format.\90\ Similarly, to
the extent some of the required disclosures overlap, issuers would not
be required to duplicate disclosures.
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    \89\ Section II.B.3 below further discusses the proposed format
of Form C and requests comments on the format and presentation of
the information.
    \90\ While the proposed rules do not mandate a specific
disclosure format, Rule 306 of Regulation S-T (17 CFR 232.306)
requires that all electronic filings made with the Commission,
including the filings that would be required under the proposed
rules, be in English. The proposed rules would not, however, prevent
an issuer from providing to the relevant intermediary both an
English and a foreign language version of the information for the
intermediary to make publicly available through its platform. The
anti-fraud and civil liability provisions of the Securities Act
would apply equally to both the English and the foreign language
version of the information.
---------------------------------------------------------------------------

    As discussed further in Section II.B.3, we are proposing to require
issuers to file the disclosures with the Commission on Form C.\91\ As
proposed, Form C would be filed in the standard format of eXtensible
Markup Language (XML). An XML-based fillable form would enable issuers
to provide information in a convenient medium without requiring the
issuer to purchase or maintain additional software or technology. This
would provide the Commission with data about offerings made in reliance
on Section 4(a)(6). Information not required to be provided in text
boxes would be filed as attachments to Form C.
---------------------------------------------------------------------------

    \91\ Issuers would use Form C to provide the required
disclosures about the crowdfunding transaction and the information
required to be filed annually. See Section II.B.3 below.
---------------------------------------------------------------------------

Request for Comment
    22. Rule 306 of Regulation S-T requires that all electronic filings
made with the Commission, including the filings that would be required
under the proposed rules, be in English. Some startups and small
businesses, and their potential investors, may principally communicate
in a language other than English. Should we amend Rule 306 to permit
filings by issuers under the proposed rules to be filed in the other
language? Why or why not? If we retain the requirement to make filings
only in English, will this impose a disproportionate burden on issuers
and potential investors who principally communicate in a language other
than English? What will be the impact on capital formation for such
issuers?
a. Offering Statement Disclosure Requirements
i. Information About the Issuer and the Offering
(a) General Information About the Issuer, Officers and Directors
    Consistent with Sections 4A(b)(1)(A) and (B), we are proposing to
require an issuer to disclose information about its legal status,
directors, officers and certain shareholders and how interested parties
may contact the issuer. Specifically, an issuer would be required to
disclose:
     Its name and legal status, including its form of
organization, jurisdiction in which it is organized and date of
organization \92\;
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    \92\ See proposed Rule 201(a) of Regulation Crowdfunding.
---------------------------------------------------------------------------

     its physical address and its Web site address \93\; and
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    \93\ Id.
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     the names of the directors and officers, including any
persons occupying a similar status or performing a similar function,
all positions and offices with the issuer held by such persons, the
period of time in which such person served in the position or office
and their business experience during the past three years,\94\
including:
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    \94\ See proposed Rule 201(b) of Regulation Crowdfunding.
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    [cir] each person's principal occupation and employment, including
whether any officer is employed by another employer; and
    [cir] the name and principal business of any corporation or other
organization in which such occupation and employment took place.
    Although the statute does not define ``officer,'' the term is
defined in Securities Act Rule 405 \95\ and in Exchange Act Rule 3b-
2.\96\ We are proposing to define ``officer'' consistent with these
existing rules. Thus, an issuer would be required to disclose
information regarding its president, vice president, secretary,
treasurer or principal financial officer, comptroller or principal
accounting officer and any person routinely performing corresponding
functions with respect to

any organization, whether incorporated or unincorporated, to the extent
it has individuals serving in these capacities.
---------------------------------------------------------------------------

    \95\ 17 CFR 230.405.
    \96\ 17 CFR 240.3b-2.
---------------------------------------------------------------------------

    We are proposing to require disclosure of the business experience
of directors and officers of the issuer during the past three years. A
three-year period is less than the five-year period that applies to
issuers conducting registered offerings \97\ or exempt offerings
pursuant to Regulation A.\98\ We believe that startups and small
businesses that may seek to raise capital in reliance on Section
4(a)(6) generally would be smaller than the issuers conducting
registered offerings or exempt offerings pursuant to Regulation A; \99\
thus, we believe that the less burdensome three-year period would
reduce the compliance cost for issuers while still providing potential
investors with sufficient information about the business experience of
directors and officers of the issuer to make an informed investment
decision.
---------------------------------------------------------------------------

    \97\ See Item 401(e) of Regulation S-K [17 CFR 229.401(e)].
    \98\ See Item 8(c) of Form 1-A [17 CFR 239.90].
    \99\ There is no cap on the amount of proceeds that may be
raised in a registered offering, and Regulation A limits offerings
to $5 million.
---------------------------------------------------------------------------

    Section 4A(b)(1)(B) requires disclosure of ``the names of . . .
each person holding more than 20 percent of the shares of the issuer.''
In contrast, Section 4A(b)(1)(H)(iii) requires disclosure of the ``name
and ownership level of each existing shareholder who owns more than 20
percent of any class of the securities of the issuer'' (emphasis
added). The proposed rules would require disclosure of the names of
persons, as of the most recent practicable date, who are the beneficial
owners of 20 percent or more of the issuer's outstanding voting equity
securities, calculated on the basis of voting power.\100\ We refer to
this group of persons as ``20 Percent Beneficial Owners.'' We believe
that the universe of 20 Percent Beneficial Owners should be the same
for the disclosure requirements and the disqualification
provisions\101\ because this would ease the burden on issuers by
requiring issuers to only identify one set of persons who would be the
subject of these rules. We believe that assessing beneficial ownership
based on total outstanding voting securities is consistent with Section
4A(b)(1)(B). Section 4A(b)(1)(B) is not limited to voting equity
securities, but we believe the limitation would be necessary to clarify
how beneficial ownership would be required to be calculated since
issuers could potentially have multiple classes of securities with
different voting powers. Assessing beneficial ownership based on
ownership of total outstanding voting securities, rather than based on
ownership of any class of securities as potentially contemplated by
Section 4A(b)(1)(H)(iii), also should ease the burden of compliance
because there would be fewer 20 Percent Beneficial Owners to track.
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    \100\ See proposed Rule 201(c) of Regulation Crowdfunding.
    \101\ See proposed Rule 503 of Regulation Crowdfunding and
Section II.E.6 below for a discussion of the proposed
disqualification provisions. This approach also would be consistent
with how beneficial ownership is calculated for the Rule 506
disqualification rules. See Disqualification of Felons and Other
``Bad Actors'' from Rule 506 Offerings, Release No. 33-9414 (July
10, 2013) [78 FR 44729 (July 24, 2013)] (``Disqualification Adopting
Release'').
---------------------------------------------------------------------------

    Neither Section 4A(b)(1)(B) nor Section 4A(b)(1)(H)(iii) states as
of what date the beneficial ownership should be calculated. The
proposed rules would require issuers to calculate beneficial ownership
as of the most recent practicable date.\102\ This is the same
requirement that applies to issuers conducting registered offerings or
Exchange Act reporting companies.\103\ We believe that it is
appropriate to provide issuers relying on Section 4(a)(6) the
flexibility to calculate beneficial ownership as of the most recent
practicable date, otherwise such issuers would be subject to a more
burdensome standard than the one that applies to issuers conducting
registered offerings or Exchange Act reporting companies.
---------------------------------------------------------------------------

    \102\ See proposed Rule 201(c) of Regulation Crowdfunding.
    \103\ See Item 403 of Regulation S-K [17 CFR 229.403].
---------------------------------------------------------------------------

Request for Comment
    23. Under the proposed rules the definition of the term ``officer''
is consistent with how that term is defined in Securities Act Rule 405
\104\ and in Exchange Act Rule 3b-2.\105\ Should we instead define
``officer'' consistent with the definition of ``executive officer'' in
Securities Act Rule 405 \106\ and in Exchange Act Rule 3b-7?\107\ Why
or why not? Which definition would be more appropriate for the types of
issuers that would be relying on the exemption?
---------------------------------------------------------------------------

    \104\ 17 CFR 230.405.
    \105\ 17 CFR 240.3b-2.
    \106\ 17 CFR 230.405.
    \107\ 17 CFR 240.3b-7.
---------------------------------------------------------------------------

    24. Are these proposed disclosure requirements relating to the
issuer and its officers and directors appropriate? Why or why not?
Should we only require the disclosures specifically called for by
statute or otherwise modify or eliminate any of the proposed
requirements? Should we require any additional disclosures (e.g.,
disclosure about significant employees)? Is there other general
information about the issuer or its officers and directors that we
should require to be disclosed? If so, what information and why? For
example, should we require disclosure of any court orders, judgments or
civil litigation involving any directors and officers, including any
persons occupying a similar status or performing a similar function?
Why or why not? If so, what time period should this disclosure cover
and why?
    25. The proposed rules would require disclosure of the business
experience of directors and officers of the issuer during the past
three years. Is the three-year period an appropriate amount of time?
Why or why not? If not, please discuss what would be an appropriate
amount of time and why. Should the requirement to disclose the business
experience of officers and directors include a specific requirement to
disclose whether the issuer's directors and officers have any prior
work or business experience in the same type of business as the issuer?
Why or why not?
    26. The proposed rules would require disclosure of the names of
persons who are beneficial owners of 20 percent or more of the issuer's
outstanding voting equity securities, calculated on the basis of voting
power. Is this approach appropriate? Why or why not? Should the
proposed rules require disclosure of the names of beneficial owners of
20 percent or more of any class of the issuer's voting securities, even
if such beneficial ownership does not exceed 20 percent of all of the
issuer's outstanding voting equity securities? Why or why not? Should
the proposed disclosure requirement apply to the names of beneficial
owners of 20 percent or more, as proposed, or to more than 20 percent
of the issuer's outstanding voting equity securities? Why or why not?
    27. The proposed rules would require that beneficial ownership be
calculated as of the most recent practicable date. Is this approach
appropriate? Why or why not? Should beneficial ownership be calculated
as of a different date? For example, should the reported beneficial
ownership only reflect information as of the end of a well-known
historical period, such as the end of a fiscal year? Please explain.
Should there be a maximum amount of time from this calculation date to
the filing to ensure that the information is current? If so, what
maximum amount of time would be appropriate?
    28. Should we provide additional guidance on how to calculate
beneficial ownership on the basis of voting power? If so, what should
that guidance include? Should the proposed rules

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

accept.\120\ For example, if the issuer sets a target offering amount
of $200,000 but is willing to accept up to $750,000, the issuer would
be required to disclose both the $200,000 target offering amount and
the $750,000 maximum offering amount that it will accept.\121\ In
addition, the issuer would be required to disclose, at the commencement
of the offering, how shares in oversubscribed offerings would be
allocated.\122\ If this disclosure is made, we do not believe it would
be necessary for us to prescribe how oversubscribed offerings would be
allocated because this approach would allow issuers the flexibility to
structure the offering as they believe appropriate. At the same time,
this approach would provide investors with the disclosure they need to
make an informed investment decision.
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    \119\ See proposed Rule 201(g) of Regulation Crowdfunding.
    \120\ See proposed Rule 201(h) of Regulation Crowdfunding.
    \121\ The issuer in this case also would need to disclose the
intended use of the additional proceeds. See proposed Instruction to
paragraph (i) of proposed Rule 201 of Regulation Crowdfunding. See
also Section II.B.1.a.i(c) above. In addition, the issuer in this
case would need to provide audited financial statements at the
commencement of the offering, rather than financial statements
reviewed by an independent public accountant as would be required
for the lower target amount. See Section II.B.1.a.ii below for a
discussion of the financial statements requirements. As another
example, an issuer that sets a target offering amount of $80,000 and
a maximum offering amount of $105,000 would be required to provide
financial statements reviewed by an independent public accountant
(rather than tax returns for the most recently completed fiscal year
and financial statements certified by the principal executive
officer).
    \122\ See proposed Rule 201(h) of Regulation Crowdfunding.
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    We believe that investors in a crowdfunding transaction would
benefit from clear disclosure about their right to cancel, the
circumstances under which an issuer may close an offering early and the
need to reconfirm the investment commitment under certain
circumstances, so investors are more aware of their rights to rescind
an investment commitment.\123\ As such, we propose to require issuers
to describe the process to cancel an investment commitment or to
complete the transaction once the target amount is met,\124\ including
a statement that:
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    \123\ Although not specifically required by Title III,
Securities Act Section 4A(b)(1)(I) provides us with discretion to
require issuers engaged in transactions in reliance on Section
4(a)(6) to provide additional information for the protection of
investors and in the public interest.
    \124\ See proposed Rule 201(j) of Regulation Crowdfunding.
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     Investors may cancel an investment commitment until 48
hours prior to the deadline identified in the issuer's offering
materials; \125\
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    \125\ Section II.C.6 below further discusses the proposed
cancelation provisions and requests comments on the proposed
approach.
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     the intermediary will notify investors when the target
offering amount has been met;
     if an issuer reaches the target offering amount prior to
the deadline identified in its offering materials, it may close the
offering early if it provides notice about the new offering deadline at
least five business days prior to that new deadline (absent another
material change that would require an extension of the offering and
reconfirmation of the investment commitment); \126\ and
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    \126\ Id.
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     if an investor does not cancel an investment commitment
before the 48-hour period prior to the offering deadline, the funds
will be released to the issuer upon closing of the offering and the
investor will receive securities in exchange for his or her investment.
    We also propose to require issuers to disclose that if an investor
does not reconfirm his or her investment commitment after a material
change is made to the offering, the investor's investment commitment
will be cancelled and committed funds will be returned.\127\ The
proposed rules also would require issuers to disclose that if the sum
of the investment commitments does not equal or exceed the target
offering amount at the time of the offering deadline, no securities
will be sold in the offering, investment commitments will be cancelled
and committed funds will be returned.\128\
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    \127\ See proposed Rule 201(k) of Regulation Crowdfunding.
    \128\ See proposed Rule 201(g) of Regulation Crowdfunding. See
also Section 4A(a)(7) (requiring intermediaries to ``ensure that all
offering proceeds are only provided to the issuer when the aggregate
capital raised from all investors is equal to or greater than a
target offering amount . . . .'') and discussion in Section II.C.6
below.
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Request for Comment
    34. Are these proposed disclosure requirements appropriate? Why or
why not? Should we modify or eliminate any of the proposed
requirements? Should we require any additional disclosures?
    35. The proposed rules would require an issuer willing to accept
investments in excess of the target offering amount to provide, at the
commencement of the offering, the disclosure that would be required in
the event the offer is oversubscribed. Is this approach appropriate?
Why or why not?
(e) Offering Price
    Consistent with Section 4A(b)(1)(G), the proposed rules would
require an issuer to disclose the offering price of the securities or
the method for determining the price, provided that prior to the sale,
each investor is provided in writing the final price and all required
disclosures.\129\
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    \129\ See proposed Rule 201(l) of Regulation Crowdfunding. See
also Sections II.C.5 and II.C.6 below for a discussion of
information that issuers would be required to provide to investors.
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Request for Comment
    36. Are these proposed disclosure requirements appropriate? Why or
why not? Should we modify or eliminate any of the proposed
requirements? Should we require any additional disclosures? Please
explain.
(f) Ownership and Capital Structure
    Consistent with Section 4A(b)(1)(H), the proposed rules would
require an issuer to provide a description of its ownership and capital
structure.\130\ This disclosure would include:
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    \130\ See proposed Rule 201(m) of Regulation Crowdfunding.
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     The terms of the securities being offered and each other
class of security of the issuer, including the number of securities
being offered and/or outstanding, whether or not such securities have
voting rights, any limitations on such voting rights, how the terms of
the securities being offered may be modified and a summary of the
differences between such securities and each other class of security of
the issuer, and how the rights of the securities being offered may be
materially limited, diluted or qualified by the rights of any other
class of security of the issuer;
     a description of how the exercise of the rights held by
the principal shareholders of the issuer could affect the purchasers of
the securities;
     the name and ownership level of persons who are 20 Percent
Beneficial Owners;
     how the securities being offered are being valued, and
examples of methods for how such securities may be valued by the issuer
in the future, including during subsequent corporate actions;
     the risks to purchasers of the securities relating to
minority ownership in the issuer and the risks associated with
corporate actions including additional issuances of securities, issuer
repurchases of securities, a sale of the issuer or of assets of the
issuer or transactions with related parties; and
     a description of the restrictions on the transfer of the
securities.
    We believe that investors in crowdfunding transactions would
benefit from clear disclosure about the terms of the securities being
offered and each other class of security of the issuer. The proposed
rules would require disclosure of the number of securities being
offered and/or outstanding,

whether or not such securities have voting rights, any limitations on
such voting rights and a description of the restrictions on the
transfer of the securities.\131\ Although Section 4A(b)(1)(H) does not
specifically call for this disclosure, we believe that such disclosure
would be necessary to provide investors with a more complete picture of
the issuer's capital structure than would be obtained solely pursuant
to the statutory requirements. We believe this would help investors
better evaluate the terms of the offer before making an investment
decision.
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    \131\ See proposed Rule 501 of Regulation Crowdfunding and
Section II.E.2 below for a discussion of restrictions on resales.
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Request for Comment
    37. Are these proposed disclosure requirements appropriate? Why or
why not? Should we modify or eliminate any of the proposed
requirements? Should we require any additional disclosures? Please
explain.
(g) Additional Disclosure Requirements
    In addition to the statutory disclosure requirements,\132\ we
propose to require:
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    \132\ Section 4A(b)(1)(I) provides us with discretion to require
crowdfunding issuers to provide additional information for the
protection of investors and in the public interest.
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     Disclosure of the name, Commission file number and Central
Registration Depository number (``CRD number'') \133\ (as applicable)
of the intermediary through which the offering is being conducted;
\134\
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    \133\ The Financial Industry Regulatory Authority, Inc.
(``FINRA'') will issue the CRD number.
    \134\ See proposed Rule 201(n) of Regulation Crowdfunding.
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     disclosure of the amount of compensation paid to the
intermediary for conducting the offering, including the amount of any
referral or other fees associated with the offering; \135\
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    \135\ See proposed Rule 201(o) of Regulation Crowdfunding.
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     disclosure of certain legends to be included in the
offering statement; \136\
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    \136\ See Item 2 of General Instruction III to proposed Form C.
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     disclosure of the current number of employees of the
issuer; \137\
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    \137\ See proposed Rule 201(e) of Regulation Crowdfunding.
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     a discussion of the material factors that make an
investment in the issuer speculative or risky; \138\
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    \138\ See proposed Rule 201(f) of Regulation Crowdfunding.
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