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(3) Final Rules
    After taking into account the comments and upon further
consideration, we have determined not to adopt a fidelity bond
requirement for funding portals. We have been persuaded by the comments
that such a requirement may not be appropriate. We believe that the
statutory protections and prohibitions set forth in Exchange Act
Section 3(a)(80) on holding, managing, possessing or otherwise handling
investor funds or securities provide substantial protections to
investors. We recognize, as some commenters observed, that there may be
potential risks to investors if a funding portal were to violate the
prohibitions in Regulation Crowdfunding, including the potential loss
of investor funds. As we discussed in the Proposing Release, funding
portals will not be members of the Securities Investor Protection
Corporation (``SIPC'') and their customers, therefore, will not receive
SIPC protection.\953\ Furthermore, consistent with the proposed rules,
the final rules also do not subject funding portals to minimum net
capital requirements. Despite these vulnerabilities, we note that the
potential burden associated with the requirement of a fidelity bond (or
any bond) may not be justified by the benefits that could be derived
from requiring that a funding portal obtain such a bond. In particular,
we are concerned that a fidelity bond requirement could create a
potential barrier to entry for some funding portals that could be
detrimental to our mission of capital formation, as well as the
feasibility of crowdfunding. At the same time, we are mindful of the
potentially limited benefits of requiring such bonds to be obtained by
funding portals, when taking into account the statutory restrictions on
funding portals' permissible activities. Instead, we believe at this
time that the prohibition on a funding portal from handling customer
funds and securities as well as the general anti-fraud provisions of
our statutes and rules provide significant investor protections that do
not need to be supplemented by a fidelity bond requirement. This
decision is consistent with our approach generally to the regulation of
funding portals in which we have sought to structure rules tailored to
the business of funding portals that address the risks posed by such
activities while considering the impact that our rules may have on this
emerging market.
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    \953\ See Proposing Release at 78 FR at 66482. Membership in
SIPC applies only to persons registered as brokers or dealers under
Section 15(b) of the Exchange Act. See 15 U.S.C. 78ccc(a)(2).
---------------------------------------------------------------------------

d. Requirements for Nonresident Funding Portals
(1) Proposed Rules
    Under proposed Rule 400(g), registration pursuant to Rule 400 of
Regulation Crowdfunding by a ``nonresident funding portal'' \954\ would
be first conditioned upon there being an information sharing
arrangement in place between the Commission and the competent regulator
in the jurisdiction under the laws of which the nonresident funding
portal is organized or where it has its principal place of business
that is applicable to the nonresident funding portal. The proposed rule
would further require a nonresident funding portal registered or
applying for registration to: (1) Obtain a written consent and power of
attorney appointing an agent for service of process in the United
States (other than the Commission or a Commission member, official or
employee), upon whom may be served any process, pleadings, or other
papers in any action; \955\ (2) furnish the Commission with the name
and address of its agent for services of process on

Schedule C of Form Funding Portal; \956\ and (3) certify on Schedule C
of Form Funding Portal and provide an opinion of counsel that it can,
as a matter of law, provide the Commission and any national securities
association of which it is a member with prompt access to its books and
records and can, as a matter of law, submit to onsite inspection and
examination by the Commission and such national securities
association.\957\
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    \954\ See proposed Rule 400(g)(1) of Regulation Crowdfunding
(defining ``nonresident funding portal'' as ``a funding portal
incorporated in or organized under the laws of any jurisdiction
outside of the United States or its territories, or having its
principal place of business in any place not in the United States or
its territories'').
    \955\ See proposed Rule 400(g)(2)(i) of Regulation Crowdfunding.
    \956\ See proposed Rule 400(g)(2)(ii) of Regulation
Crowdfunding.
    \957\ See proposed Rule 400(g)(3)(i) of Regulation Crowdfunding.
Exchange Act Section 3(h)(1)(C) permits us to impose, as part of our
authority to exempt funding portals from broker registration, ``such
other requirements under [the Exchange Act] as the Commission
determines appropriate.''
---------------------------------------------------------------------------

    Proposed Rule 400(g)(2)(iv) would require a registered nonresident
funding portal to promptly appoint a successor agent if it discharges
its identified agent for service of process or if its agent for service
of process is unwilling or unable to accept service on its behalf. In
addition, proposed Rule 400(g)(2)(iii) would require a registered
funding portal to promptly amend Schedule C to its Form Funding Portal
if its agent, or the agent's name or address, changes. Finally,
proposed Rule 400(g)(2)(v) would require the registered nonresident
funding portal to maintain, as part of its books and records, the
agreement with the agent for service of process for at least three
years after termination of the agreement.
    In addition, we proposed in Rule 400(g)(3)(ii) to require a
registered nonresident funding portal to re-certify, on Schedule C to
Form Funding Portal, within 90 days after any changes in the legal or
regulatory framework that would affect: (1) Its ability to provide (or
the manner in which it provides) the Commission, or the national
securities association of which it is a member, with prompt access to
its books and records; or (2) the ability of the Commission or the
national securities association to inspect and examine the nonresident
funding portal. The re-certification would be accompanied by a revised
opinion of counsel describing how, as a matter of law, the entity can
continue to meet its obligations to provide the Commission and the
national securities association with prompt access to its books and
records and to be subject to inspection and examination.\958\
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    \958\ See proposed Rule 400(g)(3)(ii) of Regulation
Crowdfunding.
---------------------------------------------------------------------------

(2) Comments on the Proposed Rule
    One commenter stated its view that the definition of a nonresident
funding portal will create a competitive advantage for foreign
intermediary platforms.\959\ Another commenter stated its view that
nonresident funding portals should be subject to the same rules as
domestic funding portals.\960\
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    \959\ See Public Startup Letter 3 (stating its view that the
definition of nonresident funding portal is ``flawed'' because it
believes these foreign entities could choose to act as
intermediaries for U.S. issuers and U.S. investors in crowdfunding
transactions without relying on Section 4(a)(6) and, therefore, gain
a competitive advantage by not having to comply with the
requirements of the rules under Regulation Crowdfunding in the same
manner as domestic funding portals). But see Joinvestor Letter
(stating its belief that ``nonresident funding portal is properly
defined'').
    \960\ See Wales Capital Letter 3. The commenter also recommended
using the term `` `foreign' funding portal'' to be consistent with
the treatment of corporations incorporated in another jurisdiction
under various state laws. According to the commenter, a foreign
corporation must file a notice of doing business in any state or
nation in which it does substantial regular business, and must name
an `` `agent for acceptance of service' '' in that nation (or the
Secretary of State as agent) to allow people doing business with a
foreign corporation to be able bring legal actions locally.
---------------------------------------------------------------------------

    In the Proposing Release, we requested comments about other actions
or requirements that could address our concern that the Commission and
the applicable national securities association be able to have direct
access to books and records and be able to adequately examine and
inspect a nonresident funding portal, if it would be impossible or
impractical for such funding portal to obtain the required opinion of
counsel. In response, a commenter suggested an arrangement between a
nonresident funding portal and a domestic funding portal in which the
nonresident funding portal would be required to make and keep current
books and records, but the domestic funding portal would have the
ability to obtain and be responsible for the accuracy of such books and
records.\961\
---------------------------------------------------------------------------

    \961\ Id.
---------------------------------------------------------------------------

    One commenter suggested that nonresident funding portals be
required to clearly indicate on their Web sites that they are organized
and operating outside of the U.S. and indicate whether a U.S. or non-
U.S. bank will be used to process investors' funds.\962\ One commenter
suggested that a nonresident funding portal should be required to
appoint a U.S. agent for all potential proceedings,\963\ while another
commenter suggested that a nonresident funding portal should be
required to have a resident legal representative to handle any matters
between issuers or investors and the portal.\964\
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    \962\ See Zhang Letter.
    \963\ Wales Capital Letter 3.
    \964\ See Joinvestor Letter.
---------------------------------------------------------------------------

(3) Final Rules
    We are adopting Rule 400(g) as proposed with certain minor changes,
and renumbering it as Rule 400(f) due to the elimination of the
fidelity bond requirement proposed as subparagraph (f).\965\ We are
changing the language of the rule as adopted applicable to a
nonresident funding portal to:
---------------------------------------------------------------------------

    \965\ We also added ``Inspections and Examinations'' to the
heading of Rule 400(f)(3); this modification does not change the
requirements from those proposed. In addition, we changed a cross-
cite in the rule text to reflect the renumbering.
---------------------------------------------------------------------------

     Add the term ``registered'' to any references to national
securities association in the Rule to be more consistent with the
terminology in the Exchange Act; and
     Require the nonresident funding portal also to certify
that it ``will'' provide the Commission and any national securities
association of which it ``becomes'' (rather than ``is'') a member with
prompt access to the books and records and ``will'' submit to onsite
inspection and examination by the Commission and such national
securities association.\966\
---------------------------------------------------------------------------

    \966\ The language in the proposed rule required a certification
that the funding portal ``can'' meet such obligations but did not
require a certification that it ``will'' meet them.
---------------------------------------------------------------------------

    As we noted in the Proposing Release, the rule aims to help ensure
that we and any applicable registered national securities association
can access the books and records of, conduct examinations and
inspections of, and enforce U.S. laws and regulations with respect to,
funding portals that are not based in the United States, or that are
subject to laws other than those of the United States. We believe that
these rules will further our goal of promoting the ability of the
Commission and any applicable national securities association to
conduct effective regulatory oversight of funding portals.
    We have considered the comments and believe that the final rule
appropriately takes into consideration the need to provide more choices
for U.S. issuers seeking to use intermediaries or access investors
outside of the United States, while meeting the challenges associated
with supervising, examining, and enforcing rules regarding activities
of intermediaries based outside the United States. For example, as we
noted in the Proposing Release, the requirement for an information
sharing arrangement is designed to provide us with greater assurance
that we will be able to obtain information about a nonresident funding
portal necessary for our oversight of the funding portal. The ability
to obtain information and secure

the cooperation of the home country regulator according to established
practices and protocols is expected to help to address the increased
challenges that may arise from oversight of entities located outside of
the United States. We note that nonresident funding portals are subject
to the same registration requirements as other funding portals under
Rule 400.\967\
---------------------------------------------------------------------------

    \967\ We have considered the commenter's view that there would
be a potential competitive advantage for foreign intermediaries
choosing to operate outside of the Section 4(a)(6) exemption. See
Public Startup Letter 3. However, we note that any entities (foreign
or domestic) intermediating offerings of securities between U.S.
issuers and investors generally will be broker-dealers, either
required to register under the Exchange Act or to be exempt from
registration. See 15 U.S.C. 78o(a). We also note that the offer and
sale of securities in the United States or to U.S. persons must be
registered unless an exemption is available.
---------------------------------------------------------------------------

    We have also considered the comment submitted in response to our
question about the use of books and records arrangements in situations
where it would be impossible or impractical for a nonresident funding
portal to obtain the required opinion of counsel.\968\ We have
determined not to adopt an alternative to the opinion of counsel
requirement for nonresident funding portals in Regulation Crowdfunding.
The opinion of counsel requirement is consistent with our approach to
other nonresident registered entities and we believe it is an
appropriate mechanism to use here, as well.\969\ As we stated in the
Proposing Release, we believe that the certification and supporting
opinion of counsel requirements are important to confirm that each
nonresident funding portal is in a position to provide the Commission
and FINRA (or the applicable national securities association registered
under Exchange Act Section 15A) with information that is necessary for
us and the national securities association to effectively fulfill
regulatory oversight responsibilities.\970\ We do not believe that the
books and records arrangement suggested by the commenter would provide
assurance that we or FINRA would be able to consistently obtain such
information, which could hinder our ability to fulfill our regulatory
oversight responsibilities.
---------------------------------------------------------------------------

    \968\ See Wales Capital Letter 3.
    \969\ We note that the opinion of counsel requirement is
generally consistent with the requirement for nonresident security-
based swap dealers and major security-based swap participants, as
well as those for nonresident municipal advisors. See Exchange Act
Rule 15Fb2-4 and Rule 15Ba1-6.
    \970\ See Exchange Act Section 3(h)(1)(A). Failure to make this
certification or re-certification or to provide an opinion of
counsel or revised opinion of counsel will result in an incomplete
application for registration.
---------------------------------------------------------------------------

    We have also considered the comment suggesting that a nonresident
funding portal be required to clearly indicate on its Web site that it
is organized and operating outside of the United States and whether it
will use a U.S. or non-U.S. bank to process investors' funds.\971\
However, in light of the other disclosure requirements we are adopting,
we are not persuaded that such a requirement is necessary. We note that
the information required to be filed on Form Funding Portal (and that
will be publicly disclosed) will include information about the
qualified third party for the maintenance and transmission of
investors' funds under Rule 303(e), including the name and address of
the qualified third party.\972\ In addition, a nonresident funding
portal will be required to publicly disclose information on Schedule C
to Form Funding Portal. Since Schedule C is required to be completed by
nonresident funding portals only, investors will be able to discern
easily whether or not the entity is a nonresident funding portal and,
among other things, has certified (and provided an attached opinion of
counsel indicating) that it is able to provide the Commission and any
national securities association prompt access to its books and records
and will submit to onsite inspection and examination by the same.
---------------------------------------------------------------------------

    \971\ See Zhang Letter.
    \972\ See Form Funding Portal, Item 7--Qualified Third Party
Arrangements; Compensation Arrangements.
---------------------------------------------------------------------------

    Finally, we have considered the comments suggesting that a
nonresident funding portal should be required to have a U.S. agent for
potential proceedings,\973\ or a resident legal representative to
handle any matters between issuers or investors, and the portal.\974\
We note that, as discussed above, we are requiring funding portals to
execute a written consent and power of attorney appointing an agent in
the United States. The agent will be the representative of the funding
portal for service of any process, pleadings or other papers in any
action to enforce the Exchange Act, Securities Act or any rule or
regulation promulgated thereunder. As we noted above, we have limited
the types of actions for which a nonresident funding portal will be
required to have an agent for service of process, pleadings, or other
papers in order to remain generally consistent with recent requirements
that we have imposed on other types of nonresident entities. The
funding portal will be required to disclose the name and address of its
U.S. agent in Schedule C to its Form Funding Portal, and amend the
Schedule promptly upon any change to the agent, agent's name or agent's
address. We are not, however, requiring that nonresident funding
portals have a resident legal representative to handle any matters
between the portal and issuers or investors, which is consistent with
our approach to other nonresident registered entities.\975\
---------------------------------------------------------------------------

    \973\ See Wales Capital Letter 3.
    \974\ See Joinvestor Letter.
    \975\ For example, we note that requiring a U.S. agent for
service of process but not requiring a U.S. legal representative to
handle any matters between a funding portal and issuers or investors
is generally consistent with the requirements for nonresident
security-based swap dealers and major security-based swap
participants, as well as those for nonresident municipal advisors.
See Exchange Act Rule 15Fb2-4 and Rule 15Ba1-6.
---------------------------------------------------------------------------

2. Exemption From Broker-Dealer Registration
a. Proposed Rule
    Exchange Act Section 3(h)(1), which was added by Section 304(a) of
the JOBS Act, directs the Commission by rule to exempt, conditionally
or unconditionally, a registered funding portal from the requirement to
register as a broker or dealer under Exchange Act Section 15(a),
provided that the funding portal: (1) Remains subject to the
examination, enforcement and other rulemaking authority of the
Commission; (2) is a member of a registered national securities
association; and (3) is subject to other requirements that the
Commission determines appropriate.
    As explained earlier, the role contemplated by Title III of the
JOBS Act for an entity acting as an intermediary in a crowdfunding
transaction would bring that entity within the definition of ``broker''
under Exchange Act Section 3(a)(4).\976\ A funding portal would be
``effecting transactions in securities for the account of others'' by,
among other things, ensuring that investors comply with the conditions
of Securities Act Section 4A(a)(4) and (8), making the securities
available for purchase through the funding portal, and ensuring the
proper transfer of funds and securities as required by Securities Act
Section

4A(a)(7).\977\ In addition, a funding portal's receipt of compensation
linked to the successful completion of the offering also would be
indicative of acting as a broker in connection with these transactions.
Thus, absent an exemption or exception, a funding portal would be
required to register as a broker under the Exchange Act.
---------------------------------------------------------------------------

    \976\ See Exchange Act Section 3(a)(4)(A) [15 U.S.C.
78c(a)(4)(A)] (defining ``broker'' as ``any person engaged in the
business of effecting transactions in securities for the account of
others''). An entity acting as an intermediary in the offer and sale
of securities pursuant to Section 4(a)(6), as contemplated in Title
III of the JOBS Act, would not come within the meaning of
``dealer,'' which is defined in Exchange Act Section 3(a)(5)(A) (15
U.S.C. 78c(a)(4)(A)), because it would not be engaging in the
business of buying and selling securities for its own account. See
also Exchange Act Section 15(a) [15 U.S.C. 15o(a)].
    \977\ At the same time, there are statutory restrictions on the
scope of services that a funding portal could provide. See Section
II.C.1 (discussing Exchange Act Section 3(a)(80)).
---------------------------------------------------------------------------

    We proposed Rule 401(a) to provide an exemption for registered
funding portals from the broker registration requirements of Exchange
Act Section 15(a)(1) in connection with its activities as a funding
portal. Consistent with the JOBS Act, the funding portal would remain
subject to the full range of our examination and enforcement authority,
even though it is not registered as a broker.\978\ In this regard,
proposed Rule 403 would require that a funding portal permit the
examination and inspection of all of its business and business
operations that related to its activities as a funding portal, such as
its premises, systems, platforms and records, by representatives of the
Commission and of the national securities association of which it is a
member.\979\ Proposed Rule 404 also would impose certain recordkeeping
requirements on funding portals.\980\
---------------------------------------------------------------------------

    \978\ See Exchange Act Section 3(h)(1)(C). See also Securities
Act Section 20 [15 U.S.C. 77t] and Exchange Act Sections 21 and 21C
[15 U.S.C. 78u and 78u-3]. In addition, we highlighted in the
Proposing Release that Exchange Act Sections 15(b)(4) and 15(b)(6)
(15 U.S.C. 78o(b)(4) and 78o(b)(6)) apply to brokers (including
funding portals) regardless of whether or not they are registered
with the Commission as brokers. Exchange Act Section 15(b)(4)
authorizes the Commission to bring administrative proceedings
against a broker when the broker violates the federal securities
laws (and for other misconduct) and provides for the imposition of
sanctions, up to and including the revocation of a broker's
registration. Exchange Act Section 15(b)(6) provides similar
enforcement authority against the persons associated with a broker,
including barring persons from associating with any Commission
registrant.
    \979\ See Section II.D.4.
    \980\ See Section II.D.5.
---------------------------------------------------------------------------

    We had further proposed in Rule 401(b) that, notwithstanding the
exemption from broker registration, for purposes of Chapter X of Title
31 of the Code of Federal Regulations, a funding portal would be a
broker or dealer ``required to be registered'' with the Commission
under the Exchange Act, thereby requiring funding portals to comply
with Chapter X, including certain anti-money laundering (``AML'')
provisions thereunder.\981\
---------------------------------------------------------------------------

    \981\ See 31 CFR 1010.100(h) and 1023.100(b) (defining broker or
dealer for purposes of the applicability of AML requirements). See
Currency and Foreign Transactions Reporting Act of 1970 (commonly
referred to as the Bank Secrecy Act (``BSA'')) [12. U.S.C. 1829b, 12
U.S.C. 1951-1959, 31 U.S.C. 5311-5330].
---------------------------------------------------------------------------

b. Comments on the Proposed Rule
    Commenters generally agreed with the funding portal exemption from
registration as a broker-dealer.\982\ One commenter stated that funding
portals that provide no advice, make no warranties as to the
suitability of an investment and do not handle share transfers or
money, should not be required to register as a broker-dealer and
requiring them to do so would provide no benefit to the public.\983\
---------------------------------------------------------------------------

    \982\ See, e.g., Heritage Letter; Joinvestor Letter;
PeoplePowerFund Letter; RocketHub Letter.
    \983\ See, e.g., PeoplePowerFund Letter (stating that requiring
funding portals ``to register as broker dealers thus crushing the
very idea of crowd sourced funding as a people driven force for the
good of the `everyman' '').
---------------------------------------------------------------------------

    One commenter stated that the exemption from broker-dealer
registration actually precludes funding portals from becoming members
of FINRA,\984\ and asserted that funding portals should not have to
comply with the same requirements as broker-dealers for purposes of
Chapter X of Title 31 of the CFR.\985\ Another commenter, however,
stated that it ``supports the Commission's interpretation of the
exemption, and believes that AML compliance is necessary.'' \986\
---------------------------------------------------------------------------

    \984\ See Vann Letter (reasoning that, because a funding portal
is ``not registered as a `broker dealer,' '' and because ``the
Securities Exchange Act of 1934 states `A registered securities
association shall deny membership to any person who is not a
registered broker or dealer,' '' then funding portals cannot become
members of FINRA).
    \985\ Id. (arguing that such requirements would be ``overly
burdensome'' because funding portals ``do not, by law, handle any
money'').
    \986\ See RocketHub Letter.
---------------------------------------------------------------------------

c. Final Rules
    We are adopting, as proposed, paragraph (a) under Rule 401, but
renumbering it as Rule 401 as we not adopting proposed Rule 401(b). We
note, however, that the exemption from broker registration is
applicable only to funding portals that are registered under Rule 400.
Therefore, a funding portal that ceases to be registered under Rule 400
will no longer be exempt from broker registration under Rule 401. In
response to the comment that this exemption precludes funding portals
from becoming members of FINRA, as we noted above, because a funding
portal will be engaged in the business of effecting securities
transactions for the accounts of others through crowdfunding, it will
be a ``broker'' within the meaning of Section 3(a)(4) of the Exchange
Act. We also note that Exchange Act Section 3(h)(2) states that for
purposes of sections 15(b)(8) and 15A, the term ``broker or dealer''
includes a funding portal and the term ``registered broker or dealer''
includes a registered funding portal. Therefore, funding portals are
explicitly permitted by statute to become members of FINRA.
    We are not, however, adopting proposed Rule 401(b). As described in
more detail in Section II.D.4.b. below, we have determined that the
imposition of AML requirements on funding portals should be addressed
outside of the rules that we are adopting in this release.
3. Safe Harbor for Certain Activities
    Under Exchange Act Section 3(a)(80), which was added by Section
304(b) of the JOBS Act, a funding portal is defined as an intermediary
that does not: (i) Offer investment advice or make recommendations;
(ii) solicit purchases, sales or offers to buy the securities offered
or displayed on its platform or portal; (iii) compensate employees,
agents or other persons for such solicitation or based on the sale of
securities displayed or referenced on its platform or portal; (iv)
hold, manage, possess or otherwise handle investor funds or securities;
or (v) engage in such other activities as the Commission, by rule,
determines appropriate. As noted in the Proposing Release, commenters
have raised questions about the scope of permissible activities for
funding portals consistent with these prohibitions.\987\ To provide
regulatory clarity, we proposed Rule 402, which would provide a non-
exclusive conditional safe harbor for funding portals under which
certain limited activities would be deemed consistent with the
statutory prohibitions on funding portals. The permissible activities
in the proposed safe harbor involved: (i) Limiting offerings on the
platform; (ii) highlighting and displaying offerings on the platform;
(iii) providing communication channels; (iv) providing search
functions; (v) advising issuers; (vi) compensating others for referring
persons to the funding portal; (vii) paying or offering to pay
compensation to registered brokers or dealers; (viii) receiving
compensation from a registered broker or dealer; (ix) advertising the
funding portal and offering; (x) denying access to, or cancelling,
offerings due to fraud or investor protection concerns; (xi) accepting
investment commitments on behalf of the issuer; (xii) directing the
transmission of investor funds; and (xiii) directing a qualified third
party's transmission of investor funds.
---------------------------------------------------------------------------

    \987\ See Proposing Release, 78 FR 66484-66485.

---------------------------------------------------------------------------

    Proposed Rule 402(a) also stated that no presumption shall arise
that a funding portal has violated the prohibitions under Section
3(a)(80) of the Exchange Act or Regulation Crowdfunding by reason of
the funding portal or its associated persons engaging in activities in
connection with the offer or sale of securities in reliance on Section
4(a)(6) of the Securities Act that do not meet the conditions specified
in the safe harbor, and that the antifraud provisions and all other
applicable provisions of the federal securities laws continue to apply
to the activities described in the safe harbor.
    Commenters strongly supported the idea of a safe harbor for funding
portals,\988\ but they also suggested additional examples for the safe
harbor. We are adopting the safe harbor in Rule 402 with certain
changes as discussed further below. Each activity of the safe harbor is
addressed below.
---------------------------------------------------------------------------

    \988\ See, e.g., CFIRA Letter 1; Joinvestor Letter; Merkley
Letter (stating that the proposed safe harbor ``strikes the right
balance''). But see Public Startup 3 Letter (stating that the safe
harbor should cover any activity by a funding portal not directly
related to the sale of securities for the account of others).
---------------------------------------------------------------------------

a. Limiting Offerings
(1) Proposed Rule
    Proposed Rule 402(b)(1) would permit a funding portal to apply
objective criteria to limit the securities offered in reliance on
Section 4(a)(6) of the Securities Act through the funding portal's
platform where: (i) The criteria are reasonably designed to result in a
broad selection of issuers offering securities through the funding
portal's platform, are applied consistently to all potential issuers
and offerings and are clearly displayed on the funding portal's
platform; and (ii) the criteria could include, among other things, the
type of securities being offered (for example, common stock, preferred
stock or debt securities), the geographic location of the issuer and
the industry or business segment of the issuer, provided that a funding
portal may not deny access to an issuer based on the advisability of
investing in the issuer or its offering, except to the extent described
in proposed Rule 402(b)(10) for fraud and investor protection concerns.
(2) Comments on Proposed Rule
    We received a significant number of comments on the ability of a
funding portal to limit the offerings on its platform. Many of these
comments suggested a broader standard than the standard that we
proposed. Several commenters expressed concern that the proposed safe
harbor placed funding portals at a competitive disadvantage to
registered brokers because it did not provide funding portals with the
flexibility to limit the offerings on their platforms,\989\ even if
they have legitimate concerns about offerings aside from fraud or
investor protection.\990\ For example, commenters suggested that a
funding portal should be permitted to reject offerings based on
whatever factors the portal deems appropriate without automatically
triggering regulation as a broker-dealer,\991\ especially if it deems
the offering to have tangible shortcomings that could be detrimental to
investors or overly risky.\992\
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    \989\ See, e.g., EMKF Letter; SBA Office of Advocacy Letter.
    \990\ See, e.g., ABA Letter; CfPA Letter; CrowdCheck 2 Letter;
Graves Letter; Seyfarth Letter (stating that ``even with a lower
liability threshold, curation is an essential tool for investor
protection'').
    \991\ See, e.g., IAC Recommendation (suggesting that ``[o]ne of
the most cost-effective ways to reduce the risk of serious
compliance violations is to give crowdfunding intermediaries a free
hand to reject any offering they believe could pose an undue
compliance or fraud risk''); see also CFIRA Letter 12 (agreeing with
IAC's suggestion ``that all intermediaries . . . should have greater
latitude in their ability to curate offerings. . . . All
intermediaries (including non-BD portals) should be allowed to use
their discretion as to whether or not any particular offering is
suitable for their service''). See also BetterInvesting Letter.
    \992\ See Graves Letter.
---------------------------------------------------------------------------

    Commenters asserted that a funding portal's ability to limit the
offerings on its platform is important for investor protection. They
stated that funding portals should be permitted to screen out clearly
unprepared or ill-conceived offerings,\993\ and should be permitted to
limit offerings on their platforms to issuers that are ``crowdfund-
ready.''\994\ Commenters drew a distinction between the permissibility
of applying internal screening standards to limited offerings on the
platform versus the prohibition on providing investment advice or
recommendations.\995\ Some commenters suggested that having a
disclaimer that ``curation'' (or limiting offerings on a platform) does
not constitute a recommendation on the advisability of any investment
displayed on the platform;\996\ or that the funding portal does not
advertise or make statements that the offerings listed on its platform
are safer or better investments than those listed on other
platforms,\997\ would mitigate regulatory concerns. Some commenters
also suggested that the criteria used to limit offerings should be
clearly displayed on a funding portal's platform.\998\
---------------------------------------------------------------------------

    \993\ See EMKF Letter.
    \994\ See SBEC Letter.
    \995\ See, e.g., Angel 1 Letter (``Forcing portals to become the
equivalent of common carriers that have to take every offering, no
matter how foolish, will make crowdfunding more likely to fail.'');
Consumer Federation Letter; Saunders Letter.
    \996\ See, e.g., EarlyShares Letter; EMKF Letter; SBA Office of
Advocacy Letter.
    \997\ See Milken Institute Letter.
    \998\ See, e.g., ABA Letter; CFIRA Letter 1.
---------------------------------------------------------------------------

    In addition, some commenters pointed to a tension in the statute
under which a funding portal is potentially subject to liability for
material misstatements and omissions in the issuer's offering materials
but, at the same time, may be limited in its ability to deny access to
its platform.\999\ These commenters argued that it was not equitable
for a funding portal to have such liability if it cannot determine
whether and under what circumstances to permit an issuer or offering
access to its platform.
---------------------------------------------------------------------------

    \999\ See, e.g., CrowdCheck 2 Letter; Milken Institute Letter;
RocketHub Letter.
---------------------------------------------------------------------------

(3) Final Rules
    In view of the comments, and upon further consideration, we are
modifying Rule 402(b)(1) to expressly provide that a funding portal
may, consistent with the prohibitions under Exchange Act Section
3(a)(80) (including the prohibition against offering investment advice
or recommendations in Section 3(a)(80)(A)), determine whether and under
what terms to allow an issuer to offer and sell securities in reliance
on Securities Act Section 4(a)(6) through its platform.\1000\
---------------------------------------------------------------------------

    \1000\ See also Rule 402(b) (limiting permissible activities to
those consistent with the prohibitions under Exchange Act Section
3(a)(80)). The discretion a funding portal has to limit offerings on
its platform is in addition to the requirement under Rule 301 to
deny access, and cancel offerings, based on fraud and investor
protection concerns.
---------------------------------------------------------------------------

    We agree with commenters that the ability of a funding portal to
determine which issuers may use its platform is important for the
protection of investors, as well as to the viability of the funding
portal industry, and thus the crowdfunding market. We acknowledge the
concerns raised by commenters that the proposed rules could otherwise
have unduly restricted a funding portal's ability to limit offerings
conducted on its platform, and we are modifying the safe harbor
contained in Rule 402(b)(1) to address these concerns. Specifically, we
are revising Rule 402(b)(1) to read that a funding portal may
``[d]etermine whether and under what terms to allow an issuer to offer
and sell securities in reliance on Section 4(a)(6) of the Securities
Act (15 U.S.C. 77d(a)(6)) through its platform, provided that the
funding portal otherwise complies with Regulation Crowdfunding
(Sec. Sec.  227.100 et se.).'' The new language is designed to

make it clear that a funding portal may exercise its discretion,
subject to the prohibition in the statute on providing investment
advice or recommendations, to limit the offerings and issuers that it
allows on its platform under the safe harbor, as long as it complies
with all other provisions of Regulation Crowdfunding.
    In making this change, we recognize that the activities in which a
funding portal may engage are, by definition, far more limited than the
activities in which a registered broker-dealer may engage. At the same
time, we believe that the JOBS Act established an important role for
intermediaries, both broker-dealers and funding portals, to play in
crowdfunding offerings. While we are providing funding portals with
broad discretion to determine whether and under what circumstances to
allow an issuer to offer and sell securities through its platform in
reliance on Section 4(a)(6) of the Securities Act (15 U.S.C.
77d(a)(6)), a funding portal must comply with all applicable provisions
of Regulation Crowdfunding, including the prohibition on providing
investment advice or recommendations. In this regard and as more fully
discussed below, among other things, a funding portal cannot advertise,
make statements or otherwise represent that the offerings listed on its
platform are safer or better investments than those listed on other
platforms. Given this statutory restriction, we are not, as some
commenters suggested, requiring a funding portal to provide a
disclaimer stating that limiting the offerings on its platform does not
constitute investment advice or a recommendation, nor are we requiring
that its criteria for limiting offerings on its platform be publicly
displayed. We do not believe that requiring a funding portal to display
its criteria for limiting offerings on its platform will add
significant investor protection. While a funding portal may decide to
make such criteria public, we caution that a funding portal must avoid
any appearance that it is giving investment advice or recommendations
or that the funding portal believes its offerings are investment
worthy.
b. Highlighting Issuers and Offerings
(1) Proposed Rule
    Proposed Rule 402(b)(2) would permit a funding portal to apply
objective criteria to highlight offerings on the funding portal's
platform where: (i) The criteria are reasonably designed to highlight a
broad selection of issuers offering securities through the funding
portal's platform, are applied consistently to all issuers and
offerings and are clearly displayed on the funding portal's platform;
(ii) the criteria may include, among other things, the type of
securities being offered (for example, common stock, preferred stock or
debt securities); the geographic location of the issuer; the industry
or business segment of the issuer; the number or amount of investment
commitments made, progress in meeting the issuer's target offering
amount or, if applicable, the maximum offering amount; and the minimum
or maximum investment amount; provided that a funding portal may not
highlight an issuer or offering based on the advisability of investing
in the issuer or its offering; and (iii) the funding portal does not
receive special or additional compensations for highlighting one or
more issuers or offerings on its platform.
(2) Comments on Proposed Rule
    Several commenters suggested additional criteria for the safe
harbor, including for example: (i) How long the issuer has been
operational or profitable;\1001\ (ii) historical and projected revenue
and earnings before interest, taxes, depreciation and amortization
(EBITDA); \1002\ (iii) the size of the issuer's management team; \1003\
(iv) relevant experience and length of experience of the issuer's
management;\1004\ (v) the type of corporate structure of the
issuer;\1005\ (vi) the stage and operating history of the issuer;
\1006\ (vii) valuation methodology; \1007\ (viii) results of securities
and background checks;\1008\ (ix) ``trending''; \1009\ and (x) most
money raised, soonest offering to close, most money invested, least
money invested, or on a purely random basis (so long as none of the
bases are value-driven--that is, which investment is a safer or better
investment).\1010\ Another commenter questioned whether, under the safe
harbor, funding portals would be permitted to highlight offerings based
on their discretion or the use of metrics, such as topic, media
coverage, or momentum.\1011\ However, another commenter suggested that
a funding portal should not have discretion regarding which objective
criteria it can use to highlight issuers or offerings because it may
result in the portal implicitly recommending securities.\1012\ This
commenter suggested that the Commission should create a specific list
of acceptable objective criteria that a funding portal may apply.\1013\
---------------------------------------------------------------------------

    \1001\ See, e.g., CFIRA Letter 1; CFIRA Letter 2.
    \1002\ Id.
    \1003\ Id.
    \1004\ See, e.g., CFIRA Letter 2.
    \1005\ See RocketHub Letter.
    \1006\ Id.
    \1007\ Id.
    \1008\ Id.
    \1009\ See Seyfarth Letter.
    \1010\ See ASSOB Letter.
    \1011\ See RocketHub Letter.
    \1012\ See Commonwealth of Massachusetts Letter; c.f. ABA Letter
(requesting Commission guidance that a portal engaging in activities
covered by the safe harbor will not trigger the application of the
Investment Advisers Act).
    \1013\ See Commonwealth of Massachusetts Letter. See also ABA
Letter (requesting explicit Commission guidance as to permissible
criteria).
---------------------------------------------------------------------------

    Several commenters stated that the criteria used to highlight
offerings should be clearly displayed on the platform.\1014\ However,
one commenter stated that algorithms should not be required to be
disclosed on the platform.\1015\
---------------------------------------------------------------------------

    \1014\ See, e.g., ABA Letter; CFIRA Letter 1.
    \1015\ See Joinvestor Letter.
---------------------------------------------------------------------------

    Several commenters suggested that the safe harbor should include
the ability of a funding portal to provide mechanisms by which
investors can rate an issuer or an offering, which then could be
highlighted on the platform.\1016\ However, one of these commenters
stated that any such rating must be mathematical rather than value-
driven or it would amount to ``enticement.''\1017\
---------------------------------------------------------------------------

    \1016\ See, e.g., ASSOB Letter; CFIRA Letter 1; Joinvestor
Letter.
    \1017\ See ASSOB Letter.
---------------------------------------------------------------------------

(3) Final Rules
    After considering the comments, we are adopting Rule 402(b)(2) as
proposed. Specifically, Rule 402(b)(2) allows a funding portal to
highlight particular issuers or offerings of securities made in
reliance on Section 4(a)(6) on its platform based on objective criteria
where the criteria are reasonably designed to highlight a broad
selection of issuers offering securities through the funding portal's
platform, are applied consistently to all issuers and offerings and are
clearly displayed on the funding portal's platform. Consistent with the
proposal, the final rule specifies in subparagraph (b)(2)(ii) that
objective criteria may include, for example: The type of securities
being offered (e.g., common stock, preferred stock or debt securities);
the geographic location of the issuer; the industry or business segment
of the issuer; the number or amount of investment commitments made; the
progress in meeting the target offering amount or, if applicable, the
maximum offering amount; and the minimum or maximum investment amount.
    It is important to note that the criteria must be reasonably
designed to highlight a broad selection of issuers and offerings, so as
not to recommend

or implicitly endorse one issuer or offering over another, and must be
applied consistently to all potential issuers and offerings.\1018\ This
highlighting of issuers or offerings that have been admitted to a
funding portal's platform can, depending on relevant facts and
circumstances, involve providing investment advice that violates the
prohibition on a funding portal providing such advice. To that end, the
rule provides a safe harbor only when a funding portal is using
objective criteria and such criteria are clearly displayed on its
platform to inform investors why certain issuers or offerings are being
highlighted.\1019\ To reiterate, a funding portal may not highlight an
issuer or offering based on the advisability of investing in the issuer
or offering or give the impression that the funding portal is providing
an implicit (or explicit) recommendation on whether to invest in the
issuer or offering.
---------------------------------------------------------------------------

    \1018\ See Rule 402(b)(2) and (b)(2)(i).
    \1019\ Id.
---------------------------------------------------------------------------

    To help prevent conflicts of interest and incentives for funding
portals to favor certain issuers over others, the final rule also
prohibits a funding portal from receiving any special or additional
compensation for highlighting (or offering to highlight) one or more
issuers or offerings on its platform.\1020\
---------------------------------------------------------------------------

    \1020\ See Rule 402(b)(2)(iii) of Regulation Crowdfunding. This
rule prohibits paid placements of the kind suggested by one
commenter. See Earlyshares Letter.
---------------------------------------------------------------------------

    Although some commenters suggested that we include additional
criteria in subparagraph (b)(2)(ii), we emphasize that the rule does
not establish an exclusive list. The listed criteria are intended as
examples, and the safe harbor is non-exclusive. Crowdfunding is a new
and evolving market, and we believe that providing principles in the
safe harbor by which a funding portal can highlight offerings on its
platform will provide it with the flexibility to adapt to the
crowdfunding market as it develops while maintaining investor
protection. In this regard, the examples listed in Rule 402(b)(2)(ii)
are intended to provide guidance to funding portals as they develop
their platform and related tools.
    Although we are not including additional criteria in Rule
402(b)(2)(ii) at this time, we note that certain of the suggested
highlighting criteria are covered by the criteria listed in the rule,
such as the issuer's industry; the type of securities being offered;
and the geographic location of the issuer's business. Others, while not
listed in the final rule, we believe are based on objective criteria,
such as the amount of money being raised or size of the offering;
soonest offering to close; most or least money invested; how long the
issuer has been operational or profitable; the size of the management
team of the issuer; the stage and operating history of the issuer;
valuation methodology; ``trending''; earnings before interest, taxes,
depreciation and amortization (EBITDA); and highlighting on a purely
random basis. However, we caution that a funding portal must be
cognizant not to present highlighted issuers in a manner that, directly
or implicitly, results in the provision of investment advice or
recommendations.\1021\
---------------------------------------------------------------------------

    \1021\ For example, a funding portal may provide the EBITDA of
an issuer but it cannot insinuate or state on its platform that the
EBITDA corresponds to the advisability of investing in an issuer.
---------------------------------------------------------------------------

c. Providing Search Functions
(1) Proposed Rule
    Proposed Rule 402(b)(3) would permit a funding portal to provide
search functions or other tools that investors can use to search, sort,
or categorize the offerings available through the funding portal's
platform according to objective criteria where: (i) The objective
criteria may include, among other things, the type of securities being
offered (for example, common stock, preferred stock or debt
securities); the geographic location of the issuer; the industry or
business segment of the issuer; the number or amount of investment
commitments made, progress in meeting the issuer's target offering
amount or, if applicable, the maximum offering amount; and the minimum
or maximum investment amount; and (ii) the objective criteria may not
include, among other things, the advisability of investing in the
issuer or its offering, or an assessment of any characteristic of the
issuer, its business plan, its key management or risks associated with
an investment.
(2) Comments on Proposed Rule
    Several commenters suggested that the safe harbor be broadened to
include additional criteria.\1022\ One commenter suggested that funding
portals should be permitted to sort offerings based on an algorithmic
score that takes into account any objective numerical data that is
reasonably likely to correlate to successful investments, such as
numeric ratings by accredited and unaccredited investors, number of
investment commitments weighted by investor portfolio valuation, and
number of page views.\1023\ Another commenter stated that the use of
the word ``assessment'' in the proposed safe harbor \1024\ is
inappropriately vague when applied to technology, as it could
effectively prohibit the use of any computational sorting algorithm
using objective searching and sorting criteria. This commenter
suggested that the word ``assessment'' be substituted with the word
``opinion,'' and also that the term ``objective criteria'' be removed
so that the safe harbor would prohibit the use of subjective criteria--
such as the advisability of investing or an opinion of any
characteristic of the issuer, its business plan, its key management or
risks associated with an investment--``generated exclusively by the
portal,'' excepting instances of peer review and feedback generated by
users.\1025\
---------------------------------------------------------------------------

    \1022\ See, e.g., EMKF Letter; EquityNet Letter.
    \1023\ See EMKF Letter.
    \1024\ Rule 402(b)(3)(ii) states in part that the ``objective
criteria may not include . . . an assessment of any characteristic
of the issuer, its business plan, its key management or risks . . .
''
    \1025\ See EquityNet Letter (noting that ``[a]llowing investors
the ability to sort through each other's comments or opinions
becomes an integral part of any site where commenting is allowed on
products'' and that ``[b]ecause sorting comments would require a
technological assessment of subjective data, we believe an explicit
carve out in the safe harbor provisions is necessary'').
---------------------------------------------------------------------------

(3) Final Rules
    After considering comments, we are adopting Rule 402(b)(3)
substantially as proposed. The final rule permits a funding portal to
provide search functions or other tools on its platform that users
could use to search, sort or categorize available offerings according
to objective criteria.\1026\ The final rule also permits search
functions that, for example, will allow an investor to sort through
offerings based on a combination of different criteria, such as by the
percentage of the target offering amount that has been met, geographic
proximity to the investor and number of days remaining before the
closing date of an offering.\1027\ However, the final rule makes clear
that the search criteria may not include the advisability of investing
in the issuer or its offering, or an assessment of any characteristic
of the issuer, its business plan, its management or risks associated
with an investment. In this regard, we are

making minor changes from proposed Rule 402(b)(3)(i) and (ii) by
deleting the word ``objective'' in the final rules because the term is
redundant to the requirement in Rule 402(b)(3) that the criteria be
``objective.'' Further, we are persuaded by one commenter's observation
that the use of the word objective in the subparts could be
misleading.\1028\ The new sentence structure also makes Rule 402(b)(3)
consistent with Rule 402(b)(2), which we believe provides additional
clarity and consistency for funding portals when complying with the
rules.
---------------------------------------------------------------------------

    \1026\ See Rule 402(b)(3) Regulation Crowdfunding. See also 158
Cong. Rec. 2231 (daily ed. Mar. 29, 2012) (statement of Sen. Scott
Brown) (``Funding portals should be allowed to organize and sort
information based on certain criteria. This will make it easier for
individuals to find the types of companies in which they can
potentially invest. This type of capability--commonly referred to as
curation--should not constitute investment advice.'').
    \1027\ See Rule 402(b)(3) of Regulation Crowdfunding. Rule
402(b)(3)(i) provides examples of search criteria that are
consistent with those listed in the Rule 402(b)(2)(ii) safe harbor
for highlighting issuers and offerings.
    \1028\ See EquityNet Letter. However, we do not agree with the
commenter's assertion that using the word ``assessment'' in Rule
402(b)(3) equates to a prohibition on the use of computational
sorting algorithms using objective searching and sorting criteria
because, in this context, assessment is used to refer to subjective
criteria.
---------------------------------------------------------------------------

    Rule 402(b)(3) does not preclude the use of computational sorting
algorithms using objective searching and sorting criteria.\1029\
However, a funding portal must take care not to indicate that the
platform's search results or tools, directly or indirectly, correlate
to successful investments. Likewise, we believe that the more
particular, biased or weighted a funding portal's algorithm or
assessment is, the less likely the criteria as a whole will be
objective. However, this does not preclude a funding portal from
permitting investors with access to its communication channels from
rating issuers or offerings (e.g., a star rating) on its platform or
searching such ratings, as long as a funding portal (including its
associated persons, such as its employees) does not participate in the
rating process.\1030\
---------------------------------------------------------------------------

    \1029\ In response to one commenter's suggestion that a funding
portal should be permitted to use algorithmic scores, the final rule
does not preclude the use of algorithms as long as the criteria used
by the algorithm are objective. See EMKF Letter. Thus, a ``score''
based on an algorithm may be used as long as it does not involve
subjective criteria.
    \1030\ See Rule 402(b)(4)(i).
---------------------------------------------------------------------------

d. Providing Communication Channels
(1) Proposed Rule
    Proposed Rule 402(b)(4) would address the terms under which a
funding portal could provide communication channels by which investors
can communicate with one another and with representatives of the issuer
through the funding portal's platform about offerings conducted through
the platform, as required by Rule 303(c). Under the terms of Rule
402(b)(4) as proposed, the safe harbor would apply so long as the
funding portal (and its associated persons): (i) Does not participate
in these communications, other than to establish guidelines for
communication and remove abusive or potentially fraudulent
communications; (ii) permits public access to view the discussions made
in the communication channels; (iii) restricts posting of comments in
the communication channels to those persons who have opened an account
on its platform; and (iv) requires that any person posting a comment in
the communication channels clearly disclose with each posting whether
he or she is a founder or an employee of an issuer engaging in
promotional activities on behalf of the issuer, or is otherwise
compensated, whether in the past or prospectively, to promote an
issuer's offering.
(2) Comments on Proposed Rule
    Several commenters supported permitting a funding portal to provide
communication channels on its platform through which investors can make
comments, rate issuers and provide other feedback, and through which
issuers can respond to investor comments.\1031\ One of these commenters
stated that these capabilities could enable a funding portal to share
with investors information related to issuers, capital raised by an
issuer, crowd investing, or the crowd-based rating of specific
issuers.\1032\ Another commenter suggested that funding portals allow
investors to assign a quantifiable indicator to each other's comments,
so that users can search out the best and worst of the comments and
issuers have a chance to respond to investor comments in an open
forum.\1033\ One commenter recommended that permission to rate issuers
or offerings should only be given to investors who actually invested in
or committed to invest in the offering.\1034\
---------------------------------------------------------------------------

    \1031\ See, e.g., CFIRA Letter 1; EquityNet Letter; Milken
Institute Letter.
    \1032\ See Milken Institute Letter.
    \1033\ See EquityNet Letter.
    \1034\ See CFIRA Letter 1.
---------------------------------------------------------------------------

(3) Final Rules
    We are adopting, as proposed, Rule 402(b)(4) to address the terms
under which a funding portal can provide communication channels by
which investors can communicate with one another and with
representatives of the issuer through the funding portal's platform
about offerings conducted through the platform, as required by Rule
303(c).\1035\ The safe harbor specifies that a funding portal
(including its associated persons, such as its employees) may not
participate in these communications, other than to establish guidelines
about communication and to remove abusive or potentially fraudulent
communications. Under Rule 402(b)(4), a funding portal must make
communication channels available to the general public and restrict the
posting of comments on those channels to those who have accounts on the
funding portal's platform. In addition, the funding portal must require
each person posting comments to disclose clearly with each posting in
the channel whether he or she is a founder or an employee of an issuer
engaging in promotional activities on behalf of the issuer, or is
otherwise compensated or will receive any compensation for promoting an
issuer.\1036\
---------------------------------------------------------------------------

    \1035\ See Section II.C.5.b(3) for a discussion of Rule 303(c).
    \1036\ See Rule 402(b)(4)(iv).
---------------------------------------------------------------------------

    We agree with commenters that investors should be permitted to
communicate with one other, and with representatives of the issuer,
over communication channels on the platform provided by the funding
portal.\1037\ The communication channel is meant to strengthen and
foster the ability of the crowd to communicate. We believe that the
capabilities within the communication channel will develop and evolve
over time. For example, as noted above, a communication channel may
permit investors to rate or comment on an issuer or offering, or to
assign quantifiable indicators to one other's comments. Also, a funding
portal must make communication channels available for viewing by the
general public, and permit anyone who has opened an account on its
platform to post comments on the channel.\1038\ As we stated in the
Proposing Release, requiring investors to have accounts with the
funding portal before posting a comment should provide a measure of
control over these communications that could aid in promoting
accountability for comments made and help ensure that interested
persons, such as those associated with the issuer or receiving
compensation to promote the issuer, are properly identified.
---------------------------------------------------------------------------

    \1037\ As discussed in Section II.C.5, an issuer, its agents and
promoters must identify themselves in all communications through the
communication channel.
    \1038\ See Rule 402(b)(4)(i) and (ii).
---------------------------------------------------------------------------

    We reiterate that while a funding portal must provide for a
communication channel and may develop certain features or tools as a
part of that channel (such as a crowd-based rating system), a funding
portal (including its associated persons, such as its employees) may
not engage or participate in such communications.\1039\

In addition, a funding portal should consider whether the tools or
features of the communication channels it develops and the guidelines
it establishes for the channel would constitute the funding portal
providing impermissible investment advice or recommendations. For
example, the funding portal may not establish a guideline that permits
a person to rate an offering only if the person provides a positive
rating, or otherwise incentivizes persons to give positive ratings.
However, contrary to what one commenter suggested, we do not believe a
funding portal may limit the rating capability to those account holders
who have made investment commitments to the relevant offering.\1040\ We
believe that limiting ratings capability to persons that invest in an
offering is likely to skew the ratings, and therefore, we would view
such a limitation as inappropriate. Further, such a limitation could
prevent persons with relevant and important information about the
investment from contributing their views to the crowd.
---------------------------------------------------------------------------

    \1039\ See Rule 402(b)(4)(i). See also Rule 303(c).
    \1040\ See CFIRA Letter 1.
---------------------------------------------------------------------------

e. Advising Issuers
(1) Proposed Rule
    Proposed Rule 402(b)(5) would permit a funding portal to advise an
issuer about the structure or content of the issuer's offering,
including assisting the issuer in preparing offering documentation.
(2) Final Rules
    We did not receive any comments that specifically addressed the
ability of a funding portal to advise issuers and are adopting Rule
402(b)(5) as proposed. The rule permits a funding portal to advise an
issuer about the structure or content of the issuer's offering,
including preparing offering documentation. We believe funding portals
will be in a position to provide experience and assistance to issuers
relatively efficiently, and should be able to leverage their expertise
to increase the viability of crowdfunding.
    We believe that funding portals, as well as broker-dealers, should
be permitted to provide certain services to issuers to facilitate the
offer and sale of securities in reliance on Section 4(a)(6). Without
these services, crowdfunding as a method to raise capital might not be
viable. Rule 404(b)(5) permits funding portals to advise an issuer
about the structure and content of the issuer's offering in a number of
ways. A funding portal can, for example, provide pre-drafted templates
or forms for an issuer to use in its offering that will help it comply
with its proposed disclosure obligations. Other examples of permissible
assistance can include advice about the types of securities the issuer
can offer, the terms of those securities and the procedures and
regulations associated with crowdfunding.
f. Paying for Referrals
(1) Proposed Rule
    Proposed Rule 402(b)(6) would permit a funding portal to compensate
a third party for referring a person to the funding portal, so long as
the third party does not provide the funding portal with personally
identifiable information of any investor and the compensation, other
than that paid to a registered broker or dealer, is not based, directly
or indirectly, on the purchase or sale of a security in reliance on
Section 4(a)(6) of the Securities Act offered on or through the funding
portal's platform.
(2) Comment on Proposed Rule
    One commenter requested clarification as to: (i) Whether and when
compensation paid to a non-broker-dealer will be deemed improperly
based on the purchase or sale of a security; (ii) whether a funding
portal may pay a registered broker-dealer a referral fee without a
formal agreement; and (iii) whether a funding portal may charge issuers
fees based on the success of the offering.\1041\
---------------------------------------------------------------------------

    \1041\ See ABA Letter.
---------------------------------------------------------------------------

(3) Final Rules
    We are adopting Rule 402(b)(6) as proposed. Rule 402(b)(6) permits
a funding portal to compensate a third party for referring a person to
the funding portal if the third party does not provide the funding
portal with personally identifiable information about any investor and
the compensation, other than that paid to a registered broker or
dealer, is not based, directly or indirectly, on the purchase or sale
of a security in reliance on Section 4(a)(6) of the Securities Act
offered on or through the funding portal's platform. We believe the
safe harbor in this regard addresses the prohibition in Rule 305
against an intermediary compensating any person for providing the
intermediary with the personally identifiable information of any
investor in securities offered and sold in reliance on Section 4(a)(6).
We also believe that Rule 402(b)(6)'s prohibition on funding portals
paying transaction-based compensation to third parties, other than that
paid to a registered broker or dealer, will help to minimize the
incentive for high-pressure sales tactics and other abusive practices
in this area. One commenter requested additional guidance as to what
types of compensation would equate to compensation based on the offer
or sale of a security.\1042\ The Commission and courts have interpreted
the definition of transaction-based compensation broadly,\1043\ and
whether compensation is transaction-based is a facts and circumstances
determination. Thus, we do not believe that additional guidance is
necessary or appropriate in this context.
---------------------------------------------------------------------------

    \1042\ Id.
    \1043\ See, e.g., Applicability of Broker-Dealer Registration to
Banks, Exchange Act Rel. No. 20,357 at n.14 (Nov. 8, 1983).
---------------------------------------------------------------------------

    In response to a commenter's inquiry, a funding portal may not pay
a registered broker-dealer a referral fee without a written agreement
under the safe harbor. Such an arrangement would be covered by Rule
402(b)(7), which is discussed below.
g. Compensation Arrangements With Registered Broker-Dealers
(1) Proposed Rule
    Proposed Rule 402(b)(7) would permit a funding portal to pay or
offer to pay any compensation to a registered broker or dealer for
services in connection with the offer or sale of securities by the
funding portal in reliance on Section 4(a)(6) of the Act, provided
that: (i) Such services are provided pursuant to a written agreement
between the funding portal and the registered broker or dealer; (ii)
such services and compensation are permitted under Regulation
Crowdfunding and are not otherwise prohibited under Rule 305; and (iii)
such compensation complies with and is not prohibited by the rules of
any registered national securities association of which the funding
portal is required to be a member.
    Proposed Rule 402(b)(8) would permit a funding portal to receive
any compensation from a registered broker or dealer for services
provided by the funding portal in connection with the offer or sale of
securities by the funding portal in reliance on Section 4(a)(6) of the
Act, provided that: (i) Such services are provided pursuant to a
written agreement between the funding portal and the registered broker
or dealer; (ii) such compensation is permitted under Regulation
Crowdfunding; and (iii) such compensation complies with and is not
prohibited by the rules of any registered national securities
association of which the funding portal is required to be a member.

(2) Comments on Proposed Rule
    Several commenters expressed concerns about the permitted
relationships between funding portals and broker-dealers.\1044\ One of
these commenters stated that the proposed safe harbor is ``overly
broad'' and creates ``unmanageable conflicts between funding portals
and broker dealers,'' and suggested the Commission prevent these
conflicts by prohibiting funding portals from paying broker-dealers any
type of compensation in connection with the offer or sale of securities
under the crowdfunding exemption.\1045\ Another of these commenters
suggested that the Commission require relationships between funding
portals and brokers to be arms-length and, if they are not, require
that the funding portal activity be operated by the broker-dealer
entity.\1046\
---------------------------------------------------------------------------

    \1044\ See, e.g., Commonwealth of Massachusetts Letter;
RocketHub Letter.
    \1045\ See Commonwealth of Massachusetts Letter.
    \1046\ See RocketHub Letter (expressing concern over broker-
dealers creating entities that would register as funding portals so
as to evade FINRA oversight as a broker-dealer).
---------------------------------------------------------------------------

(3) Final Rules
    We are adopting Rule 402(b)(7) generally as proposed, but with
minor modifications for clarity and consistency. Rule 402(b)(7)
specifies that a funding portal may pay or offer to pay compensation to
a registered broker or dealer for services, including for referring a
person to the funding portal, in connection with the offer or sale of
securities by the funding portal in reliance on Section 4(a)(6) of the
Securities Act, provided that (i) such services are provided pursuant
to a written agreement between the funding portal and the registered
broker or dealer; (ii) such compensation is permitted under Regulation
Crowdfunding; and (iii) such compensation complies with the rules of
any registered national securities association of which the funding
portal is a member. As discussed above, proposed Rule 402(b)(7) did not
contain a reference to ``referrals,'' while proposed Rule 402(b)(6)
included the language ``for referring a person to the funding portal.''
We have added a reference to ``referrals pursuant to [Rule 402](b)(7)''
to make clear that all payment arrangements with a broker-dealer,
including paying a broker-dealer for referrals as permitted under
subparagraph (b)(6), must be in writing.
    Proposed Rule 402(b)(7)(ii) had also stated that ``such
compensation is permitted under this part and is not otherwise
prohibited under Sec.  227.305''; and subparagraph (b)(7)(iii) stated
``such compensation complies with and is not prohibited by-the rules of
any registered national securities association of which the funding
portal is required to be a member.'' We are deleting the phrases ``and
is not otherwise prohibited under Sec.  227.305'' and ``and is not
prohibited by'' to make the language in Rule 402(b)(7) and Rule
402(b)(8) consistent, and because the phrases are redundant. Also, we
are deleting the phrase ``required to be a member'' and replacing it
with ``is a member'' in recognition of the fact that additional
national securities associations may exist in the future and that a
funding portal would only have to be a member of one such association.
    Consistent with Rule 402(b)(7), a funding portal may, for example,
pay a broker-dealer for certain services, such as information
technology services, qualified third party services or referral
services, pursuant to a written agreement. Each party to this type of
arrangement will need to comply with all applicable regulations,
including the rules of the registered national securities association
of which it is a member.
    Similarly, we are adopting Rule 402(b)(8) as proposed with minor
modifications. Rule 402(b)(8) permits a funding portal to provide
services to, and receive compensation from, a registered broker-dealer
in connection with the funding portal's offer or sale of securities in
reliance on Section 4(a)(6), provided that: (i) Such services are
provided pursuant to a written agreement between the funding portal and
the registered broker or dealer; (ii) such compensation is permitted
under Regulation Crowdfunding; and (iii) such compensation complies
with the rules of any registered national securities association of
which the funding portal is a member. The proposed rules had stated
that ``such compensation complies with and is not prohibited by the
rules of any registered national securities association of which the
funding portal is required to be a member.'' For the reasons discussed
above with regard to Rule 402(b)(7)(ii), we are deleting the phrase
``and is not prohibited'' because it is redundant and deleting the
phrase ``required to be a member'' and replacing it with ``is a
member.''
    Pursuant to Rule 402(b)(8), a funding portal may receive
compensation, including transaction-based compensation, from a broker-
dealer for providing referrals to that broker-dealer relating to an
offering made pursuant to Section 4(a)(6). It is important to emphasize
that the safe harbor does not permit a funding portal to receive
transaction-based compensation for referrals of investors in other
types of offerings, such as Rule 506 offerings, that are effected by a
registered broker-dealer.\1047\ Further, these arrangements must be
compliant with Rule 305, which prohibits, with certain exceptions, an
intermediary from compensating any person for providing the
intermediary with the personally identifiable information of any
investor.\1048\ As we stated in the Proposing Release, the safe harbor
is intended to facilitate intermediaries' cooperation with each other
and promote the use of the Section 4(a)(6) exemption to raise capital,
while maintaining a written record of compensation payments.
---------------------------------------------------------------------------

    \1047\ Receipt of transaction-based compensation in connection
with such referrals can cause a funding portal to be a broker
required to register with us under Exchange Act Section 15(a)(1) (15
U.S.C. 78o(a)(1)).
    \1048\ See Section II.C.7 (discussing Rule 305).
---------------------------------------------------------------------------

    We disagree with the commenter who suggested that Rules 402(b)(7)
and (8) create an unmanageable conflict between funding portals and
broker-dealers.\1049\ We believe that any potential conflict of
interest between broker-dealers and funding portals as a result of
compensation arrangements is mitigated due to the fact that both
entities are registered with the Commission and members of FINRA and
because permissible activities under Rule 402(b)(7) and (8) are limited
by Regulation Crowdfunding. We also are not prohibiting a registered
broker-dealer and a registered funding portal from being affiliated,
nor are we requiring that any crowdfunding operation be performed by
the registered broker-dealer in such an affiliation.\1050\ Because
funding portals and broker-dealers are each registered with the
Commission and required to be members of a registered national
securities association with the attendant rules and oversight, we
believe concerns about conflicts of interests among affiliated funding
portals and broker-dealers are sufficiently mitigated by this
regulatory framework.
---------------------------------------------------------------------------

    \1049\ See Commonwealth of Massachusetts Letter.
    \1050\ See RocketHub Letter (expressing concern over broker-
dealers creating entities that would register as funding portals, so
as to evade FINRA oversight as a broker-dealer).
---------------------------------------------------------------------------

    While a commenter questioned whether a funding portal may pay
introducing brokers a fee for referring persons to the funding portal
without a formal written arrangement,\1051\ we emphasize that Rule
402(b)(7) requires all such arrangements to be in writing.
---------------------------------------------------------------------------

    \1051\ See ABA Letter.

---------------------------------------------------------------------------

h. Advertising
(1) Proposed Rule
    Proposed Rule 402(b)(9) would permit a funding portal to advertise
the existence of the funding portal and identify one or more issuers or
offerings available on the portal on the basis of objective criteria,
as long as: (i) The criteria are reasonably designed to identify a
broad selection of issuers offering securities through the funding
portal's platform and are applied consistently to all potential issuers
and offerings; (ii) the criteria may include, among other things, the
type of securities being offered (for example, common stock, preferred
stock or debt securities); the geographic location of the issuer; the
industry or business segment of the issuer; the expressed interest by
investors, as measured by number or amount of investment commitments
made, progress in meeting the issuer's target offering amount or, if
applicable, the maximum offering amount; and the minimum or maximum
investment amount; and (iii) the funding portal does not receive
special or additional compensation for identifying the issuer or
offering in this manner.
(2) Comments on Proposed Rule
    Several commenters supported the proposed safe harbor on funding
portal advertising.\1052\ However, commenters were divided on whether
funding portals should be permitted to advertise current offerings and
issuers in their advertisements. One commenter was supportive of
allowing funding portals to ``advertise more generally, as well as
highlight ongoing offerings through various communication channels.''
\1053\ The same commenter stated that a portal's decision to feature or
highlight issues available should not be viewed by the Commission as
investment advice, a recommendation, or a solicitation.\1054\ This
commenter nonetheless cautioned that ``[p]ortals should be barred from
language that implicates the level of risk involved in the investment
or the overall quality of the investment opportunity'' as well as
``from soliciting investments for any specific campaign by providing
offering details outside of the Portal itself.'' \1055\ Another
commentator expressed opposition to ``a limitation on the funding
portal to only advertise its past offerings,'' stating that such a
limitation ``would be overly restrictive.'' \1056\
---------------------------------------------------------------------------

    \1052\ See, e.g., CFIRA Letter 1; Commonwealth of Massachusetts
Letter; ABA Letter.
    \1053\ See RocketHub Letter.
    \1054\ Id.
    \1055\ Id.
    \1056\ See CFIRA Letter 1.
---------------------------------------------------------------------------

    In contrast, one commenter stated that, while funding portals
should be allowed to advertise, funding portals should not be able to
display specific issuers in their advertising materials.\1057\ This
commenter stated that ``[t]he concern with displaying individual
issuers is that investors will interpret this as a recommendation and
endorsement of the issuer.'' \1058\ The commenter noted that the
prohibition on providing recommendations can be easily circumvented by
manipulating otherwise seemingly objective criteria, and that funding
portals could advertise offerings based on certain criteria, such as
high target offerings, that may generate more money for the funding
portal (i.e., a funding portal can mask self-interest by using
objective criteria).\1059\ This same commenter suggested that the
Commission could allow descriptions of the portals themselves and the
specific business segments featured on their Web sites, without
mentioning specific issuers currently registered with the portal.\1060\
---------------------------------------------------------------------------

    \1057\ See Commonwealth of Massachusetts Letter.
    \1058\ Id.
    \1059\ Id.
    \1060\ Id.
---------------------------------------------------------------------------

    One commenter suggested the Commission clarify that it would be
inappropriate for a funding portal to send out soliciting emails
recommending investment in particular companies to investors who have
signed up with that portal.\1061\ Another commenter stated that a
funding portal should not be permitted to advertise or otherwise make
statements that offerings listed are somehow safer or better than other
platforms.\1062\
---------------------------------------------------------------------------

    \1061\ See ABA Letter.
    \1062\ See Milken Institute Letter.
---------------------------------------------------------------------------

(3) Final Rules
    We are adopting Rule 402(b)(9) as proposed. Rule 402(b)(9) permits
a funding portal to advertise its existence and identify one or more
issuers or offerings available on the portal on the basis of objective
criteria, as long as: (i) The criteria are reasonably designed to
identify a broad selection of issuers offering securities through the
funding portal's platform and are applied consistently to all potential
issuers and offerings; (ii) the criteria may include, among other
things, the type of securities being offered (for example, common
stock, preferred stock or debt securities); the geographic location of
the issuer; the industry or business segment of the issuer; the
expressed interest by investors, as measured by number or amount of
investment commitments made, progress in meeting the issuer's target
offering amount or, if applicable, the maximum offering amount; and the
minimum or maximum investment amount; and (iii) the funding portal does
not receive special or additional compensation for identifying the
issuer or offering in this manner. However, a funding portal may not
base its decision as to which issuers to include in its advertisements
on whether it has a financial interest in the issuer,, and any
advertising may not directly or indirectly favor issuers in which the
funding portal has invested or will invest.
    After considering the comment letters, we believe that the
requirements of the safe harbor, including the requirement for
objective criteria designed to result in a broad selection of
highlighted issuers or offerings, will result in advertisements that
are focused on the funding portal itself, as opposed to recommending a
particular offering or offerings.\1063\ Funding portals continue to be
subject to the statutory prohibition on providing investment advice and
recommendations.\1064\ An advertisement by a funding portal must not be
an implicit (or explicit) recommendation as to whether to invest in the
issuer or offering or advice on the advisability of investing in the
issuer or offering. Therefore, consistent with the views of one
commenter, a funding portal may not advertise in such a way that
expresses the funding portal's view that, for example, certain
offerings on its platform are of a higher quality, safer or more worthy
than others, or that otherwise gives a recommendation.\1065\
---------------------------------------------------------------------------

    \1063\ The safe harbor is limited to identifying one or more
issuers. More detailed information about an issuer should be
provided on the funding portal's platform.
    \1064\ See Exchange Act Section 3(a)(80)(A).
    \1065\ See Milken Institute Letter.
---------------------------------------------------------------------------

    We recognize that advertisements can take many varied forms,
including non-traditional means, such as blogs, emails through social
media or other methods. We believe that these types of communications,
when made by a funding portal to investors can be a permissible means
of advertising within the scope of Rule 402(b)(9). We agree, however,
with a commenter's statement that it would be inconsistent with the
statutory prohibition on providing investment advice or recommendations
for a funding portal to send out soliciting emails recommending
investments in particular companies as part of its advertising.\1066\
---------------------------------------------------------------------------

    \1066\ See ABA Letter.

---------------------------------------------------------------------------

i. Deny Access to Platform
(1) Proposed Rule
    Proposed Rule 402(b)(10) would permit a funding portal to deny
access to its platform to, or cancel an offering of, an issuer that the
funding portal believes may present the potential for fraud or
otherwise raises investor protection concerns.
(2) Comments on Proposed Rule
    Some commenters asserted that the proposed rules are ambiguous, and
that the lack of specificity exposes funding portals to potential
liability. The commenters were concerned that the perceived lack of
specificity may also lead funding portals to unintentionally violate
the ban on providing investment advice with their attempts to mitigate
liability.\1067\
---------------------------------------------------------------------------

    \1067\ See, e.g., RocketHub Letter and Seyfarth Letter.
---------------------------------------------------------------------------

(3) Final Rules
    We are adopting Rule 402(b)(10) substantially as proposed with
modifications to make it consistent with Rule 301(c)(2), which requires
an intermediary to deny access if it has a reasonable basis for
believing that the issuer or the offering presents the potential for
fraud or otherwise raises concerns about investor protection.\1068\ In
satisfying this requirement, an intermediary must deny access if it
reasonably believes that it is unable to adequately or effectively
assess the risk of fraud of the issuer or its potential offering. In
addition, if an intermediary becomes aware of information after it has
granted access that causes it to reasonably believe that the issuer or
the offering presents the potential for fraud or otherwise raises
concerns about investor protection, the intermediary must promptly
remove the offering from its platform, cancel the offering, and return
(or, for funding portals, direct the return of) any funds that have
been committed by investors in the offering. Rule 402(b)(10) requires a
funding portal to deny access to its platform to, or cancel an offering
of an issuer, pursuant to Rule 301(c)(2), if the funding portal has a
reasonable basis for believing that the issuer or the offering presents
the potential for fraud or otherwise raises concerns.
---------------------------------------------------------------------------

    \1068\ See Section II.C.3 discussing the change to Rule 301(c)
to include a ``reasonable basis'' standard.
---------------------------------------------------------------------------

    We changed the standard in Rule 402(b)(10) to a ``reasonable basis
for believing''--rather than ``believes''--to conform the safe harbor
to the requirements of Rule 301(c)(2) as adopted. Thus, the standard in
Rule 402(b)(10) is consistent with the modifications that we made to
the standard in Rule 301(c)(2).\1069\ We believe this change also
should help to address commenters' concerns about the perceived lack of
specificity in the proposed safe harbor by providing an objective
``reasonable belief'' standard for the required determinations. Under
this standard a funding portal may not ignore facts about an issuer
that indicate fraud or investor protection concerns such that a
reasonable person would have denied access to the platform. At the same
time, a funding portal can also feel assured in its decision to deny an
issuer access or cancel an offering if it has a reasonable basis for
such a determination. We also believe that including a ``reasonable
basis'' standard adds objectivity to a funding portal's determinations
regarding which issuers must be denied access to (or removed from) its
platform, which is expected to help to address concerns regarding the
clarity of the standard under the proposed rule.
---------------------------------------------------------------------------

    \1069\ See Section II.C.3.
---------------------------------------------------------------------------

j. Accepting Investor Commitments
(1) Proposed Rule
    Proposed Rule 402(b)(11) would permit a funding portal to accept,
on behalf of an issuer, an investment commitment for securities offered
in reliance on Section 4(a)(6) of the Securities Act by that issuer on
the funding portal's platform.
(2) Comments on Proposed Rule
    One commenter noted that the statute prohibits funding portals from
handling investor funds or securities, and that the proposed rule
requiring the use of third-party entities would create additional
transaction costs for funding portals.\1070\ Another commenter stated
that the safe harbor for accepting investor commitments should permit a
funding portal to assist issuers in handling a direct registration
system (DRS) between issuers and investors.\1071\
---------------------------------------------------------------------------

    \1070\ See Stephenson, et al., Letter.
    \1071\ See RocketHub (suggesting that a portal should be
permitted to provide DRS support to issuers and investors). A DRS
allows investors to transfer a security that is registered in the
investor's name on the issuer's books, and either the company or its
transfer agent holds the security for the investor in book-entry
form.
---------------------------------------------------------------------------

(3) Final Rules
    We are adopting Rule 402(b)(11) as proposed. Rule 402(b)(11)
permits a funding portal, on behalf of an issuer, to accept investment
commitments from investors for securities offered in reliance on
Section 4(a)(6) by that issuer on the funding portal's platform. We are
not broadening the safe harbor to permit funding portals to handle
customer funds, as suggested by one commenter. Although we recognize
that the requirement to use a third party entity to handle customer
funds imposes an additional expense on a funding portal, Exchange Act
Section 3(a)(80)(D) explicitly prohibits funding portals from handling
customer funds and securities. Similarly, we believe it would be
inconsistent with the statute for a funding portal to facilitate a
securities registration system for issuers and investors because such
activity implicitly requires funding portals to handle customer funds
and securities, which is prohibited by the statute. In this regard, we
note that the activities that a funding portal is permitted to engage
in are limited in scope, and as such are subject to a more limited
regulatory scheme as compared to registered broker-dealers.
k. Directing Transmission of Funds
(1) Proposed Rule
    Proposed Rule 402(b)(12) would permit a funding portal to direct
investors where to transmit funds or remit payment in connection with
the purchase of securities offered and sold in reliance on Section
4(a)(6) of the Securities Act.
    Proposed Rule 402(b)(13) would permit a funding portal to direct a
qualified third party, as required by Rule 303(e), to release proceeds
to an issuer upon completion of a crowdfunding offering or to return
proceeds to investors in the event an investment commitment or an
offering is cancelled.
(2) Final Rules
    We did not receive comments on the ability of a funding portal to
direct investment funds and are adopting Rules 402(b)(12) and (13) as
proposed. Rules 402(b)(12) and (13) provide that a funding portal can
fulfill its obligations with respect to the maintenance and
transmission of funds and securities, as set forth in Rule 303, without
violating the prohibition in Exchange Act Section 3(a)(80)(D).
Specifically, a funding portal can direct investors where to transmit
funds or remit payment in connection with the purchase of securities
offered and sold in reliance on Section 4(a)(6),\1072\ and as required
by Rule 303(e), a funding portal can direct a qualified third party to
release the proceeds of an offering to the issuer upon completion of
the offering or to return investor proceeds when an

investment commitment or offering is cancelled.\1073\
---------------------------------------------------------------------------

    \1072\ See Rule 402(b)(12) of Regulation Crowdfunding.
    \1073\ See Rule 402(b)(13) of Regulation Crowdfunding.
---------------------------------------------------------------------------

l. Posting News
    In the Proposing Release, we asked whether we should adopt a safe
harbor that permits a funding portal to post news, such as market news
and news about a particular issuer or industry, on its platform. In
response to our request for comment, some commenters stated that the
safe harbor should permit funding portals to post third party news
related to issuers or offerings on their platform.\1074\ One commenter
cautioned that objective criteria should be used to ensure, for
example, that funding portals are not picking out the most flattering
or positive news.\1075\ Another commenter suggested that funding
portals should be aware of the content of materials posted on their
portal and held responsible for inappropriate information that is
posted.\1076\
---------------------------------------------------------------------------

    \1074\ See, e.g., CFIRA Letter 1; RoC Letter; StartupValley
Letter. But see Joinvestor Letter; Wefunder Letter.
    \1075\ See CFIRA Letter 1.
    \1076\ See RoC Letter.
---------------------------------------------------------------------------

    While we believe it is possible for funding portals to post news on
their platforms in a manner that would not violate the prohibitions in
Exchange Act Section 3(a)(80), we are not including such activities
within the safe harbor because we believe the permissibility of posting
news should be a facts and circumstances determination. When posting
news, funding portals will need to ensure that they do not violate the
prohibition on giving investment advice and recommendations. For
example, if a funding portal selectively determines which news articles
to post or posts only flattering or positive news, then the funding
portal is more likely to be giving impermissible investment advice or
recommendations.
m. No Presumption and Anti-Fraud Provisions
(1) Proposed Rule
    Proposed Rule 402(a) also stated that no presumption shall arise
that a funding portal has violated the prohibitions under Section
3(a)(80) of the Exchange Act or Regulation Crowdfunding by reason of
the funding portal or its associated persons engaging in activities in
connection with the offer or sale of securities in reliance on Section
4(a)(6) of the Securities Act that do not meet the conditions specified
in the safe harbor and that the antifraud provisions and all other
applicable provisions of the federal securities laws continue to apply
to the activities described in the safe harbor.
(2) Final Rules
    We did not receive any comments on the proposed ``no presumption''
and anti-fraud provisions and are adopting Rule 402(a) as proposed. We
also reiterate that Rule 402(b) is a non-exclusive safe harbor. Rule
402(a) expressly provides that the failure of a funding portal to meet
the conditions of the safe harbor does not give rise to a presumption
that the funding portal is in violation of the statutory prohibitions
of Exchange Act Section 3(a)(80) or Regulation Crowdfunding.\1077\
---------------------------------------------------------------------------

    \1077\ See Rule 402(a) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Further, the safe harbor under Rule 402 does not prohibit funding
portals from engaging third party service providers to assist the
funding portal in operating its platform, such as providers of
software, Web site maintenance and development, communication channel
applications, recordkeeping systems, and other technology.\1078\
However, the funding portal remains responsible for its activities and
the operation of its platform and for compliance with Regulation
Crowdfunding and other applicable federal securities laws.
---------------------------------------------------------------------------

    \1078\ One commenter asked whether funding portals could engage
third party service providers consistent with Regulation
Crowdfunding. See CFIRA Letter 1.
---------------------------------------------------------------------------

4. Compliance
a. Policies and Procedures
(1) Proposed Rule
    As proposed, Rule 403(a) would require a funding portal to
implement written policies and procedures reasonably designed to
achieve compliance with the federal securities laws and the rules and
regulations thereunder, relating to its business as a funding
portal.\1079\
---------------------------------------------------------------------------

    \1079\ As a condition to exempting funding portals from the
requirement to register as a broker or a dealer under Exchange Act
Section 15(a)(1) (15 U.S.C. 78o(a)(1)), Exchange Act Section
3(h)(1)(C) provides that registered funding portals must comply with
such other requirements as the Commission determines appropriate.
---------------------------------------------------------------------------

(2) Comments on the Proposed Rules
    One commenter agreed that the Commission should not specify
requirements for a funding portal's policies and procedures, while
another commenter thought the Commission should provide guidance
concerning the policies and procedures.\1080\ Another commenter
suggested that all changes to a funding portal's policies and
procedures should be disclosed within 30 days and publicly
announced.\1081\ Yet another commenter suggested requiring the SRO to
mandate that broker-dealers and funding portals follow the same
policies.\1082\
---------------------------------------------------------------------------

    \1080\ See ASSOB Letter; Consumer Federation of America (``[The
Commission] fails to address at all the areas that should be covered
by such policies and procedures, or what a funding portal's
responsibilities to monitor compliance would be.'').
    \1081\ See Joinvestor Letter.
    \1082\ See Rockethub Letter.
---------------------------------------------------------------------------

(3) Final Rules
    We are adopting Rule 403(a) as proposed. We believe that the
requirement to implement written policies and procedures will provide
important investor protections as it will necessitate that funding
portals remain aware of the various regulatory requirements to which
they are subject and take appropriate steps for complying with such
requirements. We recognize, however, that funding portals may have
various business models and, therefore, consistent with the views of
one commenter, we are not imposing specific requirements for a funding
portal's policies and procedures, provided the policies and procedures
are reasonably designed to achieve compliance with the federal
securities laws and the rules relating to their business as funding
portals. Rather, we are providing a funding portal with discretion to
establish, implement, maintain and enforce its policies and procedures
based on its relevant facts and circumstances.
    We note, however, that a funding portal may rely on the
representations of others when meeting certain requirements under
Regulation Crowdfunding, unless the funding portal has reason to
question the reliability of those representations. For example, a
funding portal may rely on an issuer's representation to establish a
reasonable basis for believing that an issuer seeking to offer and sell
securities in reliance on Section 4(a)(6) through its platform complies
with the requirements in Securities Act Section 4A(b) and the related
requirements in Regulation Crowdfunding, unless the funding portal has
reason to question the reliability of that representation.\1083\ A
funding portal may also rely on an investor's representation to
establish a reasonable basis for believing that an investor satisfies
the investment limits established by Section 4(a)(6)(B), unless the
funding portal has reason to question the reliability of that
representation.\1084\ We believe that when a funding portal relies on
the representations of others to form a reasonable basis, the funding
portal

should have policies and procedures regarding under what circumstances
it can reasonably rely on such representations and when additional
investigative steps may be appropriate. We further believe that a
funding portal's policies and procedures should cover not only
permitted activities, but also address prohibited activities. For
example, a funding portal should have policies and procedures on the
criteria used to limit, highlight and advertise issuers and offerings.
---------------------------------------------------------------------------

    \1083\ See Rule 301(a).
    \1084\ See Rule 303(b)(1).
---------------------------------------------------------------------------

    We note one commenter's suggestion that we require funding portals
to update their policies and procedures to reflect changes in
applicable rules and regulations within a specified time period after
the change occurs. However, as explained in the Proposing Release, we
believe that the requirement for reasonably designed policies and
procedures includes an ongoing obligation for a funding portal to
promptly update its policies and procedures if necessary to reflect
changes in applicable rules and regulations, a funding portal's
business practices, and/or the marketplace.\1085\ Finally, in response
to one commenter's suggestion that we require SROs to mandate that
broker-dealers and funding portals follow the same policies, as noted
above, we believe that funding portals should have flexibility to
implement policies and procedures suited to their own facts and
circumstances. Moreover, we note that any proposed SRO rules relating
to policies and procedures of either broker-dealers or funding portals
will be subject to the Exchange Act Section 19(b) SRO rule filing
process.\1086\
---------------------------------------------------------------------------

    \1085\ Consistent with our requirements for broker-dealers, we
are not requiring that a funding portal's policies and procedures be
made public, as suggested by a commenter.
    \1086\ Pursuant to Exchange Act Section 19(b) and Rule 19b-4,
SROs are required to file proposed new rules and rule changes with
the Commission.
---------------------------------------------------------------------------

    Commission staff expects to review intermediaries' compliance
policies and procedures relating to their activities in connection with
the offer or sale of securities in reliance on Section 4(a)(6) during
the study of the federal crowdfunding exemption that it plans to
undertake no later than three years following the effective date of
Regulation Crowdfunding.\1087\
---------------------------------------------------------------------------

    \1087\ See Section II.
---------------------------------------------------------------------------

b. Anti-Money Laundering
(1) Proposed Rule
    Proposed Rule 403(b) would require that funding portals comply with
certain AML provisions,\1088\ as set forth in Chapter X of Title 31 of
the Code of Federal Regulations. The BSA and its implementing
regulations establish the basic framework for AML obligations imposed
on financial institutions.\1089\ The BSA is intended to facilitate the
prevention, detection and prosecution of money laundering, terrorist
financing and other financial crimes.
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    \1088\ See also Section II.D.2. (discussing proposed Rule
401(b)).
    \1089\ See BSA, note 981; 31 CFR Chapter X.
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    Among other things, the BSA and its implementing regulations
require a ``broker or dealer in securities'' (sometimes referred to in
the regulations as a ``broker-dealer'') to: (1) Establish and maintain
an effective AML program;\1090\ (2) establish and maintain a Customer
Identification Program; \1091\ (3) monitor for and file reports of
suspicious activity (SARs); \1092\ and (4) comply with requests for
information from the Financial Crimes Enforcement Network
(``FinCEN'').\1093\ For purposes of the BSA obligations, a ``broker or
dealer in securities'' is defined as a ``broker or dealer in
securities, registered or required to be registered with the Securities
and Exchange Commission under the Securities Exchange Act of 1934,
except persons who register pursuant to [S]ection 15(b)(11) of the
Securities Exchange Act of 1934.'' \1094\ As explained above, Exchange
Act Section 3(h) expressly directs the Commission, conditionally or
unconditionally, to exempt funding portals from the requirement to
register as a broker or dealer under Section 15(a). As such, a funding
portal is not a broker ``registered or required to be registered'' if
it registers as a funding portal with the Commission. We proposed that,
notwithstanding this exemption from broker registration, under Rule
401(b) a funding portal would be ``required to be registered'' as a
broker or dealer with the Commission under the Exchange Act solely for
purposes of Chapter X of Title 31 of the Code of Federal Regulations,
thus subjecting funding portals to the AML requirements of Chapter X of
Title 31.
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    \1090\ See 31 U.S.C. 5318(h). See also 31 CFR 1023.210; FINRA
Rule 3310.
    \1091\ See 31 CFR 1023.220.
    \1092\ See 31 CFR 1023.320. See also FINRA Rule 3310.
    \1093\ See 31 CFR 1010.520.
    \1094\ See 31 CFR 1010.100(h). As noted above, certain FinCEN
regulations apply to a ``broker-dealer,'' which is defined as a
``person registered or required to be registered as a broker or
dealer with the Commission under the Securities Exchange Act of 1934
(15 U.S.C. 77a et seq.), except persons who register pursuant to 15
U.S.C. 78o(b)(11).'' 31 CFR 1023.100(b). Such broker-dealers also
would meet the definition of ``broker or dealers in securities''
above.
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(2) Comments on the Proposed Rule
    A few commenters generally suggested that since funding portals are
prohibited from handling customer funds and securities they should not
be required to comply with AML provisions.\1095\ Some commenters,
however, generally supported requiring funding portals to comply with
AML provisions.\1096\ One commenter, noting that non-U.S. investors may
participate in crowdfunding and use U.S.-based funding portals,
requested that the Commission provide advice and suggestions on ``how
to prevent anti-money laundering.'' \1097\
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    \1095\ See PeoplePowerFund Letter; Public Startup 3 Letter;
RFPIA Letter; Vann Letter.
    \1096\ See RocketHub Letter (stating that it ``supports the
Commissions [sic] interpretation of the exemption, and believes that
AML compliance is necessary''); Berlingeri Letter (supporting
funding portal ``compliance with existing anti-money laundering
provisions and the requirement to report suspicious activity'').
    \1097\ See Zhang Letter.
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(3) Final Rules
    Upon further consideration, we have determined not to adopt
proposed Rule 403(b). The BSA requirements play a critical role in
detecting, preventing, and reporting money laundering and other illicit
financing, such as market manipulation and fraud. However, after
careful consideration, we believe that AML obligations for funding
portals are better addressed outside of the rules that we are currently
adopting in this release, and that it would be more appropriate to work
with other regulators to develop consistent and effective AML
obligations for funding portals.\1098\ We note, however, that broker-
dealers continue to have their own AML obligations, as do certain other
parties involved in transactions

conducted pursuant to Section 4(a)(6), such as a bank acting as a
qualified third party to hold investor funds.
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    \1098\ FinCEN within the Department of Treasury has primary
regulatory responsibility for administering the BSA. We note that
FinCEN has included in the Unified Agenda and Regulatory Plan an
item that states: ``FinCEN . . . is proposing amendments to the
regulatory definitions of `broker or dealer in securities' under the
regulations implementing the Bank Secrecy Act. The proposed changes
are intended to expand the current scope of the definitions to
include funding portals. In addition, these amendments would require
funding portals to implement policies and procedures reasonably
designed to achieve compliance with all of the Bank Secrecy Act
requirements that are currently applicable to brokers or dealers in
securities.'' See Office of Mgmt. & Budget, Exec. Office of the
President, Office of Info. & Regulatory Affairs, Amendments of the
Definition of Broker or Dealer in Securities, RIN 1506-AB29,
available at http://www.reginfo.gov/public/do/eAgendaViewRule?pubId=201504&RIN=1506-AB29. In addition, the
Commission has adopted its own rules that require broker-dealers to
comply with certain requirements of the BSA's implementing
regulations, such as books and records requirements. See Exchange
Act Rule 17a-8. See also Section II.D.5.
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c. Privacy
(1) Proposed Rule
    Section 4A(a)(9) of the Securities Act requires intermediaries to
take such steps to protect the privacy of information collected from
investors as the Commission shall, by rule, determine appropriate.
Proposed Rule 403(c) would implement the requirements of Section
4A(a)(9) by subjecting funding portals to the same privacy rules as
those applicable to brokers. Proposed Rule 403(c), therefore, would
have required funding portals to comply with Regulation S-P (Privacy of
Consumer Financial Information and Safeguarding Personal
Information),\1099\ Regulation S-AM (Limitations on Affiliate
Marketing),\1100\ and Regulation S-ID (Identity Theft Red Flags) \1101\
(collectively, the ``Privacy Rules'').\1102\
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    \1099\ See Privacy of Consumer Financial Information (Regulation
S-P), Release No. 34-42974 (June 22, 2000) [65 FR 40334 (June 29,
2000)].
    \1100\ See Regulation S-AM: Limitations on Affiliate Marketing,
Release No. 34-60423 (Aug. 4, 2011) [74 FR 40398 (Aug. 11, 2009)].
    \1101\ See Identity Theft Red Flags Rules, Release No. 34-69359
(Apr. 10, 2013) [78 FR 23637 (Apr. 19, 2013)] (adopted jointly with
the Commodity Futures Trading Commission).
    \1102\ See 17 CFR part 248.
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    Regulation S-P governs the treatment of nonpublic personal
information by brokers, among others.\1103\ It generally requires a
broker to provide notice to investors about its privacy policies and
practices; describes the conditions under which a broker may disclose
nonpublic personal information about investors to nonaffiliated third
parties; and provides a method for investors to prevent a broker from
disclosing that information to most nonaffiliated third parties by
``opting out'' of that disclosure, subject to certain exceptions.
Regulation S-AM allows a consumer, in certain limited situations, to
block affiliates of covered persons (i.e., brokers, dealers, investment
companies and both investment advisers and transfer agents registered
with the Commission) from soliciting the consumer based on eligibility
information (i.e., certain financial information, such as information
about the consumer's transactions or experiences with the covered
person) received from the covered person.\1104\ Regulation S-ID
generally requires brokers to develop and implement a written identity
theft prevention program that is designed to detect, prevent and
mitigate identity theft in connection with certain existing accounts or
the opening of new accounts.\1105\
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    \1103\ See 17 CFR part 248, subpart A.
    \1104\ See 17 CFR part 248, subpart B.
    \1105\ See 17 CFR part 248, subpart C.
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(2) Comments and Final Rules
    We are adopting Rule 403(c) as proposed, but renumbering it as Rule
403(b).\1106\ One commenter opposed Proposed Rule 403(c), which would
impose the Privacy Rules on funding portals, stating that in its view,
funding portals do not raise privacy concerns.\1107\ We disagree. We
believe that privacy is a concern as it relates to funding portals
given that funding portals will collect and maintain sensitive personal
information about the investors using their platforms.
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    \1106\ The rule is being renumbered to account for the
elimination of the proposed AML provision in proposed Rule 403(b),
which is discussed in Section II.D.4.b above.
    \1107\ See Public Startup Letter 3.
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d. Inspections and Examinations
(1) Proposed Rule
    Exchange Act Section 3(h)(1)(A) specifies that funding portals must
remain subject to our examination authority to, among other things,
rely on any exemptions from broker-dealer registration that we impose.
Under proposed Rule 403(d) of Regulation Crowdfunding, a funding portal
would be required to permit the examination and inspection of all of
its business and business operations that relate to its activities as a
funding portal, such as its premises, systems, platforms and records,
by our representatives and by representatives of the registered
national securities association of which it is a member.
(2) Comment and Final Rules
    We are adopting Rule 403(d) as proposed, but renumbering it as
403(c).\1108\ One commenter opposed the Commission's proposed
inspections and examinations rules as unnecessary.\1109\ As a condition
to exempting funding portals from the requirement to register as
broker-dealers under Exchange Act Section 15(a)(1), Exchange Act
Section 3(h)(1)(A) requires that registered funding portals remain
subject to, among other things, our examination authority. We believe
that inspections and examinations are an important aspect of our
oversight function of funding portals as they will assist us in
monitoring the activities of funding portals in light of applicable
statutory and regulatory requirements. Therefore, we are adopting Rule
403(c) to implement the statute and retain examination authority over
funding portals.
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    \1108\ The Rule is being renumbered to account for the
elimination of the proposed anti-money laundering provision in
proposed Rule 403(b), which is described in more detail in Section
II.D.4.b. We are also adding the word ``registered'' to ``national
securities association'' to be consistent with the rest of the rule
text and with Exchange Act Section 3(h)(1)(B).
    \1109\ See Public Startup Letter 3.
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5. Records To Be Created and Maintained by Funding Portals
a. Proposed Rule
    As proposed, Rule 404(a) would require funding portals to make and
preserve certain records for five years, with the records retained in a
readily accessible place for at least the first two years. The required
records would include the following:
     All records relating to investors who purchase or attempt
to purchase securities through the funding portal; \1110\
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    \1110\ This would include information relating to educational
materials provided to investors, account openings and transactions,
including notices of investment commitments and reconfirmations.
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     All records relating to issuers that offer and sell, or
attempt to offer and sell, securities through the funding portal and to
persons having control with respect to those issuers;
     Records of all communications that occur on or through its
platform;
     All records related to persons that use communication
services provided by a funding portal to promote an issuer's securities
or to communicate with potential investors;
     All records demonstrating a funding portal's compliance
with requirements of Subparts C (intermediary obligations) and D
(additional funding portal requirements); \1111\
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    \1111\ This requirement alone would not, however, require the
creation of any records or proscribe the format or manner of any
records. However, without records, it would be difficult for a
funding portal to demonstrate compliance with Subparts C and D to
examiners.
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     All notices provided by the funding portals to issuers and
investors generally through the funding portal's platform or otherwise;
\1112\
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    \1112\ These would include, but not be limited to: (1) Notices
addressing hours of funding portal operations (if any); (2) funding
portal malfunctions; (3) changes to funding portal procedures; (4)
maintenance of hardware and software; (5) instructions pertaining to
access to the funding portal; and (6) denials of, or limitations on,
access to the funding portal.
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     All written agreements (or copies thereof) entered into by
a funding portal, relating to its business as such;
     All daily, monthly and quarterly summaries of transactions
effected through the funding portal; \1113\ and
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    \1113\ These would include: (1) Issuers for which the target
offering amount has been reached and funds distributed; and (2)
transaction volume, expressed in number of transactions, number of
securities involved in a transaction and total amounts raised by and
distributed to issuers, as well as total dollar amounts raised
across all issuers, expressed in U.S. dollars.

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     A log reflecting the progress of each issuer who offers
and sells securities through the funding portal toward meeting the
target offering amount.
    As proposed, Rule 404(b) would require that a funding portal make
and preserve its organizational documents during its operation as a
funding portal and also those of any successor funding portal. These
would include, but not be limited to: (1) Partnership agreements; (2)
articles of incorporation or charter; (3) minute books; and (4) stock
certificate books (or other similar type documents).
    We also proposed in Rule 404(c) that the records required to be
maintained and preserved pursuant to Rule 404(a) be produced,
reproduced, and maintained in the original, non-alterable format in
which they were created or as permitted under Section 17a-4(f) of the
Exchange Act. We proposed in Rule 404(d) to allow third parties to
prepare or maintain the required records on behalf of the funding
portal, provided that there is a written undertaking in place between
the funding portal and the third party stating that the required
records are the property of the funding portal and will be surrendered
promptly, on request by the funding portal, to the Commission or the
national securities association of which the funding portal is a
member.\1114\ The funding portal also would have been required to file,
with the registered national securities association of which it is a
member, this written undertaking, signed by a duly authorized
representative of the third party. As proposed, an agreement between a
funding portal and a third party would not relieve the funding portal
of its responsibility to prepare and maintain records, as required
under Rule 404 of Regulation Crowdfunding.
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    \1114\ The written undertaking would be required to include the
following provision:
     With respect to any books and records maintained or preserved
on behalf of [name of funding portal], the undersigned hereby
acknowledges that the books and records are the property of [name of
funding portal], and hereby undertakes to permit examination of such
books and records at any time, or from time to time, during business
hours by representatives of the Securities and Exchange Commission,
and the national securities association of which the funding portal
is a member, and to promptly furnish to the Commission and national
securities association of which the funding portal is a member, a
true, correct, complete and current hard copy of any, all, or any
part of, such books and records.
     This provision is consistent with the recordkeeping provisions