investment limits. Although we appreciate some of the additional
suggestions provided by commenters, as outlined above, we believe the
approach in Rule 303(b)(1) for establishing compliance with investment
limits is an appropriate means of implementing the provisions of
Section 4A(a)(8), which is designed to help ensure that an investor has
not made purchases, in the aggregate from all issuers, that exceed
those limits during a 12-month period. We note, however, that
intermediaries can, in their discretion, take additional measures for
evaluating investors' compliance with investment limits, including
those suggested by commenters, such as: Using a centralized data
repository, to the extent that one is created; requiring verification
of income or net worth electronically by uploading financial documents;
or creating a tool for investors to use, such as a questionnaire, to
assemble the underlying data.
    While several commenters opposed permitting an intermediary to rely
on the representations of an investor about investment limits and some
suggested requiring intermediaries to take certain affirmative steps to
verify compliance, we believe that it would be difficult for
intermediaries to monitor or independently verify whether each investor
remains within his or her investment limits where the investor may be
participating in offerings on multiple platforms. We note, however,
that reliance on investor representations must be reasonable. At a
minimum, it would not be reasonable, and therefore would be a violation
of the rule and potentially subject to an enforcement action by the
Commission, for an intermediary to ignore investments made by an
investor in other offerings on the intermediary's platform, to not
obtain information and take into account investments made by an
investor in other offerings (made in reliance on Section 4(a)(6)) on
platforms that are controlled by or under common control with the
intermediary, or to ignore other information or facts about an investor
within its possession.
    Under the final rules, an intermediary will be permitted to
reasonably rely on a centralized data repository of investor
information, should one be created in the future. We are not mandating
the creation of such a database at this time, in part to help to
minimize the obstacles that intermediaries may face in getting this
newly formed marketplace up and running.\796\ We note, in response to
one commenter,\797\ that it is the Commission's normal practice to
review the effectiveness of all of its rules, particularly in light of
market developments, and consider changes as the Commission deems
appropriate. Commission staff expects to review the need for a
centralized database 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.\798\
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    \796\ We do not believe that the statute requires the
establishment of a centralized database or repository of investor
information as one commenter suggested. See Merkley Letter. Instead,
the statute calls for intermediaries to ``make such efforts as the
Commission determines appropriate, by rule'' to ensure that no
investor exceeds the investment limits set forth in Section 4(a)(6).
    \797\ See IAC Recommendation; see also BetterInvesting Letter.
    \798\ See Section II. Further, we anticipate that, because of
the electronic nature of crowdfunding, many of the books and records
maintained by intermediaries will be in electronic format. We expect
this will enable the Commission to analyze data across the
crowdfunding industry as part of its ongoing oversight. We note that
Commission staff also expects to review the books and records
practices of intermediaries as part of its planned three-year
review.
---------------------------------------------------------------------------

(2) Acknowledgment of Risk
(a) Proposed Rule
    Securities Act Section 4A(a)(4) requires an intermediary to ensure
that each investor: (1) Reviews educational materials; (2) positively
affirms that the investor understands that he or she is risking the
loss of the entire investment and that the investor could bear such a
loss; and (3) answer questions demonstrating an understanding of the
level of risk generally applicable to investments in startups, emerging
businesses and small issuers, the risk of illiquidity and such other
matters as the Commission determines appropriate. As discussed above,
Rule 302(b) of Regulation Crowdfunding requires an intermediary to
provide to investors certain educational materials in connection with
the opening of an account. In addition, proposed Rule 303(b)(2) of
Regulation Crowdfunding would require an intermediary, each time before
accepting an investment commitment, to obtain from the investor a
representation that the investor has reviewed the intermediary's
educational materials, understands that the entire amount of his or her
investment may be lost and is in a financial condition to bear the loss
of the investment.\799\ The proposed rule would also require that an
intermediary obtain from the investor

answers to questions demonstrating the investor's understanding that
there are restrictions on the investor's ability to cancel an
investment commitment and obtain a return of his or her investment,
that it may be difficult for the investor to resell the securities, and
that the investor should not invest any funds in a crowdfunding
offering unless he or she can afford to lose the entire amount of his
or her investment.
---------------------------------------------------------------------------

    \799\ See Section II.C.4.b. (discussing Rule 302(b)(2) of
Regulation Crowdfunding).
---------------------------------------------------------------------------

(b) Comments on the Proposed Rule
    Several commenters supported the requirement that intermediaries
obtain investor acknowledgments.\800\ Some of these commenters,
however, opposed requiring investors to re-acknowledge or to re-certify
for each investment commitment.\801\
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    \800\ See, e.g., Arctic Island Letter 6; CFA Institute Letter;
Greenfield Letter; Joinvestor Letter; RocketHub Letter; STA Letter;
Wefunder Letter.
    \801\ See Wefunder Letter; RocketHub Letter (suggesting that
once an account has been created on an intermediary platform, an
investor should be able to invest in multiple offerings on the same
intermediary platform without having to re-certify and review the
educational materials).
---------------------------------------------------------------------------

    One commenter stated that investors should be required to complete
and sign ``subscription forms'' that set forth, in addition to what the
proposed rules would require, additional information concerning the
investor's level of investment experience, the identity of any person
from whom the investor acquired any information about the investment
and the percentage of the investor's liquid net worth represented by
the proposed investment.\802\
---------------------------------------------------------------------------

    \802\ See Greenfield Letter. See also STA Letter (stating that
investors should be required to acknowledge that they are aware that
``they may need to be diligent in notifying the issuer, or its
designee, of any changes that would affect their ability to receive
communications from the issuer''). We note, however, that issuers
are not obligated to contact investors directly.
---------------------------------------------------------------------------

    One commenter supported the Commission providing recommended forms
of questions and representations, noting that ``any material examples
provided by the Commission will be helpful to both the investor and the
intermediary.'' \803\ However, another commenter stated that it would
be opposed to the Commission providing recommended forms of questions
as a ``starting point'' because such recommended forms could be seen as
a safe harbor and constrain effectiveness.\804\ In contrast, a
different commenter stated that Commission-provided questions and
representations should serve as a safe harbor so there is an incentive
for issuers to use them.\805\
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    \803\ See Joinvestor Letter.
    \804\ See Wefunder Letter.
    \805\ See Public Startup Letter 3.
---------------------------------------------------------------------------

(c) Final Rules
    After considering the comments, we are adopting Rule 302(b)(2) as
proposed. As noted in the Proposing Release, this rule is intended to
help ensure that investors engaging in transactions made in reliance on
Section 4(a)(6) are fully informed and reminded of the risks associated
with their particular investment before making any investment
commitment. While an intermediary cannot ensure that all investors
understand the risks involved, the rule requires intermediaries to
confirm that an investor: (1) Has reviewed the intermediary's
educational materials delivered pursuant to Rule 302(b); (2)
understands that the entire amount of his or her investment may be
lost, and is in a financial condition to bear the loss of the
investment; and (3) has completed a questionnaire demonstrating an
understanding of the risks of any potential investment and other
required statutory elements. In addition, the questionnaire required
under the rule may help to address, at least in part, the concerns
expressed by some commenters that Section 4A(a)(4) requires more than a
mere self-certification.\806\ We note, however, that the plain language
of Section 4A(a)(4)(B) seemingly requires only that the investor
positively affirms his or her understanding of the risk of loss.
---------------------------------------------------------------------------

    \806\ See, e.g., Accredify Letter; Commonwealth of Massachusetts
Letter; Farnkoff Letter; Saunders Letter; Verinvest Letter.
---------------------------------------------------------------------------

    Our final rule does not provide a model form of acknowledgment or
questionnaire. Rather, the rule permits an intermediary to develop the
representation and questionnaire in any format that is reasonably
designed to demonstrate the investor's receipt of the information and
compliance with the other requirements under the final rules. As with
the educational material requirements, we continue to believe that
rather than providing sample content or a model form of acknowledgment
or questionnaire, intermediaries should be provided with sufficient
flexibility to choose both the content, within the requirements of Rule
302(b), and the format used to present the required materials.
Likewise, we also believe that an intermediary's familiarity with its
business and likely investor base make it best able to determine the
format in which to present the required materials. We note that any
format used must be reasonably designed to demonstrate receipt and
understanding of the information. There are many ways, especially on a
Web-based system, to convey information to, and obtain effective
acknowledgment from, investors. As explained in the Proposing Release,
the requirements of the rule would not be satisfied if, for example, an
intermediary were to pre-select answers for an investor.
    Further, an intermediary in its discretion may require additional
information, such as information concerning the investor's level of
investment experience, the identity of any person from whom the
investor acquired any information about the investment and the
percentage of the investor's liquid net worth represented by the
proposed investment, or impose additional requirements on prospective
investors, such as imposing express acknowledgments of the investor's
responsibilities with respect to compliance.
    Finally, although several commenters suggested that once an account
has been created on an intermediary's platform, an investor should be
able to invest in multiple offerings on the same intermediary platform
without having to re-certify and review the educational material, we
continue to believe that, in order to realize the statute's investor
protection goals, it is prudent to require an intermediary to obtain an
investor representation and completed questionnaire each time an
investor seeks to make an investment commitment. Accordingly, under
Rule 303(b), an intermediary will be required to obtain these items
each time an investor seeks to make an investment commitment.
c. Communication Channels
(1) Proposed Rule
    Proposed Rule 303(c) of Regulation Crowdfunding would require an
intermediary to provide, on its platform, channels through which
investors can communicate with one another and with representatives of
the issuer about offerings made available on the intermediary's
platform. An intermediary that is a funding portal would be prohibited
from participating in communications in these channels.\807\ Proposed
Rule 303(c) also would require the intermediary to: (1) Make the
communications channels publicly available; (2) permit only those
persons who have opened accounts to

post comments; and (3) require any person posting a comment in the
communication channels to disclose whether he or she is a founder or an
employee of an issuer engaging in promotional activities on behalf of
the issuer, or is otherwise compensated, whether in the past or
prospectively, to promote the issuer's offering.
---------------------------------------------------------------------------

    \807\ See Rule 303(c)(1) (an intermediary that is a funding
portal cannot ``participate in these communications, other than to
establish guidelines for communication and remove abusive or
potentially fraudulent communications''). See also Exchange Act
Section 3(a)(80) (defining the term ``funding portal'' as any person
acting as an intermediary in a transaction involving the offer or
sale of securities for the account of others, solely pursuant to
Securities Act Section 4(a)(6), that does not, among other things,
``offer investment advice or recommendations'').
---------------------------------------------------------------------------

(2) Comments on the Proposed Rule
    We received comments both supporting \808\ and opposing the
proposed rules on communications channels.\809\ Several commenters
agreed that posting in communication channels should be limited to
registered investors on an intermediary's platform.\810\
---------------------------------------------------------------------------

    \808\ See, e.g., PeoplePowerFund Letter; RocketHub Letter; Vann
Letter (stating that intermediaries should be allowed to decide who
may post on the channels).
    \809\ See, e.g., Cromwell Letter (claiming that ``[a]s [a]
venture investor, you cannot judge the abilities of the management
team over the Internet. Real venture capitalists do not make their
investments over the Internet--they spend hours and hours
interviewing the founders/management team, in person. Small
investors cannot successfully invest over the Internet, either.'');
Public Startup Letter 3; Moskowitz Letter (stating that the proposed
rules do not prevent an accredited investor from, for example,
posting a solicitation within the communication channels for more
securities than he or she could purchase in the offering within his
or her investment limits).
    \810\ See, e.g., PeoplePowerFund Letter; RocketHub Letter;
Wefunder Letter.
---------------------------------------------------------------------------

    Some commenters stated there should be more privacy or control in
the manner in which comments are posted to the communications channels,
such as submitting comments to intermediaries to review prior to
posting or restricting the publicly viewable comments.\811\ One
commenter stated that he interprets the proposed rule to permit issuers
to post videos and other promotional content (similar to marketing
content used on non-securities-based crowdfunding sites like
Kickstarter), and that he supported this approach as it would permit
the issuer to ``communicate freely and creatively . . . while giving
the crowd a forum to ask questions or offer criticism.'' \812\ Another
commenter encouraged the Commission ``to provide an investor `hotline',
where investors can report concerns relating to crowdfunding
communications or transactions, and that intermediaries be required to
provide notice on their platforms of how to access this hotline.''
\813\
---------------------------------------------------------------------------

    \811\ See, e.g., ASSOB Letter (stating that ``random unmoderated
comments'' in communication channels should not be permitted,
because it would allow for unacceptable solicitations or claims of
return on investment); RocketHub Letter (expressing concern that
certain confidential information may be disclosed between registered
investors and the issuer, which would not be suitable for a public
forum).
    \812\ See Odhner Letter.
    \813\ See CFA Institute Letter.
---------------------------------------------------------------------------

    Several commenters generally supported the disclosure requirement
on communications by issuers or intermediaries and agreed that these
communications should be made transparent to investors.\814\
---------------------------------------------------------------------------

    \814\ See, e.g., CFA Institute Letter; RocketHub Letter
(suggesting that intermediaries should be able to assist posters in
disclosing their relationship to issuer).
---------------------------------------------------------------------------

    One commenter generally supported the proposed rule requiring each
promotional communication to be accompanied by disclosure of the
receipt of past or prospective compensation.\815\ Another commenter
suggested that the proposed rules should be amended to require that
intermediaries prominently post the online identities of the issuer's
paid promoters in the communication channels.\816\ One commenter,
however, stated that the Commission should not mandate the exact
methods by which an intermediary achieves compliance with the
requirement for promoters to disclose their relationship with an
issuer.\817\
---------------------------------------------------------------------------

    \815\ See CFA Institute Letter.
    \816\ See MCS Letter.
    \817\ See Wefunder Letter (suggesting that the disclosures at
the account opening stage are better devoted to the discussion of
the risk of startup investing).
---------------------------------------------------------------------------

    In response to our request for comments, several commenters
supported requiring intermediaries to keep the communication channels
available to investors post-offering.\818\ Another commenter, however,
stated that the communication channels should be closed after stock
certificates are issued and received by investors.\819\ This commenter
further noted that the continued maintenance of a communication channel
after the end of a campaign would be an unnecessary cost. The same
commenter suggested that the issuer's Web site is a better place for
communication between investors and issuers.\820\
---------------------------------------------------------------------------

    \818\ See, e.g., PeoplePowerFund Letter (suggesting that the
posting forum should be live and accessible to all Web site members
not less than 30 days after the issue has been completed); RocketHub
Letter; StartupValley Letter (suggesting that intermediaries should
open a private channel of communication between investors and
issuers for the post offering period and not use the same public
channel that was used for the pre-offering and funding periods).
    \819\ See RFPIA Letter.
    \820\ Id. See also CfPA Letter (stating that ongoing
communication between issuers and investors should be an obligation
of issuers alone).
---------------------------------------------------------------------------

(3) Final Rule
    After considering the comments, we are adopting Rule 303(c) as
proposed. We considered commenters' suggestions that the issuer's Web
site is a better place for communication between investors and issuers
and that ongoing communication between issuers and investors should be
an obligation of issuers alone. We believe, however, that communication
channels on the intermediary's platform will provide a centralized and
transparent means for members of the public that have opened an account
with an intermediary to share their views about investment
opportunities and to communicate with representatives of the issuer to
better assess the issuer and investment opportunity.\821\ While the
JOBS Act does not impose this requirement, we believe it is consistent
with the legislative intent that such a mechanism be in place for
offerings made in reliance on Section 4(a)(6).\822\ Also, though
communications among investors may occur outside of the intermediary's
platform, communications by an investor with a crowdfunding issuer or
its representatives about the terms of the offering are required to
occur through these channels \823\ on the single platform through which
the offering is conducted.\824\ This requirement is expected to provide
transparency and accountability, and thereby further the protection of
investors.
---------------------------------------------------------------------------

    \821\ See also discussion in Section II.B.5.
    \822\ See 158 Cong. Rec. S2231 (daily ed. Mar. 29, 2012)
(statement of Sen. Scott Brown) (``In addition to facilitating
communication between issuers and investors, intermediaries should
allow fellow investors to endorse or provide feedback about issuers
and offerings, provided that these investors are not employees of
the intermediary. Investors' credentials should be included with
their comments to aid the collective wisdom of the crowd.'').
    \823\ See Rule 204 of Regulation Crowdfunding and discussion in
Section II.B.4.
    \824\ See Rule 100(a)(3) of Regulation Crowdfunding and
discussion in Section II.A.3.
---------------------------------------------------------------------------

    Although one commenter stated that it interpreted the proposed rule
to permit issuers to post videos and other promotional content, aside
from Rule 303(c)(4) and its requirements for promotional activity, Rule
303(c) itself does not address the content or form used by issuers when
communicating with investors through the channels provided on an
intermediary's platform. Rather, Rule 204 of Regulation Crowdfunding
sets forth the advertising requirements for issuers and, as explained
above, Rule 204 allows an issuer to communicate with investors about
the terms of the offering through communication channels provided by
the intermediary on the intermediary's platform, so long as the issuer
identifies

itself as the issuer in all communications.\825\
---------------------------------------------------------------------------

    \825\ See Section II.B.4 (discussing Rule 204).
---------------------------------------------------------------------------

    We are requiring intermediaries to make the communications on the
channels publicly available for viewing. We believe that this
requirement is consistent with the concept of crowdfunding, as it
provides for transparent crowd discussions about a potential investment
opportunity. We also are requiring in Rule 303(c)(3) that
intermediaries limit the posting in communication channels to those
individuals who have opened an account with the intermediary on its
platform. As stated in the Proposing Release, while we recognize that
this requirement could narrow the range of views represented by
excluding posts by anyone who has not opened an account with the
intermediary, we believe that it will help to establish accountability
for comments made in the communication channels. We continue to believe
that, without this measure, there would be greater risk of the
communications including unfounded, potentially abusive or biased
statements intended to promote or discredit the issuer and improperly
influence the investment decisions of members of the crowd.
    With respect to one commenter's suggestion that the Commission
provide an investor ``hotline'' where investors can report concerns
relating to crowdfunding communications or transactions, we note that
the Commission has an existing ``Tips, Complaints and Referrals
Portal'' available on its Web site,\826\ where the public may provide
the Commission with information about potential fraud or wrongdoing
involving alleged violations of the securities laws.
---------------------------------------------------------------------------

    \826\ See Enforcement Tips and Complaints, available at https://www.sec.gov/complaint/tipscomplaint.shtml.
---------------------------------------------------------------------------

    We are mindful of the cost associated with the communications
channel, and, therefore, we are not requiring that intermediaries keep
the communication channels available to investors post-offering, as
suggested by some commenters.\827\ However, an intermediary in its
discretion can choose to maintain the communication channels post-
offering.\828\
---------------------------------------------------------------------------

    \827\ See, e.g., PeoplePowerFund Letter; RocketHub Letter;
StartupValley Letter.
    \828\ It is important to note that an intermediary would still
have to maintain records of such communications to satisfy the books
and records requirements of the crowdfunding rules. See Rule
404(a)(3).
---------------------------------------------------------------------------

    Consistent with the prohibition on a funding portal offering
investment advice or recommendations,\829\ the rule as adopted will
prohibit an intermediary that is a funding portal from participating in
any communications in these channels, apart from establishing
guidelines for communication and removing abusive or potentially
fraudulent communications. A funding portal can, for example, establish
guidelines pertaining to the length or size of individual postings in
the communication channels and can remove postings that include
offensive or incendiary language. Also, although we understand the
reasons for commenters' suggestions that there should be more privacy
or control in the manner in which comments are posted, we believe that
aside from intermediaries removing abusive or potentially fraudulent
communications, investor protection is better served by providing the
opportunity for uncensored and transparent crowd discussions about a
potential investment opportunity.
---------------------------------------------------------------------------

    \829\ See Rule 300(c)(2)(i). Exchange Act Section 3(a)(80)
defines the term ``funding portal'' as any person acting as an
intermediary in a transaction involving the offer or sale of
securities for the account of others, solely pursuant to Securities
Act Section 4(a)(6), that does not, among other things, ``offer
investment advice or recommendations.''
---------------------------------------------------------------------------

    Finally, under the rule as adopted an intermediary must require any
person posting on the communication channel to clearly and prominently
disclose with each posting whether he or she is a founder or an
employee of an issuer engaging in promotional activities on behalf of
the issuer, or is otherwise compensated, whether in the past or
prospectively, to promote the issuer's offering. This disclosure will
apply to officers, directors and other representatives of the issuer,
and also will be required of an intermediary that is a broker and its
associated persons. We continue to believe that intermediaries, as the
hosts of the communication channels, are well placed to take measures
to ensure that promoters clearly identify themselves in their
communication channels, in accordance with Securities Act Section
4A(b)(3).
d. Notice of Investment Commitment
(1) Proposed Rule
    Proposed Rule 303(d) of Regulation Crowdfunding would require an
intermediary, upon receipt of an investment commitment from an
investor, to promptly give or send to the investor a notification
disclosing: (1) The dollar amount of the investment commitment; (2) the
price of the securities, if known; (3) the name of the issuer; and (4)
the date and time by which the investor may cancel the investment
commitment. Pursuant to proposed Rule 302(a)(2) of Regulation
Crowdfunding, this notification would be provided by email or other
electronic media, and would be documented in accordance with applicable
recordkeeping rules.\830\
---------------------------------------------------------------------------

    \830\ See Section II.C.4 (discussing Rule 100(a)(3)) and Section
II.D.5 (discussing the recordkeeping rules applicable to funding
portals). See also note 1114 (discussing the recordkeeping rules
applicable to brokers and intermediaries).
---------------------------------------------------------------------------

(2) Comments on the Proposed Rule
    Commenters generally supported the requirement that intermediaries
send these notifications to investors.\831\ One of these commenters
stated that, in its view, the notice should be submitted twice: first,
when an investor has made a commitment, and again when the cancellation
period is over.\832\ One commenter stated that, in its view, investors
also should be notified of whether a campaign has been successful or
not, both when the campaign is near completion and when the campaign
has been closed.\833\ However, one commenter opposed all notice
requirements.\834\
---------------------------------------------------------------------------

    \831\ See, e.g., CFA Institute Letter; Joinvestor Letter;
RocketHub Letter.
    \832\ See RocketHub Letter.
    \833\ See Joinvestor Letter.
    \834\ See Public Startup Letter 3.
---------------------------------------------------------------------------

(3) Final Rules
    After considering the comments, we are adopting Rule 303(d) as
proposed. As stated in the Proposing Release, the notification is
intended, among other things, to provide the investor with a written
record of the basic terms of the transaction, as well as a reminder of
his or her ability to cancel the investment commitment. We believe that
the adopted notification requirements will be useful to investors and
provide transparency. We also believe that requiring that this
notification be sent once--promptly upon receipt of an investment
commitment from an investor--rather than multiple times as commenters
suggested--will help to minimize the costs associated with providing
additional notification, while still providing the investor with, among
other things, an important reminder about the ability to cancel the
investment commitment. Although an intermediary can decide, in its
discretion, to provide additional notifications to its customers as a
business decision, we believe at this time that adopting additional
notification requirements could hamper flexibility in the evolving
crowdfunding market and potentially impair the development of best
practices that are

tailored to this unique form of raising capital.
e. Maintenance and Transmission of Funds
(1) Proposed Rule
    Securities Act Section 4A(a)(7) requires that an intermediary
``ensure that all offering proceeds are only provided to the issuer
when the aggregate capital raised from all investors is equal to or
greater than a target offering amount, . . . as the Commission shall,
by rule, determine appropriate.'' Proposed Rule 303(e)(1) of Regulation
Crowdfunding would implement this provision and address the maintenance
and protection of investor funds, pending completion of a transaction
made in reliance on Section 4(a)(6), by requiring an intermediary that
is a registered broker to comply with established requirements in
Exchange Act Rule 15c2-4 \835\ for the maintenance and transmission of
investor funds.
---------------------------------------------------------------------------

    \835\ 17 CFR 240.15c2-4.
---------------------------------------------------------------------------

    Proposed Rule 303(e)(2) would establish separate requirements for
an intermediary that is a funding portal. Because a funding portal
cannot receive any funds, it would be required to direct investors to
transmit money or other consideration directly to a ``qualified third
party'' that has agreed in writing to hold the funds for the benefit of
the investors and the issuer and to promptly transmit or return the
funds to the persons entitled to such funds. Proposed Rule 303(e)(2)
would define ``qualified third party'' to mean a bank \836\ that has
agreed in writing to either: (i) Hold the funds in escrow for the
persons who have the beneficial interests in the funds and to transmit
or return the funds directly to the persons entitled to them when the
appropriate event or contingency has occurred; or (ii) establish a bank
account (or accounts) for the exclusive benefit of investors and the
issuer.
---------------------------------------------------------------------------

    \836\ See Exchange Act Section 3(a)(6) [15 U.S.C. 78c(a)(6)]
(defining ``bank'').
---------------------------------------------------------------------------

    Proposed Rule 303(e)(3) would require an intermediary that is a
funding portal to promptly direct transmission of funds from the
qualified third party to the issuer when the aggregate amount of
investment commitments from all investors is equal to or greater than
the target amount of the offering and the cancellation period for each
investor has expired, provided that in no event may the funding portal
direct this transmission of funds earlier than 21 days after the date
on which the intermediary makes publicly available on its platform the
information required to be provided by the issuer under Rules 201 and
203(a) of proposed Regulation Crowdfunding.
(2) Comments on the Proposed Rule
    Several commenters generally supported the proposed fund
maintenance and transmission requirements.\837\ One commenter suggested
that intermediaries be allowed to reject an investor's investment
commitment if that investor does not have a correlating balance in an
account with the intermediary.\838\ Another commenter suggested that
the Commission require that such accounts be interest bearing and that
either (1) the investors' funds be returned to them with their pro rata
portion of the interest in the event the offering is canceled, or (2)
the funds and the accrued interest be dispersed to the issuer upon the
offering's successful closing.\839\ Another commenter suggested that
qualified third parties should be registered and verified for
``reputations [of] integrity''; complaints against those entities
should be made public; and ``drawdown'' schedules should be submitted
at the onset of projects and subsequently control issuer access to
``project funds.'' \840\
---------------------------------------------------------------------------

    \837\ See, e.g., Arctic Island Letter 6; ASTTC Letter; CSTTC
Letter; Greenfield Letter (suggesting that the issuer should be
required to certify in writing under penalty of perjury to the
escrow bank that the offering has been completed pursuant to the
terms in the offering statement and that there have been no material
changes of circumstances that would render the representations in
the offering statement false or misleading); Joinvestor Letter; STA
Letter.
    \838\ See Zhang Letter.
    \839\ See MCS Letter.
    \840\ See Otherworld Letter.
---------------------------------------------------------------------------

    In the Proposing Release, we requested comment on various
alternatives to the proposed rules. As to whether the proposed rules
should prohibit any variations of a contingency offering, such as
minimum-maximum, offerings, one commenter stated that the target amount
of a crowdfunding campaign ``should represent the minimum to avoid
investor confusion'' and that ``oversubscription should be allowed.''
\841\ This commenter noted that these conditions would allow companies
to ``choose to set their own minimum and maximum range.'' \842\ Another
commenter suggested that we permit contingency offers based on a
maximum amount of funds being raised or other benchmarks if the maximum
is not met or, alternatively, permit ``all-or-none'' offerings.\843\
---------------------------------------------------------------------------

    \841\ See Joinvestor Letter.
    \842\ Id.
    \843\ See PeoplePowerFund Letter (suggesting also that any
oversubscribed issues be allocated on a ``first come first served''
basis in connection with ``all-or-none'' offerings).
---------------------------------------------------------------------------

    As to whether other types of custody arrangements should be
permitted, one commenter requested clarification that a carrying broker
would not be deemed to accept any part of the sale price of any
security for purposes of Exchange Act Rule 15c2-4 under specific
circumstances.\844\
---------------------------------------------------------------------------

    \844\ See FOLIOfn Letter. Although this commenter stated its
belief that the proposed procedure is consistent with Rule 15c2-4 on
the basis that the carrying broker would not be ``accept[ing] any
part of the sale price'' until closing, at which time funds would be
promptly transferred to the issuer, it stated that additional
clarity would be helpful to ensure that the Proposing Release does
not introduce confusion if read by some as containing an implication
to the contrary.
---------------------------------------------------------------------------

    As to whether there should be a fixed deadline for transmission of
funds (such as three business days), one commenter stated that ``fixed
deadlines should be set to protect investor and issuer interests.''
This commenter suggested that ``one week (7 days) should be sufficient
to disburse collected funds.'' \845\ Another commenter suggested a
three-day deadline.\846\
---------------------------------------------------------------------------

    \845\ See Joinvestor Letter.
    \846\ See Public Startup Letter 3.
---------------------------------------------------------------------------

    As to whether SRO and staff guidance on Exchange Act Rule 15c2-4
should be expressly incorporated into the rules, one commenter
suggested that there was no need for incorporation of prior guidance
about Rule 15c2-4 into the proposed rules.\847\
---------------------------------------------------------------------------

    \847\ See Arctic Island Letter 6.
---------------------------------------------------------------------------

    As to whether the definition of ``qualified third party'' should be
expanded to include entities other than a bank, one commenter stated
that the Commission should ``consider [permitting] non-bank custodians,
such as internet services that specialize in escrow and payment
transfer.'' \848\ Another commenter suggested that ``qualified third
parties'' should include credit unions, savings and loans and other
institutions that offer similar protections to banks.\849\ Similarly,
another commenter suggested that credit unions should be included.\850\
One commenter suggested that banks should not be a qualified third
party.\851\ One

commenter suggested that the definition of ``qualified third party'' be
expanded to include certain broker-dealers that ``hold funds and
securities on behalf of customer accounts pursuant to [Exchange Act]
Rule 15c3-3 and maintain net capital pursuant to [Exchange Act] Rule
15c3-1(a)(2)(i)''.\852\ The commenter also suggested that funding
portals and other brokers should be able to utilize these brokers ``to
the identical degree they would be able to utilize banks under Rule
15c2-4.'' \853\
---------------------------------------------------------------------------

    \848\ See Joinvestor Letter.
    \849\ See Growthfountain Letter.
    \850\ See Vann Letter.
    \851\ See Public Startup Letter 3 (claiming that ``[b]anks are
unable to serve as the `qualified third party' '' and that no
entities other than registered broker-dealers should serve this
function in connection with Regulation Crowdfunding sales.). But see
Computershare Letter (supporting the ``inclusion of a requirement
that Funding Portals use a qualified third party, which is a bank,
to hold investor funds as escrow agent and transmit the funds to the
issuer once the offering requirements are met''); ASTTC Letter
(stating that it ``strongly supports the Proposed Rule's requirement
that Funding Portals be required to utilize qualified escrow agents
to hold the investor assets prior to transmittal to issuers and that
``[q]ualified escrow agents are generally regulated banks''); STA
Letter (stating that ``[it] is pleased that the Proposed Rules
contain a requirement that Funding Portals transmit investor assets
to qualified escrow agents, which are banks, prior to their release
to the issuer.'').
    \852\ See FOLIOfn Letter. See also Arctic Island Letter 8
(suggesting that the rules permit a $250,000 net capital broker-
dealer to act as trustee for an omnibus escrow account at an FDIC
insured bank); Ex 24 Letter.
    \853\ See FOLIOfn Letter (stating also its belief that the
brokers ``should be distinguished from other broker-dealers in the
context of Regulation Crowdfunding and not be subject to the
requirements of SEC Rule 15c2-4(b)'').
---------------------------------------------------------------------------

    Commenters generally agreed with our proposed approach not to
require funding portals to maintain net capital, noting among other
things that imposing ``net capital requirements would increase the cost
of starting a new funding portal and reduce the potential number of
intermediaries, while providing little additional protection to
investors and issuers.''\854\
---------------------------------------------------------------------------

    \854\ See Tiny Cat Letter (stating that ``[f]unding portals are
already prohibited from handling funds and securities, and are also
subject to a fidelity bond in the proposed regulations''). See also
Joinvestor Letter (suggesting that since funding portals will not be
monetary custodians, there should be no net capital requirement
instituted); Vann Letter (stating that a ``capital requirement would
unnecessarily restrict competition'').
---------------------------------------------------------------------------

    As to whether certain methods of payment for the purchase of
securities should either be required or prohibited, one commenter
suggested that the types of payment methods not be limited in any
way.\855\ However, some commenters stated, generally, that credit cards
should be prohibited as a form of payment for securities in connection
with crowdfunding.\856\
---------------------------------------------------------------------------

    \855\ See Public Startup Letter 3.
    \856\ See, e.g., Arctic Island Letter 6 (suggesting that, given
the chargeback periods for credit cards, broker-dealers should only
be permitted to accept credit card payments from investors if the
broker-dealer ``directly and unconditionally guarantees the amounts
obtained thereby to both the issuer and the escrow agent'');
Consumer Federation Letter (suggesting that allowing payment via
credit card increases the risk that investors will make crowdfunding
investments that they cannot afford); Joinvestor Letter; RocketHub
Letter (stating that ``[p]ermitting debt-based payment vehicles,
such as credit cards, which have their own rescission policies,
(i.e., charge backs) is problematic'').
---------------------------------------------------------------------------

(3) Final Rule
    After considering the comments, we are adopting Rule 303(e)
substantially as proposed, but with certain revisions in response to
comments. Rule 303(e)(1), as adopted, requires an intermediary that is
a registered broker-dealer to comply with established requirements in
Exchange Act Rule 15c2-4 for the maintenance and transmission of
investor funds. Rule 15c2-4 requires, in relevant part, that in
connection with a contingency offering of a security, any money or
other consideration received by a broker-dealer participating in the
distribution must be promptly deposited in a separate bank account, as
agent or trustee for the persons who have the beneficial interest
therein, until the appropriate event or contingency has occurred, and
thereafter promptly transmitted or returned to the persons entitled
thereto; \857\ or alternatively, that all such funds must be promptly
transmitted to a bank that has agreed in writing to hold such funds in
escrow for the persons who have the beneficial interests therein and to
transmit or return such funds directly to the persons entitled thereto
when the appropriate event or contingency has occurred.\858\ When the
Commission adopted Rule 15c2-4, the Commission explained that the rule
was designed to prevent fraud by a broker-dealer ``either upon the
person on whose behalf the distribution is being made or upon the
customer to whom the payment is to be returned if the distribution is
not completed.'' \859\ As such, consistent with Securities Act Section
4A(a)(7), the intermediary may transmit the proceeds to the issuer only
if the target offering amount is met or exceeded.
---------------------------------------------------------------------------

    \857\ See Exchange Act Rule 15c2-4(b)(1). We note, however, that
any broker-dealer seeking to hold such investor funds in a separate
bank account as agent or trustee for the persons who have a
beneficial interest therein are still subject to net capital
requirements pursuant to Exchange Act Rule 15c3-1.
    \858\ See Exchange Act Rule 15c2-4(b)(2).
    \859\ Adoption of Rule 15c2-4 under the Securities Exchange Act
of 1934, Release No. 34-6737 (Feb. 21, 1962) [27 FR 2089 (Mar. 3,
1962)].
---------------------------------------------------------------------------

    Rule 303(e)(2) as adopted establishes separate requirements for an
intermediary that is a funding portal (as compared to an intermediary
that is a broker-dealer) because a funding portal cannot, by statute,
hold, manage, possess, or otherwise handle investor funds or
securities.\860\ Therefore, Rule 303(e)(2) requires a funding portal to
direct investors to transmit money or other consideration directly to a
qualified third party that has agreed in writing \861\ to hold the
funds for the benefit of the investors and the issuer and to promptly
transmit or return the funds to the persons entitled to such
funds.\862\
---------------------------------------------------------------------------

    \860\ See Exchange Act Section 3(a)(80)(D).
    \861\ This written agreement is required to be maintained by the
funding portal pursuant to proposed Rule 404 of Regulation
Crowdfunding. See Section II.D.5.
    \862\ In the crowdfunding context, we expect that the
intermediary will make the determination as to whether the
contingency (i.e., the target offering amount) has been met. See
Securities Act Section 4A(a)(7) (requiring that an intermediary
``ensure that all offering proceeds are only provided to the issuer
when the aggregate capital raised from all investors is equal to or
greater than a target offering amount, . . . as the Commission
shall, by rule, determine appropriate.'').
---------------------------------------------------------------------------

    We are revising the definition of a ``qualified third party'' to
include for purposes of the final rule: a registered broker or dealer
that carries customer or broker or dealer accounts and holds funds or
securities for those persons,\863\ a bank, or a credit union insured by
the National Credit Union Administration (``NCUA'').\864\ We had
proposed to define ``qualified third party'' to mean a bank \865\
because investors, as well as intermediaries and issuers, would then be
afforded the protections of existing regulations that apply to banks,
in particular those pertaining to the safeguarding of customer
funds.\866\ However, after considering the comments, we agree with
those commenters who suggested that the definition of ``qualified third
party'' should be expanded to include entities other than a bank and
should include, as one commenter suggested, credit unions provided that
these entities offer similar protections to banks.\867\ We also

made a corresponding change to the language of the rule text to
indicate that a qualified third party arrangement may involve either a
bank or credit union account (or accounts) established for the
exclusive benefit of investors and the issuer.
---------------------------------------------------------------------------

    \863\ Broker-dealers that may serve as qualified third parties
under Rule 303(e) include only those broker-dealers that are
required to maintain minimum net capital of $250,000 or a higher
minimum amount depending on their status under Appendix E of Rule
15c3-1 under the Exchange Act. See Exchange Act Rules 15c3-
1(a)(2)(i) and 15c3-1(a)(7)(i).
    \864\ The NCUA was established by the Federal Credit Union Act
of 1934. See Federal Credit Union Act of 1934, as amended, 12 U.S.C.
1752 et seq. The NCUA administers the National Credit Union Share
Insurance Fund (``NCUSIF''), which is backed by the full faith and
credit of the U.S. government. NCUSIF protection covers the deposits
in federal credit unions, as well as a majority of state-chartered
credit unions. See NCUA Share Insurance Fund Information, Reports,
and Statements, Frequently Asked Questions, National Credit Union
Administration, http://www.ncua.gov/DataApps/Pages/SI-FAQs.aspx.
    \865\ See Proposing Release, at 182-83 [78 FR 66427, at 66473].
See also Exchange Act Section 3(a)(6) [15 U.S.C. 78c(a)(6)]
(defining ``bank'').
    \866\ For example, bank deposit accounts at FDIC-insured banks
are protected by FDIC deposit insurance. See Federal Deposit
Insurance Corp., Deposit Insurance FAQs, available at http://www.fdic.gov/deposit/deposits/faq.html.
    \867\ We do not believe that the definition of qualified third
party should be extended to include Internet service providers that
specialize in escrow and payment transfer, as suggested by one
commenter, because we do not believe that such entities are governed
by a regulatory scheme designed to provide similar protections as
the other entities that we are defining as qualified third parties
under Rule 303(e). We note that another commenter suggested the
addition of savings and loan associations. We believe that certain
savings and loan associations are covered by the definition of
``bank'' under Exchange Act Section 3(a)(6), and as such, are
qualified third parties under Rule 303(e). We note that the Federal
Deposit Insurance Corp. extended its authority to cover savings and
loan associations in 1989. See Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 (FIRREA) (creating the Savings
Association Insurance Fund (SAIF)).
---------------------------------------------------------------------------

    After considering the comments, we further believe that the
definition of ``qualified third party'' should be expanded to include
certain types of registered broker-dealers. We are expanding the
definition to include registered broker-dealers that carry customer or
broker or dealer accounts and holds funds or securities for those
persons. We believe such brokers-dealers are appropriate entities to
serve as qualified third parties as they are subject to various
regulatory obligations, which are designed to provide enhanced
protection of investor funds through the imposition of capital and
other requirements.\868\ We note that we are not amending the
requirements of Rule 15c2-4 through this release and not distinguishing
broker-dealers that participate in offerings made in reliance on
Securities Act Section 4(a)(6), either as a qualified third party or an
intermediary, from broker-dealers in any other contingency offerings.
As such, broker-dealers participating in offerings made in reliance on
Section 4(a)(6), either as an intermediary or as a qualified third
party, are still subject to Rule 15c2-4.\869\ Further, we believe that
existing Commission and staff guidance on Rule 15c2-4 is extensive and
clear and does not warrant incorporation into the final rule or
clarification.
---------------------------------------------------------------------------

    \868\ See, e.g., Exchange Act Rule 15c3-1 and Rule 15c2-4.
    \869\ Under existing Rule 15c2-4, the qualified third party
broker-dealer will be required to promptly deposit the funds in a
separate bank account, as agent or trustee for the persons who have
the beneficial interest therein, until the appropriate event or
contingency has occurred, and thereafter promptly transmit or return
the funds to the persons entitled thereto. See Rule 15c2-4(b)(1).
---------------------------------------------------------------------------

    The statute does not limit or require a particular payment
mechanism, and we are not imposing such a restriction because we
believe that the rules should provide reasonable flexibility regarding
the payment mechanisms intermediaries employ. We believe that
restrictions on particular payment mechanisms would not serve to
significantly increase investor protection, particularly in light of
the established investment limits. We note, however that an
intermediary can, in its discretion, decline to accept certain payment
methods, such as credit cards, or accept them only in certain
circumstances.\870\
---------------------------------------------------------------------------

    \870\ We note, for example, that an intermediary can, in its
discretion, decline to accept credit cards given that, as at least
one commenter suggested, an investor's use of his or her right to
dispute credit card charges can inhibit the ability of an issuer to
meet its target or to provide accurate disclosures to investors and
the Commission regarding the progress it has made toward, and
whether it has, reached the target offering amount. This potential
impact will affect offerings conducted through brokers and funding
portals alike. We also note that pursuant to Exchange Act Section
3(a)(80)(D) (15 U.S.C. 78c(a)(80)(D)), a funding portal is
statutorily prohibited from extending credit or margin to customers.
---------------------------------------------------------------------------

    We also are not adopting additional requirements that would, for
example, (1) prohibit variations of a contingency offering, such as
minimum-maximum offerings; (2) establish a fixed deadline for
transmission of funds as compared to the proposed requirement to
transmit funds ``promptly''; or (3) require funding portals to maintain
a certain amount of net capital. We believe that additional
restrictions, such as prohibiting variations of a contingency offering
or establishing a fixed deadline for the transmission of funds could
hamper flexibility in the nascent crowdfunding market and prohibit the
development of best practices specifically tailored to this unique form
of capital raising. Finally, we are not requiring in the final rule net
capital standards for funding portals. As noted above, funding portals
are prohibited from handling, managing or possessing investor funds or
securities.\871\ We continue to believe that the requirements relating,
in particular, to transmission of proceeds under the final rules will
help ensure that investor funds are protected, without requiring
funding portals to maintain net capital.
---------------------------------------------------------------------------

    \871\ See Exchange Act Section 3(a)(80)(D) [15 U.S.C.
78c(a)(80)(D)] and discussion in Section II.C.1.
---------------------------------------------------------------------------

f. Confirmation of Transactions
(1) Proposed Rule
    As proposed, Rule 303(f)(1) of Regulation Crowdfunding would
require that an intermediary, at or before the completion of a
transaction made pursuant to Section 4(a)(6), give or send to each
investor a notification disclosing: (1) The date of the transaction;
(2) the type of security that the investor is purchasing; (3) the
identity, price and number of securities purchased by the investor, as
well as the number of securities sold by the issuer in the transaction
and the price(s) at which the securities were sold; (4) certain
specified terms of the security, if it is a debt or callable security;
and (5) the source and amount of any remuneration received or to be
received by the intermediary in connection with the transaction,
whether from the issuer or from other persons. This notification would
be required to be provided by email or other electronic media,\872\ and
to be documented in accordance with applicable recordkeeping
rules.\873\ Pursuant to proposed Rule 303(f)(2), an intermediary that
gives or sends to each investor the notification described above would
be exempt from the requirements of Exchange Act Rule 10b-10 \874\ for
the subject transaction.
---------------------------------------------------------------------------

    \872\ See proposed Rule 302(a)(2) (requiring an intermediary to
provide all information electronically). See also Section II.C.4.a
(discussing electronic delivery requirements).
    \873\ Intermediaries that are brokers are subject to the
recordkeeping requirements of Exchange Act Rules 17a-3 and 17a-4,
and intermediaries that are funding portals are subject to
recordkeeping requirements under Rule 404 of Regulation
Crowdfunding. See note 1114 (discussing the recordkeeping rules
applicable to brokers and intermediaries). See also Section II.D.5.
    \874\ See note 882 (discussing Exchange Act Rule 10b-10 (17 CFR
240.10b-10) generally).
---------------------------------------------------------------------------

(2) Comments on the Proposed Rule
    Commenters generally supported the proposed confirmation
requirements.\875\ One commenter, however, stated its view that
permitting intermediaries to satisfy the delivery requirement for
transaction confirmations through delivery of a message that contains a
notice that the information is available on the intermediary's Web site
would not be sufficient.\876\
---------------------------------------------------------------------------

    \875\ See, e.g., CFA Institute Letter; Joinvestor Letter.
    \876\ See Consumer Federation Letter (stating that ``[w]hile
most if not all intermediaries would be likely to deliver the actual
confirmation to investors, the rule would not guarantee this'').
---------------------------------------------------------------------------

(3) Final Rule
    After considering the comments, we are adopting Rule 303(f), as
proposed, but with one clarifying change. As proposed, Rule
303(f)(1)(vi) would have required an intermediary to give or send to
each investor a notification disclosing: ``[t]he source and amount of
any remuneration received or to be received by the intermediary in
connection with the transaction, including the amount and form of any
remuneration that is received, or will be received, by the intermediary
from persons other than the issuer. We are

revising Rule 303(f)(1)(vi) to require disclosure as well of the form
of any remuneration received or to be received by the intermediary in
connection with the transaction, including any remuneration received or
to be received by the intermediary from persons other than the issuer.
This edit is intended to clarify the rule by placing ``source, form and
amount'' together, rather than having ``form'' listed out separately as
proposed.
    As explained in the Proposing Release, we believe that transaction
confirmations serve an important and basic investor protection function
by, among other things, conveying information and providing a reference
document that allows investors to verify the terms of their
transactions, acting as a safeguard against fraud and providing
investors a means by which to evaluate the costs of their
transactions.\877\ Each of the required items of information is
intended to assist investors in memorializing and assessing their
transactions. Furthermore, the requirement that an intermediary
disclose to an investor the source, form and amount of any remuneration
received or to be received is designed to help to highlight potential
conflicts of interest if, for example, an intermediary has a financial
interest in an issuer using its services.\878\
---------------------------------------------------------------------------

    \877\ See Proposing Release at 78 FR 66475. See also
Confirmation of Transactions, Release No. 34-34962 (Nov. 10, 1994)
[59 FR 59612, 59613 (Nov. 17, 1994)].
    \878\ Although Securities Act Section 4A(a)(11) requires an
intermediary to prohibit its directors, officers or partners (or any
person occupying a similar status or performing a similar function)
from having any financial interest in an issuer using its services,
the final rules do not include a complete prohibition on the
intermediary, itself, having a financial interest in an issuer using
its services. The intermediary may have a financial interest in an
issuer using its services, subject to certain limitations. See Rule
300(b). See also Section II.C.2.b.
---------------------------------------------------------------------------

    As for the concern raised by one commenter about the delivery
requirements for transaction confirmations,\879\ we note, as we did in
the Proposing Release, that the confirmation is required to be provided
by email or other electronic media, consistent with the Commission's
long-standing policies on the use of electronic media for delivery
purposes.\880\ This is also consistent with the requirement for an
intermediary to provide all information electronically. We believe that
this delivery requirement is appropriate for crowdfunding transactions
and satisfies our obligation that requirements under Securities Act
Section 4A(a)(12) be for the protection of investors and in the public
interest. As to the same commenter's view that the rule would not
guarantee delivery of a confirmation to investors,\881\ although we
acknowledge that statutes and rules cannot guarantee compliance, there
is a robust regulatory scheme in place that is designed to promote
compliance and that is coupled with supervision and enforcement by both
the Commission and the registered national securities association.
---------------------------------------------------------------------------

    \879\ See Consumer Federation Letter.
    \880\ See Proposing Release, at 189 [78 FR 66427, at 66475]. See
also Use of Electronic Media, note 714 at 25853 (discussing the
``access equals delivery'' concept and citing Use of Electronic
Media for Delivery Purposes, Release No. 34-36345 (Oct. 6, 1995) [60
FR 53548, 53454 (Oct. 13, 1995)])).
    \881\ See Consumer Federation Letter.
---------------------------------------------------------------------------

    In addition, under Rule 303(f)(2) as adopted, an intermediary that
gives or sends to each investor the notification described above is
exempt from the requirements of Exchange Act Rule 10b-10 for the
subject transaction.\882\ The confirmation terms under Rule 303(f)(2)
are similar to, but not as extensive as, those broker-dealers are
subject to under Rule 10b-10. We believe that this difference is
appropriate given the more limited scope of an intermediary's role in
crowdfunding transactions. Rule 10b-10, for example, requires
disclosure about such matters as payment for order flow, riskless
principal transactions, payment of odd-lot differentials and asset-
backed securities. These items generally would not be relevant to
crowdfunding securities transactions or an intermediary's participation
in such transactions, and their inclusion in a crowdfunding securities
confirmation may be confusing to investors. Therefore, we believe that
if an intermediary satisfies the notification requirements of the final
rules, the intermediary will have provided investors with sufficient
relevant information about the crowdfunding security, and so should not
be required to meet the additional requirements of Rule 10b-10.
---------------------------------------------------------------------------

    \882\ Exchange Act Rule 10b-10 (17 CFR 240.10b-10) generally
requires a broker-dealer effecting a customer transaction in
securities (other than U.S. savings bonds or municipal securities)
to provide a notification to its customer, at or before completion
of a securities transaction, that discloses certain information
specific to the transaction. Specifically, Rule 10b-10 requires the
disclosure of the date, time, identity, prices and number of
securities bought or sold; the capacity in which the broker-dealer
acted (e.g., as agent or principal); yields on debt securities; and
under specified circumstances, the amount of remuneration the
broker-dealer will receive from the customer and any other parties.
With regard to the specified circumstances mentioned above, the
remuneration disclosures of Rule 10b-10 generally are required, but
certain exclusions apply. For example, the remuneration disclosures
are generally required where a broker or dealer is acting as agent
for a customer or some other person. In the case where remuneration
is received or to be received by the broker from such customer in
connection with the transaction, the disclosures are not required
where the remuneration paid by such customer is determined pursuant
to written agreement with such customer, otherwise than on a
transaction basis. 17 CFR 240.10b-10(a)(2)(i)(B). In contrast, the
remuneration disclosure requirements of Rule 303(f)(2)(vi) are
required across all crowdfunding transactions where remunerations
are received or are to be received. Given the limits on the dollar
amount of securities that can be offered, as well as the limits on
individual investment amounts, in transactions relying on Section
4(a)(6), we do not expect investors to negotiate individualized
compensation agreements.
---------------------------------------------------------------------------

6. Completion of Offerings, Cancellations and Reconfirmations
a. Proposed Rule
    Under Securities Act Section 4A(a)(7), an intermediary is required
to allow investors to cancel their commitments to invest as the
Commission shall, by rule, determine appropriate. Securities Act
Section 4A(b)(1)(G) requires an issuer, prior to sale, to provide
investors ``a reasonable opportunity to rescind the commitment to
purchase the securities.'' We proposed, therefore, in Rule 304(a) of
Regulation Crowdfunding, to give investors an unconditional right to
cancel an investment commitment for any reason until 48 hours prior to
the deadline identified in the issuer's offering materials. Under this
approach, an investor could reconsider his or her investment decision
with the benefit of the views of the crowd and other information, until
the final 48 hours of the offering. Thereafter, an investor would not
be able to cancel any investment commitments made within the final 48
hours of the offering (except in the event of a material change to the
offering, as discussed below).\883\
---------------------------------------------------------------------------

    \883\ See proposed Rule 304(c).
---------------------------------------------------------------------------

    We also proposed in Rule 304(b) that if an issuer reached the
target offering amount prior to the deadline identified in its offering
materials, it could close the offering once the target offering amount
was reached, provided that: (1) The offering had been open for a
minimum of 21 days; (2) the intermediary provided notice about the new
offering deadline at least five business days prior to the new offering
deadline; (3) investors would be given the opportunity to reconsider
their investment decision and to cancel their investment commitment
until 48 hours prior to the new offering deadline; and (4) at the time
of the new offering deadline, the issuer continued to meet or exceed
the target offering amount.
    In addition, we proposed in Rule 304(c) that if there was a
material

change \884\ to the terms of an offering or to the information provided
by the issuer about the offering, the intermediary would be required to
give or send to any investors who have made investment commitments
notice of the material change, stating that the investor's investment
commitment will be cancelled unless the investor reconfirms his or her
commitment within five business days of receipt of the notice.\885\ As
proposed, if the investor failed to reconfirm his or her investment
within those five business days, the intermediary would be required,
within five business days thereafter, to: (1) Provide or send the
investor a notification disclosing that the investment commitment was
cancelled, the reason for the cancellation and the refund amount that
the investor should expect to receive; and (2) direct the refund of
investor funds.\886\ This notification, like other notifications from
an intermediary, would be required to be provided by email or other
electronic media, and to be documented in accordance with applicable
recordkeeping rules.\887\
---------------------------------------------------------------------------

    \884\ In the Proposing Release, we noted that in those instances
where an issuer had previously disclosed in its offering materials
only the method for determining the price of the securities offered
and not the final price of those securities, setting of the final
price would be considered a material change. We also noted that if
the change involved closing the offering once the target offering
amount is reached, which would be prior to the deadline identified
in the offering materials, then the procedures required under
proposed Rule 304(b), and not those in Rule 304(c), would apply.
    \885\ The proposed rules also required that an issuer extend an
offering to allow for a five business day period in instances where
material changes to the offering or to the information provided by
the issuer occurred within five business days of the maximum number
of days that an offering was to remain open. See proposed Rule
304(c)(2) of Regulation Crowdfunding. See also Rule 302(a)(2)
(requiring that notification be provided by email or through other
electronic media).
    \886\ See proposed Rule 304(c)(1) of Regulation Crowdfunding.
    \887\ Intermediaries that are brokers would be subject to the
recordkeeping requirements of Exchange Act Rules 17a-3 and 17a-4,
and intermediaries that are funding portals would be subject to
recordkeeping requirements under proposed Rule 404 of Regulation
Crowdfunding. See note 1114 (discussing the recordkeeping rules
applicable to brokers and intermediaries). See also Section II.D.5;
Section II.C.4. (discussing an intermediary's electronic delivery
requirements and Rule 302(a)(2)).
---------------------------------------------------------------------------

    Finally, we proposed in Rule 304(d) that if an issuer did not
complete an offering, for example, because the target was not reached
or the issuer decided to terminate the offering, the intermediary would
be required, within five business days, to: (1) Give or send to each
investor who had made an investment commitment a notification
disclosing the cancellation of the offering, the reason for the
cancelation, and the refund amount that the investor should expect to
receive; (2) direct the refund of investor funds; and (3) prevent
investors from making investment commitments with respect to that
offering on its platform. This notification, like other notifications
from an intermediary, would be required to be provided by email or
other electronic media, and to be documented in accordance with
applicable recordkeeping rules.\888\
---------------------------------------------------------------------------

    \888\ See note 1114 (discussing the recordkeeping rules
applicable to brokers and intermediaries).
---------------------------------------------------------------------------

b. Comments on the Proposed Rule
    One commenter supported the unconditional right of investors to
cancel an investment commitment for any reason until 48 hours prior to
the close of an offering.\889\ Other commenters, however, expressed
concern over the potential for misconduct regarding cancellations,\890\
such as scenarios where investors commit and then withdraw at the last
minute.\891\
---------------------------------------------------------------------------

    \889\ See CFA Institute Letter.
    \890\ See, e.g., Joinvestor Letter (suggesting the lock-in-date
should be fourteen days prior to the closing date to prevent any
misconduct surrounding the approach of a target, or the limit of
oversubscription, near to the close of the round); Consumer
Federation Letter; RocketHub Letter.
    \891\ See, e.g., RocketHub Letter (recommending a 24-hour
cancellation period in order to protect investors from `` `pump &
rescind' schemes'' and minimize an issuer's exposure to the risk of
`` `short fall' situations''); Consumer Federation Letter (noting
the risk that ``individuals associated with the issuer will commit
money to the offering early in the process in order to stimulate
interest and create a sense of urgency about investing, only to
withdraw at the last minute''). The same commenter suggested that
potential gamesmanship by investors associated with the issuer has
the potential to discredit crowdfunding and recommended that the
Commission consider more meaningful restrictions on issuer
participation.
---------------------------------------------------------------------------

    One commenter stated that the rule on early closure of an offering
should be more narrowly defined.\892\ This commenter requested that the
Commission clarify whether, under such circumstances, an offering
should be closed from accepting more funds or keep accepting
commitments until the end of the five business day period, even if this
puts an offering over set limits.\893\
---------------------------------------------------------------------------

    \892\ See RFPIA Letter (stating that ``[i]f the issuer reaches
the target offering amount prior to the deadline the current
proposed regulation require[s] a funding portal to give a 5 day
notice to investors of the new closing date. Since funding portals
have no crystal balls, this process needs to be more narrowly
defined'').
    \893\ Id.
---------------------------------------------------------------------------

    Some commenters supported the proposal that existing disclosure
materials can be modified in the event of a material change, with the
original offering remaining open,\894\ while one commenter also
suggested that no changes should be allowed within 21 days of the close
date.\895\ Several commenters generally agreed that an investor should
have to reconfirm the commitment to invest when a material change
occurs.\896\ One commenter stated that many investors would prefer not
to have to re-confirm their investments and recommended allowing
investors to decide how to handle material changes.\897\ Another
commenter opposed any reconfirmation requirement because it believed
there should be a presumption that any changes made would be in the
best interest of the issuer and all of its stakeholders.\898\
---------------------------------------------------------------------------

    \894\ See, e.g., Arctic Island Letter 6; Joinvestor Letter;
Wales Capital Letter 2.
    \895\ See Joinvestor Letter.
    \896\ See, e.g., CFA Institute Letter; Wales Capital 2 Letter.
    \897\ See Wefunder Letter.
    \898\ See Public Startup Letter 3.
---------------------------------------------------------------------------

    Some commenters supported the proposed five-day reconfirmation
period for investors.\899\ Some commenters, however, stated that five
business days is not enough time for an investor to decide whether to
reconfirm an investment commitment after a material change is made by
the issuer.\900\ One commenter suggested a shorter reconfirmation time
period.\901\ Another commenter recommended that the Commission clarify
when the five-day reconfirmation period begins.\902\ One commenter
suggested material revisions made to the offering should restart the
21-day minimum period for the campaign, though generally agreed that a
five-business day notification is sufficient in the event that an
offering is cancelled.\903\
---------------------------------------------------------------------------

    \899\ See, e.g., CFA Institute Letter; Wales Capital 2 Letter.
    \900\ See, e.g., Arctic Island Letter 6 (advocating that the
time period be ``indefinite'' so as to give investors more time to
consider the changes and to give issuers more time to answer
questions of individual investors and provide clarifications or make
subsequent changes as needed); CfPA Letter (recommending that any
change in offering documents on a Web site after initial posting
restart the 21-day period (or at least half of that) during which
offerings cannot close and prospective or pledged investors can
reconsider and rescind their commitments).
    \901\ See RFPIA Letter (suggesting eliminating the requirement
or reducing it to 72 hours).
    \902\ See ODS Letter.
    \903\ See Wales Capital Letter 2.
---------------------------------------------------------------------------

c. Final Rules
    We are adopting Rule 304 as proposed, with a technical change to
correct a cross-cite in the rule text. We believe that the final rule
appropriately takes into consideration the needs of investors to be
able to consider material

changes to the terms of the offering and new views expressed by the
crowd, while allowing issuers to have certainty about their ability to
close an offering at the end of the offering period. We have considered
the comments outlined above about concerns with cancellation generally
and those suggesting other types of cancellation or lock-in periods.
However, we continue to believe that allowing investors to cancel any
investment commitments for any reason until 48 hours prior to the
deadline identified in the issuer's offering materials is an
appropriate cancellation period because it is consistent with the
requirement of Section 4A(b)(1)(G) that investors have a ``reasonable
opportunity'' to rescind investment commitments, while also providing
issuers with certainty within a reasonable amount of time about whether
they have indeed received investment commitments. Although we
acknowledge commenters' concerns about potential misconduct in
connection with cancellations of investment commitments, we note that
issuers and investors, including investors associated with the issuer,
are subject to the antifraud provisions of the securities laws. We also
note that, as we discussed above, an intermediary is required to
promptly remove an offering from its platform if it becomes aware of
information that causes it to believe that the issuer or the offering
presents the potential for fraud or otherwise raises concerns about
investor protection.\904\
---------------------------------------------------------------------------

    \904\ See Section II.C.3.
---------------------------------------------------------------------------

    In regards to one commenter's request for clarification as to
whether an intermediary may continue to receive investment commitments
during the five business day period prior to an early closure of an
offering (even if the commitment may be oversubscribed), we note that
intermediaries are permitted to continue to receive investment
commitments during that time period, provided that the intermediary
informs investors about the continuation of such acceptance in
accordance with Rule 304(b).\905\
---------------------------------------------------------------------------

    \905\ However, the issuer will still have to comply with the
rules regarding oversubscriptions. See Section II.B.6.a. This same
commenter expressed uncertainty about how an issuer will communicate
early closure to a funding portal so that the funding portal can
provide appropriate notice to investors about the new offering
deadline. The final rules do not prescribe the mechanics for how
funding portals must communicate with issuers as we believe the
better course is to provide for flexibility in this regard so that
intermediaries and issuers can arrive at efficient working
arrangements.
---------------------------------------------------------------------------

    In addition, we believe that when material changes arise during the
course of an offering, an investor who had made a prior investment
commitment should have a reasonable period during which to review the
new information and to decide whether to invest by reconfirming the
investment commitment. Despite some commenters' concerns outlined
above, we continue to believe that a five business day period is
appropriate because it reasonably reflects the need to allow an
investor sufficient time to consider material changes to the terms of
the offering while giving issuers certainty about their ability to
close an offering. For the same reasons noted above, we also believe
that five business days is a sufficient amount of time for
intermediaries to notify investors about offerings that are not
completed or terminated. Finally, we believe that requiring an investor
to reconfirm his or her investment commitment within five business days
of receipt of the notice of a material change is sufficiently clear as
to when the reconfirmation period begins and provides additional
investor protection and is therefore an appropriate requirement for the
final rule.
7. Payments to Third Parties
a. Proposed Rule
    Securities Act Section 4A(a)(10) provides that an intermediary in a
transaction made in reliance on Section 4(a)(6) shall not compensate
``promoters, finders, or lead generators for providing the broker or
funding portal with the personal identifying information of any
potential investor.''
    We proposed in Rule 305(a) of Regulation Crowdfunding to prohibit
an intermediary from compensating any person for providing it with the
``personally identifiable information'' \906\ of any investor. As
explained in the Proposing Release, we believe that any person
compensated for providing the personally identifiable information of
investors would be acting as a promoter, finder or lead generator
within the meaning of Securities Act Section 4A(a)(10).
---------------------------------------------------------------------------

    \906\ As proposed, the term ``personally identifiable
information'' would mean any information that can be used to
distinguish or trace an individual's identity, either alone or when
combined with other personal or identifying information that is
linked or linkable to a specific individual. See proposed Rule
305(c) of Regulation Crowdfunding. As explained in the Proposing
Release, personally identifiable information could include any
information that can be used to identify an individual, such as
name, social security number, date or place of birth, mother's
maiden name or biometric records, as well as any other information
that is linked directly to an individual, such as financial,
employment, educational or medical information.
---------------------------------------------------------------------------

    Proposed Rule 305(b), however, would permit an intermediary to
compensate a person for directing issuers or investors to the
intermediary's platform if: (1) The person does not provide the
intermediary with the personally identifiable information of any
investor, and (2) the compensation, unless it is paid to a registered
broker or dealer, is not based, directly or indirectly, on the purchase
or sale of a security offered in reliance on Securities Act Section
4(a)(6) on or through the intermediary's platform.\907\
---------------------------------------------------------------------------

    \907\ We note that the receipt of direct or indirect
transaction-based compensation would strongly indicate that the
recipient is acting as a broker. As such, the party receiving the
compensation in the scenario described needs to consider whether it
would be required to register as a broker.
---------------------------------------------------------------------------

b. Comments on the Proposed Rule
    Some commenters generally supported the portion of the proposed
rule that allows intermediaries to compensate third parties for
directing investors to the platform.\908\ Some of these comments also
agreed that intermediaries should be permitted to compensate third
parties for general business advertising including, for example, web
search engine direction or other standard Internet marketing
techniques.\909\ In response to our request for comment as to whether
disclosures should be required when an intermediary compensates third
parties for directing investors to its platform, one commenter
suggested the Commission should not require disclosure of ``standard
Internet marketing [practices]'' that ``inform investors of companies
they may be interested in.'' \910\ Another commenter stated that
compensation should only be allowed under limited circumstances, albeit
without providing examples of those limited circumstances.\911\ We did
not receive comments related to the definition of the term ``personally
identifiable information'' as proposed in Rule 305(c).
---------------------------------------------------------------------------

    \908\ See, e.g., RoC Letter; RocketHub Letter; Wefunder Letter.
    \909\ See, e.g., RocketHub Letter; Wefunder Letter. See also ABA
Letter (discussing the practice of so-called ``passive bulletin
boards'').
    \910\ Wefunder Letter.
    \911\ See Joinvestor Letter (``We believe such compensation
should be allowed under extremely limited circumstances, as
promotion will be a central issue to these campaigns.'').
---------------------------------------------------------------------------

c. Final Rules
    We are adopting Rule 305 with modifications. Rule 305(a), like the
proposed rule, states that an intermediary may not compensate 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) of the Securities Act. However, we are not including
in the final rule

what was proposed in paragraph (b), which stated that an intermediary
may compensate a person for directing issuers to the intermediary's
platform, provided that unless the compensation is made to a registered
broker or dealer, the compensation is not based, directly or
indirectly, on the purchase or sale of a security offered in reliance
on Section 4(a)(6) of the Securities Act on or through the
intermediary's platform. Upon further consideration, we believe this
provision would be duplicative of Rule 402(b)(6), which addresses
referral payments that funding portals are permitted to pay to third
parties.\912\ In addition, registered broker-dealers are already
subject to limitations on the types of compensation that they may pay
to third parties, and as we explained in the Proposing Release, are
subject to an established regulatory and oversight regime that provides
important safeguards for investors.
---------------------------------------------------------------------------

    \912\ See Section II.D.3.
---------------------------------------------------------------------------

    We agree with those commenters who believe intermediaries should be
permitted to compensate third parties for general business advertising
including, for example, web search engine direction or other standard
Internet marketing techniques so long as that compensation is not
based, directly or indirectly, on the purchase or sale of a security
offered in reliance on Securities Act Section 4(a)(6).\913\ We believe
permitting compensation for these types of general business advertising
does not raise the same privacy concerns as those implicated by the
provision of personally identifiable information and is generally
consistent with the statutory scheme for crowdfunding promotional
activities. Therefore, under the rules, an intermediary may pay a
person a flat fixed fee \914\ to direct persons to the intermediary's
platform through, for example, hyperlinks or search term results or
make payments to a person to advertise its existence.\915\ The
intermediary, however, cannot pay to receive personally identifiable
information in under any circumstances pursuant to the prohibition in
Rule 305(a).
---------------------------------------------------------------------------

    \913\ See, e.g., 158 Cong. Rec. S5474-03 (daily ed. July 26,
2012) (statement of Sen. Jeff Merkley) (``[T]he limitation on off-
platform advertising is intended to prohibit issuers--including
officers, directors, and 20 percent shareholders--from promoting or
paying promoters to express opinions outside the platform that would
go beyond pointing the public to the funding portal.'').
    \914\ A flat fixed fee is one that is not based on the success
of the offering, and so would not be transaction-based compensation.
We note that the receipt of direct or indirect transaction-based
compensation would strongly indicate that the recipient is acting as
a broker. As such, the party receiving this kind of compensation
needs to consider whether it would be required to register as a
broker.
    \915\ See also Rule 402 of Regulation Crowdfunding and
discussion in Section II.D.3 (discussing advertising and marketing
activities in which a funding portal may engage under the
Regulation's safe harbor).
---------------------------------------------------------------------------

    Finally, we are adopting as proposed the definition of personally
identifiable information, which will be renumbered as Rule 305(b).

D. Additional Funding Portal Requirements

1. Registration Requirement
a. Generally
(1) Proposed Rules
    Securities Act Section 4A(a)(1) requires that an intermediary
facilitating a transaction made in reliance on Securities Act Section
4(a)(6) register with the Commission as a broker or a funding portal.
The statute does not, however, prescribe the manner in which a funding
portal would register with the Commission.\916\ Securities Act Section
4A(a)(12) requires intermediaries to comply with requirements as the
Commission may, by rule, prescribe for the protection of investors and
in the public interest. Exchange Act Section 3(h)(1)(C) also permits
the Commission to impose, as part of its authority to exempt funding
portals from broker registration, ``such other requirements under [the
Exchange Act] as the Commission determines appropriate.''
---------------------------------------------------------------------------

    \916\ Compare Exchange Act Section 15(b) [15 U.S.C. 78o(b)]
(prescribing the manner of registration of broker-dealers).
---------------------------------------------------------------------------

    We proposed to establish a streamlined registration process under
which a funding portal would register with the Commission by filing a
form with information consistent with, but less extensive than, the
information required for broker-dealers on the Uniform Application for
Broker-Dealer Registration (``Form BD'').\917\ Under proposed Rule
400(a), a funding portal would register by completing a Form Funding
Portal, which would include information concerning the funding portal's
principal place of business, its legal status and its disciplinary
history, if any; business activities, including the types of
compensation the funding portal would receive; control affiliates of
the funding portal and disclosure of their disciplinary history, if
any; FINRA membership or membership with any other registered national
securities association; and the funding portal's Web site address(es)
or other means of access.\918\ Proposed Rule 400(a) also would require
a funding portal to become a member of FINRA or another applicable
national securities association registered under Exchange Act Section
15A. As proposed in Rule 400(a), the funding portal's registration
would become effective the later of: (1) 30 calendar days after the
date that the registration is received by the Commission; or (2) the
date the funding portal is approved for membership in FINRA or any
other registered national securities association.
---------------------------------------------------------------------------

    \917\ Brokers currently register with the Commission using Form
BD. Information on that form regarding the broker's credentials,
including current registrations or licenses and employment and
disciplinary history, is publicly available on FINRA's BrokerCheck.
    \918\ We discuss in Section II.D.1.b the information required to
be included in Form Funding Portal.
---------------------------------------------------------------------------

    Proposed Rule 400(b) would require a funding portal to file an
amendment to Form Funding Portal within 30 days of any of the
information previously submitted on the form becoming inaccurate for
any reason.
    In addition, proposed Rule 400(c)(1) would permit a funding portal
that succeeds to and continues the business of a registered funding
portal to also succeed to the registration of the predecessor on Form
Funding Portal. As proposed in Rule 400(c)(1), the registration would
remain effective as the registration of the successor if the successor,
within 30 days after such succession, files a registration on Form
Funding Portal and the predecessor files a withdrawal on Form Funding
Portal.\919\ Proposed Rule 400(c)(1), therefore, would not apply where
the predecessor funding portal intends to continue to engage in funding
portal activities.
---------------------------------------------------------------------------

    \919\ Under the proposed rules, the registration of the
predecessor funding portal would be deemed withdrawn 45 days after
the notice registration on Form Funding Portal was filed by the
successor. See proposed Rule 400(c)(1). A similar process exists for
registered broker-dealers under Exchange Act Rule 15b1-3 (17 CFR
240.15b1-3).
---------------------------------------------------------------------------

    In certain circumstances, proposed Rule 400(c)(2) would allow the
successor to file an amendment to the predecessor's Form Funding Portal
rather than requiring the successor and predecessor, respectively, to
follow the registration filing and withdrawal process under Rule
400(c)(1) described above. Specifically, proposed Rule 400(c)(2)
provides that, if the succession is based solely on a change of the
predecessor's date or state of incorporation, form of organization or
composition of a partnership, the successor may, within 30 days after
the succession, amend the notice registration of the predecessor on
Form Funding Portal to reflect these changes. Successions by amendment
would be limited to those successions that

resulted from a formal change in the structure or legal status of the
funding portal but did not result in a change in control.
    The instructions to the proposed Form Funding Portal would limit
the term ``successor'' to an entity that assumed or acquired
substantially all of the assets and liabilities of the predecessor
funding portal's business.
    We also proposed in Rule 400(d) to require a funding portal to
promptly file a withdrawal of registration on Form Funding Portal upon
ceasing to operate as a funding portal. The withdrawal would be
effective on the later of 30 days after receipt by the Commission,
after the funding portal was no longer operational, or within a longer
period of time consented to by the funding portal or that the
Commission, by order, determined as necessary or appropriate in the
public interest or for the protection of investors.\920\
---------------------------------------------------------------------------

    \920\ A similar process exists for registered broker-dealers
under Exchange Act Section 15(b)(5) (15 U.S.C. 78o(b)(5)) and Rule
15b6-1 (17 CFR 240.15b6-1) thereunder.
---------------------------------------------------------------------------

    Proposed Rule 400(e) would provide that each application for
registration, amendment thereto, successor registration or withdrawal
would be considered filed when a complete Form Funding Portal was
submitted with the Commission or its designee. Proposed Rule 400(e)
also would require duplicate originals of the application to be filed
with surveillance personnel designated by the registered national
securities association of which the funding portal is a member.
(2) Comments on the Proposed Rule
    We received some comments generally supporting the proposed
registration method,\921\ while one commenter generally opposed the
proposed registration method, stating the Commission is requiring too
stringent a registration process and financial overhead for funding
portals.\922\ One commenter encouraged the Commission to require
broker-dealers to register on the same form as funding portals.\923\
---------------------------------------------------------------------------

    \921\ See, e.g., Joinvestor Letter; DreamFunded Letter (favoring
the proposed rules which provide a ``high barrier to entry'' to
funding portals, as it will ``stop anyone from potentially creating
a funding portal over a weekend'').
    \922\ See PeoplePowerFund Letter (suggesting that the Commission
should consider, ``a simple registration detailing the owners and
operators of a web portal, the legal domicile and registration
contact information etc. and the portals [sic] commitment to
adherence of the rules of the [C]ommission'').
    \923\ See RocketHub Letter. The commenter also stated that it
has ``a serious concern with [broker-dealers] having an unfair
advantage in the market, by already being regulated and registered
with the Commission as well as FINRA. Therefore, they may be able to
service the market well ahead of [funding] [p]ortals.''
---------------------------------------------------------------------------

    In the Proposing Release, we requested comments on whether we
should impose other restrictions or prohibitions on affiliations of the
funding portal, such as affiliation with a registered broker-dealer or
registered transfer agent. Some commenters opposed the imposition of
other restrictions or prohibitions on affiliations of the funding
portal.\924\ One of these commenters stated that affiliations and
partnerships with brokers or transfer agents should be optional.\925\
---------------------------------------------------------------------------

    \924\ See, e.g., Joinvestor Letter; Tiny Cat Letter.
    \925\ See Tiny Cat Letter.
---------------------------------------------------------------------------

(3) Final Rules
    We are adopting Rule 400(a)-(e) generally as proposed with one
change. We are deleting from Rule 400(e) as proposed the language
stating that Form Funding Portal may be filed with a Commission
designee, as we have determined not to designate this function. Rather,
these filings will be made through the EDGAR system as explained in
more detail below.
    Rule 400 establishes a streamlined registration process for a
funding portal to register with the Commission. We have considered the
general comment suggesting that the registration requirement for
funding portals is too stringent and creates financial overhead. We
believe, however, that the rules as adopted provide a reasonable
approach to funding portal registration--they are based on broker-
dealer registration requirements, which we believe have been effective
in providing investor protection and allowing the Commission to perform
its oversight function. At the same time, the registration requirement
takes into account the more limited activities of funding portals as
compared to broker-dealers. As such, the registration requirements we
are imposing on funding portals are generally consistent with those
imposed on broker-dealers, while not as extensive in every aspect. As
we note in Section III.B.5, we have considered the costs of funding
portal registration and believe that the anticipated costs to funding
portals are justified in light of the expected benefits investors will
receive from utilizing funding portals that are subject to registration
requirements, which include public disclosure of registration
information on Form Funding Portal in EDGAR, as described in more
detail in Section II.D.1.b below. We believe that having such a
registration system will promote investor confidence in this new and
emerging market, while providing us and FINRA (and any other applicable
national securities association registered pursuant to Exchange Act
Section 15A) with information integral to effective oversight.
    Finally, consistent with the proposal, we are not imposing
additional restrictions or prohibitions on affiliations of the funding
portal in the final rules. We note, however, that Form Funding Portal,
which will be publicly available, requires a funding portal to disclose
information about its control relationships and the disciplinary
history of associated persons.\926\
---------------------------------------------------------------------------

    \926\ See Item 4--Control Relationship of Form Funding Portal
and Item 5--Disclosure Information of Form Funding Portal.
``Control'' is defined for the purposes of Form Funding Portal as
``[t]he power, directly or indirectly, to direct the management or
policies of the funding portal, whether through contract, or
otherwise. A person is presumed to control a funding portal if that
person: (1) IS A director, general partner or officer exercising
executive responsibility (or has a similar status or functions); (2)
directly or indirectly has the right to vote 25 percent or more of a
class of a voting security or has the power to sell or direct the
sale of 25 percent or more of a class of voting securities of the
funding portal; or (3) in the case of a partnership, has
contributed, or has a right to receive, 25 percent or more of the
capital of the funding portal.'' See Instructions to Form Funding
Portal.
---------------------------------------------------------------------------

b. Form Funding Portal
(1) Proposed Rules
    As noted above, proposed Rule 400(a) requires a funding portal
seeking to register with the Commission, through an initial
application, to file a completed Form Funding Portal with the
Commission. As proposed, Rule 400(b)-(d) would have also required
funding portals to use proposed Form Funding Portal to amend any part
of the funding portal's most recent Form Funding Portal, including
certain successor registrations, or to withdraw from registration as a
funding portal with the Commission.\927\ We proposed to make a blank
Form Funding Portal available through the Commission's Web site or such
other electronic database, as determined by the Commission in the
future.
---------------------------------------------------------------------------

    \927\ As noted in Section II.D.1.a., a successor funding portal
may amend the registration of its predecessor on Form Funding
Portal, within 30 days after succession, if the succession is based
solely on a change of the predecessor's date of incorporation, state
of incorporation, form of organization, or composition of a
partnership. Otherwise, a successor must file a registration
statement on Form Funding portal within 30 days after succession and
a predecessor must file a withdrawal on Form Funding Portal. See
Rule 400(c).
---------------------------------------------------------------------------

    As proposed, Form Funding Portal appropriately considered the need
to provide efficiency in completing the

form while requesting sufficient information from funding portals to
allow for effective regulatory oversight. The proposed form would have
consisted of eight sections, including items related to: Identifying
information, form of organization, successions, control persons,
disclosure information, non-securities related business, escrow,
compensation arrangements, and withdrawal. These items would require an
applicant to provide certain basic identifying and contact information
concerning its business; list its direct owners and executives;
identify persons that directly or indirectly control the funding
portal, control the management or policies of the funding portal and
persons the funding portal controls; and supply information about its
litigation and disciplinary history and the litigation and disciplinary
history of its associated persons.\928\ Under proposed Form Funding
Portal, a funding portal would be able to operate multiple Web site
addresses under a single funding portal registration, provided the
funding portal disclosed on Form Funding Portal all the Web sites and
names under which it did business.\929\ In addition, the proposed form
would have required an applicant to describe any non-securities related
business activities and supply information about its escrow
arrangements, compensation arrangements with issuers and fidelity bond.
---------------------------------------------------------------------------

    \928\ This information would be used to determine whether to
approve an application for registration, to decide whether to revoke
registration, to place limitations on the applicant's activities as
a funding portal and to identify potential problem areas on which to
focus during examinations. If an applicant or its associated person
has a disciplinary history, then the applicant could be required to
complete the appropriate Disclosure Reporting Page (``DRP''), either
Criminal, Regulatory, Civil Judicial, Bankruptcy, Bond or Judgment
on proposed Form Funding Portal.
    \929\ See proposed Form Funding Portal, Item 1; 17 CFR 249.2000.
---------------------------------------------------------------------------

    Upon a filing to withdraw from registration, a funding portal would
be required to provide certain books and records information. In
addition, as discussed in detail in Section II.D.1.d. below, applicants
that are incorporated in or organized under the laws of a jurisdiction
outside of the United States or its territories, or whose principal
place of business is not in the United States or its territories, would
have been required to complete Schedule C to Form Funding Portal, which
would require information about the applicant's arrangements to have an
agent for service of process in the United States, as well as a
certification and an opinion of counsel addressing the ability of the
applicant to provide the Commission and the national securities
association of which it is a member with prompt access to its books and
records and to submit to onsite inspection and examination by the
Commission and the national securities association.
    We also proposed that a person duly authorized to bind the funding
portal be required to sign Form Funding Portal in order to execute the
documents.\930\ As proposed, the funding portal also would have been
required to consent to service of process to its contact person on the
form.\931\
---------------------------------------------------------------------------

    \930\ See execution statement of proposed Form Funding Portal.
We proposed requiring a person executing Form Funding Portal and
Schedule C (if applicable) to represent that the person has executed
the form on behalf of, and is duly authorized to bind, the funding
portal; the information and statements contained in the form and
other information filed are current, true and complete; and if the
person is filing an amendment, to the extent that any information
previously submitted is not amended, such information is currently
accurate and complete.
    \931\ See execution statement of proposed Form Funding Portal.
Specifically, we proposed requiring the funding portal to consent
that service of any civil action brought by, or notice of any
proceeding before, the Commission or any national securities
association of which it is a member, in connection with the funding
portal's investment-related business, may be given by registered or
certified mail to the funding portal's contact person at the main
address, or mailing address, on the form.
---------------------------------------------------------------------------

    Finally, we proposed to make all current Forms Funding Portal,
including amendments and registration withdrawal requests, immediately
accessible and searchable by the public, with the exception of certain
personally identifiable information or other information with
significant potential for misuse (including the contact employee's
direct phone number and email address and any IRS Employer
Identification Number, social security number, date of birth, or any
other similar information).\932\
---------------------------------------------------------------------------

    \932\ See proposed Instructions to Form Funding Portal.
---------------------------------------------------------------------------

(2) Comments on Proposed Rules
    We received one comment in support of using EDGAR for all funding
portal filing and registration requirements.\933\ Some commenters also
generally supported allowing a funding portal to file one registration
application to operate multiple Web sites.\934\ One commenter, however,
expressed concern about allowing funding portals to file one
registration form for multiple Web sites. This commenter suggested the
Commission ``clearly address Portals that register with the Commission,
and then subsequently license out or sell their registration.'' \935\
The same commenter stated that ``[s]ome entrepreneurs have indicated
that they intend to operate a `parent' funding [p]ortal, which allows
other sites to operate under its umbrella, (leveraging the parent's
systems, architecture, design, infrastructure, etc.).'' \936\
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    \933\ See Public Startup Letter 3.
    \934\ See, e.g., Joinvestor Letter; Tiny Cat Letter (stating
that requiring new applications for each Web site would be
unnecessary as it ``would not provide any new information for either
the commission or the public'' so long as the expansion involves no
material changes to information in the initial application).
    \935\ RocketHub Letter.
    \936\ Id.
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(3) Final Rules
    We are adopting Form Funding Portal generally as proposed,\937\
with the following changes:
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    \937\ We also made minor non-substantive technical changes and
changes to increase the clarity of the information being requested
in the form.
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     The final rules amend Regulation S-T to permit a funding
portal to file PDF exhibits and attachments to Form Funding Portal on
EDGAR as ``official filings.'' \938\
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    \938\ See Rule 101(a)(1)(xviii) of Regulation S-T. As we noted
in Section II.B.3, Regulation S-T generally allows PDF documents to
be filed only as unofficial copies. See Rule 104 of Regulation S-T.
However, Rule 101 provides for certain exceptions to this
restriction. The PDF documents must be in the format required by the
EDGAR Filer Manual, as defined in Rule 11 of Regulation S-T.
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     The following has been added to the title of the form:
``Application or Amendment to Application for Registration or
Withdrawal from Registration as Funding Portal'' to clarify that the
form will be used for all funding portal registration applications,
amendments and withdrawals;
     Amendments to Form Funding Portal will require a narrative
explaining the amendment, which we believe will clarify to investors
and potential investors the particular information being amended by the
funding portal in its filing;
     Form Funding Portal will not require information about
fidelity bonds since we are not adopting the fidelity bond requirement
in the proposed rules; \939\
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    \939\ See Section II.D.1.c.
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     Item 1 also will require information about Web site URL
changes on the most recent Form Funding Portal, title of the contact
employee and the month the applicant funding portal's fiscal year ends;
     The title of Item 4 is changed from ``Control Persons,''
as proposed, to ``Control Relationships,'' as adopted, to clarify that
Item 4 may capture information not being captured in Schedules A and B;
     The language in Item 5 ``to determine whether to approve
an

application for registration'' has been deleted;\940\
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    \940\ We note, however, that failure to answer a question in
Item 5 will result in an incomplete application for registration.
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     Item 7, as adopted, references ``qualified third party
arrangements'' rather than ``escrow arrangements,'' as proposed, to
indicate that, in addition to holding the funds in escrow, a qualified
third party may also hold investor funds in an account for the benefit
of investors and the issuer;\941\
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    \941\ See Section II.C.5.e.
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     ``G--Other (general partner, trustee, or elected member)''
has been added as an ownership code in Schedule A;
     Schedules A and B have been changed from the proposal to
clarify that the Schedules are collecting information about whether
direct owners and executive officers are ``control'' persons;
     The language to Schedule C of Form Funding Portal has been
changed to track more closely the requirements of Rule 400(f) for
nonresident funding portals and to add an execution section for these
entities; and
     Withdrawal information for funding portals proposed to be
collected under Item 8 will instead be collected in a new ``Schedule
D''.\942\
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    \942\ There have been no substantive changes to the withdrawal
information to be collected on Schedule D. The instructions to Form
Funding Portal have been modified from the proposal to (1) include
IRS Tax Identification Number and the contact employee's fax number
as information that will be redacted on Form Funding Portal by the
Commission and, therefore, not disseminated to the public by the
form; and (2) inform funding portals that they should manually
redact certain personally identifiable information or other
information with significant potential for misuse (including the
contact employee's direct phone number, fax number and email address
and any IRS Employer Identification Number, IRS Tax Identification
Number, social security number, or any other similar information)
from any PDF attachments they file as part of their Form Funding
Portal submission due to privacy concerns. The instructions have
also been modified to amend the definition of SRO to delete the
reference to Section 3 of the Exchange Act and clarify that the
phrase ``any national securities association registered with the
Commission'' in the definition encompasses any national securities
association registered under Section 15A of the Exchange Act, in
order to alleviate any confusion by funding portals when completing
the form.
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    We continue to believe that the information required by Form
Funding Portal is important for our oversight of funding portals and to
allow us to assess a funding portal's application for registration and
perform examinations of funding portals. We also note that the
information required by the Form will be available to investors and
potential investors and will provide transparency regarding
intermediaries. Although we generally modeled Form Funding Portal on
Form BD, we have tailored the questions to the activities of funding
portals. For example, Form Funding Portal, in contrast to Form BD, does
not include any questions about holding customer funds and securities
because funding portals are statutorily prohibited from holding or
maintaining customer funds or securities. We also included questions in
Form Funding Portal to address specific restrictions that are imposed
upon funding portals but not upon broker-dealers. For example, Form
Funding Portal requires specific information about a funding portal's
qualified third party arrangements because a funding portal is
prohibited from holding and maintaining customer funds.
    In developing these requirements, we have taken into account that
funding portals are limited purpose brokers that are conditionally
exempt from registration as broker-dealers, and accordingly have sought
to require appropriate information from these entities, while, at the
same time, not making the process of completing and filing the required
form inappropriately burdensome for funding portals.
    As noted above, we proposed to make a blank Form Funding Portal
available through our Web site or another electronic database. At the
time of the Proposing Release, we had not yet determined the
appropriate database through which to access and electronically file
Form Funding Portal. We requested comments in the Proposing Release on
the type of web-based registration that funding portals should use for
accessing and filing Form Funding Portal, and as noted above, received
one comment in support of using EDGAR for funding portal filing and
registration requirements.\943\ We have determined to require funding
portals to access and file Form Funding Portal through the Commission's
EDGAR system. Before a funding portal will be able to access EDGAR and
electronically file Form Funding Portal, it will have to obtain EDGAR
access codes and a central index key (``CIK'') by creating and
submitting a Form ID with the Commission for authorization to access
EDGAR. The applicant will be required to fill out general user
information fields on Form ID, including filer type name, address,
phone number, email address, organization name and employer
identification number and file a signed, notarized version of the
document. To facilitate this process, we are amending Form ID to add
``Funding Portal'' as a filer type and are also revising the
instructions to the form to include the definition of ``funding
portal'' (as defined by Rule 300(c)(2)). Once the application has been
accepted by the Commission, the funding portal will receive an email
with a CIK, which it can use (along with a passphrase that it has
previously created) to generate EDGAR access codes, and access the
system and Form Funding Portal.
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    \943\ See Public Startup Letter 3.
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    As proposed, a funding portal will be required to check a box
indicating the purpose for which the funding portal was filing the
form:
     To register as a funding portal with the Commission,
through an initial application;
     to amend any part of the funding portal's most recent Form
Funding Portal, including a successor registration; or
     to withdraw from registration as a funding portal with the
Commission.
    The funding portal will receive an SEC file number after it files
its Form Funding Portal initial application, and thereafter must
provide us that file number when submitting an amendment or withdrawal
from registration on Form Funding Portal. We will use this number to
cross-reference amendments and withdrawals to the original
registration.
    When a funding portal's registration becomes effective, the
information on Form Funding Portal will be made available to the public
through EDGAR, with the exception of certain personally identifiable
information or other information with significant potential for misuse
(including the contact employee's direct phone number, fax number and
email address and any IRS Employer Identification Number, IRS Tax
Identification Number, social security number, date of birth or any
other similar information). In addition to current versions of Form
Funding Portal, investors and potential investors also will be able to
access historical versions of a funding portal's filings on EDGAR. We
believe that making these documents publicly available and searchable
will provide the public with information about the registration process
and the funding portal industry, thereby increasing transparency into
this developing market.
    The final rule permits a funding portal to operate multiple Web
site addresses under a single funding portal registration. As we noted
in the Proposing Release, we believe that allowing a funding portal to
utilize more than one Web site address, if it chooses to do so, may
allow the portal to minimize its regulatory costs while having the
flexibility to customize each Web site to fit its specific needs, such
as appealing to certain industries or

investors. We have considered one commenter's concern about funding
portals licensing or selling their registrations, and note that
registrations are not transferrable among entities; rather, each
funding portal is required to register with the Commission, pursuant to
Rule 400(a). As explained above, an entity may succeed to and continue
the business of a registered funding portal, but the successor must
file a registration on Form Funding Portal within 30 days after any
succession resulting in a change of control.\944\
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    \944\ See Section II.D.1.a.
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c. Fidelity Bond
(1) Proposed Rule
    Proposed Rule 400(f) would have required that funding portals, as a
condition of registration, have in place, and thereafter maintain for
the duration of such registration, a fidelity bond that: (1) Has a
minimum coverage of $100,000; (2) covers any associated person of the
funding portal unless otherwise excepted in the rules set forth by
FINRA or any other registered national securities association of which
it is a member; and (3) meets any other applicable requirements set
forth by FINRA or any other registered national securities association
of which it is a member. While fidelity bond coverage was not mandated
by statute, the proposed requirement was intended to help insure
against the loss of investor funds that might occur if a funding portal
were to violate the express prohibition set forth in Exchange Act
Section 3(a)(80) on holding, managing, possessing or otherwise handling
investor funds or securities.
(2) Comments on Proposed Rule
    We received comments both in support of,\945\ and opposition
to,\946\ the proposed requirement for funding portals to maintain
fidelity bonds. One commenter stated its view that a fidelity bond may
be necessary as a preventative measure to protect the interests of
investors and issuers.\947\ Another commenter noted that although
fidelity bond coverage may be ``indirect'' to customers, they are
protected under such coverage because the insured entity may recover
its losses due to theft or embezzlement by its employees and meet the
obligations of its customers.\948\ The same commenter, however,
suggested that the Commission may find a surety bond more appropriate
in the crowdfunding context than a fidelity bond because investors
would be able to make a direct claim under it for losses due to a
funding portal's violation of the rules, and the insurer would be able
to seek indemnity for that amount from the funding portal.\949\ One
commenter stated that it is not appropriate to require that the
fidelity bond cover associated persons, and that the requirement is a
``hangover from a non-transparent financial services sector,'' unlike
the transparent crowdfunding model.\950\ Another commenter noted that a
fidelity bond would protect a funding portal from employee theft or
embezzlement, and suggested that there is a low risk of this occurring
since a funding portal not does hold cash or customer funds.\951\ The
commenter further stated that ``[o]btaining a bond is simply one more
expense that the portal must incur and it is necessary to control
compliance costs if crowdfunding is to be a success.'' \952\
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    \945\ See, e.g., Joinvestor Letter; Public Startup 3 Letter;
RocketHub Letter; SFAA Letter.
    \946\ See, e.g., ASSOB Letter; Heritage Letter; PeoplePowerFund
Letter; RoC Letter.
    \947\ See Joinvestor Letter.
    \948\ See SFAA Letter.
    \949\ See id.
    \950\ See ASSOB Letter.
    \951\ See Heritage Letter
    \952\ Id.