effective for it in light of its business model, types of offerings and
any other relevant considerations.\434\
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    \433\ See Commonwealth of Massachusetts Letter.
    \434\ FINRA (or any other applicable registered national
securities association) could seek to impose a compliance structure
that may require such designation. Any proposed requirement by FINRA
(or any other applicable registered national securities association)
would be filed with us pursuant to the Exchange Act and the rules
thereunder. 17 CFR 240.19b-4.
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Request for Comment
    162. Should we require intermediaries to have investors acknowledge
issuer-specific or security-specific risks as part of the transaction
process? Why or why not? If so, to what extent?
    163. Are there considerations relating to investor acknowledgments
we should take into account, other than those discussed above? Is the
proposed requirement to obtain an acknowledgement as to investors'
understanding of their ability to cancel investment commitments
appropriate? Why or why not? Should we require acknowledgement of
investors' understanding of any other matters? Why or why not? If so,
which ones and why?
    164. Are there any matters apart from the risks identified above
that we should require to be addressed in the investor
acknowledgements? If so, which ones, and why? How should they be
addressed?
    165. Should we provide a recommended form of questions and
representations? Why or why not? If so, should the Commission provide
the form as a starting point, and not a safe harbor, so that
intermediaries can adapt the questions and representations to
particular offerings? Why or why not?
c. Communication Channels
    The proposed rules 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, subject to certain
conditions.\435\ While the JOBS Act does not impose this requirement,
we believe that Congress contemplated that there would be such a
mechanism in place for offerings made in reliance on Section
4(a)(6).\436\ Some commenters

refer to communication channels as an integral part of crowdfunding.
For example, one commenter suggested that intermediaries should provide
a mechanism for communication between issuers and investors, without
necessarily requiring the communication itself to take place.\437\
Others have urged us to encourage dialogue among potential investors
and issuers as a key component of the crowdfunding model, suggesting
that it would contribute to low levels of fraud.\438\ One commenter
also maintained that there is value in allowing interested parties
generally, such as experts and journalists, to participate in these
discussions, as well as maintaining transparency regarding the identity
of those participating in the discussions.\439\
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    \435\ See proposed Rule 303(c) of Regulation Crowdfunding.
    \436\ 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.'').
    \437\ See RocketHub Letter 1.
    \438\ See Mollick Letter, Lucas Letter. One commenter raised a
concern about communications being construed as investment advice by
funding portals. See Grow VC Letter. See also Section II.D.3 below
for a discussion of the proposed safe harbor for funding portals.
    \439\ See Mollick Letter.
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    The communication channels we are proposing would 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. Also,
though communications among investors could occur outside the
intermediary's platform, communications by an investor with a
crowdfunding issuer or its representatives about the terms of the
offering would be required to occur through these channels,\440\ on the
single platform through which the offering is conducted.\441\ This
requirement should provide transparency and accountability, and thereby
further the protection of investors.
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    \440\ See proposed Rule 204 of Regulation Crowdfunding and
discussion in Section II.B.4 above.
    \441\ See proposed Rule 100(a)(3) of Regulation Crowdfunding and
discussion in Section II.A.3 above.
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    Under the proposed rules, an intermediary that is a funding portal
would be prohibited from participating in any communications in these
channels, apart from establishing guidelines for communication and
removing abusive or potentially fraudulent communications.\442\ For
example, a funding portal could establish guidelines pertaining to the
length or size of individual postings in the communication channels and
could remove postings that include offensive or incendiary language.
Intermediaries that are funding portals are prohibited from providing
investment advice or recommendations. In contrast, intermediaries that
are brokers may provide investment advice and recommendations, subject
to certain conditions.\443\
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    \442\ See proposed Rule 303(c) of Regulation Crowdfunding.
    \443\ The Investment Advisers Act of 1940 excludes from the
definition of investment adviser any broker or dealer whose
performance of investment advisory services is ``solely incidental''
to the conduct of its business as a broker or dealer and who
receives no ``special compensation'' for those advisory services.
See Advisers Act Section 202(a)(11)(C) [15 U.S.C. 80b-2(a)(11)(C)].
See also Study on Investment Advisers and Broker-Dealers, note 405
at 15-16 (discussing the terms used in this exclusion). As such,
brokers that are not registered as investment advisers are able to
provide investment advice, provided they meet these two
requirements. Subject to applicable rules, brokers also can make
recommendations concerning securities, if they have a reasonable
basis to believe that the recommendations are suitable. See, e.g.,
FINRA Rule 2111 (``Suitability'').
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    The proposed rules would require the intermediary to make the
communications on the channels publicly available for viewing. For
instance, an intermediary could not restrict viewing of the
communications to only those investors who have opened accounts with
it. We believe that this requirement is consistent with the concept of
crowdfunding, as it provides transparent crowd discussions about a
potential investment opportunity. The proposed rule would, however,
require the intermediary to permit only those persons who have opened
accounts with it to post comments. 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 this proposed requirement would help to establish
accountability for comments made in the communication channels. Among
other things, the records required to be kept by intermediaries should
help to track the origins of any abusive or potentially fraudulent
comments made through the communication channels. Without this measure,
we believe there could be greater risk of the communications including
unfounded, potentially abusive, biased statements aimed unjustifiably
to promote or discredit the issuer and improperly influence the
investment decisions of members of the crowd.
    The proposed rules also would require any person posting a comment
in the communication channels 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 would apply to officers,
directors and other representatives of the issuer, and also would be
required of an intermediary that is a broker or its associated persons.
Although the statute requires issuers, but not intermediaries, to
disclose compensation to promoters of an offering, we believe that
intermediaries, as the hosts of the communication channels, would be
well placed to take measures to ensure that promoters are clearly
identified in their communication channels, in accordance with Section
4A(b)(3).\444\ This requirement would be consistent with Section
4A(b)(3), which requires issuers to take steps required by the
Commission and established by rule, to ensure disclosure of
compensation or promotional activity ``upon each instance of such
promotional communication.''
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    \444\ See discussion in Section II.B.5 above.
---------------------------------------------------------------------------

Request for Comment
    166. Should we require intermediaries to provide communication
channels, as proposed, on their platforms? Why or why not? If not, what
other methods of communication could, or should, be used and why?
    167. Are the proposed conditions imposed on the requirement to
provide communication channels appropriate? Why or why not? For
example, should the communications on the channels be available for
public viewing or participation? Why or why not? What other
restrictions, if any, should communication channels be subject to, and
why? For example, should we require more specific actions for
intermediaries to take in order to ensure adequate disclosure of
issuers' and promoters' communications? If so, what actions and why?
    168. Under the proposed rules, we limit the ability to post in the
communication channels to only those persons who have opened accounts
with the intermediaries and thereby identified themselves to the
intermediaries. Is this restriction adequate? Why or why not? Would it
be appropriate to permit anyone, including persons who have not
identified themselves in any way, to post comments in intermediaries'

communication channels? Why or why not?
    169. The proposed rules would require any person posting a comment
in the communication channels to 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.
Should we impose this requirement on other types of persons as well,
such as affiliates of the issuer, regardless of whether they are
engaging in promotional activities? Why or why not?
    170. Should we require the intermediary to maintain the
communication channels of its platform during the post-offering period,
in order to permit communication between investors and the issuer after
the offering has completed? Why or why not? If so, for how long after
the offering is completed (e.g., for one month, for six months, for one
year, or longer) should the intermediary be required to maintain the
channels?
d. Notice of Investment Commitment
    The proposed rules 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.\445\ This notification would be
required to be provided by email or other electronic media, and to be
documented in accordance with applicable recordkeeping rules.\446\ The
proposed 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 regarding his or her ability to cancel the
investment commitment.
---------------------------------------------------------------------------

    \445\ See proposed Rule 303(d) of Regulation Crowdfunding. The
statutory requirements for intermediaries do not expressly address
an intermediary's obligation to notify an investor of receipt of the
investor's commitment, although the statutory provision provides us
with authority to do so in our rules. See Section 4A(a)(12).
    \446\ 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.
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Request for Comment
    171. Would the notifications we are proposing to require be useful
to investors? Why or why not? Should we provide further specificity as
to when notice must be provided?
    172. Are there any other circumstances under which an investor
should receive a notice? If so, under what other circumstances?
e. Maintenance and Transmission of Funds
    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.'' The proposed rules 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).\447\
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    \447\ See proposed Rule 303(e) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules would require an intermediary that is a
registered broker to comply with established requirements in Exchange
Act Rule 15c2-4 \448\ for the maintenance and transmission of investor
funds.\449\ Application of Exchange Act Rule 15c2-4(b) to an
intermediary that is a broker in the crowdfunding context, would
require, in relevant part, that money or other consideration received
is 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 then the funds would
be promptly transmitted or returned to the persons entitled thereto; or
all such funds would be promptly transmitted to a bank, which 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. Under Section 4A(a)(7), proceeds are to be
transmitted to the issuer only if the target offering amount is met or
exceeded. As explained in the adopting release to Rule 15c2-4, this
rule was designed to prevent fraud ``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.'' \450\
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    \448\ 17 CFR 240.15c2-4.
    \449\ See proposed Rule 303(e)(1) of Regulation Crowdfunding.
    \450\ Adoption of Rule 15c2-4 under the Securities Exchange Act
of 1934, Release No. 34-6737 (Feb. 21, 1962) [27 F.R. 2089 (Mar. 3,
1962)].
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    The proposed rules would establish separate requirements for an
intermediary that is a funding portal.\451\ 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 \452\ 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.\453\ The
proposed rules would define ``qualified third party'' to mean a bank
\454\ that has agreed in writing either (i) to 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) to
establish a bank account (or accounts) for the exclusive benefit of
investors and the issuer. We have chosen to specify that the qualified
third party would be a bank 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.\455\
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    \451\ See proposed Rule 303(e)(2) of Regulation Crowdfunding.
    \452\ This written agreement would be required to be maintained
by the funding portal pursuant to proposed Rule 404 of Regulation
Crowdfunding. See discussion in Section II.D.5 below.
    \453\ In the crowdfunding context, it is expected that the
intermediary would be making the determination as to whether the
contingency, i.e., the target offering amount, has been met.
    \454\ See Exchange Act Section 3(a)(6) [15 U.S.C. 78c(a)(6)]
(defining ``bank'').
    \455\ For example, protections afforded to bank accounts include
FDIC deposit insurance. See Federal Deposit Insurance Corp., FDIC
Deposit Insurance Coverage, http://www.fdic.gov/deposit/deposits/dis/.
---------------------------------------------------------------------------

    The proposed rules also 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,\456\ but no 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 such as information
about the issuer and the offering pursuant to Rules 201 and 203(a) of
proposed Regulation Crowdfunding.\457\ We believe that this approach is
consistent

with the requirements in (1) Section 4A(a)(7) providing for the
transfer of funds to an issuer when the issuer's target offering amount
has been met, (2) Section 4A(a)(6) providing that issuer information be
made available to investors for at least 21 days prior to the first day
on which securities are sold in the offering, and (3) Section
4A(b)(1)(G) providing that investors must be allowed a reasonable
opportunity to rescind their investment commitment. Under our proposed
rules, an intermediary could permit a minimum-maximum offering, for
example, in which the minimum would serve as the target offering
amount.\458\
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    \456\ See Section II.C.6 below for a discussion of the
cancellation period.
    \457\ See proposed Rule 303(e)(3)(i) of Regulation Crowdfunding.
See also Exchange Act Rule 10b-9 [17 CFR 240.10b-9].
    \458\ In a minimum-maximum offering, a minimum amount of
securities must be sold within the offering period in order for a
contingency to be satisfied, and the amount of securities sold may
not exceed a pre-determined maximum. See Vim Funding Letter
(suggesting that minimum and maximum offerings will allow issuers to
focus on achieving ``funding milestones'' and the amount of funding
they believe they need, while an ``all or nothing'' offering will
likely incentivize issuers to seek smaller raises because of the
possibility of failing at raising a larger amount). Compare
AppleSeedz Letter (stating that an ``all or nothing'' offering would
best protect investors). See also Section II.B.1.a.i(c) above for a
discussion of the issuer's disclosure requirements about the use of
proceeds in a minimum-maximum offering.
---------------------------------------------------------------------------

    The proposed rules also would require an intermediary that is a
funding portal to promptly direct the return of funds to an investor
when an investment commitment has been cancelled (including when there
has been a failure to obtain effective reconfirmation when there has
been a material change).\459\ The proposed rules also would require an
intermediary that is a funding portal promptly to direct the return of
funds to investors when an issuer does not complete an offering.\460\
This could occur if an issuer does not receive investment commitments
that meet its minimum target amount during the offering period. There
also may be other circumstances in which an issuer chooses to cancel
its offering.\461\
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    \459\ See proposed Rule 303(e)(3)(ii) of Regulation
Crowdfunding.
    \460\ See proposed Rule 303(e)(3)(iii) of Regulation
Crowdfunding.
    \461\ See proposed Rule 304(d) and discussion in Section II.C.6
below regarding offerings that are not completed.
---------------------------------------------------------------------------

    Some commenters suggested that investors should be able to transmit
funds for an investment commitment through a mechanism such as those
provided by Automated Clearing House (``ACH''), PayPal, Inc. or a
linked bank account.\462\ We are not proposing to limit or require a
particular payment mechanism, so as to provide both intermediaries and
investors with flexibility in the means of payment, but we note that
under the statute and the proposed rules, an intermediary that is a
funding portal may not hold, manage, possess or otherwise handle
investor funds or securities.\463\ One commenter urged us not to permit
the use of credit cards to fund an investment because investors could
claim charge-backs \464\ after a security is sold.\465\ Two commenters
\466\ advocated permitting the use of credit cards for certain types of
crowdfunding offerings, with one noting that this payment method
involves customary Internet disclosures on the part of the
investor.\467\ Again, we are not proposing to limit payment mechanisms,
but we note that an intermediary could, in its discretion, decline to
accept certain payment methods, such as credit cards, or accept them
only in certain circumstances.\468\
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    \462\ See Vim Funding Letter (stating that investors should be
able to authorize an intermediary to save investor banking
information, in much the same way that consumers today can link a
bank account to their online brokerage account); Arctic Island
Letter (stating that funds should be transferred only to a bank in
the United States).
    \463\ See Exchange Act Section 3(a)(80)(D) [15 U.S.C.
78c(a)(80)(D)] and discussion in Section II.D.3 below.
    \464\ In the United States, credit card customers have charge
reversal rights under Regulation Z (12 CFR 226.13) of the Truth in
Lending Act (15 U.S.C. 1666) and debit card holders are afforded
such rights under Regulation E (12 CFR 205.6) of the Electronic Fund
Transfer Act (15 U.S.C. 1693(b)).
    \465\ See RocketHub Letter 1.
    \466\ See City First Letter; RFPIA Letter 5.
    \467\ See City First Letter.
    \468\ We note that an investor's use of his or her right to
dispute credit card charges could 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 would 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 would be
statutorily prohibited from extending credit or margin to customers.
---------------------------------------------------------------------------

    One commenter recommended that we prohibit purchases by an issuer
or its officers, directors, control persons and other affiliates from
counting toward meeting the target offering amount and obtaining a
release of the funds held in escrow.\469\ The commenter expressed
concern that, without this prohibition, issuers that are unable to
attract sufficient interest from unaffiliated investors could ``game''
the system by accepting affiliated investor funds in an offering that
otherwise would have failed. We believe that this commenter's concern
is reflected in the purpose and intent of the JOBS Act's crowdfunding
provisions. In particular, we believe it would be contrary to the
intent and purpose of the statute and the proposed rules to declare an
offering ``sold'' on the basis of ``non-bona fide sales designed to
create the appearance of a successful completion of the offering.''
\470\ As we have said in other contexts, non-bona fide purchases would
include ``purchases by the issuer through nominee accounts or purchases
by persons whom the issuer has agreed to guarantee against loss.''
\471\ Although we are not restricting directors and officers of an
issuer from purchasing securities in an offering, we expect
intermediaries to scrutinize any purchases by these individuals for
``red flags,'' such as repeated investment commitments and
cancellations, that would indicate that the purchase was designed to
create an impression that the offering has reached, or will reach, its
target amount.\472\
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    \469\ See NASAA Letter.
    \470\ See Requirements of Rules 10b-9 and 15c2-4 under the
Securities Exchange Act of 1934 Relating to Issuers, Underwriters
and Broker-Dealers Engaged in an ``All or None'' Offering, Release
No. 34-11532, 7 SE.C. Docket 403, 1975 WL 163128, at 1 (July 11,
1975).
    \471\ Id.
    \472\ Intermediaries are required to cancel an offering if they
believe the issuer or offering presents the potential for fraud or
otherwise raises concerns regarding investor protection. See
proposed Rule 301(c)(2) of Regulation Crowdfunding and discussion in
Section II.C.3 above.
---------------------------------------------------------------------------

    Several commenters urged us to adopt net capital standards for
funding portals.\473\ We are not proposing net capital standards for
funding portals primarily because they are prohibited from handling,
managing or possessing investor funds or securities. We believe that
the requirements relating, in particular, to transmission of proceeds
under the proposed rules would help ensure that investor funds are
protected, without requiring funding portals to maintain net capital.
We are, however, proposing to require funding portals to obtain
fidelity bonds, as discussed below.\474\
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    \473\ See, e.g., Risingtidefunding.com Letter (stating that
capital standards should be limited); Arctic Island Letter (stating
that funding portals should be required to maintain net capital that
is at least equivalent to that of broker-dealers that handle
customer funds).
    \474\ See discussion in Section II.D.1.c below.
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Request for Comment
    173. Are the proposed requirements for fund maintenance and
transmission appropriate? Are there other types of custody arrangements
that we should specifically permit? Why or why not? If so, what types
of arrangements should we permit and how would they protect investor
funds?
    174. Should we prohibit any variations of a contingency offering,
like minimum-maximum offerings? Why or why not? Should we require that
offerings made in reliance on Section

4(a)(6) be conducted on an ``all-or-none'' basis? Why or why not?
    175. Instead of a requirement to transmit funds ``promptly,'' as
proposed, should we establish fixed deadlines for transmission, such as
three business days? Why or why not?
    176. Should we expressly incorporate into the rules prior
Commission, SRO and staff guidance regarding Exchange Act Rule 15c2-4
on, among other things: (1) The meaning of the phrase ``distribution'';
\475\ (2) the meaning of ``prompt transmittal''; \476\ (3) the payment
mechanics for escrow arrangements; \477\ (4) ``receipt of offering
proceeds'' in the context of payment by check; \478\ (5) ``prompt
deposit,'' as it applies to the use of segregated deposit accounts; and
(6) specifics as to who could act as the ``agent or trustee''
maintaining the segregated deposit account? \479\ Why or why not?
Should any other specific guidance regarding Rule 15c2-4 be explicitly
incorporated into the rules? Please explain.
---------------------------------------------------------------------------

    \475\ See, e.g., Baikie & Alcantara, Inc., Release No. 34-19410
(Jan. 6, 1983). See also Letter from Larry E. Bergmann, Assistant
Director, Division of Market Regulation, Securities and Exchange
Commission to Linda A. Wertheimer, Chairman, Subcommittee on
Partnerships, Trusts and Unincorporated Associations, Federal
Regulation of Securities Committee, American Bar Association (Oct.
16, 1984) (explaining that a ``distribution'' is any offering of
securities, whether or not registered, that ``is distinguished from
ordinary trading transactions by the magnitude of the offering and
the presence of special selling efforts and selling methods.'').
    \476\ See NASD (n/k/a FINRA), Notice to Members 84-64 (Nov. 26,
1984). See also NASD, Notice to Members 84-7 (Jan. 30, 1984).
    \477\ Id.
    \478\ See NASD (n/k/a FINRA), Notice to Members 94-7 (Jan. 24,
1994).
    \479\ Id.
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    177. Should we expand the definition of ``qualified third party''
to include entities other than a bank? Why or why not? If so, which
ones? Please explain how other entities could adequately safeguard
customers' funds and securities?
    178. Should we require funding portals to maintain a certain amount
of net capital? Why or why not? If so, what would be an appropriate
amount, and how should that amount be determined?
    179. Should we require or prohibit certain methods of payments for
the purchase of securities under Section 4(a)(6)? Why or why not? Are
there any particular concerns raised by different methods? Would it
depend upon whether a broker-dealer or funding portal is facilitating
the transaction? Why or why not?
f. Confirmation of Transaction
    The proposed rules 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.\480\ This notification
would be required to be provided by email or other electronic media,
and to be documented in accordance with applicable recordkeeping
rules.\481\ As the Commission has long stated, 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.\482\ Each of the transaction items of information
proposed to be required is intended to assist investors in
memorializing and assessing their transactions. The requirement for an
intermediary to disclose to an investor the source and amount of any
remuneration received or to be received should help to highlight
potential conflicts of interest the intermediary may have.
---------------------------------------------------------------------------

    \480\ See Proposed Rule 303(f)(1) of Regulation Crowdfunding.
The statutory requirements for intermediaries do not expressly
address an intermediary's obligation to provide investors
confirmation of a transaction, but the statute provides us with
authority to do so in our rules. See Section 4A(a)(12).
    \481\ 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.
    \482\ See Confirmation of Transactions, Release No. 34-34962
(Nov. 10, 1994) [59 FR 59612, 59613 (Nov. 17, 1994)].
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    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 for the subject transaction.\483\ The
confirmation terms are similar to, but not as extensive as, those under
Rule 10b-10. We believe that this difference is appropriate given the
more limited scope of an intermediary's role in crowdfunding
transactions. For example, Rule 10b-10 requires disclosure regarding
such matters as payment for order flow,\484\ riskless principal
transactions,\485\ payment of odd-lot differentials \486\ and asset-
backed securities.\487\ 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. We believe, therefore, that
if an intermediary satisfies the notification requirements of the
proposed rules, the intermediary would have provided investors with
sufficient relevant information regarding the crowdfunding security,
and so would not be required to meet the additional requirements of
Rule 10b-10.
---------------------------------------------------------------------------

    \483\ See proposed Rule 303(f)(2) of Regulation Crowdfunding.
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 disclosures of proposed Rule 303(f)(2)(vi) would be
required across all crowdfunding transactions where remunerations
are received or are to be received. Given the limitations on the
dollar amount of securities that could be offered, as well as the
limits on individual investment amounts, in transactions relying on
Section 4(a)(6), we would not expect investors or potential
investors to negotiate individualized compensation agreements.
    \484\ 17 CFR 240.10b-10(a)(2)(i)(C).
    \485\ 17 CFR 240.10b-10(a)(2)(ii).
    \486\ 17 CFR 240.10b-10(a)(3).
    \487\ 17 CFR 240.10b-10(a)(7).
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Request for Comment
    180. Are the proposed items of disclosure appropriate? Should we
require more or less disclosure? Please explain. Should the disclosure
items differ from those in Rule 10b-10? Are there any proposed
disclosures that should be modified or deleted? Why or why not? If so,
what different items should be included and why? Should the proposed
notification requirements

be deemed to be satisfied if an intermediary complies with Rule 10b-10?
Why or why not? If we take this approach, would this confuse investors?
    181. As mentioned above, we do not expect that investors would
negotiate individualized compensation agreements with intermediaries in
the crowdfunding context. Is this expectation appropriate? Why or why
not? Should the proposed rules require disclosure of these
arrangements, and if so, in a way that would be similar to or different
from what is required under Rule 10b-10? Please explain.
6. Completion of Offerings, Cancellations and Reconfirmations
    Section 4A(a)(7) requires an intermediary to allow investors to
cancel their commitments to invest as the Commission shall, by rule,
determine appropriate. As discussed above, Section 4A(b)(1)(G) requires
issuers to provide investors, ``prior to sale, . . . a reasonable
opportunity to rescind the commitment to purchase the securities.''
    Commenters suggested a range of approaches to these statutory
requirements. Some commenters favored a ``rolling'' rescission right,
similar to the three business day rescission right provided in the
Truth in Lending Act,\488\ under which an investor could cancel an
investment commitment within 24 \489\ or 48 hours \490\ of making the
initial commitment. Other commenters suggested permitting investors to
cancel their investment commitments at any time prior to a specified
date. For example, one commenter recommended permitting investors to
cancel a commitment for up to three days before the target date.\491\
Another commenter suggested that an investor should be permitted to
cancel a commitment until the moment that the target offering amount is
reached, but not thereafter.\492\ Another commenter recommended a ten-
day window, after a target offering amount is met, during which
investors could cancel a commitment to invest.\493\ Another commenter
recommended that an investor be permitted to cancel a commitment until
the date the offering closes.\494\ In contrast, one commenter
recommended that an investor be permitted to cancel a commitment only
if the offering fails to meet the target amount or for other limited
purposes.\495\
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    \488\ 15 U.S.C. 1601 et seq.; 12 CFR 226.
    \489\ See RocketHub Letter 1 (stating that: (1) A system could
be used whereby commitments to invest would be considered
``pending'' for 24 hours, during which an investor would be able to
cancel his or her investment commitment; after the 24-hour period
expires, an investor's commitment status would be changed from
``pending'' to ``committed,'' and the investor's funds would be held
in escrow until transferred to the issuer; (2) if an offering did
not reach its target offering amount before a specific deadline, an
investor's funds should be returned; (3) a short rescission period
will protect investors from ``pump & dump'' schemes and minimize an
issuer's exposure to the risk of a funding ``short fall''; (4) a
longer rescission period is unnecessary because Title III requires a
minimum offering period of 21 days, giving potential investors
enough time to review an offering before making an investment
commitment; and (5) because Title III contemplates that issuers
could raise capital ``greater than a target offering amount,'' the
issuer also must establish an offering cap that would limit
oversubscriptions).
    \490\ See NCA Letter (stating that this will prevent commitments
from being made solely for the purpose of attracting new investors
(i.e., ``pumping'' the offering) and that cancellation should be
permitted when there is a change in investment terms or materially
adverse information is subsequently disclosed).
    \491\ See RFPIA Letter 3 (further stating that the Commission
should impose penalties on issuers if they abuse this provision).
    \492\ See Cera Technology Letter (stating that permitting
investors to cancel a commitment to invest after the funding goal is
reached could cause an entire fundraising round to collapse).
    \493\ See Crowdfunding Offerings Ltd. Letter 2 (stating that
funding portals should be permitted to have an open and closed
period for rescinding a commitment to invest; that this option is
necessary in the event that an investor cancels his or her
commitment to invest during the window; and that a competitor could
commit to invest and then cancel that commitment at a critical
moment during the fundraising effort, causing the offering to fall
short of the target offering amount).
    \494\ See CFIRA Letter 9.
    \495\ See Schwartz Letter.
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    We believe that the principles underlying crowdfunding indicate
that investors should have the full benefit of the views of other
potential investors regarding offerings made in reliance on Section
4(a)(6), even after they have made investment commitments.\496\ The
proposed rules, therefore, would 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.\497\
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 (except in the event of a material change to
the offering, as discussed below). We believe that the other approaches
suggested by commenters, described above, could either terminate the
cancellation right too early, so that investors would not be able to
benefit from the views of the crowd and other information they obtain,
or too late, so that the issuer would be subject to uncertainty as to
whether it had met the target offering amount. We believe that the
proposed rules strike an appropriate balance between giving investors
the continuing benefit of the collective views of the crowd and then,
if desired, to cancel their investment commitments, while providing
issuers with certainty about their ability to close an offering at the
end of the offering period.
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    \496\ See, e.g., 158 Cong. Rec. S5474-03 (daily ed. July 26,
2012) (statement of Sen. Jeff Merkley) (``Two important investor
protections in the Crowdfund Act are the public review period and
withdrawal rights. They are designed to allow investors the chance
to carefully consider offerings, permitting the `wisdom of the
crowd' to develop, rather than perhaps just the `excitement of the
crowd.' '').
    \497\ See proposed Rule 304(a) of Regulation Crowdfunding.
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    Pursuant to the proposed rules, if an issuer reaches the target
offering amount prior to the deadline identified in its offering
materials, it may close the offering once the target offering amount is
reached, provided that: (1) The offering will have remained open for a
minimum of 21 days; (2) the intermediary provides notice about the new
offering deadline at least five business days prior to the new offering
deadline; (3) investors are 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 continues to meet or exceed the
target offering amount.\498\ We believe these conditions are
appropriate, as they would result in adequate notice being provided to
investors and are consistent with the statutory provisions that
offering materials are made available for at least 21 days before any
securities can be sold to an investor,\499\ that proceeds be provided
to the issuer only once the target offering amount has been met \500\
and that investors are provided an opportunity to cancel their
commitments.\501\
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    \498\ See proposed Rule 304(b) of Regulation Crowdfunding.
Consistent with the cancellation provision for an offering that does
not close prior to the deadline identified in its offering
materials, an investor would not be able to cancel any investment
commitments made within the final 48 hours prior to the new offering
deadline (except in the event of a material change to the offering).
    \499\ See Section 4A(a)(6).
    \500\ See Section 4A(a)(7).
    \501\ See id.
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    If there is a material change to the terms of an offering \502\ or
to the

information provided by the issuer regarding the offering, the proposed
rules would require the intermediary to give or send to any potential
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.\503\ We recognize that
complying with this requirement could result in certain offerings being
extended beyond the offering period specified in the offering
statement. If the investor fails to reconfirm his or her investment
within those five business days, the proposed rules would require an
intermediary, 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. 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. This notification would be required to be provided by email or
other electronic media, and to be documented in accordance with
applicable recordkeeping rules.\504\
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    \502\ We note that in those instances where an issuer has
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. See Section II.B.2 above. We also note
if the material change is to close 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 304(c), would apply. See
discussion in this Section II.C.6 above.
    \503\ See proposed Rule 304(c)(1) of Regulation Crowdfunding.
    \504\ 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.
---------------------------------------------------------------------------

    Finally, if an issuer does not complete an offering because the
target is not reached or the issuer decides to terminate the offering,
the proposed rules would require an intermediary, 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.\505\ This notification would be
required to be provided by email or other electronic media, and to be
documented in accordance with applicable recordkeeping rules.\506\
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    \505\ See proposed Rule 304(d) of Regulation Crowdfunding.
    \506\ 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.
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Request for Comment
    182. Are the proposed requirements for cancellations and
notifications appropriate? Why or why not? Should investors be
permitted to withdraw commitments at any time until the offering
closes? Should investors be provided with additional time to cancel
their commitments after the closing of the offering if the commitment
was made within 48 hours of the offering deadline? Would some time
period other than 48 hours be more appropriate? Do the proposed rules,
whereby an investor cannot cancel commitments made within 48 hours of
the offering deadline, strike the appropriate balance between (1)
giving investors the ability to cancel commitments in light of new
views expressed in the crowd and (2) providing issuers with certainty
about their ability to close an offering by meeting the target offering
amount? Please explain. What are the advantages and disadvantages of
any alternative time period? Should no new investment commitments be
permitted after a date that is two full business days prior to the
beginning of the 48-hour period when investments are no longer
cancellable? Why or why not?
    183. Should an investor be required to reconfirm his or her
commitment to invest when a material change has occurred? Why or why
not? Is the five business day period for reconfirmation after material
changes appropriate? Would another time period be more appropriate? If
so, what time period and why?
    184. The proposed rules provide a mechanism by which existing
disclosure materials can be modified in the event of a material change,
with the original offering remaining open. Should the proposed rules
require that an offering be cancelled in the event of a material
change, and then, if the issuer desires, reopened in a new offering
that includes the revised disclosure? Why or why not?
    185. Are there any other circumstances under which an investor
should receive a notification? If so, under what other circumstances?
Should we provide further specificity on when notifications must be
provided?
    186. Under the proposed rules, in the event of a cancellation an
intermediary would be required to provide a notice to prospective
investors within five business days. Is this requirement appropriate?
Should the time period be longer or shorter, such as 3 business days or
10 business days? Why or why not? Should we include any other
notification requirements in the event an offering is canceled? If so,
what requirement should we include and why?
7. Payments to Third Parties
    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.''
    One commenter noted that the terms ``promoters,'' ``finders'' and
``lead generators'' are not defined in the statute.\507\ The commenter
also expressed concern that promoters, finders and lead generators
could provide a broker or funding portal with potential investors'
personally identifiable information as long as the broker or funding
portal did not directly compensate them.\508\
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    \507\ See Crowdfunding Offerings Letter 2.
    \508\ See id. (stating that there could be circumstances in
which a third party stands to gain in some way by a successful
crowdfunding effort).
---------------------------------------------------------------------------

    Another commenter stated that ``personal identifying information''
should be clearly defined.\509\ While agreeing that funding portals
should not be permitted to compensate third parties for personally
identifiable information of potential investors, the commenter asserted
that funding portals, but not registered brokers, should be allowed to
compensate promoters, finders or lead generators for directing
potential issuers or investors to view either the portal itself or
specific offerings.\510\ The commenter further stated that revenue
sharing arrangements should not be restricted when these relationships
are not promoter-, finder- or lead generator-based.\511\
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    \509\ See RocketHub Letter 1.
    \510\ See id.
    \511\ See id.
---------------------------------------------------------------------------

    The proposed rules would broadly prohibit an intermediary from
compensating any person for providing it with the personally
identifiable information of any investor or potential investor.\512\
The term ``personally identifiable information'' would be defined to
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.\513\ Personally
identifiable information could include, for example, any information,
such as name, social security number, date or place of birth, mother's
maiden name or biometric records, that can be used to identify an
individual, as well as any other information that is linked directly to
an individual, such as financial, employment, educational or medical
information. We believe that any person compensated for providing the
personally identifiable information of potential investors would be
acting as a promoter, finder or lead generator within the meaning of
Section 4A(a)(10). Thus, the proposed rules would prohibit compensation
broadly to ``any person.''
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    \512\ See proposed Rule 305(a) of Regulation Crowdfunding.
    \513\ See proposed Rule 305(c) of Regulation Crowdfunding. The
proposed definition is consistent with those used in other
government agency reports that discuss strategies for protecting
personally identifiable information. See, e.g., Government
Accountability Office (``GAO''), Privacy: Alternatives Exist for
Enhancing Protection of Personally Identifiable Information, GAO-08-
536, at 1 n.1 (May 2008); GAO, Information Security: Protecting
Personally Identifiable Information, GAO-08-343, at 5 n.9 (Jan.
2008). See also Erika McCallister, Tim Grance and Karen Scarfone,
Guide to Protecting the Confidentiality of Personally Identifiable
Information (PII): Recommendations of the National Institute of
Standards and Technology, U.S. Department of Commerce, National
Institute of Standards and Technology, Special Publication 800-122,
at ES-1 (Apr. 2010).
---------------------------------------------------------------------------

    The proposed rules would, however, permit an intermediary to
compensate a person for directing issuers or potential investors to the
intermediary's platform if (1) the person does not provide the
intermediary with the personally identifiable information of any
potential 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 Section
4(a)(6) on or through the intermediary's platform.\514\ The proposed
rules would not permit a funding portal to compensate third parties by
commission or other transaction-based compensation unless that third
party is a registered broker or dealer and thereby subject to an
established regulatory and oversight regime that provides important
safeguards to investors. We believe that the prohibition on
transaction-based compensation in the proposed rules would help to
remove the incentive for high-pressure sales tactics and other abusive
practices.\515\ Under the proposed rules, an intermediary could pay a
person a flat fixed fee \516\ to direct other persons to the
intermediary's platform through, for example, hyperlinks or search term
results, if the intermediary received no personally identifiable
information. Although the statute is clear that an intermediary cannot
pay for the personally identifiable information of potential investors,
we do not believe Congress intended to disrupt current practices, such
as paying for advertising based on Internet search rankings. It would
be acceptable under the proposed rules, therefore, for an intermediary
to make payments to advertise its existence, provided that in doing so,
it does not pay for the personally identifiable information of
investors or potential investors.\517\
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    \514\ See proposed Rule 305(b) of Regulation Crowdfunding. 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
    \515\ See Persons Deemed Not to Be Brokers, Release No. 34-22172
(June 27, 1985) [50 FR 27,940, 27942 (July 9, 1985)] (``Compensation
based on transactions in securities can induce high pressure sales
tactics and other problems of investor protection that require
application of broker-dealer regulation.''). See also 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. Such paid testimonials and manufactured excitement
would represent a prohibited form of off-site advertising if those
disclosures were not present. Whether on or off the platform, paid
advertising must clearly be disclosed as such. In short, the
investor deserves a transparent medium for making healthy
decisions.'').
    \516\ A flat fixed fee is one that is not based on the success
of the offering, and so would not be transaction-based compensation.
As noted above, receipt of transaction-based compensation would
strongly indicate that the recipient is acting as a broker, and the
party receiving this kind of compensation needs to consider whether
it would be required to register as a broker.
    \517\ See also proposed Rule 402 of Regulation Crowdfunding and
discussion in Section II.D.3 below.
---------------------------------------------------------------------------

Request for Comment
    187. Should we permit an intermediary to compensate a third party
for directing potential investors to the intermediary's platform under
the limited circumstances described above? Why or why not? Should any
disclosures be required? Why or why not? Please identify reasonable
alternatives to this approach, if any.
    188. What other concerns may be relevant in the context of third
parties referring others to intermediaries, and how could they be
addressed? For example, should compensation be limited in some
additional way? Please explain.

D. Additional Requirements on Funding Portals

1. Registration Requirement
a. Generally
    Securities Act Section 4A(a)(1) requires that an intermediary
facilitating a transaction made in reliance on 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.\518\ 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 us to
impose, as part of our authority to exempt funding portals from broker
registration, ``such other requirements under [the Exchange Act] as the
Commission determines appropriate.''
---------------------------------------------------------------------------

    \518\ Compare Exchange Act Section 15(b) [15 U.S.C. 78o(b)]
(prescribing the manner of registration of broker-dealers).
---------------------------------------------------------------------------

    Some commenters asked specifically for clarification on the nature
of a funding portal's registration requirements.\519\ One commenter
suggested that we permit a funding portal to have multiple intermediary
Web sites under a single registration application.\520\ The commenter
argued that this will permit a registered funding portal to offer
issuers the opportunity to offer their securities on a funding portal
Web site that is specific as to parameters such as industry, geography,
community and affinity group, which would result in a better organized
market for both issuers and investors.
---------------------------------------------------------------------------

    \519\ See NSBA Letter; RocketHub Letter 1. See also Applied
Dynamite Letter (stating that the requirements for those who wish to
be intermediaries in offerings pursuant to Rule 506 of Regulation D
should be harmonized with those for funding portals, and that we
should provide for a common registration process for the two). We
note, however, that Securities Act Section 4(b)(1) provides an
exemption from broker-dealer registration for certain portals
facilitating transactions pursuant to Rule 506 of Regulation D, as
revised by Section 201 of the JOBS Act.
    \520\ See NCA Letter.
---------------------------------------------------------------------------

    One commenter asked us to consider the creation of a ``Registered
Portal-Check,'' similar to the BrokerCheck system maintained by FINRA,
to provide greater transparency to participants in Section 4(a)(6)
transactions.\521\ Another commenter

asked us to require that funding portals, like issuers engaged in
crowdfunding transactions in reliance on Section 4(a)(6), be organized
under and subject to the laws of a State or territory of the United
States or the District of Columbia.\522\
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    \521\ See CFIRA Letter 2 (further stating that the system should
``clearly identify the registration status of a funding portal and
its management, display any regulatory actions against such portal
and provide a hyperlink to its Web site'').
    \522\ See Liles Letter 2 (stating that this requirement would
strengthen the ability of the Commission and other U.S. authorities
to make surprise audits or investigations of, or bring enforcement
action against, a funding portal).
---------------------------------------------------------------------------

    We are proposing 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 Form BD.\523\
Under the proposed rules, a funding portal would register by completing
a Form Funding Portal, which includes information concerning the
funding portal's principal place of business, its legal organization
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.\524\ We also are
proposing, as discussed in greater detail below, not to permit
nonresident entities to register as funding portals unless they comply
with certain conditions designed to provide the Commission and FINRA
(or any other registered national securities association) with
appropriate tools for supervising such entities.
---------------------------------------------------------------------------

    \523\ See 158 Cong. Rec. S2230-31 (daily ed. Mar. 29, 2012)
(statement of Sen. Scott Brown) (``As the Securities and Exchange
Commission works to implement this new law, it is my hope that it
will recognize that the funding portal registration process is meant
to be more streamlined and less burdensome than traditional broker-
dealer registration''); 158 Cong. Rec. S1817-29 (daily ed. Mar. 20,
2012) (statement of Sen. Jeff Merkley) (``Our amendment provides two
pathways: The first pathway is for a portal to register as a broker-
dealer. The second is streamlined funding portal registration.'').
    \524\ See proposed Rule 400(a) of Regulation Crowdfunding. We
discuss below the information required to be included in the form.
---------------------------------------------------------------------------

    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. This approach is intended to help ensure that a
funding portal is subject to regulation by the Commission and FINRA or
any other national securities association before it can engage in
business with the public.
    We also are proposing to require a funding portal to file an
amendment to Form Funding Portal within 30 days of any of the
information previously submitted on Form Funding Portal becoming
inaccurate for any reason.\525\
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    \525\ See proposed Rule 400(b) of Regulation Crowdfunding. A
similar process exists for registered broker-dealers under Exchange
Act Rule 15b3-1 (17 CFR 240.15b3-1).
---------------------------------------------------------------------------

    The proposed rules 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.\526\ The registration would be deemed to 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.\527\ The
rule would further provide that, if 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. Form
Funding Portal would require the successor to provide certain
information, such as the name and Commission file number of the
predecessor. The successor also would be required to briefly describe
details of the succession, including any assets or liabilities not
assumed by the successor.
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    \526\ See proposed Rule 400(c) of Regulation Crowdfunding.
    \527\ 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 is filed by the
successor. A similar process exists for registered broker-dealers
under Exchange Act Rule 15b1-3 (17 CFR 240.15b1-3).
---------------------------------------------------------------------------

    The proposed rules are intended to provide an efficient
registration mechanism for a person that becomes a successor to a
funding portal.\528\ The provisions on succession are intended to be
used only when there is a direct and substantial business nexus between
the predecessor and the successor.\529\ The proposed rules would not be
designed for use by a funding portal in order to sell its registration,
eliminate substantial liabilities, spin off personnel or facilitate the
transfer of a ``shell'' organization that does not conduct a funding
portal business. To require that there be a legitimate connection
between the predecessor and the successor, the instructions to the
proposed Form Funding Portal would limit the term ``successor'' to an
entity that assumes or acquires substantially all of the assets and
liabilities of the predecessor funding portal's business. In addition,
the proposed rule would not apply where the predecessor funding portal
intends to continue to engage in funding portal activities.\530\
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    \528\ We are proposing to treat funding portal successions in a
manner consistent with broker-dealer successions. See Registration
of Successors to Broker-Dealers and Investment Advisers, Release No.
34-31661 (Dec. 28, 1992) [58 FR 7 (Jan. 4, 1993)].
    \529\ We are proposing that a direct and substantial nexus exist
between a predecessor and successor funding portal to be consistent
with the applicable rules for broker-dealer successions.
    \530\ See proposed Rule 400(c)(1) of Regulation Crowdfunding,
which requires the predecessor funding portal to file a withdrawal
on Form Funding Portal as a condition of the successor registration.
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    In certain circumstances, the proposed rule would allow the
successor to file an amendment to the predecessor's Form Funding
Portal. Successions by amendment would be limited to those successions
that result from a formal change in the structure or legal status of
the funding portal but do not result in a change in control.\531\
Assuming that there is no change in control, succession by amendment
would be available for changes in the form of organization, in legal
status and in composition of a partnership.
---------------------------------------------------------------------------

    \531\ See proposed Rule 400(c)(2) of Regulation Crowdfunding.
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    In all other successions, the successor would be able to operate
under the registration of the predecessor for a limited period of time
only if it files its own completed application for registration on Form
Funding Portal within 30 days after such succession. Examples of the
types of successions that would require this type of application filing
would include, but not be limited to, acquisitions and consolidations.
    The proposed rules would require a funding portal to promptly file
a withdrawal of registration on Form Funding Portal upon ceasing to
operate as a funding portal.\532\ The withdrawal would be effective on
the later of 30 days after receipt by the Commission, after the funding
portal is no longer operational, within such longer period of time as
to which the funding portal consents or within such period of time as
to which the Commission, by order, may determine as necessary or
appropriate in the public interest or for the protection of
investors.\533\ This

delaying provision would provide time to evaluate whether a withdrawal
is the result of a legitimate winding down of a funding portal's
business or whether there are additional factors to consider in
connection with the funding portal's withdrawal that are relevant to
the protection of investors. Based on such information, we would
determine whether any actions, including enforcement proceedings,
should be taken against the withdrawing funding portal.
---------------------------------------------------------------------------

    \532\ See proposed Rule 400(d) of Regulation Crowdfunding.
    \533\ 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.
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    The proposed rules \534\ provide that each application for
registration, amendment thereto, successor registration or withdrawal
would be considered filed when a complete Form Funding Portal is
submitted with the Commission or its designee. The proposed rules also
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.
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    \534\ See proposed Rule 400(e) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Under the approach to registration that we are proposing, and as
described by the requirements of proposed Form Funding Portal
(discussed below), a funding portal would be able to operate multiple
Web site addresses under a single funding portal registration, provided
the funding portal discloses on Form Funding Portal all the Web sites
and names under which it does business. Allowing for multiple Web site
addresses might allow a funding portal to customize each address to fit
its specific needs, such as appealing to certain industries or
investors while reducing regulatory costs. We recognize that permitting
multiple Web site addresses by a single registrant could result in
investors being confused about the identity of the registrant. We
believe, however, that the potential for confusion is justified by the
value of the additional flexibility afforded to intermediaries.\535\
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    \535\ We note that brokers are currently required to prominently
disclose in any retail communications their name, or the name under
which their broker-dealer business is primarily conducted as
disclosed on their registration form. See FINRA Rule 2210(d)(3).
---------------------------------------------------------------------------

    One commenter requested that we implement a system similar to the
BrokerCheck system operated by FINRA for registered funding
portals.\536\ We are not proposing that the Commission create such a
system at this time because, as discussed below, the information in a
funding portal's completed Form Funding Portal would be available for
public viewing through the Commission's Web site or other such
electronic system, as determined by the Commission in the future,
subject to the redaction of certain personally identifiable
information, or other information with a significant potential for
misuse, of the contact person(s) or other identified individuals of the
funding portal.
---------------------------------------------------------------------------

    \536\ See CFIRA Letter 2.
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Request for Comment
    189. Is the proposed method for registration appropriate? Why or
why not? Are there methods that would be less burdensome to potential
funding portals while not impairing investor protection? If so, what
are those methods?
    190. Should we impose other restrictions or prohibitions on
affiliations of the funding portal, such as affiliation with a
registered broker-dealer or registered transfer agent? If so, what are
they and why?
    191. Should the Commission, as proposed, permit a funding portal to
have multiple intermediary Web sites under a single registration
application? Why or why not?
b. Form Funding Portal
    A funding portal seeking to register with the Commission would need
to file a completed Form Funding Portal with the Commission.\537\ We
propose 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.
---------------------------------------------------------------------------

    \537\ See proposed Rule 400(a) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    To access the registration system and enter information on Form
Funding Portal, a funding portal would have to first establish an
account and obtain credentials (i.e., username and password). We
propose that an applicant would need to fill out general user
information fields, including name, address, phone number, email
address, organization name and employer identification number, and user
account information (i.e., username and password), and select and
answer a security question. Once accepted by the registration system,
the applicant would receive an email notification that the account has
been established, and the applicant would be able to access and
complete Form Funding Portal. We anticipate that applicants ordinarily
would obtain access credentials the same day that they are requested.
    In order to complete Form Funding Portal, a funding portal would be
required to check a box indicating the purpose for which the funding
portal is 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.
    If the funding portal is submitting an amendment or withdrawing
from registration, it also would be necessary to provide the Commission
file number assigned to the funding portal at the time of its initial
application to register. This information would be used to cross-
reference amendments and withdrawals to the original registration, thus
allowing Form Funding Portal to be used for the initial application to
register, amendments to registration and withdrawal from registration.
    We intend proposed Form Funding Portal to be a streamlined version
of Form BD. We believe Form BD is an appropriate model for Form Funding
Portal, because funding portals are limited purpose brokers that are
conditionally exempt from registration as broker-dealers. There are
certain questions on Form BD that we believe are not applicable to
funding portals. For example, a funding portal is prohibited from
holding or maintaining customer funds or securities; therefore,
proposed Form Funding Portal, unlike Form BD, does not include any
questions about holding customer funds and securities. Funding portals
also are restricted in their activities in ways that broker-dealers are
not; thus, proposed Form Funding Portal includes particular questions
that address these differences. For example, because a funding portal
is prohibited from holding and maintaining customer funds, proposed
Form Funding Portal would request information about a funding portal's
escrow arrangements. As funding portals also are subject to certain
compensation restrictions, Form Funding Portal would require a
description of the funding portal's compensation arrangements.
    Form Funding Portal seeks to strike a balance between efficiency in
completing the form and requesting sufficient information from funding
portals. The proposed form consists of eight sections, including items
related to: identifying information, form of organization, successions,
control persons, disclosure information, non-securities related
business, escrow, and 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.\538\ In addition, an applicant would be required to describe
any non-securities related business activities and supply information
about its escrow arrangements, compensation arrangements with issuers
and fidelity bond.\539\ 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 below,\540\ 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
be required to complete Schedule C to Form Funding Portal, which
requires information about the applicant's arrangements to have an
agent for service of process in the United States, as well as 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.
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    \538\ 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.
    \539\ See Section II.D.1.c. below.
    \540\ See Section II.D.1.d. below.
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    We propose that a person duly authorized to bind the funding portal
be required to sign Form Funding Portal in order to execute the
documents.\541\ A person executing Form Funding Portal and Schedule C
(if applicable) would be required 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.\542\ The funding portal also would be required
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.\543\
---------------------------------------------------------------------------

    \541\ See execution statement of proposed Form Funding Portal.
    \542\ See id.
    \543\ See id.
---------------------------------------------------------------------------

    We believe that this information is important for our oversight of
funding portals, including, among other things, assessing a funding
portal's application and performing examinations of funding portals,
and that it is pertinent to investors and issuers. We propose 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).\544\ Making these
documents publicly available and searchable would enhance transparency
of the registration process and the funding portal industry as it
develops, while the limited redactions would appropriately protect the
privacy of the individuals involved.
---------------------------------------------------------------------------

    \544\ See the proposed Instructions to Form Funding Portal.
---------------------------------------------------------------------------

Request for Comment
    192. What type of web-based registration should the Commission use
for accessing Form Funding Portal? Would a system like EDGAR be
appropriate, or would a different type of system be preferable? Why?
    193. Should we consider alternatives to creating a new form for
funding portal registration? Should we amend the existing Form BD to
provide for funding portal registration? Why or why not? Which
questions on Form BD would be relevant to funding portals and why? Are
there other questions we should include for funding portals that are
not on the proposed Form Funding Portal or in existing Form BD? If so,
which questions and why?
    194. Are there types of information (other than personally
identifiable information) required by proposed Form Funding Portal that
should not be made readily accessible to the public? If so, what types
of information and why?
    195. Should we require the identifying and contact information
requested on Form Funding Portal, or should it be modified in any way?
Should additional information be required? If so, which information and
why?
    196. Are the proposed disclosures in Form Funding Portal unduly
burdensome? Are there certain requirements that should be eliminated or
modified? Which requirements and why? Would such changes be consistent
with investor protection?
    197. Should proposed Form Funding Portal be modified to request
from funding portals a narrative description of their compliance
programs and due diligence procedures with respect to issues? Would
some other form of reporting be more useful? Why or why not?
    198. Are the proposed representations required of a person who
executes Form Funding Portal appropriate? Should the Commission require
attestations? If so, from whom?
    199. Should we require any other information from a funding portal
that is withdrawing from registration?
c. Fidelity Bond
    The proposed rules would require, as a condition of registration,
that a funding portal have in place, and thereafter maintain for the
duration of such registration, a fidelity bond \545\ 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, as set
forth by FINRA or any other registered national securities association
of which it is a member.\546\
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    \545\ A fidelity bond is a type of insurance that aims to
protect its holder against certain types of losses, including but
not limited to those caused by the malfeasance of the holder's
officers and employees, and the effect of such losses on the
holder's capital. See Release No. 34-63961 (Feb. 24, 2011) [76 FR
11542 (Mar. 2, 2011)].
    \546\ See proposed Rule 400(f) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Although not mandated by the statute, we believe that a fidelity
bond requirement would help insure against the loss of investor funds
that might occur if, for example, a funding portal were to violate the
prohibition set forth in Section 304(b) of the JOBS Act on holding,
managing, possessing or otherwise handling investor funds or
securities. This is a meaningful

protection because funding portals would not be members of the
Securities Investor Protection Corporation (``SIPC''). If a firm is a
SIPC member and goes out of business, then the cash and securities held
for each customer by that firm are generally protected up to $500,000,
including a $250,000 limit for cash.\547\ Because funding portals are
non-SIPC members,\548\ funding portal customers would not receive this
SIPC protection. Furthermore, given that we are not proposing to
require, pursuant to our discretionary authority, that funding portals
be subject to minimum net capital requirements, a fidelity bond would
provide a single layer of protection, in the event of such losses.
While the proposed rule imposes this requirement as a condition to
registration, we anticipate that, like the fidelity bond requirement
registered broker-dealers are currently subject to pursuant to SRO
rules, specific requirements of the fidelity bond for funding portals
would be set forth in rules of FINRA or any other registered national
securities association. In recognition of the limits on the amounts
investors may invest, and the amounts issuers may raise, through
crowdfunding, as provided in Section 4(a)(6), we propose to require
that funding portals' fidelity bonds have an amount of coverage that is
equivalent to the minimum amount of coverage registered broker-dealers
are required to have under FINRA Rule 4360, which is $100,000.\549\
Furthermore, we believe that fidelity bond coverage would be most
effective if it covers actions by not only the funding portal entity,
but also all of its associated persons.
---------------------------------------------------------------------------

    \547\ See the Securities Investor Protection Act of 1970, Pub.
L. No. 91-598 (1970).
    \548\ Membership in SIPC applies only to persons registered as
brokers or dealers under Section 15(b) of the Exchange Act. See 15
U.S.C. 78ccc(a)(2).
    \549\ See FINRA Rule 4360. Introducing brokers, like funding
portals, do not hold customer funds and securities. Introducing
brokers are required to maintain a minimum bond of $100,000 under
current SRO rules, and we are proposing the same minimum amount for
funding portals.
---------------------------------------------------------------------------

Request for Comment
    200. Is it appropriate for us to require a funding portal to have a
fidelity bond? Why or why not?
    201. With respect to the fidelity bond requirement, is the proposed
coverage of $100,000 appropriate for funding portals? If not, what
other amount or formula for calculating the required amount would be
more appropriate and why?
    202. Is it appropriate to require the fidelity bond to cover
associated persons of the funding portal? Why or why not?
    203. Are there other specific terms of a fidelity bond that we
should consider requiring? If so, what terms and why?
    204. Apart from requiring a funding portal to have a fidelity bond,
is there some other requirement that could be imposed on funding
portals, like insurance or something similar to SIPC, which would
further protect investors? If so, what type of requirement and why?
d. Requirements for Nonresident Funding Portals
    Although there is no statutory requirement that funding portals be
domestic entities, we are mindful of our ability to effectively oversee
this new category of registrants--as well as more generally the
development of the new crowdfunding market and role of intermediaries
in that market--given the greater challenges entailed in supervising,
examining, and enforcing the requirements that would be applicable to
activities of intermediaries based outside the United States.\550\ At
the same time, we recognize that the use of funding portals located
outside the United States could provide more choices for U.S. issuers
seeking to engage an intermediary to facilitate a crowdfunding
offering, and potentially expand those issuers' access to investors
located abroad. In seeking to strike an appropriate balance among these
considerations, we propose not to permit nonresident entities to
register as funding portals unless they comply with certain conditions
designed to provide the Commission and FINRA (or any other registered
national securities association) with appropriate tools for supervising
such entities.
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    \550\ The exemption under Section 4(a)(6) is not available for a
transaction involving the offer or sale of securities by an issuer
that is not organized under and subject to the laws of a State or
territory of the United States or the District of Columbia. See
Section 4A(f), discussed in Section II.A.3 above.
---------------------------------------------------------------------------

    Under the proposed rules, registration pursuant to Rule 400 of
Regulation Crowdfunding by a nonresident funding portal (a funding
portal incorporated in or organized under the laws of any jurisdiction
outside of the United States or its territories, or having its
principal place of business outside the United States or its
territories) \551\ would be first conditioned upon there being an
information sharing arrangement in place between the Commission and the
competent regulator in the jurisdiction under the laws of which the
nonresident funding portal is organized or where it has its principal
place of business that is applicable to the nonresident funding portal.
The proposed rules would further require a nonresident funding portal
to (1) obtain a written consent and power of attorney appointing an
agent for service of process in the United States (other than the
Commission or a Commission member, official or employee), upon whom may
be served any process, pleadings, or other papers in any action; (2)
furnish the Commission with the name and address of its agent for
services of process on Schedule C of Form Funding Portal; (3) certify
that it can, as a matter of law, provide the Commission and any
national securities association of which it is a member with prompt
access to its books and records and can, as a matter of law, submit to
onsite inspection and examination by the Commission; and (4) provide
the Commission with an opinion of counsel and certify on Schedule C on
Form Funding Portal that the firm can, as a matter of law, provide the
Commission and such national securities association with prompt access
to its books and records and can, as a matter of law, submit to onsite
inspection and examination by the Commission and the national
securities association.\552\
---------------------------------------------------------------------------

    \551\ See proposed Rule 400(g)(1) of Regulation Crowdfunding.
    \552\ See proposed Rule 400(g) of Regulation Crowdfunding.
Exchange Act Section 3(h)(1)(C) permits us to impose, as part of our
authority to exempt funding portals from broker registration, ``such
other requirements under [the Exchange Act] as the Commission
determines appropriate.''
---------------------------------------------------------------------------

    In general, the requirements for nonresident funding portals that
we are proposing are consistent with those we have proposed for other
nonresident entities subject to our regulation.\553\ These requirements
aim to ensure that funding portals that are not based in the United
States, or that are subject to laws other than those of the United
States, would nevertheless be accessible to us and other relevant
regulators for purposes of accessing the books and records of,
conducting examinations and inspections of, and enforcing U.S. laws and
regulations with respect to, these entities.
---------------------------------------------------------------------------

    \553\ See, e.g., Registration of Security-Based Swap Dealers and
Major Security-Based Swap Participants, Release No. 34-65543 (Oct.
12, 2011) [76 FR 65784 (Oct. 24, 2011)], at 65799-65801. See also
Cross-Border Security-Based Swap Activities; Re-Proposal of
Regulation SBSR and Certain Rules and Forms Relating to the
Registration of Security-Based Swap Dealers and Major Security-Based
Swap Participants, Release No. 34-69490 (May 1, 2013) [78 FR 30968
(May 23, 2013)].
---------------------------------------------------------------------------

    Requirements for a nonresident funding portal to obtain an agent
for service of process in the United States, and to furnish the
Commission with the name and address of this agent, are important to
facilitate enforcement of the federal securities laws and the rules
thereunder by the Commission and

others (e.g., the U.S. Department of Justice and any other agency or
entity with law enforcement authority). The proposed rules also would
require a registered nonresident funding portal to promptly appoint a
successor agent if it discharges its identified agent for service of
process or if its agent for service of process is unwilling or unable
to accept service on its behalf. A registered funding portal must
promptly amend Schedule C to its Form Funding Portal if its agent, or
the agent's name or address, changes. Finally, the proposed rules would
require the registered nonresident funding portal to maintain, as part
of its books and records, the agreement with the agent for service of
process for at least three years after termination of the agreement.
    The proposed rules would require that each nonresident funding
portal provide an opinion of counsel and certify, as a matter of law,
that it can provide the Commission, and the national securities
association of which it is a member, with prompt access to its books
and records and submit to onsite inspections and examinations. We
believe that this proposed certification and supporting opinion of
counsel are important to confirm that each nonresident funding portal
is in the position to provide the Commission and the national
securities association with information that is necessary for us and
the national securities association to effectively fulfill our
regulatory oversight responsibilities.\554\ Commenters have previously
brought to our attention that it may conflict with the laws of certain
jurisdictions to provide such an opinion.\555\ Failure to make this
certification or provide an opinion of counsel would provide a basis to
deny an application for registration.
---------------------------------------------------------------------------

    \554\ See Exchange Act Section 3(h)(1)(A).
    \555\ See comment letter from Sarah A. Miller, Chief Executive
Officer, Institute of International Bankers, dated August 21, 2013,
available at https://www.sec.gov.edgekey.net/comments/s7-34-10/s73410.shtml. See also comment letters from Patrick Pearson,
European Commission, dated August 21, 2013, and Kenneth E Bentsen,
Jr., Executive Vice President, Public Policy and Advocacy,
Securities Industry and Financial Markets Association, dated
December 16, 2011, available at https://www.sec.gov.edgekey.net/comments/s7-34-10/s73410.shtml; comment letter from Carlos Tavares,
Vice-Chairman, European Securities and Markets Authority, dated
January 17, 2011, available at http://www.sec.gov/comments/s7-35-10/s73510-19.pdf.
---------------------------------------------------------------------------

    The requirement for an information sharing agreement is designed to
provide the Commission greater assurance that it will be able to obtain
the information about a nonresident funding portal necessary for the
Commission's oversight of the nonresident funding portal. The home
country regulator may possess information concerning, for example, the
funding portal's affiliations, contractual relationships with issuers,
and the nature and extent of measures taken to protect investors. In
this context, particularly in the event that evidence arises of
potential fraudulent or other unlawful activity by a nonresident
funding portal, the ability to obtain information and secure the
cooperation of the home country regulator according to established
practices and protocols should help to address the increased challenges
that may arise from oversight of entities located outside the United
States.
    A registered nonresident funding portal also would be required to
re-certify, on Schedule C to Form Funding Portal, within 90 days after
any relevant changes in its legal or regulatory framework, and provide
a revised opinion of counsel confirming that, as a matter of law, the
entity will continue to meet its obligations to provide the Commission
and the national securities association with prompt access to its books
and records and to be subject to inspection and examination. Failure to
make this certification or provide an opinion of counsel may be a basis
for the Commission to revoke the nonresident funding portal's
registration.
Request for Comment
    205. Is the term nonresident funding portal defined appropriately?
If not, how should it be modified? Please explain.
    206. Should the Commission impose additional or different
conditions for nonresident funding portals than those proposed? If so,
what conditions, and why? Should any be eliminated? Why or why not?
What effect might such conditions have on the development of the
industry and the market, and on issuers and investors? Please explain.
    207. If, as a matter of law, it would be impossible or impractical
for a nonresident funding portal to obtain the required opinion of
counsel, what other actions or requirements could address our concern
that we and the national securities association would be able to have
direct access to books and records and adequately examine and inspect
the funding portal?
    208. Should any of the proposed requirements be more specific? For
example, should only certain types of entities (such as law firms) be
allowed to act as U.S. agents for service of process? Please explain.
    209. Should a nonresident funding portal be required to appoint a
U.S. agent for purposes of all potential legal proceedings, including
those from nongovernmental entities? Why or why not?
    210. Should we require the opinion of counsel if it might
contradict the laws of a jurisdiction where an intermediary is
incorporated? Why or why not? If not, should we impose an alternative
requirement?
    211. Should we specify that the opinion of counsel contain any
additional information? For instance, should we require the opinion to
reference the applicable local law or, in the case of an amendment, the
manner in which the local law was amended? Please explain.
2. Exemption From Broker-Dealer Registration
    Exchange Act Section 3(h)(1) directs the Commission to exempt,
conditionally or unconditionally, a registered funding portal from the
requirement to register as a broker or dealer under Exchange Act
Section 15(a), provided that the funding portal: (1) Remains subject to
the examination, enforcement and other rulemaking authority of the
Commission; (2) is a member of a registered national securities
association; and (3) is subject to other requirements that the
Commission determines appropriate. The proposed rules would exempt a
registered funding portal from the broker registration requirements of
Exchange Act Section 15(a)(1), in connection with its activities as a
funding portal.\556\
---------------------------------------------------------------------------

    \556\ See proposed Rule 401(a) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    But for the exemption from registration Congress directed, a
funding portal would be required to register as a broker under the
Exchange Act.\557\ The obligations imposed under the JOBS Act on an
entity acting as an intermediary in a crowdfunding transaction would
bring that entity within the definition of ``broker'' under Exchange
Act Section 3(a)(4). A funding portal would be ``effecting transactions
in securities for the account of others'' by, among other things,
ensuring that investors comply with the conditions of Securities Act

Section 4A(a)(4) and (8), making the securities available for purchase
through the funding portal, and ensuring the proper transfer of funds
and securities as required by Securities Act Section 4A(a)(7).\558\ In
addition, a funding portal's receipt of compensation linked to the
successful completion of the offering also would be indicative of
acting as a broker in connection with these transactions.
---------------------------------------------------------------------------

    \557\ See Exchange Act Section 3(a)(4)(A) [15 U.S.C.
78c(a)(4)(A)] (defining ``broker'' as ``any person engaged in the
business of effecting transactions in securities for the account of
others''). An entity acting as an intermediary in the offer and sale
of securities pursuant to Section 4(a)(6), as contemplated in Title
III of the JOBS Act, would not come within the meaning of
``dealer,'' which is defined in Exchange Act Section 3(a)(5)(A) (15
U.S.C. 78c(a)(4)(A)), because it would not be engaging in the
business of buying and selling securities for its own account. See
also Exchange Act Section 15(a) [15 U.S.C. 15o(a)] and proposed Rule
300(b) of Regulation Crowdfunding.
    \558\ At the same time, there are statutory restrictions on the
scope of services that a funding portal could provide. Among other
things, a funding portal could act as an intermediary only in
transactions involving the offer or sale of securities pursuant to
Securities Act Section 4(a)(6). Further, a funding portal, by
definition, could not offer investment advice or recommendations;
solicit purchases, sales, or offers to buy the securities offered or
displayed on its Web site or portal; compensate persons for such
solicitation or based on the sale of securities displayed or
referenced on its Web site or portal; or hold manage, possess or
otherwise handle investor funds or securities. See generally
Exchange Act Section 3(a)(80).
---------------------------------------------------------------------------

    Pursuant to Exchange Act Section 3(h)(1), as stated above, we are
proposing rules that would exempt an intermediary that is registered as
a funding portal from the requirement to register as a broker-dealer
under Exchange Act 15(a)(1). Consistent with the JOBS Act, the funding
portal would remain subject to the full range of our examination and
enforcement authority.\559\ In this regard, the proposed rules would
require that a funding portal permit the examination and inspection of
all of its business and business operations that relate to its
activities as a funding portal, such as its premises, systems,
platforms and records, by representatives of the Commission, and of the
national securities association of which it is a member.\560\ The
proposed rules also would impose certain recordkeeping
requirements.\561\
---------------------------------------------------------------------------

    \559\ See Exchange Act Section 3(h)(1)(C). See also Securities
Act Section 20 [15 U.S.C. 77t] and Exchange Act Sections 21 and 21C
[15 U.S.C. 78u and 78u-3]. In addition, we highlight that Exchange
Act Sections 15(b)(4) and 15(b)(6) (15 U.S.C. 78o(b)(4) and
78o(b)(6)) apply to brokers (including funding portals) regardless
of whether or not they are registered with the Commission as
brokers. Exchange Act Section 15(b)(4) authorizes the Commission to
bring administrative proceedings against a broker when the broker
violates the federal securities laws (and for other misconduct) and
provides for the imposition of sanctions, up to and including the
revocation of a broker's registration. Exchange Act Section 15(b)(6)
provides similar enforcement authority against the persons
associated with a broker, including barring persons from associating
with any Commission registrant. See Section II.D.3 below for further
discussion, in response to commenters' concerns, about the scope of
permissible activities in which funding portals may engage under the
safe harbor of proposed Rule 402.
    \560\ See proposed Rule 403 of Regulation Crowdfunding. See also
discussion in Section II.D.4 below.
    \561\ See proposed Rule 404 of Regulation Crowdfunding. See also
discussion in Section II.D.5 below.
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    The proposed rules would provide that, notwithstanding this
exemption from broker registration, for purposes of Chapter X of Title
31 of the Code of Federal Regulations, a funding portal would be deemed
to be ``required to be registered'' as a broker with the Commission
under the Exchange Act, thereby requiring funding portals to comply
with Chapter X, including certain anti-money laundering (``AML'')
provisions thereunder.\562\
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    \562\ See 31 CFR 1010.100(h) and 1023.100(b) (defining broker or
dealer for purposes of the applicability of AML requirements). See
Currency and Foreign Transactions Reporting Act of 1970 (commonly
referred to as the Bank Secrecy Act (``BSA'')) [12. U.S.C. 1829b, 12
U.S.C. 1951-1959, 31 U.S.C. 5311-5330]. See also proposed Rule
403(b) of Regulation Crowdfunding and discussion in Section II.D.4
below. 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. As
discussed in Sections II.C.1 and II.D.2 above, a funding portal is a
broker that, in the absence of the exemption from the requirement to
register as a broker or dealer provided for under the JOBS Act in
Exchange Act Section 3(h)(1), would otherwise be required to
register as a broker under Section 15(a) (15 U.S.C. 78o) of the
Exchange Act, and by being so registered, would be subject to the
full range of BSA obligations applicable to registered broker-
dealers. As discussed further in Section II.D.4.b below, we believe
such obligations also should be imposed on funding portals.
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Request for Comment
    212. Is the proposed exemption for funding portals from broker
registration appropriate? Why or why not?
    213. Should the exemption be conditioned on the funding portal
remaining in compliance with Subpart D of the proposed rules? Why or
why not?
    214. Is it appropriate to propose to require funding portals to
comply with the same requirements for purposes of Chapter X of Title 31
of the Code of Federal Regulations as imposed on a person required to
be registered as a broker or a dealer? Why or why not?
    215. Should the proposed exemption from broker registration be
conditioned upon a funding portal's compliance with applicable Subpart
C and D rules of proposed Regulation Crowdfunding? Why or why not?
Should the failure to comply with certain requirements cause a funding
portal to lose its exemption? If so, which requirements and why? Under
what circumstances should the Commission consider revoking the
exemption of a funding portal that fails to comply with these
requirements?
3. Safe Harbor for Certain Activities
    Exchange Act Section 3(a)(80) provides that a funding portal may
not offer investment advice or make recommendations; solicit purchases,
sales or offers to buy the securities offered or displayed on its
platform or portal; compensate employees, agents or other persons for
such solicitation or based on the sale of securities displayed or
referenced on its platform or portal; hold, manage, possess or
otherwise handle investor funds or securities; or engage in such other
activities as the Commission, by rule, determines appropriate.
    We received a number of comments concerning the scope and
definition of permissible activities for a funding portal. A number of
commenters sought guidance on services they might be permitted to
provide consistent with the prohibition on offering investment advice
or recommendations.\563\ We also received comments seeking
clarification about the prohibitions on funding portals soliciting
investors and handling funds and securities.\564\
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    \563\ See, e.g., NCA Letter; NSBA Letter; CFIRA Letter 2.
    \564\ See, e.g., CFIRA Letter 2; NCA Letter; Wright Letter 1;
RocketHub Letter 1; Grow VC Letter.
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    One commenter asked us to clarify what activities would constitute
prohibited investment advice and suggested that the Commission should
establish ``bright lines'' that would make it clear how a funding
portal can avoid being viewed as giving prohibited investment
advice.\565\ This commenter and others provided numerous examples of
potential funding portal activities, including:
---------------------------------------------------------------------------

    \565\ See CFIRA Letter 2.

 Advising issuers on the structure and contents of their
offerings; \566\
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    \566\ See id.
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 providing access to the portal's platform to certain issuers
and rejecting or removing others, based on criteria such as the
``type'' or ``market characteristics'' of the offerings (e.g., film
production securities, women- or minority-owned businesses or
businesses in specific geographical areas); \567\
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    \567\ See NCA Letter; NSBA Letter.
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 removing an offering before the end of the offering period for
lack of investor interest; \568\
---------------------------------------------------------------------------

    \568\ See id.
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 removing an issuer for failing to provide documents responsive
to the funding portal's due diligence or qualification standards,
including standards other than those established by our rules,\569\ or
the portal's belief

that an offering or the issuer may be fraudulent or abusive; \570\
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    \569\ See id.
    \570\ See CFIRA Letter 3.
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 highlighting, or otherwise making more prominent, the
offering(s) of one or more issuers; \571\
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    \571\ See RocketHub Letter 1; Wright Letter 1.
---------------------------------------------------------------------------

 organizing issuers listed on the funding portal's platform
into groups based on the funding portal's view of the riskiness of the
investment; \572\
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    \572\ See id.
---------------------------------------------------------------------------

 providing information management tools (i.e., search functions
and automatic notification mechanisms) on the funding portal's
platform; \573\
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    \573\ See CFIRA Letter 3.
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 providing a ``valuation framework'' that could guide investors
in determining a fair valuation for securities listed on the funding
portal's platform, while also creating a ``negotiation space'' for an
issuer and its potential investors; \574\ and
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    \574\ A ``negotiation space'' would provide some ability for
investors to set or influence the price of the securities, which
would not necessarily depend on a specific valuation of the
securities. See Pearfunds Letter.
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 hosting on the funding portal's platform:
    [cir] third-party market and news updates; \575\
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    \575\ See RocketHub Letter 1; Wright Letter 2.
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    [cir] third-party opinions (including those of investors) on
message boards and other information exchanges moderated by the funding
portal; \576\ or
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    \576\ See CFIRA Letter 3; Applied Dynamite Letter; Grow VC
Letter.
---------------------------------------------------------------------------

    [cir] judgments about issuers made by a funding portal or its
vendors or partners.\577\
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    \577\ See Applied Dynamite Letter.
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    With regard to the prohibition on solicitation, one commenter noted
that the mere act of having a web platform available to the public on
which issuers can list their offerings could be viewed as impermissible
solicitation.\578\ Another commenter asked whether funding portals
would be permitted to compensate employees and agents to solicit
issuers by commission, referral fee or otherwise.\579\ Another
commenter asked that we preserve the ability of funding portals to pay
for search listings or advertisements in online social networks.\580\
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    \578\ See Crowdfunding Offerings Ltd. Letter 2.
    \579\ See NCA Letter.
    \580\ See Cera Technology Letter.
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    Commenters requested that we identify the kinds of third parties
that could hold, manage, possess or otherwise handle investor funds and
securities in connection with an offering made in reliance on Section
4(a)(6).\581\ One commenter stated that a fiduciary would likely hold
the funds for disposition as instructed by the funding portal and asked
whether this instruction would constitute an impermissible handling of
the funds.\582\ Another commenter stated that an intermediary should be
authorized by the issuer and investors to operate as an escrow agent to
facilitate transactions.\583\ One commenter asserted that funding
portals need the ability to temporarily hold customer funds to properly
clear and settle a securities transaction.\584\ The commenter further
contended that, to ensure issuers are not overwhelmed with thousands of
new shareholders, intermediaries, including funding portals, should be
able to act as nominees of the investors who are the beneficial owners
of the securities.
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    \581\ See Crowdfunding Offerings Ltd. Letter 2; NSBA Letter.
    \582\ See Crowdfunding Offerings Ltd. Letter 4.
    \583\ See RocketHub Letter 1 (further stating that the
intermediary should be permitted to hold investor funds in an escrow
account that is segregated from the operating funds of the
intermediary and that withdrawals from the account only be permitted
for: ``payments to offerings that have successfully closed (having
reached or exceeded their funding goals); payments to investors
requesting refunds of uncommitted funds; or payment of established
intermediary fees'').
    \584\ See Grow VC Letter.
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    In light of these questions and comments, we are proposing to
provide a non-exclusive, conditional safe harbor for funding portals
that engage in certain limited activities.\585\ Failure of a funding
portal to meet the conditions of this non-exclusive safe harbor would
not create a presumption that the funding portal is in violation of the
statutory prohibitions of Exchange Act Section 3(a)(80) or the rules in
proposed Regulation Crowdfunding.\586\
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    \585\ See proposed Rule 402 of Regulation Crowdfunding. The term
``investment advice'' is not defined in the crowdfunding provisions
of the JOBS Act or otherwise in the federal securities laws, and we
do not include a definition of that term in our proposal. In the
context of interpreting the term ``investment adviser,'' the
determination of whether a particular communication rises to the
level of investment advice depends on the facts and circumstances
and is construed broadly. To the extent a funding portal limits its
securities activities to those permitted by the proposed rules,
including the safe harbor, we preliminarily believe that it would
not come within the meaning of the term investment adviser under the
Advisers Act. If it conducts other activities, such as advising an
issuer concerning the investment of proceeds in securities, however,
it would need to consider whether it comes within the meaning of
that term under the Advisers Act. See Advisers Act Section
202(a)(11) [15 U.S.C. 80b-2(a)(11)]. See also 2012 SEC Government-
Business Forum, note 29 (stating that there is a need for safe
harbors that explicitly permit certain activities that may otherwise
be seen as indicia of broker-dealer status or activities that are
prohibited or otherwise subject to separate regulation).
    \586\ See proposed Rule 402(a) of Regulation Crowdfunding.
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    In proposing the safe harbor, we are mindful that, while Section
304 of the JOBS Act directs us to exempt a registered funding portal,
conditionally or unconditionally, from broker-dealer registration and
associated regulatory requirements, the statutory provisions also make
clear that the activities in which a funding portal may engage are far
more limited than those of a registered broker-dealer.\587\ At the same
time, we recognize that the statutory prohibitions could be read so
broadly as to limit the utility of funding portals. The proposed rule
seeks to strike an appropriate balance by identifying certain limited
activities in which a funding portal may engage, consistent with the
statutory prohibitions.\588\ These activities relate to:
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    \587\ See Exchange Act Section 3(a)(80). See also 158 Cong. Rec.
S5474-03 (daily ed. July 26, 2012) (statement of Sen. Jeff Merkley)
(``The Crowdfund Act is designed so that funding portals will be
subject to fewer regulatory requirements than broker-dealers because
they will do fewer things than broker-dealers. Among other limits,
the law prohibits funding portals from engaging in solicitation,
making recommendations, and providing investment advice. Relative
passivity and neutrality, especially with respect to the investing
public, are touchstones of the funding portal streamlined
treatment.'').
    \588\ See proposed Rule 402 of Regulation Crowdfunding.
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     Limiting offerings made on or through the funding portal's
platform based on eligibility requirements;
     highlighting and displaying offerings on the platform;
     providing communication channels for potential investors
and issuers;
     providing search functions on the platform;
     advising issuers on the structure or content of offerings;
     compensating others for referring persons to the funding
portal and for other services; and
     advertising the funding portal's existence.
    In addition, the proposed rules would clarify that, consistent with
other provisions of Regulation Crowdfunding,\589\ funding portals may
deny access to issuers in certain circumstances, accept investment
commitments and direct the transmission of funds, in connection with
offerings conducted on their platforms.
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    \589\ See, e.g., proposed Rules 303(d) and 303(e) of Regulation
Crowdfunding.
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[ssquf] Limiting Offerings
    We anticipate that some funding portals may wish to limit, to some
extent, the scope of their businesses by, for example, specializing in
offerings by issuers in certain industries or geographic locations. In
some

circumstances, these limitations could be viewed as providing