``reward,'' such as a perk or a pre-order of a product, and it defines
donation-based crowdfunding as a model where funders make philanthropic
donations to causes that they want to support, with no return on their
investment expected.\1288\ According to the industry report, royalty-
based crowdfunding, which involves a percentage of revenue from a
license or a usage-based fee for the other parties' right to the
ongoing use of an asset, continues to grow.\1289\
---------------------------------------------------------------------------

    \1285\ See Massolution 2015.
    \1286\ Id. In this industry report, ``lending-based''
crowdfunding includes peer-to-peer lending to consumers and peer-to-
business lending.
    \1287\ The report does not identify which jurisdictions were
represented in the survey. For example, France, Italy, Japan, and
the UK have adopted specialized equity crowdfunding regimes. It
should be noted that ``equity-based'' crowdfunding is not a one-
size-fits-all model. The crowdfunding regimes in these four
countries differ on a number of dimensions (e.g., securities allowed
to be sold by issuers, or types of issuers allowed to use the
exemption), amongst themselves and when compared to Regulation
Crowdfunding. Some number also allow equity crowdfunding through
their general securities laws. See Eleanor Kirby and Shane Worner,
Crowd-funding: An Infant Industry Growing Fast, Staff Working Paper
of the IOSCO Research Department, available at http://www.iosco.org/research/pdf/swp/Crowd-funding-An-Infant-Industry-Growing-Fast.pdf.
    \1288\ See Massolution 2015 at 42. Many of the current domestic
crowdfunding offerings relate to individual projects and may not
have a defined or sustained business model commensurate with typical
issuers of securities.
    \1289\ Id. at 43. The Massolution 2015 report did not provide
separate statistics on royalty-based and hybrid crowdfunding models
prior to the 2013 report.
---------------------------------------------------------------------------

    The industry report indicates that, in 2014, crowdfunding platforms
raised approximately $16.2 billion globally, which represented a 167%
increase over the amount raised in 2013.\1290\ These amounts include
various types of crowdfunding: lending-based crowdfunding accounted for
the largest share of volume (approximately $11.08 billion) followed by
equity-based crowdfunding (approximately $1.11 billion), reward-based
crowdfunding (approximately $1.33 billion), donation-based crowdfunding
(approximately $1.94 billion), royalty-based crowdfunding
(approximately $273 million), and hybrid crowdfunding (approximately
$487 million).\1291\ In 2014, North American crowdfunding volume was
approximately $9.46 billion, which represented a 145% increase over the
amount raised in 2013 \1292\ (including approximately $1.23 billion in
reward-based crowdfunding, approximately $959 million in donation-based
crowdfunding, and approximately $787.5 million in equity-based
crowdfunding, with the remainder comprised of lending-based, royalty-
based, and hybrid models \1293\). The industry report further indicates
that global equity-based crowdfunding volume grew by 182% in
2014.\1294\ According to the report, this rapid growth in equity-based
crowdfunding has been driven largely by North America and Europe.\1295\
---------------------------------------------------------------------------

    \1290\ Id. at 13.
    \1291\ Id. at 14.
    \1292\ Id. at 53.
    \1293\ Id. at 55.
    \1294\ Id. at 14. By comparison, in 2014, ``reward-based''
crowdfunding grew by 84%, ``lending-based'' crowdfunding by 223%;
``donation-based'' crowdfunding by 45%; ``royalty-based''
crowdfunding by 336%; and ``hybrid'' crowdfunding by 290%.
    \1295\ Id. at 55. ``Equity-based'' crowdfunding in North America
($787.5 million) and Europe ($177.5 million) grew by 301% and 145%,
respectively.
---------------------------------------------------------------------------

    The industry report further indicates that, in 2014 the worldwide
average size of a funded campaign was less than $4,000 for consumer
lending-based, reward-based, and donation-based crowdfunding
types.\1296\ Crowdfunded business loans and equity-based campaigns,
however, were substantially higher. In 2014, the global average size of
a funded peer-to-business lending-based crowdfunding campaign was
$103,618.\1297\ In 2014, a typical equity-based campaign was larger,
with the global average size of $275,461.\1298\ These figures suggest
that the types of ventures financed through equity-based crowdfunding
could be different than those financed through other crowdfunding
methods. In 2014, the average size of a funded equity-based campaign in
North America was $175,000.\1299\
---------------------------------------------------------------------------

    \1296\ Id. at 59.
    \1297\ Id. at 60.
    \1298\ Id. at 60.
    \1299\ Id. at 60. The report does not provide the average size
of North American donation-based, reward-based, or lending-based
crowdfunding campaigns. The report notes that, in 2014, the average
funded North American donation-based and reward-based campaigns were
56% and 54%, respectively, of the average size of funded European
donation-based and reward-based campaigns. Id. at 60.
---------------------------------------------------------------------------

    Since the passage of the JOBS Act, many U.S. states have made
changes to their securities laws to accommodate intrastate securities-
based crowdfunding transactions. Based on information from NASAA, as of
September 2015, 29 states and the District of Columbia have enacted
state crowdfunding provisions that rely, at the federal level, on the
intrastate offering exemptions under Securities Act Section 3(a)(11)
and Rule 147 or on Rule 504 of Regulation D. These state crowdfunding
rules allow businesses in a state to use securities-based crowdfunding
to raise capital from investors within that state.\1300\ There is
limited information available to us about the scope of domestic
crowdfunding activity in reliance on the intrastate exemptions. Since
December 2011, when the first state (Kansas) enacted its crowdfunding
provisions, 118 state crowdfunding offerings have been reported to be
filed with the respective state regulator and 102 were reported to be
approved or cleared, as of August 1, 2015.\1301\
---------------------------------------------------------------------------

    \1300\ See NASAA's Intrastate Crowdfunding Resource Center at
http://www.nasaa.org/industry-resources/corporation-finance/instrastate-crowdfunding-resource-center/, accessed in September
2015. See also NASAA's State Crowdfunding Update, available at:
http://nasaa.cdn.s3.amazonaws.com/wp-content/uploads/2014/12/Intrastate-Crowdfunding-Overview-2015.pdf.
    \1301\ Based on information provided by NASAA. The jurisdictions
included in the estimate are Alabama, District of Columbia, Georgia,
Idaho, Indiana, Kansas, Maine, Maryland, Massachusetts, Michigan,
Oregon, Texas, Vermont, Washington, and Wisconsin.
---------------------------------------------------------------------------

4. Survival Rates for Startups and Small Businesses
    Startups and small businesses that lack tangible assets or business
experience needed to obtain conventional financing might turn to

securities-based crowdfunding in reliance on Section 4(a)(6) as an
attractive potential source of financing. There is broad evidence that
many of these potential issuers are likely to fail after receiving
funding. For example, a 2010 study reports that of a random sample of
4,022 new high-technology businesses started in 2004, only 68% survived
by the end of 2008.\1302\
---------------------------------------------------------------------------

    \1302\ See Alicia Robb, E.J. Reedy, Janice Ballou, David
DesRoches, Frank Potter and Zhanyun Zhao, An Overview of the
Kauffman Firm Survey: Results from the 2004-2008 Data, Kauffman
Foundation, available at http://www.kauffman.org/uploadedFiles/kfs_2010_report.pdf (``Kauffman Firm Survey'').
---------------------------------------------------------------------------

    Similarly, other studies suggest that startups and small businesses
financed by venture capitalists also tend to have high failure rates.
One study finds that for 16,315 VC-backed companies that received their
first institutional funding round between 1980 and 1999, approximately
one-third failed after the first funding round.\1303\ Additionally,
another study of more than 2,000 companies that received at least $1
million in venture funding, from 2004 through 2010, finds that almost
three-quarters of these companies failed.\1304\ Another study, based on
a sample ending in 2005, found cumulative failure rates of 34.1% for
VC-financed firms and 66.3% for non-VC-financed firms, with the
difference driven by lower failure rates of VC-financed firms in the
initial years after receiving VC financing.\1305\
---------------------------------------------------------------------------

    \1303\ See Yael V. Hochberg, Alexander Ljungqvist and Yang Lu,
Whom You Know Matters: Venture Capital Networks and Investment
Performance, 62 J. of Fin. 251-301 (2007).
    \1304\ See Deborah Gage, The Venture Capital Secret: 3 Out of 4
Start-Ups Fail, Wall St. J., Sept. 19, 2012.
    \1305\ See Puri, note 1281. According to this study, the
difference in the outcomes of VC-financed and non-VC-financed firms
decreases after accounting for observable differences in firm
characteristics, but it does not disappear. However, as the study
notes, in evaluating the remaining differences in the outcomes of
VC-financed and non-VC-financed firms, it is not possible to fully
differentiate the effects of superior selection on the basis of
unobservable firm characteristics from the effects of VC monitoring
and expertise.
---------------------------------------------------------------------------

    Taken all together, the failure rates documented in these studies
are high for startups and small businesses, even with the involvement
of sophisticated investors like VCs. Because we expect that issuers
that will engage in offerings made in reliance on Section 4(a)(6) will
be in an earlier stage of business development than the businesses
included in the above studies, we believe that issuers that engage in
securities-based crowdfunding may have higher failure rates than those
in the studies cited above.
5. Market Participants
    The final rules will have their most significant impact on the
market for the financing of startups and small businesses. The number
of participants in this market and the amounts raised through
alternative sources indicate that this is a large market. In 2013,
there were more than 5 million small businesses, defined by the U.S.
Census Bureau as having fewer than 500 paid employees.\1306\ As of June
2014, FDIC-insured depositary institutions held approximately $590
billion in approximately 23.4 million small business loans.\1307\
According to the SBA's fiscal year 2014 annual performance report,
approximately 51,500 small businesses received funding in 2014 through
SBA's main lending programs, 7(a) and 504 loans.\1308\ In 2014, VCs
invested $49.3 billion of capital in in 4,361 transactions involving
3,665 startups, according to an industry source.\1309\ In 2014, angel
investors contributed $24.1 billion, with approximately 73,400
entrepreneurial ventures receiving angel funding.\1310\
---------------------------------------------------------------------------

    \1306\ See U.S. Department of Commerce, United States Census
Bureau, Business Dynamics Statistics, Data: Firm Characteristics
(2013), available at http://www.census.gov/ces/dataproducts/bds/data_firm.html.
    \1307\ For the purposes of this figure, small business loans are
defined as loans secured by nonfarm nonresidential properties and
commercial and business loans of $1,000,000 or less. See FDIC
Statistics, note 1254.
    \1308\ See 2014 Annual Performance Report, note 1262.
    \1309\ See NVCA, note 1277.
    \1310\ See Sohl, note 1282.
---------------------------------------------------------------------------

    Below, we analyze the economic effect of the final rules on the
following parties: (1) Issuers, typically startups and small
businesses, that seek to raise capital by issuing securities; (2)
intermediaries through which issuers seeking to engage in transactions
in reliance on Section 4(a)(6) will offer and sell their securities;
(3) investors who purchase or may consider purchasing securities in
such offerings; and (4) other capital providers, broker-dealers and
finders who currently participate in private offerings. The potential
economic impact of the final rules will depend on how these market
participants respond to the final rules. Each of these parties is
discussed in further detail below.
a. Issuers
    The final rules will permit certain entities to raise capital by
issuing securities for the first time. The number, type and size of the
potential issuers that will seek to use crowdfunding to offer and sell
securities in reliance on Section 4(a)(6) is uncertain, but data on
current market practices may help identify the number and
characteristics of potential issuers.
    It is challenging to precisely predict the number of future
securities offerings that might rely on Section 4(a)(6), particularly
because rules governing the process are being adopted today.\1311\
---------------------------------------------------------------------------

    \1311\ See also Section IV.B.1.
---------------------------------------------------------------------------

    According to filings made with the Commission, from 2009 to 2014,
there were approximately 4,559 issuers per year in new Regulation D
offerings with offer sizes of up to $1 million (excluding issuers that
are pooled investment vehicles), including approximately 1,020 (22%)
per year that reported having no revenue and approximately 861 (19%)
per year that reported revenues of up to $1 million.\1312\ Among
issuers in new Regulation D offerings with offer sizes of up to $1
million (excluding issuers that are pooled investment vehicles) during
this period, the overwhelming majority of issuers (approximately 80%)
are younger than 5 years old, with the median age of approximately one
year. Approximately 92% of these issuers were organized as either a
corporation or a limited liability company.
---------------------------------------------------------------------------

    \1312\ In addition, in an average year, approximately 50% of
issuers in new Regulation D offerings with offer sizes of up to $1
million (excluding issuers that are pooled investment vehicles)
declined to disclose their revenues. It is also possible that some
issuers in Regulation D offerings that report revenues in excess of
$1 million may participate in offerings in reliance on Section
4(a)(6).
---------------------------------------------------------------------------

    It is expected that many future issuers of securities in
crowdfunding offerings would have otherwise raised capital from one of
the alternative sources of financing discussed above, while others
would have been financed by friends and family or not financed at all.
Due to the differences between small business loans (including SBA-
guaranteed loans) and securities-based crowdfunding offerings that can
be conducted under the final rules, we are not able to estimate how
many small businesses utilizing these forms of financing may instead
pursue an offering in reliance on Section 4(a)(6). Similarly, due to
the differences between the terms of crowdfunding campaigns in
existence today and the provisions of the final rules, is not clear how
many current campaigns can instead become offerings in reliance on
Section 4(a)(6).\1313\

Hence, while some of the businesses using these alternative funding
sources may become issuers offering and selling securities in reliance
on Section 4(a)(6) in the future, we cannot know how many of these
businesses will elect securities-based crowdfunding in reliance on
Section 4(a)(6) once it becomes available, nor can we know how many
future businesses may not be financed at all.
---------------------------------------------------------------------------

    \1313\ A recent industry report estimated that the equity-based
crowdfunding volume in North America in 2014 was $787.5 million and
the average size of a successful equity-based crowdfunding campaign
was $175,000. See Massolution 2015 at 55 and 60. This allows us to
estimate approximately 4,500 successful equity-based crowdfunding
campaigns for North America in 2014. The report does not provide
statistics for the United States alone. Equity-based crowdfunding
campaigns in the United States are currently limited to accredited
investors or intrastate offerings in certain jurisdictions. Further,
the industry report does not provide information that would allow us
to estimate the number of crowdfunding campaigns of other types
(such as reward-based or donation-based) in North America or the
United States in 2014. We note that many such campaigns,
particularly those that relate to individual projects, may not have
a defined or sustained business model commensurate with typical
issuers of securities. In particular, many of the current reward-
based or donation-based crowdfunding projects likely entail
endeavors that may not be suitable to a long-lived securities
issuance (e.g., certain artistic endeavors or artistic projects).
---------------------------------------------------------------------------

    We believe that many potential issuers of securities through
crowdfunding will be startups and small businesses that are close to
the ``idea'' stage of the business venture and that have business plans
that are not sufficiently well-developed or do not offer the growth
potential or business model to attract VCs or angel investors. In this
regard, a study of one large platform revealed that relatively few
companies on that platform operate in technology sectors that typically
attract VC investment activity.\1314\
---------------------------------------------------------------------------

    \1314\ See Ethan R. Mollick, The Dynamics of Crowdfunding: An
Exploratory Study, Working Paper (June 26, 2013), available at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2088298.
---------------------------------------------------------------------------

b. Intermediaries
    Section 4(a)(6)(C) requires that an offer and sale of securities in
reliance on Section 4(a)(6) be conducted through a registered funding
portal or a broker. Registered broker-dealers, both those that are
already registered with the Commission and those that will register,
might wish to facilitate securities-based crowdfunding transactions.
New entrants that do not wish to register as broker-dealers might
decide to register as funding portals to facilitate securities-based
crowdfunding transactions in reliance on Section 4(a)(6). Donation-
based or reward-based crowdfunding platforms with established customer
relationships might seek to leverage these relationships and register
as funding portals, or register as or associate with registered broker-
dealers. Although the number of potential intermediaries that will fill
these roles is uncertain, practices of existing broker-dealers and
crowdfunding platforms provide insight into how the market might
develop.
    Based on FOCUS Reports filed with the Commission, as of December
2014, there were 4,267 broker-dealers registered with the Commission,
with average total assets of approximately $1.1 billion per broker-
dealer. The aggregate total assets of these registered broker-dealers
are approximately $4.9 trillion. Of these registered broker-dealers,
816 also are dually registered as investment advisers.
    Existing crowdfunding platforms are diverse and actively involved
in financing, allowing thousands of projects to search for capital. A
recent industry report estimates that, as of 2014, 1,250 crowdfunding
platforms were operating worldwide, including 375 platforms operating
in North America.\1315\ Globally, approximately 19% (236) of platforms
were engaged in equity-based crowdfunding, 18.3% in lending-based
crowdfunding, 22.6% in donation-based crowdfunding, 28.9% in reward-
based crowdfunding, with the remainder engaged in royalty-based and
hybrid crowdfunding.\1316\ An earlier industry report indicated that
crowdfunding platforms typically charge entrepreneurs a ``transaction
fee'' that is based on how large the target amount is and/or upon
reaching the target and that fees from survey participants worldwide
ranged from 2% to 25%, with an average of 7% in North America and
Europe.\1317\ The 2012 industry report provides one case study of fees
for a ``large-securities-based CFP'' stating ``[t]here are no
management fees for uncommitted capital, but a ``2 and 20'' arrangement
is set on deals funded.'' \1318\
---------------------------------------------------------------------------

    \1315\ See Massolution 2015 at 84. The report does not provide
separate statistics for the United States.
    \1316\ Id. at 89.
    \1317\ See Massolution Crowdfunding Industry Report: Market
Trends, Composition and Crowdfunding Platforms (May 2012)
(``Massolution 2012'') at 38.
    \1318\ Id.
---------------------------------------------------------------------------

    We do not know at present which market participants will become
intermediaries under Section 4(a)(6) and Regulation Crowdfunding, but
we believe that existing crowdfunding platforms might seek to leverage
their already-existing Internet-based platforms, brand recognition and
user bases to facilitate offerings in reliance on Section
4(a)(6).\1319\
---------------------------------------------------------------------------

    \1319\ For example, the Massolution 2012 industry report
suggests that funding portal reputation is important in the
crowdfunding market, especially for equity-based crowdfunding. See
Massolution 2012 at 46.
---------------------------------------------------------------------------

    Under the statute and the final rules, funding portals are
constrained in the services they can provide, and persons (or entities)
seeking the ability to participate in activities unavailable to funding
portals, such as offering investment advice or holding, managing,
possessing or otherwise handling investor funds, would instead need to
register as broker-dealers or investment advisers, depending on their
activities. Although we expect that initially, upon adoption of the
final rules, more new registrants will register as funding portals than
as broker-dealers given the less extensive regulatory requirements
imposed on funding portals, it is possible that market competition to
offer broker-dealer services as part of intermediaries' service
capabilities might either drive more broker-dealer growth in the longer
term or provide registered funding portals with the incentive to form
long-term partnerships with registered broker-dealers. One commenter
suggested that funding portals may find it beneficial to cooperate with
registered broker-dealers and transfer agents.\1320\ Other commenters
on the proposal did not provide additional information on this issue.
There is anecdotal evidence that such partnerships are already forming
under existing regulations in crowdfunding transactions involving
accredited investors.\1321\ The final rules provide that intermediaries
will be deemed to have satisfied the requirement to have a reasonable
basis for believing that an issuer has established means to keep
accurate records of the holders of the securities it would offer and
sell through the

intermediary's platform if the issuer has engaged the services of a
registered transfer agent.\1322\ This registered transfer agent safe
harbor may lead intermediaries to encourage issuers to use a registered
transfer agent.
---------------------------------------------------------------------------

    \1320\ See TinyCat Letter (but noting that such partnerships
should be optional).
    \1321\ See David Drake, Rich Man's Crowd Funding, Forbes, Jan.
15, 2013, available at http://www.forbes.com/sites/groupthink/2013/01/15/rich-mans-crowd-funding/. See also Mohana Ravindranath, For
broker/dealers, crowdfunding presents new opportunity, Wash. Post,
Mar. 29, 2013, available at http://www.washingtonpost.com/business/on-small-business/for-brokerdealers-crowdfunding-presents-new-opportunity/2013/03/28/bb835942-8075-11e2-8074-b26a871b165a_story.html; J.J. Colao, In the Crowdfunding Gold Rush,
This Company Has a Rare Edge, Forbes, June 5, 2013, available at
http://www.forbes.com/sites/jjcolao/2013/06/05/in-the-crowdfunding-gold-rush-this-company-has-a-rare-edge/; Arina Shulga, Crowdfunding
Right Now (Fund Model, Broker-Dealer Model, Lending Platforms and
Intrastate Offerings), LexisNexis.com, Aug. 7, 2014, available at
http://www.lexisnexis.com/legalnewsroom/banking/b/venture-capital/archive/2014/08/07/crowdfunding-right-now-fund-model-broker-dealer-model-lending-platforms-and-intrastate-offerings.aspx; Alessandra
Malito, Broker-dealer expands crowdfunding reach with new
partnership, InvestmentNews, Apr. 14, 2015, available at http://www.investmentnews.com/article/20150414/FREE/150419972/broker-dealer-expands-crowdfunding-reach-with-new-partnership.
    \1322\ See Rule 301(b) of Regulation Crowdfunding.
---------------------------------------------------------------------------

c. Investors
    It is unclear what types of investors will participate in offerings
made in reliance on Section 4(a)(6), but given the investment
limitations in the final rules, we believe that many investors affected
by the final rules will likely be individual retail investors who
currently do not have broad access to investment opportunities in
early-stage ventures. Offerings made in reliance on Section 4(a)(6) may
provide retail investors with additional investment opportunities,
although the extent to which they invest in such offerings will likely
depend on their view of the potential return on investment as well as
the risk for fraud.
    In contrast, larger, more sophisticated or well-funded investors
may be less likely to invest in offerings made in reliance on Section
4(a)(6). The relatively low investment limits set by the statute for
crowdfunding investors may make these offerings less attractive for
professional investors, including VCs and angel investors.\1323\ While
an offering made in reliance on Section 4(a)(6) can bring an issuer to
the attention of these investors, it is possible that professional
investors will prefer, instead, to invest in offerings in reliance on
Rule 506, which are not subject to the investment limitations
applicable to offerings made in reliance on Section 4(a)(6).
---------------------------------------------------------------------------

    \1323\ An observer suggests that, unlike angels, VCs may be less
interested in crowdfunding because, if VCs rely on crowdfunding
sites for their deal flow, it would be difficult to justify charging
a 2% management fee and 20% carried interest to their limited
partners. See Ryan Caldbeck, Crowdfunding--Why Angels, Venture
Capitalists And Private Equity Investors All May Benefit, Forbes,
Aug. 7, 2013.
---------------------------------------------------------------------------

d. Other Capital Providers, Broker-Dealers and Finders in Private
Offerings
    The final rules may affect other parties that provide sources of
capital, such as small business lenders, VCs, family and friends and
angel investors that currently finance small private businesses. The
current scope of financing provided by these capital providers is
discussed above. As discussed below, the magnitude of the final rules'
economic impact will depend on whether crowdfunding in reliance on
Section 4(a)(6) emerges as a substitute or a complement to these
financing sources.
    In addition, issuers conducting private offerings may, outside of
offerings in reliance on Section 4(a)(6), currently use broker-dealers
to help them with various aspects of the offering and to help ensure
compliance with the ban on general solicitation and advertising that
exists for most private offerings. Private offerings also could involve
finders who connect issuers with investors for a fee.\1324\ These
private offering intermediaries also may be affected by the final
rules, because once issuers can undertake offerings in reliance on
Section 4(a)(6), some issuers might no longer need the services of
those broker-dealers and finders.
---------------------------------------------------------------------------

    \1324\ Depending on their activities, these persons may need to
be registered as broker-dealers.
---------------------------------------------------------------------------

    Although we are unable to predict the exact size of the market for
broker-dealers and finders in private offerings that are comparable to
those that the final rules permit, data on the use of broker-dealers
and finders in the Regulation D markets suggest that they may not
currently play a large role in private offerings. Based on a staff
study, only 21% of all new Regulation D offerings from 2009 to 2014
used an intermediary such as a broker-dealer or a finder.\1325\ The use
of a broker-dealer or a finder increased with offering size; they
participated in approximately 17% of offerings for up to $1 million and
30% of offerings for more than $50 million. Moreover, the fee tends to
decrease with offering size. Unlike the gross spreads in registered
offerings, the differences in fees for Regulation D offerings of
different sizes are large: the average total fee (commission plus
finder fee) paid by issuers conducting offerings of up to $1 million
(6.4% in 2014) is almost three times larger on a percentage basis than
the average total fee paid by issuers conducting offerings of more than
$50 million (1.9% in 2014).\1326\ These estimates, however, only
reflect practices in the Regulation D market. It is possible that
issuers engaging in other types of private offerings (e.g., those
relying on Section 4(a)(2)), for which we do not have data, may use
broker-dealers and finders more frequently and have different fee
structures.
---------------------------------------------------------------------------

    \1325\ See Unregistered Offerings White Paper, note 1230.
    \1326\ ID.
---------------------------------------------------------------------------

B. Analysis of Final Rules

    As noted above, we are mindful of the costs and benefits of the
final rules, as well as the impact that the final rules may have on
efficiency, competition and capital formation. In enacting Title III,
Congress established a framework for a new type of exempt offering and
required us to adopt rules to implement that framework. To the extent
that crowdfunding rules are successfully utilized, the crowdfunding
provisions of the JOBS Act are expected to provide startups and small
businesses with the means to raise relatively modest amounts of
capital, from a broad cross section of investors, through securities
offerings that are exempt from registration under the Securities Act.
They also are expected to permit small investors to participate in a
wider range of securities offerings than may be currently
available.\1327\ Specifically, the statutory provisions and the final
rules address several challenges specific to financing startups and
small businesses, including, for example, accessing a large number of
investors, the regulatory requirements associated with issuing a
security, protecting investors and making such securities offerings
cost-effective for the issuer.
---------------------------------------------------------------------------

    \1327\ See, e.g., 158 Cong. Rec. S1781 (daily ed. Mar. 19, 2012)
(statement of Sen. Carl Levin) (``Right now, the rules generally
prohibit a company from raising very small amounts from ordinary
investors without significant costs.'').
---------------------------------------------------------------------------

    In the sections below, we analyze the costs and benefits associated
with the crowdfunding regulatory regime, as well as the potential
impacts of such a regulatory regime on efficiency, competition and
capital formation, in light of the baseline discussed above.
1. Broad Economic Considerations
    In this release, we discuss the potential costs and benefits of the
final rules. Many of these costs and benefits are difficult to quantify
or estimate with any degree of certainty, especially considering that
Section 4(a)(6) provides a new method for raising capital in the United
States. Some costs are difficult to quantify or estimate because they
represent transfers between various participants in a market that does
not yet exist. For instance, costs to issuers can be passed on to
investors and costs to intermediaries can be passed on to issuers and
investors. These difficulties in estimating and quantifying such costs
are exacerbated by the limited public data that indicates how issuers,
intermediaries and investors will respond to these new capital raising
opportunities.
    The discussion below highlights several general areas where
uncertainties about the new crowdfunding market might affect the
potential costs and benefits of the final rules, as well as our ability
to quantify those costs and benefits. It also highlights the potential
effects on

efficiency, competition and capital formation.
    The extent to which the statute and the final rules affect capital
formation and the cost of capital to issuers depends in part on the
issuers that choose to participate. In particular, if offerings in
reliance on Section 4(a)(6) only attract issuers that are otherwise
able to raise capital through another type of exempt offering, the
statute and the final rules may result in a redistribution of capital
flow, which may enhance allocative efficiency but have a limited impact
on the aggregate level of capital formation.\1328\
---------------------------------------------------------------------------

    \1328\ For example, a 2012 GAO report on Regulation A offerings
suggests that a significant decline in the use of this funding
alternative after 1997 could be partially attributed to a shift to
Rule 506 offerings under Regulation D, as a result of the preemption
of state law registration requirements for Rule 506 offerings that
occurred in 1996. See GAO Report, note 1231.
---------------------------------------------------------------------------

    Notwithstanding the existence of these alternative methods of
capital raising, we believe that offerings pursuant to Section 4(a)(6)
will likely represent a new source of capital for many small issuers
that currently have difficulty raising capital. Startups and small
businesses usually have smaller and more variable cash flows than
larger, more established companies, and internal financing from their
own business operations tends to be limited and unstable. Moreover,
these businesses tend to have smaller asset bases \1329\ and, thus,
less collateral for traditional bank loans. As discussed above,
startups and small businesses, which are widely viewed to have more
financial constraints than publicly-traded companies and large private
companies, could therefore benefit significantly from a securities-
based crowdfunding market. Some small businesses may not qualify for
traditional bank loans and may find alternative debt financing too
costly or incompatible with their financing needs. While some small
businesses may attract equity investments from angel investors or VCs,
other small businesses, particularly, businesses at the seed stage may
have difficulty obtaining external equity financing from these sources.
We believe that the statute, as implemented by the final rules, may
increase both capital formation and the efficiency of capital
allocation among small issuers by expanding the range of methods of
external financing available to small businesses and the pool of
investors willing to finance such types of businesses. The extent to
which such issuers will use the Section 4(a)(6) offering exemption,
however, is difficult to assess.
---------------------------------------------------------------------------

    \1329\ See, e.g., John Asker, Joan Farre-Mensa and Alexander
Ljungqvist, Corporate Investment and Stock Market Listing: A Puzzle?
European Corporate Governance Institute Finance Working Paper (June
2012), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1603484.
---------------------------------------------------------------------------

    If startups and small businesses find other capital raising options
more attractive than securities-based crowdfunding, the impact of
Section 4(a)(6) on capital formation may be limited. Even so, the
availability of securities-based crowdfunding as a financing option may
increase competition among suppliers of capital, resulting in a
potentially lower cost of capital for all issuers, including those that
choose not to use securities-based crowdfunding.
    For issuers that pursue offerings in reliance on Section 4(a)(6),
establishing an initial offering price might be challenging. Offerings
relying on Section 4(a)(6) will not involve an underwriter who, for
larger offerings, typically assists the issuer with pricing and placing
the offering. Investors in offerings relying on Section 4(a)(6) may
lack the sophistication to evaluate the offering price. Thus, the
involvement of these investors, who are likely to have a more limited
capacity for conducting due diligence on deals, may contribute to less
accurate valuations.
    Moreover, because of the investment limitations in securities-based
crowdfunding transactions, there may not be a strong incentive, even
assuming adequate knowledge and experience, for an investor to perform
a thorough analysis of the issuer disclosures. To the extent that these
potential information asymmetries resulting from the lack of a thorough
analysis of the disclosures are anticipated by prospective investors,
investor participation in offerings made in reliance on Section 4(a)(6)
may decline and the associated benefits of capital formation may be
lower.
    Uncertainty surrounding exit strategies for investors in
crowdfunding offerings also may limit the benefits. In particular, it
is unlikely that purchasers in crowdfunding transactions will be able
to follow the typical path to liquidity that investors in other exempt
offerings follow. For instance, investors in a VC-backed startup may
eventually sell their securities in an initial public offering on a
national securities exchange or to another company in an
acquisition.\1330\ We anticipate that most businesses engaging in
offerings in reliance on Section 4(a)(6) will be unlikely to progress
directly to an initial public offering on a national securities
exchange given their small size,\1331\ and investors may lack adequate
strategies or opportunities to eventually divest their holdings.\1332\
A sale of the business will require the issuer to have a track record
in order to attract investors with the capital willing to buy the
business.
---------------------------------------------------------------------------

    \1330\ See Gompers, note 1249.
    \1331\ As noted, under the statute and the final rules, issuers
relying on Section 4(a)(6) would be limited to raising an aggregate
of $1 million during a 12-month period. By contrast, as noted in the
IPO Task Force, the size of an initial public offering generally
exceeds $50 million. See IPO Task Force, note 1223.
    \1332\ In contrast, given the required investor qualifications
and offering limit amounts, Regulation D offerings may generally
attract issuers that are more experienced and better capitalized.
Moreover, such offerings are likely to have a larger proportion of
accredited investors because, in contrast to securities-based
crowdfunding, there are no limitations on individual investment
amounts. As a result, we believe that Regulation D issuers and
investors are more likely to have potential exit strategies in
place.
---------------------------------------------------------------------------

    Further, the likely broad geographical dispersion of crowdfunding
investors may make shareholder coordination difficult. It may also
exacerbate information asymmetries between issuers and investors, if
the distance between them diminishes the ability for investors to
capitalize on local knowledge that may be of value in assessing the
viability of the issuer's business. The use of electronic means may
mitigate some of these difficulties. Even if an issuer can execute a
sale or otherwise offer to buy back or retire the securities, it might
be difficult for investors to determine whether the issuer is offering
a fair market price. These uncertainties may limit the use of the
Section 4(a)(6) exemption.
    The potential benefits of the final rules also may depend on how
investors respond to potential liquidity issues unique to the
securities-based crowdfunding market. It is currently unclear how
securities offered and sold in transactions conducted in reliance on
Section 4(a)(6) will be transferred in the secondary market after the
one-year restricted period ends, and investors who purchased securities
in transactions conducted in reliance on Section 4(a)(6) and who seek
to divest their securities may not find a liquid market.\1333\ Assuming
a secondary market develops, securities may be quoted on the over-the-
counter market or on trading platforms for shares of private
companies.\1334\ Nevertheless, it

is possible that secondary trading costs for investors may be
substantial, effective and quoted spreads may be wide, trading volume
may be low, and price volatility may be high compared to those of
listed securities.\1335\ Illiquidity, to different degrees, remains a
concern for other exempt offerings and for registered offerings by
small issuers. However, because investors purchasing securities sold in
reliance on Section 4(a)(6) may be less sophisticated than investors in
other private offerings due to the fact that there are no investor
qualification requirements, they may face additional challenges in
addressing the impact of illiquidity, either in finding a suitable
trading venue or negotiating with the issuer for an alternative
liquidity option. The potentially high degree of illiquidity associated
with securities purchased in reliance on Section 4(a)(6) may discourage
some investors from investing in issuers through such offerings, thus
limiting the potential efficiency, competition and capital formation
benefits of the final rules.
---------------------------------------------------------------------------

    \1333\ Academic studies have shown that the over-the-counter
market is less liquid than the national exchanges. See Nicolas
Bollen and William Christie, Market Microstructure of the Pink
Sheets, 33 J. Banking & Fin. 1326-1339 (2009); Andrew Ang, Assaf
Shtauber and Paul Tetlock, Asset Pricing in the Dark: The Cross
Section of OTC Stocks, 26 Rev. Fin. Stud. 2985-3028 (2013).
    \1334\ Given the services that funding portals are permitted to
provide under the statute and the final rules, investors will not be
able to use funding portals to trade in securities offered and sold
in reliance on Section 4(a)(6) in the secondary market.
    \1335\ Academic studies show that reducing the information
transparency about an issuer increases the effective and quoted
spreads of its shares, reduces share price and increases price
volatility. Specifically, percentage spreads triple and volatility
doubles when NYSE issuers are delisted to the Pink Sheets. See
Jonathan Macey, Maureen O'Hara and David Pompilio, Down and Out in
the Stock Market: The Law and Finance of the Delisting Process, 51
J.L. & Econ 683-713 (2008). When NASDAQ issuers delist and
subsequently trade on the OTC Bulletin Board and/or the Pink Sheets,
share volume declines by two-thirds, quoted spreads more than
double, effective spreads triple and volatility triples. See Jeffrey
H. Harris, Venkatesh Panchapagesan and Ingrid M. Werner, Off But Not
Gone: A Study of NASDAQ Delistings, Fisher College of Business
Working Paper No. 2008-03-005 and Dice Center Working Paper No.
2008-6 (Mar. 4, 2008), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=628203. One factor that may alleviate
transparency concerns is the fact that issuers that sold securities
in an offering made in reliance on Section 4(a)(6) will have an
ongoing reporting obligation, so disclosure of information about the
issuer will continue to be required.
---------------------------------------------------------------------------

    Even with the mandated disclosures, unsophisticated investors
purchasing securities issued in reliance on Section 4(a)(6) may face
certain expropriation risks, potentially limiting the upside of their
investment, even when they select investments in successful ventures.
This can occur if issued securities include certain features (e.g.,
callable securities or securities with differential control rights) or
if issuers conduct insider-only financing rounds or financing rounds at
reduced prices (so-called ``down rounds'') that have the effect of
diluting an investor's interest or otherwise diminishing the value of
the securities offered and sold in reliance on Section 4(a)(6).
Investors purchasing securities issued in reliance on Section 4(a)(6)
may not have the experience or the market power to negotiate various
anti-dilution provisions, right of first refusal, tag-along rights,
superior liquidation preferences and rights upon a change in control
that have been developed by institutional and angel investors as
protections against fundamental changes in a business.\1336\ Moreover,
the disperse ownership stakes of investors in securities-based
crowdfunding offerings may weaken their incentives to monitor the
issuer to minimize the risk of expropriation. The ensuing expropriation
risk may discourage some investors from participating in offerings made
in reliance on Section 4(a)(6), potentially limiting the efficiency,
competition and capital formation benefits of the final rules.
---------------------------------------------------------------------------

    \1336\ See Kaplan, note 1279.
---------------------------------------------------------------------------

    The final rules also may have an effect on broker-dealers and
finders participating in private offerings. Some issuers that
previously relied on broker-dealers and finders to assist with raising
capital through private offerings may, instead, begin to rely on the
Section 4(a)(6) exemption to find investors. The precise impact of the
final rules on these intermediaries will depend on whether (and, if so,
to what extent) issuers switch from using existing exemptions to using
the exemption provided by Section 4(a)(6) or whether the final rules
primarily attract new issuers. The impact of the final rules on
registered broker-dealers will also depend on the extent to which
broker-dealers participate as intermediaries in the securities-based
crowdfunding market. If a significant number of issuers switch from
raising capital under existing private offering exemptions to relying
on the exemption provided by Section 4(a)(6), this may negatively
affect the revenue of finders and broker-dealers in the private
offerings market. While this may disadvantage existing private offering
market intermediaries, the new competition may ultimately lead to more
efficient allocation of capital.
    If securities-based crowdfunding primarily attracts new issuers to
the market, the impact on broker-dealers and finder revenue may be
negligible and the final rules may even have a positive effect on their
revenues by revealing more potential clients for them, particularly to
the extent that they chose to operate a funding portal. Additionally,
greater investor interest in private company investment may increase
capital formation, creating new opportunities for broker-dealers and
finders that otherwise would have been unavailable.
    The final rules also may encourage current participants in the
crowdfunding market to diversify their funding models to attract a
broader group of companies and to provide additional investment
opportunities for investors. For example, donation-based crowdfunding
platforms that currently offer investment opportunities in micro-loans
generally do not permit donors to collect interest on their investments
because of concerns that this activity will implicate the federal
securities laws unless an exemption from registration is
available.\1337\ Under the final rules, these platforms may choose to
register as funding portals and permit businesses to offer securities
that provide investors with the opportunity to obtain a return on
investment. This can broaden their user base and attract a group of
investors different from those already participating in reward-based or
donation-based crowdfunding. It is likely that some registered broker-
dealers will find it profitable to enter the securities-based
crowdfunding market and operate funding portals as well. Such an entry
will increase the competition among intermediaries and likely lead to
lower issuance costs for issuers.
---------------------------------------------------------------------------

    \1337\ See, e.g., Deutsche Bank Microcredit Development Fund,
Inc., SEC No-Action Letter (Apr. 8, 2012).
---------------------------------------------------------------------------

    However, many projects that are well suited for reward-based or
donation-based crowdfunding (e.g., because they have finite lives,
their payoffs to investors could come before the project is completed
or could be contingent on the project's success, etc.) may have little
in common with startups and small businesses that are well suited for
an offering in reliance on Section 4(a)(6). As a result,
diversification among existing platforms may not always be optimal or
preferred, particularly if complying with the final rules proves
disproportionately costly compared to the potential amount of capital
to be raised.
2. Crowdfunding Exemption
a. Limitation on Capital Raised
    The statute imposes certain limitations on the total amount of
securities that may be sold by an issuer during the 12-month period
preceding the date of the transaction made in reliance on Section
4(a)(6). Specifically, Section 4(a)(6)(A) provides for a maximum
aggregate amount of $1 million sold in reliance on the exemption during
a 12-month

period.\1338\ The final rules preserve the $1 million limit. The
limitation on the amount that may be raised is expected to benefit
investors by reducing the potential loss from dilution or fraud \1339\
in the securities-based crowdfunding market. However, we recognize that
this limit on the amount that may be sold in reliance on Section
4(a)(6) also can prevent certain issuers from raising all the capital
they need to make their businesses viable, which in turn can result in
lost opportunities, as indicated by various commenters.\1340\ It also
is likely to limit efficiency to the extent that capital cannot be
channeled to the most productive use. Due to the lack of data, however,
we are not able to quantify the unrealized efficiency or capital
formation associated with the adoption of the $1 million limit instead
of the alternative of a higher limit. Since issuers in securities-based
crowdfunding offerings bear certain fixed costs, as discussed in
Section III.B.3., offering costs as a percentage of offering proceeds
will be larger under the $1 million limit than under the alternative of
a higher limit.
---------------------------------------------------------------------------

    \1338\ See also Rule 100(a)(1) of Regulation Crowdfunding.
    \1339\ While we lack information to predict the potential
incidence of fraud in securities-based crowdfunding offerings made
in reliance on Section 4(a)(6) and note that current crowdfunding
practices differ significantly from the securities-based
crowdfunding market that may develop upon effectiveness of the final
rules, some concern has been expressed about the potential for fraud
in this area. See, e.g., NASAA Enforcement Report: 2015 Report on
2014 data, September 2015, available at http://nasaa.cdn.s3.amazonaws.com/wp-content/uploads/2011/08/2015-Enforcement-Report-on-2014-Data_FINAL.pdf (listing Internet fraud
(including social media and crowdfunding) among the products and
schemes that are frequently investigated by states, without
statistics specific to securities-based crowdfunding).
    \1340\ See, e.g., Advanced Hydro Letter; Bushroe Letter; Cole D.
Letter; Concerned Capital Letter; Hamman Letter; Harrison Letter;
Hillside Letter; Jazz Letter; Kickstarter Coaching Letter; McCulley
Letter; McGladrey Letter; Meling Letter; Miami Nation Enterprises
Letter; Multistate Tax Service Letter; Peers Letter; Pioneer Realty
Letter; Public Startup Letter 2; Qizilbash Letter; Rosenthal O.
Letter; Sarles Letter; SBM Letter; Taylor R. Letter; Taylor T.
Letter; Wales Capital Letter 1; Wales Capital Letter 3; WealthForge
Letter; Wear Letter; Wilhelm Letter; Winters Letter; Yudek Letter.
---------------------------------------------------------------------------

    As an alternative, we could have defined the $1 million limit to be
net of intermediary fees, as suggested by some commenters.\1341\ If a
funding portal announces in advance the fees it charges for a given
transaction (fixed or variable), the economic effects of such an
alternative definition would be qualitatively similar to the effects of
raising the offering limit. If the funding portal fees are not known in
advance, then this alternative may also create uncertainty for issuers
about how much capital they would be able to raise. Several commenters
opposed such an alternative.\1342\
---------------------------------------------------------------------------

    \1341\ See, e.g., Benjamin Letter; FundHub Letter 1; Hackers/
Founders Letter; Joinvestor Letter; Odhner Letter; Omara Letter;
Public Startup Letter 2; RFPIA Letter; RoC Letter; RocketHub Letter;
Seed&Spark Letter; Thomas Letter 1; Wales Capital Letter 1; Whitaker
Chalk Letter; Wilson Letter.
    \1342\ See, e.g., Arctic Island Letter 4; ASSOB Letter;
Commonwealth of Massachusetts Letter; MCS Letter; PeoplePowerFund
Letter.
---------------------------------------------------------------------------

    The costs associated with not increasing the investment limit above
$1 million are mitigated in part by the ability of issuers to
concurrently seek additional financing in reliance on another type of
exempt offering, such as Regulation D or Regulation A, in addition to
the offering in reliance on Section 4(a)(6). In this release, we
provide guidance clarifying our view that issuers may conduct other
exempt offerings without having those offerings integrated with the
offering made in reliance on Section 4(a)(6), provided that each
offering complies with the applicable exemption relied upon for that
particular offering. Several commenters opposed this approach on the
ground that it could result in fewer investor protections than if the
offerings were integrated. Some commenters noted that a potential cost
to investors associated with not requiring integration is a reduction
in investor protection due to the possibility of an issuer's use of
advertising for one offering to indirectly promote another exempt
offering that would have been subject to more stringent advertising
restrictions.\1343\ While we recognize this concern, we note that the
final rules do not provide a blanket exemption from integration with
other private offerings that are conducted simultaneously with, or
around the same time as, a Section 4(a)(6) offering. Rather, we provide
guidance that an offering made in reliance on Section 4(a)(6) is not
required to be integrated with another exempt offering made by the
issuer to the extent that each offering complies with the requirements
of the applicable exemption that is being relied upon for that
particular offering. As mentioned earlier, an issuer conducting a
concurrent exempt offering for which general solicitation is not
permitted will need to be satisfied that purchasers in that offering
were not solicited by means of the offering made in reliance on Section
4(a)(6). Alternatively, an issuer conducting a concurrent exempt
offering for which general solicitation is permitted, for example,
under Rule 506(c), cannot include in any such general solicitation an
advertisement of the terms of an offering made in reliance on Section
4(a)(6), unless that advertisement otherwise complies with Section
4(a)(6) and the final rules. This may partly alleviate some of
commenters' concerns because each offering will have the investor
protections of the offering exemption upon which it relies.
---------------------------------------------------------------------------

    \1343\ See AFR Letter; BetterInvesting Letter; Consumer
Federation Letter; Fund Democracy Letter; IAC Recommendation; MCS
Letter.
---------------------------------------------------------------------------

    As an alternative, in line with the suggestions of some
commenters,\1344\ we could have provided guidance that the amounts
offered in reliance on Section 4(a)(6) should be integrated with the
amounts offered pursuant to other exempt offerings. Under such an
alternative, the amounts raised in other exempt offerings would count
toward the maximum offering amount under Section 4(a)(6). Such an
alternative would potentially limit the amount of capital raised by
issuers, including the set of issuers eligible to conduct an exempt
offering relying on Section 4(a)(6), and thus potentially limit the
capital formation benefits of the final rules. Compared to this
alternative, the ability of issuers to conduct other exempt offerings
that do not count toward the maximum offering amount under Section
4(a)(6) may alleviate some of the concerns that certain issuers will
not be able to raise sufficient capital. The net effect on capital
formation will also depend on whether issuers seeking an aggregate
exempt offering amount in excess of $1 million elect to rely on
Regulation Crowdfunding as part of their capital raising or elect to
rely on a different exemption, such as Rule 506 of Regulation D. These
considerations and the relative differences in the investor protections
associated with the different offering exemptions will determine the
net effect on the amount of information about issuers available to
market participants and the level of investor protection.
---------------------------------------------------------------------------

    \1344\ See, e.g., AFL-CIO Letter; Brown J. Letter; Consumer
Federation Letter; Fund Democracy Letter; MCS Letter; NASAA Letter.
---------------------------------------------------------------------------

b. Investment Limitations
    Since offering documents for offerings made in reliance on Section
4(a)(6) will not be subject to review by Commission staff prior to the
sale of securities, we are sensitive to potential investor protection
concerns arising from the participation of less sophisticated investors
in these exempt offerings. Some commenters \1345\ raised concerns that
the ``wisdom of the crowd'' will not result in investors pooling
information so as to lead to better informed

investment decisions.\1346\ While we acknowledge these concerns, we
note that, by adding Section 4(a)(6) to the Securities Act, Congress
made an express determination to facilitate securities-based
crowdfunding transactions under the federal securities laws, subject to
certain specified investor protections.
---------------------------------------------------------------------------

    \1345\ See, e.g., AFR Letter; Brown J. Letter; Consumer
Federation Letter.
    \1346\ Predictions in research studies regarding the impact of
social interaction on investor decisions are mixed. On the one hand,
a recent study of opinions that were posted on the Internet Web site
http://seekingalpha.com finds evidence of predictability of earnings
surprises and returns that is interpreted as potentially suggesting
the value relevance of user opinions rather than a na[iuml]ve
investor reaction. See Hailiang Chen, Prabuddha de, Yu Hu, and
Byoung-Hyoun Hwang, Wisdom of Crowds: The Value of Stock Opinions
Transmitted Through Social Media, 27 Rev. Fin. Stud. 1367-1403
(2014). An earlier theoretical paper shows that word-of-mouth can,
under some circumstances, result in superior decisions. See Glenn
Ellison and Drew Fudenberg, Word-of-Mouth Communication and Social
Learning, 110 Quarterly J. Econ. 93-125 (1995). On the other hand,
some behavioral finance literature examines irrational herding and
contagion of thought and behavior through social interaction, such
as the propagation of investing memes, which need not be predictive
of superior trading performance. For example, one article
characterizes memes as ``mental representation (such as an idea,
proposition, or catchphrase) that can be passed from person to
person''. The article provides an example of investors using
``verbal `reasons' to decide how to trade'' and notes that these
reasons ``are often not cogent''. The article notes that such
reasons, or financial memes, can be simple or can be elaborate
structures of analysis, examples, terminology, catchphrases, and
modeling. See for example, David A. Hirshleifer and Siew Hong Teoh,
Thought and Behavior Contagion in Capital Markets, Handbook of
Financial Markets: Dynamics and Evolution (2009). Another article
compares the investment decisions of stock clubs and individuals. It
finds that while both individuals and clubs are more likely to
purchase stocks that are associated with ``good reasons'' (such as a
company that is featured on a list of ``most-admired'' companies),
stock clubs favor such stocks more than individuals, despite the
fact that such reasons do not improve performance. The article
analyzes social dynamics that may make ``good reasons'' more
important for groups than individuals. See Brad Barber, Chip Heath,
and Terrance Odean, Good Reasons Sell: Reason-Based Choice Among
Group and Individual Investors in the Stock Market, 49 Management
Science 1636-1652 (2003).
---------------------------------------------------------------------------

    Consistent with the statute, the final rules incorporate several
important investor protections, including limits on the amount that can
be raised, issuer eligibility criteria, and issuer and intermediary
requirements, including statutorily mandated investor education
requirements. The statute and the final rules also impose certain
limitations on the aggregate dollar amount of securities in offerings
in reliance on Section 4(a)(6) that may be sold to an investor during a
12-month period.\1347\ These provisions are designed to limit the
potential investment and, consequently, the potential losses for any
single investor, thus providing downside protection for investors.
---------------------------------------------------------------------------

    \1347\ See Section 4(a)(6)(B). See also Rule 100(a)(2) of
Regulation Crowdfunding.
---------------------------------------------------------------------------

    We recognize that these provisions also will limit the potential
upside for investors. This may particularly affect the decisions of
investors with large portfolios who might be able to absorb losses and
understand the risks associated with risky investments and who may have
more expertise and stronger incentives to acquire and analyze
information about an issuer. For these investors, the $100,000
aggregate limit may reduce their incentive to participate in the
securities-based crowdfunding market, compared to other types of
investments, potentially depriving the securities-based crowdfunding
market of more experienced and knowledgeable investors and impeding
capital formation. Moreover, limiting the participation of such
investors may negatively affect the informational efficiency of the
securities-based crowdfunding market because sophisticated investors
are better able to accurately price such offerings. These investors
also can add value to the discussions taking place through an
intermediary's communication channels about a potential offering by
providing their views on the issuer's financial viability and potential
for fraud. Persons with larger portfolios are also likely to be in a
better position to monitor the issuer's insiders, which can reduce the
extent of moral hazard and the risk of fraud on the part of the issuer
and the issuer's insiders, yielding benefits for all investors. Such
investors also can add value by advising the issuer and contributing
strategic expertise, which can be particularly beneficial for early-
stage issuers. Some of these potential benefits, however, may still be
available to issuers that seek to attract such investors through
another type of exempt offering, such as a Regulation D offering.
    The aggregate limit on crowdfunding investments also can impede the
ability of investors to diversify within the securities-based
crowdfunding market. As securities-based crowdfunding investments might
have inherently high failure rates,\1348\ investors who do not or
cannot diversify their investments across a number of offerings can
face an increased risk of incurring large losses, relative to their
investments, even when they investigate offerings thoroughly. By
comparison, VC firms typically construct highly diversified portfolios
with the understanding that many ventures fail, resulting in a complete
loss of some investments, but with the expectation that those losses
will be offset by the large upside of the relatively fewer investments
that succeed.\1349\ The securities-based crowdfunding market is
expected to involve earlier-stage financing compared to venture capital
financing, and therefore, the chances of investment success may be
lower.\1350\ The statutory caps on aggregate securities-based
crowdfunding investments under Section 4(a)(6) may limit an investor's
ability to choose a sufficiently large number of investments to offset
this risk and to recover the due diligence costs of sufficiently
investigating individual investments. One potential solution to this
diversification problem is to invest smaller amounts in a greater
number of ventures. However, such a strategy has limited benefit to the
extent that there is a fixed cost to the due diligence associated with
identifying and reviewing each investment opportunity, making it more
costly to implement than a strategy that relies on the selection of
fewer investment opportunities.
---------------------------------------------------------------------------

    \1348\ See discussion in Section III.A.4 above.
    \1349\ See, e.g., John Cochrane, The Risk and Return of Venture
Capital, 75 J. of Fin. Econ. 3 (2005).
    \1350\ See Rajshree Agarwal and Michael Gort, Firm and Product
Life Cycles and Firm Survival, 92 Am. Econ. Rev. 184-190 (2002).
---------------------------------------------------------------------------

    In a change from the proposed rules, both the investor's annual
income and net worth must be above $100,000 for the 10 percent
limitation to apply. This change is intended to strengthen investor
protections for investors whose annual income or net worth is below
$100,000. Such investors may not be as well situated to bear the risk
of loss (e.g., in the event of fraud on the part of an issuer) as
investors with both income and net worth of $100,000 or more. According
to Commission staff analysis of the data in the 2013 Survey of Consumer
Finances, approximately 17% of U.S. households have both income and net
worth of $100,000 or higher. By comparison, 39% of U.S. households have
either income or net worth of $100,000 or higher.\1351\ Thus,
approximately 22% of households will be subject to a lower investment
limit under the final rules than under the proposal. We note that these
figures are only available at the household level rather than at the
individual level. We further note that these figures do not account for
the fact that only some households might seek to invest in an offering
in reliance on Section 4(a)(6). Thus, we are not able to determine the

actual percentage of investors affected by this change in the final
rules relative to the proposal.
---------------------------------------------------------------------------

    \1351\ Based on data from the 2013 Survey of Consumer Finances,
a triennial survey sponsored by the Federal Reserve Board, available
at http://www.federalreserve.gov/econresdata/scf/scfindex.htm.
---------------------------------------------------------------------------

    Within each investment limitation tier, the investment limitation
percentage is multiplied by the ``lesser of'' an investor's annual
income or net worth in the investment limitation calculation, which was
suggested by several commenters.\1352\ This change from the proposal is
expected to reduce the permitted investment limit for each individual
investor because most investors are unlikely to have annual income and
net worth amounts that are identical.\1353\
---------------------------------------------------------------------------

    \1352\ See, e.g., AFR Letter; BetterInvesting Letter; Consumer
Federation Letter; Fund Democracy Letter; Fryer Letter;
Growthfountain Letter; IAC Recommendation (but also stating that the
``greater of'' approach would be appropriate for accredited
investors); Merkley Letter; NASAA Letter; Schwartz Letter; Zhang
Letter (recommending that net worth not be used to calculate the
investment limit).
    \1353\ Although we lack information to determine the average
change in the applicable investment limit resulting from this
change, based on Commission staff analysis of the 2013 Survey of
Consumer Finances, a larger percentage of households exceeded a
particular dollar threshold, such as $100,000 or $200,000, based on
the net worth standard than the percentage of households that
exceeded the same dollar threshold based on the income standard.
---------------------------------------------------------------------------

    Investment limitations will likely have a negative effect on
capital formation. For example, investment limitations may make it more
difficult for some issuers to reach their funding targets. However,
these limits also are expected to reduce the risk and impact of
potential loss for investors that accompany the high failure rates
associated with investments in small businesses and startups, thus
potentially improving investor protection. There is no available market
data that would allow us to empirically evaluate the magnitude of these
effects.
    Consistent with the proposed rules, the final rules allow an issuer
to rely on the efforts that an intermediary is required to undertake in
order to determine that the aggregate amount of securities purchased by
an investor will not cause the investor to exceed the investor limits,
provided that the issuer does not have knowledge that the investor had
exceeded, or would exceed, the investor limits as a result of
purchasing securities in the issuer's offering, which was supported by
various commenters.\1354\ This may result in aggregate verification
cost savings since a given intermediary may be involved in and have
information on crowdfunding transactions pertaining to the offerings of
multiple issuers, which makes it potentially less costly to identify
investors that exceed the investment limitation. As a potential
alternative, we could have imposed more extensive verification
requirements on issuers, which would have resulted in larger compliance
costs for issuers but could have potentially increased investor
compliance with the investment limitations, with corresponding investor
protection benefits. As noted above, we believe the final rules
appropriately consider investor protection and facilitating capital
formation.
---------------------------------------------------------------------------

    \1354\ See, e.g., Arctic Island Letter 4; CFA Institute Letter;
Consumer Federation Letter; CrowdBouncer Letter; EarlyShares Letter;
EMKF Letter; Finkelstein Letter; Fund Democracy Letter; Heritage
Letter; Joinvestor Letter; Public Startup Letter 2; RoC Letter;
RocketHub Letter; Vann Letter; Wefunder Letter; Whitaker Chalk
Letter.
---------------------------------------------------------------------------

c. Issuer Eligibility
    Section 4A(f) of the statute excludes certain categories of issuers
from eligibility to engage in securities-based crowdfunding
transactions in reliance on Section 4(a)(6). The final rules exclude
those categories of issuers.\1355\ The final rules also exclude two
additional categories of issuers, beyond those identified in the
statute, from being eligible to rely on Section 4(a)(6) to engage in
crowdfunding transactions. First, the final rules exclude issuers that
sold securities in reliance on Section 4(a)(6) and have not filed with
the Commission and provided to investors the ongoing annual reports
required by Regulation Crowdfunding during the two years immediately
preceding the filing of the required offering statement,\1356\ which is
generally consistent with suggestions from several commenters.\1357\
This additional exclusion is not expected to impose any additional
burdens and costs on an issuer that it would not have already incurred
had it complied with the ongoing reporting requirements as they came
due. Further, the requirement that a delinquent issuer prepare and file
up to two annual reports at one time in order to become eligible to
rely on Section 4(a)(6) is expected to incentivize issuers to provide
updated and current information to investors, if they intend to rely
again on Section 4(a)(6) to raise additional capital, without
necessarily requiring an issuer to become fully current in its
reporting obligations. We recognize that conditioning an issuer's
Section 4(a)(6) eligibility on the requirement that issuers provide
ongoing reports for only the previous two years may result in less
information being available to investors in some periods, with
potential adverse effects on the price formation and liquidity of the
securities in the secondary market. The potential damage to an issuer's
reputation resulting from being delinquent along with potential
enforcement action for failure to comply with a regulatory reporting
obligation and the modification from the proposed rules to require an
issuer to disclose in its offering statement if it or any of its
predecessors previously failed to comply with the ongoing reporting
requirements of Rule 203 of Regulation Crowdfunding, however, may help
to mitigate these potential adverse effects. As an alternative, we
could have chosen not to impose this exclusion or adopted a shorter
look-back period, as suggested by some commenters.\1358\ Compared to
the provisions in the final rules, either of these alternatives could
result in less information being available to investors and reduced
informational efficiency of securities prices or possibly increased
likelihood of issuer misconduct in offerings made in reliance on
Section 4(a)(6).
---------------------------------------------------------------------------

    \1355\ These categories of issuers are: (1) Issuers that are not
organized under the laws of a state or territory of the United
States or the District of Columbia; (2) issuers that are subject to
Exchange Act reporting requirements; (3) investment companies as
defined in the Investment Company Act or companies that are excluded
from the definition of investment company under Section 3(b) or 3(c)
of the Investment Company Act. See Section 4A(f). See also Rule
100(b) of Regulation Crowdfunding.
    \1356\ See discussion in Section II.A.4 above.
    \1357\ See, e.g., ASSOB Letter; Commonwealth of Massachusetts
Letter; Consumer Federation Letter; Fund Democracy Letter; Grassi
Letter; Joinvestor Letter; NASAA Letter; Wefunder Letter.
    \1358\ See, e.g., ABA Letter; Parsont Letter; Projectheureka
Letter; Public Startup Letter 2; RocketHub Letter.
---------------------------------------------------------------------------

    Second, the final rules exclude a company that has no specific
business plan or has indicated that its business plan is to engage in a
merger or acquisition with an unidentified company or companies, as
suggested by several commenters.\1359\ This requirement is intended to
help ensure that investors have adequate information about the issuer's
proposed business plan to make an informed investment decision, which
may increase investor protection in some instances. As an alternative,
we could have chosen not to impose this exclusion or to impose a less
restrictive exclusion, as suggested by several commenters.\1360\
Although these alternatives might increase capital formation by
allowing a subset of additional issuers to rely on Section 4(a)(6),
they may also result in less

informed investor decisions in such offerings.
---------------------------------------------------------------------------

    \1359\ See, e.g., Anonymous Letter 2; CFA Institute Letter;
CFIRA Letter 7; Commonwealth of Massachusetts Letter; Consumer
Federation Letter; NASAA Letter; ODS Letter; Traklight Letter;
Whitaker Chalk Letter.
    \1360\ See, e.g., ABA Letter; FundHub Letter 1; Projectheureka
Letter; Public Startup Letter 2; RoC Letter; RocketHub Letter; SBM
Letter; Wilson Letter.
---------------------------------------------------------------------------

    Overall, categories of issuers that are excluded from eligibility
under the final rules may be at a competitive disadvantage relative to
those that are eligible to offer securities under the final rules, to
the extent that excluded issuers may raise less external capital or
incur a higher direct or indirect cost of financing, or additional
restrictions, when seeking financing from alternative sources.
3. Issuer Requirements
a. Issuer Costs
    We recognize that there are benefits and costs associated with
Regulation Crowdfunding's requirements pertaining to issuers, including
the final rule's disclosure requirements. In the Proposing Release, we
provided cost estimates for each of these requirements and requested
comment on our estimates.\1361\ In response, we received several
comment letters providing alternative cost estimates, some of which
were lower and some of which were higher than the cost estimates in the
Proposing Release.\1362\ For example, one commenter \1363\ provided the
following cost estimates: Portal fees of 6% to 15% \1364\; accounting
review fees of $1,950 to $9,000; accounting audit fees of $3,100 to
$9,000; financial statements/projections costs of $2,000 to $5,000;
Title III disclosure/compliance costs of $1,000 to $4,000; and
corporate formation costs of $300 to $500.\1365\ In addition, the
commenter estimated the total cost to raise $99,000 of capital under
the proposed rules to be $9,300 to $24,500 (9.4% to 24.7%); to raise
$499,000 of capital to be $33,240 to $84,750 (6.7% to 17%); and to
raise $1 million of capital to be $72,800 to $168,500 (7.3% to 16.9%).
The commenter stated that the entry of new vendors into the market and
ensuing competition may lead to a decline in some of these costs over
time. Another commenter \1366\ estimated that a $200,000 offering will
incur the following average costs: Legal fees of $10,000; intermediary
fees of $20,000 (10%); accounting fees of $5,000; accounting review
fees of $8,000; and other fees (transfer agent, campaign development,
filing and other) of $7,000. A different commenter estimated that the
cost to issuers could range from 26% to 601% of the offering amount
over a five-year period, depending on the size of the offering, which
does not account for additional estimated opportunity costs of internal
personnel time of $35,000 to $85,000 over a five-year period.\1367\
Some commenters referred to estimates of total costs without estimating
individual components of those costs.\1368\ Other commenters provided
additional analysis of costs under different scenarios and offering
sizes based on the estimates in the Proposing Release.\1369\
---------------------------------------------------------------------------

    \1361\ See Proposing Release, Section III.B.3.
    \1362\ See, e.g., StartEngine Letter 2; FundHub Letter 2;
Heritage Letter; SeedInvest Letter 1; SeedInvest Letter 2; Traklight
Letter.
    \1363\ See StartEngine Letter 2.
    \1364\ The commenter does not specify whether these fees are
expressed as a percentage of the amount sought or raised in the
offering.
    \1365\ We do not consider the costs associated with the
incorporation or formation of the business itself to be part of the
incremental costs of Regulation Crowdfunding, as these are costs
associated with forming any business endeavor that relies on outside
sources of capital.
    \1366\ See Grassi Letter.
    \1367\ See SeedInvest Letter 1.
    \1368\ See, e.g., WealthForge Letter (suggesting that the costs
associated with completing a crowdfunding transaction under the
current regulations can be as high as one hundred thousand dollars,
including audit fees, intermediary fees, legal fees and other
offering costs); Berlingeri Letter (suggesting that the total cost
would amount to between 15% and 20% of the offering); Traklight
Letter (suggesting that the total cost would amount to between 15%
and 20% of the offering for offerings above $100,000); FundHub
Letter 1 (referring to potential costs, based on the Commission's
estimates and the commenter's assumptions, of between $15,000 and
$25,000 associated with raising $100,000); Harrison Letter and
Ramsey Letter (referencing a Forbes estimate that the costs of
disclosure documents, engaging an intermediary, performing
background checks, and filing annual reports with the Commission
might be upwards of $100,000). See also SEC Proposes Crowdfunding
Rules, Forbes, Oct. 23, 2013, http://www.forbes.com/sites/deborahljacobs/2013/10/23/sec-proposes-crowdfunding-rules/.
    \1369\ See, e.g., EarlyShares Letter; RocketHub Letter;
SeedInvest Letter 1.
---------------------------------------------------------------------------

    In general, commenters identified the following as the main costs
for issuers in securities-based crowdfunding offerings: The
intermediary fees; the costs of preparing, ensuring compliance with,
and filing of Form C and Form C-AR; and the cost of accounting review
or audit of financial statements.\1370\ Below we discuss the comments
received on each of these costs and any revisions to our estimates made
in response.
---------------------------------------------------------------------------

    \1370\ But see Growthfountain Letter (suggesting that
crowdfunding issuers will also incur investor relations costs). We
do not consider investor relations costs to be incremental to
Regulation Crowdfunding, as these costs may be incurred by any
business that relies on outside sources of capital and a widely
dispersed investor base. However, to the extent that investment
limitations in crowdfunding offerings increase the number of
investors in a typical offering and to the extent that some investor
relations costs are variable, issuers in crowdfunding offerings may
incur higher investor relations costs than issuers in types of
offerings that typically have fewer investors.
---------------------------------------------------------------------------

    With regard to intermediary fees, the estimates of the commenters
that quantified these fees \1371\ were generally very close to our
estimates in the Proposing Release (5% to 15%). We agree with the
commenter that suggested that there is likely to be a fixed component
to these costs that reflects a certain necessary level of due diligence
and background screening, which will result in these costs as a
percentage of offering size being higher for smaller offerings.\1372\
Thus, we have revised our intermediary fee estimates in the following
way: We project (as a percentage of offering proceeds) 5% to 15% for
offerings of $100,000 or less, 5% to 10% for offerings between $100,000
and $500,000, and 5% to 7.5% for offerings above $500,000. Data on
Regulation D offerings that involve intermediaries suggests that
offerings of up to $1 million have an intermediary fee (commission and/
or finder fee) of approximately 6.5% on average, which is within the
range we estimate for larger crowdfunding offerings. Although
crowdfunding intermediaries are not expected to provide issuers with
services commensurate with those provided by underwriters in registered
offerings (and, in fact, funding portals would be prohibited from doing
so), the fees charged in a crowdfunding offering can be significantly
larger on a percentage basis relative to the underwriting fees for
registered offerings, which range from as high as 7% for initial public
offerings to less than 1% for certain bond issuances.\1373\ In general,
to the extent that a significant component of these fees is fixed, the
transaction costs for issuers will make smaller offerings more

expensive on a percentage basis. As previously discussed, we believe
that competition among crowdfunding venues and the potential
development of new products and services may have a significant impact
on these estimates over time.
---------------------------------------------------------------------------

    \1371\ See StartEngine Letter 2 (estimating portal fees of 6-
15%). See also Grassi Letter (estimating an intermediary fee of
$20,000 for a $200,000 offering, which amounts to 10% of the
offering). But see Wefunder Letter (noting that, in contrast to the
assumption in the Proposing Release, ``good startups will pay a
maximum of $0'' and citing three accredited investor crowdfunding
platforms that use a ``carried interest'' model for Rule 506
offerings, including the example of the commenter itself that does
not charge a fee to startups but that charges investors a $25 fee
and 10% carried interest (share of profits upon acquisition or
initial public offering)).
    \1372\ See Heritage Letter.
    \1373\ See, e.g., Hsuan-Chi Chen and Jay R. Ritter, The Seven
Percent Solution, 55 J. Fin. 1105-1131 (2000); Mark Abrahamson, Tim
Jenkinson, and Howard Jones, Why Don't U.S. Issuers Demand European
Fees for IPOs? 66 J. Fin. 2055-2082 (2011); Shane A. Corwin, The
Determinants of Underpricing for Seasoned Equity Offers, 58 J. Fin.
2249-2279 (2003); Lily Hua Fang, Investment Bank Reputation and the
Price and Quality of Underwriting Services, 60 J. Fin. 2729-2761
(2005); Rongbing Huang and Donghang Zhang, Managing Underwriters and
the Marketing of Seasoned Equity Offerings, 46 J. Fin. Quant.
Analysis 141-170 (2011); Stephen J. Brown, Bruce D. Grundy, Craig M.
Lewis and Patrick Verwijmeren, Convertibles and Hedge Funds as
Distributors of Equity Exposure, 25 Rev. Fin. Stud. 3077 -3112
(2012).
---------------------------------------------------------------------------

    The next major cost driver for issuers in securities-based
crowdfunding offerings, as suggested by commenters, is the cost of
preparing and filing disclosure documents and the internal burden of
ensuring compliance with the disclosure requirements of the final
rules. Issuers will incur costs to comply with the disclosure
requirements and file the information in the new Form C: Offering
Statement and Form C-U: Progress Update before the offering is funded.
Thus, issuers will incur those costs regardless of whether their
offerings are successful. In addition, for successful offerings,
issuers will incur costs to comply with the ongoing reporting
requirements and file information in the new Form C-AR: Annual
Report.\1374\
---------------------------------------------------------------------------

    \1374\ See Rule 203(b) of Regulation Crowdfunding. See also
Section II.B.3 above.
---------------------------------------------------------------------------

    Several commenters provided estimates of these costs. One commenter
stated that Form C could be prepared by third-party service providers,
such as itself, at much lower costs than those estimated by the
Commission, noting that it can prepare Form C and other required
disclosure documents, perform ``bad actor'' checks, verify investor
status and fulfill other compliance requirements for an estimated total
cost of $2,500 for an offering of $100,000 and that, in most cases, its
services and associated legal fees will cost an issuer between $2,500
and $5,000 for an offering up to $500,000 and between $5,000 and
$10,000 for an offering between $500,000 and $1,000,000.\1375\
---------------------------------------------------------------------------

    \1375\ See FundHub Letter 2.
---------------------------------------------------------------------------

    Other commenters indicated that the compliance costs for issuers
are likely to be higher than the Commission's estimates. One commenter
indicated that the burden of completing Form C would likely exceed the
60 burden hours estimated by the Commission in the proposed rules and
that the sum of attorney and accounting fees and management and
administrative time and other costs to prepare these required
disclosures will likely exceed $10,500, except in cases of start-ups
with no operating history.\1376\ The commenter also noted that most
Regulation D offerings, which tend to be less complex than crowdfunding
offerings, based on the requirements in the proposed rules, incur
accounting and legal fees above $2,500.\1377\ Another commenter noted
that issuers and intermediaries will likely incur higher attorney and
accounting fees and financial and administrative burdens than estimated
in the proposed rules but did not provide estimates.\1378\
---------------------------------------------------------------------------

    \1376\ See Heritage Letter.
    \1377\ Id.
    \1378\ See NSBA Letter.
---------------------------------------------------------------------------

    One commenter submitted several estimates of the compliance costs
associated with the final rules' disclosure requirements. In one
comment letter, the commenter estimated the upfront compliance costs of
the proposed rules to be potentially hundreds of hours in internal
company time and $20,000 to $50,000 in outside professional costs and
noted that such costs will likely be a significant deterrent to
crowdfunding.\1379\ In a different comment letter,\1380\ this commenter
stated that, based on an informal survey of potential vendors, it
believes the costs of preparing a Form C-AR would range from $6,000 to
$20,000, with the median being roughly $10,000. The commenter \1381\
further estimated that an additional $15,000 worth of internal burden
per year would be required to prepare Form C-AR and an additional
$5,000 to $10,000 worth of internal burden would be required to prepare
financial statements. In yet another comment letter,\1382\ this
commenter estimated the cost of ongoing disclosure obligations and
ongoing requirements to file financial statements under the proposed
rules to be upwards of $10,000 to $40,000 per year.
---------------------------------------------------------------------------

    \1379\ See SeedInvest Letter 2.
    \1380\ See SeedInvest Letter 1.
    \1381\ Id.
    \1382\ See SeedInvest Letter 4.
---------------------------------------------------------------------------

    Based on these comments, we have revised our estimates of the
compliance costs associated with the disclosure requirements of the
final rules and Forms C and C-AR. On the lower end of the spectrum, one
commenter suggested that the cost of preparing and filing these forms
and the associated compliance costs would range from $3,000 to
$9,000.\1383\ Another commenter estimated preparation and compliance
costs of $2,500 for an offering of $100,000, between $2,500 and $5,000
for an offering between $100,000 and $500,000, and between $5,000 and
$10,000 for an offering between $500,000 and $1,000,000.\1384\ We rely
on this commenter's estimates of the costs of preparing and filling
Form C for offerings of up to $100,000 and offerings between $100,000
and $500,000. Another commenter presented higher estimates, ranging
from $6,000 to $20,000, with a median cost of $10,000, but did not
provide estimates for different offering sizes.\1385\ Given commenters'
estimates, we think that the $6,000 to $20,000 estimate is more
appropriate for larger offerings (of more than $500,000). Thus, to
estimate the costs of preparing, filing, and complying with Form C for
large offerings, we combine the cost ranges provided by the two
commenters for these types of offerings, resulting in a cost estimate
between $5,000 and $20,000. As in the Proposing Release, we estimate
that the cost of preparing and complying with the requirements related
to Form C-AR will be approximately two-thirds of that for Form C. We
base this estimate on the fact that no offering-specific information
will be required in Form C-AR and issuers may thus be able to update
disclosure previously provided on Form C. Our estimates of the costs of
Forms C and C-AR are exclusive of the costs of an accounting review or
audit, which are discussed separately below.
---------------------------------------------------------------------------

    \1383\ See StartEngine Letter 2.
    \1384\ See FundHub Letter 2.
    \1385\ See SeedInvest Letter 1.
---------------------------------------------------------------------------

    We expect that the cost of preparing and filing Forms C and C-AR
will vary based on the characteristics of issuers, but we do not have
the information to quantify such variation. For example, issuers with
little operating activity may have less to disclose than issuers with
more complex operations. Further, some issuers may rely to a greater
extent on the services of outside professionals in preparing the
required filings,\1386\ while other issuers may choose to prepare and
file the required forms without seeking the assistance of outside
professionals.\1387\ We also recognize the possibility that many if not
all of the filing requirements may ultimately be performed by funding
portals on behalf of issuers using their platforms.
---------------------------------------------------------------------------

    \1386\ See, e.g., McGladrey Letter (suggesting that issuers that
are startups may rely on outside professional services to a greater
extent, which would increase costs).
    \1387\ For purposes of the PRA, we estimate that, for the
average issuer, 25 percent of the burden associated with preparing
and filing Form C and Form C-AR will be carried by outside
professionals. See Section IV.C.1.a below.
---------------------------------------------------------------------------

    The other significant cost for crowdfunding issuers, as identified
by commenters, is the cost of an independent accounting review or
audit. As discussed above, reviewed financial statements will be
required in offerings of more than $100,000 but not more than $500,000,
unless the issuer has audited statements otherwise available. Audited
financial statements

are required in offerings of more than $500,000.
    In a change from the proposal, issuers that have not previously
sold securities in reliance on Section 4(a)(6) will be permitted to
provide reviewed financial statements in offerings of more than
$500,000 but not more than $1,000,000, unless the issuer has audited
statements otherwise available. This change is expected to greatly
reduce the initial costs associated with providing financial statements
for first-time crowdfunding issuers offering more than $500,000 but not
more than $1,000,000. According to one commenter, the difference in
cost for reviewed versus audited financial statements could easily run
into tens of thousands of dollars.\1388\
---------------------------------------------------------------------------

    \1388\ See FundHub Letter 1. The comment letter also cites the
commenter's article, which notes that ``while a review could be in
the range of $1000 in some cases, a formal audit by a CPA typically
starts at $5,000 and could be much more.'' See Kendall Almerico, Has
The SEC Made Equity Crowdfunding Economically Unfeasible? Crowdfund
Insider (Nov. 21, 2014), available at http://www.crowdfundinsider.com/2013/11/26291-sec-made-equity-crowdfunding-economicallyunfeasible.
---------------------------------------------------------------------------

    Some commenters argued that the cost of reviewed or audited
financial statements of startup companies, which is the type of
companies expected to use Regulation Crowdfunding, would be lower than
our estimates because such companies would be less complex and because
a competitive industry would develop to support the compliance and
disclosure needs of securities-based crowdfunding issuers.\1389\
Commenters provided estimates for the cost of an accounting review of
financial statements that generally ranged from $1,500-$10,000.\1390\
One commenter suggested that the cost of an accounting review is
approximately 60% of the cost of an audit.\1391\ Consistent with this
comment, we also use an alternative way to estimate the cost of an
accounting review: indirectly, from the cost of an audit.
---------------------------------------------------------------------------

    \1389\ See, e.g., CrowdFunding Network Letter; dbbmckennon
Letter; Denlinger Letter 2; FundHub Letter 2; Holm Letter;
StartEngine Letter 1; StartEngine Letter 2.
    \1390\ See, e.g., Grassi Letter (estimating the cost of
accounting review for a $200,000 offering as $8,000); NPCM Letter
(suggesting that the minimum cost to obtain an audit, or even a
review, would be $5,000); StartEngine Letter 1 (estimating
accounting review and audit costs of $1,500-$10,000 for smaller,
newer companies); StartEngine Letter 2 (estimating accounting review
costs of $1,950-$9,000).
    \1391\ See Traklight Letter.
---------------------------------------------------------------------------

    Commenters provided several estimates of the cost of an audit for
securities-based crowdfunding issuers, most of which ranged from $2,500
to $10,000.\1392\ Other commenters, however, provided higher annual
audit cost estimates of up to $20,000-$30,000.\1393\ Based on a
compilation of audit fee data from reporting companies for fiscal year
2014, the average cost of an audit for an issuer with less than $1
million in market capitalization and less than $1 million in revenues
is approximately $20,000.\1394\ We estimate the audit cost to be
approximately $2,500 to $30,000. In the Proposing Release, we estimated
the audit cost to be $28,700, which falls within this range. Assuming
that, as suggested by one commenter,\1395\ the accounting review cost
is approximately 60% of the audit cost, this range of audit costs
yields an estimate of the accounting review cost of approximately
$1,500 to $18,000. In the Proposing Release, we estimated the
accounting review cost to be $14,350, which falls within this range.
Estimates of the cost of an accounting review that we received from
commenters also fall within this range. In light of the wide range of
estimates provided by commenters for the cost of a review or audit of
financial statements, we use in this release a range of estimates
($1,500-$18,000 for the accounting review cost and $2,500-$30,000 for
the audit cost) instead of a single point estimate for these
anticipated costs for offerings.
---------------------------------------------------------------------------

    \1392\ See, e.g., dbbmckennon Letter (estimating audit costs of
$4,000-$9,000 for new companies with limited historical operations);
Denlinger Letter 2 (noting that audit costs may be in the range of
$2,000-$4,000 for a pre-revenue startup); FundHub Letter 2 (noting
the emergence of CPA firms willing to perform a complete audit for a
startup for $2,500 or less); NPCM Letter (suggesting that the
minimum cost to obtain an audit, or even a review, would be $5,000);
StartEngine Letter 1 (estimating accounting review and audit costs
of $1,500-$10,000 for smaller, newer companies); StartEngine Letter
2 (estimating audit costs of $3,100-$9,000).
    \1393\ See, e.g., Frutkin Letter (suggesting a ``rough estimate
of $30,000 per audit''); Graves Letter (suggesting that audit costs
can be upwards of $18,000 to $25,000); Startup Valley Letter
(suggesting that audit fees can be up to $10,000 for small startups
with no financials and can exceed $20,000 for companies that have
been in business for a few years); Traklight Letter (suggesting that
audit costs can be up to $20,000).
    \1394\ See Audit Analytics, Auditor-Fees, available at http://www.auditanalytics.com/0002/audit-data-company.php. The auditor fee
database contains fee data disclosed by Exchange Act reporting
companies in electronic filings since January 1, 2001. For purposes
of our calculation, we averaged the auditor fee data for companies
with both market capitalization and revenues of greater than zero
and less than $1 million (the smallest subgroup of companies for
which data is compiled). We note that the cost of an audit for many
issuers conducting a securities-based crowdfunding offering in
reliance on Section 4(a)(6) is likely to be lower than for the
subset of Exchange Act reporting companies referenced above, because
they likely would be at an earlier stage of development than issuers
that file Exchange Act reports with us and, thus, could be less
complex to audit.
    \1395\ See Traklight Letter.
---------------------------------------------------------------------------

    As discussed below, in a change from the proposal, the final rules
do not require issuers to provide reviewed or audited financial
statements in the annual report, unless such statements are otherwise
available, which is expected to yield cost savings on an annual basis
compared with the proposal.
    The table below presents the main adjusted cost estimates for the
final rules.\1396\
---------------------------------------------------------------------------

    \1396\ In addition to the compliance costs outlined in the
table, issuers also will incur costs to (1) obtain EDGAR access
codes on Form ID; (2) prepare and file progress updates on Form C-U;
and (3) prepare and file Form C-TR to terminate ongoing reporting.
These additional compliance costs are discussed further below. In
addition, for purposes of the Paperwork Reduction Act (``PRA''), we
provide burden estimates for each of these filings obligations in
Section IV.C.1, below.
    \1397\ For purposes of the table, we estimate the range of fees
that an issuer would pay the intermediary assuming the following:
(1) The fees would be calculated as a percentage of the offering
amount ranging from 5% to 15% of the total offering amount for
offerings of $100,000 or less, 5% to 10% for offerings between
$100,000 and $500,000, and 5% to 7.5% for offerings of more than
$500,000; and (2) the issuer is offering $50,000, $300,000 and
$750,000, which are the mid-points of the offering amounts under
each of the respective columns. The fees paid to the intermediary
may, or may not, cover services to an issuer in connection with the
preparation and filing of the forms identified in this table.

----------------------------------------------------------------------------------------------------------------
                                                             Offerings of more than
                                      Offerings of $100,000  $100,000, but not more     Offerings of more than
                                             or less              than $500,000                $500,000
----------------------------------------------------------------------------------------------------------------
Fees paid to the                     $2,500-$7,500.........  $15,000-$30,000.......  $37,500-$56,250.
 intermediary.\1397\.
Costs per issuer for preparation     $2,500................  $2,500-$5,000.........  $5,000-$20,000.
 and filing of Form C for each
 offering and related compliance
 costs.
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
                                                             Offerings of more than
                                      Offerings of $100,000  $100,000, but not more     Offerings of more than
                                             or less              than $500,000                $500,000
----------------------------------------------------------------------------------------------------------------
Costs per issuer for preparation     $1,667................  $1,667-$3,333.........  $3,333-$13,333.
 and filing of annual report on
 Form C-AR \1398\ and related
 compliance costs.
Costs per issuer for review or       Not required..........  $1,500-$18,000........  $2,500-$30,000.
 audit of financial statements.                                                      ($1,500-$18,000 for first-
                                                                                time issuers raising more
                                                                                than $500,000 but not more
                                                                                than $1,000,000.) \1399\
----------------------------------------------------------------------------------------------------------------

    We do not have additional data on the costs likely to be incurred
by crowdfunding issuers to prepare the required disclosures beyond the
information discussed above. Overall, we recognize that cost estimates
may vary from issuer to issuer and from service provider to service
provider. However, even with the additional accommodations provided in
the final rules, the costs of compliance may be significant for some
issuers.
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    \1398\ As noted above, we estimate that these costs are
approximately two-thirds of the costs for preparation and filing of
Form C.
    \1399\ First-time crowdfunding issuers within this offering
range will be permitted to provide reviewed financial statements.
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b. General Disclosure Requirements
    The statute and the final rules related to issuer disclosures are
intended to reduce the information asymmetries that currently exist
between small businesses and investors. Small private businesses
typically do not disclose information as frequently or as extensively
as public companies, if at all. Moreover, unlike public companies,
small private businesses generally are not required to hire an
independent accountant to review financial statements. When information
about a company is difficult to obtain or the quality of the
information is uncertain, investors are at risk of making poorly-
informed investment decisions about that company.
    Such information asymmetries may be especially acute in the
securities-based crowdfunding market because the market includes
startups and small businesses that have significant risk factors and
other characteristics that may have led them to be rejected by other
potential funding sources, including banks, VCs and angel investors. In
addition, the securities-based crowdfunding market may attract
unsophisticated investors who may not have the resources necessary to
gather and analyze information about issuers before investing or to
effectively monitor issuers after investing. Moreover, investment
limits in securities-based crowdfunding offerings in reliance on
Section 4(a)(6) will likely lead to investors having smaller stakes in
the firm, which may reduce their incentives to monitor or gather
information for a given investor. These considerations may give rise to
adverse selection and moral hazard in offerings in reliance on Section
4(a)(6). For instance, some issuers may use capital to fund riskier
projects than what was disclosed to investors, or they may not pursue
their stated business objectives. If investors in securities-based
crowdfunding have limited information about issuers or a limited
ability to monitor such issuers, they may seek higher returns for their
investment or choose to withdraw from the securities-based crowdfunding
market altogether, which would increase the cost of capital to issuers
and limit the capital formation benefits of the final rules. In
addition, investors in offerings made in reliance on Section 4(a)(6)
may make relatively small investments, due in part to the application
of investment limitations. This potential dispersed investor base may
make it difficult for investors to solve collective action problems in
monitoring the issuer.
    The statute and the final rules seek to reduce information
asymmetries by requiring issuers to file specified disclosures with the
Commission for offerings made in reliance on Section 4(a)(6) during the
offering and on an annual basis thereafter.\1400\ Issuers also are
required to provide these disclosures to investors and, in the case of
offering documents, to investors and the relevant intermediary. The
disclosure requirements, which are described above,\1401\ are more
extensive than those required under some other existing exemptions from
registration. For example, although the current requirements of Tier 1
Regulation A offerings include similar initial financial disclosures,
issuers in Tier 1 offerings are not required to file ongoing
reports.\1402\ Issuers using the Rule 504 exemption under Regulation D
to raise up to $1 million are not required to provide audited financial
statements, and there are no periodic disclosure requirements.
Regulation D offerings under Rules 505 and 506 for up to $2 million
require issuers to provide audited current balance sheets (and
unaudited statements of income, cash flows and changes in stockholders'
equity) to non-accredited investors, but there are no periodic
reporting requirements. The disclosure requirements in Regulation
Crowdfunding are expected to benefit investors by enabling them to
better evaluate the issuer and the offering, monitor how the issuer is
performing over time and be aware of when the issuer may terminate its
ongoing reporting obligations. This will allow investors with various
risk preferences to invest in the offerings best suited for their risk
tolerance, thus improving allocative efficiency.
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    \1400\ See Section 4A(b). See also Rules 201, 202 and 203 of
Regulation Crowdfunding.
    \1401\ See Section II.B.1 above.
    \1402\ However, issuers in Tier 1 Regulation A offerings are
required to provide information about sales in such offerings and to
update certain issuer information by electronically filing a Form 1-
Z exit report with the Commission not later than 30 calendar days
after the termination or completion of an offering. Further, Tier 1
offerings must be qualified by the Commission and are subject to
state registration requirements. Issuers in Tier 2 offerings are
subject to annual, semiannual and current reporting requirements.
See Regulation A Adopting Release.
---------------------------------------------------------------------------

    The disclosure requirements also may improve informational
efficiency in the market. Specifically, the required disclosure may
provide investors with a useful benchmark to evaluate the issuer and
compare the issuer to other private issuers both within and outside of
the securities-based crowdfunding market.\1403\ Additionally,
disclosure by issuers engaging in crowdfunding transactions in reliance
on Section 4(a)(6) may inform financial markets more generally about
new consumer trends and new products, thus creating externalities that
benefit other types of investors and issuers.
---------------------------------------------------------------------------

    \1403\ See Christian Leuz and Peter Wysocki, Economic
Consequences of Financial Reporting and Disclosure Regulation: A
Review and Suggestions for Future Research, (Working Paper,
University of Chicago) (2008), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1105398.

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

    We recognize, however, that the disclosure requirements also will
have associated limitations and costs, including the direct costs of
preparation, certification, independent accounting review (when
necessary) and dissemination of the disclosure documents. As noted
above, the disclosure requirements for offerings made in reliance on
Section 4(a)(6) are more extensive, in terms of breadth and frequency,
than those for other exempt offerings. The statute also provides us
with the discretion to impose additional requirements on issuers
engaging in crowdfunding transactions, and in some cases, the final
rules require issuers to disclose information beyond what is
specifically mandated by the statute.\1404\ We recognize that these
additional discretionary disclosure provisions may impose additional
compliance costs on issuers compared with the proposal. However, we
believe these provisions will improve investor decision-making and may
ultimately benefit issuers by improving price efficiency in the
securities-based crowdfunding market. Although requiring less
disclosure could impose lower compliance costs, we believe that the
disclosure requirements we are adopting appropriately consider the need
to enhance the ability of issuers relying on Section 4(a)(6) to raise
capital while enabling investors to make informed investment decisions.
In response to the suggestion by some commenters that issuers not be
required to disclose information in multiple places,\1405\ under the
final rules, an issuer is not required to repeat disclosure that is
already provided in the issuer's financial statements. This may help to
mitigate the cost of compliance for issuers.
---------------------------------------------------------------------------

    \1404\ See Section 4A(b)(5). See also Section II.B.1.a.i(g) for
a description of the additional disclosure requirements.
    \1405\ See, e.g., EY Letter (noting that certain required
disclosure would be included in an issuer's financial statements);
Grassi Letter (same).
---------------------------------------------------------------------------

    We note that the disclosure requirements may have indirect costs to
the extent that information disclosed by issuers relying on Section
4(a)(6) can be used by their competitors, resulting in a potential loss
of a competitive advantage or intellectual property, particularly for
high-growth issuers and issuers engaged in significant research and
development. Requiring significant levels of disclosure at an early
stage of an issuer's lifecycle may affect an issuer's competitive
position and may limit the use of the exemption in Section 4(a)(6) by
issuers who are especially concerned with confidentiality. These
disclosure costs also may make other types of private offerings more
attractive to potential securities-based crowdfunding issuers. For
example, the 2013 changes to Rule 506 of Regulation D,\1406\ which
allow for general solicitation, subject to certain conditions, may make
it a more attractive option for small business financing and, thus, may
divert potential issuers from crowdfunding.
---------------------------------------------------------------------------

    \1406\ See Rule 506(c) Adopting Release, note 5.
---------------------------------------------------------------------------

    In addition, under the statute and the final rules, issuers that
complete a crowdfunding offering in reliance on Section 4(a)(6) are
subject to ongoing reporting requirements,\1407\ which will increase
compliance costs. The ongoing reporting, however, may provide a
liquidity benefit for secondary sales of securities issued in
crowdfunding transactions and make the prices of such securities more
informationally efficient, should a secondary market develop.
---------------------------------------------------------------------------

    \1407\ See Rule 202 of Regulation Crowdfunding.
---------------------------------------------------------------------------

c. Financial Condition and Financial Statement Disclosure Requirements
    Consistent with the statute, the final rules require narrative
disclosure about the issuer's financial condition, including, to the
extent material, liquidity, capital resources and the issuer's
historical results of operations.\1408\ We expect that this discussion
will inform investors about the financial condition of the issuer,
without imposing significant costs on issuers, because issuers likely
will already have such information readily available. In addition, the
final rules do not prescribe the content or format for this
information.
---------------------------------------------------------------------------

    \1408\ See Rule 201(s) of Regulation Crowdfunding. See also
Section II.B.1.a.(ii)(a) above.
---------------------------------------------------------------------------

    With respect to the requirement to provide financial statements,
the final rules implement tiered financial disclosure requirements
based on the aggregate amount of securities offered and sold in
reliance on Section 4(a)(6) during the preceding 12-month period,
inclusive of the offering amount in the offering for which disclosure
is being provided.\1409\ The disclosure requirements will provide
investors with more information than might otherwise be obtained in
private offerings, but also may create additional costs for those
issuers that have limited financial and accounting expertise necessary
to produce the financial disclosures envisioned by the statute and the
final rules.
---------------------------------------------------------------------------

    \1409\ See Rule 201(t) of Regulation Crowdfunding. See also
Section II.B.1.a.(ii)(b) above.
---------------------------------------------------------------------------

    The final rules, consistent with the proposed rules, require
issuers to provide a complete set of their financial statements
(balance sheets, statements of comprehensive income, statements of cash
flows and statement of changes in stockholders' equity) that are
prepared in accordance with U.S. GAAP and cover the shorter of the two
most recently completed fiscal years or the period since
inception.\1410\ We could have chosen an alternative that allows
financial statements to be prepared in accordance with other
comprehensive bases of accounting, as some commenters suggested.\1411\
Such an alternative may have mitigated costs for some issuers,
especially those smaller issuers that historically have prepared their
financial statements in accordance with other comprehensive bases of
accounting rather than U.S. GAAP. However, as we discussed above, this
alternative would reduce the comparability of financial statements
across issuers and might not provide investors with a fair
representation of a company's financial position and results of
operations. Further, it may be difficult for investors to determine
whether the issuer complied with such basis of accounting.\1412\
---------------------------------------------------------------------------

    \1410\ See Instruction 3 to paragraph (t) of Rule 201 of
Regulation Crowdfunding.
    \1411\ See, e.g., ABA Letter (for offerings of $100,000 or less,
but stating that the Commission could require providing U.S. GAAP
financial statements if available); AICPA Letter; CFIRA Letter 5;
CFIRA Letter 7; CrowdCheck Letter 4; EarlyShares Letter; EY Letter
(for offerings of $100,000 or less, unless U.S. GAAP financial
statements are available); Grassi Letter; Graves Letter (for issuers
with less than $5 million in revenue); Mahurin Letter (stating that
simple Excel spreadsheets accompanied by bank records should meet
the financial statement requirements); Milken Institute Letter (for
early-stage issuers); NFIB Letter; SBEC Letter; StartupValley
Letter; Tiny Cat Letter (for offerings of less than $500,000);
Whitaker Chalk Letter (for offerings of less than $500,000 if the
issuer has an asset or income level below a certain level).
    \1412\ See Section II.B.1.a.(ii)(b) above.
---------------------------------------------------------------------------

    The final rules also specify that an issuer may conduct an offering
in reliance on Section 4(a)(6) using financial statements for the
fiscal year prior to the most recently completed fiscal year, provided
that not more than 120 days have passed since the end of the issuer's
most recently completed fiscal year, and financial statements for the
most recently completed fiscal year are not otherwise available.\1413\
This may impose a cost on investors to the extent that the investors do
not have more current financial information about the issuer. However,
this concern is somewhat mitigated by the requirement that issuers
include a discussion of any material changes or trends known to
management in the financial condition and results of

operations subsequent to the period for which financial statements are
provided.\1414\
---------------------------------------------------------------------------

    \1413\ See Instruction 10 to paragraph (t) of Rule 201 of
Regulation Crowdfunding.
    \1414\ See Rule 201(s) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Requiring financial statements covering the two most recently
completed fiscal years is expected to benefit investors by providing a
basis for comparison against the most recently completed fiscal year
and by allowing investors to identify changes in the development of the
business. Compared to an alternative that we could have selected, that
of requiring financial statements covering only the most recently
completed fiscal year, as some commenters suggested,\1415\ requiring a
second year of financial statements will to some degree increase the
cost for the issuer. Also, to the extent that the issuer had little or
no operations in the prior year, the benefit of comparability may not
be realized. We recognize that many crowdfunding issuers may not have
any financial history, and investors may make investment decisions
without a track record of issuer performance, relying largely on the
belief that an issuer can succeed based on their business plan and
other factors. Nevertheless, for those issuers that do have a financial
history, we believe this disclosure can contribute to better informed
investment decisions and improve the overall allocative efficiency of
the securities-based crowdfunding market.
---------------------------------------------------------------------------

    \1415\ See, e.g., Denlinger Letter 1; EY Letter; Fryer Letter;
Grassi Letter; Joinvestor Letter; Public Startup Letter 2; RFPIA
Letter; RocketHub Letter.
---------------------------------------------------------------------------

    For offerings of $100,000 or less, the final rules require the
issuer to provide financial statements that are certified by the
principal executive officer to be true and complete in all material
respects.\1416\ The final rules include a form of certification for the
principal executive officer to provide in the issuer's offering
statement, which we believe will help issuers comply with the
certification required by the statute and the final rules.\1417\
However, if reviewed financial statements or audited financial
statements are otherwise available, they must be provided.\1418\
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    \1416\ See Section 4A(b)(1)(D)(i). See also Rule 201(t)(1) of
Regulation Crowdfunding.
    \1417\ See Instruction 4 to paragraph (t) of Rule 201 of
Regulation Crowdfunding.
    \1418\ See Rule 201(t)(1) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules would have required income tax returns for the
most recently completed year (if any). In a change from the proposed
rules, consistent with the suggestions of some commenters and to
respond to privacy concerns,\1419\ the final rules do not require
complete tax returns and instead require that an issuer disclose its
total income, taxable income and total tax, or the equivalent line
items from the applicable form, and have the principal executive
officer certify that those amounts reflect accurately the information
in the issuer's federal income tax returns.\1420\ We believe that the
requirement to provide selected items from the return, rather than the
return itself, will alleviate some of the privacy concerns for issuers.
This change may increase record keeping costs for issuers and give rise
to potential transcription errors. It also may reduce the amount of
information available to investors, but as we noted in the Proposing
Release, it is not clear to what extent all of the information
presented in a tax return would be useful for an investor evaluating
whether or not to purchase securities from the issuer. Finally,
although principal executive officers will incur some incremental
liability for their certification that these amounts reflect accurately