to the intermediary's platform in certain circumstances.\1571\ This
provision is expected to benefit intermediaries by providing them with
a means to attract more investors to their crowdfunding platforms,
thereby encouraging capital formation. Investors also will benefit from
the condition of this safe harbor prohibiting transaction-based
compensation (other than to registered broker-dealers), which is
expected to reduce the incentive for abusive practices.
---------------------------------------------------------------------------

    \1570\ See Rule 402(b)(6) of Regulation Crowdfunding.
    \1571\ See Rule 305(b) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The final rules also provide a safe harbor for a funding portal to
pay or offer to pay compensation to a registered broker-dealer for
services provided in connection with the offer or sale of securities in
reliance on Section 4(a)(6), subject to conditions set forth in the
rule.\1572\ Similarly, a funding portal can, subject to certain
conditions, receive compensation from a registered broker-dealer for
services provided in connection with the offer or sale of securities by
the funding portal in reliance on Section 4(a)(6).\1573\ We note that
some commenters expressed concern that such relationships between
funding portals and broker-dealers could create conflicts of
interest.\1574\ However, funding portals are expected to benefit from
being able to enter into these types of arrangements with registered
broker-dealers who can provide services that the funding portals
otherwise are prohibited from providing, such as engaging a broker-
dealer to serve as a qualified third party for the transmission of
investor funds. Broker-dealers also will benefit from the additional
business that funding portals may be able to attract through the
funding portals' platforms, as well as from services, such as those
related to technology, that funding portals can provide. We anticipate
that these types of service arrangements will ultimately benefit
investors.
---------------------------------------------------------------------------

    \1572\ See Rule 402(b)(7) of Regulation Crowdfunding.
    \1573\ See Rule 402(b)(8) of Regulation Crowdfunding.
    \1574\ See e.g., Commonwealth of Massachusetts Letter; RocketHub
Letter.
---------------------------------------------------------------------------

    The final rules permit a funding portal to advertise its existence
and identify one or more issuers or offerings available through its
platform subject to certain conditions.\1575\ This provision will
benefit funding portals by allowing them to potentially attract more
investors to their crowdfunding platforms. This provision also may
enhance market efficiency as investors become more aware of available
offerings through advertisements by funding portals and are thus able
to better match their investments with projects that are better suited
to their risk preferences and investment strategies. The conditions on
advertising by funding portals in the final rules aim to consider
informational benefits and investor protection concerns. For instance,
while a funding portal advertising its existence may also identify one
or more issuers or offerings available on its platform, it must do so
on the basis of objective criteria that are reasonably designed to
identify a broad selection of issuers and offerings and are applied
consistently to all potential issuers and offerings. In addition,
advertisements sent by a funding portal must not suggest that it is a
recommendation to purchase a security or advice as to the advisability
in investing in any security.\1576\ While we believe these conditions
are appropriate to protect the integrity of the crowdfunding market, we
recognize that they may impose costs on funding portals. For example
these conditions may limit the utility of advertising for the funding
portal while the prohibition on special or additional compensation for
identifying the offering in an advertisement may reduce the funding
portal's revenue.
---------------------------------------------------------------------------

    \1575\ See Rule 402(b)(9) of Regulation Crowdfunding.
    \1576\ See Section II.D.3.h.
---------------------------------------------------------------------------

    As discussed above, the final rules require an intermediary to deny
access to its platform to an issuer that the intermediary has a
reasonable basis for believing presents the potential for fraud or
otherwise raises concerns about investor protection.\1577\ The final
rules also provide a conditional safe harbor to intermediaries that are
funding portals to deny access to the platform or cancel an offering in
such instances.\1578\ These provisions are expected to enhance investor
protection by giving funding portals greater ability to deny
potentially fraudulent offerings. Funding portals are expected to
benefit from the ability to deny access to certain issuers to protect
the integrity of the offering process and the market reputation of
their crowdfunding platforms, without fear of violating the statutory
prohibition on providing investment advice.
---------------------------------------------------------------------------

    \1577\ See Rule 301(c) of Regulation Crowdfunding.
    \1578\ See Rule 402(b)(10) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The final rules specify that a funding portal may accept, on behalf
of an issuer, investment commitments for crowdfunding offerings from
investors.\1579\ Under the final rules funding portals also can direct
investors where to transmit funds or remit payment in connection with
the purchase of securities offered and sold in reliance on Section
4(a)(6).\1580\ Similarly, a funding portal can direct a qualified third
party to release proceeds of a successful offering to the issuer upon
completion of the offering or to return investor proceeds when an
investment commitment or offering is

cancelled.\1581\ These provisions will facilitate the implementation of
the requirements of the final rules regarding the maintenance and
transmission of investor funds \1582\ for intermediaries that are
funding portals and give both funding portals and entities with which
they do business a measure of legal certainty that funding portals
accepting investment commitments for crowdfunding offerings and
providing direction for funds to and from qualified third parties in
compliance with the final rules will not be in violation of the
statutory prohibitions on holding, managing, possessing or otherwise
handling investor funds or securities. While we agree with the
commenter that stated that the requirement to use a qualified third
party to handle customer funds creates an additional cost,\1583\
Section 3(a)(80)(D) of the Exchange Act explicitly prohibits funding
portals from handling customer funds and securities.
---------------------------------------------------------------------------

    \1579\ See Rule 402(b)(11) of Regulation Crowdfunding.
    \1580\ See Rule 402(b)(12) of Regulation Crowdfunding.
    \1581\ See Rule 402(b)(13) of Regulation Crowdfunding.
    \1582\ See Rule 303(e) of Regulation Crowdfunding.
    \1583\ See Stephenson, et al., Letter.
---------------------------------------------------------------------------

b. Compliance Requirements
    The final rules require that a funding portal implement written
policies and procedures, reasonably designed to achieve compliance with
the federal securities laws and the rules and regulations thereunder,
relating to its business as a funding portal.\1584\ This requirement
will provide a benefit to investors and funding portals alike, as
written policies and procedures will enhance compliance with the final
rules. Funding portals will incur costs associated with the requirement
to develop their own procedures and implement written policies and
procedures, as well as to update and enforce them. These costs are
reflected in the tables above as part of the costs to comply with
requirements to act as an intermediary in transactions pursuant to
Section 4(a)(6).
---------------------------------------------------------------------------

    \1584\ See Rule 403(a) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    In contrast to the proposal, the final rules do not impose anti-
money laundering (AML) obligations for funding portals. Some commenters
generally suggested that since funding portals are prohibited from
handling customer funds and securities, they should not be required to
comply with AML provisions.\1585\ As noted above, we believe it would
be appropriate to work with other regulators to develop consistent and
effective AML obligations for funding portals.\1586\ By not imposing
AML requirements in the final rules, we may avoid the possibility of
conflicting or overlapping requirements. Registered broker-dealers that
serve as intermediaries in securities-based crowdfunding transactions
continue to have AML obligations, as do certain other parties involved
in transactions conducted pursuant to Section 4(a)(6), such as a bank
acting as a qualified third party to hold investor funds.\1587\ To the
extent that this difference in compliance obligations between funding
portals and registered broker-dealers affects compliance costs and
persists in the future, it may place funding portals at a relative
competitive advantage. If this difference in compliance obligations
between funding portals and registered broker-dealers persists in the
future, it may also potentially expose investors in those securities-
based crowdfunding offerings for which the intermediary is a funding
portal to additional risks.
---------------------------------------------------------------------------

    \1585\ See, e.g., PeoplePowerFund Letter; Public Startup Letter
3; RFPIA Letter.
    \1586\ See Section II.D.4.b.
    \1587\ Id.
---------------------------------------------------------------------------

    Additionally, the statute requires that intermediaries take such
steps to protect the privacy of information collected from investors as
we determine appropriate. In the final rules, we implement this
statutory provision by requiring a funding portal to comply with
Regulation S-P, S-ID and Regulation S-AM, as they apply to broker-
dealers.\1588\ We recognize that compliance with these privacy
requirements will impose costs on funding portals. However, we believe
that requiring a funding portal to comply with privacy obligations will
help protect the personally identifiable information of investors,
consistent with how it is required to be protected by other financial
intermediaries. These privacy protections can give investors the
confidence to participate in offerings made in reliance on Section
4(a)(6), which will facilitate capital formation and benefit the
markets generally. As an alternative, we could have developed a more
limited privacy regime applicable only to funding portals. Such an
alternative would result in inconsistent treatment of funding portals
and broker-dealers with respect to privacy obligations and could reduce
the willingness of investors to participate in securities-based
crowdfunding offerings. This alternative might also affect competition
between funding portals and registered broker-dealers in the market for
securities-based crowdfunding offerings.
---------------------------------------------------------------------------

    \1588\ See Rule 403(b) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    As a condition to exempting funding portals from the requirement to
register as broker-dealers under Exchange Act Section 15(a)(1),
Exchange Act Section 3(h)(1)(A) requires that registered funding
portals remain subject to, among other things, the Commission's
examination authority. Under the final rules, a funding portal is
required to permit the examination and inspection of all its business
and business operations relating to its activities as a funding portal,
such as its premises, systems, platforms and records, by Commission
representatives and by representatives of the registered national
securities association of which it becomes a member.\1589\ Although
funding portals will face time and compliance costs in submitting to
Commission and registered national securities association examinations,
inspections or investigations, and potentially responding to any issues
identified, funding portals, investors and issuers will benefit from
the enhanced compliance with legal obligations due to this oversight,
as well as the sanctions or other disciplinary actions that may follow
upon findings of violations through such inspections, examinations or
investigations.
---------------------------------------------------------------------------

    \1589\ See Rule 403(c) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Further, the final rules require a registered funding portal to
maintain and preserve certain books and records relating to its
business for a period of not less than five years and in an easily-
accessible place for the first two years.\1590\ Recordkeeping
requirements can assist registrants with compliance. They are a well-
established and important element of the approach to broker-dealer
regulation, as well as the regulation of investment advisers and
others, and are designed to maintain the effectiveness of our
inspection program for regulated entities, facilitating our review of
their compliance with statutory mandates and with our rules. These
requirements will enable the Commission and registered national
securities organizations to more effectively gather information about
the activities in which a funding portal has been engaged to discern
whether the funding portal and the other parties are in compliance with
the requirements of Regulation Crowdfunding and other relevant
regulatory requirements. Standardized recordkeeping practices for
intermediaries will enable regulators to perform more efficient,
targeted inspections and examinations and thereby increase the
likelihood of

identifying improper conduct at earlier stages of the inspection or
examination, which ultimately will benefit investors and the
marketplace as a whole. To the extent that these requirements result in
better regulatory oversight, they may increase investor confidence in
funding portals and may also benefit funding portals by promoting
issuer reliance on funding portals in crowdfunding offerings.
---------------------------------------------------------------------------

    \1590\ See Rule 404(a) of Regulation Crowdfunding. We note that
registered broker-dealers already are required to comply with
Exchange Act Rules 17a-3 and 17a-4 pertaining to books and records
(17 CFR 240.17a-3 and 17a-4). Thus, all intermediaries, whether
registered as broker-dealers or as funding portals, are required to
make and preserve books and records.
---------------------------------------------------------------------------

    Funding portals may incur costs in establishing the systems
necessary to comply with the books and records requirements. We note
that the records required to be made and preserved under the final
rules are those that would ordinarily be made and preserved in the
ordinary course of business by a regulated broker-dealer engaging in
these activities. Entities that newly register as broker-dealers will
be subject to the recordkeeping requirements of Rules 17a-3 and 17a-4.
While these costs will constitute part of the cost of compliance for
entities that choose to become intermediaries in crowdfunding
transactions by registering as broker-dealers, the cost of broker-
dealer compliance with recordkeeping requirements of Rules 17a-3 and
17a-4 is not by itself a result of the final rule. Entities solely
intending to serve as intermediaries in crowdfunding transactions for
which the cost of compliance with broker-dealer recordkeeping
requirements is too high may elect to register as funding portals.
Funding portals will be required to make and keep records related to
their activities to facilitate transactions in reliance on Section
4(a)(6), which we estimate for the purposes of the PRA to result in an
initial burden of 325 hours and an initial cost of $5,350 per funding
portal. We estimate that ongoing recordkeeping burden and cost will be
similar to the initial burden and cost.\1591\ We also note that some
commenters stated that the cost burden for a funding portal to maintain
the proposed books and records would not be significant.\1592\ We
recognize that there may be a slight competitive advantage for funding
portals over broker-dealers to the extent that the recordkeeping rule
for funding portals is less burdensome for than the requirements
applicable to broker-dealers. At the same time, we believe that the
recordkeeping rule for funding portals is consistent with the narrow
range of their permitted activities.
---------------------------------------------------------------------------

    \1591\ See Section IV.C.2.n.
    \1592\ See CFIRA Letter 1; Joinvestor Letter.
---------------------------------------------------------------------------

6. Insignificant Deviations
    We are providing a safe harbor for issuers for certain
insignificant deviations from a term, condition or requirement of
Regulation Crowdfunding.\1593\ This safe harbor will provide that
insignificant deviations from a term, condition or requirement of
Regulation Crowdfunding will not result in a loss of the exemption, so
long as the issuer relying on the exemption can show that: (1) The
failure to comply was insignificant with respect to the offering as a
whole; (2) the issuer made a good faith and reasonable attempt to
comply with all applicable terms, conditions and requirements of
Regulation Crowdfunding; and (3) the issuer did not know of the failure
to comply, where the failure to comply with a term, condition or
requirement was the result of the failure of the intermediary to comply
with the requirements of Section 4A(a) and the related rules, or such
failure by the intermediary occurred solely in offerings other than the
issuer's offering.
---------------------------------------------------------------------------

    \1593\ See Rule 502(a) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The safe harbor is expected to decrease the costs incurred by
issuers compared to the alternative of not providing a safe harbor. In
the absence of a safe harbor, issuers might be hesitant to participate
in this new marketplace for fear of inadvertently violating an
applicable regulatory requirement, thereby reducing the benefits of
Regulation Crowdfunding on efficiency, competition and capital
formation. We recognize that providing a safe harbor can impose costs
on investors, intermediaries and regulators, compared with the
alternative of not providing a safe harbor, to the extent that issuers
lessen the vigor with which they develop and implement systems and
controls to achieve compliance with the requirements of Regulation
Crowdfunding, which may result in a decrease in investor protection.
Accordingly, we have designed the conditions of the safe harbor--
specifically, the issuer must show that the failure to comply was
insignificant with respect to the offering as a whole; it made a good
faith and reasonable attempt to comply; and it did not know of the
failure or such failure occurred solely in offerings other than the
issuer's offering--to lessen the potential impact on investor
protection.
    Several commenters suggested that the safe harbor for insignificant
deviations should not apply with respect to state regulatory
enforcement actions.\1594\ Adopting such an alternative could have
significantly undermined the utility of the Section 4(a)(6) exemption
by subjecting issuers to loss of state law preemption \1595\ and
potential state enforcement action for insignificant deviations from
Regulation Crowdfunding's requirements.
---------------------------------------------------------------------------

    \1594\ See, e.g., Commonwealth of Massachusetts Letter; NASAA
Letter.
    \1595\ See Section III.B.7.
---------------------------------------------------------------------------

7. Relationship With State Law
    Section 305 of the JOBS Act amended Securities Act Section 18(b)(4)
\1596\ to preempt the ability of states to regulate certain aspects of
crowdfunding conducted pursuant to Section 4(a)(6). This statutory
amendment will benefit issuers by preempting any registration
requirements in states in which they offer or sell securities in
reliance on Section 4(a)(6), thereby reducing the costs for these
transactions. It also can benefit investors because these cost savings
ultimately may be passed on to investors. Absent preemption of state
registration requirements, an offering made through the Internet in
reliance on Section 4(a)(6) and the final rules could result in an
issuer potentially violating state securities laws. Some evidence in
donation-based and reward-based crowdfunding campaigns suggests that
contributions are not exclusively local.\1597\ The statutory preemption
of state registration requirements will reduce issuer uncertainty about
the necessity of state registration. On the other hand, state
registration requirements may provide an additional layer of investor
protection, and their preemption will remove a potential layer of
review that may help to deter fraud. This potential cost of state law
preemption, however, may be offset by some of the statutory and final
rule requirements that are designed to protect investors, such as
public disclosure,\1598\ investment limits,\1599\ the use of a
registered intermediary,\1600\ provisions regarding measures to reduce
the risk of fraud,\1601\ and disqualification provisions.\1602\ The
requirement in the final rules that issuers file information on EDGAR
also helps to ensure that information about

issuers is available to individual state regulators, which retain the
authority to bring enforcement actions for fraud.
---------------------------------------------------------------------------

    \1596\ 15 U.S.C. 77r(b)(4).
    \1597\ For example, in crowdfunding campaigns for early stage
musical projects, the average distance between artist-entrepreneurs
and contributors was 3,000 miles. See Ajay Agrawal, Christian
Catalini and Avi Goldfarb, The Geography of Crowdfunding, NET
Institute Working Paper No. 10-08 (Oct. 29, 2010), available at
http://ssrn.com/abstract=1692661.
    \1598\ See Rule 201 of Regulation Crowdfunding.
    \1599\ See Rule 100(a)(2) of Regulation Crowdfunding.
    \1600\ See Rule 100(a)(3) of Regulation Crowdfunding.
    \1601\ See Rule 301 of Regulation Crowdfunding.
    \1602\ See Rule 503 of Regulation Crowdfunding.
---------------------------------------------------------------------------

8. Exemption From Section 12(g)
    Rule 12g-6 provides that securities issued pursuant to an offering
made under Section 4(a)(6) are exempted from the record holder count
under Section 12(g) provided the issuer is current in its ongoing
annual reports required pursuant to Rule 202 of Regulation
Crowdfunding, has total assets as of the end of its last fiscal year
not in excess of $25 million, and has engaged the services of a
transfer agent registered with the Commission pursuant to Section 17A
of the Exchange Act. The issuer size test is broadly consistent with
some commenters' suggestions.\1603\
---------------------------------------------------------------------------

    \1603\ See, e.g., ABA Letter ($25 million); PeoplePowerFund
Letter.
---------------------------------------------------------------------------

    An issuer that exceeds the $25 million total asset threshold in
addition to exceeding the thresholds in Section 12(g) will be granted a
two-year transition period before it is required to register its class
of securities pursuant to Section 12(g), provided it timely files all
its ongoing reports due pursuant to Rule 202 of Regulation Crowdfunding
during such period.\1604\ Section 12(g) registration will be required
only if, on the last day of the fiscal year in which the company
exceeded the $25 million total asset threshold, the company has total
assets of more than $10 million and the class of equity securities is
held by more than 2,000 persons or 500 persons who are not accredited
investors.\1605\ In such circumstances, an issuer that exceeds the
thresholds in Section 12(g) and has total assets of $25 million or more
is required to begin reporting under the Exchange Act the fiscal year
immediately following the end of the two-year transition period.\1606\
An issuer entering Exchange Act reporting will be considered an
``emerging growth company'' to the extent the issuer otherwise
qualifies for such status.
---------------------------------------------------------------------------

    \1604\ Id.
    \1605\ 15 U.S.C. 78l(g).
    \1606\ 17 CFR 240.12g-6.
---------------------------------------------------------------------------

    The conditional 12(g) exemption will defer the more extensive
Exchange Act reporting requirements until the issuer either sells
securities in a registered transaction or registers a class of
securities under the Exchange Act. Consequently, smaller issuers will
not be required to become an Exchange Act reporting company as a result
of a Section 4(a)(6) offering. These offerings may have a large number
of investors due to the limits on the amount each investor may invest
and the absence of investor eligibility restrictions, or as a result of
secondary market transactions in crowdfunding securities after the
expiration of resale restrictions. Given the $1 million offering
limitation, the potential cost of becoming an Exchange Act reporting
company could have made many offerings in reliance on Section 4(a)(6)
prohibitively costly.
    The condition that the issuer remain current in its ongoing
reporting, as suggested by one commenter,\1607\ is intended to provide
sufficient disclosure to help investors make informed decisions. We
believe that the ongoing disclosures required of crowdfunding issuers
in the final rules accomplish this objective and provide an appropriate
consideration of investor protection and capital formation. This
condition is expected to increase the level of investor protection by
strengthening the incentives of securities-based crowdfunding issuers
that exceed the Section 12(g) thresholds related to issuer size and the
number of shareholders of record to comply with the ongoing reporting
requirements of Regulation Crowdfunding. The extent of additional
investor protection benefits from this condition is difficult to
estimate, given a separate provision in the final rules that conditions
the use of the Section 4(a)(6) exemption for future offerings on
compliance with Regulation Crowdfunding's ongoing reporting
requirements.
---------------------------------------------------------------------------

    \1607\ See Joinvestor Letter.
---------------------------------------------------------------------------

    The issuer size limit condition is designed to be broadly
consistent with the crowdfunding exemption being tailored to facilitate
small company capital formation and the likely small size of a typical
issuer in the crowdfunding market. This condition is expected to
strengthen investor protection by reducing the likelihood that an
issuer will grow and accumulate a significant number of investors as a
result of multiple offerings in reliance on Section 4(a)(6) while
remaining permanently exempt from the more extensive reporting
requirements of the Exchange Act that would otherwise be required
pursuant to Section 12(g) (unless the issuer registers a class of
securities). The size limit condition will require larger issuers to
provide investors with the more extensive disclosures required by the
Exchange Act for reporting companies. However, we recognize that this
condition also may subject crowdfunding issuers that are larger than
the size threshold or that have a higher rate of growth, and are thus
more likely to exceed the size threshold in the future, to the costs of
Section 12(g) registration and Exchange Act reporting, potentially
placing them at a competitive disadvantage to issuers that are close to
but below the size threshold. It may also discourage some high-growth
issuers from relying on Section 4(a)(6) or may lead issuers approaching
the size threshold to divest assets to remain under the threshold,
potentially resulting in inefficient investment decisions.
    While the condition requiring an issuer to use a registered
transfer agent to rely on the exemption will impose costs on
issuers,\1608\ it is designed to provide investor protection benefits
by introducing a regulated entity with experience in maintaining
accurate shareholder records, thus helping to ensure that security
holder records and secondary trades will be handled accurately.
---------------------------------------------------------------------------

    \1608\ See STA Letter (stating that strong competition in the
registered transfer agent industry may result in monthly fees of
$75-$300 for transfer agent services, depending on a number of
factors). See also CapSchedule Letter (stating that there exist
cost-effective ways to keep records of security holders, such as
``Software-As-A-Service'' products, that costs $0 to set up initial
records regardless of the number of investors, then pricing from $5
per month for up to 100 investors, $15 per month up to 1,000
investors and $25 per month for over 1,000 investors).
---------------------------------------------------------------------------

9. Disqualification
    The statute and the final rules impose disqualification provisions
under which an issuer is not eligible to offer securities pursuant to
Section 4(a)(6) and an intermediary is not eligible to effect or
participate in transactions pursuant to Section 4(a)(6).\1609\ The
disqualification provisions for issuers are substantially similar to
those imposed under Rule 262 of Regulation A and Rule 506 of Regulation
D,\1610\ while the disqualification provisions for intermediaries under
Section 3(a)(39), which is an established standard for broker-dealers,
are substantially similar to the provisions of Rule 262.
---------------------------------------------------------------------------

    \1609\ See Section 302(d) of the JOBS Act and Rule 503 of
Regulation Crowdfunding. See also discussion in Section II.E.6
above.
    \1610\ See Disqualification Adopting Release, note 1182. See
also Regulation A Adopting Release, note 506.
---------------------------------------------------------------------------

a. Issuers
    The final rules are expected to induce issuers to implement
measures to restrict bad actor participation in offerings made in
reliance on Section 4(a)(6). This will help reduce the potential for
fraud in the market for such offerings, which in turn may reduce the
cost of raising capital to issuers that rely on Section 4(a)(6), to the
extent that disqualification standards lower the risk premium
associated with the presence of bad

actors in securities offerings. In addition, the requirement that
issuers determine whether any covered persons are subject to
disqualification may obviate the need for investors to do their own
investigations and eliminate redundancies that may exist in otherwise
separate investigations. This is expected to help reduce information-
gathering costs to investors, to the extent that issuers are at an
advantage in accessing much of the relevant information and to the
extent that issuers can do so at a lower cost than investors.
    The final rules will, however, impose costs on some issuers, other
covered persons and investors. If issuers are disqualified from relying
on Section 4(a)(6) to make their offerings, they may experience
increased costs in raising capital through alternative methods that do
not require bad actor disqualification, if available, or they may be
precluded from raising capital altogether. This can result in negative
effects on capital formation. In addition, issuers may incur costs in
connection with internal personnel changes that issuers may make to
avoid the participation of those covered persons who are subject to
disqualifying events. Issuers also may incur costs associated with
restructuring share ownership positions to avoid having 20 Percent
Beneficial Owners who are subject to disqualifying events. Finally,
issuers may incur costs in connection with seeking waivers of
disqualification from the Commission or determinations by other
authorities that existing orders do not give rise to disqualification.
    The final rules provide a reasonable care exception whereby an
issuer will not lose the benefit of the Section 4(a)(6) exemption if it
is able to show that it did not know, and in the exercise of reasonable
care could not have known, of the existence of a
disqualification.\1611\ A reasonable care exception may encourage
capital formation by eliminating any hesitation issuers may otherwise
experience under a strict liability standard. However, such an
exception also may encourage issuers to take fewer steps to inquire
about the existence of a disqualification than they would if a strict
liability standard applied, increasing the potential for fraud in the
market for offerings made in reliance on Section 4(a)(6). Nevertheless,
some issuers, in exercising reasonable care, may incur costs associated
with conducting and documenting their factual inquiry into possible
disqualifications. The lack of specificity in the rule, while providing
flexibility to the issuer to tailor its factual inquiry as appropriate
to a particular offering, may increase these costs because uncertainty
can drive issuers to do more than necessary under the rule.
---------------------------------------------------------------------------

    \1611\ See Rule 503(b)(4) of Regulation Crowdfunding. See also
Section II.E.6.a.iii.
---------------------------------------------------------------------------

    The requirement under the final rules that issuers disclose matters
that would have triggered disqualification, had they occurred after the
effective date of Regulation Crowdfunding,\1612\ also will impose costs
and benefits. The disclosure requirement will reduce costs associated
with covered persons who would be disqualified under the final rules
but for the fact that the disqualifying event occurred prior to the
effective date of the rules. However, this approach will allow the
participation of past bad actors, whose disqualifying events occurred
prior to the effective date of the final rules, which can expose
investors to the risks that arise when bad actors are associated with
an offering. Nevertheless, investors will benefit by having access to
such information that can inform their investment decisions. Issuers
also may incur costs associated with the factual inquiry, preparing the
required disclosure and making any internal or share ownership changes
to avoid the participation of covered persons that trigger the
disclosure requirement. Disclosure of triggering events also may make
it more difficult for issuers to attract investors, and issuers may
experience some or all of the impact of disqualification as a result.
---------------------------------------------------------------------------

    \1612\ See Rule 201(u) of Regulation Crowdfunding. See also
Section II.E.6.a.v.
---------------------------------------------------------------------------

    We believe the inclusion of Commission cease-and-desist orders in
the list of disqualifying events will not impose a significant,
incremental cost on issuers and other covered persons because many of
these actors may already be subject to disqualifying orders issued by
the states, federal banking regulators and the National Credit Union
Administration.\1613\
---------------------------------------------------------------------------

    \1613\ See Disqualification Adopting Release, note 1182.
---------------------------------------------------------------------------

    Under the final rules, orders issued by the CFTC will trigger
disqualification to the same extent as orders of the regulators
enumerated in Section 302(d)(2)(B)(i) of the JOBS Act (e.g., state
securities, insurance and banking regulators, federal banking agencies
and the National Credit Union Administration). We believe that
including orders of the CFTC will result in the similar treatment, for
disqualification purposes, of comparable sanctions. In this regard, we
note that the conduct that will typically give rise to CFTC sanctions
is similar to the type of conduct that will result in disqualification
if it were the subject of sanctions by another financial services
industry regulator. This is likely to enable the disqualification rules
to more effectively screen out bad actors.
    As discussed above, the baseline for our economic analysis of
Regulation Crowdfunding, including the baseline for our consideration
of the effects of the final rules on efficiency, competition and
capital formation, is the situation in existence today, in which
startups and small businesses seeking to raise capital through
securities offerings must register the offer and sale of securities
under the Securities Act unless they can comply with an existing
exemption from registration under the federal securities laws. Relative
to the current baseline, we believe that the disqualification
provisions will not impose significant incremental costs on issuers and
other covered persons because the final rules are substantially similar
to the disqualification provisions under existing exemptions.
    As an alternative, we could have specified that pre-existing events
are subject to the disqualification rules, as suggested by some
commenters.\1614\ As another alternative, we could have expanded the
list of covered persons to include transfer agents and lawyers, as
suggested by one commenter.\1615\ By expanding the range and categories
of potentially disqualified persons, both of these alternatives could
have the benefit of strengthening investor protection. At the same
time, they would increase the compliance costs for issuers and
disqualified persons described above. Overall, we believe that
preserving consistency with the disqualification criteria of Rule 262
and Rule 506, as we do in the final rules, can potentially yield
compliance cost savings for issuers that undertake multiple types of
exempt offerings while still maintaining appropriate investor
protections.
---------------------------------------------------------------------------

    \1614\ See, e.g., Guzik Letter 1; NASAA Letter.
    \1615\ See Brown J. Letter (also recommending the Commission
adopt similar bad actor provisions under Rule 504).
---------------------------------------------------------------------------

b. Intermediaries
    With regard to intermediaries, the final rules apply the
disqualification provisions under Section 3(a)(39) of the Exchange Act,
rather than a standard based on Rule 262.\1616\ The Section 3(a)(39)
standard is an established one among broker-dealers and their
regulators, and we believe that, despite the differences, Section
3(a)(39) and Rule 262 are substantially similar with

regard to the persons and events they cover, their scope and their
purpose.\1617\ We believe that imposing any new or different standard,
including one based on Rule 262, for those intermediaries that engage
in crowdfunding transactions would likely create confusion and
unnecessary burdens, as currently-registered broker-dealers and their
associated persons would become subject to two distinct standards for
disqualification. Moreover, adopting a more stringent disqualification
standard may reduce the number of intermediaries eligible under the
final rules and decrease competition among intermediaries in the
securities-based crowdfunding market. By contrast, consistent standards
for all broker-dealers and funding portals will assist a registered
national securities association in monitoring compliance and enforcing
its rules.
---------------------------------------------------------------------------

    \1616\ See Rule 503(d) of Regulation Crowdfunding.
    \1617\ See discussion in Section II.E.6.b above.
---------------------------------------------------------------------------

    The final rules implement the statutory requirement for
intermediaries by providing that a person subject to a statutory
disqualification, as defined in Exchange Act Section 3(a)(39), may not
act as, or be an associated person of, an intermediary in a transaction
involving the offer or sale of securities in reliance on Section
4(a)(6) unless so permitted by Commission rule or order. While this
requirement will potentially reduce the number of intermediaries for
Section 4(a)(6) transactions, we expect that it will strengthen
investor protection by preventing bad actors from entering the
securities-based crowdfunding market, thereby reducing the potential
for fraud and other abuse.
    As discussed above, the baseline for our economic analysis of
Regulation Crowdfunding, including the baseline for our consideration
of the effects of the final rules on efficiency, competition and
capital formation, is the situation in existence today, in which
intermediaries intending to facilitate securities transactions are
required to register with the Commission as broker-dealers under
Exchange Act Section 15(a). Relative to this baseline, we believe that
the disqualification provisions will not impose significant incremental
costs to broker-dealers because the final rules include the same
disqualification provisions that are already imposed on broker-dealers.

IV. Paperwork Reduction Act

A. Background

    Certain provisions of the final rules contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\1618\ We published a notice requesting
comment on the collection of information requirements in the Proposing
Release, and we submitted the proposal to the Office of Management and
Budget (``OMB'') for review in accordance with the PRA.\1619\
---------------------------------------------------------------------------

    \1618\ 44 U.S.C. 3501 et seq.
    \1619\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
---------------------------------------------------------------------------

    In the Proposing Release, we solicited comment on the assumptions
and estimates in our PRA analysis. We received no comments on our
estimates of and assumptions about the number of issuers and
intermediaries that will participate in securities-based crowdfunding
transactions or the size and frequency of those transactions. We
received several comments on our estimates of the time and expense
required of issuers to meet their filing obligations.\1620\ We also
received several comments on our estimates of the costs incurred by
intermediaries.\1621\ One commenter recommended a lessened paperwork
burden in general.\1622\ These comments are discussed in further detail
below, and where appropriate, we have revised our burden estimates in
response to commenters' suggestions and to reflect changes in the final
rules, as adopted.
---------------------------------------------------------------------------

    \1620\ See, e.g., Angel Letter 1; Heritage Letter; SeedInvest
Letter 1.
    \1621\ See, e.g., Arctic Island Letter 8; CapSchedule Letter;
Heritage Letter; Joinvestor Letter; SBEC Letter; Seed & Spark
Letter; STA Letter.
    \1622\ Peers Letter.
---------------------------------------------------------------------------

    The titles for the collections of information are:
    (1) ``Form ID'' (OMB Control Number 3235-0328);
    (2) ``Form C'' (OMB Control Number 3235-0716) (a new collection of
information);
    (3) ``Form BD'' (OMB Control Number 3235-0012); and
    (4) ``Crowdfunding Rules 300-304--Intermediaries'' (OMB Control
Number 3235-0726) \1623\ (a new collection of information) and
---------------------------------------------------------------------------

    \1623\ This includes burdens for compliance with privacy rules
(Reg. S-P, Reg. S-AM and Reg S-ID) as required by Rule 403(b).
---------------------------------------------------------------------------

    (5) ``Crowdfunding Rules 400-404--Funding Portals'' (OMB Control
Number 3235-0727) \1624\ (a new collection of information).
---------------------------------------------------------------------------

    \1624\ This includes burdens for Form Funding Portal.
---------------------------------------------------------------------------

    An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a
currently valid OMB control number. We applied for OMB control numbers
for the new collections of information in accordance with 44 U.S.C.
3507(j) and 5 CFR 1320.13, and as of the date of this release, OMB has
assigned a control number to each new collection as specified above.
Responses to these new collections of information will be mandatory for
issuers raising capital under Regulation Crowdfunding and
intermediaries participating in offerings under Regulation
Crowdfunding.
    The hours and costs associated with preparing disclosure, filing
forms, and retaining records constitute reporting and cost burdens
imposed by the collections of information. In deriving estimates of
these hours and costs, we recognize that the burdens likely will vary
among individual issuers and intermediaries based on a number of
factors, including the stage of development of the business, the amount
of capital an issuer seeks to raise, the number of offerings an
intermediary hosts on its platform, and the number of years since
inception of the business. We believe that some issuers and
intermediaries will experience costs in excess of the average and some
issuers and intermediaries may experience less than the average costs.

B. Estimate of Issuers and Intermediaries

1. Issuers
    The number, type and size of the issuers that will participate in
securities-based crowdfunding transactions are uncertain, but data on
current market practices may help identify the number and
characteristics of potential issuers that may offer and sell securities
in reliance on Section 4(a)(6).\1625\ While it is not possible to
predict the number of future offerings made in reliance on Section
4(a)(6), particularly because rules governing securities-based
crowdfunding are not yet in effect, for purposes of this analysis, we
estimate that approximately 1,900 issuers will seek to offer and sell
securities in reliance on Section 4(a)(6) per year. We base this
estimate on the average number of issuers (excluding issuers that are
pooled investment vehicles) per year that conducted a new Regulation D
offering of up to $1 million from 2009 to 2014 and had no revenues or
less than $1 million in revenues.\1626\ We

believe those issuers will be similar in size to the potential issuers
that may participate in securities-based crowdfunding, and we assume
that each issuer will conduct one offering per year.
---------------------------------------------------------------------------

    \1625\ See Section III.A.5.a for a discussion of the data
regarding current market practices.
    \1626\ Id. This estimate differs from our estimate in the
proposal. It uses more recent data than the proposal and is based on
the average number of issuers per year rather than the average
number of unique issuers. According to filings made with the
Commission, an average of approximately 4,559 issuers per year
conducted new Regulation D offerings of up to $1 million from 2009
to 2014. 22%, or 1,003, of those issuers reported having no
revenues. (0.22 x 4,559 = 1,003). 19%, or 866, of those issuers
reported having less than $1 million in revenues. (0.19 x 4,559 =
866). Therefore, the average number of issuers per year is 1,003 +
866 = 1,869, or approximately 1,900 issuers.
---------------------------------------------------------------------------

    We received no comments on our estimate of the number of issuers
expected to participate in securities-based crowdfunding transactions
or the number of offerings in reliance on Section 4(a)(6) we expect
those issuers to conduct. In developing the estimate for the number of
issuers in the final rule, we refined the methodology used in the
Proposing Release and applied that methodology to more recent data,
resulting in an updated estimate that we believe is reasonable and
appropriate.
2. Intermediaries That Are Registered Brokers
    The final rules require intermediaries to register with us as
either a broker-dealer or as a funding portal. Consistent with the
Proposing Release, we estimate that the collection of information
requirements in the final rules will apply to approximately 10
intermediaries per year that are not currently registered with the
Commission and that will choose to register as brokers, rather than as
funding portals, to act as intermediaries for offerings made in
reliance on Section 4(a)(6). However, we believe that, given the cost
that an unregistered entity will incur to register as a broker compared
with the lower cost of becoming a funding portal, unregistered entities
that choose to act as crowdfunding intermediaries will generally be
more likely to register as funding portals than as brokers.
    Consistent with the Proposing Release, we further estimate that
approximately 50 intermediaries per year that are already registered as
brokers with the Commission will choose to add to their current service
offerings by also serving as crowdfunding intermediaries. These
entities will not have to file a new application for registration with
us, and if currently doing business with the public, they will already
be members of FINRA (the applicable national securities association
registered under Exchange Act Section 15A). We note, however, that
given the nascent nature of the equity-based crowdfunding market, we do
not have any data or other evidence indicating the number of currently-
registered brokers that will be interested in becoming crowdfunding
intermediaries. Therefore, we recognize that the number of brokers per
year that may engage in crowdfunding activities could differ
significantly from our current estimate. We received no comments on our
estimates of the number of broker-dealers that will act as
intermediaries.
3. Funding Portals
    Consistent with the Proposing Release, we estimate that on average
approximately 50 intermediaries per year that are not already
registered as brokers will choose to be registered as funding portals
during the first three years following effectiveness of the final
rules. This estimate assumes that, upon effectiveness of the final
rules, about 15% of the approximately 200 U.S.-based crowdfunding
portals \1627\ currently in existence will participate in securities-
based crowdfunding and that the number of crowdfunding portals will
grow at 60% per year over the next three years.\1628\ Therefore, we
estimate that an average of approximately 50 respondents will be
registered as funding portals annually.\1629\ Of those 50 funding
portals, we estimate that two will be nonresident funding portals.
These estimates are based in part on indications of interest expressed
in responses to FINRA's voluntary interim form for funding portals. We
received no comments on our estimates on the number of funding portals
that will act as intermediaries
---------------------------------------------------------------------------

    \1627\ This estimate is based in part on an industry estimate
that, as of April 2012, there were approximately 200 non-securities-
based crowdfunding portals operating in the United States. See
Massolution 2012 at 16. We did not receive comment on these
estimates and therefore continue to believe our estimates in the
Proposing Release are appropriate. See also Massolution 2015 at 84
(estimating that, as of December 2014, there were approximately 375
crowdfunding portals operating in North America, not just the United
States).
    \1628\ A worldwide survey of crowdfunding portals indicated
that, in 2011, approximately 14.8% of the surveyed crowdfunding
portals (mostly based in Europe) participated in ``equity-based''
crowdfunding. Id. Also, the total number of crowdfunding portals
worldwide grew by an estimated 60% from 2011 to 2012. Id. at 13. We
did not receive comment on these estimates and therefore continue to
believe our estimates in the Proposing Release are appropriate. See
also Massolution 2015 at 82-83 (estimating that, as of December
2014, there were approximately 1250 crowdfunding portals worldwide
compared to 813 worldwide in 2012, which represents an increase of
approximately 54%).
    \1629\ 200 U.S.-based crowdfunding portals x 15% (estimated
percentage of crowdfunding portals that will participate in
securities-based crowdfunding) = 30 funding portals that will
participate in securities-based crowdfunding. Assuming 60% growth
over three years, the number of registered funding portals will be
30 during the first year, 48 during the second year and 77 during
the third year. The average number of registered funding portals
over three years is (30 + 48 + 77)/3 = 52 funding portals (or
approximately 50 funding portals per year).
---------------------------------------------------------------------------

C. Estimate of Burdens

1. Issuers
a. Form C: Offering Statement and Progress Update
    Under the final rules, an issuer conducting a transaction in
reliance on Section 4(a)(6) will be required to file with us specified
disclosures on a Form C: Offering Statement.\1630\ An issuer also will
be required to file with us amendments to Form C to disclose any
material change in the offer terms or disclosure previously provided to
investors.\1631\ Form C is similar to the Form 1-A offering statement
under Regulation A, but it requires fewer disclosure items (e.g., it
does not require disclosure about the plan of distribution, the
compensation of officers and directors, litigation or a discussion of
federal tax aspects). We note that offerings made in reliance on
Regulation A allow issuers to offer up to $50 million, involve review
by SEC staff and, in the case of Tier 1 offerings, require filings at
the state level.\1632\ In light of these factors, we expect that
issuers seeking to raise capital pursuant to a Regulation A offering
generally will be at a more advanced stage of development than issuers
likely to raise capital pursuant to Section 4(a)(6), so the complexity
of the required disclosure and, in turn, the burden of compliance with
the requirements of Form C will be significantly less than for Form 1-
A.\1633\ In the Proposing Release we estimated that the burden to
prepare and file Form C would be approximately 60 hours per issuer,
which represented approximately 10% of the burden to prepare then-
existing Form 1-A.\1634\ We estimated that 75% of the burden, or 45
hours, would be carried internally and the remaining 25% of the burden
would be carried by outside professionals at a cost of $6,000 per
issuer.
---------------------------------------------------------------------------

    \1630\ See Rule 203(a)(1) of Regulation Crowdfunding.
    \1631\ See Rule 203(a)(2) of Regulation Crowdfunding.
    \1632\ See Rule 256 of Regulation A; Regulation A Adopting
Release, note 506.
    \1633\ We currently estimate the average burden per response for
preparing and filing a Form 1-A to be approximately 750 hours.
    \1634\ See Proposing Release at 78 FR 66540.
---------------------------------------------------------------------------

    As discussed in more detail in the Economic Analysis, above, we
received a number of comments concerning the burdens and costs of the
proposed rules.\1635\ Many of these commenters

provided monetary estimates without distinguishing between internal
burden hours and outside professional costs. Some commenters suggested
that the Proposing Release underestimated the time and expense that
would be required to prepare and file Form C.\1636\ In contrast, one
commenter stated that it was a third-party service provider that could
prepare Form C at much lower costs than those estimated by the
Commission.\1637\ Another commenter suggested that the cost of
preparing and filing these forms and the associated compliance costs
would range from $3,000 to $9,000.\1638\ Additionally, we received a
number of comments about the costs of the audit and review of financial
statements, as proposed. We believe that these costs would be a
component of the outside professional costs associated with Form C. In
the Economic Analysis, we have set forth our monetized estimates of the
various cost components, grouped into categories based on the size of
the offering. Our Form C estimates range from $2,500 for the smallest
offerings (up to $100,000); to a range of $2,500 to $5,000 for somewhat
larger offerings (more than $100,000 but not more than $500,000) and a
range of $5,000 and $20,000 for the largest offerings (more than
$500,000). Additionally, our estimates of the cost of financial
statement review or audit range from $0 for the smallest offerings; to
between $1,500 and $18,000 for larger offerings and for first-time
crowdfunding issuers conducting offerings between $500,000 and
$1,000,000; and $2,500 to $30,000 for other issuers that are conducting
an offering in the largest offering amount category. Accordingly, in
our Economic Analysis we estimate a cost range estimate for Form C and
the financial statement review of: $2,500 for the smallest offerings,
$4,000 to $23,000 for the larger offerings, $6,500 to $38,000 for
first-time crowdfunding issuers conducting offerings between $500,000
and $1,000,000, and $7,500 to $50,000 for other issuers conducting an
offering in the largest offering amount category. For purposes of the
PRA, however, we must provide a single estimate, comprised of both
burden hours and outside professional costs, for an average issuer.
---------------------------------------------------------------------------

    \1635\ See Section III.B.3.a.
    \1636\ See, e.g., Heritage Letter (stating that the costs to
prepare the required disclosures will likely exceed $10,500, except
in cases of start-ups with no operating history); NSBA Letter
(stating that issuers and intermediaries will likely incur higher
attorney and accounting fees and financial and administrative
burdens than estimated in the proposed rules but without providing
estimates); SeedInvest Letter 2 (estimating upfront compliance costs
to be ``potentially hundreds of hours [in internal company time] and
$20,000 to $50,000 [in outside professional costs]'').
    \1637\ FundHub Letter 2 (stating that the commenter will prepare
Form C and all disclosure documents, do all bad actor checks, verify
investor status and perform all other necessary compliance measures
for a $100,000 offering for $2,500 total, 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).
    \1638\ See StartEngine Letter 2.
---------------------------------------------------------------------------

    Based on these comments and our Economic Analysis, we have revised
our estimate of the burden associated with the preparation and filing
of Form C. We acknowledge that a number of commenters suggested that we
underestimated the burdens of the proposed rule, but believe that
changes in the final rule, particularly with respect to the financial
statement requirements for first-time crowdfunding issuers, may
mitigate the impact of those costs. Accordingly, we estimate that the
average total burden to prepare and file the Form C, including any
amendment to disclose any material change, will be approximately 100
hours, which, while higher than our proposed estimate, is still
substantially less than the burden to prepare a Form 1-A for an
offering under Regulation A, as recently amended. We continue to
estimate that 75 percent of the burden of preparation will be carried
by the issuer internally and that 25 percent will be carried by outside
professionals \1639\ retained by the issuer at an average cost of $400
per hour.\1640\ This reflects 75 internal burden hours per issuer and
$10,000 in external professional costs. While for PRA purposes, we must
present this estimate in terms of hours and costs, we believe that this
estimate is consistent with the monetary ranges that we set forth in
the Economic Analysis.
---------------------------------------------------------------------------

    \1639\ For example, an issuer could retain an outside
professional to assist in the preparation of the financial
statements, but could decide to address the remaining disclosure
requirements internally.
    \1640\ We estimate the average external cost of preparing Form C
to be 0.25 x 100 hours x $400 per hour = $10,000.
    We recognize that the costs of retaining outside professionals
may vary depending on the nature of the professional services, but
for purposes of this PRA analysis, we estimate that such costs would
be an average of $400 per hour. This is the rate we typically
estimate for outside legal services used in connection with public
company reporting.
---------------------------------------------------------------------------

    Under the final rules, the issuer also will be required to file
with us regular updates on the progress of the issuer in meeting the
target offering amount.\1641\ In a change from the proposal, the rules
permit issuers to satisfy the progress update requirement by relying on
the relevant intermediary to make publicly available on the
intermediary's platform frequent updates about the issuer's progress
toward meeting the target offering amount. Nevertheless, an issuer
relying on the intermediary's reports of progress must still file a
progress update at the end of the offering to disclose the total amount
of securities sold in the offering. The issuer is required to make the
filing under cover of a Form C-U: Progress Update. Form C-U is similar
to a Form D Notice of Exempt Offering of Securities under Regulation
D.\1642\ Form C-U will require significantly less disclosure than the
Form D, however, as it will require disclosure only of the issuer's
progress in meeting the target offering amount, rather than
compensation and use of proceeds disclosures or other information about
the issuer and the offering. Thus, the complexity of the required
disclosure and the burden to prepare and file Form C-U will be
significantly less than for Form D. We continue to estimate that the
burden to prepare and file each progress update will be 0.50 hours. In
light of the change from the proposal, we expect most issuers will rely
on the relevant intermediary to provide interim progress updates and
therefore will be required to file an average of one progress update
during each offering rather than the two progress updates that we
estimated in the Proposing Release.\1643\ As in the Proposing Release,
we estimate that the entirety of this burden will be borne internally
by the registrant.
---------------------------------------------------------------------------

    \1641\ See Rule 203(a)(3) of Regulation Crowdfunding.
    \1642\ We currently estimate the burden per response for
preparing and filing a Form D to be 4.00 hours.
    \1643\ See Rule 203(a)(3) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Overall, we estimate that compliance with the requirements of a
Form C filed in connection with offerings made in reliance on Section
4(a)(6) will require 190,000 burden hours (1,900 offering statements x
100 hours/offering statement) in aggregate each year, which corresponds
to 142,500 hours carried by the issuer internally (1,900 offering
statements x 100 hours/offering statement x 0.75) and costs of
$19,000,000 (1,900 offering statements x 100 hours/offering statement x
0.25 x $400) for the services of outside professionals. We also
estimate that compliance with the requirements of Form C-U filed during
an offering will require 950 burden hours (1,900 offering statements x
1 progress update per offering x 0.50 hours per progress update) in
aggregate each year.
b. Form C-AR: Annual Report
    Under the final rules, unless the reporting has been terminated,
any

issuer that sells securities in a transaction made pursuant to Section
4(a)(6) will be required to file annually with us an annual report on
Form C-AR: Annual Report.\1644\ Form C-AR will require disclosure
substantially similar to the disclosure provided in the Form C:
Offering Statement, except that offering-specific disclosure will not
be required and the issuer may be able to update disclosure previously
provided in the Form C. In addition, in a change from the proposal,
instead of requiring financial statements in the annual report that
meet the highest standard of review previously provided (either
reviewed or audited), the final rules require financial statements of
the issuer certified by the principal executive officer of the issuer
to be true and complete in all material respects.\1645\ Therefore, we
estimate that the burden to prepare and file Form C-AR will be less
than that required to prepare and file Form C.
---------------------------------------------------------------------------

    \1644\ See Rule 202 of Regulation Crowdfunding.
    \1645\ See Rule 202(a) of Regulation Crowdfunding. However,
issuers that have available financial statements that have been
reviewed or audited by an independent certified public accountant
because they prepare them for other purposes shall provide them and
will not be required to have the principal executive officer
certification. Id.
---------------------------------------------------------------------------

    As discussed in the Economic Analysis, we received some comments on
the costs of Form C-AR.\1646\ One commenter that submitted comments
concerning both Form C and Form C-AR provided several cost estimates or
ranges for Form C-AR that varied but were ranges or amounts that were
lower than the commenter's estimates for Form C.\1647\ Our analysis of
the cost of Form C-AR in our Economic Analysis reflects these comments,
and in that analysis, we estimate that the cost of Form C-AR represents
two-thirds of the cost of Form C (exclusive of the financial statement
review).
---------------------------------------------------------------------------

    \1646\ See Section III.B.3.a.
    \1647\ See SeedInvest Letter 1; SeedInvest Letter 4.
---------------------------------------------------------------------------

    Additionally, in light of the change to the final rules for Form C-
AR to require financial statements that are certified by the principal
executive officer of the issuer to be true and complete in all material
respects, rather than requiring financial statements that meet the
highest level of review previously provided, we estimate that for Form
C-AR there will be a further reduction of PRA burden compared with the
burden of Form C. Accordingly, we estimate that compliance with Form C-
AR will be approximately one-half of the burden of Form C, resulting in
a burden of 50 hours per response. We further estimate that 75 percent
of the burden of preparation will be carried by the issuer internally
and that 25 percent will be carried by outside professionals \1648\
retained by the issuer at an average cost of $400 per hour.\1649\
---------------------------------------------------------------------------

    \1648\ See note 1639.
    \1649\ See note 1640.
---------------------------------------------------------------------------

    We estimate that compliance with the requirements of Form C-AR in
the first year after issuers sell securities pursuant to Section
4(a)(6) will require 95,000 burden hours (1,900 issuers x 50 hours/
issuer) in the aggregate, which corresponds to 71,250 hours carried by
the issuer internally (1,900 issuers x 50 hours/issuer x 0.75) and
costs of $9,500,000 (1,900 issuers x 50 hours/issuer x 0.25 x $400) for
the services of outside professionals.
c. Form C-TR: Termination of Reporting
    Under the final rules, any issuer terminating its annual reporting
obligations will be required to file a notice under cover of Form C-TR:
Termination of Reporting to notify investors and the Commission that it
no longer will file and provide annual reports pursuant to the
requirements of Regulation Crowdfunding.\1650\ We estimate that eight
percent of the issuers that sell securities pursuant to Section 4(a)(6)
will file a notice under cover of Form C-TR during the first
year.\1651\ The Form C-TR will be similar to the Form 15 that issuers
file to provide notice of termination of the registration of a class of
securities under Exchange Act Section 12(g) or to provide notice of the
suspension of the duty to file reports required by Exchange Act
Sections 13(a) or 15(d).\1652\ Therefore, we estimate that compliance
with the Form C-TR will result in a similar burden as compliance with
Form 15, that is, a burden of 1.50 hours per response. We estimate that
compliance with Form C-TR will result in a burden of 228 hours (1,900
issuers x 0.08 issuers filing Form C-TR x 1.50 hours/issuer) in the
aggregate during the first year for issuers terminating their reporting
obligations. As in the Proposing Release, we estimate that the entirety
of this burden will be borne internally by the registrant. We received
no comments on our estimates with respect to Form C-TR and continue to
believe that these estimates are reasonable.
---------------------------------------------------------------------------

    \1650\ See Rule 203(b)(2) of Regulation Crowdfunding.
    \1651\ For purposes of this PRA analysis, we estimate that eight
percent of issuers will not survive past their first year, based on
a recent study that found that of a random sample of 4,022 new high-
technology businesses started in 2004, 92.3% survived past their
first year. See Kauffman Firm Survey, note 1302 at 13.
    \1652\ We currently estimate the burden per response for
preparing and filing a Form 15 to be 1.50 hours.
---------------------------------------------------------------------------

d. Form ID Filings
    Under the final rules, an issuer will be required to file specified
disclosures with us on EDGAR.\1653\ We anticipate that the majority of
first-time issuers seeking to offer and sell securities in reliance on
Section 4(a)(6) will not previously have filed an electronic submission
with us and so will need to file a Form ID. Form ID is the application
form for access codes to permit filing on EDGAR. The final rules will
not change the form itself, but we anticipate that the number of Form
ID filings will increase due to new issuers seeking to offer and sell
securities in reliance on Section 4(a)(6). One commenter stated that it
would take approximately 70 minutes to complete a Form ID, considerably
more time than the estimated 0.15 hours.\1654\ However, the information
required by Form ID is very limited, primarily the name and address of
the filer, so we continue to believe the estimated 0.15 hours per
response is appropriate. For purposes of this PRA analysis, we estimate
that all of the issuers who will seek to offer and sell securities in
reliance on Section 4(a)(6) will not have filed an electronic
submission with us previously and will, therefore, be required to file
a Form ID. As noted above, we estimate that approximately 1,900 issuers
per year will seek to offer and sell securities in reliance on Section
4(a)(6), which will correspond to 1,900 additional Form ID filings. As
a result, we estimate the additional annual burden associated with this
form will be approximately 285 hours (1,900 filings x 0.15 hours/
filing).\1655\
---------------------------------------------------------------------------

    \1653\ See Rules 201-203 of Regulation Crowdfunding.
    \1654\ Angel Letter 1.
    \1655\ We currently estimate the burden per response for
preparing and filing with Form ID to be 0.15 hours.
---------------------------------------------------------------------------

2. Brokers and Funding Portals
    Below, we discuss our estimates of the internal burdens and
professional costs associated with the collections of information
required under the final rules as they relate to intermediaries. Where
relevant, we discuss any comments received on these estimates and any
changes to estimates, including changes made in response to comments on
them.
a. Registration Requirements
(1) Time Burden
    The final rules will require intermediaries to register with us as
either a broker or as a funding portal. As noted above, we believe that
some intermediaries for transactions made in

reliance on Section 4(a)(6) and Regulation Crowdfunding will already be
registered as brokers. Therefore, this registration requirement will
impose no new requirement on these entities and no additional burden
for purposes of this PRA analysis. Entities that are not already
registered as brokers may decide to register either as brokers or as
funding portals and to become members of a registered national
securities association (if they are not already a member) pursuant to
the final rules. We estimate that each year, on average, approximately
10 entities may decide to be registered as brokers and approximately 50
entities may decide to be registered as funding portals by filing Form
Funding Portal.\1656\ In addition, we estimate that of those 50
entities that register as funding portals, two will be nonresident
funding portals and subject to the additional requirements under Rule
400(f) of completing Schedule C (including the required
certifications), requirements related to the agent for service of
process in the United States, and obtaining an opinion of counsel.
---------------------------------------------------------------------------

    \1656\ As noted above, funding portals will have to complete and
file Form ID in order to obtain access codes to file on EDGAR. Based
on our estimates, 50 funding portals per year will newly register
through EDGAR, which will correspond to 50 additional Form ID
filings. As a result, we estimate the additional annual burden
associated with this form will be approximately 7.5 hours (50
filings x 0.15 hours/filing).
---------------------------------------------------------------------------

    We estimate the burden for registering with the Commission as a
broker based upon the existing burdens for completing and filing Form
BD, currently estimated as 2.75 hours.\1657\ Consequently, we estimate
that the total annual burden hours required for all crowdfunding
intermediaries, including brokers and funding portals, to register with
us under the final rules will be approximately 165 hours (2.75 hours/
respondent x (10 brokers + 50 funding portals)). In addition, those
entities that register as nonresident funding portals will face an
additional burden of half an hour to complete Schedule C and make the
required certifications, half an hour to document the appointment of an
agent for the service of process, and one hour to obtain an opinion of
counsel. Consequently, we estimate that, of the 50 registered funding
portals, two will each face an additional burden of two hours to
register, for a total additional annual burden of four hours.
---------------------------------------------------------------------------

    \1657\ While it is likely that the time necessary to complete
Form BD varies depending on the nature and complexity of the
entity's securities business, we currently estimate the average time
necessary for a broker-dealer to complete and file an application
for broker-dealer registration on Form BD to be approximately 2.75
hours. We also estimate that the time burden to register as a
funding portal on Form Funding Portal will be, for purposes of this
PRA analysis, the same as the time required to complete and file
Form BD because the information required for that form is similar.
---------------------------------------------------------------------------

    We have taken into consideration that brokers that register to
engage in crowdfunding transactions conducted in reliance on Section
4(a)(6) may eventually decide to withdraw their registration.
Withdrawal requires an entity to complete and file with us a Form
BDW.\1658\ We further estimate that approximately 430 broker-dealers
withdraw from Commission registration annually \1659\ and, therefore,
file a Form BDW. Of them, we estimate that approximately one broker who
had registered in order to facilitate crowdfunding offerings made in
reliance on Section 4(a)(6) will decide to withdraw in each year
following adoption of the rules.\1660\ Therefore, the one broker-dealer
that withdraws from registration by filing Form BDW will incur an
aggregate annual reporting burden of approximately 0.25 hours (0.25
hours/respondent x 1 broker). Similarly, we estimate that approximately
five funding portals will choose to withdraw from registration each
year \1661\ and that each withdrawal, as with Form BDW, will take
approximately 0.25 hours. This will result in an aggregate annual
reporting burden of approximately 1.25 hours (0.25 hours/respondent x 5
funding portals).
---------------------------------------------------------------------------

    \1658\ The time necessary to complete Form BDW varies depending
on the nature and complexity of the applicant's securities business.
We currently estimate that it takes a broker-dealer approximately
0.25 burden hours to complete and file a Form BDW to withdraw from
Commission registration, as required by Exchange Act Rule 15b6-1 (17
CFR 240.15b6-1).
    \1659\ This estimate is based on Form BDW data collected over
the past five years and may be high as a result of the impact of the
financial crisis on broker-dealers. For the past five fiscal years
(from 10/1 through 9/30), the number of broker-dealers that withdrew
from registration was as follows: 524 in 2011 and 428 in 2012, 434
in 2013, 454 in 2014 and 306 by September 15, 2015. We thus estimate
the number of broker-dealers that withdraw from the Commission
annually to be 430 ((524+428+434+454+306)/5).
    \1660\ As of September 2015, there were 4,213 broker-dealers
registered with the Commission. An average of 430 broker-dealers per
year withdraw from registration, or 10% of the number of registered
broker-dealers (430 withdrawing broker-dealers/4,213 registered
broker-dealers). We assume that the same percentage of broker-
dealers that withdraw from registration will apply to the population
of registered broker-dealers participating in offerings in reliance
on Section 4(a)(6). Of our estimate of 10 registered broker-dealers
per year registering to participate in crowdfunding transactions in
reliance on Section 4(a)(6), we estimate that approximately one
broker-dealer per year (10 registered broker-dealers x 0.10) will
withdraw from registration.
    \1661\ We estimate that the percentage of registered funding
portals participating in crowdfunding transactions in reliance on
Section 4(a)(6) that will withdraw from registration annually would
be the same as the percentage of broker dealers that withdraw from
registration annually because of the similarity of these entities'
businesses. Of our estimate of 50 registered funding portals
participating in crowdfunding transactions in reliance on Section
4(a)(6), we estimate that approximately five funding portals per
year (50 registered funding portals x 0.10) will withdraw from
registration. For funding portals, a decision to withdraw
registration will be required to be reported to us in the same way
as an amendment; however, for brokers, withdrawal requires the
filing of Form BDW.
---------------------------------------------------------------------------

    In the Proposing Release, we also included an estimate of PRA
burdens and costs for newly-registered intermediaries to become members
of FINRA or any other registered national securities association.
Specifically, the Proposing Release included a discussion of an
estimate of the paperwork burdens and costs that would be incurred by
an intermediary to register with a national securities association as
well as an estimate of the ongoing fees (e.g., FINRA annual assessment
fees) that would be incurred by an intermediary to remain registered
with a national securities association. However, after further
consideration, we do not believe the hour burdens and costs associated
with FINRA's membership constitute paperwork burdens and costs
attributable to the Commission's rules. Accordingly, we are not
providing estimates of burdens and costs resulting from membership in a
registered national securities association in this PRA analysis. We
have, however, considered the costs of such membership, both initial
and ongoing, in our Economic Analysis above.\1662\
---------------------------------------------------------------------------

    \1662\ See Section III.B.4.
---------------------------------------------------------------------------

    Once registered, a broker must promptly file an amended Form BD
when information originally reported on Form BD changes or becomes
inaccurate. Similarly, a registered funding portal must file amendments
relating to changes in information filed in a Form Funding Portal
filing.\1663\ Based on the number of amended Forms BD that we received
from October 1, 2011 through September 15, 2015, we estimate that the
total number of amendments that we will receive on Form BD from the 10
brokers that register under Regulation Crowdfunding will be
approximately 32.\1664\ Therefore,

we estimate that the total additional annual burden hours necessary for
broker-dealers to complete and file amended Forms BD will be
approximately 10.6 hours (32 amended Forms BD per year x 0.33 hours).
Using the same ratios, we estimate that the total annual burden hours
for funding portals to complete and file amended Forms Funding Portal
will be approximately 52.8 hours (50 funding portals x 3.2 amendments
per year x 0.33 hours per amendment).
---------------------------------------------------------------------------

    \1663\ We currently estimate that the average time necessary to
complete an amended Form BD to be approximately 20 minutes, or 0.33
hours. We estimate that an amendment to Form Funding Portal will
take the same amount of time as an amendment to Form BD because the
forms are similar.
    \1664\ We received 15,491, 13,271, 12,902, 14,330 and 10,848
amended Forms BD during the fiscal years ending 2011, 2012, 2013,
2014 and 2015, respectively, reflecting an average of 13,368
amendment filings per year (15,491 + 13,271+12,902+ 14,330+10,848)/5
years). As of September 15, 2015, there were 4,213 broker-dealers
registered with the Commission. Therefore, we estimate that there
are approximately 3.17 amendments (13,368 amended Forms BD/4,213
broker-dealers) per registered broker-dealer per year. We therefore
estimate that the 10 broker-dealers who register under Regulation
Crowdfunding will file, on aggregate, approximately 32 amendments
per year.
---------------------------------------------------------------------------

(2) Cost
    We estimate that two intermediaries will face a cost per
intermediary of $25,179 to retain an agent for service of process and
provide an opinion of counsel to register as a nonresident funding
portal.\1665\
---------------------------------------------------------------------------

    \1665\ We have altered our cost estimates slightly from the
Proposing Release (from $25,130 to $25,179) and note that the
amended estimates are consistent with our recent estimates of what
it would cost other types of nonresident entities to retain an agent
for service of process and provide an opinion of counsel. See
Registration Process for Security-Based Swap Dealers and Major
Security-Based Swap Participants, Exchange Act Release No. 34-75611,
80 FR 48964, 48994 (Aug. 14, 2015). We inadvertently included the
costs to non-resident funding portals of completing Schedule C in
the Proposing Release. We anticipate, however, that nonresident
funding portals will incur a time burden rather than a cost burden
to complete Schedule C.
---------------------------------------------------------------------------

b. Development of Intermediary Platform
(1) Time Burden
    The final rules envision that intermediaries will develop
electronic platforms to offer securities to the public in reliance on
Section 4(a)(6). We anticipate that an intermediary's platform will
incorporate related systems functionality to comply with our final
rules (including the collection of information associated with, for
example, the requirements of Rules 302, 303 and 304) as well as execute
other platform capabilities and system operations. The estimated time
burdens and costs for platform development discussed in this section
include the estimated time burdens and costs for the functionalities
that will allow funding portals to comply with their disclosure,
communication channel, and investor notification requirements.\1666\
---------------------------------------------------------------------------

    \1666\ See Sections IV.C.2.g. and IV.C.2.h.
---------------------------------------------------------------------------

    Intermediaries that develop their platforms in-house will incur an
initial time burden associated with setting up their systems. Based on
our discussions with potential intermediaries prior to the publication
of our proposed rules, we estimate that intermediaries creating the
initial platform in-house will typically have a team of approximately
four to six developers that will work on all aspects of platform
development, including, but not limited to, front-end programming, data
management, systems analysis, communication channels, document
delivery, and Internet security.\1667\ We estimate, based on our
discussions with potential intermediaries prior to the publication of
our proposed rules, that in developing a platform in-house,
intermediaries will spend an average of 1,500 hours for planning,
programming, and implementation.\1668\
---------------------------------------------------------------------------

    \1667\ See Sections IV.C.2.g. and IV.C.2.h.
    \1668\ This average takes into account intermediaries that will
develop a brand new platform and those that will modify an existing
platform to function in accordance with Regulation Crowdfunding.
---------------------------------------------------------------------------

    It is difficult to estimate the number of intermediaries that will
develop their initial platforms in-house, but assuming that half of the
110 newly-registered intermediaries \1669\ do so, the total initial
time burden on those intermediaries will be 82,500 hours (55
intermediaries x 1,500 hours = 82,500 hours).
---------------------------------------------------------------------------

    \1669\ As discussed above, we anticipate that 10 intermediaries
will newly register as brokers, 50 intermediaries will be brokers
that are already registered, and 50 intermediaries will register as
funding portals.
---------------------------------------------------------------------------

    We estimate that annually updating the features and functionality
of an intermediary's platform will require approximately 20% of the
hours required to initially develop the platform, for an average burden
of 300 hours per year. If we assume that half of the 110 crowdfunding
intermediaries update their systems accordingly each year, the total
ongoing time burden will be 16,500 hours per year (55 intermediaries x
300 hours = 16,500 hours).
(2) Cost
    There will be a cost associated with developing a platform for an
intermediary that hires a third-party to develop its platform rather
than developing it in-house. Based on our discussions with potential
intermediaries prior to the publication of our proposed rules, we
estimate that it will cost an intermediary approximately $250,000 to
$600,000 \1670\ to build a new Internet-based crowdfunding portal and
all of its basic functionality.\1671\ Assuming that half of the 110
newly-registered intermediaries hire outside developers to build or to
tailor their platforms, the total initial cost will range from
$13,750,000 to $33,000,000 (55 intermediaries x $250,000 = $13,750,000;
55 intermediaries x $600,000 = $33,000,000). For purposes of this PRA
analysis, we estimate the cost to be $23,375,000 (the average of
$13,750,000 and $33,000,000).
---------------------------------------------------------------------------

    \1670\ See, e.g., ASSOB Letter (suggesting that the cost to
establish a funding portal would run at least $480,000, which is
within the range of our estimate).
    \1671\ We anticipate that some percentage of intermediaries will
already have in place platforms and related systems that will need
to be tailored to comply with the requirements of Title III of the
JOBS Act and Regulation Crowdfunding. We anticipate that these
intermediaries will hire outside developers to tailor their
platforms. We estimate an average cost of approximately $250,000 in
the first year in order to tailor the current systems for an
intermediary that already has in place a platform and related
systems. Thus, this amount is already covered in our range of costs
above--$250,000 to $600,000.
---------------------------------------------------------------------------

    We estimate that it will typically cost an intermediary
approximately one-fifth of the initial development cost per year to use
a third-party developer to provide annual maintenance on an Internet-
based crowdfunding portal, including updating and basic functionality,
or $85,000 per year on average.\1672\ If we assume that half of the 110
crowdfunding intermediaries updated their systems accordingly, the
total ongoing cost will be $4,675,000 per year (55 intermediaries x
$85,000 = $4,675,000).
---------------------------------------------------------------------------

    \1672\ Our estimate of the average initial external cost per
intermediary to develop a crowdfunding platform is the average of
the cited range of $250,000 to $600,000, or $425,000 (($250,000 +
$600,000)/2). One-fifth of the cost of $425,000 is $85,000.
---------------------------------------------------------------------------

c. Measures To Reduce the Risk of Fraud
(1) Time Burden
    The final rules will require intermediaries to have a reasonable
basis for believing that an issuer seeking to offer and sell securities
in reliance on Section 4(a)(6) through the intermediary's platform
complies with the requirements in Section 4A(b) and the related
requirements in Regulation Crowdfunding.\1673\ The final rules will
also require intermediaries to have a reasonable basis for believing
that an issuer has established means to keep accurate records of the
holders of the securities it will offer and sell through the
intermediary's platform.\1674\ For both requirements, an intermediary
may reasonably rely on the representations of the issuer, unless the
intermediary has reason to question the reliability of those
representations. For the purposes

of this PRA analysis, we expect that 100% of intermediaries will rely
on the representations of issuers. Based on our industry knowledge and
discussions with participants prior to the publication of our proposed
rules, we calculate that this requirement will impose a time burden in
the first year of five hours per intermediary to establish standard
representations it will request from issuers, and six minutes per
intermediary per issuer to obtain the issuer representation, which is
consistent with estimates we have used for other regulated entities to
obtain similar documentation, such as consents, from customers.
---------------------------------------------------------------------------

    \1673\ See Rule 301(a) of Regulation Crowdfunding.
    \1674\ See Rule 301(b) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Based on our estimate that there will be approximately 1,900
offerings per year, that each issuer will conduct one offering per
year, and that there will be 110 intermediaries, we estimate that each
intermediary will facilitate an average of approximately 17 offerings
per year (1,900 offerings/(10 newly registered broker-dealers + 50
previously registered broker-dealers + 50 funding portals)). Therefore,
we estimate that the total initial burden hours will be approximately
740 hours ((5 hours/intermediary x (10 newly-registered broker-dealers
+ 50 previously-registered broker-dealers + 50 funding portals)) + (0.1
hours/issuer x 17 offerings x 110 intermediaries).
    We believe that the ongoing time burdens for this requirement will
be approximately one hour per intermediary per year to review and
confirm that the standard representations it requests from issuers
remain appropriate, and six minutes (0.1 hours) per intermediary per
issuer to obtain an issuer's representation. Therefore, we estimate
that the ongoing total burden hours necessary for intermediaries to
rely on the representations of the issuers will be approximately 300
hours per year ((1 hour/intermediary x (10 newly-registered broker-
dealers + 50 previously-registered broker-dealers + 50 funding
portals)) + (0.1 hours/issuer x 17 offerings x 110 intermediaries).
(2) Cost
    The final rules will require intermediaries to conduct a background
and securities enforcement regulatory history check on each issuer and
each officer, director or 20 Percent Beneficial Owner of an issuer to
determine whether the issuer or such person is subject to a
disqualification. We anticipate that most intermediaries will employ
third parties to perform background and securities enforcement
regulatory history checks in light of the costs of developing an in-
house capability to conduct such checks. Therefore, for the purposes of
this PRA analysis, we assume that 100% of intermediaries will use these
third-party service providers.
    The cost for a third party to perform a background check is
estimated to be between $200 and $500, depending on the nature and
extent of the information provided.\1675\ We recognize that some
issuers will require more than one background check (e.g., for officers
or directors of the issuer), and we estimate that intermediaries will
perform four background checks per issuer, on average. We base this
number on the assumption that most crowdfunding issuers will be
startups and small businesses with small management teams and few
owners. Assuming an average of approximately 1,900 offerings made in
reliance on Section 4(a)(6) per year, the total estimated initial cost
for all intermediaries to fulfill the required background and
securities enforcement regulatory history checks will range from
approximately $1,520,000 to $3,800,000 per year,\1676\ or approximately
$13,818 to $34,546 per intermediary per year.\1677\ For purposes of
this PRA analysis, we average this cost to $24,182 per intermediary per
year.
---------------------------------------------------------------------------

    \1675\ See, e.g., A Matter of Fact, Background Check FAQ:
Frequently Asked Questions, available at http://www.amof.info/faq.htm (Matter of Fact is a background check provider accredited by
the National Association of Professional Background Screeners and
the Background Screening Credentialing Council. This source states
that the cost for a comprehensive background check is $200 to $500).
    \1676\ 1,900 securities-based offerings made in reliance on
Section 4(a)(6) per year x ($200 to $500 per background and
securities enforcement regulatory history check) x 4 checks per
offering = $1,520,000 to $3,800,000 per year.
    \1677\ $1,520,000/110 intermediaries = approximately $13,818 per
intermediary; $3,800,000/110 intermediaries = approximately $34,546
per intermediary.
---------------------------------------------------------------------------

    One commenter noted, as a general matter, that the ``costs incurred
by the intermediary in dealing with an issuer, doing the required due
diligence and background screening, establishing a Web page describing
the offering and so on do not vary linearly with the offering size. As
a percentage of the offering amount, they will be disproportionately
high for smaller offerings.'' \1678\ This commenter did not, however,
question our underlying assumptions or our estimates of these costs.
For purposes of this PRA analysis and as discussed above, we believe
that these cost estimates are reasonable. We also believe that
intermediaries are in a better position to make their own business
decisions as to whether such costs would be disproportionately high for
smaller offerings.\1679\
---------------------------------------------------------------------------

    \1678\ Heritage Letter.
    \1679\ As noted above, we agree with the commenter's suggestion
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.
---------------------------------------------------------------------------

    We believe that, on an ongoing basis, intermediaries will continue
to use third-party services to conduct background and securities
enforcement regulatory history checks. We also believe that the total
estimated ongoing cost for all intermediaries to fulfill the required
background and securities enforcement regulatory history checks will be
the same as the estimated initial cost, or on average $24,182 per
intermediary per year.
d. Account Opening: Accounts and Electronic Delivery
    The final rules provide that no intermediary or associated person
of an intermediary may accept an investment commitment in a transaction
involving the offer or sale of securities made in reliance on Section
4(a)(6) until an investor has opened an account with the intermediary
and consented to electronic delivery of materials.\1680\ This
requirement will impose certain information gathering and recordkeeping
burdens on intermediaries. For the purposes of this PRA analysis, we
expect that the functionality required to allow an investor to open an
account with an intermediary and obtain consents will result in an
initial time burden of approximately 10 hours per intermediary in the
first year. Therefore, we estimate that the total initial burden hours
resulting from this functionality will be approximately 1,100 hours (10
hours/intermediary x (10 newly-registered broker-dealers + 50
previously-registered broker-dealers + 50 funding portals)).
---------------------------------------------------------------------------

    \1680\ See Rule 302(a) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We believe that the ongoing time burdens for this requirement will
be significantly less than the initial time burden, and thus we
estimate approximately two hours per intermediary per year to review
and assess the related processes. Therefore, we estimate that the
ongoing total burden hours necessary for this functionality will be
approximately 220 hours per year (2 hours/intermediary x (10 newly-
registered broker-dealers + 50 previously-registered broker-dealers +
50 funding portals)).

e. Account Opening: Educational Materials
(1) Time Burden
    The final rules require intermediaries to provide educational
materials to investors,\1681\ about the risks and costs of investing in
securities offered and sold in reliance on Section 4(a)(6). Because the
intermediary will determine what electronic format will prove most
effective in communicating the requisite contents of the educational
material, the expected costs for intermediaries to develop the
educational material are expected to vary widely and are difficult to
estimate. For the purposes of this PRA analysis, we assume that half of
the intermediaries will develop their educational materials in-house,
potentially including online presentations and written documents, and
that the other half will employ third parties to produce educational
materials, such as professional-quality online video presentations. We
estimate that to develop their educational materials in-house, each
intermediary will incur an initial time burden of approximately 20
hours. Therefore, the total initial burden will be approximately 1,100
hours (55 intermediaries x 20 hours/intermediary).\1682\
---------------------------------------------------------------------------

    \1681\ See Rule 302(b) of Regulation Crowdfunding.
    \1682\ In the Proposing Release we did not take into account in
our estimated time burden and cost calculations our assumption that
half of the intermediaries would develop educational materials in-
house. Therefore, we have re-calculated the estimated total initial
and ongoing time burdens and costs for the development of in-house
materials in this release based on 55 (rather than 110)
intermediaries.
---------------------------------------------------------------------------

    Assuming that half of the intermediaries will develop their
educational materials in-house, we also expect that these
intermediaries will update their educational materials in-house, as
needed. We estimate that to update their educational materials in-
house, each intermediary will incur an ongoing time burden of
approximately 10 hours per year. Therefore, the total ongoing burden
will be approximately 550 hours per year (55 intermediaries x 10 hours/
intermediary).
(2) Cost
    As stated above, for the purposes of this PRA analysis, we assume
that half of the intermediaries will employ third-party firms to
produce educational materials, such as professional-quality online
video presentations, instead of developing materials in-house. Public
sources indicate that the typical cost to produce a professional
corporate training video ranges from approximately $1,000 to $3,000 per
production minute.\1683\ Based on discussions with industry
participants prior to the publication of our proposed rules, we assume
that, on average, each intermediary will produce a series of short
educational videos that will cover all of the requirements of the final
rules and that the video material will be 10 minutes long in total.
Based on this assumption, we estimate that the average initial cost for
an intermediary to develop and produce educational materials will range
from approximately $10,000 to $30,000. The total initial cost across
all intermediaries estimated to employ a third party per year will be
$550,000 to $1,650,000.\1684\ For purposes of this PRA analysis, we
average the cost to $20,000 per intermediary per year. We note that the
estimated initial cost may be significantly lower, because not all
intermediaries that outsource the development of educational materials
may choose to produce professional-quality online video presentations;
others may produce videos of shorter length or use other types of
educational materials.
---------------------------------------------------------------------------

    \1683\ See, e.g., Lee W. Frederiksen, What Is the Cost of Video
Production for the Web?, Hinge Marketing, available at http://www.hingemarketing.com/library/article/what-is-the-cost-of-video-production-for-the-web.
    \1684\ 55 intermediaries x $10,000 production cost = $550,000.
55 intermediaries x $30,000 production cost = $1,650,000.
---------------------------------------------------------------------------

    We estimate that, on an ongoing basis, when using a third-party
company to update their video educational materials, each intermediary
will spend approximately half of the initial average cost. We estimate,
therefore, that the average ongoing annual cost for an intermediary to
update its video educational materials will range from approximately
$5,000 to $15,000 and that the total ongoing annual cost across all
intermediaries will range from approximately $275,000 to $825,000 per
year.\1685\ For purposes of this PRA analysis, we average the cost to
$10,000 per intermediary per year.
---------------------------------------------------------------------------

    \1685\ $550,000 total cost x 0.50 = $275,000. $1,650,000 total
cost x 0.50 = $825,000.
---------------------------------------------------------------------------

f. Account Opening: Promoters
    The final rules require an intermediary, at the account opening
stage, to disclose to users of its platform that any person who
receives compensation to promote an issuer's offering, or who is a
founder or employee of an issuer engaging in promotional activities on
behalf of the issuer, must clearly disclose the receipt of compensation
and his or her engagement in promotional activities on the
platform.\1686\ We expect that this requirement will result in an
estimated time burden of five hours per intermediary in the first year,
to prepare this particular disclosure and incorporate it into the
account opening process. Therefore, we estimate that the total initial
burden hours necessary for intermediaries to comply with this
requirement will be approximately 550 hours (5 hours/intermediary x (10
newly-registered broker-dealers + 50 previously-registered broker-
dealers + 50 funding portals)).
---------------------------------------------------------------------------

    \1686\ See Rule 302(c) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We believe that the ongoing time burdens for this requirement will
be approximately one hour per intermediary per year to review and check
that the disclosures remain appropriate. Therefore, we estimate that
the ongoing total burden hours necessary for intermediaries to comply
with this requirement will be approximately 110 hours per year (1 hour/
intermediary x (10 newly-registered broker-dealers + 50 previously-
registered broker-dealers + 50 funding portals)).
g. Issuer Disclosures To Be Made Available
(1) Time Burden
    The final rules require an intermediary to make publicly available
on its platform the information that an issuer of crowdfunding
securities is required to provide to investors, in a manner that
reasonably permits a person accessing the platform to save, download or
otherwise store the information, until the offer and sale of securities
is completed or cancelled.\1687\
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    \1687\ See Rule 303(a) of Regulation Crowdfunding.
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    For purposes of the PRA, our estimate of the hourly burdens related
to the public availability of the issuer information is included in our
estimate of the hourly burdens associated with overall platform
development, discussed above in Section IV.C.2.b. We note that the
platform functionality will include not only the ability to display,
upload and download issuer information as required under the final
rules, but also the ability to provide users with required online
disclosures
    We recognize that, over time, intermediaries may need to update
their systems that allow issuer information to be uploaded to their
platforms. We do not expect a significant ongoing burden related to the
requirement for providing issuer disclosures, primarily because the
functionality required for required issuer disclosure information to be
uploaded is a standard feature offered

on many Web sites and will not require frequent or significant updates.
(2) Cost
    We do not expect a significant ongoing cost for providing issuer
disclosures, primarily because the functionality required to upload
required issuer disclosure information is a standard feature offered on
many Web sites and will not require frequent updates. To the extent an
intermediary uses a third party to develop the functionality for this
requirement, the initial costs relevant to this requirement will be
incorporated into the cost of hiring a third party to develop the
platform, discussed above in subsection IV.C.2.b.2.
h. Other Disclosures to Investors
(1) Time Burden
    Intermediaries will be required to implement and maintain systems
to comply with the information disclosure, communication channels, and
investor notification requirements of Regulation Crowdfunding,
including providing disclosure about compensation at account opening,
obtaining investor acknowledgments to confirm investor qualifications
and review of educational materials, providing investor questionnaires,
maintaining communication channels with third parties and among
investors, notifying investors of investment commitments, confirming
completed transactions and confirming or reconfirming offering
cancellations.
    For purposes of the PRA analysis, our estimate of the hourly
burdens related to these information disclosure, communication channel
and investor notification requirements of Regulation Crowdfunding is
included in our estimate of the hourly burdens associated with overall
platform development, discussed above in Section IV.C.2.b. Based on our
discussions with industry participants, we expect that these
functionalities will generally be part of the overall platform
development process and costs. We discuss the burdens of platform
development above, and note that these will include developing the
functionality that will allow intermediaries to comply with disclosure
and notification requirements.\1688\
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    \1688\ See Section IV.C.2.b.1.
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    We do not expect a significant ongoing burden for providing
disclosures, as required by the final rules, because the functionality
required to provide information and communication channels will likely
not require frequent updates. We incorporate the total burden to update
the required functionality for processing investor disclosures and
investor acknowledgment information in the total burden estimates
relating to platform development discussed above.\1689\
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    \1689\ See Section IV.C.2.b.1.
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(2) Cost
    We recognize that some intermediaries may implement the required
functionality for processing investor disclosures and investor
acknowledgments by using a third-party developer. The total cost for
issuers to use third-party developers to add the required functionality
for processing investor disclosures and investor acknowledgments, as
well as to update the required functionality for processing investor
disclosures and investor acknowledgments, is incorporated into our
discussion of the total cost estimates relating to platform development
in Section IV.C.2.b.
    We also do not expect there to be a significant ongoing cost for
developing the functionality to process these disclosures and
acknowledgments, primarily because this functionality will likely not
require frequent updates by third-party developers.
i. Maintenance and Transmission of Funds
    The final rules contain requirements related to the maintenance and
transmission of funds. A registered broker will be required to comply
with the requirements of Rule 15c2-4 of the Exchange Act (Transmission
or Maintenance of Payments Received in Connection with
Underwritings).\1690\ A registered funding portal will be required to
enter into a written agreement with a qualified third party that has
agreed in writing to hold the client funds.\1691\ It also will be
required to send directions to the qualified third party depending on
whether an investing target is met or if an investment commitment or
offering is cancelled. For purposes of the PRA, we are providing an
estimate for the hour burden that a funding portal will incur to enter
into a written agreement with the qualified third party on an initial
basis, and to review and update that agreement on an ongoing basis.
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    \1690\ See Rule 303(e)(1) of Regulation Crowdfunding. See also
17 CFR 240.15c2-4. For purposes of this PRA discussion, any burdens
associated with Rule 15c2-4, as well as for any other rule to which
brokers are subject regardless of whether they engage in
transactions pursuant to Section 4(a)(6), are not addressed here;
rather, they are included in any OMB approvals for the relevant
rules.
    \1691\ See Rule 303(e)(2) of Regulation Crowdfunding.
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    Based on discussion with industry participants, we estimate that
funding portals will incur an initial burden of approximately 20 hours
each to comply with these requirements, for a total burden of 1,000
hours (20 hours per funding portal x 50 funding portals). We expect
that the burden associated with the Web site functionality required to
send directions to third parties will be included as part of the
platform development discussed above.\1692\
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    \1692\ See Section IV.C.2.b.
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    We expect that, on an ongoing basis, a registered funding portal
will have to periodically review and update its written agreement with
the qualified third party to hold its client funds. A registered
funding portal will also be required to send directions on an ongoing
basis to a qualified third party depending on whether an investing
target is met or an investment commitment or offering is cancelled.
Based on discussion with industry participants, we estimate that
funding portals will incur an ongoing annual burden of approximately 5
hours each to comply with these requirements, or 250 hours total (5
hours per funding portal x 50 funding portals).
j. Compliance: Policies and Procedures
    The final rules require a funding portal to implement written
policies and procedures reasonably designed to achieve compliance with
the federal securities laws and the rules and regulations thereunder,
relating to its business as a funding portal. We anticipate that
funding portals will comply with this requirement by using internal
personnel and internal information technology resources integrated into
their platforms. Based on discussion with industry participants, we
estimate that a funding portal will spend approximately 40 hours to
establish written policies and procedures to achieve compliance with
these requirements. This will result in a total aggregate initial
recordkeeping burden of 2,000 hours (40 hours x 50 funding portals).
    We estimate that, on an ongoing basis, funding portals will spend
approximately 5 hours per year updating, as necessary, the policies and
procedures required by the final rules. This will result in an
aggregate ongoing recordkeeping burden of 250 hours (5 hours x 50
funding portals).
k. Compliance: Privacy
    Funding portals will be required to comply with the Privacy Rules
as they

apply to broker-dealers, including Regulation S-P, S-AM and S-ID.\1693\
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    \1693\ See Rule 403(b) of Regulation Crowdfunding.
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    Under Rule 403(b), a funding portal will be required to comply with
Regulation S-P, which will require the funding portal to provide notice
to investors about its privacy policies and practices; describe the
conditions under which a broker may disclose nonpublic personal
information about investors to nonaffiliated third parties; and provide
a method for investors to prevent a funding portal from disclosing that
information to most nonaffiliated third parties by ``opting out'' of
that disclosure, subject to certain exceptions. For funding portals, we
expect that the privacy and opt-out notices will be delivered
electronically, thereby reducing the delivery burden as compared to
paper delivery.
    We estimate that under the final rules all 50 funding portals will
be subject to the requirements of Regulation S-P pursuant to Rule
403(b). In developing an estimate of the burden relating to the
Regulation S-P requirements under Rule 403(b), we have considered: (1)
The minimal recordkeeping burden imposed by Regulation S-P; \1694\ (2)
the summary fashion in which information must be provided to investors
in the privacy and opt-out notices required by Regulation S-P; \1695\
and (3) the availability of the model privacy form and online model
privacy form builder. Given these considerations, we estimate that each
funding portal will spend, on an ongoing basis, an average of
approximately 12 hours per year complying with the information
collection requirement of Regulation S-P, for a total of approximately
600 annual burden-hours (12 hours/respondent x 50 funding portals).
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    \1694\ Regulation S-P has no recordkeeping requirement, and
records relating to customer communications already must be made and
retained by broker-dealers pursuant to other Commission rules. The
estimates of the burdens relating to recordkeeping requirements for
funding portals are discussed below in Section IV.C.2.l.
    \1695\ The model privacy form adopted by the Commission and the
other agencies in 2009, designed to serve as both a privacy notice
and an opt-out notice, is only two pages.
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    Funding portals will be required to comply with Regulation S-AM,
which will require funding portals to provide notice to each affected
individual informing the individual of his or her right to prohibit
such marketing before a receiving affiliate may make marketing
solicitations based on the communication of certain consumer financial
information from the broker. Based on our discussions with industry
participants, we estimate that approximately 20 funding portals will
have affiliations that will subject them to the requirements of
Regulation S-AM under the final rules, and that they will incur an
average one-time burden of one hour to review affiliate marketing
practices, for a total of 20 burden hours (1 hour/respondent x 20
funding portals).
    We estimate that these 20 funding portals will be required to
provide notice and opt-out opportunities to consumers pursuant to the
requirements of Regulation S-AM, as imposed by Rule 403(b), and that
they will incur an average initial burden of 18 hours to do so, for a
total estimated initial burden of 360 hours (18 hours/respondent x 20
funding portals). We also estimate that funding portals will incur an
ongoing burden related to Regulation S-AM's requirements for providing
notice and opt-out opportunities of approximately four hours per
respondent per year. This burden will cover the creation and delivery
of notices to new investors and the recording of any opt-outs that are
received on an ongoing basis, for a total of approximately 80 annual
burden-hours (4 hours/respondent x 20 funding portals).
    Funding portals will be required to comply with rule S-ID, which
will require funding portals to develop and implement a written
identity theft prevention program that is designed to detect, prevent
and mitigate identity theft in connection with certain existing
accounts or the opening of new accounts. We estimate that the initial
burden for funding portals to comply with the applicable portions of
Regulation S-ID, as imposed by Rule 403(b), will be (1) 25 hours to
develop and obtain board approval of a program; (2) four hours to train
staff; and (3) two hours to conduct an initial assessment of relevant
accounts, for a total of 31 hours per funding portal. We estimate that
all 50 funding portals will incur these initial burdens, resulting in
an aggregate time burden of 1,550 hours ((25 + 4 + 2 hours/respondent)
x 50 funding portals).
    With respect to the requirements of Rule 403(b) relating to
Regulation S-ID, we estimate that the ongoing burden per year will
include: (1) Two hours to periodically review and update the program,
review and preserve contracts with service providers and review and
preserve any documentation received from service providers; (2) four
hours to prepare and present an annual report to a compliance director;
and (3) two hours to conduct periodic assessments to determine if the
entity offers or maintains covered accounts, for a total of eight
hours, of which we estimate 7 seven hours will be spent by internal
counsel and 1 one hour will be spent by a compliance director. We
estimate that all 50 funding portals will incur these ongoing burdens,
for a total ongoing burden 400 hours (8 hours/respondent x 50 funding
portals).
l. Records to be Made and Kept by Funding Portals
(1) Time Burden
    All funding portals will be required to make and keep records
related to their activities to facilitate transactions in reliance on
Section 4(a)(6) and the related rules.\1696\ These books and records
requirements are based generally on Exchange Act Rules 17a-3 and 17a-4,
which apply to broker-dealers. To estimate the initial burden for
funding portals, we base our analysis upon the current annual burdens
of Rules 17a-3 and 17a-4.
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    \1696\ See Rule 404 of Regulation Crowdfunding.
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    We currently estimate the annual recordkeeping burden for broker-
dealer compliance with Rule 17a-3 to be 394.16 hours per respondent,
and the most recently approved annual recordkeeping burden for broker-
dealer compliance with Rule 17a-4 to be 249 hours per respondent.
    Given the more limited scope of a funding portal's business as
compared to that of a broker, the more targeted scope of the books and
records rules, and the fact that funding portals will be required to
make, deliver and store records electronically, we expect the burden of
the final rules will likely be less than that of Rules 17a-3 and 17a-4.
For the purposes of the PRA, we assume that the recordkeeping burden,
on average, for a funding portal to comply with the final rules will be
50% of the burdens of a broker-dealer to comply with Rules 17a-3 and
17a-4. Therefore, we estimate the initial burden to be approximately
325 hours per respondent,\1697\ or 16,250 hours total (325 hours/
respondent x 50 respondents). We expect the ongoing recordkeeping
burden for funding portals will be the same as the initial burden
because the requirements regarding maintaining such records will be
consistent each year.
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    \1697\ 394.16 hours (recordkeeping burden for Rule 17a-3) + 249
hours (recordkeeping burden for Rule 17a-4) = 643.16 hours. 638.16
hours/2 = 321.58 hours.
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(2) Cost
    We currently estimate the annual recordkeeping cost for broker-
dealer compliance with Rule 17a-3 to be $5,706.67 per respondent. These
ongoing recordkeeping costs reflect the costs of systems and equipment

development. We currently estimate the annual recordkeeping cost for
broker-dealer compliance with Rule 17a-4 to be $5,000 per respondent.
    Given the more limited scope of a funding portal's business as
compared to that of a broker, the more targeted scope of the books and
records rules, and the fact that funding portals will be required to
make, deliver and store records electronically, we expect the annual
recordkeeping cost of the final rule requirements will likely be less
than that of Rules 17a-3 and 17a-4. For purposes of the PRA, we assume
that the annual recordkeeping cost on average for a funding portal to
comply with the requirements that records be made and kept will be
about 50% less than burdens of a broker-dealer to comply with Rules
17a-3 and 17a-4. We expect the initial recordkeeping cost for funding
portals, therefore, to be approximately $5,350 per respondent,\1698\ or
$267,500 total ($5,350 per respondent x 50 respondents). We expect the
ongoing recordkeeping cost burden for funding portals will be the same
as the initial burden because the requirements regarding maintaining
such records will be consistent each year.
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    \1698\ $5,706.67 (recordkeeping cost for Rule 17a-3) + $5,000
(recordkeeping cost for Rule 17a-4) = $10,706.67. $10,706.67/2 =
$5,353.34.
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    One commenter stated that ``[u]nder the expectation that
crowdfunding portals will be online operations and will almost
certainly retain records through digital methods, the burden of
collection should be minimal.'' \1699\ We agree that digital