investment advice. To accommodate reasonable limitations, the proposed
safe harbor would permit a funding portal to apply objective criteria
to limit the offerings on its platform, without being deemed to be
providing investment advice.\590\ Those criteria would be required to
be reasonably designed to result in a broad selection of issuers
offering securities through the funding portal's platform and be
applied consistently to all potential issuers and offerings, so as not
to recommend or implicitly endorse one issuer or offering over others.
The criteria also would be required to be clearly displayed on the
funding portal's platform.
---------------------------------------------------------------------------

    \590\ See proposed Rule 402(b)(1) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The requirements that the objective criteria be reasonably designed
to result in a broad selection of issuers, and be applied consistently,
are intended to ensure that the funding portal does not provide
impermissible investment advice by, for example, applying criteria that
would so limit the number of issuers that the funding portal could be
viewed as providing an implicit endorsement or recommendation of those
issuers' offerings. An issuer that meets these criteria, and is not
otherwise disqualified, would, subject to the funding portal's measures
to reduce the risk of fraud under proposed Rule 301,\591\ be eligible
to list its offering on the funding portal's platform.
---------------------------------------------------------------------------

    \591\ See discussion in Section II.C.3 above.
---------------------------------------------------------------------------

    One criterion could include the type of security being offered
(such as common stock, preferred stock or debt securities). We believe
that this criterion would be appropriate because potential investors
may be interested in certain types of securities as a consideration
separate from the identity of issuers. Other criteria also could
include the geographic location of the issuer or the industry or
business segment of the issuer. We believe that these criteria would be
appropriate because a funding portal may wish to specialize and focus
its efforts on facilitating offerings in particular areas or
industries.\592\ The proposed rule would require funding portals to
disclose to investors the criteria they use to limit the offerings
available on their platforms. This should help investors better
appreciate any niche focus of a funding portal and the scope of the
offerings available on the funding portal's platform. In addition, we
recognize that a funding portal may seek to limit the number of issuers
or offerings on its platform at any given time, including for resource
reasons. The application of the objective criteria could, in practice,
result in the number of issuers or offerings displayed on the platform
being very small, such as, for example, in the period soon after a
funding portal begins operations. Nevertheless, we would not consider
the funding portal to be providing investment advice if the objective
criteria are designed to result in a broad selection of issuers.
---------------------------------------------------------------------------

    \592\ See, e.g., CrowdFund Connect Letter (stating that rural
communities could build new local based co-operatives similar to the
electric and telephone cooperatives for new technologies).
---------------------------------------------------------------------------

    To qualify for the safe harbor, a funding portal may not use
criteria based on an assessment of the merits or the shortcomings of a
particular issuer or offering. In particular, a funding portal may not
deny access to an issuer based on the advisability of investing in the
issuer or its offering.\593\ As noted above, one commenter stated that
the prohibition on investment advice could potentially preclude a
funding portal from denying access to a fraudulent offering or
issuer.\594\ This would place investors at unnecessary risk and would
be contrary to the funding portal's obligation under the proposed rules
to deny access to its platform if it believes that the issuer or its
offering presents potential for fraud or otherwise raises concerns
regarding investor protection.\595\ Thus, as described above, a funding
portal must deny access if it believes that the issuer or its offering
has potential for fraud or otherwise raises concerns regarding investor
protection.\596\
---------------------------------------------------------------------------

    \593\ Of course, a funding portal would be required to deny
access to the issuer if the funding portal has a reasonable basis
for believing that issuer is subject to a disqualification or if the
funding portal believes that the issuer or the offering presents the
potential for fraud or otherwise raises concerns regarding investor
protection. See proposed Rule 301(c) of Regulation Crowdfunding.
    \594\ See CFIRA Letter 3.
    \595\ See proposed Rule 301 of Regulation Crowdfunding.
    \596\ Consistent with proposed Rule 301, proposed Rule
402(b)(10) of Regulation Crowdfunding would clarify that a funding
portal may deny access to an issuer if the funding portal believes
that the issuer or its offering has potential for fraud or otherwise
raises concerns regarding investor protection.
---------------------------------------------------------------------------

[ssquf] Highlighting Issuers and Offerings
    Under the proposed rules, a funding portal may highlight particular
offerings of securities made in reliance on Section 4(a)(6) on its
platform based on objective criteria that may include: the type of
securities being offered (e.g., common stock, preferred stock or debt
securities); the geographic location of the issuer; the industry or
business segment of the issuer; the number or amount of investment
commitments made; and the progress in meeting the target offering
amount or, if applicable, the maximum offering amount, and minimum or
maximum investment amount.\597\ A potential investor, for example, may
have a strong interest in supporting a small issuer that is within the
potential investor's geographic vicinity. Other potential investors may
be interested in offerings that are about to close soon, that have
particular maximum investment amounts or that have generated
significant interest from users of the funding portal's platform. Some
investors may only be interested in offerings in which a significant
percentage of the target amount has been committed.\598\ We believe
that the listed criteria are sufficiently objective, so as to reduce
the risk of a funding portal applying them to advance a particular bias
or subjective assessment of the issuers or offerings.
---------------------------------------------------------------------------

    \597\ See proposed Rule 402(b)(2) of Regulation Crowdfunding.
    \598\ See Howe, note 2.
---------------------------------------------------------------------------

    Consistent with the prohibition on investment advice and
recommendations, the criteria must be reasonably designed to highlight
a broad selection of issuers, so as not to recommend or implicitly
endorse one issuer or offering over another, and must be applied
consistently to all potential issuers and offerings. The selection
criteria may not be based on an assessment of the merits of a
particular issuer or offering and must be clearly displayed on the
funding portal's platform, to permit investors to comprehend on what
basis certain issuers are being highlighted, and, thereby, to help
prevent them from misconstruing the highlighting as a recommendation or
implicit endorsement of any issuer or offering. The funding portal may
not highlight an issuer or offering based on the advisability of
investing in the issuer or offering. To help prevent conflicts of
interest and incentives for funding portals to favor certain issuers
over others, the proposed rules would prohibit a funding portal from
receiving any special or additional compensation for highlighting (or
offering to highlight) one or more issuers or offerings on its
platform.\599\
---------------------------------------------------------------------------

    \599\ See proposed Rule 402(b)(2)(iii) of Regulation
Crowdfunding.
---------------------------------------------------------------------------

    Some commenters sought clarification whether funding portals could
distinguish offerings based on riskiness.\600\ We are not proposing a
safe harbor for this type of distinction at this time, because we
preliminarily believe that an assessment of risk necessarily

involves the exercise of judgment indicative of the giving of
investment advice.
---------------------------------------------------------------------------

    \600\ See RocketHub Letter 1; Wright Letter 1.
---------------------------------------------------------------------------

[ssquf] Providing Search Functions
    The proposed rules would permit a funding portal to provide, on its
platform, search functions or other tools that users could use to
search, sort or categorize the offerings available on the funding
portal's platform according to objective criteria.\601\ Search
functions could help potential investors to more efficiently search for
offerings that focus on a specific industry, funding goal or other
criteria. Under the proposed rules, a funding portal also would be able
to categorize offerings into general subject areas, so that a potential
investor could readily find those offerings on the funding portal's
platform. The proposed rules would also permit more granular tools
that, for example, could provide a potential investor the ability to
sort offerings based on a combination of different criteria, such as by
the percentage of the target offering amount that has been met,
geographic proximity to the investor and number of days remaining
before an offering is to close.\602\ The objective criteria specified
in the proposed rules are consistent with those in the proposed safe
harbor for highlighting issuers and offerings.\603\ Consistent with the
activities specifically prohibited by statute, funding portals would
not be permitted to use criteria that search, sort or categorize
offerings based on the advisability of investing in the issuer or its
offering or an assessment of any characteristic of the issuer, its
business plan, its management, or risks associated with an investment.
One commenter questioned whether a funding portal could give potential
investors the ability to create automated email notifications, based on
criteria they have provided to identify particular offerings on the
funding portal's platform.\604\ The proposed rules would permit funding
portals to do so.
---------------------------------------------------------------------------

    \601\ See proposed Rule 402(b)(3) Regulation Crowdfunding. See
also 158 Cong. Rec. 2231 (daily ed. Mar. 29, 2012) (statement of
Sen. Scott Brown) (``Funding portals should be allowed to organize
and sort information based on certain criteria. This will make it
easier for individuals to find the types of companies in which they
can potentially invest. This type of capability--commonly referred
to as curation--should not constitute investment advice.'').
    \602\ See proposed Rule 402(b)(3) of Regulation Crowdfunding.
    \603\ See proposed Rule 402(b)(2)(ii) of Regulation
Crowdfunding.
    \604\ See CFIRA Letter 3.
---------------------------------------------------------------------------

    We recognize that there are many potential ways that a tool or
mechanism can be used to search, sort or categorize offerings. The
proposed rules are intended to be sufficiently broad to cover any
number of combinations of implementing tools or mechanisms for a
search, while limiting the search parameters to objective criteria.
[ssquf] Providing Communication Channels
    The proposed rules would permit a funding portal to provide, on its
platform, communication channels by which investors could communicate
with one another and with representatives of the issuer about offerings
of securities displayed on the funding portal's platform, in accordance
with the conditions set out in proposed Rule 303(c).\605\ The safe
harbor would specify that a funding portal (including its associated
persons, such as its employees) may not participate in these
communications, other than to establish guidelines about communication
and to remove abusive or potentially fraudulent communications. For the
reasons discussed above, a funding portal would be required to make
communication channels available to the general public and to restrict
the posting of comments on those channels to those who have
accounts.\606\ In addition, the funding portal would need to require
persons posting comments to disclose, in the channel, whether they
receive or would receive any compensation for promoting an issuer.
---------------------------------------------------------------------------

    \605\ See proposed Rule 402(b)(4) of Regulation Crowdfunding.
    \606\ See discussion in Section II.C.5.c above and proposed Rule
303(c)(2) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Communication channels should facilitate the access to information
among members of the public and provide potential investors with the
crowd's insight as to the merits of an issuer or business plan.\607\
Restricting funding portal participation should help to ensure that
funding portals do not provide impermissible recommendations or
investment advice. Moreover, requiring potential investors to have
accounts with the funding portal before posting a comment should
provide a control that could aid in promoting accountability for
comments made and help ensure that interested persons, such as those
associated with the issuer or receiving compensation to promote the
issuer, are properly identified.\608\
---------------------------------------------------------------------------

    \607\ See, e.g., Bradford, note 1. See also Howe, note 2.
    \608\ See 158 Cong. Rec. S2231 (daily ed. Mar. 29, 2012)
(statement of Sen. Scott Brown) (``In addition to facilitating
communication between issuers and investors, intermediaries should
allow fellow investors to endorse or provide feedback about issuers
and offerings, provided that these investors are not employees of
the intermediary. Investors' credentials should be included with
their comments to aid the collective wisdom of the crowd.'') See
also discussion in Section II.C.5.c above.
---------------------------------------------------------------------------

    As suggested by commenters, the proposed rule would permit a
funding portal to create a ``negotiation space'' in which those who
have opened accounts with the funding portal and issuers could discuss
and potentially negotiate certain aspects of the issuer's offering,
including the price of the issuer's securities.\609\
---------------------------------------------------------------------------

    \609\ See Pearfunds Letter; CFIRA Letter 3.
---------------------------------------------------------------------------

[ssquf] Advising Issuers
    The proposed rules would permit a funding portal to advise an
issuer about the structure or content of the issuer's offering,
including preparing offering documentation.\610\ This advice is not the
type of advice that we believe should be impermissible.\611\ We also
believe that funding portals and brokers could provide certain services
to issuers in order to facilitate the offer and sale of securities in
reliance on Section 4(a)(6), and without this kind of advice to
issuers, crowdfunding as a method to raise capital would not be viable.
In particular, to the extent that the issuers that may choose to
conduct offerings in reliance on Section 4(a)(6) would include startups
and small businesses, we expect that these issuers would seek in many
cases to obtain advice on the structure of the offering from
intermediaries. Funding portals would be in a position to provide this
type of assistance relatively efficiently, together with the other
services under the proposed rules that they would be permitted to
provide to issuers.
---------------------------------------------------------------------------

    \610\ See proposed Rule 402(b)(5) of Regulation Crowdfunding.
    \611\ Compare Registration of Municipal Advisors, Release No.
34-63576 (Dec. 10, 2010) [76 FR 824 (Jan. 6, 2011)] (noting that
Commission staff has taken the position that financial advisors that
limit their advisory activities to advising municipal issuers as to
the structuring of their financings, rather than providing advice
for compensation regarding the investment of assets, may not need to
register as investment advisers).
---------------------------------------------------------------------------

    The proposed safe harbor would permit funding portals to advise an
issuer about the structure and content of the issuer's offering in a
number of ways. A funding portal could, for example, provide pre-
drafted templates or forms for an issuer to use in its offering that
would help it comply with its proposed disclosure obligations.\612\

Other examples of permissible assistance could include, as commenters
have suggested, advice about the types of securities the issuer can
offer, the terms of those securities and the procedures and regulations
associated with crowdfunding.\613\
---------------------------------------------------------------------------

    \612\ See, e.g., 158 Cong. Rec. S2231 (daily ed. Mar. 29, 2012)
(statement of Sen. Scott Brown) (``Similarly, funding portals should
be allowed to engage in due diligence services. This would include
providing templates and forms, which will enable issuers to comply
with the underlying statute. In crafting this law, it was our intent
to allow funding portals to provide such services.''); 158 Cong.
Rec. S5474-03 (daily ed. July 26, 2012) (statement of Sen. Jeff
Merkley) (``Subject to such limits as the SEC determines necessary
for the protection of investors and the crowdfunding issuers,
funding portals should be able to provide (or make available through
service providers) services to assist entrepreneurs utilizing
crowdfunding, including, for example, providing basic standardized
templates, models, and checklists. Enabling them to help small
businesses construct simple, standard deal structures will
facilitate quality, low-cost offerings.'').
    \613\ See CFIRA Letter 2.
---------------------------------------------------------------------------

[ssquf] Paying for Referrals
    The proposed rules would clarify that, consistent with proposed
Rule 305, a funding portal could compensate a third party for referring
a person to the funding portal if the third party does not provide the
funding portal with personally identifiable information of any
potential investor. For example, a third party could provide hyperlinks
to a funding portal in order to inform potential investors learn about
securities offerings made in reliance on Section 4(a)(6). Any
compensation, unless paid to third party that is a registered broker or
dealer, could not be based, directly or indirectly, on the purchase or
sale of a security offered in reliance on Section 4(a)(6) on or through
the funding portal's platform.\614\ Otherwise, such transaction-based
compensation could trigger broker-dealer registration requirements. We
also believe that this prohibition on transaction-based compensation
would help to remove the incentive for high-pressure sales tactics and
other abusive practices.\615\
---------------------------------------------------------------------------

    \614\ See proposed Rule 402(b)(6) of Regulation Crowdfunding.
See also discussion in Section II.C.7 above. Proposed Rule 305 of
Regulation Crowdfunding would implement the prohibition in Section
4A(a)(10).
    \615\ See note 515.
---------------------------------------------------------------------------

[ssquf] Compensation Arrangements With Registered Broker-Dealers
    The proposed rules would specify that a funding portal could enter
into certain arrangements with a registered broker-dealer, through
which they could compensate each other for services.\616\ In speaking
with industry participants, we understand that because the statute
narrowly defines the permissible activities in which funding portals
may engage, funding portals may wish to contract or affiliate with
registered broker-dealers, which are not subject to similar
constraints.\617\ For example, a registered broker-dealer could, among
other things, recommend securities offered on the funding portal's
platform or provide services involving the handling of investor funds
and securities. Conversely, funding portals may wish to offer certain
services, including information technology services, to a broker-
dealer, for a fee. Each party to this type of arrangement would,
because it is a regulated entity, need to comply with all applicable
regulations, including the rules of the registered national securities
association of which it is a member.
---------------------------------------------------------------------------

    \616\ See proposed Rules 402(b)(7) and 402(b)(8) of Regulation
Crowdfunding.
    \617\ Exchange Act Section 3(a)(80) limits the permissible
securities activities of a funding portal to those in connection
with the offer and sale of securities in reliance on Securities Act
Section 4(a)(6).
---------------------------------------------------------------------------

    Proposed Rule 402(b)(7) would permit a funding portal to pay or
offer to pay compensation to a registered broker or dealer for services
in connection with the funding portal's offer or sale of securities in
reliance on Section 4(a)(6). Proposed Rule 402(b)(8) would permit a
funding portal to provide services to and receive compensation from a
registered broker-dealer in connection with the funding portal's offer
or sale of securities in reliance on Section 4(a)(6).\618\ Compensation
could include any monetary form of payment, such as fees, discounts,
commissions, concessions, reimbursement of expenses and other
allowances. The proposed safe harbor would not, however, permit a
funding portal to receive transaction-based compensation for referrals
of potential investors in other types of offerings being effected by a
registered broker-dealer, such as a Rule 506 offering.\619\ The
proposed rules would require the funding portal to provide any services
pursuant to a written agreement with the registered broker-dealer, and
they also would require the payments to be compliant with, and not
prohibited by, the rules of the registered national securities
association of which the funding portal is a member.\620\ The proposed
rules would require that a funding portal's offers to pay, and payments
made to, a registered broker-dealer, as well as a funding portal's
receipt of compensation from a registered broker-dealer, under these
arrangements, be compliant with Regulation Crowdfunding. In particular,
these arrangements would have to be compliant with proposed Rule 305
which prohibits, with certain exceptions, an intermediary from
compensating any person for providing the intermediary with the
personally identifiable information of any investor or potential
investor.\621\ These proposed provisions, taken as a whole, are
intended to facilitate intermediaries' cooperation with each other and
promote the use of the Section 4(a)(6) exemption to raise capital,
while maintaining a clear audit trail.
---------------------------------------------------------------------------

    \618\ See also FINRA, Payments to Unregistered Persons: FINRA
Request Comment on Proposed Consolidated FINRA Rule Governing
Payments to Unregistered Persons, Regulatory Notice 09-69 (Dec.
2009), available at http://www.finra.org/web/groups/industry/@ip/<EMAIL_ADDRESS>    \619\ Receipt of transaction-based compensation in connection
with such referrals could cause a funding portal to be a broker
required to register with us under Exchange Act Section 15(a)(1) (15
U.S.C. 78o(a)(1)).
    \620\ See, e.g., FINRA Rule 4311 (``Carrying Agreements'').
    \621\ See proposed Rule 305 of Regulation Crowdfunding and
discussion in Section II.C.7 above.
---------------------------------------------------------------------------

[ssquf] Advertising
    The proposed rules would permit a funding portal to advertise its
existence and engage in certain other limited advertising
activities.\622\ The proposed rule does not limit the manner in which a
funding portal could advertise its existence. A funding portal may, for
example, choose to advertise through social media, internet
advertisements or traditional sources of advertising like print media.
---------------------------------------------------------------------------

    \622\ See proposed Rule 402(b)(9) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    In addition, funding portals could identify issuers and offerings
in the advertisements on the basis of criteria that are reasonably
designed to identify a broad selection of issuers (so as not to
recommend or implicitly endorse one issuer or offering over others) and
are applied consistently to all potential issuers and offerings. The
criteria, consistent with those described above with regard to
highlighting issuers and offerings on the platform and the ability to
provide investors with search functions, could include the type of
securities being offered, the geographic location of the issuer, the
industry or business segment of the issuer, the number or amount of
investment commitments made, the progress in meeting the issuer's
target offering amount and, if applicable, the maximum offering amount
and the minimum or maximum investment amount.\623\ Of course, a funding
portal is subject to the statutory prohibition on providing investment
advice and recommendations, and soliciting, and so

the safe harbor would not permit a funding portal to advertise in such
a way that expresses that any of the offerings offered on its platform
are of a higher quality, are safer, or are more worthy investments
compared to any others, whether offered on its platform or those of
other intermediaries.
---------------------------------------------------------------------------

    \623\ As a funding portal could be subject to liability for
fraud, it would need to consider whether its advertisements are not
misleading or otherwise fraudulent, such as by implying that past
performance of offerings on its platform is indicative of future
results. See Exchange Act Rule 10b-5 [17 CFR 240.10b-5].
---------------------------------------------------------------------------

    The proposed rule would also specify that the funding portal could
not receive special or additional compensation for identifying an
issuer or offering in its advertisement, because this could create an
incentive for the funding portal to promote one issuer over another.
This prohibition should help to limit the dissemination of information
that may be misleading or easily misconstrued.\624\
---------------------------------------------------------------------------

    \624\ In response to one commenter, we note that this would
preserve the ability of funding portals to pay for search listings
or advertisements in online social networks. See Cera Technology
Letter.
---------------------------------------------------------------------------

[ssquf] Denying Access Based on Potential Fraud or Investor Protection
Concerns
    In light of the comments received, the proposed rules would require
a funding portal to deny access to its platform to, or cancel an
offering of, an issuer that the funding portal believes may present the
potential for fraud or otherwise raises concerns regarding investor
protection, as is required under proposed Rule 301(c).\625\
---------------------------------------------------------------------------

    \625\ See proposed Rule 402(b)(10) of Regulation Crowdfunding.
See also discussion in Section II.C.3 above.
---------------------------------------------------------------------------

[ssquf] Accepting Investor Commitments
    The proposed rules would permit a funding portal, on behalf of an
issuer, to accept investment commitments from potential investors for
securities offered in reliance on Section 4(a)(6) by that issuer on the
funding portal's platform.\626\ Given the breadth of the statutory
prohibition on holding, managing, possessing or otherwise handling
investor funds or securities, we believe that it is important to
clarify the activities, in this area, in which a funding portal may
permissibly engage, including with regard to accepting investment
commitments.\627\
---------------------------------------------------------------------------

    \626\ See proposed Rule 402(b)(11) of Regulation Crowdfunding.
    \627\ As described above, we are proposing other measures that
would prescribe the requirements for funding portals with respect to
the maintenance and transmission of funds, including the use of a
qualified third party to hold and transmit investor funds. See
discussion in Section II.C.5.d above.
---------------------------------------------------------------------------

    Although some commenters expressed the view that funding portals
should be permitted to handle investor funds and securities in a
limited capacity as the issuer's transfer agent or to be the holder of
record,\628\ we do not believe that these activities would be
consistent with the statutory directive in Exchange Act Section
3(a)(80). In our view, a funding portal acting as custodian for
securities through a book entry system likely would be engaged in
handling or managing securities in violation of the statutory
prohibition in Section 3(a)(80).\629\
---------------------------------------------------------------------------

    \628\ See Crowdfunding Offerings Ltd. Letter 4; RocketHub Letter
1.
    \629\ Cf. Exchange Act Section 3(a)(23) [15 U.S.C. 78c(a)(23)]
(defining ``clearing agency'' as an intermediary who ``acts as a
custodian of securities in connection with a system for the central
handling of securities'' where the securities may be administered
``by bookkeeping entry without physical delivery of securities
certificates'').
---------------------------------------------------------------------------

[ssquf] Directing Transmission of Funds
    The proposed rules would provide that a funding portal could
fulfill its obligations with respect to the maintenance and
transmission of funds and securities, as set forth in proposed Rule
303, without violating the prohibition in Exchange Act Section
3(a)(80)(D).\630\ Thus, subject to other applicable rules, a funding
portal could 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).\631\ It also could direct a qualified
third party to release the proceeds of an offering to the issuer upon
completion of the offering or to return investor proceeds when an
investment commitment or offering is cancelled.\632\ We believe that
these discrete activities would facilitate crowdfunding transactions
without exceeding the scope of permissible activities, and without
unduly raising investor protection concerns.
---------------------------------------------------------------------------

    \630\ We believe the statutory requirements, and the rules we
are proposing to implement such requirements, provide clear
requirements for the protection of investor funds. In addition, the
requirement for the funding portals to maintain a fidelity bond
under proposed Rule 400(f) provides an additional protection with
respect to investor funds. See discussion in Section II.D.1 above.
See also proposed Rule 400(f) of Regulation Crowdfunding.
    \631\ See proposed Rule 402(b)(12) of Regulation Crowdfunding.
    \632\ See proposed Rule 402(b)(13) of Regulation Crowdfunding.
---------------------------------------------------------------------------

Request for Comment
    216. Does the proposed safe harbor appropriately define the actions
in which a funding portal may engage? Are there other activities that
should be addressed in the safe harbor? Are there activities included
in the proposed safe harbor that should be modified or eliminated? If
so, which activities and why?
    217. Are there any additional conditions that should apply to the
activities covered under the proposed safe harbor? If so, which
conditions, and why?
    218. Exchange Act Section 3(a)(80) provides that a funding portal
may not offer investment advice, and the proposed rules would provide a
conditional safe harbor for certain activities that funding portals may
engage in without violating the statutory prohibition on providing
investment advice. Is the safe harbor sufficient, or should we provide
additional guidance regarding the status of funding portals under the
Investment Advisers Act of 1940? Why or why not? Please discuss.
    219. Should the proposed safe harbor permit a funding portal to
limit the offerings on its platform? If so, are the criteria set forth
in the proposed rules appropriate? Why or why not? If not, what other
criteria or conditions would be appropriate?
    220. Are there any additional criteria that a funding portal should
be permitted to use when highlighting issuers and offerings on its
platform? If so, which ones and why? Should a funding portal be
permitted to highlight issuers and offerings based on criteria that
specifically relate to the activities of users on its site, such as
offerings that have been viewed by the largest number of visitors to
the platform over a particular time period? Why or why not?
    221. As a condition of the proposed safe harbor, should we require
funding portals to clearly display, on their platforms, the objective
criteria they use in limiting or highlighting offerings? Why or why
not?
    222. Under the proposed safe harbor, should we permit a funding
portal to post news, such as market news and news about a particular
issuer or industry, on its platform? Why or why not? If so, what
restrictions, conditions or other safeguards should apply, in
particular so that a funding portal would not be providing
impermissible investment advice? For example, are there certain types
of news or news feeds that should or should not be permitted, or should
we restrict a funding portal from posting only positive news coverage?
Should a funding portal be able to freely select the news stories it
posts, or should there be some objective criteria? Please explain.
    223. Are the proposed limitations on a funding portal advertising
its past offerings appropriate? Should we consider other advertising
limitations? Should the proposed advertising rules be modified in any
other way?
    224. Should we permit a funding portal to receive transaction-based
compensation for referring potential investors to a registered broker-
dealer? Why or why not? If so, should we

impose disclosure requirements or other measures to mitigate potential
conflicts? What should those requirements be and why? Should we permit
a funding portal to receive transaction-based compensation from an
affiliate? Why or why not?
    225. In addition to transaction-based compensation, are there other
types of compensation that we should prohibit funding portals from
paying to persons who are not registered broker-dealers? Should we
permit, as proposed, funding portals to enter into compensation
arrangements with registered broker-dealers or with any other regulated
entities? Why or why not? If so, what types of regulated entities
should be included? Please explain.
    226. Are there circumstances in which a funding portal could
provide transfer agent services without handling investor funds or
securities? If so, please describe.
    227. Should the proposed safe harbor permit a funding portal to
engage in any other activities in connection with the required
communication channels? Why or why not? If so, which activities and
why?
    228. Should the proposed safe harbor include other types of
activities that potentially could be construed as investment advice? If
so, which ones and why? Would an exemption from the Investment Advisers
Act of 1940 or other regulatory relief be appropriate in connection
with such activities? Are there types of advice an issuer may seek from
a funding portal, that would not be considered advice about the
structure or content of the issuer's offering? Please explain.
    229. Should the agreed-upon terms of an arrangement with a funding
portal be required to be documented in a written agreement with the
issuer? Are there certain terms that should be included?
    230. Should the proposed safe harbor permit funding portals to
provide a mechanism by which investors can rate an issuer or an
offering? If so, what safeguards, if any, should be required? \633\
Should the Commission, as a condition of the safe harbor, limit the
ability to rate to persons who have opened an account with the funding
portal? \634\
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    \633\ An intermediary that is a registered broker could provide
a mechanism for investors to rate an issuer or offering. But see
Social Media Web sites and the Use of Personal Devices for Business
Communications, FINRA Regulatory Notice 11-39 (Aug. 2011), available
at http://www.finra.org/web/groups/industry/@ip/<EMAIL_ADDRESS>(noting that a firm is responsible
under NASD Rule 2210 for third-party site content if the firm has
adopted or has become entangled with the site's content).
    \634\ Any person who promotes an issuer's offering for
compensation, whether past or prospective, or who is a founder or an
employee of an issuer that engages in promotional activities on
behalf of the issuer on the intermediary's platform, must clearly
disclose in all communications on the intermediary's platform,
respectively, the receipt of compensation and that he or she is
engaging in promotional activities on behalf of the issuer. See
proposed Rule 302(c) of Regulation Crowdfunding.
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4. Compliance
a. Policies and Procedures
    The proposed rules would require a funding portal to implement
written policies and procedures reasonably designed to achieve
compliance with the federal securities laws and regulations thereunder,
relating to its business as a funding portal.\635\ Under the proposed
rules, a funding portal would have discretion to establish, implement,
maintain and enforce those policies and procedures based on its
relevant facts and circumstances. We believe that it is important to
provide this flexibility in order to accommodate the various business
models funding portals may have while at the same time accomplishing
the Commission's investor protection goals. We also recognize that
FINRA or any other registered national securities association may have
separate requirements in this regard. Inherent in the notion of
reasonably designed compliance policies and procedures is that a
funding portal would promptly update its policies and procedures to
reflect changes in applicable rules and regulations, as well as its
business practices and the changing marketplace.
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    \635\ See proposed Rule 403(a) of Regulation Crowdfunding. As a
condition to exempting funding portals from the requirement to
register as a broker or a dealer under Exchange Act Section 15(a)(1)
(15 U.S.C. 78o(a)(1)), Exchange Act Section 3(h)(1)(C) provides that
registered funding portals must comply with such other requirements
as the Commission determines appropriate.
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Request for Comment
    231. Should we specify requirements for funding portals' compliance
policies and procedures? Why or why not? If so, what requirements and
why?
    232. Should we require funding portals to update their policies and
procedures to reflect changes in applicable rules and regulations
within a specified time period after the change occurs? If so, what
time period would be appropriate (e.g., 30 days, 60 days, six months)?
b. Anti-Money Laundering
    The proposed rules require that funding portals comply with certain
AML provisions,\636\ as set forth in Chapter X of Title 31 of the Code
of Federal Regulations.\637\ We preliminarily believe that funding
portals could play a critical role in detecting, preventing, and
reporting money laundering and other illicit financing, such as market
manipulation and fraud. As discussed in more detail below, we believe
it is important for funding portals to comply with BSA requirements,
because they would be engaged in a similar business as a category of
registered broker-dealers--introducing brokers--which have BSA
obligations.\638\ Specifically, while a funding portal is prohibited by
statute from handling, managing or possessing customer funds or
securities, which means it cannot accept cash from customers or
maintain custody of customer securities--and an introducing broker
typically does not accept cash or maintain custody of customer
securities--we believe that a funding portal, like an introducing
broker, is in the best position to ``know its customers,'' and to
identify and monitor for suspicious and potentially illicit activity at
the individual customer level, as compared to the qualified third
party, which may not see such activity given its less direct contact
with individual customers.\639\ We also believe it is important for
funding portals to comply with BSA requirements because they would be
in engaged in the same business of effecting securities transactions
for the accounts of others as registered broker-dealers, which have BSA
obligations. To require otherwise could inadvertently steer potential
money launders to funding portals.
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    \636\ See proposed Rule 403(b) of Regulation Crowdfunding. See
also proposed Rule 401(b) and discussion in Section II.D.2 above,
which discusses how funding portals fall within the scope of Chapter
X of Title 31 of the Code of Federal Regulations.
    \637\ See note 562.
    \638\ See 31 C.F.R 1023.100 et seq.
    \639\ See, e.g., NASD (n/k/a FINRA), NASD Provides Guidance To
Member Firms Concerning Anti-Money Laundering Compliance Programs
Required by Federal Law, Special Notice to Members 02-21 (Apr.
2002), available at https://www.finra.org/Industry/Regulation/Notices/2002/p003703 (stating that ``introducing brokers generally
are in the best position to `know the customer,' and thus to
identify potential money laundering concerns at the account opening
stage, including verification of the identity of the customer and
deciding whether to open an account for a customer.'').
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    Moreover, we expect that funding portals would often facilitate
offerings of microcap or low-priced securities, which may be more
susceptible to fraud and market manipulation.\640\ We believe

that imposing the monitoring and reporting requirements of the BSA on
funding portals would establish a valuable oversight, prevention and
detection mechanism. The Financial Action Task Force (``FATF''), an
inter-governmental body whose objective is to set standards and promote
effective implementation of legal, regulatory and operational measures
for combating money laundering, terrorist financing and other related
threats to the integrity of the international financial system, has
also identified low-priced and privately-placed securities as potential
vehicles for laundering money.\641\ As explained by FATF, these
securities pose a money laundering risk because they are often used to
generate illicit assets through market manipulation, insider trading
and fraud.\642\ In addition, unlawfully acquired assets can be used to
purchase these securities in order to resell them and create the
appearance of legitimately sourced funds.\643\ We believe that
securities offered and sold in reliance on Section 4(a)(6) could be
susceptible to money laundering because they are low priced, are placed
in an offering that is exempt from registration and not subject to the
filing review process of a registered offering. In addition, we expect
that many of the issuers relying on the exemption in Section 4(a)(6)
may be shell companies, which have been associated with a high risk of
money laundering.\644\ We believe that Congress was aware of these
risks, which is why, in part, it chose to require that securities
offered and sold in reliance on Section 4(a)(6) be sold through a
regulated intermediary.\645\
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    \640\ A number of the Commission's enforcement actions in the
BSA area have involved broker-dealers failing to report suspicious
activity involving microcap securities fraud. See, e.g., In the
Matter of Gilford Securities, Incorporated, Ralph Worthington, IV,
David S. Kaplan, and Richard W. Granahan, Release No. 34-65450
(Sept. 30, 2011); In the Matter of Elizabeth Pagliarini, Release No.
34-63964 (Feb. 24, 2011).
    \641\ See Financial Action Task Force (``FATF''), Money
Laundering and Terrorist Financing in the Securities Sector 20-21
(Oct. 2009) (``FATF Typology'') (discussing the money laundering
risks associated with low priced securities, private issuers and
shell companies).
    \642\ Id. As explained in the FATF Typology, illicit actors
``can either use existing shares that are already publicly traded or
start a shell company for the express purpose of engaging in those
illicit activities. In addition, criminal organizations also have
been known to use illicit assets generated outside the securities
industry to engage in market manipulation and fraud.'' Id.
    \643\ Id. ``Moreover, criminal organizations can also initially
invest in a private company that they can then use as a front
company for commingling illicit and legitimate assets. They can then
take this company public through an offering in the public
securities markets, thus creating what appear to be legitimate
offering revenues. Alternatively, criminal organizations can acquire
a publicly traded company and use it to launder illicit assets.''
Id. The FATF Typology further highlighted the risk of shell
companies that, for example, ``can be established to accept payments
from criminal organizations for non-existent services. These
payments, which appear legitimate, can be deposited into depository
or brokerage accounts and either wire transferred out of a
jurisdiction or used to purchase securities products that are easily
transferable or redeemable.'' Id. at 39.
    \644\ See, e.g., Joint Release, Guidance on Obtaining and
Retaining Beneficial Ownership Information, FIN-2010-G001 (Mar. 5,
2010) (noting that criminals, money launderers, tax evaders and
terrorists may exploit the privacy and confidentiality surrounding
some business entities, including shell companies and other vehicles
designed to conceal the nature and purpose of illicit transactions
and the identities of the persons associated with them); Financial
Crimes Enforcement Network, The Role of Domestic Shell Companies in
Financial Crime and Money Laundering: Limited Liability Companies
(Nov. 2006), available at http://www.fincen.gov/news_room/rp/files/LLCAssessment_FINAL.pdf.
    \645\ 158 Cong. Rec. S1781 (daily ed. Mar. 19, 2012) (statement
of Sen. Carl Levin) (``Senior citizens, state securities regulators,
and others worry that this will give rise to money laundering and
fraud risks.'')
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    The BSA \646\ and its implementing regulations establish the basic
framework for AML obligations imposed on financial institutions.\647\
The BSA is intended to facilitate the prevention, detection and
prosecution of money laundering, terrorist financing and other
financial crimes. Below, we clarify which aspects of these regulations
we anticipate would be relevant to funding portals, given the limited
scope of their activities.\648\
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    \646\ See BSA, note 562.
    \647\ See 31 CFR Chapter X.
    \648\ We also propose to impose on funding portals obligations
that are analogous to those imposed on broker-dealers pursuant to
Exchange Act Rule 17a-8 (17 CFR 240.17a-8), which requires broker-
dealers to comply with the reporting, recordkeeping and record
retention requirements of the BSA's implementing regulations, as
found in Chapter X of Title 31 of the CFR. These proposed
obligations are discussed in Section II.D.5 below, which also
addresses other recordkeeping requirements we are proposing for
funding portals. See proposed Rule 404(f) of Regulation
Crowdfunding.
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    Among other things, the BSA and its implementing regulations
require a ``broker or dealer in securities'' (sometimes referred to in
the regulations as a ``broker-dealer'') to: (1) Establish and maintain
an effective AML program (``AML Program Requirement''); \649\ (2)
establish and maintain a Customer Identification Program (``CIP
Requirement''); \650\ (3) monitor for and file reports of suspicious
activity (``the SAR Requirement''); \651\ and (4) comply with requests
for information from the Financial Crimes Enforcement Network
(``FinCEN'') (the ``Section 314(a) Requirements'').\652\ For purposes
of the BSA obligations, a ``broker or dealer in securities'' is defined
as a ``broker or dealer in securities, registered or required to be
registered with the Securities and Exchange Commission under the
Securities Exchange Act of 1934, except persons who register pursuant
to [S]ection 15(b)(11) of the Securities Exchange Act of 1934.'' \653\
As discussed above in Section II.D.2.a, for purposes of Chapter X of
Title 31 of the Code of Federal Regulations, a funding portal is
``required to be registered'' as a broker or dealer with the Commission
under the Exchange Act.
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    \649\ See 31 U.S.C. 5318(h). See also 31 CFR 1023.210; FINRA
Rule 3310.
    \650\ 31 CFR 1023.220.
    \651\ 31 CFR 1023.320. See also FINRA Rule 3310.
    \652\ 31 CFR 1010.520.
    \653\ 31 CFR 1010.100(h). As noted above, certain FinCEN
regulations apply to a ``broker-dealer,'' which is defined as a
``person registered or required to be registered as a broker or
dealer with the Commission under the Securities Exchange Act of 1934
(15 U.S.C. 77a et seq.), except persons who register pursuant to 15
U.S.C. 78o(b)(11).'' 31 CFR 1023.100(b). Such broker-dealers also
would meet the definition of ``broker or dealers in securities''
above.
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    Finally, we note that while other parties involved in transactions
conducted pursuant to Section 4(a)(6) through a funding portal (such as
a bank acting as a qualified third party to hold investor funds) have
their own BSA obligations, again, as noted above, we believe that the
funding portal, like an introducing broker, is in the best position to
``know its customers,'' and to identify and monitor for suspicious and
potentially illicit activity at the individual customer level.
    While a funding portal would be required to comply with all of the
provisions in the BSA and its implementing regulations that are
applicable to broker-dealers, the Commission anticipates that, as a
practical matter, a funding portal's BSA obligations would typically be
limited, based on the relatively limited securities activities in which
funding portals would be permitted to engage. For a typical transaction
involving an individual U.S. investor, funding portal activities, for
example, would not involve the maintenance of ``correspondent
accounts'' with foreign financial institutions or the offer of
``private banking accounts'' that would trigger the corresponding due
diligence obligations under the BSA.\654\ While it is possible that a
funding portal's activities could trigger other BSA obligations, we
expect that the nature of a funding portal's business would typically
implicate the AML Program Requirement, the CIP Requirement, the SAR
Requirement and the information sharing provisions of the Section
314(a) Requirements. We, therefore, highlight these obligations below.
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    \654\ See 31 CFR 1010.610 and 1010.620.
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    Brokers and funding portals, which as noted above meet the
definition of

``broker,'' \655\ can satisfy the AML Program Requirement by
implementing and maintaining an AML program that complies with SRO
rules.\656\ Generally, under existing rules applicable to brokers, an
AML program must be in writing and include, at a minimum: (1) Policies,
procedures and internal controls reasonably designed to achieve
compliance with the BSA and its implementing rules; (2) policies and
procedures that can be reasonably expected to detect and cause the
reporting of transactions under 31 U.S.C. 5318(g) and the implementing
regulations thereunder; (3) the designation of an AML compliance
officer, including notification to the SROs; (4) ongoing AML employee
training; and (5) an independent test of the firm's AML program,
annually for most firms.\657\
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    \655\ See discussion in this section above and in Section
II.D.2.a above.
    \656\ 31 CFR 1023.210 (providing that a broker-dealer is deemed
to have satisfied the requirement to establish an AML program if it
(1) implements and maintains an anti-money laundering program that
complies with the rules, regulations or requirements of its SRO
governing such programs; and (2) the rules, regulations or
requirements of the SRO have been approved, if required, by the
SEC).
    \657\ See, e.g., FINRA Rule 3310. FINRA's existing AML program
rule applies to member broker-dealers. FINRA or any other national
registered securities association may adopt an AML Program
Requirement specific to funding portals. Consistent with the BSA,
any such rule must require that the AML program include, at a
minimum: the development of internal policies, procedures and
controls; designation of a compliance officer, an ongoing employee
training program and an independent audit function to test the
program. See 31 U.S.C. 5318(h).
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    FinCEN's BSA regulations also require brokers, and thus would
require funding portals, to establish a written CIP that, at a minimum,
includes procedures for: (1) Obtaining customer identifying information
from each customer prior to account opening; (2) verifying the identity
of each customer,\658\ to the extent reasonable and practicable, within
a reasonable time before or after account opening; (3) making and
maintaining a record of obtained information relating to identity
verification; (4) determining, within a reasonable time after account
opening or earlier, whether a customer appears on any list of known or
suspected terrorist organizations designated by Treasury; \659\ and (5)
providing each customer with adequate notice, prior to opening an
account, that information is being requested to verify the customer's
identity.\660\
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    \658\ For purposes of the CIP requirements, a customer is
generally defined as ``a person that opens a new account.'' 31 CFR
1023.100(d).
    \659\ To date, there are no designated government lists to
verify specifically for CIP purposes.
    \660\ 31 CFR 1023.220.
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    The CIP rule provides that, under certain defined circumstances,
brokers, which would include funding portals, may rely on the
performance of another financial institution to fulfill some or all of
the requirements of the broker's CIP.\661\ In order for brokers (which
would include funding portals) to rely on the other financial
institution, for example, the reliance must be reasonable.\662\ The
other financial institution also must be subject to an AML compliance
program rule and be regulated by a federal functional regulator.\663\
Additionally, the broker and the other financial institution must enter
into a contract, and the other financial institution must certify
annually to the broker that it has implemented an AML program and that
it will perform the specified requirements of the broker's CIP.\664\
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    \661\ 31 CFR 1023.220(a)(6).
    \662\ 31 CFR 1023.220(a)(6)(i).
    \663\ 31 CFR 1023.220(a)(6)(ii).
    \664\ 31 CFR 1023.220(a)(6)(iii).
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    Under the SAR Requirement, brokers and funding portals, which as
noted above meet the definition of ``broker,'' \665\ must file a
suspicious activity report if: (1) A transaction is conducted or
attempted to be conducted by, at, or through a broker; (2) the
transaction involves or aggregates funds or other assets of at least
$5,000; and (3) the broker knows, suspects or has reason to suspect
that the transaction: (i) Involves funds or is intended to disguise
funds derived from illegal activity, (ii) is designed to evade
requirements of the BSA, (iii) has no business or apparent lawful
purpose, and the broker knows of no reasonable explanation for the
transaction after examining the available facts, or (iv) involves the
use of the broker-dealer to facilitate criminal activity.\666\ The
suspicious activity must be reported on a form prescribed by FinCEN,
which includes instructions.\667\ Brokers, which would include funding
portals, must maintain a copy of any suspicious activity report filed,
as well as supporting documentation for a period of five years from the
date of filing the report.\668\ The report (and any information that
would reveal its existence) must be kept confidential.\669\
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    \665\ See discussion in this section above and in Section
II.D.2.a above.
    \666\ 31 CFR 1023.320(a).
    \667\ 31 CFR 1023.320(b).
    \668\ 31 CFR 1023.320(d).
    \669\ 31 CFR 1023.320(e).
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    Under the Section 314(a) Requirements, brokers, which would include
funding portals, also must respond to mandatory requests for
information made by FinCEN on behalf of federal law enforcement
agencies.\670\ Law enforcement agencies with criminal investigative
authority are permitted to request that FinCEN solicit, on the agency's
behalf, certain information from a financial institution, including
brokers; FinCEN also may make similar requests on its own behalf or on
behalf of certain components of Treasury.\671\ Upon receiving such a
request, a broker (which would include a funding portal) is required to
search its records to determine whether it has accounts for, or has
engaged in transactions with, any specified individual, entity or
organization.\672\ If the broker identifies an account or transaction
identified with any individual, entity or organization named in the
request, it must report certain relevant information to FinCEN.\673\
Brokers also must designate a contact person (typically the firm's AML
compliance officer) to receive the requests and must maintain the
confidentiality of any request and any responsive reports to
FinCEN.\674\
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    \670\ 31 CFR 1010.520.
    \671\ 31 CFR 1010.520(b).
    \672\ 31 CFR 1010.520(b)(3).
    \673\ 31 CFR 1010.520(b)(3)(ii).
    \674\ 31 CFR 1010.520(b)(3)(iii) and (iv).
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Request for Comment
    233. We identified the AML Program, CIP, SAR and 314(a)
Requirements as the most significant requirements that would most
typically apply to funding portals, in light of the nature of their
business. Under the proposed rules, however, funding portals would be
subject to all BSA requirements applicable to registered brokers. Are
there any other requirements under the BSA and its implementing
regulations that should be clarified, with regard to application in the
crowdfunding context, or excluded from application to funding portals?
If so, which ones?
    234. Is express compliance with the BSA by funding portals, as
proposed, necessary to protect against the risk of money laundering,
given that other regulated entities involved in transactions conducted
pursuant to Section 4(a)(6), such as the qualified third party we
propose to require be involved in the transmission of proceeds, are
subject to the BSA? Please explain.
    235. Is there another approach, other than the one we have
proposed, to help protect against the risk of money laundering, that
does not rely on BSA compliance? If so, please explain.
c. Privacy
    Section 4A(a)(9) requires intermediaries to take such steps to

protect the privacy of information collected from investors as the
Commission shall, by rule, determine appropriate. One commenter
suggested that the responsibility for storing confidential information
should rest with the intermediary and that data should not be shared
with, or stored by, any other organization.\675\ The commenter
recommended requiring intermediaries to store information in a secure
fashion on a dedicated, secure server. The commenter also urged the
Commission to identify, by rule or otherwise, an appropriate industry
standard for protection of this data, perhaps looking to standards
adopted in the legal and banking industries as examples. Another
commenter suggested that a procedure should be established to allow the
public to control the delivery and the amount of emails soliciting
funds for crowdfunding projects.\676\
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    \675\ See RocketHub Letter 1.
    \676\ See Bach Letter.
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    The proposed rules would implement the requirements of Section
4A(a)(9) by subjecting funding portals, as brokers, to the same privacy
rules applicable to brokers.\677\ Proposed Rule 403(c), therefore,
would require funding portals to comply with Regulation S-P (Privacy of
Consumer Financial Information and Safeguarding Personal
Information),\678\ Regulation S-AM (Limitations on Affiliate Marketing)
\679\ and Regulation S-ID (Identity Theft Red Flags) \680\
(collectively, the ``Privacy Rules'').\681\
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    \677\ See proposed Rule 403(c) of Regulation Crowdfunding.
    \678\ See Privacy of Consumer Financial Information (Regulation
S-P), Release No. 34-42974 (June 22, 2000) [65 FR 40334 (June 29,
2000)].
    \679\ See Regulation S-AM: Limitations on Affiliate Marketing,
Release No. 34-60423 (Aug. 4, 2011) [74 FR 40398 (Aug. 11, 2009)].
    \680\ See Identity Theft Red Flags Rules, Release No. 34-69359
(Apr. 10, 2013) [78 FR 23637 (Apr. 19, 2013)] (``Identity Theft Red
Flags Rules'') (adopted jointly with the Commodity Futures Trading
Commission).
    \681\ See 17 CFR part 248.
---------------------------------------------------------------------------

    Regulation S-P governs the treatment of nonpublic personal
information by brokers, among others.\682\ It generally requires a
broker to provide notice to investors about its privacy policies and
practices; describes the conditions under which a broker may disclose
nonpublic personal information about investors to nonaffiliated third
parties; and provides a method for investors to prevent a broker from
disclosing that information to most nonaffiliated third parties by
``opting out'' of that disclosure, subject to certain exceptions.
Regulation S-AM allows a consumer, in certain limited situations, to
block affiliates of covered persons (i.e., brokers, dealers, investment
companies and both investment advisers and transfer agents registered
with the Commission) from soliciting the consumer based on eligibility
information (i.e., certain financial information, such as information
regarding the consumer's transactions or experiences with the covered
person) received from the covered person.\683\ Regulation S-ID
generally requires brokers to develop and implement a written identity
theft prevention program that is designed to detect, prevent and
mitigate identity theft in connection with certain existing accounts or
the opening of new accounts.\684\
---------------------------------------------------------------------------

    \682\ See 17 CFR part 248 subpart A.
    \683\ 17 CFR part 248 subpart B.
    \684\ See Identity Theft Red Flags Rules, note 680.
---------------------------------------------------------------------------

    While we recognize that crowdfunding activities, like any Internet-
based communications, could raise novel issues not already addressed in
existing regulations and guidance, we believe that it is unnecessary to
repeat identical, existing requirements, in a separate rule proposal
only for funding portals, or to propose rules that would apply not only
to crowdfunding, but to a broader set of technology-based activity. We
believe that the requirements of the Privacy Rules would impose
relatively minimal costs on funding portals,\685\ but provide key
investor protections, and that persons who deal with funding portals,
as opposed to brokers, should not have to lose the benefit of those
protections.
---------------------------------------------------------------------------

    \685\ See discussion in Section IV.C.2.l below.
---------------------------------------------------------------------------

    Although one commenter suggested the development of a procedure to
allow the public to control the delivery and the amount of emails that
solicit funds for crowdfunding projects,\686\ we note that the
definition of funding portal in Exchange Act Section 3(a)(80) and the
proposed rules \687\ prohibit a funding portal from soliciting
investors for specific crowdfunding projects. Moreover, Section
4A(b)(2) and the proposed rules \688\ prohibit issuers from advertising
the terms of an offering, except for directing potential investors to
the intermediary.\689\ The proposed rules \690\ also incorporate
prohibitions on the transmission of personally identifiable information
in connection with intermediaries' advertisements, referrals and
payments to third parties.\691\ We believe that these provisions, in
combination with the Privacy Rules, address the commenter's concern.
Although one commenter urged us not to permit intermediaries to store
information with third parties,\692\ we note that our recordkeeping
rules applicable to brokers permit the use of third-party service
providers for storing records.\693\ We are proposing a similar
requirement for funding portals, as discussed in Section II.D.5 below.
A different requirement for funding portals would not be consistent
with the requirements for brokers and may not be economically feasible
for some intermediaries.
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    \686\ See Bach Letter.
    \687\ See proposed Rule 300(c) of Regulation Crowdfunding.
    \688\ See proposed Rule 204 of Regulation Crowdfunding.
    \689\ See discussion in Section II.B.4 above.
    \690\ See proposed Rules 305 and 402(b)(6) of Regulation
Crowdfunding.
    \691\ See discussion in Sections II.C.7 and II.D.3 above.
    \692\ See RocketHub Letter 1.
    \693\ See 17 CFR 240.17a-4(i).
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Request for Comment
    236. Is it appropriate to implement the requirements of Section
4A(a)(9) by applying the requirements of the Privacy Rules to funding
portals? Why or why not? Is the nature of a funding portal's activities
such that a different requirement to protect privacy would be more
appropriate? Please explain.
    237. Are there specific considerations with respect to privacy and
crowdfunding that are not already adequately addressed in the Privacy
Rules? If so, what are they and how should we address them?
    238. Should we provide additional guidance concerning the
application of the Privacy Rules to funding portals? If so, which parts
and why?
    239. Under the proposed rules, funding portals would be required to
collect information about their customers in order to comply with anti-
money laundering provisions, as brokers are required to do, as
discussed above in relation to proposed Rule 402(b). At the same time,
intermediaries would be required to take steps to protect the privacy
of information collected from customers, as set forth in Section
4A(a)(9). Do our proposed rules achieve the appropriate balance between
these two objectives? What other approaches would achieve an
appropriate balance? Please explain.
d. Inspections and Examinations
    Congress specified that funding portals must remain subject to our
examination authority.\694\ Under the

proposed rules, a funding portal would be required to permit the
examination and inspection of all of its business and business
operations that relate to its activities as a funding portal, such as
its premises, systems, platforms and records, by our representatives
and by representatives of the registered national securities
association of which it is a member.
---------------------------------------------------------------------------

    \694\ As a condition to exempting funding portals from the
requirement to register as broker-dealers under Exchange Act Section
15(a)(1) (15 U.S.C. 78c(a)(1)), Exchange Act Section 3(h)(1)(A)
requires that registered funding portals remain subject to, among
other things, our examination authority. See proposed Rule 403(d) of
Regulation Crowdfunding.
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Request for Comment
    240. Are there any additional provisions that should be
incorporated in the proposed rules regarding inspection and examination
of funding portals? Please explain.
5. Records To Be Created and Maintained by Funding Portals
    The proposed rules would require a funding portal to create and
maintain certain records.\695\ We believe that it is important for
funding portals to be subject to a recordkeeping requirement in order
to create a meaningful audit trail of the crowdfunding transactions and
communications. Without these records, the Commission and any
registered national securities association would have difficulty
examining a funding portal for compliance with the requirements of
Regulation Crowdfunding, the BSA \696\ and the federal securities laws.
---------------------------------------------------------------------------

    \695\ See proposed Rule 404 of Regulation Crowdfunding. Exchange
Act Section 3(h)(1)(C) permits us to impose, as part of our
authority to exempt funding portals from broker registration, ``such
other requirements under [the Exchange Act] as the Commission
determines appropriate.''
    \696\ In the release adopting Exchange Act Rule 17a-8 (17 CFR
240.17a-8), which requires broker-dealers to comply with the
reporting, recordkeeping and record retention rules adopted under
the BSA, the Commission noted that the ``most effective means of
enforcing compliance with the reporting and recordkeeping
requirements is through on-site examinations of broker-dealer firms
conducted by the Commission and the self-regulatory organizations. .
. .'' See Recordkeeping by Brokers and Dealers, Release No. 34-18321
(Dec. 10, 1981) [46 FR 61454 (Dec. 17, 1981)].
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    The proposed rules would require a funding portal to make and
preserve certain records for five years, with the records retained in a
readily accessible place for at least the first two years.\697\ The
records would include those regarding investors who purchase or attempt
to purchase securities through the funding portal, such as information
relating to educational materials provided to investors, account
opening and transactions (including notices of investment commitments
and reconfirmations), as required under Subpart C. They also would
include records relating to issuers that offer and sell, or attempt to
offer and sell, securities through the funding portal and to persons
having control with respect to those issuers. This proposed requirement
would better enable regulators to gather information about the
activities in which the funding portal has been engaged, as well as
about the issuers and investors that use the funding portal for their
crowdfunding transactions.
---------------------------------------------------------------------------

    \697\ See proposed Rules 404(a)(1) through (9) of Regulation
Crowdfunding.
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    The proposed rules also would require a funding portal to maintain
records of all communications that occur on or through its
platform.\698\ Some commenters expressed concerns about the ability of
funding portals to track and store communications that take place
outside of their platforms.\699\ We believe that funding portals should
be responsible to keep records of only the communications that occur on
or through their platforms, including in the communication channels
they are required to provide. We do not believe they should be
responsible for keeping records of communications that take place
exclusively outside of their platforms, such as on third-party social
media sites or elsewhere on the Internet. The proposed rules also would
require a funding portal to keep all records related to persons that
use communication services provided by a funding portal to promote an
issuer's securities or to communicate with potential investors.\700\
These proposed requirements would help regulators to examine the
funding portal for any potential connection with promoters, including
associated persons that act as promoters, whose promotion or
communication activities could cause the funding portal to lose its
exemption from broker-dealer registration.
---------------------------------------------------------------------------

    \698\ See id.
    \699\ See CFIRA Letter 13.
    \700\ See proposed Rule 404(a)(3) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules would require a funding portal to maintain
records demonstrating its compliance with requirements of Subparts C
(intermediary obligations) and D (funding portal requirements).\701\
This proposed requirement would require a funding portal to keep all
the records it has created in the course of its business in order to
comply with Regulation Crowdfunding. This requirement alone would not,
however, require the creation of any records or proscribe the format or
manner of any records. This proposed requirement would not only assist
in regulators' compliance examinations, but also should assist funding
portals in complying with the rules pertaining to their crowdfunding
activities.
---------------------------------------------------------------------------

    \701\ See proposed Rule 404(a)(5) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules would require a funding portal to maintain all
notices provided by the funding portal to issuers and investors
generally through the funding portal's platform or otherwise.\702\ This
proposed requirement would assist regulatory examination of the funding
portal for any communications to issuers or investors that could
indicate violations of particular provisions of proposed Regulation
Crowdfunding.
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    \702\ These would include, but not be limited to: (1) Notices
addressing hours of funding portal operations (if any); (2) funding
portal malfunctions; (3) changes to funding portal procedures; (4)
maintenance of hardware and software; (5) instructions pertaining to
access to the funding portal; and (6) denials of, or limitations on,
access to the funding portal. See proposed Rule 404(a)(6) of
Regulation Crowdfunding.
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    The proposed rules would require a funding portal to maintain
records of all written agreements (or copies thereof) entered into by a
funding portal, relating to its business as such.\703\ This proposed
requirement is intended to capture details of any funding portal
arrangements and the funding portal's compliance with applicable
requirements.
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    \703\ See proposed Rule 404(a)(7) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules would require a funding portal to create and
maintain daily, monthly and quarterly summaries of transactions
effected through it.\704\ The purpose of this proposed requirement is
to help ensure that an historical and ongoing record exists of the
transactions that have been conducted through the funding portal,
especially given the high volume of transactions we expect to occur on
funding portals' platforms.
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    \704\ These would include: (1) Issuers for which the target
offering amount has been reached and funds distributed; and (2)
transaction volume, expressed in number of transactions, number of
securities involved in a transaction and total amounts raised by and
distributed to issuers, as well as total dollar amounts raised
across all issuers, expressed in U.S. dollars. See proposed Rule
404(a)(8) of Regulation Crowdfunding.
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    The proposed rules would require a funding portal to make and keep
a log of each offering, reflecting the progress of each issuer in
meeting the target offering amount.\705\ This proposed requirement is
intended to support, or otherwise be compared against, information
included on an issuer's filing of Form C-U.\706\
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    \705\ See proposed Rule 404(a)(9) of Regulation Crowdfunding.
    \706\ See discussion in Section II.B.1 above. See also Section
II.C.5 above for a discussion of proposed Rule 303(a) of Regulation
Crowdfunding.
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    The proposed rules also would require that a funding portal make
and

preserve its organizational documents, during its operation as a
funding portal and of any successor funding portal.\707\ This proposed
requirement is intended to ensure that these key documents are
maintained for identification and verification purposes.
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    \707\ These would include, but not be limited to: (1)
Partnership agreements; (2) articles of incorporation or charter;
(3) minute books; and (4) stock certificate books (or other similar
type documents). See proposed Rule 404(b) of Regulation
Crowdfunding.
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    These recordkeeping requirements are similar to, but in many ways
less extensive than, those for registered broker-dealers under Exchange
Act Rule 17a-4(a).\708\ Because funding portals would be engaged in a
more limited range of activities than brokers and a relatively high
proportion of funding portals would be new market entrants that may not
have formal recordkeeping practices in place, the proposed requirements
are relatively streamlined, compared to those for brokers. The proposed
funding portal recordkeeping requirements would require only those
documents that relate to the funding portal's business and would
require the portal to retain them for five years, but in an easily
accessible place for the first two years, for purposes of facilitating
and ensuring timeliness of inspections. A funding portal would be
required to produce, reproduce and maintain the required records in the
original, non-alterable format in which they were created or as
permitted under Exchange Act Rule 17a-4(f).\709\ This flexibility
should be appropriate for funding portals, because we believe that many
of their documents would already be in electronic form. Thus, funding
portals should not incur a significant additional burden for
maintenance of those records. This flexibility also is consistent with
the broker recordkeeping requirements under Exchange Act Rule 17a-4(f).
---------------------------------------------------------------------------

    \708\ Exchange Act Rule 17a-4 provides more extensive details of
the types of records required, and it also specifies different time
periods for retention, namely three to six years, depending on the
type of record. 17 CFR 240.17a-4(a).
    \709\ See proposed Rule 404(c) of Regulation Crowdfunding.
Permitted formats would include the use of electronic storage media
that otherwise permits the funding portal to comply with its
obligations under the proposed rules. 17 CFR 240.17a-4(f).
---------------------------------------------------------------------------

    We recognize that a funding portal may find it cost-effective or
otherwise appropriate to use the recordkeeping services of a third
party. The proposed rules would allow third parties to prepare or
maintain the required records on behalf of the funding portal, provided
that there is a written agreement in place between the funding portal
and the third party in which the third party states that the required
records are the property of the funding portal and would be surrendered
promptly on request by the Commission or the national securities
association of which the funding portal is a member.\710\ The funding
portal also would be required to file, with the registered national
securities association of which it is a member, this written
undertaking, signed by a duly authorized representative of the third
party. We believe that this provision would help to ensure that records
maintained or preserved by a third party would be readily available for
examination.
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    \710\ See proposed Rule 404(d) of Regulation Crowdfunding. An
agreement between a funding portal and a third party would not
relieve the funding portal from its responsibility to prepare and
maintain records, as required under proposed Rule 404 of Regulation
Crowdfunding. The written undertaking would be required to include
the following provision: ``With respect to any books and records
maintained or preserved on behalf of [name of funding portal], the
undersigned hereby acknowledges that the books and records are the
property of [name of funding portal], and hereby undertakes to
permit examination of such books and records at any time, or from
time to time, during business hours by representatives of the
Securities and Exchange Commission, the national securities
association of which the funding portal is a member, and to promptly
furnish to the Commission and national securities association of
which the funding portal is a member, a true, correct, complete and
current hard copy of any, all, or any part of, such books and
records.'' See proposed Rule 404(d) of Regulation Crowdfunding. This
provision is consistent with the recordkeeping provisions applicable
to brokers under Exchange Act Rules 17a-4(f) (17 CFR 17a-4(f)) and
17a-4(j) (17 CFR 240.17a-4(j)), but it is somewhat simplified to be
more appropriate for funding portals.
---------------------------------------------------------------------------

    Under the proposed rules, all records of a funding portal would be
subject at any time, or from time to time, to such reasonable periodic,
special or other examination by our representatives and representatives
of the registered national securities association of which the funding
portal is a member.\711\ We believe that this requirement would
facilitate our oversight of funding portals and crowdfunding
activities, as Congress intended.\712\
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    \711\ See proposed Rule 404(e) of Regulation Crowdfunding.
    \712\ See Exchange Act Section 3(h)(1)(A). See also 158 Cong.
Rec. S5474-03 (daily ed. July 26, 2012) (statement of Sen. Jeff
Merkley) (``I would encourage the SEC and the relevant national
securities association to engage in regular reviews and reports
regarding developments in the crowdfunding marketplace. . . . Should
problems arise, these authorities should act quickly, including use
of their full rulemaking and enforcement authorities. . . . For
[crowdfunding] to succeed long-term, it will require careful
oversight, especially during the early stages.'').
---------------------------------------------------------------------------

    Finally, the proposed rules would require that a funding portal
comply with the reporting, recordkeeping and record retention
requirements of Chapter X of Title 31 of the Code of Federal
Regulations, a requirement analogous to that imposed on broker-dealers
under Exchange Act Rule 17a-8.\713\ This requirement is intended to
ensure that funding portals create and maintain an accurate record of
their compliance with BSA obligations, including the requirement to
maintain records of suspicious activity reports.\714\ As noted above,
we believe that it is important for funding portals to be subject to a
recordkeeping requirement, along the same lines of the requirement
applicable to brokers, to create a meaningful audit trail of the
crowdfunding transactions and communications that occur on and through
their platforms. Without these records, we, FINRA or any other
registered national securities association, would have difficulty
examining a funding portal for compliance with the requirements of
Regulation Crowdfunding, the BSA \715\ and the federal securities laws.
Although under the proposed rules funding portals would be required to
create and maintain certain records, we believe this particular rule is
necessary to achieve consistent application of, and ability to examine
and enforce, BSA requirements across all intermediaries, whether
brokers or funding portals.
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    \713\ 17 CFR 240.17a-8.
    \714\ We note that a funding portal's proposed obligation, under
the BSA, to report suspicious activity includes an obligation to
maintain the confidentiality of suspicious activity reports and any
information that would reveal the existence of a suspicious activity
report. See generally 31 CFR 1023.320.
    \715\ See note 696.
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Request for Comment
    241. We have proposed a variety of documents and data to be
retained by a funding portal. Are these documents and data appropriate?
Should other types of documents and data be required to be retained,
and if so, which documents and data and why? Are any of the documents
and data we propose to require be retained unnecessary, unclear or not
sufficiently detailed? If so, which ones? Please explain. Should any of
the proposed books and records requirements be modified? If so, please
explain why.
    242. What burdens or costs would the retention of such information
entail? Is it appropriate to base the books and records requirements of
funding portals on the books and records requirements for broker-
dealers generally? Have we appropriately tailored the broker-dealer
requirements for funding portals? If not, how should they be further
modified? Would these tailored requirements create any competitive
advantages for funding portals as compared to broker-

dealers engaged solely in the same limited activities in which a
funding portal may engage? Are there books and records requirements
currently applicable to broker-dealers, but not included in the
proposed rules, that should be included? Please provide examples of any
such requirements or any suggested alternatives.

E. Miscellaneous Provisions

1. Insignificant Deviations From Regulation Crowdfunding
    We are proposing to provide issuers a safe harbor for certain
insignificant deviations from a term, condition or requirement of
Regulation Crowdfunding.\716\ To qualify for the safe harbor, the
issuer relying on the exemption would have to show that: (1) The
failure to comply with a term, condition or requirement 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.
---------------------------------------------------------------------------

    \716\ See proposed Rule 502 of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The first two prongs of the safe harbor provision are modeled after
a similar provision in Rule 508 of Regulation D,\717\ and we believe a
similar safe harbor is appropriate for offerings made in reliance on
Section 4(a)(6). The offering exemption in Section 4(a)(6) was designed
to help alleviate the funding gap and the accompanying regulatory
concerns faced by startups and small businesses, many of which may not
be familiar with the federal securities laws. We believe that issuers
should not lose the Section 4(a)(6) exemption because of a failure to
comply that is not significant with respect to the offering as a whole,
so long as the issuer, in good faith, attempted to comply with the
rules. We also propose to include the third prong of the safe harbor
because, under the statute, an issuer could lose the exemption because
of the failure of the intermediary to comply with the requirements of
Section 4A(a). We believe that an issuer should not lose the offering
exemption due to such failure by the intermediary, which likely would
be out of the issuer's control, if the issuer did not know of such
failure or such failure related to offerings other than the issuer's
offering. Absent this safe harbor, we believe issuers may be hesitant
to participate in offerings in reliance on Section 4(a)(6) due to
uncertainty regarding their ability to rely on the exemption, which
could undermine the facilitation of capital raising for startups and
small businesses.
---------------------------------------------------------------------------

    \717\ 17 CFR 230.508.
---------------------------------------------------------------------------

    We believe that the potential harm to investors that might result
from the applicability of this safe harbor would be minimal because the
deviations must be insignificant to the offering as a whole for the
safe harbor to apply. In addition, the proposed rules would provide
that notwithstanding this safe harbor, any failure to comply with
Regulation Crowdfunding would nonetheless be actionable by the
Commission.\718\ We believe that this safe harbor would address
concerns raised by one commenter and a member of Congress.\719\ We also
believe it appropriately would protect an issuer who made a diligent
attempt to comply with the proposed rules from losing the exemption as
a result of insignificant deviations from Regulation Crowdfunding.
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    \718\ See proposed Rule 502(b) of Regulation Crowdfunding.
    \719\ See 2012 SEC Government-Business Forum, note 29
(recommending that we provide a safe harbor for ``innocent
violations of procedural or disclosure requirements'' in
transactions relying on Section 4(a)(6)). See also 158 Cong. Rec.
S2230 (daily ed. Mar. 29, 2012) (statement of Sen. Scott Brown)
(``[I]ssuers should not be held liable for misstatements or
omissions that were made by mistake'').
---------------------------------------------------------------------------

Request for Comment
    243. Is a safe harbor for certain insignificant deviations from a
term, condition or requirement of Regulation Crowdfunding appropriate?
If so, is the proposed safe harbor sufficiently broad or too broad? Are
there additional conditions that should apply for an issuer to rely on
the safe harbor? If so, what conditions and why?
    244. Should we define the term ``insignificant'' or use a different
term? Please explain. Should we use a standard requiring something
other than ``good faith and reasonable attempt'' to comply with the
requirements? If so, what standard and why? Is it appropriate for the
safe harbor to cover the failure of the intermediary to comply with the
requirements of Section 4A(a) if the issuer did not know of such
failure or such failure occurred solely in offerings other than the
issuer's offering? Why or why not?
    245. Are there certain deviations that should never be considered
insignificant for purposes of this safe harbor? Why or why not? Should
we provide examples of deviations that we would consider significant?
If so, what should those be (e.g., failure to file the Form C: Offering
Statement on EDGAR)?
2. Restrictions on Resales
    Section 4A(e) provides that securities issued in reliance on
Section 4(a)(6) may not be transferred by the purchaser for one year
after the date of purchase, except when transferred: (1) To the issuer
of the securities; (2) to an accredited investor; (3) as part of an
offering registered with the Commission; or (4) to a family member of
the purchaser or the equivalent, or in connection with certain events,
including death or divorce of the purchaser, or other similar
circumstances, in the discretion of the Commission. Section 4A(e)
further provides that the Commission may establish additional
limitations on securities issued in reliance on Section 4(a)(6).
    The proposed rules track the provisions of Section 4A(e).\720\ We
also are proposing to include instructions in the rules to define
``accredited investor'' and a ``member of the family of the purchaser
or the equivalent.'' Under the proposed rules, the term ``accredited
investor'' would have the same definition as in Rule 501(a) of
Regulation D.\721\
---------------------------------------------------------------------------

    \720\ See proposed Rule 501 of Regulation Crowdfunding.
    \721\ 17 CFR 230.501(a). See also note 38.
---------------------------------------------------------------------------

    The statute does not define ``member of the family of the purchaser
or the equivalent.'' We propose to define the phrase to mean a ``child,
stepchild, grandchild, parent, stepparent, grandparent, spouse or
spousal equivalent, sibling, mother-in-law, father-in-law, son-in-law,
daughter-in-law, brother-in-law, or sister-in-law of the purchaser, and
shall include adoptive relationships.'' This definition tracks the
definition of ``immediate family'' in Exchange Act Rule 16a-1(e),\722\
but with the addition of ``spousal equivalent.'' We propose to include
the term spousal equivalent to address the concept in Section
4A(e)(1)(D) of the ``equivalent'' of a member of the family of the
purchaser. The proposed rules would define spousal equivalent to mean a
cohabitant occupying a relationship generally equivalent to that of a
spouse.\723\ This is the same definition as in Rule

202(a)(11)(G)-1(d)(9) under the Investment Advisers Act of 1940.\724\
We believe issuers and investors would benefit from definitions that
are consistent with those already used in our rules, rather than
creating a new definition, because issuers may be familiar with those
terms and should benefit from existing Commission and staff guidance.
The proposed rules also would provide that securities offered and sold
in reliance on Section 4(a)(6) may be transferred during the initial
one-year period to a trust controlled by the initial purchaser or to a
trust created for the benefit of a member of the family of the
purchaser or the equivalent. We believe allowing transfers in such
cases would be consistent with the intent of the provision because the
person that controls or benefits from the trust would otherwise be
covered by the rules.
---------------------------------------------------------------------------

    \722\ 17 CFR 240.16a-1(e).
    \723\ See proposed Instruction to paragraph (c) of proposed Rule
501 of Regulation Crowdfunding.
    \724\ 17 CFR 275.202(a)(11)(G)-1(d)(9). See also Family Offices,
Release No. IA-3220 (Jun. 22, 2011) [76 FR 37983 (June 29, 2011)]
(adopting release); Family Offices, Release No. IA-3098 (Oct. 12,
2010) [75 FR 63753 (Oct. 18, 2010)] (proposing release).
---------------------------------------------------------------------------

Request for Comment
    246. Are the proposed limitations on resale appropriate? Why or why
not? If not, what approach would be more appropriate and why? Should
there be additional limitations on resale, especially after the first
year? Why or why not? If so, what should they be and why? If an issuer
no longer was in compliance with the ongoing reporting requirements
\725\ or was no longer in business, should we place restrictions on the
resale of the issuer's securities or otherwise limit the ability of
those shares to trade? If so, please describe the appropriate
restrictions and explain how we could implement such restrictions.
---------------------------------------------------------------------------

    \725\ See Section II.B.2 above for a discussion of the ongoing
reporting requirements.
---------------------------------------------------------------------------

    247. To transfer securities to an accredited investor during the
one-year period beginning when the securities are sold in reliance on
Section 4(a)(6), the seller would need to have a reasonable belief that
the purchaser is an accredited investor.\726\ Is this approach
appropriate? Why or why not?
---------------------------------------------------------------------------

    \726\ See proposed Rule 501(b) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    248. Is the proposed use of the definition of ``accredited
investor'' in Rule 501(a) of Regulation D appropriate? Why or why not?
Should a different definition be used for purposes of Regulation
Crowdfunding? Please explain.
    249. Is the proposed definition of ``member of the family of the
purchaser or the equivalent'' appropriate? Is it appropriate to track
the definition of ``immediate family'' under Exchange Act Section 16
(with the addition of ``spousal equivalent''), or would another
definition be more appropriate? Should any persons be included or not
included in the definition? Why or why not? Should we use a consistent
definition throughout Regulation Crowdfunding even if it differs from
similar rules in other Commission regulations? Why or why not?
3. Information Available to States
    Under Section 4A(d), the Commission shall make available, or shall
cause to be made available by the relevant intermediary, the
information required under Section 4A(b) and such other information as
the Commission, by rule, determines appropriate to the securities
commission (or any agency or office performing like functions) of each
State and territory of the United States and the District of Columbia.
    One commenter suggested that all information filed with the
Commission should be made available to state regulators.\727\ Another
commenter questioned whether open Internet access to the crowdfunding
platforms would be sufficient, questioning a platform's ability to
maintain or archive records from Web sites that are routinely
updated.\728\ Another commenter suggested that the requirement in
Section 4A(d) should create an affirmative obligation for an
intermediary only if a state regulator requests information in excess
of what is provided to the Commission.\729\
---------------------------------------------------------------------------

    \727\ See Commonwealth of Massachusetts Letter.
    \728\ See NASAA Letter.
    \729\ See RocketHub Letter 1.
---------------------------------------------------------------------------

    We are proposing to require issuers to file on EDGAR the
information required by Section 4A(b) and the related rules.
Information filed on EDGAR is publicly available and would, therefore,
be available to each state, territory and the District of Columbia. We
believe this approach would satisfy the requirement to make the
information available. Accordingly, we do not believe that it is
necessary to propose to impose any additional obligations on
intermediaries with respect to this requirement.
Request for Comment
    250. Would the availability of information on EDGAR satisfy the
requirement to make the information available to each state, territory
and the District of Columbia? Are there other means of making the
information available? Should we impose any additional obligations on
intermediaries with respect to this requirement? If so, what are they?
For example, should we require issuers or intermediaries to provide
this information directly to state regulators? Please explain.
4. Exemption from Section 12(g)
    Section 303 of the JOBS Act amended Exchange Act Section 12(g) to
provide that ``the Commission shall, by rule, exempt, conditionally or
unconditionally, securities acquired pursuant to an offering made under
[S]ection 4[(a)](6) of the Securities Act of 1933 from the provisions
of this subsection.''
    As amended by the JOBS Act, Section 12(g) requires, among other
things, that an issuer with total assets exceeding $10,000,000 and a
class of securities held of record by either 2,000 persons, or 500
persons who are not accredited investors, register such class of
securities with the Commission.\730\ Crowdfunding contemplates the
issuance of securities to a large number of holders, which could
increase the likelihood that Section 4(a)(6) issuers would exceed the
thresholds for reporting in Section 12(g). Section 303 could be read to
mean that securities acquired in a crowdfunding transaction would be
excluded from the record holder count permanently, regardless of
whether the securities continue to be held by a person who purchased in
the crowdfunding transaction. An alternative reading could provide that
securities acquired in a crowdfunding transaction would be excluded
from the record holder count only while held by the original purchaser
in the Section 4(a)(6) transaction, as a subsequent purchaser of the
securities would not be considered to have ``acquired [the securities]
pursuant to an offering made under [S]ection 4[(a)](6).''
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    \730\ See Section 501 of the JOBS Act. In the case of an issuer
that is a bank or a bank holding company, Exchange Act Section
12(g)(1)(B) (15 U.S.C. 78l(g)(1)(B)) requires, among other things,
that the issuer, if it has total assets exceeding $10,000,000 and a
class of securities held of record by 2,000 persons, register such
class of securities with the Commission. See Section 601 of the JOBS
Act.
---------------------------------------------------------------------------

    Commenters expressed concern that once the securities issued
pursuant to Section 4(a)(6) are transferred, the exemption from Section
12(g) registration could cease to apply and any new holders of those
securities would be included in the calculation of holders of record
for purposes of Section 12(g), which could potentially require an
issuer to register its securities with the Commission.\731\ Another

commenter noted that the prospect that resales could trigger
registration requirements under the Exchange Act might provide an
incentive for issuers to attempt in some way to restrict resale and
transfer of the securities issued in the offering made in reliance on
Section 4(a)(6), even after the lapse of the one year transfer
limitation, which would be to the detriment of small crowdfunding
investors seeking liquidity.\732\ One commenter suggested that the
exemption from Section 12(g) registration should attach to different
securities issued in a subsequent restructuring, recapitalization or
similar transaction that is exempt from, or otherwise not subject to,
the registration requirements of Section 5, so long as the parties to
the transaction are affiliates of the original issuer.\733\ The same
commenter suggested that the availability of the exemption be
conditioned on the issuer complying with the ongoing reporting
requirements and not having total assets at the last day of the fiscal
year in excess of $25 million.\734\
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    \731\ See Liles Letter 1; NCA Letter (stating that the time and
expense associated with registration of a class of securities could
affect an issuer's working capital and business operations); CFIRA
Letter 2 (stating that the need for additional capital to meet
registration requirements would result in an issuer either having to
borrow money, thus leveraging its business, or raising additional
capital through a subsequent equity offering that would dilute
existing stockholders); ABA Letter 2 (stating that a Section 12(g)
exemption limited to the initial purchaser of securities would
undermine the utility of such an exemption and that an initial
purchaser should not be able to force an issuer to register under
Section 12(g) simply by reselling his or her securities).
    \732\ See Liles Letter 1.
    \733\ See ABA Letter 2.
    \734\ Id.
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    Proposed Rule 12g-6 provides that securities issued pursuant to an
offering made under Section 4(a)(6) would be permanently exempted from
the record holder count under Section 12(g). An issuer seeking to
exclude a person from the record holder count would have the
responsibility for demonstrating that the securities held by the person
were initially issued in an offering made under Section 4(a)(6). We
believe that allowing issuers to sell securities pursuant to Section
4(a)(6) without becoming Exchange Act reporting issuers is consistent
with the intent of Title III.\735\ In this regard, we note that Title
III provides for an alternative reporting system under which issuers
would be required to file annual reports with the Commission.\736\ We
believe this is consistent with the proposal to permanently exempt
securities issued in reliance on Section 4(a)(6) from the record holder
count under Section 12(g). Section 303 of the JOBS Act does not extend
the exemption from Section 12(g) to different securities issued in a
subsequent restructuring, recapitalization or similar transaction, so
we are not proposing to exempt such securities at this time, as one
commenter suggested.\737\ We also are not proposing to condition the
exemption on the issuer's compliance with the ongoing reporting
requirements or on the issuer not having total assets in excess of a
certain amount, as the same commenter suggested.\738\ We believe that
the size of the issuer should not affect the availability of the
exemption because conditioning the exemption on the issuer not
exceeding a certain amount of total assets would impose an additional
burden on successful issuers that unsuccessful issuers would not face,
which in turn would discourage growth. We also believe that failure to
comply with the ongoing reporting requirements could be better
addressed as proposed by making the issuer ineligible to use the
exemption under Section 4(a)(6),\739\ rather than by requiring such
issuer to register a class of securities under Section 12(g).\740\
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    \735\ See 158 Cong. Rec. S1829 (daily ed. Mar. 20, 2012)
(statement of Sen. Jeff Merkley) (``It also provides a very
important provision so the small investors do not count against the
shareholder number that drives companies to have to become a fully
public company. That is critical and interrelates with other parts
of the [crowdfunding] bill before us.'').
    \736\ See Section II.B.2 above for a discussion of the
requirement to file annual reports.
    \737\ See ABA Letter 2.
    \738\ See id.
    \739\ See proposed Rule 100(b)(6) of Regulation Crowdfunding.
    \740\ We note, however, that making the issuer ineligible to use
the exemption under Section 4(a)(6) if the issuer failed to comply
with the ongoing reporting requirements could have a limited impact
since it only would impact an issuer that intended to rely on the
Section 4(a)(6) exemption for future offers and sales. But see
Bradford note 1 (``The need to go back to investors for future
funding should constrain self-dealing, opportunistic behavior by the
entrepreneur.'').
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Request for Comment
    251. Should the Commission permanently exempt securities issued
pursuant to an offering under Section 4(a)(6) from the record holder
count under Section 12(g), as proposed? Why or why not? Should the
Commission exempt securities issued under Section 4(a)(6) only when
held of record by the original purchaser in the Section 4(a)(6)
transaction, an affiliate of the original purchaser, a member of the
original purchaser's family or a trust for the benefit of the original
purchaser or the original purchaser's family? Why or why not? Are there
other ways to implement Section 303 that may be more appropriate?
Please explain.
    252. One commenter suggested \741\ that the Section 4(a)(6)
exemption should survive and attach to different securities issued in a
subsequent restructuring, recapitalization or similar transaction that
is exempt from, or otherwise not subject to, the registration
requirements of Section 5, if the parties to the transaction are
affiliates of the original issuer. While we are not proposing to
implement this suggestion at this time, we invite commenters to discuss
the advantages and disadvantages of this approach.
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    \741\ See ABA Letter 2.
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    253. The same commenter suggested \742\ that the availability of
the exemption under Section 12(g)(6) should be conditioned on the
issuer not having total assets, at the last day of the fiscal year with
respect to which the Section 12(g) compliance determination is made (or
a reasonable time before or after such date), in excess of $25 million.
Should we condition the availability of the exemption under Section
12(g)(6) on the issuer not having total assets in excess of $25
million? If not $25 million, should the availability of the exemption
be conditioned on total assets not exceeding some other amount (e.g.,
$10 million, $50 million, etc.)? Should this determination be made as
of the last day of the fiscal year or a different date? Please explain.
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    \742\ See id.
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    254. Should issuers that fail to comply with the ongoing reporting
requirements\743\ of Regulation Crowdfunding be disqualified from
relying on the exemption under Section 12(g)(6), as suggested by one
commenter? \744\ Why or why not?
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    \743\ See proposed Rules 202 and 203(b) of Regulation
Crowdfunding and Section II.B.2 above for a discussion of the
ongoing reporting requirements.
    \744\ See ABA Letter 2.
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    255. How would issuers be able to distinguish securities issued in
a transaction exempt under Section 4(a)(6) from securities issued in
other offerings? What would be the costs associated with making such a
determination?
5. Scope of Statutory Liability
    As noted above, Securities Act Section 4A(c) sets forth a liability
provision for crowdfunding transactions under Section 4(a)(6).\745\
Section 4A(c) provides that an issuer will be liable to a purchaser of
its securities in a

transaction exempted by Section 4(a)(6) if the issuer, in the offer or
sale of the securities, makes an untrue statement of a material fact or
omits to state a material fact required to be stated or necessary in
order to make the statements, in light of the circumstances under which
they were made, not misleading, provided that the purchaser did not
know of the untruth or omission, and the issuer does not sustain the
burden of proof that such issuer did not know, and in the exercise of
reasonable care could not have known, of the untruth or omission.
Section 4A(c)(3) defines, for purposes of the liability provisions of
Section 4A, an issuer as including ``any person who offers or sells the
security in such offering.'' On the basis of this definition, it
appears likely that intermediaries, including funding portals, would be
considered issuers for purposes of this liability provision. We believe
that steps intermediaries could take in exercising reasonable care in
light of this liability provision would include establishing policies
and procedures \746\ that are reasonably designed to achieve compliance
with the requirements of Regulation Crowdfunding, and that include the
intermediary conducting a review of the issuer's offering documents,
before posting them to the platform, to evaluate whether they contain
materially false or misleading information.
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    \745\ The anti-fraud and civil liability provisions of the
Securities Act, such as Sections 12(a)(2) and 17, apply to exempted
transactions, including those transactions that will be conducted in
reliance on Section 4(a)(6).
    \746\ With respect to intermediaries that are funding portals,
see proposed Rule 403(a) of Regulation Crowdfunding and the
discussion in Section II.D.4 above.
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    Under this liability provision, an investor who purchases
securities in a crowdfunding transaction may bring an action against
the issuer to recover the consideration paid for the security, with
interest, or damages if the person no longer holds the security. The
statute further provides that actions brought under Section 4A(c) will
be subject to the provisions of Securities Act Sections 12(b) and 13,
as though the liability were created under Securities Act Section
12(a)(2).
6. Disqualification
    Section 302(d) of the JOBS Act requires the Commission to establish
disqualification provisions under which an issuer would not be eligible
to offer securities pursuant to Section 4(a)(6) and an intermediary
would not be eligible to effect or participate in transactions pursuant
to Section 4(a)(6). Section 302(d)(2) specifies that the
disqualification provisions must be ``substantially similar'' to the
disqualification provisions contained in Rule 262 of Regulation A,\747\
and they also must cover certain actions by state regulators enumerated
in Section 302(d)(2). The disqualifying events listed in Rule 262 apply
to the issuer and certain other persons associated with the issuer or
the offering, including the issuer's predecessors and affiliated
issuers; directors, officers and general partners of the issuer;
beneficial owners of 10 percent or more of any class of the issuer's
equity securities; promoters connected with the issuer; and
underwriters and their directors, officers and partners. Rule 262
disqualifying events include:
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    \747\ 17 CFR 230.262.
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     Felony and misdemeanor convictions in connection with the
purchase or sale of a security or involving the making of a false
filing with the Commission (the same criminal conviction standard as in
Section 302(d) of the JOBS Act) within the last five years in the case
of issuers and 10 years in the case of other covered persons;
     injunctions and court orders within the last five years
against engaging in or continuing conduct or practices in connection
with the purchase or sale of securities, or involving the making of any
false filing with the Commission;
     United States Postal Service false representation orders
within the last five years;
     filing, or being named as an underwriter in, a
registration statement or Regulation A offering statement that is the
subject of a proceeding to determine whether a stop order should be
issued, or as to which a stop order was issued within the last five
years; and
     for covered persons other than the issuer:
    [cir] being subject to a Commission order:
    [ssquf] revoking or suspending their registration as a broker,
dealer, municipal securities dealer or investment adviser;
    [ssquf] placing limitations on their activities as such;
    [ssquf] barring them from association with any entity; or
    [ssquf] barring them from participating in an offering of penny
stock; or
    [cir] being suspended or expelled from membership in, or suspended
or barred from association with a member of, a registered national
securities exchange or national securities association for conduct
inconsistent with just and equitable principles of trade.
    The disqualifying events specifically required by Section 302(d)(2)
are:
     final orders issued by state securities, banking, savings
association, credit union and insurance regulators, federal banking
regulators and the National Credit Union Administration that either:
    [cir] bar a person from association with an entity regulated by the
regulator issuing the order; engaging in the business of securities,
insurance or banking; or engaging in savings association or credit
union activities; or
    [cir] are based on a violation of any law or regulation that
prohibits fraudulent, manipulative or deceptive conduct within a 10-
year period ending on the date of the filing of the offer or sale; and
     felony and misdemeanor convictions in connection with the
purchase or sale of a security or involving the making of a false
filing with the Commission.
    One commenter urged us to apply the same standards adopted by the
Commission for Rule 506 of Regulation D \748\ to this exemption.\749\
Another commenter stated that searching for most disqualifying events
could be achieved with automated or semi-automated inquiries to
databases or data services, but other disqualifying events would be
difficult to identify with those types of inquiries and should be the
responsibility of the issuer to address with representations and
warranties.\750\ One commenter stated that if a bankruptcy proceeding
would be a disqualifying event, it should be limited to a bankruptcy
proceeding of the issuer or the intermediary and not include a personal
bankruptcy proceeding.\751\ Another commenter recommended that the
disqualification rules: (1) Not be so broad as to affect ``persons who
may not be true bad actors--such as persons who consent to the entry of
judgments which do not also include meaningful monetary or other
penalties;'' (2) not apply retroactively to cover disqualifying events
prior to the adoption of the final rules; and (3) apply to other types
of exempt offerings

(including offerings made in reliance on Regulation A).\752\
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    \748\ See Securities Act Rule 506(d) [17 CFR 230.506(d)]. See
also Disqualification Adopting Release, note 101.
    \749\ See NASAA Letter (stating that an offering made pursuant
to Section 4(a)(6) also should be subject to disqualification based
on the prior bad acts of the funding portal and its management).
    \750\ See Applied Dynamite Letter (stating that certain
disqualifying events have open-ended definitions that would make it
difficult to satisfy with confidence: ``any court of competent
jurisdiction'' having entered an order because there is no limit to
the number of courts which may have, at some time, been competent to
enter an order regarding an issuer; being ``subject to'' certain
unpublished orders or injunctions such as a United States Postal
Service false representation order; and the extension of
disqualification events to predecessors and affiliated issuers
because of the innumerable ways in which two companies might be
deemed to be affiliated).
    \751\ See Landon Letter 1.
    \752\ See SEC Government-Business Forum, note 29.
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a. Issuers and Certain Other Associated Persons
    The disqualification provisions included in Section 302(d) of the
JOBS Act are modeled on the disqualification provisions included in
Section 926 of the Dodd-Frank Act, which required the Commission to
adopt rules, ``substantially similar'' to Rule 262, that disqualify
securities offerings involving certain ``felons and other `bad actors'
'' from reliance on Rule 506 of Regulation D.\753\ On July 10, 2013, we
adopted rules to implement Section 926 of the Dodd-Frank Act to
disqualify certain securities offerings from reliance on Rule 506 of
Regulation D.\754\ The proposed disqualification rules,\755\ as they
relate to issuers and certain other associated persons, are modeled on
the Rule 506 disqualification rules, which, in turn, are substantially
similar to the disqualification provisions in Rule 262.
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    \753\ See Dodd-Frank Act, note 38.
    \754\ See Disqualification Adopting Release, note 101.
    \755\ See proposed Rules 503(a)-(c) of Regulation Crowdfunding.
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i. Covered Persons
    The proposed rules would apply the disqualification provisions to:
     the issuer and any predecessor of the issuer or affiliated
issuer;
     any director, officer, general partner or managing member
of the issuer;
     any 20 percent Beneficial Owner;
     any promoter connected with the issuer in any capacity at
the time of the sale;
     any person that has been or will be paid (directly or
indirectly) remuneration for solicitation of purchasers in connection
with sales of securities in the offering (which we refer to as a
``compensated solicitor''); and
     any director, officer, general partner or managing member
of any such compensated solicitor.
    These covered persons are substantially similar to those currently
covered by the disqualification rules for Rules 262 and 506. The
proposed rules would cover any ``officer'' \756\ of the issuer,
mirroring the coverage in Rule 262, rather than any ``executive officer
[and] other officer participating in the offering'' \757\ as it is
currently covered in Rule 506. In adopting the Rule 506
disqualification rules, we noted that an ``officer'' test would be
unduly burdensome and overly restrictive due to the larger and more
complex organizations that are involved in many Rule 506 transactions
as compared to the smaller entities that use Regulation A. We also
noted that limiting the coverage of the Rule 506 disqualification rules
to executive officers and officers who participate in the offering
would lessen the potential compliance burden by limiting the number of
covered persons. In contrast, we believe that the startups and small
businesses that may seek to raise capital in reliance on Section
4(a)(6) generally will be smaller than the entities involved in Rule
506 transactions and, likely, smaller than the issuers of securities
relying on Regulation A.\758\ We also believe that the ``officers'' of
many issuers relying on Section 4(a)(6) may be only a few individuals,
with or without formal titles. As a result, we do not believe that an
``officer'' test would be more burdensome than the test used for
Regulation A purposes, so we do not see a need to deviate from Rule 262
in this context.
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    \756\ Under Securities Act Rule 405, the term ``officer'' is
defined as ``a president, vice president, secretary, treasurer or
principal financial officer, comptroller or principal accounting
officer, and any person routinely performing corresponding functions
with respect to any organization.'' 17 CFR 230.405.
    \757\ Under Securities Act Rule 405, the term ``executive