crowdfunding market, we believe that many investors affected by the
proposed rules would likely be individual retail investors who
currently do not have broad access to investment opportunities in
early-stage ventures, either because they do not have the necessary
accreditation or sophistication to invest in most private offerings or
because they do not have sufficient funds to participate as angel
investors. Offerings made in reliance on Section 4(a)(6) might provide
retail investors with additional investment opportunities, although the
extent to which they invest in such offerings would likely depend on
their view of the potential return on investment as well as the risk
for fraud.
    In contrast, larger, more sophisticated or well-funded investors
may be less likely to invest in offerings made in reliance on Section
4(a)(6). The relatively low investment limits set by the statute for
crowdfunding investors might make these offerings less attractive for
professional investors, including VCs and angel investors.\892\ While
an offering made in reliance on Section 4(a)(6) could bring an issuer
to the attention of these investors, it is possible that professional
investors would prefer, instead, to invest in a

Rule 506 offering, which is not subject to the investment limitations
applicable to offerings made in reliance on Section 4(a)(6).
---------------------------------------------------------------------------

    \892\ An observer suggests that, unlike angels, VCs may be less
interested in crowdfunding because, if VCs rely on crowdfunding
sites for their deal flow, it would be difficult to justify charging
a 2% management fee and 20% carried interest to their limited
partners. See Ryan Caldbeck, Crowdfunding--Why Angels, Venture
Capitalists And Private Equity Investors All May Benefit, Forbes,
Aug. 7, 2013.
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d. Other Capital Providers, Broker-Dealers and Finders in Private
Offerings
    The proposed rules might affect the capital providers that
currently finance small private businesses: small business lenders,
VCs, family and friends and angel investors. The current scope of
fundraising done by these capital providers is discussed above. As
discussed below, the magnitude of the impact would depend on whether
crowdfunding in reliance on Section 4(a)(6) emerges as a substitute or
a complement to these financing sources.
    In addition, issuers conducting private offerings might currently
use broker-dealers to help them with various aspects of the offering
and to help ensure compliance with the ban on general solicitation and
advertising that exists for most private offerings. Private offerings
also could involve finders who connect issuers with potential investors
for a fee.\893\ These private offering intermediaries also may be
affected by the proposed rules because once these rules come into
effect, issuers might no longer need the services of those broker-
dealers and finders. Although we are unable to predict the exact size
of the market for broker-dealers and finders in private offerings that
are comparable to those that the proposed rules would permit,\894\ data
on the use of broker-dealers and finders in the Regulation D markets
suggest that they may not currently play a large role in private
offerings. Only 13% of all new Regulation D offerings from 2009 to 2012
used an intermediary such as a broker-dealer or a finder.\895\
Approximately 11% of new offerings reported sales commissions greater
than zero, while approximately 3% reported finder fees greater than
zero. The use of a broker-dealer or a finder increased with offering
size; they participated in 13% of offerings for up to $1 million and
18% of offerings for more than $50 million. Moreover, broker-dealer
commissions and finder fees tend to decrease with offering size. Unlike
the gross spreads in registered offerings, the differences in
commissions for Regulation D offerings of different sizes are large:
the average commission paid by issuers conducting offerings of up to $1
million (6.5%) is almost three times larger than the average commission
paid by issuers conducting offerings of more than $50 million (1.9%).
Similarly, the average finder's fee for offerings of up to $1 million
is approximately 6.1%, compared to 1.4% for offerings of more than $50
million. We base these estimates, however, only on the Regulation D
market. It is possible that issuers engaging in other types of private
offerings (e.g., those relying on Section 4(a)(2)), for which we do not
have data, might use broker-dealers and finders more frequently and
have different fee structures.
---------------------------------------------------------------------------

    \893\ Depending on their activities, these persons may need to
be registered as broker-dealers.
    \894\ See The Task Force on Private Placement Broker-Dealers,
ABA Section of Business Law, Report and Recommendations of the Task
Force on Private Placement Broker-Dealers, 60 Bus. Law. 959, 969-70
(2005) (``Task Force on Private Placement Broker-Dealers'').
    \895\ See Ivanov/Bauguess Study, note 816.
---------------------------------------------------------------------------

B. Analysis of Proposed Rules

    As noted above, we are sensitive to the costs and benefits of the
proposed rules, as well as the impact that the proposed rules would
have on efficiency, competition and capital formation. In enacting
Title III, Congress established a framework for a new type of exempt
offering and required us to adopt rules to implement that framework. To
the extent that crowdfunding rules are successfully utilized, the
crowdfunding provisions of the JOBS Act should provide startups and
small businesses with the means to raise relatively modest amounts of
capital, from a broad cross section of potential investors, through
securities offerings that are exempt from registration under the
Securities Act. They also should permit small investors to participate
in a wider range of securities offerings than may be available
currently.\896\ Specifically, the statutory provisions and the proposed
rules address several challenges specific to financing startups and
small businesses, including, for example, accessing a large number of
potential investors, the regulatory requirements associated with
issuing a security, protecting investors and making such securities
offerings cost-effective for the issuer.
---------------------------------------------------------------------------

    \896\ See, e.g., 158 Cong. Rec. S1781 (daily ed. Mar. 19, 2012)
(statement of Sen. Carl Levin) (``Right now, the rules generally
prohibit a company from raising very small amounts from ordinary
investors without significant costs.'').
---------------------------------------------------------------------------

    In the sections below, we analyze the costs and benefits associated
with the proposed crowdfunding regulatory regime, as well as the
potential impacts of such a regulatory regime on efficiency,
competition and capital formation, in light of the background discussed
above.
1. Broad Economic Considerations
    In this release, we discuss costs and benefits that are related to
the proposed rules. Many of these costs and benefits are difficult to
quantify or estimate with any degree of certainty, especially
considering that Section 4(a)(6) provides a new method for raising
capital in the United States. Some costs are difficult to quantify or
estimate because they represent transfers between various market
participants. For instance, costs to issuers could be passed on to
investors and costs to intermediaries could be passed on to issuers and
investors. These difficulties in estimating and quantifying are
exacerbated by the limited public data that indicates how issuers,
intermediaries and investors would respond to these new investment
opportunities.
    The discussion below highlights several general areas where
uncertainties regarding the new crowdfunding market might affect the
potential costs and benefits of the proposed rules. It also highlights
the potential effects on efficiency, competition and capital formation,
as well as our ability to quantify relevant benefits and costs. In
light of these uncertainties, we encourage commenters to provide data
and analysis to help further quantify or estimate the potential
benefits and costs of these proposed rules.
    The extent to which the statute and the proposed rules would affect
capital formation and the cost of capital to issuers depends in part on
the issuers that choose to participate. In particular, if the offering
exemption under Section 4(a)(6) only attracts issuers that are
otherwise able to raise capital through alternative venues (e.g.,
offerings relying on an exception from registration under Securities
Act Section 3(a)(11), Securities Act Section 4(a)(2), Regulation A or
Regulation D), the statute and the proposed rules could result in a
redistribution of capital flow, which would enhance allocative
efficiency but have a limited impact on the aggregate level of capital
formation.\897\ In addition, the degree to which the proposed rules
would affect capital formation depends on the implementation of other
provisions of the JOBS Act that may alter existing options for small
companies to raise

capital. For example, Title II allows issuers relying on the exemption
in Securities Act Rule 506(c) to use general solicitation and general
advertising, while Title IV envisions a modified Regulation A offering
exemption with a higher dollar limit.
---------------------------------------------------------------------------

    \897\ For example, a recent GAO report on Regulation A offerings
suggests that a significant decline in the use of this funding
alternative after 1997 could be partially attributed to a shift in
offerings to Rule 506 offerings under Regulation D, as a result of
the preemption of state securities laws for Rule 506 offerings that
occurred in 1996. See GAO Report, note 824.
---------------------------------------------------------------------------

    Notwithstanding these alternatives, we believe that the Section
4(a)(6) offering exemption would likely represent a new source of
capital for many issuers that currently have difficulty raising capital
and that would continue to have difficulty raising capital when other
JOBS Act provisions are implemented. Startups and small businesses
usually have smaller and more variable cash flows than larger more
established companies, and internal financing from their own business
operations tends to be limited and unstable. Moreover, these businesses
tend to have smaller asset bases \898\ and, thus, less collateral for
traditional bank loans. Startups and small businesses, which are widely
viewed to have more financial constraints than publicly-traded
companies and large private companies, could therefore benefit
significantly from a securities-based crowdfunding market. We believe
that the statute, as it would be implemented by the proposed rules,
could increase both capital formation and the efficiency of capital
allocation. The extent to which such issuers would use the Section
4(a)(6) offering exemption, however, is difficult to assess.
---------------------------------------------------------------------------

    \898\ See, e.g., John Asker, Joan Farre-Mensa and Alexander
Ljungqvist, Corporate Investment and Stock Market Listing: A Puzzle?
(European Corporate Governance Institute Finance Working Paper, June
2012), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1603484.
---------------------------------------------------------------------------

    If startups and small businesses find alternative capital raising
options more attractive than securities-based crowdfunding, the impact
of Section 4(a)(6) on capital formation could be limited. Even so, the
availability of securities-based crowdfunding as a financing option
could increase competition among suppliers of capital, resulting in a
potentially lower cost of capital for all issuers, including those that
choose not to use securities-based crowdfunding.
    For issuers that pursue offerings in reliance on Section 4(a)(6),
establishing an initial price might be challenging. Although the
statute requires certain issuer disclosures and the proposed rules are
intended to help investors evaluate the viability of the issuer and the
initial offering, these disclosures may be insufficient for investors
to determine an appropriate price since there would be no underwriter
of the offering and the issuer may not otherwise be skilled in
valuation. It is not clear, therefore, how an initial offering price
would be reached for many of the securities offered, nor how investors
would be protected against poor initial valuations.\899\ These
potential difficulties might limit investor participation in offerings
made in reliance on Section 4(a)(6) and mitigate some of the associated
benefits of capital formation.
---------------------------------------------------------------------------

    \899\ There also is a chance that valuations that emerge are
inaccurate. For example, there is vast literature documenting that,
on average, IPOs are significantly underpriced relative to their
initial prices on the secondary market. For a review of the theory
and evidence of IPO underpricing, see Jay Ritter and Ivo Welch, A
Review of IPO Activity, Pricing, and Allocations, 57 J. Fin. 1795-
1828 (2002). See also Ivo Welch, Sequential Sales, Learning, and
Cascades, 47 J. Fin. 695-732 (1992) (analyzing the risk of herding
among investors when shares are sold sequentially).
---------------------------------------------------------------------------

    Uncertainty surrounding exit strategies for investors in
crowdfunding offerings also might limit the benefits. In particular, it
is unlikely that purchasers in crowdfunding transactions would be able
to follow the typical path to liquidity that investors in other exempt
offerings follow. For instance, investors in a VC-backed startup might
eventually sell their securities in an initial public offering on a
national securities exchange or to another company in an
acquisition.\900\ We anticipate that most businesses engaging in
offerings in reliance on Section 4(a)(6) are unlikely to progress
directly to an initial public offering on a national securities
exchange given their small size,\901\ and investors might lack adequate
strategies or opportunities to eventually divest their holdings.\902\ A
sale of the business would require the issuer to have a track record in
order to attract investors with the capital willing to buy the
business. Moreover, the likely broad geographical dispersion of
crowdfunding investors might make shareholder coordination difficult,
although the electronic means may mitigate any difficulties. Even if an
issuer could execute a sale or otherwise offer to buy back or retire
the securities, it might be difficult for investors to determine
whether the issuer was offering a fair market price. These
uncertainties might limit the use of the Section 4(a)(6) exemption.
---------------------------------------------------------------------------

    \900\ See Gompers, note 830.
    \901\ As noted, under the statute and the proposed rules,
businesses relying on Section 4(a)(6) would be limited to raising an
aggregate of $1 million during a 12-month period. By contrast, as
noted in the IPO Task Force report, the size of an initial public
offering generally exceeds $50 million. See IPO Task Force, note
818.
    \902\ In contrast, given the required qualifications and capital
amount limits, Regulation D offerings may generally attract issuers
that are more knowledgeable and better capitalized. Moreover, such
offerings are likely to have a larger proportion of accredited
investors because, in contrast to securities-based crowdfunding,
there are no limitations on individual investment amounts. As a
result, we believe that Regulation D issuers and investors are more
likely to have potential exit strategies in place.
---------------------------------------------------------------------------

    The potential benefits of the proposed rules also might depend on
how investors respond to potential liquidity issues unique to the
securities-based crowdfunding market. It is currently unclear how
securities offered and sold in reliance on Section 4(a)(6) would be
transferred in the secondary market after the one-year restricted
period ends, and investors who purchased securities in reliance on
Section 4(a)(6) and who seek to divest their securities would be
unlikely to find a liquid market.\903\ Shares might migrate to the
over-the-counter market or to trading platforms that trade shares of
private companies.\904\ It is possible that secondary trading costs for
investors might be substantial, effective and quoted spreads might be
wide, and price volatility might be high compared to those of listed
securities.\905\ Illiquidity is a concern for other exempt offerings
and small registered offerings. However, because investors purchasing
securities in reliance on Section 4(a)(6) might be less sophisticated
than investors in other private offerings due to the fact

that there would be no investor qualification requirements, we expect
that they would face additional challenges in addressing the impact of
illiquidity, either in finding a suitable trading venue or negotiating
with the issuer for an alternative retirement provision. The
potentially high degree of illiquidity associated with securities
purchased in reliance on Section 4(a)(6) might prevent investors from
investing in businesses through such offerings, thus limiting potential
capital formation.
---------------------------------------------------------------------------

    \903\ Academic studies have shown that the over-the-counter
market is less liquid than the national exchanges. See Christie,
Market Microstructure of the Pink Sheets, 33 J. Banking & Fin.
1,326-1,339 (2009); Andrew Ang, Assaf Shtauber and Paul Tetlock,
Asset Pricing in the Dark: The Cross Section of OTC Stocks, Rev.
Fin. Stud. (forthcoming).
    \904\ Given the services that funding portals are permitted to
provide under the statute and the proposed rules, investors would
not be able to use funding portals to trade in securities offered
and sold in reliance on Section 4(a)(6) in a secondary market.
    \905\ Academic studies show that reducing the information
transparency about an issuer increases the effective and quoted
spreads of its shares, reduces share price and increases price
volatility. Specifically, percentage spreads triple and volatility
doubles when NYSE issuers are delisted to the Pink Sheets. See
Jonathan Macey, Maureen O'Hara and David Pompilio, Down and Out in
the Stock Market: The Law and Finance of the Delisting Process, 51
J.L. & Econ 683-713 (2008). When NASDAQ issuers delist and
subsequently trade on the OTC Bulletin Board and/or the Pink Sheets,
share volume declines by two-thirds, quoted spreads more than
double, effective spreads triple and volatility triples. See Jeffrey
H. Harris, Venkatesh Panchapagesan and Ingrid M. Werner, Off But Not
Gone: A Study of NASDAQ Delistings, Fisher College of Business
Working Paper No. 2008-03-005 and Dice Center Working Paper No.
2008-6 (Mar. 4, 2008), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=628203. One factor that may alleviate
transparency concerns is the fact that issuers that sold securities
in an offering made in reliance on Section 4(a)(6) would have an
ongoing reporting obligation, so disclosure of information about the
issuer would continue to be required.
---------------------------------------------------------------------------

    Even with the mandated disclosures, unsophisticated investors
purchasing securities issued in reliance on Section 4(a)(6) also may
face certain expropriation risks, potentially limiting the upside of
their investment, even when they select investments in successful
ventures. This could occur if issuers issue securities with certain
features (e.g., callable securities or securities with differential
control rights) or have insider-only financing rounds or financing
rounds at reduced prices (the so-called ``down rounds'') that could
have the effect of diluting an investor's interest or otherwise
diminishing the value of the securities offered and sold in reliance on
Section 4(a)(6). Investors purchasing securities issued in reliance on
Section 4(a)(6) might not have the experience or the market power to
negotiate various anti-dilution provisions, right of first refusal,
tag-along rights, superior liquidation preferences and rights upon a
change in control that have been developed by institutional and angel
investors as protections against fundamental changes in a
business.\906\ If these or similar types of protections are absent, the
expropriation risk could discourage some potential investors from
participating in offerings made in reliance on Section 4(a)(6),
potentially hindering efficiency, competition and capital formation.
---------------------------------------------------------------------------

    \906\ See Kaplan, note 858.
---------------------------------------------------------------------------

    The proposed rules also might have an effect on broker-dealers and
finders participating in private offerings. Some issuers that
previously relied on broker-dealers and finders to assist with raising
capital through private offerings may, instead, begin to rely on the
Section 4(a)(6) exemption to find potential investors. The precise
impact of the proposed rules on these intermediaries would depend on
whether (and, if so, to what extent) issuers switch from using existing
exemptions to using the exemption provided by Section 4(a)(6) or
whether the proposed rules primarily attract new issuers. If a
significant number of issuers switch from raising capital under
existing private offering exemptions to relying on the exemption
provided by Section 4(a)(6), this likely would negatively affect the
revenue of finders in the market for private offerings, while
intermediaries under Section 4(a)(6) likely would gain from the
potential losses in revenue that finders may face. This may
disadvantage finders, but competition may ultimately lead to more
efficient allocation of capital.
    Using information from the Regulation D market allows us to
quantify at least some of these potential losses. For example, from
2009 to 2012, the estimated cumulative dollar amount of finder fees
charged for Regulation D offerings of up to $1 million was
approximately $18 million, covering 437 offerings.\907\ In a similar
vein, from 2009 to 2012, the estimated cumulative dollar amount of
commissions charged by broker-dealers for Regulation D offerings of up
to $1 million was approximately $76.6 million, covering 1,480
offerings.\908\ Thus, to the extent that issuers rely on Section
4(a)(6) to offer and sell securities in lieu of relying on Regulation
D, the dollar amount of commissions and finder fees generated would be
reduced, unless broker-dealers and finders provide new services that
such issuers are willing to pay. For example, under the statute,
broker-dealers would be able to operate portals. If securities-based
crowdfunding primarily attracts new issuers to the market, the impact
on broker-dealers and finder revenue could be negligible and the
proposed rules may even have a positive effect on their revenues by
revealing more potential clients for them. Additionally, greater
investor interest in private company investment might increase capital
formation, creating new opportunities for broker-dealers and finders
that otherwise would have been unavailable.
---------------------------------------------------------------------------

    \907\ We use data from new Form D filings and include in the
analysis only filings with an offer amount greater than zero. We
also exclude indefinite offerings because, for those, we cannot
determine the offer size.
    \908\ Since we do not have data on broker-dealer and finder
participation in other types of private offerings (e.g., Section
4(a)(2) offerings), it is possible that the impact of crowdfunding
in those offerings could be different than the impact on broker-
dealers and finders in Regulation D offerings.
---------------------------------------------------------------------------

    Rules implementing Section 4(a)(6) also could encourage current
participants in the securities-based crowdfunding market to diversify
their funding models to attract a broader group of issuers and to
provide additional investment opportunities for investors. For example,
donation-based crowdfunding platforms that currently offer investment
opportunities in micro-loans generally do not permit donors to collect
interest on their investments because of concerns that this activity
would implicate the federal securities laws unless an exemption from
registration is available.\909\ Under the proposed rules, these
platforms might choose to permit businesses to offer securities that
would provide investors with the opportunity to obtain a return on
investment. This could broaden their user base and attract a group of
investors different from those already participating in reward-based or
donation-based crowdfunding. It is likely that some registered broker-
dealers will find it profitable to enter the securities-based
crowdfunding market and operate funding portals as well. Such an entry
will increase the competition among intermediaries and likely lead to
lower costs for issuers.
---------------------------------------------------------------------------

    \909\ See, e.g., Deutsche Bank Microcredit Development Fund,
Inc., SEC No-Action Letter (Apr. 8, 2012).
---------------------------------------------------------------------------

    However, many projects that are well suited for reward-based or
donation-based crowdfunding (e.g., because they have finite lives,
their payoffs to investors could come before the project is completed,
they could be contingent on the project's success, etc.) may have
little in common with startups and small businesses that are well
suited for an offering in reliance on Section 4(a)(6). As a result,
diversification among existing platforms might not always be optimal or
preferred, particularly if complying with the proposed rules proves
disproportionately costly compared to the amount of potential capital
to be raised.
2. Crowdfunding Exemption
a. Limitation on Capital Raised
    The statute imposes certain limitations on the total amount of
securities that may be sold by an issuer during the 12-month period
preceding the date of the transaction made in reliance on Section
4(a)(6). Specifically, Section 4(a)(6)(A) provides for a maximum
aggregate amount of $1 million sold in reliance on the exemption during
the 12-month period.\910\
---------------------------------------------------------------------------

    \910\ See also proposed Rule 100(a)(1) of Regulation
Crowdfunding.
---------------------------------------------------------------------------

    The limitation on the amount that may be raised could benefit
investors by reducing the potential for dilution or fraud. However, we
recognize that the cap on the maximum amount that may be sold in
reliance on Section 4(a)(6) also could prevent certain issuers from
raising all the capital they need to make

their businesses viable, which in turn could result in lost
opportunities. It also is likely to reduce efficiency to the extent
that resources cannot be channeled to productive use. Due to the lack
of data, however, we are not able to quantify the size of the
efficiency loss. We are proposing, however, to allow issuers to conduct
other exempt offerings that would not necessarily be integrated with
the offering made in reliance on Section 4(a)(6), as long as the issuer
satisfies the requirements of the exemption relied upon for the
particular offering. We could have selected an alternative that would
have aggregated the amounts offered in reliance on Section 4(a)(6) with
the amounts offered pursuant to other exempt offerings. Under such an
alternative, the amounts raised in other exempt offerings would count
toward the maximum offering amount under Section 4(a)(6). Compared to
this alternative, the ability of issuers to conduct other exempt
offerings that would not count toward the maximum offering amount under
Section 4(a)(6) might alleviate some of the concerns that certain
issuers would not be able to raise sufficient capital.
b. Investment Limitations
    The statute and the proposed rules also impose certain limitations
on the aggregate dollar amount of securities that may be sold to any
investor in reliance on Section 4(a)(6) during the preceding 12
months.\911\ These provisions would cap the potential investment and,
consequently, the potential losses for any single investor. Offerings
made in reliance on Section 4(a)(6) would not be subject to review by
Commission staff prior to the sale of securities, but the aggregate
investment limits would provide some measure of protection for
investors.
---------------------------------------------------------------------------

    \911\ See Section 4(a)(6)(B). See also proposed Rule 100(a)(2)
of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We recognize that the investment caps would limit the potential
upside for investors. This might particularly affect the decisions of
those with large portfolios who might be able to absorb losses and
understand the risks associated with risky investments. For these
investors, the $100,000 aggregate cap might limit their incentive to
participate in the securities-based crowdfunding market, compared to
other types of investments, potentially depriving the securities-based
crowdfunding market of more experienced and knowledgeable investors and
possibly impeding capital formation. Limiting the participation of such
investors would be likely to negatively affect the informational
efficiency of the securities-based crowdfunding market because
sophisticated investors are better able to accurately price such
offerings. These investors also could add value to the discussions
taking place through an intermediary's communication channels about a
potential offering by providing their views on financial viability.
    The aggregate cap on investments also could limit the ability of
investors to diversify within the securities-based crowdfunding market.
As securities-based crowdfunding investments might have inherently high
failure rates,\912\ investors who do not diversify their investments
across a number of offerings could face an increased risk of incurring
large losses, relative to their investments, even when they investigate
offerings thoroughly. By comparison, VC firms typically construct
highly diversified portfolios with the understanding that many ventures
fail, resulting in a complete loss of some investments, but with the
expectation that those losses will be offset by the large upside of the
relatively fewer investments that succeed.\913\ The securities-based
crowdfunding market is expected to involve earlier-stage financing
compared to venture capital financing, and therefore, the chances of
investment success may be lower.\914\ The statutory thresholds for
overall securities-based crowdfunding investments under Section 4(a)(6)
might limit an investor's ability to choose a sufficiently large number
of investments to offset this risk and to recover the due diligence
costs of sufficiently investigating individual investments. One
potential solution to this diversification problem would be to invest
smaller amounts in more ventures. The drawback is that the costs
associated with identifying and reviewing investment opportunities are,
to a large extent, fixed.
---------------------------------------------------------------------------

    \912\ See discussion in Section III.A.3 above.
    \913\ See John Cochrane, The Risk and Return of Venture Capital,
75 J. of Fin. Econ. 3 (2005).
    \914\ See Agarwal, note 873.
---------------------------------------------------------------------------

c. Issuer Eligibility
    The statute and the proposed rules exclude certain categories of
issuers from eligibility to rely on Section 4(a)(6) to engage in
crowdfunding transactions.\915\ We are proposing to exclude three
additional categories of issuers, beyond those identified in the
statute, from being eligible to rely on Section 4(a)(6) to engage in
crowdfunding transactions. First, we propose to exclude issuers that
would be disqualified from relying on Section 4(a)(6) pursuant to the
disqualification provisions of Section 302(d) of the JOBS Act.\916\
Second, we propose to exclude issuers that sold securities in reliance
on Section 4(a)(6) and have not filed with the Commission and provided
to investors the ongoing annual reports required by Regulation
Crowdfunding during the two years immediately preceding the filing of
the required offering statement.\917\ This additional exclusion would
not impose any additional burdens and costs on an issuer that the
issuer would not have already incurred had it complied with the ongoing
reporting requirements as they came due. Further, the requirement that
a delinquent issuer prepare two annual reports at one time should
provide updated and current information to investors without requiring
an issuer to become current in its reporting obligations. As a result,
we believe that this exclusion would incentivize issuers to comply with
its ongoing reporting requirements, if they intend to rely again on
Section 4(a)(6) to raise additional capital, which would allow
investors to make more informed investment decisions. We also recognize
that conditioning an issuer's Section 4(a)(6) eligibility on the
requirement that issuers provide ongoing reports for only the previous
two-years may deprive investors of information in some periods that
might otherwise have negative effects on the price formation and
liquidity of the securities in the secondary market. The potential
damage to an issuer's reputation resulting from being delinquent,
however, may provide the issuer with sufficient incentive to
consistently comply with the ongoing reporting requirements.
---------------------------------------------------------------------------

    \915\ See Section 4A(f). See also proposed Rule 100(b) of
Regulation Crowdfunding.
    \916\ See proposed Rule 100(b)(4) of Regulation Crowdfunding.
    \917\ See discussion in Section II.A.4 above.
---------------------------------------------------------------------------

    Third, we propose to exclude a company that has no specific
business plan or has indicated that its business plan is to engage in a
merger or acquisition with an unidentified company or companies. This
proposed ineligibility requirement will have only a marginal effect on
issuer participation and capital formation because the startups and
small businesses seeking the exemption would generally have, even in
the early stage of their development, a business plan specific enough
to distinctly differentiate them from companies with no specific
business plan.

3. Issuer Requirements
    We recognize that there are benefits and costs associated with the
statutory requirements and the proposed rules, including the disclosure
requirements, pertaining to issuers. While the estimated costs to
issuers are discussed in further detail elsewhere in this section, the
following table summarizes these costs:
---------------------------------------------------------------------------

    \918\ See discussion in Section III.B.4 below. For purposes of
the table, we estimate the range of compensation that an issuer
would pay the intermediary assuming the following: (1) The
compensation would be calculated as a percentage of the offering
amount ranging from 5% to 15% of the total offering amount; and (2)
the issuer is offering $50,000, $300,000 and $750,000, which are the
mid-points of the offering amounts under each of the respective
columns. The compensation paid to the intermediary may, or may not,
cover services to an issuer in connection with the preparation and
filing of the proposed filings identified in this table.
    \919\ See Section IV.C.1.d below for a discussion of the hourly
burdens for obtaining EDGAR access codes on Form ID. We estimate,
for purposes of the Paperwork Reduction Act, the cost of outside
counsel at a rate of $400 an hour. We recognize that the costs of
retaining outside professionals may vary depending on the nature of
the professional service and that many small issuers are likely to
face substantially lower costs. Small issuers also may choose to
prepare the proposed forms without seeking the assistance of outside
counsel. The table shows only those costs we attribute to outside
professionals, for purposes of this analysis, as we believe internal
costs would vary greatly among issuers.
    \920\ See proposed Rule 203(a)(1) of Regulation Crowdfunding.
See also Section IV.C.1.a below for a discussion of the hourly
burdens for preparing and filing Form C for each offering. For
purposes of the table, we estimate that 25 percent of the hourly
burden would be carried by outside professionals retained by the
issuer at an average cost of $400 per hour.
    \921\ See proposed Rule 203(a)(3) of Regulation Crowdfunding.
See also Section IV.C.1.a below for a discussion of the hourly
burdens for preparing and filing the progress updates on Form C-U.
For purposes of the table, we estimate that the hourly burden would
be carried by outside professionals retained by the issuer at an
average cost of $400 per hour.
    \922\ See proposed Rule 203(b)(1) of Regulation Crowdfunding.
See also Section IV.C.1.b below for a discussion of the hourly
burdens for preparing and filing each annual report on Form C-AR.
For purposes of the table, we estimate that 25 percent of the hourly
burden would be carried by outside professionals retained by the
issuer at an average cost of $400 per hour.
    \923\ See proposed Rule 201(t) of Regulation Crowdfunding. See
also Section II.B.1.a.ii above.
    \924\ See proposed Rule 203(b)(2) of Regulation Crowdfunding.
See also Section IV.C.1.c below for a discussion of the hourly
burdens for preparing and filing Form C-TR. For purposes of the
table, we estimate that the hourly burden would be carried by
outside professionals retained by the issuer at an average cost of
$400 per hour.

----------------------------------------------------------------------------------------------------------------
                                                                                Offerings of
                                                                                more than     Offerings of
                                                  Offerings of $100,000 or less    $100,000, but     more than
                                                                                not more than     $500,000
                                                                                $500,000
----------------------------------------------------------------------------------------------------------------
Compensation to the intermediary \918\........  $2,500-7,500....................  $15,000-45,000  $37,500-112,50
                                                                                0
Costs per issuer for obtaining EDGAR access     60..............................              60              60
 codes on Form ID \919\.
Costs per issuer for preparation and filing of  6,000...........................           6,000           6,000
 Form C for each offering \920\.
Costs per issuer for preparation and filing of  400.............................             400             400
 the progress updates on Form C-U \921\.
Costs per issuer for preparation and filing of  4,000...........................           4,000           4,000
 annual report on Form C-AR \922\.
Costs for annual review or audit of financial   Not required....................          14,350          28,700
 statements per issuer \923\.
Costs per issuer for preparation and filing of  600.............................             600             600
 Form C-TR to terminate reporting \924\.
----------------------------------------------------------------------------------------------------------------

a. General Disclosure Requirements
    The statute and the proposed rules related to issuer disclosures
are intended to reduce the information asymmetries that currently exist
between small businesses and potential investors. Small private
businesses typically do not disclose information as frequently or as
extensively as public companies, if at all. Moreover, unlike public
companies, small private businesses are not required to hire an
independent third party to validate the information disclosed. When
information about a company is difficult to obtain or the quality of
the information is uncertain, investors are at risk of making poorly-
informed investment decisions regarding that company.
    Such information asymmetries might be especially acute in the
securities-based crowdfunding market because the market includes
startups and small businesses that have significant risk factors and
that might have characteristics that have led them to be rejected by
other potential funding sources, including banks, VCs and angel
investors. In addition, the securities-based crowdfunding market may
attract unsophisticated retail investors who may not have the resources
necessary to effectively monitor issuers. For instance, some issuers
might use capital to fund riskier projects than what was disclosed to
investors, or they might not make best efforts to achieve their stated
business objectives. If investors in securities-based crowdfunding are
unable to monitor such issuers because of limited information or
credible third-party validation of this information, they might
eventually seek higher yields or choose to withdraw from the
securities-based crowdfunding market altogether, thus increasing the
cost of capital to issuers and impeding capital formation. In addition,
investors in offerings made in reliance on Section 4(a)(6) might make
relatively small investments. The potential dispersed investor base may
make it difficult for investors to solve collective action problems.
    The statute and the proposed rules seek to reduce information
asymmetries by requiring issuers to file specified disclosures with the
Commission for offerings made in reliance on Section 4(a)(6) on the
offer date and on an annual basis thereafter.\925\ Issuers also would
be required to provide these disclosures to investors, and in the case
of offering documents, to potential investors and the relevant broker
or funding portal. The proposed disclosure requirements described above
\926\ are more extensive than those required under existing offering
exemptions. For example, although the current requirements under
Regulation A require similar initial financial disclosures, they do not
require periodic reporting.\927\ Issuers using the Rule 504 exemption
under Regulation D to raise up to $1 million do not need to provide
audited financial statements and there are no periodic disclosure
requirements. Regulation D offerings under Rules 505 and 506 for up to
$2 million require issuers to provide audited current balance sheets to
non-accredited

investors (and unaudited statements of income, cash flows and changes
in stockholders' equity), but there are no periodic reporting
requirements. The disclosure requirements in the proposed rules should
benefit investors by enabling them to better evaluate the issuer and
the offering, monitor how the issuer is doing over time and be aware of
when the issuer may terminate its ongoing reporting obligations. This
would allow investors with various risk preferences to invest in the
offerings best suited for their risk tolerance, thus improving
allocative efficiency.
---------------------------------------------------------------------------

    \925\ See Section 4A(b). See also proposed Rules 201, 202 and
203 of Regulation Crowdfunding.
    \926\ See Section II.B.1 above.
    \927\ Securities Act Rule 257 (17 CFR 230.257), however,
requires issuers conducting offerings pursuant to Regulation A to
file Form 2-A (17 CFR 239.91) with the Commission at certain
intervals to report sales and the use of proceeds until termination,
completion or final sale of securities in the offering or until the
proceeds have been applied, whichever is later.
---------------------------------------------------------------------------

    The disclosure requirements also could improve informational
efficiency in the market. Specifically, the required disclosure would
provide investors with a useful benchmark to evaluate other private
issuers both within and outside of the securities-based crowdfunding
market.\928\ Additionally, disclosure by issuers engaging in
crowdfunding transactions in reliance on Section 4(a)(6) could inform
financial markets more generally by providing information about new
consumer trends and new products, thus creating externalities that
benefit other types of investors and issuers.
---------------------------------------------------------------------------

    \928\ See Christian Leuz and Peter Wysocki, Economic
Consequences of Financial Reporting and Disclosure Regulation: A
Review and Suggestions for Future Research, (Working Paper,
University of Chicago) (2008), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1105398.
---------------------------------------------------------------------------

    We recognize, however, that the proposed disclosure requirements
also would have associated limitations and costs, including the direct
costs of preparation, certification (when necessary) and dissemination
of the disclosure documents. We note that, under the statute, the
disclosure requirements for offerings made in reliance on Section
4(a)(6) are more extensive, in terms of breadth and frequency, than
those for other private offerings. The statute also provides us with
the discretion to impose additional requirements on issuers engaging in
crowdfunding transactions, and in some cases, the proposed rules would
require issuers to disclose information in addition to the information
specifically listed in the statute.\929\ For example, we are proposing
to require disclosure of any indebtedness of the issuer \930\ because
we believe that servicing debt could place additional pressures on a
company in the early stages of development and this information would
be important to investors. The proposed rules also would require
disclosure of any prior securities-based crowdfunding or other exempt
offerings conducted within the past three years.\931\ In some cases, an
issuer might have previously engaged in crowdfunding in reliance on
Section 4(a)(6) and may be returning for additional funding. We believe
that it would be important to investors to know whether the prior
securities-based crowdfunding or other offerings of securities were
successful, and if so, the amount raised in these prior offerings.
Compared to the disclosure requirements under existing private offering
exemptions, this information would better inform investors about the
capital structure of an issuer, might provide insight into how prior
offerings were valued and could enable investors to more fully assess
the issuer and the potential risks associated with the current
offering.
---------------------------------------------------------------------------

    \929\ See Section 4A(b)(5). See also Section II.B.1.a.i(g) for a
description of the additional disclosure requirements.
    \930\ See proposed Rule 201(p) of Regulation Crowdfunding.
    \931\ See proposed Rule 201(q) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We recognize that the additional information required by the
discretionary requirements would increase the disclosure costs to
issuers, but we believe that this would improve investor decision-
making and ultimately benefit issuers with viable investment
opportunities by improving price efficiency in the securities-based
crowdfunding market. Although we recognize that requiring less
disclosure would impose lower compliance costs, we believe that the
additional disclosure requirements we are proposing strike the
appropriate balance between enhancing the ability of issuers relying on
Section 4(a)(6) to raise capital and enabling investors to make
informed investment decisions. Additionally, disclosure might have
indirect costs to the extent that information disclosed by issuers
relying on Section 4(a)(6) could be used by their competitors.
Requiring significant levels of disclosure at an early stage of an
issuer's lifecycle might affect an issuer's competitive position and
might limit the use of the exemption in Section 4(a)(6) by issuers who
are especially concerned with confidentiality. It also is possible that
these disclosure costs would make other types of private offerings more
attractive to potential securities-based crowdfunding issuers. For
example, the recent changes to Rule 506 of Regulation D,\932\ which
allow for general solicitation, subject to certain conditions, are
likely to increase its attractiveness and, thus, may divert potential
issuers from crowdfunding.
---------------------------------------------------------------------------

    \932\ See General Solicitation Adopting Release, note 12.
---------------------------------------------------------------------------

    In addition, under the statute and the proposed rules, issuers that
complete a crowdfunding transaction in reliance on Section 4(a)(6)
would be subject to ongoing reporting requirements,\933\ which are not
required under other private offering exemptions and which might
increase compliance costs. The ongoing reporting, however, might
provide a liquidity benefit for secondary sales of the issuers'
securities.
---------------------------------------------------------------------------

    \933\ See Section 4A(b)(4). See also proposed Rule 202 of
Regulation Crowdfunding.
---------------------------------------------------------------------------

b. Financial Condition and Financial Statement Disclosure Requirements
    With respect to the statutory requirement to provide disclosure
about the issuer's financial condition, the proposed rules would
require narrative disclosure addressing the issuer's historical results
of operations, in addition to information about its liquidity and
capital resources.\934\ We expect that this discussion would inform
investors about the financial condition of the issuer, without imposing
significant costs, because the issuer should already have such
information readily available. In addition, the proposed rules would
not prescribe the content or format for this information.
---------------------------------------------------------------------------

    \934\ See proposed Rule 201(s) of Regulation Crowdfunding. See
also Section II.B.1.a.ii(a) above.
---------------------------------------------------------------------------

    With respect to the requirement to provide financial statements,
the proposed rules would implement the tiered financial disclosure
requirements specified by the statute, which are based on the aggregate
amount of securities offered and sold during the preceding 12-month
period, inclusive of the offering amount in the offering for which
disclosure is being provided.\935\ Although the disclosure requirements
would provide investors with more information than might otherwise be
obtained in private offerings, the disclosures might create additional
costs for those issuers who have limited financial and accounting
expertise necessary to produce the financial disclosures envisioned by
the statute and the proposed rules. In this respect, the statute
anticipates a level of development among issuers that might not be
present in the relevant securities-based crowdfunding market. For
instance, a startup with a promising business idea might have little
capital prior to the offering, leaving limited amounts to be audited or
certified. The issuer disclosures required for offerings made in
reliance on Section 4(a)(6),

therefore, might not always help investors with their investment
decisions or may weigh against an issuer when a potential investor is
deciding whether to make an investment.
---------------------------------------------------------------------------

    \935\ See proposed Rule 201(t) of Regulation Crowdfunding. See
also Section II.B.1.a.ii(b) above.
---------------------------------------------------------------------------

    The proposed rules would require all issuers to provide a complete
set of their financial statements (a balance sheet, income statement,
statement of cash flows and statement of changes in owners' equity)
that are prepared in accordance with U.S. GAAP and cover the shorter of
the two most recently completed fiscal years or the period since
inception.\936\ This proposed requirement may impose a cost on
potential issuers, especially those smaller issuers that may have
historically prepared their financial statements in accordance with
other comprehensive bases of accounting, such as a cash basis of
accounting or a tax basis of accounting, rather than U.S. GAAP.
Investors, however, would benefit from the requirement that financial
statements be prepared in accordance with U.S. GAAP, as U.S. GAAP is
widely used and would allow for more comparability among issuers.
---------------------------------------------------------------------------

    \936\ See proposed Instruction 2 to paragraph (t) of proposed
Rule 201 of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules also specify that an issuer could conduct an
offering in reliance on Section 4(a)(6) using financial statements for
the fiscal year prior to the most recently completed fiscal year,
provided that not more than 120 days have passed since the end of the
issuer's most recently completed fiscal year, the issuer was not
otherwise required to update the financial statements and updated
financial statements are not otherwise available.\937\ This might
impose a cost on potential investors to the extent that the investors
would not have the most recent information about the issuer's financial
condition. However, this concern is somewhat mitigated by the proposed
requirement that issuers include a discussion of changes in their
financial condition since the period covered by the financial
statements, including changes in revenue or net income and other
relevant financial measures.\938\
---------------------------------------------------------------------------

    \937\ See proposed Instruction 8 to paragraph (t) of proposed
Rule 201 of Regulation Crowdfunding.
    \938\ See proposed Instruction 9 to paragraph (t) of proposed
Rule 201 of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Requiring financial statements covering the two most recently
completed fiscal years, as proposed, would benefit investors by
providing a basis for comparison against the most recently completed
fiscal year and by allowing investors to identify changes in the
development of the business. Compared to an alternative that we could
have selected, that of requiring financial statements covering only the
most recently completed fiscal year as one commenter suggested,\939\
requiring a second year of financial statements might increase the cost
for the issuer.\940\ Also, to the extent that the issuer had no or
little operations in the prior year, the benefit of comparability might
not apply. In this regard, we recognize that many issuers might not
have any financial history, and potential investors might make
investment decisions without a track record of issuer performance,
relying largely on the belief that an issuer can succeed based on the
concept and other factors.
---------------------------------------------------------------------------

    \939\ See CompTIA Letter.
    \940\ But see note 174.
---------------------------------------------------------------------------

    For offerings of $100,000 or less, the statute and the proposed
rules would require the issuer to provide its filed income tax returns
for the most recently completed year (if any) and financial statements
that are certified by the principal executive officer to be true and
complete in all material respects.\941\ While providing an income tax
return is not expected to impose a significant cost on issuers, it is
not clear to what extent the information presented in a tax return
would be useful for an investor evaluating whether or not to purchase
securities from the issuer. Although the information might be limited,
it would not be uninformative. Under the proposed rules, issuers would
be required to redact personal information from the required tax
returns.\942\ We believe that this would alleviate privacy concerns,
while still satisfying the statutory requirement to provide tax return
information.
---------------------------------------------------------------------------

    \941\ See Section 4A(b)(1)(D)(i). See also proposed Rule
201(t)(1) of Regulation Crowdfunding.
    \942\ See proposed Instruction 3 to paragraph (t) of proposed
Rule 201 of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Moreover, the proposed rules would specify that if an issuer is
offering securities in reliance on Section 4(a)(6) before filing a tax
return for the most recently completed fiscal year, the issuer could
use the tax return filed for the prior year, on the condition that the
issuer provides the tax return for the most recent fiscal year when it
is filed, if it is filed during the offering period.\943\ This
accommodation should benefit issuers by enabling them to engage in
transactions during the time period between the end of their fiscal
year and when they file their tax return for that year. This might
impose a cost on potential investors because they might not receive the
most up-to-date information about the issuer's financial condition.
However, this concern is somewhat mitigated by the proposed requirement
that issuers provide disclosure about material changes in their
financial condition since the prior year.\944\ In addition, we are
proposing a form of certification for the principal executive officer
to provide in the issuer's offering statement, which we believe would
help issuers comply with the certification required by the statute and
the proposed rules.\945\
---------------------------------------------------------------------------

    \943\ Id.
    \944\ See proposed Instruction 9 to paragraph (t) of proposed
Rule 201 of Regulation Crowdfunding.
    \945\ See proposed Instruction 4 to paragraph (t) of proposed
Rule 201 of Regulation Crowdfunding.
---------------------------------------------------------------------------

    For offerings of more than $100,000, but not more than $500,000,
the proposed rules specify that the required financial statements must
be reviewed in accordance with SSARS issued by the AICPA.\946\ Although
one alternative we could have selected is to develop a new review
standard for purposes of these rules, we believe that issuers would
benefit from a rule that requires the use of the AICPA's widely-
utilized review standard, particularly in light of the fact that there
are no other widely-utilized review standards from which to choose. We
believe that many accountants reviewing financial statements of issuers
raising capital in reliance on Section 4(a)(6) would be familiar with
the AICPA's standards and procedures for review, which should help to
lessen review costs.
---------------------------------------------------------------------------

    \946\ See proposed Rule 201(t)(2) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    For offerings of more than $500,000, the statute and the proposed
rules would require that financial statements be audited.\947\ The
statute gives us discretion to change the threshold that would require
audited financial statements, but we are not proposing to change it at
this time. We believe that audited financial statements would benefit
investors in offerings by issuers with substantive prior business
activity by providing them with greater confidence in the quality of
the financial statements of issuers seeking to raise larger amounts of
capital. We also understand that requiring audited financial statements
would increase the cost to issuers, and for issuers that are newly
formed, with no or very limited operations, the benefit of the audit
may not justify the cost of the audit. Compared to an alternative that
we could have taken, that of a higher threshold (e.g., offerings of
more than $700,000) for providing audited financial statements, our
approach in the proposed rules would likely result in more issuers
having to provide audited financial statements, as well as

higher compliance costs for those issuers. Based on a compilation of
data submitted to us by reporting companies, the average cost of an
audit for an issuer with less than $1 million in market capitalization
and less than $1 million in revenues is approximately $28,700.\948\ We
expect that the cost of an audit for many issuers engaging in a
crowdfunding transaction in reliance on Section 4(a)(6) might be less,
because they likely would be at an earlier stage of development than
issuers that file Exchange Act reports with us and, thus, would be less
complex to audit.
---------------------------------------------------------------------------

    \947\ See Section 4A(b)(1)(D)(iii). See also proposed Rule
201(t)(3) of Regulation Crowdfunding.
    \948\ See Audit Analytics, Auditor-Fees, available at http://www.auditanalytics.com/0002/audit-data-company.php. The auditor fee
database contains fee data disclosed by Exchange Act reporting
companies in electronic filings since January 1, 2001. For purposes
of our calculation, we averaged the auditor fee data for companies
with both market capitalization and revenues of less than $1 million
(the smallest subgroup of companies for which data is compiled).
---------------------------------------------------------------------------

    For offerings of more than $500,000, the proposed rules also would
require financial statements to be audited in accordance with the
auditing standards issued by either the AICPA or the PCAOB.\949\ We
believe that letting issuers choose the auditing standards could
provide a number of benefits. If an issuer currently has financial
statements audited under one of the specified standards, the issuer
would not need to obtain a new audit or engage a different auditor to
conduct an audit to engage in a crowdfunding transaction in reliance on
Section 4(a)(6) and the proposed rules. If an issuer chooses to have an
audit conducted in accordance with PCAOB auditing standards, it would
not need to obtain a new audit to file a registration statement with
the Commission for a registered offering. By not taking an alternative
approach, that of requiring the audits to be conducted by PCAOB-
registered firms, the proposed rules should allow for the eligibility
of a greater number of accountants to audit the issuers' financial
statements, and thereby, could reduce costs for crowdfunding issuers.
---------------------------------------------------------------------------

    \949\ See proposed Rule 201(t)(3) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    As described above, the statute and the proposed rules require some
financial statements to be reviewed or audited by a public accountant.
The proposed rules would specify that a public accountant must be
independent of the issuer, in accordance with the independence
standards set forth in Rule 2-01 of Regulation S-X.\950\ The proposed
requirement to comply with our independence standards may impose costs
to the extent that there are higher costs associated with engaging an
accountant that satisfies the independence standards. Also, the
independence standards set forth in Rule 2-01 of Regulation S-X may
impose higher costs than other independence standards, such as the
AICPA independence standards.\951\
---------------------------------------------------------------------------

    \950\ See proposed Instruction 7 to paragraph (t) of proposed
Rule 201 of Regulation Crowdfunding.
    \951\ For example, under the independence standards set forth in
Rule 2-01 of Regulation S-X, an auditor cannot provide bookkeeping
services to an audit client, so an issuer would need to retain a
different accountant to provide those services. See Rule 2-01(c)(4)
of Regulation S-X [17 CFR 210.2-01(c)(4)].
---------------------------------------------------------------------------

    In addition, the proposed rules would require an issuer to file a
review report or audit report, whichever is applicable.\952\ This could
impose an additional cost on issuers to the extent that the accountant
or auditor increases the fee associated with the review or audit to
compensate for any additional liability that may result.
---------------------------------------------------------------------------

    \952\ See proposed Instructions 5 and 6 to paragraph (t) of
proposed Rule 201 of Regulation Crowdfunding.
---------------------------------------------------------------------------

c. Issuer Filing Requirements
    The statute does not specify a format that issuers must use to
present the required disclosures and file the disclosures with the
Commission. As noted above, we are proposing to require issuers to file
the mandated disclosure on EDGAR using new Form C.\953\ Issuers would
incur the cost to comply with the disclosure requirements and file the
information in the new proposed Form C: Offering Statement and Form C-
U: Progress Update before the offering was funded, thus imposing a cost
on issuers regardless of whether their offerings were successful. In
addition, issuers would incur the cost to comply with the ongoing
reporting requirements and file information in the new proposed Form C-
AR: Annual Report.\954\
---------------------------------------------------------------------------

    \953\ See proposed Rule 203(a) of Regulation Crowdfunding. See
also Section II.B.3 above.
    \954\ See proposed Rule 203(b) of Regulation Crowdfunding. See
also Section II.B.3 above.
---------------------------------------------------------------------------

    Form C would require certain disclosures to be submitted using an
XML-based filing,\955\ while allowing the issuer to customize the
presentation of other required disclosures. This proposed approach
would provide issuers with the flexibility to present required
disclosures in a cost-effective manner, while also requiring the
disclosure of certain key offering information that would be collected
in a standardized format, which we believe would benefit investors and
help facilitate capital formation.
---------------------------------------------------------------------------

    \955\ See proposed Instruction to paragraph (a)(1) of proposed
Rule 203 of Regulation Crowdfunding. See also Section II.B.3 above.
---------------------------------------------------------------------------

    We expect that requiring certain disclosures to be submitted using
XML-based filings would produce numerous benefits for issuers,
investors and the Commission. For instance, using information filed
pursuant to these proposed requirements, users of the information could
readily track capital generated through crowdfunding offerings without
requiring the manual inspection of each filing. The ability to
efficiently collect information on all issuers also could provide an
incentive for data aggregators or other market participants to offer
services or analysis that investors could use to compare and choose
among different offerings. For example, reporting key financial
information using XML-based filings would allow investors, analysts and
data aggregators to more easily compile, analyze and compare
information regarding the capital structure and financial position of
various issuers. XML-based filings also would provide the Commission
with data about the use of the new exemption that would allow the
Commission to evaluate whether the rules implementing the exemption
include appropriate investor protections and whether the rules unduly
restrict capital formation. In addition, requiring disclosure of the
compensation paid to intermediaries would help inform the Commission,
issuers and investors about the costs of raising capital in this
market.
    We expect that the cost of preparing and filing Form C could vary
significantly among issuers. For example, issuers with little operating
activity might have lower costs because they likely would have less to
disclose than a more complex operation. Further, small issuers might
choose to prepare and file Form C without seeking the assistance of
outside counsel.\956\ Thus, the Commission also expects that reporting
costs for many small issuers may be insignificant.\957\
---------------------------------------------------------------------------

    \956\ See Section IV.C.1. below.
    \957\ We estimate, for purposes of the Paperwork Reduction Act,
that 25 percent of the 60 hours anticipated to prepare and file Form
C could be performed by outside counsel at a rate of $400 an hour.
See Section IV.C.1.a below. We recognize that the costs of retaining
outside professionals may vary depending on the nature of the
professional service and that many small issuers are likely to face
substantially lower costs.
---------------------------------------------------------------------------

    The proposed rules also would require that issuers file a Form C-U:
Progress Update to describe the progress of the issuer in meeting the
target offering amount.\958\ The proposed rules would require the
issuer to file two progress updates within five business

days from the day when the issuer reaches one-half and 100 percent of
the target offering amount, as well as a final progress update within
five business days after the end of the offering period if the issuer
will accept proceeds in excess of the target offering amount. The
Commission expects the costs of preparing these updates to vary but to
be relatively small, given how little information is required.\959\
However, if the size of the security-based crowdfunding market
developed to a level commensurate with the current non-security-based
crowdfunding market, this could result in tens of thousands of filings
with the Commission each year. To the extent that this same progress
information also would be available on the registered intermediary's
Web site, as is already occurring with existing non-security-based
offering platforms, then there might be little marginal benefit to
these filings. For these reasons, we are seeking comment on alternative
frequencies and manner of progress updates.
---------------------------------------------------------------------------

    \958\ See proposed Rule 203(a)(3) of Regulation Crowdfunding.
See also Sections II.B.1.b and II.B.3 above.
    \959\ See Section IV.C.1.a below.
---------------------------------------------------------------------------

    As noted above, the statute also requires an issuer to file and
provide to investors information about the issuer's financial condition
on at least an annual basis, as determined by the Commission.\960\ To
implement this statutory requirement, the proposed rules would require
any issuer that sold securities in a crowdfunding transaction in
reliance on Section 4(a)(6) to file annually with the Commission a new
Form C-AR: Annual Report, no later than 120 days after the end of each
fiscal year covered by the report.\961\ We believe that annual reports
would inform investors in their portfolio decisions and could enhance
price efficiency. Moreover, as discussed above, under the statute and
the proposed rules, the securities would be freely tradable after one
year,\962\ and therefore, this information also would benefit potential
future holders of the issuer's securities by enabling them to update
their assessments as new information was made available through the
annual updates, potentially allowing for more efficient pricing. More
generally, these proposed continued disclosures also might help
facilitate the transfer of securities in secondary markets after the
one-year restricted period ends, which could mitigate some of the
potential liquidity issues that are unique to the securities-based
crowdfunding market, discussed above.
---------------------------------------------------------------------------

    \960\ See Section 4A(b)(4).
    \961\ See proposed Rule 202 of Regulation Crowdfunding. See also
Section II.B.2 above for a discussion of the disclosure requirements
for Form C-AR.
    \962\ See Section 4A(e). See also proposed Rule 501 of
Regulation Crowdfunding.
---------------------------------------------------------------------------

    Annual reporting requirements, however, would impose ongoing costs
on issuers. The proposed rules would require that issuers continue to
file Form C-AR: Annual Report until the earlier of the following: (1)
The issuer becomes a reporting company required to file reports under
Exchange Act Sections 13(a) or 15(d); (2) the issuer or another party
repurchases all of the securities issued pursuant to Securities Act
Section 4(a)(6), including any payment in full of debt securities or
any complete redemption of redeemable securities; or (3) the issuer
liquidates or dissolves its business in accordance with state law.\963\
We estimate that the cost to prepare and file Form C-AR would be
approximately two-thirds of the cost to prepare and file Form C:
Offering Statement. Form C-AR requires similar disclosure as Form C. If
an issuer undertakes multiple offerings, which individually require
different levels of financial statements, the issuer would be required
to provide financial statements that meet the highest standard
previously provided. An issuer would not be required to provide the
offering-specific information that was filed at the time of the
offering, but the disclosure requirements would otherwise be the same
as those required in connection with the offer and sale of the
securities,\964\ which should minimize the disclosure burden for
issuers. Any issuer terminating its annual reporting obligations would
be required to file a notice under cover of ``Form C-TR: Termination of
Reporting'' to notify investors and the Commission that it would no
longer file and provide annual reports pursuant to the requirements of
Regulation Crowdfunding.\965\ The Commission expects the costs of
preparing these updates to vary significantly among issuers.\966\
---------------------------------------------------------------------------

    \963\ See proposed Rule 202(b) of Regulation Crowdfunding.
    \964\ See proposed Rule 202(a) of Regulation Crowdfunding.
    \965\ See proposed Rule 203(b)(2) of Regulation Crowdfunding.
    \966\ Issuers would spend, on average, approximately 1.5 hours
to complete this task. Again, we do not have the information
necessary to provide a reasonable estimate of the costs associated
with this time burden because these costs would vary significantly
among small issuers and would depend, in part, on the stage of the
issuer's development. See Section IV.C.1.c below.
---------------------------------------------------------------------------

d. Advertising--Notice of Offering
    The statute and the proposed rules would prohibit an issuer from
advertising the terms of the offering, except for notices that direct
investors to an intermediary's platform.\967\ The terms of the offering
would include the amount offered, the nature of the securities, price
of the securities and length of the offering period.\968\ The proposed
rules would allow an issuer to publish a notice about the terms of the
offering made in reliance on Section 4(a)(6), subject to certain
limitations on the content of the notice.\969\ The notices would be
similar to the ``tombstone ads'' permitted under Securities Act Rule
134,\970\ except that the proposed rules would require the notices to
direct potential investors to the intermediary's platform, through
which the offering made in reliance on Section 4(a)(6) would be
conducted.
---------------------------------------------------------------------------

    \967\ See Section 4A(b)(2). See also proposed Rule 204 of
Regulation Crowdfunding.
    \968\ See proposed Instruction to proposed Rule 204 of
Regulation Crowdfunding.
    \969\ See proposed Rule 204(b) of Regulation Crowdfunding. See
also Section II.B.4 above.
    \970\ 17 CFR 230.134.
---------------------------------------------------------------------------

    We believe this approach would allow issuers to generate interest
in offerings and to leverage the power of social media to attract
potential investors. At the same time, we believe it also would protect
potential investors by limiting the ability of issuers to provide
certain advertising materials without also providing the disclosures,
available on the intermediary's platform, that are required for an
offering made in reliance on Section 4(a)(6). Moreover, this proposed
requirement that limits the issuer's ability to advertise the terms of
the offering, while directing investors to the intermediary's platform
for more offering-specific information, would not impose costs to
market participants.
e. Compensation of Persons Promoting the Offering
    The statute and the proposed rules would prohibit an issuer from
compensating, or committing to compensate, directly or indirectly, any
person to promote the issuer's offering through communication channels
provided by the intermediary unless the issuer takes reasonable steps
to ensure that such person clearly discloses the receipt of such
compensation (both past and prospective) each time a promotional
communication is made.\971\
---------------------------------------------------------------------------

    \971\ See Section 4A(b)(3). See also proposed Rule 205 of
Regulation Crowdfunding.
---------------------------------------------------------------------------

    We believe that such requirement would benefit the securities-based
crowdfunding market because it would allow investors to make better
informed investment decisions. A premise of crowdfunding is that
investors would rely, at least in part, on the collective wisdom of the
crowd to make better informed investment decisions.

Accordingly, we propose to require intermediaries to provide
communication channels for issuers and investors to exchange
information about the issuer and its offering.\972\ Although the
requirement to take steps to ensure disclosure of compensation paid to
persons promoting the offering would impose compliance costs for
issuers, we believe that investors would benefit from knowing if the
investment they are considering and discussing with other potential
investors is being touted by a promoter who is compensated by the
issuer.
---------------------------------------------------------------------------

    \972\ See proposed Rule 303(c) of Regulation Crowdfunding.
---------------------------------------------------------------------------

f. Oversubscription and Offering Price
    The proposed rules would permit an issuer to accept investments in
excess of the target offering amount, subject to the $1 million
limitation and certain conditions.\973\ We believe that permitting
oversubscriptions would provide flexibility to issuers so that they can
raise the amount of capital they deem necessary to finance their
businesses. For example, permitting oversubscriptions would allow an
issuer to raise more funds, while lowering compliance costs, if the
issuer discovers during the offering process that there is greater
investor interest in the offering than initially anticipated or if the
cost of capital is lower than initially anticipated.
---------------------------------------------------------------------------

    \973\ See proposed Rule 201(h) of Regulation Crowdfunding. See
also Section II.B.6.i above.
---------------------------------------------------------------------------

    The proposed rules also would not require issuers to set a fixed
price or prohibit dynamic pricing. We believe that allowing issuers
flexibility in setting the offering price would allow them to extract
investors' reservation price for a given offering or to incentivize
investors to subscribe to an offering early, thus increasing the
likelihood that the offering would be successful. Further, the proposed
required disclosure of the pricing method used and the final prices for
the securities before an offering closes,\974\ coupled with the
investor's ability to cancel his or her investment commitment,\975\
could mitigate potential concerns that dynamic pricing could be used to
provide preferential treatment to certain investors (e.g., when an
issuer offers better prices to relatives or insiders). We also believe
that the proposed cancellation rights would address the concerns about
time pressure on the investment decision because investors would have
the opportunity to cancel their investment commitments if they decide
to do so.
---------------------------------------------------------------------------

    \974\ See proposed Rule 201(l) of Regulation Crowdfunding.
    \975\ See proposed Rule 201(j) of Regulation Crowdfunding.
---------------------------------------------------------------------------

h. Restrictions on Resales
    The statute and the proposed rules also include restrictions on
transfers of securities for one year, subject to limited exceptions
(e.g., for transfers to the issuer of the securities, in a registered
offering, to an accredited investor or to certain family members).\976\
The proposed rules also would permit transfers to trusts controlled by,
or held for the benefit of, covered family members.\977\ We believe
that including such proposed restrictions is important for investor
protection. By restricting the transfer of securities for a one-year
period, the proposed rules would give investors in a business a defined
period to observe the performance of the business and to potentially
obtain more information about the potential success or failure of the
business before trading occurs. The restrictions on resales, however,
may impede price discovery.
---------------------------------------------------------------------------

    \976\ See Section 4A(e). See also proposed Rule 501 of
Regulation Crowdfunding.
    \977\ See proposed Rule 501(a)(4) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed one-year restriction on transfers of securities
purchased in a transaction conducted in reliance on Section 4(a)(6)
might reduce trading liquidity, raise capital costs to issuers and
limit investor participation, particularly for investors who cannot
risk locking up their investments for this period. The illiquidity cost
would be mitigated, in part, by provisions that allow investors to
transfer the securities within one year of issuance by reselling the
securities to accredited investors, back to the issuer or in a
registered offering or transferring them to certain family members or
trusts of those family members. These provisions likely would improve
the liquidity of these securities and, thus, could increase investor
participation in securities-based crowdfunding offerings.
4. Intermediary Requirements
    The statute and the proposed rules require that transactions be
conducted through a registered broker or registered funding portal. The
use of a registered intermediary to match issuers and investors would
require that they incur certain transactions costs necessary to support
the intermediation activity, but also would provide centralized venues
for crowdfunding activities that should lower investor and issuer
search costs. As discussed earlier, existing rewards-based and
donations-based crowdfunding platforms already engage in a large number
of transactions, estimated at over 500,000 successful campaigns in the
aggregate,\978\ demonstrating that the use of platforms for
crowdfunding may be familiar to investors and issuers.
---------------------------------------------------------------------------

    \978\ See note 863.
---------------------------------------------------------------------------

    We believe that existing crowdfunding platforms would initially be
the primary, non-broker-dealer intermediaries in the securities-based
crowdfunding market. Registered brokers, or broker-dealers that are
currently unregistered, but are planning to register in the future,
also might wish to enter the securities-based crowdfunding market,
which would increase the competition among crowdfunding intermediaries
and potentially lower the cost of intermediation to issuers. Both
existing non-securities-based crowdfunding platforms and registered
brokers might need to invest resources (including costs to comply with
the proposed regime) to create the infrastructure for securities-based
crowdfunding, with brokers likely investing to develop an Internet-
based platform and non-securities-based crowdfunding platforms
investing to register as funding portals and revise their existing
sites to comply with the requirements of the statute and the proposed
rules. Although the eventual extent of broker involvement in the
securities-based crowdfunding market is difficult to anticipate, we
believe that some brokers might acquire or form partnerships with
funding portals to obtain access to a new and diverse investor base. In
addition, some existing non-securities-based crowdfunding platforms
might eventually either register as brokers or form partnerships with
registered brokers to offer brokerage services as part of their service
offerings. As discussed above, we believe that there could be
incentives for funding portals to pursue such partnerships, because of
brokers' expertise and access to investors, as well as because of the
statutory and proposed rule restrictions on funding portal activities.
    Although it is not possible to predict precisely the future number
of persons (or entities) who would register as either brokers or
funding portals to act as intermediaries in securities-based
crowdfunding transactions,\979\ we

estimate that intermediaries would number approximately 110, including
approximately 10 intermediaries that would register as brokers in order
to engage in crowdfunding, approximately 50 intermediaries that would
already be registered as brokers and approximately 50 intermediaries
that would register as funding portals.\980\ It is possible that the
actual number of participants could deviate significantly from these
estimates, and it is likely that there would be significant competition
between existing crowdfunding venues and new entrants that could result
in further changes in the number and types of intermediaries as the
market develops and matures. It also is likely that there will be
significant developments in the types and ranges of crowdfunding
products and services offered to potential issuers and investors,
particularly as competitors learn from their experiences. Moreover, the
business models of the successful crowdfunding intermediaries are
likely to change over time as they grow in size or market share or if
they are forced to differentiate from other market participants in
order to maintain a place in the market.
---------------------------------------------------------------------------

    \979\ There are significant challenges to establishing a
statistically reliable estimate of the number of intermediaries that
would participate in the securities-based crowdfunding market. For
example, in a similar context, a 2005 report on private placement
broker-dealers determined that there is no effective measuring
device to estimate the number of intermediaries for small businesses
currently in the marketplace. See Task Force on Private Placement
Broker-Dealers, note 894. We also recognize that there are
limitations on predicting the number of intermediaries that would
participate in securities-based crowdfunding, based on existing
practices in the donation-based and rewards-based crowdfunding
markets or foreign securities-based crowdfunding. In particular,
platforms currently involved in donation-based and rewards-based
crowdfunding may be motivated by philanthropic interests and may not
intend to expand their platforms to offer securities-based
crowdfunding opportunities. In addition, foreign securities-based
crowdfunding takes place in a different regulatory setting, and
thus, the market may not develop the same way in the United States.
    \980\ These estimates are based, in part, on current indications
of interest, which may change as the market develops. According to
FINRA, as of October 3, 2013, approximately 36 entities have
submitted the voluntary Interim Form for Funding Portals to FINRA to
indicate their intention to act as funding portals under the JOBS
Act. See Press Release, Financial Industry Regulatory Authority,
FINRA Issues Voluntary Interim Form for Crowdfunding Portals (Jan.
10, 2013), available at http://www.finra.org/Newsroom/NewsReleases/2013/P197636; Financial Industry Regulatory Authority, Crowdfunding
Portals, available at http://www.finra.org/industry/issues/crowdfunding. Based on the current indication of interest, we expect
that the number of funding portals that would ultimately register
with the Commission will be approximately 50. This estimate may
change as the market develops.
---------------------------------------------------------------------------

    As a result of the uncertainty over how the market may develop, any
estimates of the potential number of market participants, their
services or fees charged are subject to significant estimation error.
While we recognize that there are benefits as well as costs associated
with the statutory requirements and the proposed rules pertaining to
intermediaries, there are significant limitations to our ability to
estimate the potential benefits and costs.
    The statute requires that the offer or sale of securities in
reliance on Securities Act Section 4(a)(6) be conducted through a
broker or a funding portal that complies with the requirements of
Securities Act Section 4A(a).\981\ Among other things, the intermediary
must register with the Commission as a broker or a funding portal, and
it also must register with a registered national securities
association.\982\ The proposed rules would implement these statutory
requirements, including by requiring an intermediary to be a member of
FINRA or any other applicable registered national securities
association.
---------------------------------------------------------------------------

    \981\ Section 4(a)(6)(C).
    \982\ Section 4A(a)(2).
---------------------------------------------------------------------------

    We recognize that there are benefits and costs associated with the
statutory requirements and the proposed rules pertaining to
intermediaries. While the benefits and costs are described in further
detail below, the following tables summarize the estimated direct costs
to intermediaries, including brokers and funding portals. Some of the
direct costs of the rules would be incurred by all intermediaries,
while others are specific to whether the intermediary is a new entrant
(either broker or funding portal) or is already registered as a broker.
    Although we have attempted to estimate the direct costs on
intermediaries, we recognize that some costs could vary significantly
across intermediaries, and within categories of intermediaries. For
example, some intermediaries may choose to leverage existing platforms
or systems and so may not need to incur significant additional expenses
to develop a platform or comply with specific proposed requirements of
Regulation Crowdfunding. In light of these uncertainties, we encourage
commenters to provide data and analysis to help analyze and quantify
further the potential benefits and costs of these rules.
    We estimate that the cost for an entity to register as a broker and
become a member of a national securities association in order to engage
in crowdfunding pursuant to Section 4(a)(6) would be approximately
$275,000, with an ongoing annual cost of approximately $50,000 to
maintain that registration and membership.\983\ In addition, we
estimate that the cost to comply with the various requirements that
apply to registered brokers engaging in transactions pursuant to
Section 4(a)(6) would be approximately $245,000 initially, and $180,000
each year thereafter. In making this estimate, we assume that brokers
acting as intermediaries in transactions pursuant to Section 4(a)(6)
would provide a full range of brokerage services in connection with
these transactions, including certain services such as providing
investment advice and recommendations, soliciting investors, and
managing and handling customer funds and securities, that funding
portals cannot provide.\984\
---------------------------------------------------------------------------

    \983\ We recognize that the cost of registering and becoming a
member of a national securities association varies significantly
among brokers, depending on facts and circumstances. Among other
things, the cost can vary depending on the number of associated
persons of the broker entity and their licensing requirements, the
scope of the proposed brokerage activities, and the means by which
the broker administers the registration process (e.g., it may choose
to hire outside counsel to assist with the process). We also
recognize that the time required for a broker to become a member of
a national securities association varies and could take six months
to one year. We estimate the range of this cost to be between
$50,000 and $500,000, and so we have chosen the average amount of
$275,000 for purposes of this discussion.
    \984\ Among other things, a broker providing recommendations and
investment advice would be required to comply with FINRA rules on
suitability. See FINRA Rule 2111. A broker soliciting through
advertisements would be required to comply with FINRA rules relating
to communications with the public. See FINRA Rule 2210. Brokers
handling customer funds and securities also would be required to
maintain net capital, segregate customer funds and comply with
Exchange Act Rule 15c2-4. See Exchange Act Rules 15c3-1, 15c3-3 and
15c2-4 [17 CFR 240.15c3-1, 15c3-3 and 15c2-4].
---------------------------------------------------------------------------

    If instead an entity were to register as a funding portal and
become a funding portal member of a national securities association, we
estimate the initial cost would be approximately $100,000, with an
ongoing cost of approximately $10,000 in each year thereafter to
maintain this registration and membership.\985\
---------------------------------------------------------------------------

    \985\ In making these estimates, we assume that the membership
process would take approximately one month and that there would be
no related licensing requirement for associated persons of the
funding portal. We also only include domestic entities in these
estimates, which would not need to comply with the proposed
requirements in Regulation Crowdfunding that would apply to
nonresident funding portals. Nonresident funding portals would be
subject to an additional cost of approximately $25,870 to comply
with the costs of completing Schedule C to Form Funding Portal,
hiring and maintaining an agent for service of process and providing
the required opinion of counsel.
---------------------------------------------------------------------------

    These estimated costs are exclusive of the cost of establishing and
maintaining a platform and related functionality. We anticipate that a
significant percentage of intermediaries (whether brokers or funding
portals) will already have in place platforms and related systems that
would only need to be tailored to comply with the requirements of Title
III of the JOBS Act and Regulation Crowdfunding. We estimate that a
cost

of approximately $100,000 in the first year, and approximately $40,000
annually thereafter for an intermediary that already has in place a
platform and related systems. However, for an intermediary (whether
broker or funding portal) that would need to develop a platform from
scratch, we estimate the cost to do so would be approximately $400,000
in the initial year, and approximately $40,000 annually to maintain
thereafter.
---------------------------------------------------------------------------

    \986\ As discussed above, these costs include, among others, the
costs to the broker of having associated persons, who have licensing
requirements, suitability requirements, requirements relating to
advertisements, net capital and fidelity bond requirements, and
compliance with Exchange Act Rule 15c2-4 (17 CFR 240.15c2-4), as
well as the costs of complying with proposed Subpart C of Regulation
Crowdfunding. See Section IV.C. 2 below for further detail on the
costs associated with the requirements under proposed Subpart C.
    \987\ As described above, the cost to develop a platform is
expected to vary depending on the extent to which the entity already
has a platform and related systems in place. For purposes of this
chart, we use the average of the range provided above ($100,000 to
$400,000 in the initial year).
    \988\ As described above, this estimate reflects a streamlined
process of becoming a member of a national securities association,
which we assume would take approximately one month and not involve
application or licensing of associated persons.
    \989\ This includes the costs of complying with the requirements
of proposed Subparts C and D of Regulation Crowdfunding. See Section
IV.C.2 below for further detail on these costs.
    \990\ As described above, the cost to develop a platform is
expected to vary depending on the extent to which the entity already
has a platform and related systems in place. For purposes of this
chart, we use the average of the range provided above. See Section
IV.C.2 below for further detail on costs associated with developing
a platform.

       Estimated Costs of Intermediaries That Register as Brokers
------------------------------------------------------------------------
                                                  Estimated costs
                                         -------------------------------
                                           Initial cost    Ongoing cost
                                             (year 1)        per year
------------------------------------------------------------------------
Form BD Registration and National               $275,000         $50,000
 Securities Association Membership......
Complying with Requirements to Act as an         245,000         180,000
 Intermediary in, and to Engage in
 Broker Activities Related to,
 Transactions pursuant to Section
 4(a)(6) \986\..........................
Platform Development....................   \987\ 250,000          40,000
                                         -------------------------------
    Subtotal............................         770,000         270,000
------------------------------------------------------------------------

   Estimated Costs of Intermediaries That Register as Funding Portals
------------------------------------------------------------------------
                                                  Estimated costs
                                         -------------------------------
                                           Initial cost    Ongoing cost
                                             (year 1)        per year
------------------------------------------------------------------------
Form Funding Portal Registration and            $100,000         $10,000
 National Securities Association
 Membership \988\.......................
Complying with Requirements to Act as an          67,000          40,000
 Intermediary \989\.....................
Platform Development \990\..............         250,000          40,000
                                         -------------------------------
    Subtotal............................         417,000          90,000
------------------------------------------------------------------------

   Estimated Incremental Costs of Intermediaries Already Registered as
                                 Brokers
------------------------------------------------------------------------
                                                  Estimated costs
                                         -------------------------------
                                           Initial cost    Ongoing cost
                                             (year 1)        per year
------------------------------------------------------------------------
Complying with Requirements to Act as an         $45,000         $30,000
 Intermediary in Transactions pursuant
 to Section 4(a)(6) \991\...............
Platform Development \992\..............         250,000          40,000
                                         -------------------------------
    Subtotal............................         295,000          70,000
------------------------------------------------------------------------

    We believe that, while the registration requirements would
necessarily impose costs on intermediaries, they also would provide
significant protections for the crowdfunding investor marketplace.
Among other things, in addition to the Commission's oversight and rule-
writing functions with regard to broker-dealers, FINRA currently is
responsible for conducting most broker-dealer examinations, mandating
certain disclosures by its members, writing rules governing the conduct
of its members and associated persons, and informing and educating the
investing public. Similarly, the regulatory framework that a registered
national securities association--likely initially FINRA--would be
required to create for funding portals would play an important role in
the oversight of these entities.
---------------------------------------------------------------------------

    \991\ This includes the incremental costs of complying with the
requirements of proposed Subpart C of Regulation Crowdfunding, but
it excludes any registration or membership requirements. See Section
IV.C.2 below for further detail on these costs.
    \992\ As described above, the cost to develop a platform is
expected to vary depending on the extent to which the entity already
has a platform and related systems in place. For purposes of this
chart, we use the average of the range provided above. See Section
IV.C.2 below for further detail on costs associated with developing
a platform.
---------------------------------------------------------------------------

    The estimated costs in the table above reflect the direct,
quantifiable costs that intermediaries would incur in connection with
registering as a broker on Form BD or as a funding portal on Form
Funding Portal, submitting amendments to registrations and withdrawing
registrations. We estimate that approximately 50 intermediaries that
would already be brokers that have already registered with the

Commission \993\ and, as such, these brokers would not incur additional
SEC registration costs associated with the proposed rules.
Additionally, intermediaries that are not otherwise registered with
FINRA or any other registered national securities association would
need to register, and the estimated cost for such registration is
included in the table above. We anticipate that the cost for a funding
portal to become a member of a registered national securities
association would be proportionately less than the cost for a broker to
do so because of the more limited nature of a funding portal's
permissible activities, and the streamlined set of rules that the
association would impose on funding portals.\994\ However, the exact
cost of registration for funding portals would not be known until a
registered national securities association adopts rules applicable to
funding portals, and for purposes of this economic analysis, we have
used a conservative estimate for this cost based on the current fee and
costs applicable to brokers applying to become members of a national
securities association.
---------------------------------------------------------------------------

    \993\ See Section IV.C.2 below.
    \994\ See FINRA, Jumpstart Our Business Startups Act: FINRA
Requests Comment on Proposed Regulation of Crowdfunding Activities,
FINRA Regulatory Notice 12-34 (July 2012), available at http://www.finra.org/web/groups/industry/@ip/<EMAIL_ADDRESS>(``In writing rules specifically for registered
funding portals, FINRA would seek to ensure that the capital-raising
objectives of the JOBS Act are advanced in a manner consistent with
investor protection. Commenters are urged to identify the types of
requirements that should apply to registered funding portals, taking
into account the relatively limited scope of activities by a
registered funding portal permitted under the JOBS Act.'')
---------------------------------------------------------------------------

    The proposed rules would also require that an intermediary execute
transactions exclusively through its online platform. This requirement
should help to minimize the potential for ``boiler room'' and other
similar abusive sales practices. Based on comments received and our
discussions with industry participants,\995\ we believe that the use of
an online platform would enhance the ability of issuers and investors
to transparently communicate as compared to the alternative of allowing
transactions to occur offline. This requirement should help issuers
gain exposure to a wide range of potential investors, who also may
benefit from having numerous investment opportunities aggregated in one
place, resulting in lower search costs or burdens related to
identifying suitable investment opportunities.
---------------------------------------------------------------------------

    \995\ See note 888.
---------------------------------------------------------------------------

    We preliminarily estimate that the requirement to use an
intermediary could result in transaction costs for issuers of 5% to 15%
of the amount of the offering made in reliance on Section 4(a)(6),\996\
depending on the intermediary used and the fees charged for services,
including payment processing. Although crowdfunding intermediaries are
not expected to provide issuers with underwriting services commensurate
with registered offerings (and, in fact, funding portals would be
prohibited from doing so), the fees charged in a crowdfunding offering
could be significantly larger on a percentage basis relative to the
underwriting fees for registered offerings, which range from as high as
7% for initial public offerings to less than 1% for certain bond
issuances.\997\ In general, to the extent that a significant component
of the fees is fixed, the transaction costs for issuers would make
smaller issues more expensive. Although crowdfunding offerings would
likely vary in size, based on an offering size of $100,000, an issuer
would incur an average of $5,000 to $15,000 in fees. As previously
discussed, we believe that competition among potential crowdfunding
venues and the potential development of new products and services could
have a significant impact on these estimates over time.
---------------------------------------------------------------------------

    \996\ See note 918.
    \997\ See note 817 and accompanying text.
---------------------------------------------------------------------------

a. Disclosure and Dissemination Requirements
    The statute and proposed rules include disclosure and dissemination
provisions designed to provide information to security-based
crowdfunding investors. These provisions, together with the issuer
disclosure provisions discussed above, are expected to limit
information asymmetries and promote the efficient allocation of capital
amongst crowdfunding issues. Additionally, these disclosure and
dissemination provisions would provide information intended to ensure
that investors are aware of the risks associated with their investment,
which would help protect investors in this new market. As discussed
above, many of these costs and benefits are difficult to quantify or
estimate with any degree of certainty, especially considering
securities-based crowdfunding provides a new method for raising capital
in the United States. To the extent possible, however, we have
quantified the direct costs to intermediaries associated with these
provisions in the table above. The proposed rules would prohibit any
intermediary or its associated persons from accepting an investment
commitment until the investor has opened an account with the
intermediary and the intermediary has obtained the investor's consent
to electronic delivery of materials. This requirement would help ensure
that certain basic information about the investor is on file with the
intermediary and that all investors are on notice of the primary method
of delivery for communications from the intermediary. We estimate the
direct cost of this requirement in the table above.
    The statute requires intermediaries to provide disclosures related
to risks and other investor education materials. The proposed rules
would implement this statutory mandate by requiring intermediaries to
deliver educational materials that explain how the offering process
works and the risks associated with investing in crowdfunding
securities.\998\
---------------------------------------------------------------------------

    \998\ See proposed Rule 302(b) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed educational requirements would help make investors
aware of the limits and risks associated with purchasing crowdfunding
securities. Such knowledge would help investors understand the payoff
structures that are specified by the offering contractual features and
the circumstances under which they could expect to be compensated. It
also would help ensure that offerings proceed more efficiently as
investors would be more informed by the time they decide to make their
investment commitments and receive required notices. We recognize that
the effectiveness of the educational materials to enhance investor
protection would vary depending upon the education and experience of
retail investors.\999\ In addition, a presentation that highlights the
risks of securities-based crowdfunding could discourage investor
participation.
---------------------------------------------------------------------------

    \999\ See Jennifer E. Bethel and Allen Ferrell, Policy Issues
Raised by Structured Products, Harv. L. & Econ. Discussion Paper No.
560, 2007, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=941720.
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    Under the proposed rules, the educational materials could be in any
electronic format, including video format, and the intermediary would
have the flexibility to determine how best to communicate the contents
of the educational material, thus the cost for intermediaries to
develop educational materials is expected to vary widely. The table
above includes our current estimates of the direct, quantifiable costs
that would be incurred to comply with the proposed requirement, as well

as additional costs to update or revise the materials from time to
time.
    The proposed rules also require that intermediaries obtain
representations from investors regarding their review of the investor
education materials and their understanding of the risks.\1000\ The
Commission believes these proposed rules would improve investors'
understanding of crowdfunding generally, as well as aspects of certain
types of securities and the implications for their investments in
issuers that are raising capital through securities-based crowdfunding
in reliance on Section 4(a)(6). We estimate that the direct costs of
this requirement to an intermediary would be incorporated into the
costs of developing a platform and that the ongoing burden to comply
would be minimal. This proposed requirement also might impose a further
cost to the extent that the requirement deters investors from making
investment commitments or otherwise participating in offerings made in
reliance on Section 4(a)(6).
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    \1000\ See proposed Rule 303(b)(2) of Regulation Crowdfunding.
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    The proposed rules would also require an intermediary to clearly
disclose the manner in which the intermediary is compensated in
connection with offers and sales of securities in reliance on Section
4(a)(6).\1001\ As explained above, we believe that investors would
benefit by having information about how intermediaries are compensated,
such as through compensation arrangements with affiliates. We believe
that the costs of complying with this requirement also generally would
be included in the overall cost for intermediaries to develop their
platforms, as it would entail adding an item of disclosure that would
be built into the functionality of their platforms. The costs are
reflected in the table above, and we believe that this requirement
would impose only nominal incremental costs on intermediaries on an
ongoing basis. We also do not expect significant competitive costs from
the disclosure of such compensation arrangements.
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    \1001\ See proposed Rule 302(d) of Regulation Crowdfunding.
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    The statute and the proposed rules further would require that
intermediaries make available certain issuer-provided information. As
described above, intermediaries would have to implement and maintain
systems to comply with the information disclosure requirements so that
the information was publicly available and easily accessible on the
intermediary's platform by interested persons.
    The issuer disclosure requirements should benefit investors by
enabling them to better evaluate the issuer and the offering. Requiring
intermediaries to make the issuer information publicly available and
easily accessible on their platforms would reduce information
asymmetries between issuers and investors and would enhance both
transparency and efficiency of the market. We expect that
intermediaries would incur costs to develop the functionality that
would allow the uploading and downloading of issuer information. We
believe that the direct costs of complying with this requirement would
be included in the overall cost to intermediaries to develop their
platforms and that this requirement would impose only nominal
incremental costs on intermediaries on an ongoing basis, primarily
because the functionality necessary to upload the required issuer
disclosure information is a standard feature offered on many Web sites
and would not require frequent updates.
    The proposed rules would also require an intermediary to provide
communication channels on its platform, meeting certain conditions,
which would allow investors who have opened accounts with
intermediaries and representatives of the issuer to interact and
exchange comments about the issuer's offering on that intermediary's
platform, and which would be publicly available for viewing (i.e., by
those who may not have opened accounts with the intermediary).\1002\
While Congress contemplated the use of such communication channels, the
statute does not explicitly require intermediaries to provide
them.\1003\ Compared with the alternative of not requiring
intermediaries to provide communication channels, we believe that
requiring the communications channel to be on the intermediary's
platform would allow investors, particularly those who might be less
familiar with online social media, to participate in online discussions
regarding ongoing offerings without having to actively search for such
discussions on external Web sites. We do recognize, however, that this
requirement would not preclude investors from initiating additional
discussions on external Web sites. Furthermore, the requirements that
the communication channels be viewable by the public and that promoters
be clearly identified on these channels would enhance transparency
about the issuer and its offering with appropriate disclosures,
ultimately allowing investors to make more informed investment
decisions. We estimate that the costs of this proposed requirement are
incorporated into the costs of developing a platform and that once the
platform has been set up the ongoing burden to comply would be minimal.
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    \1002\ See proposed Rule 303(c) of Regulation Crowdfunding.
    \1003\ See Section 4A(b)(3).
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    We are also proposing to require intermediaries to, upon receipt of
an investment commitment from an investor, promptly provide or send to
the investor a notification of that investment commitment.\1004\ While
this notice is not statutorily required, we believe that this
requirement is appropriate as it would provide investors with key
information about their investment commitments, including notice of the
opportunity, as relevant, to cancel their investment commitments.
Investors would benefit from these requirements because they would be
provided with the necessary information to evaluate their investment
commitments, their securities transactions and the intermediaries that
are effecting those transactions. We estimate that the costs of these
requirements are incorporated into the costs of developing a platform
and that the ongoing burden to comply would be minimal.
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    \1004\ See proposed Rule 303(d) of Regulation Crowdfunding.
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    We also propose to implement the statutory requirement for
intermediaries to allow investors to cancel their commitments to
invest, by requiring investors to have until 48 hours prior to the
deadline identified in the issuer's offering materials to cancel their
investment commitments.\1005\ If an issuer reaches its target offering
amount prior to the target offering deadline, the proposed rules would
permit early closing of the offering, provided that the intermediary
sends notices to investors informing them of the closing and the
deadline for the opportunity to cancel.\1006\ The proposed rules also
would set forth notice requirements and requirements related to the
intermediary directing payments in the event of cancellations and
material changes to offerings.\1007\ The proposed rules would impose
specific obligations on intermediaries related to informing investors
about their right to cancel, depending on particular circumstances
relating to timing of the offering, such as in the event of early
closings,

cancellations and material changes that trigger reconfirmations of
investment commitments.
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    \1005\ See proposed Rule 304(a) of Regulation Crowdfunding.
    \1006\ See proposed Rule 304(b) of Regulation Crowdfunding.
    \1007\ See proposed Rules 304(c) and (d) of Regulation
Crowdfunding.
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    We believe that investors would benefit from receiving these
notices because the notifications and accompanying information would
keep investors informed about the status of the offering and help them
make informed investment decisions. We further believe that investors
would reasonably expect to be informed of changes impacting the timing
of offerings and other material changes. This approach also would
benefit investors by providing investors with sufficient time to review
and assess information and communications about the issuer.
    We recognize that allowing investors to cancel their investment
commitments up to 48 hours prior to the deadline identified in the
issuer's offering materials may impose a cost on issuers who, because
of investors cancelling commitments late in the offering period, may
fall below the target offering amount and so decide to cancel the
offering or to extend the offering period. Accordingly, we recognize
that this requirement may have an effect on capital formation.
Intermediaries also may incur direct costs in developing and
maintaining such systems, for instance to send the relevant notices to
investors, as part of the cost of developing a platform reflected in
the table above.
b. Measures To Reduce the Risk of Fraud and Limitations
    The statute and proposed rules require intermediaries to take
certain steps to reduce the risk of fraud, including steps related to
checking whether issuers are eligible to rely on Section 4(a)(6) and
whether investors comply with investment limits in order to participate
in an offering pursuant to Section 4(a)(6). We believe that
intermediaries will be in the best position to take these steps and
that these requirements will increase investor protections.
Additionally, the statute and proposed rules place certain limitations
on intermediaries. These limitations are further meant to increase
investor protection in the securities-based crowdfunding market. As
noted above, the costs and benefits of these provisions are difficult
to quantify or estimate with any degree of certainty. To the extent
possible, however, we have quantified estimates of the direct costs
associated with these provisions and the proposed rules in the table
above.
    The proposed rules would require that an intermediary have a
reasonable basis for believing that an issuer seeking to offer and sell
securities in reliance on Section 4(a)(6) through the intermediary's
platform complies with the requirements in Section 4A(b) of the
Securities Act and the related requirements in Regulation Crowdfunding.
In satisfying this requirement, an intermediary may rely on the
representations of the issuer concerning compliance with these
requirements unless the intermediary has reason to question the
reliability of those representations. The proposed rules would also
require that an intermediary have a reasonable basis for believing that
an issuer seeking to offer and sell securities on the intermediary's
platform complies with all issuer requirements and has established
means to keep accurate records of holders of the securities. The
proposed rules would permit an intermediary to rely on an issuer's
representations concerning compliance with these requirements unless
the intermediary has reason to question the reliability of the
representations. The proposed rules also would require an intermediary
to deny access to an issuer if it has a reasonable basis for believing
that the issuer or any of its officers, directors (or any person
occupying a similar status or performing a similar function) or 20
Percent Beneficial Owners was subject to a disqualification under the
proposed rules. As required by the statute, the proposed rules would
require the intermediary to conduct a background and securities
enforcement check on each of these persons. Furthermore, the proposed
rules would require an intermediary to deny access to its platform if
the intermediary believes that the issuer or the offering presents the
potential for fraud or otherwise raises concerns regarding investor
protection.\1008\ Each of these proposed requirements is intended to
help reduce the risk of fraud in securities-based crowdfunding.
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    \1008\ See proposed Rule 301 of Regulation Crowdfunding.
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    We believe that if intermediaries take the measures we propose to
require, investors would be more willing to participate in securities-
based crowdfunding offerings. Investors would rely on the efforts of
the intermediary that conducted a background and securities enforcement
regulatory history check, solving a collective action problem that
would be prohibitively costly if left to individual investors. To the
extent these checks lessened the likelihood of inappropriate or
nefarious activity, they could increase investor willingness to
purchase crowdfunding securities, thereby potentially resulting in
issuers having greater access to capital. We anticipate that most
intermediaries would employ third parties to perform background checks.