a description of the material terms of any indebtedness of
the issuer, including the amount, interest rate, maturity date and any
other material terms; \139\
---------------------------------------------------------------------------

    \139\ See proposed Rule 201(p) of Regulation Crowdfunding.
---------------------------------------------------------------------------

     disclosure of exempt offerings conducted within the past
three years; \140\ and
---------------------------------------------------------------------------

    \140\ See proposed Rule 201(q) of Regulation Crowdfunding.
---------------------------------------------------------------------------

     disclosure of certain related-party transactions.\141\
---------------------------------------------------------------------------

    \141\ See proposed Rule 201(r) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Requiring an issuer to identify the name, Commission file number
and CRD number (as applicable) of the intermediary through which the
offering is being conducted should assist investors and regulators in
obtaining information about the offering and facilitate monitoring the
use of the exemption. It also could help investors obtain background
information on the intermediary, for instance through filings made by
the intermediary with the Commission as well as through the Financial
Industry Regulatory Authority's (``FINRA'') BrokerCheck system for
brokers \142\ or a similar system, if created, for funding portals.
---------------------------------------------------------------------------

    \142\ See FINRA, FINRA BrokerCheck, available at http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/P015175.
---------------------------------------------------------------------------

    In addition, requiring an issuer to disclose the amount of
compensation paid to the intermediary for conducting the offering,
including the amount of referral or other fees associated with the
offering, would permit investors and regulators to determine how much
of the proceeds of the offering are used to compensate the intermediary
and to facilitate the monitoring of compensation paid to
intermediaries.
    The requirement for an issuer to include in the offering statement
certain specified legends about the risks of investing in a
crowdfunding transaction is intended to help investors understand the
general risks of investing in a crowdfunding transaction. In addition,
the requirement that an issuer include in the offering statement
certain legends about the required ongoing reports, including how those
reports would be made available to investors and how an issuer may
terminate its ongoing reporting obligations, is intended to help
investors understand an issuer's ongoing reporting obligations and
inform investors of how they will be able to access those reports.
    The proposed rules also would require disclosure of the material
factors that make an investment in the issuer speculative or
risky.\143\ We believe that this risk factor information should help
investors to better understand the risks of investing in a specific
issuer's offering.
---------------------------------------------------------------------------

    \143\ See proposed Rule 201(f) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules also would require disclosure of certain
related-party transactions between the issuer and any director or
officer of the issuer, any person who is a 20 Percent Beneficial Owner,
any promoter of the issuer (if the issuer was incorporated or organized
within the past three years), or immediate family members of the
foregoing persons.\144\ For purposes of this related-party transactions
disclosure, ``immediate family member'' would have the same meaning
that it has in Item 404 of Regulation S-K,\145\ which relates to the
disclosure of related-party transactions for Exchange Act reporting
companies. This related-party transactions disclosure should assist
investors in obtaining a more complete picture of the financial
relationships between certain related parties and the issuer.
---------------------------------------------------------------------------

    \144\ See proposed Rule 201(r) of Regulation Crowdfunding.
    \145\ 17 CFR 229.404. See proposed Rule 201(r)(4) of Regulation
Crowdfunding.
---------------------------------------------------------------------------

    Several commenters suggested that we should model the disclosure
form after Securities Act Form 1-A \146\ or the North American
Securities Administrators Association's (``NASAA'') uniform Small
Company Offering Registration Form (U-7).\147\ The proposed disclosure
requirements regarding risk factors and related-party transactions are
similar to those in Form 1-A except that, with respect to the
disclosure about related-party transactions, the proposed rules would
require disclosure about transactions since the beginning of the
issuer's last full fiscal year, rather than the two fiscal years
required in Form 1-A. Given the early stage of development of the small
businesses and startups that we expect would seek to raise capital
pursuant to Section 4(a)(6), as well as the investment limitations
prescribed by the proposed rules, we believe that limiting the
disclosure to related-party transactions since the beginning of the
issuer's last full fiscal year will reduce the burden on issuers while
still providing investors with sufficient information to evaluate the
relationship between related parties and the issuer. Also, the proposed
rules only would require disclosure of related-party transactions in
excess of five percent of the aggregate amount of capital raised by the
issuer in reliance on Section 4(a)(6) during the preceding 12-month
period, inclusive of the amount the issuer seeks to raise in the
current offering under Section 4(a)(6). For

example, an issuer seeking to raise $1 million would be required to
disclose related-party transactions in excess of $50,000, which is the
same threshold required in Form 1-A. We believe that, in light of the
sizes and varieties of issuers that may make offerings in reliance on
Section 4(a)(6), this scaled approach is more appropriate than the
fixed amount approach used in Form 1-A, which might be disproportionate
to the size of certain offerings and issuers.
---------------------------------------------------------------------------

    \146\ 17 CFR 239.90. Form 1-A is the form used for securities
offerings made pursuant to Regulation A.
    \147\ See Commonwealth of Massachusetts Letter; Coan Letter;
Liles Letter 1; Vim Funding Letter; NASAA Letter.
---------------------------------------------------------------------------

    Two commenters suggested that the Commission require the issuer to
disclose the total number of employees.\148\ The proposed rules would
require disclosure of the issuer's current number of employees.\149\
This information should assist investors and regulators in obtaining
information about the size of the businesses using the exemption. This
information would make data available that could be used to evaluate
whether the businesses using the exemption are creating additional
jobs.\150\
---------------------------------------------------------------------------

    \148\ See NASAA Letter; Ohio Division of Securities Letter.
    \149\ See proposed Rule 201(e) of Regulation Crowdfunding.
    \150\ Issuers would be required to disclose the current number
of employees in the offering document and the ongoing reports, which
should permit comparison of the number of employees over different
time periods.
---------------------------------------------------------------------------

    The proposed rules also would require disclosure of the material
terms of any indebtedness of the issuer, including, among other items,
the amount, interest rate and maturity date.\151\ We believe this
information would be important to investors because servicing debt
could place additional pressures on an issuer in the early stages of
development.
---------------------------------------------------------------------------

    \151\ See proposed Rule 201(p) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    In addition, the proposed rules would require disclosure of exempt
offerings conducted within the past three years.\152\ For each exempt
offering within the past three years, the proposed rules would require
a description of the date of the offering, the offering exemption
relied upon, the type of securities offered and the amount of
securities sold and the use of proceeds.\153\ We believe that it would
be important to investors to know of prior offerings of securities.
This information would better inform investors about the capital
structure of the issuer and would provide information about how prior
offerings were valued.
---------------------------------------------------------------------------

    \152\ See proposed Rule 201(q) Regulation Crowdfunding.
    \153\ See proposed Instruction to paragraph (q) of proposed Rule
201 of Regulation Crowdfunding.
---------------------------------------------------------------------------

Request for Comment
    38. Are these proposed disclosure requirements appropriate? Why or
why not? Should we modify or eliminate any of the proposed
requirements? If so, how and why?
    39. To assist investors and regulators in obtaining information
about the offering and to facilitate monitoring the use of the
exemption, the proposed rules would require an issuer to identify the
name, Commission file number and CRD number (as applicable) of the
intermediary through which the offering is being conducted. Is there a
better approach? What other information should be provided? If so,
please describe it.
    40. Should we require disclosure of the amount of compensation paid
to the intermediary, as proposed? Why or why not? Should we require
issuers to separately disclose the amounts paid for conducting the
offering and the amounts paid for other services? Why or why not?
    41. Should we require the issuer to include certain specified
legends about the risks of investing in a crowdfunding transaction and
disclosure of the material factors that make an investment in the
issuer speculative or risky, as proposed? Why or why not? Should we
provide examples in our rules of the types of material risk factors an
issuer should consider disclosing? Why or why not? If so, what should
those examples be?
    42. Should we require disclosure of certain related-party
transactions, as proposed? Why or why not? The proposed rules would
require disclosures of certain transactions between the issuer and
directors or officers of the issuer, 20 Percent Beneficial Owners, any
promoter of the issuer, or relatives of the foregoing persons. Is this
the appropriate group of persons? Should we limit or expand the list of
persons? If so, how and why?
    43. As proposed, immediate family member, for purposes of related-
party transactions disclosure, would have the same meaning that it has
in Item 404 of Regulation S-K.\154\ Is this the appropriate approach?
Why or why not? If not, what would be a more appropriate definition and
why? For purposes of restrictions on resales of securities issued in
transactions made in reliance on Section 4(a)(6), ``member of the
family of the purchaser or the equivalent'' would, as proposed,
expressly include spousal equivalents.\155\ Should the definition of
immediate family member for purposes of related-party transactions
disclosure also expressly include spousal equivalents, or would
including spousal equivalents create confusion in light of the fact
that the definition for purposes of related-party transactions already
includes any persons (other than a tenant or employee) sharing the same
household? Please explain.
---------------------------------------------------------------------------

    \154\ 17 CFR 229.404. See proposed Rule 201(r)(4) of Regulation
Crowdfunding.
    \155\ See proposed Rule 501(c) of Regulation Crowdfunding and
the related instruction thereto. See also Section II.E.2 below for a
discussion of spousal equivalent.
---------------------------------------------------------------------------

    44. Is it appropriate to limit the disclosure about related-party
transactions to transactions since the beginning of the issuer's last
full fiscal year? Why or why not? Is it appropriate to limit disclosure
to those related-party transactions that exceed five percent of the
aggregate amount of capital raised by the issuer in reliance on Section
4(a)(6)? Should we instead require disclosure of all related-party
transactions or all transactions in excess of an absolute threshold
amount?
    45. Is it appropriate to require a description of any prior exempt
offerings conducted within the past three years, as proposed? Why or
why not? Would another time period (e.g., one year, five years, etc.)
or no time limit be more appropriate?
    46. Should we require any additional disclosures (e.g., should we
require disclosure about executive compensation and, if so, what level
of detail should be required in such disclosure)? If so, what
disclosures and why?
ii. Financial Disclosure
    Section 4A(b)(1)(D) requires ``a description of the financial
condition of the issuer.'' It also establishes a framework of tiered
financial disclosure requirements based on aggregate target offering
amounts of the offering and all other offerings made in reliance on
Section 4(a)(6) within the preceding 12-month period:
     issuers offering $100,000 or less are required to file
with the Commission, provide to investors and the relevant intermediary
and make available to potential investors income tax returns filed by
the issuer 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;
     issuers offering more than $100,000, but not more than
$500,000, are required to file with the Commission, provide to
investors and the relevant intermediary and make available to

potential investors financial statements reviewed by a public
accountant that is independent of the issuer; and
     issuers offering more than $500,000 (or such other amount
as the Commission may establish) are required to file with the
Commission, provide to investors and the relevant intermediary and make
available to potential investors audited financial statements.
    Section 4A(h) further provides that these dollar amounts shall be
adjusted by the Commission not less frequently than once every five
years, by notice published in the Federal Register, to reflect any
change in the Consumer Price Index for All Urban Consumers published by
the Bureau of Labor Statistics.
(a) Financial Condition Discussion
    Consistent with Section 4A(b)(1)(D), the proposed rules would
require an issuer to provide a narrative discussion of its financial
condition.\156\ This discussion should address, to the extent material,
the issuer's historical results of operations in addition to its
liquidity and capital resources. If an issuer does not have a prior
operating history, the discussion should focus on financial milestones
and operational, liquidity and other challenges. If an issuer has a
prior operating history, the discussion should focus on whether
historical earnings and cash flows are representative of what investors
should expect in the future. An issuer's discussion of its financial
condition should take into account the proceeds of the offering and any
other known or pending sources of capital. Issuers also should discuss
how the proceeds from the offering will affect their liquidity and
whether these funds and any other additional funds are necessary to the
viability of the business. In addition, issuers should describe the
other available sources of capital to the business, such as lines of
credit or required contributions by principal shareholders.
---------------------------------------------------------------------------

    \156\ See proposed Rule 201(s) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We expect that the discussion required by the proposed rule and
instruction would inform investors about the financial condition of the
issuer in a manner similar to the management's discussion and analysis
of financial condition and results of operations (``MD&A'') required by
Item 303 of Regulation S-K \157\ for registered offerings. Because
issuers seeking to engage in crowdfunding transactions would likely be
smaller, less complex and at an early stage of development compared to
issuers conducting registered offerings or Exchange Act reporting
companies, we expect that the discussion would not generally need to be
as lengthy or detailed as the MD&A of Exchange Act reporting companies.
We are not proposing to prescribe content or format for this
information, but rather to set forth principles of disclosure. To the
extent these items of disclosure overlap with the issuer's discussion
of its business or business plan, issuers are not required to make
duplicate disclosures. While we are not proposing to mandate a specific
presentation, we expect issuers to present the required disclosures,
including any other information that would be material to an investor,
in a clear and understandable manner.
---------------------------------------------------------------------------

    \157\ 17 CFR 229.303.
---------------------------------------------------------------------------

Request for Comment
    47. Are these proposed requirements for the discussion of the
financial condition of the issuer appropriate? Why or why not? Should
we modify or eliminate any of the requirements in the proposed rule or
instruction? If so, which ones and why? Should we require any
additional disclosures? If so, what disclosures and why? Should we
prescribe a specific format or presentation for the disclosure? Please
explain.
    48. Should we exempt issuers with no operating history from the
requirement to provide a discussion of their financial condition? If
so, why? Should we require such issuers to specifically state that they
do not have an operating history, as proposed? Why or why not?
    49. In the discussion of the issuer's financial condition, should
we require issuers to provide specific disclosure about prior capital
raising transactions? Why or why not? Should we require specific
disclosure relating to prior transactions made pursuant to Section
4(a)(6), including crowdfunding transactions in which the target amount
was not reached? Why or why not?
(b) Financial Disclosures
    As noted above, Section 4A(b)(1)(D) establishes tiered financial
statement disclosure requirements that are based on aggregate target
offering amounts within the preceding 12-month period. We received a
range of comments on this requirement.
    In response to the requirement for issuers offering $100,000 or
less to file with the Commission, provide to investors and the relevant
intermediary and make available to potential investors their income tax
returns for the most recently completed year, one commenter suggested
that, even if redacted, income tax returns should not be made
public.\158\ One commenter suggested that financial statements should
cover the most recently completed fiscal year.\159\ Other commenters
suggested that issuers offering $100,000 or less should provide
financial statements prepared in accordance with generally accepted
accounting principles (``GAAP''), including explanatory notes, even
though those financial statements would not be subject to an
independent accountant's review or audit.\160\
---------------------------------------------------------------------------

    \158\ See RocketHub Letter 1 (stating that information can be
taken from the issuer's tax return and entered digitally, by the
issuer, for inclusion in the offering materials).
    \159\ See CompTIA Letter.
    \160\ See Commonwealth of Massachusetts Letter; NASAA Letter.
---------------------------------------------------------------------------

    For issuers offering more than $100,000, but not more than
$500,000, one commenter suggested that the Commission require the
financial statement review to be done by accountants in good standing
for at least five years.\161\ Another commenter stated that issuers in
existence for less than 12 months should not be required to provide
independently reviewed financial statements.\162\
---------------------------------------------------------------------------

    \161\ See Philipose Letter 1.
    \162\ See CFIRA Letter 2.
---------------------------------------------------------------------------

    Several commenters objected to the requirement for issuers to
provide audited financial statements when offering more than $500,000
and suggested alternatives.\163\ One

commenter suggested that an issuer should not be required to provide
audited financial statements if: (1) The target offering amount is not
greater than $100,000 (notwithstanding any other transactions made in
reliance on Section 4(a)(6) within the preceding 12-month period); and
(2) the issuer has not conducted a transaction in reliance on Section
4(a)(6) within the preceding six months.\164\ Another commenter
suggested that issuers should be required to identify the accountant
used to certify or audit the financial statements.\165\
---------------------------------------------------------------------------

    \163\ See CFIRA Letter 2 (stating that the requirement to
provide audited financial statements should apply solely to issuers
that have been engaged in their current business for more than 12
months and which are seeking to raise at least $1,000,000); Vim
Funding Letter (stating that the statute gives the Commission the
discretion to raise the threshold at which audits are required, ``in
theory all the way up to the $1,000,000 level'' and asking that the
Commission exercise its discretion); RocketHub Letter 1 (stating
that the threshold for the audit requirement should be raised to an
amount in excess of $1,000,000 and audited financial statements
should only be required for issuers that have been in operation for
more than two years); Parker Letter (stating that the audit
requirement is an unnecessary expense); Cera Technology Letter
(stating that the audit requirement should be raised to $1,000,000);
ABA Letter 1 (stating that the Commission should consider a higher
threshold, such as $750,000, or identify additional criteria, such
as revenue levels, that would require audited financial statements);
Loofbourrow Letter (stating that the Commission should not impose an
audit requirement); InitialCrowdOffering Letter (stating that the
requirement for audited financial statements should be eliminated);
Genedyne Letter 1 (stating that the Commission should not impose an
audit requirement for offerings under $1,000,000); BrainThrob
Laboratories Letter (stating that the Commission should defer
imposing an audit requirement until further study can determine
whether it is economically beneficial to the investment community);
Vogele Letter (stating that obtaining audited financial statements
takes time and new businesses do not have a lot of time). See also
2012 SEC Government-Business Forum, note 29 (recommending that the
Commission consider raising the offering amount at which audited
financial statements are required).
    \164\ See ABA Letter 1.
    \165\ See RocketHub Letter 1 (stating that disclosure of the
identity of the accountant used to review or audit the financial
statements would allow investors to conduct diligence on the
accountant and permit the intermediary to track accountant
activities and block issuers on their platform from using
accountants who produce poor quality or fraudulent work).
---------------------------------------------------------------------------

    Under the proposed rules, in determining the financial statements
that would be required, an issuer would need to aggregate the amounts
offered and sold in reliance on Section 4(a)(6) within the preceding
12-month period with the target offering amount (or the maximum
offering amount, including the aggregate amount of any possible
oversubscriptions if the issuer will accept oversubscriptions) of the
offering for which disclosure is being provided.\166\ The statute
refers to aggregate ``offering amounts'' within the preceding 12-month
period. We are proposing to require issuers to aggregate only amounts
offered and sold (rather than all offered amounts, including those not
sold) within the preceding 12-month period with the amount the issuer
is seeking to raise in the transaction.\167\ We do not believe that
this provision should require an issuer to aggregate amounts offered in
prior offerings but not sold (for example, because the target offering
amount was not met). Otherwise, an issuer that initially sought to
raise $400,000, did not complete the crowdfunding transaction because
the target offering amount was not met, and would like to raise
$200,000 in a second attempt would be required to provide audited
financial statements rather than financial statements reviewed by a
public accountant in connection with that $200,000 offering. We believe
that this result would increase costs to issuers when those issuers
were unsuccessful in prior offerings within the preceding 12-month
period. Requiring issuers to aggregate amounts offered and sold should
still prevent issuers from circumventing the framework of tiered
financial disclosure requirements by structuring a larger offering as a
series of smaller offerings.\168\ We do not propose to prohibit issuers
from providing financial statements that meet the requirements for a
higher aggregate target offering amount than the proposed rules would
require.\169\
---------------------------------------------------------------------------

    \166\ See proposed Instruction 1 to paragraph (t) of proposed
Rule 201 of Regulation Crowdfunding.
    \167\ See also Hutchens Letter (suggesting that the Commission
``devise a rule that creates a relationship between the amount of
capital actually raised by an issuer in a crowdfunding offering and
the degree of financial disclosure the issuer must provide'').
    \168\ For example, we believe aggregating completed offerings
within the preceding 12-month period is necessary to avoid having an
issuer who seeks to raise more than $500,000, which requires audited
financial statements, structure the offering as a series of smaller
offerings to circumvent this requirement.
    \169\ See proposed Instruction 10 to paragraph (t) of proposed
Rule 201 of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules would require all issuers to file with the
Commission, provide to investors and the relevant intermediary and make
available to potential investors a complete set of their financial
statements (a balance sheet, income statement, statement of cash flows
and statement of changes in owners' equity), prepared in accordance
with U.S. generally accepted accounting principles (``U.S. GAAP''),
covering the shorter of the two most recently completed fiscal years or
the period since inception of the business.\170\ In proposing this
requirement we considered commenters' suggestions that we require
financial statements prepared in accordance with U.S. GAAP,\171\ as
well as the fact that the same requirement applies to offerings under
Regulation A.\172\
---------------------------------------------------------------------------

    \170\ See proposed Instruction 2 to paragraph (t) of proposed
Rule 201 of Regulation Crowdfunding. Financial statements prepared
in accordance with U.S. GAAP are generally self-scaling to the size
and complexity of the issuer, which should reduce the burden of
preparing financial statements for many issuers.
    \171\ See Commonwealth of Massachusetts Letter; NASAA Letter.
    \172\ See Part F/S of Form 1-A. [17 CFR 239.90].
---------------------------------------------------------------------------

    We considered proposing to require financial statements covering
only the most recently completed fiscal year, as one commenter
suggested,\173\ rather than the two most recently completed fiscal
years; however, we believe that requiring a second year will provide
investors with a basis for comparison against the most recently
completed period, without substantially increasing the burden for the
issuer.\174\ We also considered proposing to require a third year of
financial statements, but we are concerned that this could be overly
burdensome for the types of issuers that likely would engage in
crowdfunding transactions.\175\
---------------------------------------------------------------------------

    \173\ See CompTIA Letter.
    \174\ See Smaller Reporting Company Regulatory Relief and
Simplification, Release No. 33-8876 (Dec. 19, 2007) [73 FR 934 (Jan.
4, 2008)] (in the context of requiring two years, rather than just
one year, of audited balance sheet data for smaller reporting
companies, the Commission noted that comparative balance sheets will
provide a much more meaningful presentation for investors without a
significant additional burden on smaller reporting companies, since
the earlier year data should be readily available for the purposes
of preparing the other financial statements). See also SEC Advisory
Committee on Smaller Public Companies, Final Report (Apr. 23, 2006),
available at http://www.sec.gov/info/smallbus/acspc.shtml.
    \175\ Requiring a third year of financial statements also would
place a greater burden on issuers relying on Section 4(a)(6) than on
emerging growth companies conducting registered offerings. See
Section 102(b) of the JOBS Act.
---------------------------------------------------------------------------

    During the first 120 days of the issuer's fiscal year, an issuer
would be able to conduct an offering in reliance on Section 4(a)(6) and
the related rules using financial statements for the fiscal year prior
to the most recently completed fiscal year if the financial statements
for the most recently completed fiscal year are not otherwise available
or required to be filed.\176\ We believe this accommodation is needed
because otherwise issuers would not be able to conduct offerings in
reliance on Section 4(a)(6) for a period of time between the end of
their fiscal year and the date when the financial statements for that
period are available.\177\ The issuer could not do this, however, if it
was otherwise required to provide updated financial statements by the
ongoing reporting requirements \178\ or financial statements are
otherwise available.\179\ For example, if an issuer that has a calendar
fiscal year end conducts an offering in April 2014, it would be
permitted to include financial statements for the fiscal year ended
December 31, 2012 if the financial statements for the fiscal year ended

December 31, 2013 are not yet available. Once more than 120 days have
passed since the end of the issuer's most recent fiscal year, the
issuer would be required to include financial statements for its most
recent fiscal year.\180\ Regardless of the age of the financial
statements, an issuer would be required to include a discussion of any
material changes in the financial condition of the issuer during any
time period subsequent to the period for which financial statements are
provided, including changes in reported revenue or net income, to
inform investors of changes to the financial condition of the
issuer.\181\
---------------------------------------------------------------------------

    \176\ See proposed Instruction 8 to paragraph (t) of proposed
Rule 201 of Regulation Crowdfunding.
    \177\ Issuers conducting a registered offering after the end of
their fiscal year also are permitted to use financial statements for
their prior period until the 90th day after their fiscal-year end
for non-accelerated filers (or 75th day for accelerated filers and
60th day for large accelerated filers) if certain conditions are
satisfied. See Rule 3-01(c) of Regulation S-X [17 CFR 210.3-01(c)].
    \178\ See Section II.B.2 below for a discussion of ongoing
reporting requirements.
    \179\ Additionally, if the offering period remains open beyond
120 days after the end of the issuer's fiscal year (resulting in
financial statements older than 485 days at the time the offering
closes), then the issuer would be required to update the disclosure
in the offering statement to include financial statements for the
most recently completed fiscal year. See proposed Instruction 8 to
paragraph (t) of proposed Rule 201 of Regulation Crowdfunding.
    \180\ Id.
    \181\ See proposed Instruction 9 to paragraph (t) of proposed
Rule 201 of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Section 4A(b)(1)(D)(i) requires issuers to file with the
Commission, provide to investors and the relevant intermediary and make
available to potential investors income tax returns and financial
statements. As specified in the statute, we are proposing to require an
issuer that is conducting an offering of $100,000 or less in reliance
on Section 4(a)(6) to provide its filed income tax returns for the most
recently completed fiscal year, if any, and its financial statements
certified by its principal executive officer.\182\ Although one
commenter suggested the Commission should provide otherwise,\183\ the
statute specifically calls for the Commission to require the filing of
income tax returns. To address the privacy concerns raised by
commenters with regard to the requirement to provide tax returns, we
are proposing to require issuers to redact personally identifiable
information, such as social security numbers, from their tax returns
before filing. Issuers that offer securities in reliance on Section
4(a)(6) before filing their tax returns for the most recently completed
fiscal year would be allowed to use the tax return filed for the prior
year, provided that the issuer discloses any material changes since
that prior year. In addition, the issuer would be required to provide
the tax return for the most recent fiscal year when filed with the U.S.
Internal Revenue Service (if filed during the offering period). With
regard to the requirement to provide financial statements that are
certified to be true and complete in all material respects, we are
proposing a form of the certification that would be provided by the
issuer's principal executive officer.\184\
---------------------------------------------------------------------------

    \182\ See proposed Rule 201(t)(1) of Regulation Crowdfunding.
    \183\ See RocketHub Letter 1.
    \184\ 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,
Section 4A(b)(1)(D)(ii) requires issuers to file with the Commission,
provide to investors and the relevant intermediary and make available
to potential investors financial statements reviewed by a public
accountant who is ``independent'' of the issuer, using professional
standards and procedures or standards and procedures established by the
Commission for this purpose. The statute does not define the term
``independent.'' We propose that to qualify as an independent public
accountant for purposes of this requirement, the accountant would need
to comply with the Commission's independence rules, which are set forth
in Rule 2-01 of Regulation S-X.\185\ We believe that accounting
professionals could benefit from the guidance the Commission and staff
have provided about these independence rules. We also believe that
financial statement reviews under these standards could provide
investors with more confidence regarding the reliability of the
financial statements.\186\ An issuer subject to this requirement that
seeks to eventually become an Exchange Act reporting company may have
an easier transition because the issuer would already be complying with
our independence rules.\187\
---------------------------------------------------------------------------

    \185\ 17 CFR 210.2-01. Rule 2-01 of Regulation S-X is designed
to ensure that auditors are qualified and independent both in fact
and in appearance. The rule sets forth restrictions on, including
but not limited to, financial, employment, and business
relationships between an accountant and a client and restrictions on
an accountant providing certain non-audit services to a client. The
general standard of independence is set forth in Rule 2-01(b). The
rule does not purport to, and the Commission could not, consider all
the circumstances that raise independence concerns, and these are
subject to the general standard in paragraph (b) of Rule 2-01. In
considering this standard, the Commission looks in the first
instance to whether a relationship or the provision of a service:
(a) Creates a mutual or conflicting interest between the accountant
and the client; (b) places the accountant in the position of
auditing his or her own work; (c) results in the accountant acting
as management or an employee of the client; or (d) places the
accountant in a position of being an advocate for the client.
    \186\ For example, under the Commission's independence rules, an
auditor cannot provide bookkeeping services to an audit client, so
investors would be able to rely on the benefits that accompany the
prohibition against an auditor auditing its own work. See Rule 2-
01(c)(4) of Regulation S-X [17 CFR 210.2-01(c)(4)].
    \187\ Using an accountant that is not independent in accordance
with our independence rules could result in increased expense and
delay to the extent that an issuer seeking to become an Exchange Act
reporting company would need to obtain an audit of the financial
statements by an accountant complying with the Commission's
independence standards.
---------------------------------------------------------------------------

    The statute also gives the Commission discretion to determine the
professional standards and procedures used for the review of the
financial statements. To implement this requirement, the proposed rules
would require issuers to provide financial statements reviewed in
accordance with the Statements on Standards for Accounting and Review
Services (``SSARS'') issued by the Accounting and Review Services
Committee of the American Institute of Certified Public Accountants
(``AICPA'').\188\ We are not proposing new review standards for
purposes of these rules at this time because we do not believe it is
necessary. The AICPA's review standard is widely utilized, and we are
not aware of any other widely utilized standards for reviews. Many
accountants reviewing financial statements of crowdfunding issuers
should be familiar with the AICPA's standards and procedures for
review, which could make it less burdensome for issuers.
---------------------------------------------------------------------------

    \188\ See proposed Rule 201(t)(2) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The issuer would be required to file with the Commission, provide
to investors and the relevant intermediary and make available to
potential investors a copy of the public accountant's review
report.\189\ This should benefit investors by giving them the ability
to consider any modification that may have been made to the review
report. It also would serve as a way to identify the accounting firm
used to review the financial statements. As one commenter
suggested,\190\ investors then could conduct due diligence on the
accounting firm by, for example, researching the other offerings made
in reliance on Section 4(a)(6) in which the accounting firm was
involved or reviewing the accounting firm's licensure status and any
publicly-available disciplinary proceedings.
---------------------------------------------------------------------------

    \189\ See proposed Instruction 5 to paragraph (t) of proposed
Rule 201 of Regulation Crowdfunding.
    \190\ See RocketHub Letter 1.
---------------------------------------------------------------------------

    For offerings of more than $500,000, consistent with the threshold
identified in Section 4A(b)(1)(D)(iii), the proposed rules would
require issuers to file with the Commission, provide to investors and
the relevant intermediary and make available to potential investors
audited financial statements. While Congress authorized the Commission
to establish a different threshold, we are not proposing at this time
to raise the threshold at which an issuer would be required to provide
audited financial statements, as some commenters suggested.\191\ We
note that Congress specifically selected $500,000 as the threshold at
which to require audited

financial statements. If we were to raise the threshold to $1 million,
as suggested by some commenters,\192\ it would eliminate the
requirement for issuers ever to provide audited financial statements
because the maximum offering amount under Section 4(a)(6) is $1
million. Leaving the $500,000 threshold unchanged also would provide
the Commission, investors and issuers an opportunity to become familiar
with the new offering exemption before considering possible changes to
the threshold.
---------------------------------------------------------------------------

    \191\ See CFIRA Letter 2; Vim Funding Letter; RocketHub Letter
1; Cera Technology Letter; Genedyne Letter 1; Schwartz Letter.
    \192\ See CFIRA Letter 2; Vim Funding Letter; Cera Technology
Letter; Genedyne Letter 1.
---------------------------------------------------------------------------

    Under the proposed rules, the auditor conducting the audit of the
financial statements would be required to be independent of the issuer
and the audit would have to be conducted in accordance with the
auditing standards issued by either the AICPA or the Public Company
Accounting Oversight Board (``PCAOB'').\193\ The proposed instructions
to the rules would provide that the auditor would be required to be
independent of the issuer based on the Commission's independence
standard in Rule 2-01 of Regulation S-X.\194\ Providing issuers with a
choice of auditing standards could provide a benefit in a number of
ways. If an issuer currently has audited financial statements using one
of the specified standards, the issuer would not need to obtain a new
audit or engage a different auditor to conduct an audit in order to
engage in a crowdfunding transaction in reliance on Section 4(a)(6). If
an issuer chooses to have an audit conducted in accordance with PCAOB
auditing standards, it generally would not need to obtain a new audit
in order to file a registration statement with the Commission for a
registered offering or to register a class of securities under the
Exchange Act and become an Exchange Act reporting company. The proposed
rules would not require the audit to be conducted by a PCAOB-registered
firm. This should mean that a greater number of accountants would be
eligible to audit the issuers' financial statements, which may reduce
issuers' costs.
---------------------------------------------------------------------------

    \193\ See proposed Rule 201(t)(3) of Regulation Crowdfunding.
    \194\ 17 CFR 210.2-01.
---------------------------------------------------------------------------

    An issuer would be required to file with the Commission, provide to
investors and the relevant intermediary and make available to potential
investors a copy of the audit report.\195\ This should benefit
investors by serving as a way to identify the accounting firm used to
audit the financial statements. Investors then could conduct due
diligence by, for example, researching other offerings made in reliance
on Section 4(a)(6) in which the accounting firm was involved or
reviewing the accounting firm's licensure status and any publicly-
available disciplinary proceedings.
---------------------------------------------------------------------------

    \195\ See proposed Instruction 6 to paragraph (t) of proposed
Rule 201 of Regulation Crowdfunding.
---------------------------------------------------------------------------

    An issuer that received an unqualified or a qualified audit opinion
would be in compliance with the audited financial statement
requirements.\196\ An issuer that received an adverse opinion or a
disclaimer of opinion, however, would not be in compliance with the
audited financial statement requirements,\197\ because the auditor
determined that the financial statements of the issuer do not present
fairly its financial position, results of operations or cash flows in
conformity with U.S. GAAP, or that the auditor does not express an
opinion on the financial statements.
---------------------------------------------------------------------------

    \196\ Id.
    \197\ Id.
---------------------------------------------------------------------------

    Under Rule 2-01 of Regulation S-X, the Commission does not
recognize as a public accountant any person who: (1) Is not duly
registered and in good standing as a certified public accountant under
the laws of the place of his residence or principal office; or (2) is
not in good standing and entitled to practice as a public accountant
under the laws of the place of his residence or principal office.\198\
We believe that this rule promotes the use of qualified accountants
that are in compliance with the requirements for their profession for
the review or audit of the financial statements with respect to all
offerings, including offerings in reliance on Section 4(a)(6).\199\ We
are not proposing to require that the public accountant be in good
standing for at least five years, as one commenter suggested,\200\
because that could unnecessarily restrict the pool of available public
accountants by, for example, excluding accountants who are in good
standing but who have been in business for fewer than five years.
---------------------------------------------------------------------------

    \198\ See 17 CFR 210.2-01(a).
    \199\ Accountants also would be subject to Rule 102(e) of the
Rules of Practice and Investigations. See 17 CFR 201.102(e). Under
Rule 102(e), the Commission can censure, suspend or bar
professionals who appear or practice before it if it finds such
professionals, after notice and an opportunity for hearing: (1) Not
to possess the requisite qualifications to represent others; or (2)
to be lacking in character or integrity or to have engaged in
unethical or improper professional conduct; or (3) to have willfully
violated, or willfully aided and abetted the violation of, any
provision of the Federal securities laws or the rules and
regulations thereunder. See 17 CFR 201.102(e)(1)(i), (ii) and (iii).
    \200\ See Philipose Letter 1.
---------------------------------------------------------------------------

    We believe that many issuers engaging in crowdfunding transactions
in reliance on Section 4(a)(6) are likely to be at a very early stage
of their business development and may not have an operating history. In
many instances, these issuers will have no more than a business plan
for which they are seeking investors to help fund. We are not proposing
to exempt these issuers (or issuers that have been in existence for
less than 12 months, as one commenter suggested) \201\ from the
requirement to provide financial statements based on the tiered
offering amounts. Financial statements prepared in accordance with U.S.
GAAP are generally self-scaling to the size and complexity of the
issuer, which reduces the burden of preparing financial statements for
many early stage issuers. We would not expect that the required
financial statements would be long or complicated for issuers that are
recently formed and have limited operating histories. We preliminarily
believe, nevertheless, that financial statements for such issuers would
be useful for investors, particularly when presented along with a
description of the issuer's financial condition. This would give
investors a more complete picture of the issuer and would highlight its
early stage of development.
---------------------------------------------------------------------------

    \201\ See CFIRA Letter 2.
---------------------------------------------------------------------------

Request for Comment
    50. Under the statute and the proposed rules, issuers are required
to file with the Commission, provide to investors and the relevant
intermediary and make available to potential investors financial
statements. The proposed rules would require all issuers to provide a
complete set of financial statements (a balance sheet, income
statement, statement of cash flows and statement of changes in owner's
equity) prepared in accordance with U.S. GAAP. Should we define
financial statements differently than under U.S. GAAP? If so, what
changes would be appropriate and why? What costs or challenges would be
associated with the use of a model other than U.S. GAAP (e.g., lack of
comparability)? What would be the benefits? Please explain.
    51. Should we exempt issuers with no operating history or issuers
that have been in existence for fewer than 12 months from the
requirement to provide financial statements, as one commenter
suggested? \202\ Why or why not? Specifically, what difficulties would
issuers with no operating history or issuers that have been in
existence for fewer than 12 months have in providing financial
statements? Please explain.
---------------------------------------------------------------------------

    \202\ Id.
---------------------------------------------------------------------------

    52. If we were to exempt issuers with little or no operating
history from the requirement to provide financial statements, should we
require

additional discussion of the fact that the issuer does not have an
operating history? If so, what additional discussion should we require?
    53. Section 4A(b)(1)(D) establishes tiered financial statement
requirements based on aggregate target offering amounts within the
preceding 12-month period. Under the proposed rules, issuers would not
be prohibited from voluntarily providing financial statements that meet
the requirements for a higher aggregate target offering amount (e.g.,
an issuer seeking to raise $80,000 provides financial statements
reviewed by a public accountant who is independent of the issuer,
rather than the required income tax returns and a certification by the
principal executive officer). Is this approach appropriate? Why or why
not?
    54. Should we allow issuers to prepare financial statements using a
comprehensive basis of accounting other than U.S. GAAP? For example,
should issuers be allowed to provide financial statements prepared on
an income tax basis, a cash basis or a modified cash basis of
accounting? Why or why not? If so, should we allow all issuers to use a
comprehensive basis of accounting other than U.S. GAAP, or only issuers
seeking to raise $100,000 or less, or $500,000 or less? Why or why not?
    55. Should we require issuers to provide two years of financial
statements, as proposed? Should this time period be one year, as one
commenter suggested,\203\ or three years? Please explain.
---------------------------------------------------------------------------

    \203\ See CompTIA Letter.
---------------------------------------------------------------------------

    56. Should we require some or all issuers also to provide financial
statements for interim periods, such as quarterly or semi-annually? Why
or why not? If so, which issuers and why? Should we require these
financial statements to be subject to public accountant or auditor
involvement? If so, what level of involvement is appropriate?
    57. As proposed, subject to certain conditions, issuers would be
able to conduct an offering during the first 120 days of the issuer's
fiscal year if the financial statements for the most recently completed
fiscal year are not yet available. For example, an issuer could raise
capital in April 2014 by providing financial statements from December
2012, instead of a more recent period. Is this an appropriate approach?
If the issuer is a high growth company subject to significant change,
would this approach result in financial statements that are too stale?
Should the period be shorter or longer (e.g., 90 days, 150 days, etc.)?
What quantitative and qualitative factors should we consider in setting
the period? Should issuers be required to describe any material changes
in their financial condition for any period subsequent to the period
for which financial statements are provided, as proposed? Please
explain if you do not believe this description should be required.
    58. The proposed rules would require issuers offering $100,000 or
less to provide financial statements that are certified by the
principal executive officer to be true and complete in all material
respects. Should we require issuers offering more than $100,000, but
not more than $500,000, and/or issuers offering more than $500,000 to
provide financial statements that are certified by the principal
executive officer to be true and complete in all material respects? Why
or why not?
    59. Have we adequately addressed the privacy concerns raised by the
requirement to provide income tax returns? Should we require issuers to
redact personally identifiable information from any tax returns, as
proposed? Is there additional information that issuers should be
required or allowed to redact? In responding, please specify each item
of information that issuers should be required or allowed to redact and
why. Under the statute and proposed rules, an issuer must be a business
organization, rather than an individual. Does this requirement
alleviate some of the potential privacy concerns? Please explain.
    60. If an issuer has not yet filed its tax return for the most
recently completed fiscal year, should we allow the issuer to use the
tax return filed for the prior year and require the issuer to update
the information after filing the tax return for the most recently
completed fiscal year, as proposed? Should the same apply to an issuer
that has not yet filed its tax return for the most recently completed
fiscal year and has requested an extension of the time to file? Should
issuers be required, as proposed, to describe any material changes that
are expected in the tax returns for the most recently completed fiscal
year? Please explain.
    61. As proposed, the accountant reviewing or auditing the financial
statements would have to be independent, as set forth in Rule 2-01 of
Regulation S-X. Should we require compliance with the independence
standards of the AICPA instead? Why or why not? If so, similar to the
requirement in Rule 2-01 of Regulation S-X, should we also require an
accountant to be: (1) Duly registered and in good standing as a
certified public accountant under the laws of the place of his or her
residence or principal office; or (2) in good standing and entitled to
practice as a public accountant under the laws of his or her place of
residence or principal office? Is there another independence standard
that would be appropriate? If so, please identify the standard and
explain why. Alternatively, should we create a new independence
standard for purposes of Section 4(a)(6)? If so, what would be an
appropriate standard? Please explain.
    62. As proposed, the accountant reviewing or auditing the financial
statements must be independent based on the independence standard in
Rule 2-01 of Regulation S-X. Are there any requirements under Rule 2-01
that should not apply to the accountant reviewing or auditing the
financial statements that are filed pursuant to the proposed rules? Why
or why not? Are there any that would not apply, but should? For
example, should the accountant reviewing or auditing the financial
statements of issuers in transactions made in reliance on Section
4(a)(6) be subject to the partner rotation requirements of Rule 2-
01(c)(6)? Why or why not?
    63. As proposed, an issuer with a target offering amount greater
than $100,000, but not more than $500,000, would be required to file
with the Commission, provide to investors and the relevant intermediary
and make available to potential investors financial statements reviewed
by an independent public accountant in accordance with the review
standards issued by the AICPA. Is this standard appropriate, or should
we use a different standard? Why or why not? If so, what standard and
why? Alternatively, should we create a new review standard for purposes
of Section 4(a)(6)? If so, what would be an appropriate standard and
why would it be more appropriate than the one proposed? What costs
would be involved for companies and accountants in complying with a new
review standard? How should the Commission administer and enforce a
different standard?
    64. Section 4A(b)(1)(D)(iii) requires audited financial statements
for offerings of more than $500,000 ``or such other amount as the
Commission may establish, by rule.'' Should we increase the offering
amount for which audited financial statements would be required? If so,
to what amount (e.g., $600,000, $750,000, etc.)? Please provide a basis
for any amount suggested. Should we identify additional criteria other
than the offering amount, as one commenter

suggested,\204\ that could be used to determine when to require an
issuer to provide audited financial statements? If so, what should
those criteria be?
---------------------------------------------------------------------------

    \204\ See ABA Letter 1 (stating that revenue could be a criteria
for determining when audited financial statements would be
required).
---------------------------------------------------------------------------

    65. Should financial statements be required to be dated within 120
days of the start of the offering? If so, what standard should apply?
Should those financial statements be reviewed or audited? Why or why
not?
    66. Under Rule 502(b)(2)(B)(1)-(2) of Regulation D, if an issuer,
other than a limited partnership, cannot obtain audited financial
statements without unreasonable effort or expense, then only the
issuer's balance sheet must be audited. Should we include a similar
provision in the proposed rules? Why or why not? Should we provide any
guidance as to what would constitute unreasonable effort or expense in
this context? If so, please describe what should be considered to be an
unreasonable effort or expense. If we were to require an issuer's
balance sheet to be dated within 120 days of the start of the offering,
should we allow the balance sheet to be unaudited? Why or why not?
    67. As proposed, an issuer with a target offering amount greater
than $500,000 could select between the auditing standards issued by the
AICPA or the PCAOB. Should we instead mandate one of the two standards?
If so, which standard and why? Alternatively, should we create a new
audit standard for purposes of Section 4(a)(6)? If so, what would be an
appropriate standard? What costs would be involved for companies and
auditors in complying with a new audit standard?
    68. Should we require that all audits be conducted by PCAOB-
registered firms? Why or why not?
    69. Should we consider the requirement to file with the Commission,
provide to investors and the relevant intermediary and make available
to potential investors financial statements subject to a review to be
satisfied if the review report includes modifications? Why or why not?
Would your response differ depending on the nature of the modification?
Please explain.
    70. As proposed, an issuer receiving an adverse audit opinion or
disclaimer of opinion would not satisfy its requirement to file with
the Commission, provide to investors and the relevant intermediary and
make available to potential investors audited financial statements.
Should an issuer receiving a qualified audit opinion be deemed to have
satisfied this requirement? Should certain qualifications (e.g., non-
compliance with U.S. GAAP) result in the financial statements not
satisfying the requirement to provide audited financial statements
while other types of qualifications would be acceptable? If so, which
qualifications would be acceptable and why?
    71. Should we require that the certified public accountant
reviewing or auditing the financial statements be in good standing for
at least five years, as one commenter suggested? \205\ Why or why not?
Should we require that the public accountant be in good standing for a
lesser period of time? If so, for how long? Would such a requirement
restrict the pool of available public accountants? If so, by how much?
Would such a requirement reduce investor protections? If so, how?
---------------------------------------------------------------------------

    \205\ See Philipose Letter 1.
---------------------------------------------------------------------------

b. Progress Updates
    Consistent with Section 4A(b)(1)(F), the proposed rules would
require an issuer to prepare regular updates on its progress in meeting
the target offering amount.\206\ These updates would be filed with the
Commission on EDGAR, under cover of Form C, provided to investors and
the relevant intermediary and made available to potential investors.
The issuer would check the box for ``Form C-U: Progress Update'' on the
cover of the Form C and provide the required update in the space
provided. One commenter suggested that issuers should be exempted from
issuing status updates and/or reports so long as the funding portal
publicly displays the progress of the issuer in meeting the target
offering amount.\207\
---------------------------------------------------------------------------

    \206\ See proposed Rules 201(v) and 203(a)(3) of Regulation
Crowdfunding.
    \207\ See RocketHub Letter 1 (also stating that if the
Commission mandates the filing of status updates, it should not
mandate a particular form of update).
---------------------------------------------------------------------------

    As proposed, the rules would require an issuer to file with the
Commission and provide investors and the relevant intermediary regular
updates regarding the issuer's progress in meeting the target offering
amount no later than five business days after the issuer reaches
particular intervals--i.e., one-half and 100 percent--of the target
offering amount.\208\ If the issuer will accept proceeds in excess of
the target offering amount, the issuer also would be required to file
with the Commission and provide investors and the relevant intermediary
a final progress update, no later than five business days after the
offering deadline, disclosing the total amount of securities sold in
the offering.\209\ If, however, multiple progress updates are triggered
within the same five-business-day period (e.g., the issuer reaches one-
half of the target offering amount on November 5 and 100 percent of the
target offering amount on November 8), the issuer could consolidate
such progress updates into one Form C-U, so long as the Form C-U
discloses the most recent threshold that was met and the Form C-U is
filed with the Commission and provided to investors and the relevant
intermediary by the day on which the first progress update would be
due.\210\ The proposed rules also would require the intermediary to
make these updates available to investors and potential investors
through the intermediary's platform.\211\
---------------------------------------------------------------------------

    \208\ See proposed Rule 203(a)(3) of Regulation Crowdfunding.
    \209\ Id.
    \210\ See proposed Instruction 2 to paragraph (a)(3) of proposed
Rule 203 of Regulation Crowdfunding.
    \211\ See proposed Rule 303(a) of Regulation Crowdfunding and
Section II.C.5.a below.
---------------------------------------------------------------------------

    We believe that this information would be important to investors by
allowing them to gauge whether interest in the offer has increased
gradually or whether it was concentrated at the beginning or at the end
of the offering period. In addition, we believe that the final progress
update would be necessary to inform investors of the total amount of
securities sold by the issuer, especially in cases where an issuer may
have sold more than the target offering amount. The proposed rules do
not include an exemption from this requirement when progress updates
are provided solely on the intermediary's platform. We believe that
proposing to require that the progress updates be filed with the
Commission would create a central repository for this information--
information that otherwise might no longer be available on the
intermediary's platform after the offering terminated. The progress
updates filed with the Commission also would make data available that
could be used to evaluate the effects of the Section 4(a)(6) exemption
on capital formation.
Request for Comment
    72. Views about what constitutes a ``regular update'' may vary,
particularly when considering the length of the offering. Is the
requirement to file an update when the issuer reaches one-half and 100
percent of the target offering amount appropriate? Is the proposed
requirement to file a final update in offerings in which the issuer
will accept proceeds in excess of the target offering amount
appropriate? Why or why not?

Should we require the progress updates to be filed at different
intervals (e.g., one-third, two-thirds or some other intervals)? Why or
why not? Alternatively, should the progress updates be filed after a
certain amount of the offering time has elapsed (e.g., weekly or
monthly until the target or maximum is reached or until the offering
closes)? Should the progress updates be based on reaching other
milestones or on some other basis? If so, what milestones or other
basis and why?
    73. As proposed, issuers would have five business days from the
time they reach the relevant threshold to file a progress update. Is
this time period appropriate? Why or why not? If not, what would be an
appropriate time period? Please explain. Should issuers be allowed to
consolidate multiple progress updates into one Form C-U if multiple
progress updates are triggered within a five-business-day period, as
proposed? Why or why not?
    74. Should issuers be required to certify that they have filed all
the required progress updates prior to the close of the offering? Why
or why not?
    75. Should we exempt issuers from the requirement to file progress
updates with the Commission as long as the intermediary publicly
displays the progress of the issuer in meeting the target offering
amount? Why or why not? If so, should the Commission establish
standards about how prominent the display would need to be?
c. Amendments to the Offering Statement
    We are proposing to require that an issuer amend its disclosure for
any material change in the offer terms or disclosure previously
provided to investors. The amended disclosure would be filed with the
Commission on Form C, provided to investors and the relevant
intermediary and made available to potential investors.\212\ The issuer
would check the box for ``Form C-A: Amendment'' on the cover of the
Form C and explain, in summary manner, the nature of the changes,
additions or updates in the space provided. An issuer would determine
whether changes in the offer terms or disclosure are material based on
the facts and circumstances. Information is material if there is a
substantial likelihood that a reasonable investor would consider it
important in deciding whether or not to purchase the securities.\213\
For example, we believe that a material change to financial condition
or to the intended use of proceeds would require an amendment to an
issuer's disclosure. Also, in those instances in which an issuer has
previously disclosed only the method for determining the price, and not
the final price, of the securities offered, we believe that
determination of the final price would be considered a material change
to the terms of the offer and would have to be disclosed. These are
not, however, the only possible material changes that would require
amended disclosure. In addition, as discussed further in Section II.C.6
below, if any change, addition or update constitutes a material change
to information previously disclosed, the issuer shall check the box
indicating that investors must reconfirm their investment commitments.
Investors would have five business days to reconfirm their investment
commitments, or the investment commitments would be cancelled.\214\
---------------------------------------------------------------------------

    \212\ See proposed Rule 203(a)(2) of Regulation Crowdfunding.
    \213\ See Basic Inc. v. Levinson, 485 U.S. 224 (1988) (quoting
TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976)).
    \214\ See proposed Rule 203(a)(2) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Issuers would be permitted, but not required, to amend the Form C
to provide information with respect to other changes that are made to
the information presented on the intermediary's platform and provided
to investors and potential investors.\215\ Issuers amending the Form C
to provide information that it considers not material would not check
the box indicating that investors must reconfirm their investment
commitments.
---------------------------------------------------------------------------

    \215\ See proposed Instruction to paragraph (a)(2) of proposed
Rule 203 of Regulation Crowdfunding.
---------------------------------------------------------------------------

Request for Comment
    76. Should we specify that an amendment to an offering statement
must be filed within a certain time period after a material change
occurs? Why or why not? What would be an appropriate time period for
filing an amendment to an offering statement to reflect a material
change? Why?
    77. If an issuer amends its Form C, should the intermediary be
required to notify investors? If so, should we specify the method of
notification, such as via email or other electronic means?
    78. Should establishment of the final price be considered a
material change that would always require an amendment to Form C and
reconfirmation, as proposed? Would it be appropriate to require
disclosure of the final price but not require reconfirmation? Should we
consider any change to the information required by Section 4A(b)(1) to
be a material change? Why or why not?
    79. Should we require issuers to amend Form C to reflect all
changes, additions or updates regardless of materiality so that the
Form C filed with us would reflect all information provided to
investors through the intermediary's platform? Why or why not?
2. Ongoing Reporting Requirements
    Section 4A(b)(4) requires, ``not less than annually, [the issuer
to] file with the Commission and provide to investors reports of the
results of operations and financial statements of the issuer, as the
Commission shall, by rule, determine appropriate, subject to such
exceptions and termination dates as the Commission may establish, by
rule.''
    One commenter suggested that the Commission should create a
standardized form or template for this ongoing disclosure.\216\ The
same commenter suggested that this ongoing disclosure should be
publicly available and shared with other regulators. Another commenter
noted that the requirement to file reports not less than annually could
be difficult to enforce and that it is unclear who would be responsible
for enforcing the requirement.\217\ The same commenter noted that this
provision seems to presume the success of every business that raises
capital through crowdfunding and questioned what would happen when an
issuer goes out of business. One commenter suggested that financial
statements included in an annual report should be required to be
reviewed or audited only if the issuer's total assets exceeded a
specified amount at the last day of the issuer's fiscal year.\218\ One
commenter suggested that annual reports should be required to be
reviewed by a qualified accountant in good standing for at least five
years.\219\ Two commenters noted that compliance with the exemption
would not be known at the time of the transaction if the annual reports
are a condition to the

exemption under Section 4(a)(6).\220\ One commenter suggested that the
Commission should require a failed business that issued securities
pursuant to Section 4(a)(6) to file a final annual report, in the year
of the failure, that provides final financial statements and discloses
to investors the material reasons for the liquidation, dissolution,
wind-down or bankruptcy.\221\
---------------------------------------------------------------------------

    \216\ See Commonwealth of Massachusetts Letter.
    \217\ See Crowdfunding Offerings Ltd. Letter 5.
    \218\ See ABA Letter 1 (suggesting that financial statements
reviewed by an independent accountant be required only if the
issuer's total assets as of the end of its fiscal year exceeded
$300,000 and that audited financial statements be required only if
the issuer's total assets exceeded $750,000 because (i) public
reporting pursuant to Exchange Act Section 12(g) is based, in part,
on an asset test and (ii) this would offer a reasonable predicate
for balancing the relative costs to very small, early-stage issuers
and the informational benefits to investors).
    \219\ See Philipose Letter 2.
    \220\ See Ohio Division of Securities Letter; Whitaker Letter
(suggesting that the filing of the annual report should not be a
condition to satisfying the exemption under Section 4(a)(6)).
    \221\ See Ohio Division of Securities Letter.
---------------------------------------------------------------------------

    To implement the ongoing reporting requirement in Section 4A(b)(4),
the proposed rules would require an issuer that sold securities in
reliance on Section 4(a)(6) to file a report on EDGAR annually, no
later than 120 days after the end of the most recent fiscal year
covered by the report.\222\ Although the statute provides that an
``issuer who offers or sells securities'' in reliance on Section
4(a)(6) shall provide ongoing reports, we do not believe the intent was
to require ongoing reports from a company that has not completed a
crowdfunding transaction and thus did not issue any securities.
---------------------------------------------------------------------------

    \222\ See proposed Rule 202(a) of Regulation Crowdfunding. See
also proposed Rule 203(b) of Regulation Crowdfunding and proposed
Instruction to paragraph (b)(1) thereof.
---------------------------------------------------------------------------

    To implement the statutory requirement that issuers provide the
report to investors, we propose to require issuers to post the annual
report on their Web sites.\223\ We believe that investors in this type
of Internet-based offering would be familiar with obtaining information
on the Internet and that providing the information in this manner would
be cost-effective for issuers. As discussed above, we believe Congress
contemplated that crowdfunding would, by its very nature, occur over
the Internet or other similar electronic media accessible to the
public,\224\ so we are not proposing to require issuers to provide
physical copies of the report to investors. We also are not proposing
to require issuers to provide a copy of the annual report, or refer
investors to the posting of the annual report, via email because we
believe that many issuers may not have email addresses for the
investors, especially after the shares issued pursuant to Section
4(a)(6) are traded by the original purchasers.\225\ To the extent email
addresses for investors are available to issuers, an issuer could refer
investors to the posting of the annual report via email.
---------------------------------------------------------------------------

    \223\ We are not proposing to require issuers to post the annual
report on the intermediary's platform because issuers may not
necessarily have an ongoing relationship with the intermediary
following an offering. See discussion in Section II.C.4.b below.
    \224\ See note 55.
    \225\ We believe that in order for the issuer to have email
addresses for the investors, it would need to obtain those email
addresses from the intermediary, since it would be the intermediary
that would collect that information when a potential investor opens
an account. In order for the issuer to have email addresses after
the shares issued pursuant to Section 4(a)(6) are traded, an issuer
would need to collect that information from each new investor in
connection with any sale of the issuer's securities in a secondary
market.
---------------------------------------------------------------------------

    When filing the annual report with the Commission, an issuer would
check the box for ``Form C-AR: Annual Report'' on the cover of the Form
C. The issuer would be required to disclose information similar to the
information required in the offering statement, including disclosure
about its financial condition that meets the financial statement
requirements that were applicable to its offering statement. The issuer
also would be able to voluntarily provide financial statements that
meet the requirements for a higher aggregate target offering amount
than it was required to provide in its offering statement. 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. We believe that investors who purchased on the basis of the
higher level of financial statements should continue to receive that
level of disclosure, and investors in other offerings of the issuer
should receive the same information.\226\ Although an issuer would not
be required to provide the offering-specific information that it filed
at the time of the offering (because the issuer will not be offering or
selling securities),\227\ it would be required to disclose information
about the company and its financial condition, as was required in
connection with the offer and sale of the securities.\228\ This should
minimize the disclosure burden for issuers to the extent they would be
able to use the offering materials as a basis to prepare the ongoing
disclosure. Investors should benefit from receiving annual updates to
the information they received when making the decision to invest in the
issuer's securities, which should allow them to continue to be informed
about issuer developments. Under the statute and the proposed rules,
the securities will be freely tradable after one year and, therefore,
this information also would benefit potential future holders of the
issuer's securities and help them to make more informed investment
decisions.
---------------------------------------------------------------------------

    \226\ For example, if an issuer had previously completed an
offering with a $200,000 target and an offering with a $700,000
target, the issuer would be required to provide audited financial
statements rather than reviewed financial statements. This would be
the case even if the $200,000 offering was conducted more recently
than the $700,000 offering.
    \227\ An issuer would not be required to provide information
about: (1) The stated purpose and intended use of the proceeds of
the offering; (2) the target offering amount and the deadline to
reach the target offering amount; (3) whether the issuer will accept
investments in excess of the target offering amount; (4) whether, in
the event that the offer is oversubscribed, shares will be allocated
on a pro-rata basis, first come-first served basis, or other basis;
(5) the process to complete the transaction or cancel an investment
commitment once the target amount is met; (6) the price to the
public of the securities being offered; (7) the terms of the
securities being offered; (8) the name, Commission file number and
CRD number (as applicable) of the intermediary through which the
offering is being conducted; and (9) the amount of compensation paid
to the intermediary.
    \228\ Issuers would be required to provide disclosure about its
directors and officers, business, current number of employees,
financial condition (including financial statements), capital
structure, significant factors that make an investment in the issuer
speculative or risky, material indebtedness and certain related-
party transactions.
---------------------------------------------------------------------------

    We are proposing to require issuers to file the annual report until
one of the following events occurs: (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 purchases or 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.\229\ In these
situations, we believe it is appropriate to terminate an issuer's
reporting obligations because it will either be required by other
provisions of the securities laws to provide investors with necessary
information or it will no longer have investors. Any issuer terminating
its annual reporting obligations would be required to file on EDGAR,
within five business days from the date of the terminating event, a
notice to investors and the Commission that it will no longer file and
provide annual reports pursuant to the requirements of Regulation
Crowdfunding.\230\ The issuer would check the box for ``Form C-TR:
Termination of Reporting'' on the cover of Form C.
---------------------------------------------------------------------------

    \229\ See proposed Rule 202(b) of Regulation Crowdfunding.
    \230\ See proposed Rule 203(b)(2) of Regulation Crowdfunding.
---------------------------------------------------------------------------

Request for Comment
    80. Should we require ongoing annual reports, as proposed? Why or
why not? Should we require ongoing reporting more frequently than
annually? Why or

why not? If so, how often (e.g., semi-annually or quarterly)?
    81. Two commenters noted that compliance with the exemption would
not be known at the time of the transaction if the annual reports are a
condition to the exemption under Section 4(a)(6).\231\ Should the
requirement to provide ongoing annual reports be a condition to the
exemption under Section 4(a)(6)? If so, for how long (e.g., until the
first annual report is filed, until the termination of an issuer's
reporting obligations or some other period)? Please explain.
---------------------------------------------------------------------------

    \231\ See Ohio Division of Securities Letter; Whitaker Letter.
---------------------------------------------------------------------------

    82. Should we require that the annual reports be provided to
investors by posting the reports on the issuer's Web site and filing
them on EDGAR, as proposed? Should we require issuers also to directly
notify investors of the availability of the annual report, such as by
email or other electronic means? Should we instead require issuers to
deliver the annual reports directly to investors? If so, should we
specify the method of delivery (e.g., email or other electronic means,
U.S. mail or some other method)? Would investors have an electronic
relationship with the issuer after the offering terminates? If not, how
would an issuer notify or deliver a copy of the annual report to the
investor? Would issuers continue to have an ongoing relationship with
intermediaries once the offering is completed? If so, should we also
require that the issuer post its annual report on the intermediary's
platform? Why or why not?
    83. After completion of the offering, should we require that
investors be represented by a nominee or other party who could help to
facilitate physical delivery of the annual report to investors? Why or
why not? Should the nominee or other party have other responsibilities,
such as speaking on behalf of and representing the interests of
investors (e.g., when the issuer wishes to take certain corporate
actions that could impact or dilute the rights of investors,
distribution of dividend payments, etc.)? If a nominee or other party
should be required, what structure should this arrangement take and
why?
    84. Are the proposed ongoing disclosure requirements appropriate?
Why or why not? Should we modify or eliminate any of the proposed
requirements?
    85. Should the discussion of the issuer's financial condition
address changes from prior periods? Why or why not? Should the number
of years covered by the financial statements be the same as in the
offering statement? Why or why not? If not, what should they be?
    86. Should we require that reviewed or audited financial statements
be provided only if the total assets of the issuer at the last day of
its fiscal year exceeded a specified amount, as one commenter
suggested? \232\ Why or why not? If so, what level of total assets
would be appropriate (e.g., $1 million, $10 million, or some other
amount)? Are there other criteria (other than total assets) that we
should consider? Please explain.
---------------------------------------------------------------------------

    \232\ See ABA Letter 1.
---------------------------------------------------------------------------

    87. The proposed rules would require any issuer terminating its
annual reporting obligations to file on EDGAR, within five business
days from the date of the terminating event, a notice to investors and
the Commission that it will no longer file and provide annual reports.
Is this approach appropriate? Why or why not? Should we require issuers
to file the notice earlier (e.g., within two business days of the
event) or later (e.g., within 10 business days of the event)? If so,
what would be an appropriate amount of time after the event and why?
    88. Should an issuer be able to terminate its annual reporting
obligation in circumstances other than those provided in the proposed
rules? For example, should an issuer be allowed to terminate its
reporting obligation after filing a certain number of annual reports,
as one commenter suggested,\233\ so long as the issuer does not engage
in additional transactions in reliance on Section 4(a)(6) (e.g., after
filing one annual report, two annual reports or some other number of
annual reports)? Why or why not? If so, what would be an appropriate
number of annual reports? Should all issuers be allowed to terminate
their reporting obligations or only issuers that have not sold more
than a certain amount of securities in reliance on Section 4(a)(6)? If
so, what would be an appropriate amount of securities (e.g., $100,000,
$500,000, or some other amount)? Should an issuer be allowed to
terminate its reporting obligation following the issuer's or another
party's purchase or repurchase of a significant percentage of the
securities issued in reliance on Section 4(a)(6) (including any payment
of a significant percentage of debt securities or redemption of a
significant percentage of redeemable securities), or receipt of consent
to cease reporting from a specified percentage of the unaffiliated
security holders? Why or why not? If so, what would be an appropriate
percentage (greater than 50 percent, 75 percent or some other
percentage)? Should an issuer be allowed to terminate its reporting
obligation if the securities issued in reliance on Section 4(a)(6) are
held by less than a specified number of holders of record, as suggested
by a commenter? \234\ Why or why not? If so, what would be an
appropriate number of holders of record (less than 500, 300 or some
other number)?
---------------------------------------------------------------------------

    \233\ See Schwartz Letter.
    \234\ See ABA Letter 1.
---------------------------------------------------------------------------

    89. If an issuer files a petition for bankruptcy, what effect
should that filing have on the issuer's reporting obligations? Please
explain.
    90. Should issuers be required to file reports to disclose the
occurrence of material events on an ongoing basis? What events would be
material and therefore require disclosure? Should we identify a list of
material events that would trigger a report, similar to the list in
Form 8-K \235\ (such as changes in control, bankruptcy or receivership,
material acquisitions or dispositions of assets, issuances of
securities and changes to the rights of security holders)? Or should we
require that all material events be reported without specifying any
particular events? How many days after the occurrence of the material
event should the issuer be required to file the report? Please explain.
---------------------------------------------------------------------------

    \235\ 17 CFR 249.308. Form 8-K is a report that public companies
must file to announce major events that shareholders should know
about on a more current basis. Form 8-K includes a specific list of
the types of events that trigger a public company's obligation to
file a current report, including matters relating to the company's
business and operations, financial information, securities and
trading markets, accountants and financial statements, corporate
governance and management, asset-backed securities, exhibits and
other matters that are not specifically called for by Form 8-K that
the company considers to be of importance to security holders.
Generally, a Form 8-K must be filed within four business days from
the date of the event that triggered the report.
---------------------------------------------------------------------------

    91. We have the authority to include exceptions to the ongoing
reporting requirements in Section 4A(b)(4). Should we consider
excepting certain issuers from ongoing reporting obligations (e.g.,
those raising a certain amount, such as $100,000 or less)? Should any
exception always apply or only after a certain number of reports have
been filed? Please explain.
3. Form C and Filing Requirements
    Section 4A(b)(1) does not specify a format that issuers must use to
present the required disclosures and file these disclosures with the
Commission. Several commenters stated that the Commission should
require the disclosure on a form modeled after, or

require the use of NASAA's Small Company Offering Registration Form (U-
7).\236\ One commenter suggested using Form 1-A, which is used for
securities offerings made pursuant to Regulation A,\237\ as a
model.\238\ One commenter requested that we create a form for issuers
that ``simplifies the process and provides legal certainty for
investors, intermediaries and issuers,'' \239\ while another commenter
suggested that we adopt a ``simple, uniform, easy-to-understand yet
comprehensive template prospectus that is similar in principle to the
mutual fund industry's summary prospectus.'' \240\ Another commenter
recommended that disclosure be simple, allow for standardization and
take into account the size and stage of development of the issuer.\241\
One commenter suggested we create a disclosure template that would
allow issuers to complete certain fields by inserting the required
disclosure.\242\ Another commenter suggested we require a single
offering document incorporating disclosures that intermediaries and
issuers are required to make.\243\
---------------------------------------------------------------------------

    \236\ See Coan Letter; Liles Letter 1; Vim Funding Letter; NASAA
Letter.
    \237\ 17 CFR 230.251 et seq.
    \238\ See Commonwealth of Massachusetts Letter.
    \239\ CFIRA Letter 2.
    \240\ The Motley Fool Letter.
    \241\ See 2012 SEC Government-Business Forum, note 29.
    \242\ See ABA Letter 1.
    \243\ See Ohio Division of Securities Letter.
---------------------------------------------------------------------------

    We are proposing to require issuers to file the mandated disclosure
on EDGAR using new Form C.\244\ As proposed, Form C would require
certain disclosures to be presented in a specified format, while
allowing the issuer to customize the presentation of other disclosures
required by Section 4A(b)(1) and the related rules. This approach
should provide key offering information in a standardized format and
give issuers flexibility in the presentation of other required
disclosures. We believe this flexibility is important given that we
expect that issuers engaged in crowdfunding transactions in reliance on
Section 4(a)(6) would encompass a wide variety of industries at
different stages of business development.
---------------------------------------------------------------------------

    \244\ An issuer that does not already have EDGAR filing codes,
and to which the Commission has not previously assigned a user
identification number, which we call a ``Central Index Key (CIK)''
code, would need to obtain the codes by filing electronically a Form
ID [17 CFR 239.63; 249.446; 269.7 and 274.402] at https://www.filermanagement.edgarfiling.sec.gov. The applicant also would be
required to submit a notarized authenticating document as a Portable
Document Format (PDF) attachment to the electronic filing. The
authenticating document would need to be manually signed by the
applicant over the applicant's typed signature, include the
information contained in the Form ID and confirm the authenticity of
the Form ID. See 17 CFR 232.10(b)(2).
---------------------------------------------------------------------------

    We propose to require issuers to use an XML-based fillable form to
input certain information.\245\ This XML-based fillable form would
support the assembly and transmission of those required disclosures to
EDGAR on Form C.\246\ It also would help the Commission to collect
certain key information about each offering to monitor the
implementation of the crowdfunding exemption under Section 4(a)(6). For
example, the Commission could monitor the types of issuers using the
exemption, including the issuers' size, location, securities offered
and offering amounts and the intermediaries through which the offerings
are taking place. Monitoring the implementation of the crowdfunding
exemption also would give the Commission more information to evaluate
whether the rules include appropriate investor protections and
facilitate capital formation. Issuers could customize the presentation
of the rest of their disclosures and file those disclosures as exhibits
to the Form C. For example, an issuer could provide the required
disclosures by uploading to EDGAR, as an exhibit to Form C, a text
version of the relevant information presented on the intermediary's
platform, including a transcript of any video presentation and a
description of any charts or graphs.
---------------------------------------------------------------------------

    \245\ See proposed Instruction to paragraph (a)(1) of proposed
Rule 203 of Regulation Crowdfunding. Issuers would input in the
proposed XML-based filing the following information: name, legal
status and contact information of the issuer; name, Commission file
number and CRD number (as applicable) of the intermediary through
which the offering will be conducted; the amount of compensation
paid to the intermediary to conduct the offering, including the
amount of referral and other fees associated with the offering; type
of security offered; number of securities offered; offering price;
target offering amount and maximum offering amount (if different
from the target offering amount); whether oversubscriptions will be
accepted and, if so, how they will be allocated; deadline to reach
the target offering amount; current number of employees of the
issuer; and selected financial data for the prior two fiscal years.
    \246\ The Commission would disseminate the information in a
format that provides normal text for reading and XML-tagged data for
analysis. Currently the Commission's OnlineForms Web site (https://www.onlineforms.edgarfiling.sec.gov) supports the assembly and
transmission of XML filings required by Exchange Act Section 16 (15
U.S.C. 78p).
---------------------------------------------------------------------------

    Under the proposed rules, Form C would be used for all of an
issuer's filings with the Commission.\247\ The issuer would check one
of the following boxes on the cover of the Form C to indicate the
purpose of the Form C filing:
---------------------------------------------------------------------------

    \247\ See proposed Rule 203 of Regulation Crowdfunding.
---------------------------------------------------------------------------

     ``Form C: Offering Statement'' for issuers filing the
initial disclosures required for an offering made in reliance on
Section 4(a)(6);
     ``Form C-A: Amendment'' for issuers seeking to amend a
previously-filed Form C for an offering;
     ``Form C-U: Progress Update'' for issuers filing a
progress update required by Section 4A(b)(1)(H) and the related rules;
     ``Form C-AR: Annual Report'' for issuers filing the annual
report required by Section 4A(b)(4) and the related rules; and
     ``Form C-TR: Termination of Reporting'' for issuers
terminating their reporting obligations pursuant to Section 4A(b)(4)
and the related rules.

We believe that the use of one form would be more efficient than
requiring multiple forms and would simplify the filing process for
issuers and their preparers. EDGAR would automatically provide each
filing with an appropriate tag depending on which box the issuer checks
so that investors could distinguish between the different filings.\248\
---------------------------------------------------------------------------

    \248\ EDGAR would tag the offering statement as ``Form C,'' any
amendments to the offering statement as ``Form C-A,'' progress
updates as ``Form C-U,'' annual reports as ``Form C-AR'' and
termination reports as ``Form C-TR.''
---------------------------------------------------------------------------

    Section 4A(b)(1) requires issuers to file the offering information
with the Commission, provide it to investors and the relevant
intermediary and make it available to potential investors.\249\ Under
the proposed rules, issuers would satisfy the requirement to file the
information with the Commission by filing the Form C: Offering
Statement, including any amendments and progress updates, on EDGAR. To
satisfy the requirement to provide the disclosures to the relevant
intermediary, we propose that issuers provide to the relevant
intermediary a copy of the disclosures filed with the Commission on
EDGAR.\250\ To satisfy the requirement to

provide the disclosures to investors and make them available to
potential investors, we propose that issuers provide the information to
investors electronically by referring investors to the information on
the intermediary's platform.\251\ Issuers could refer investors through
a posting on the issuer's Web site or by email.\252\ We believe that
investors in this type of Internet-based offering would be familiar
with obtaining information on the Internet and that providing the
information in this manner would be cost-effective for issuers. As
discussed above, we believe Congress contemplated that crowdfunding
would, by its very nature, occur over the Internet or other similar
electronic medium that is accessible to the public,\253\ so we are not
proposing to require issuers to provide physical copies of the
information to investors. We propose to allow issuers to refer
investors to the information on the intermediary's platform through a
posting on the issuer Web site or by email, rather than requiring
email, because we believe that many issuers may not have email
addresses for investors.\254\
---------------------------------------------------------------------------

    \249\ Section 4A(b)(4) requires issuers to file with the
Commission and provide to investors, not less than annually, reports
of the results of operations and financial statements of the issuer.
As discussed above in Section II.B.2, to satisfy this requirement,
the proposed rules would require an issuer to post the annual report
on its Web site and file it on EDGAR. See proposed Rule 202(a) of
Regulation Crowdfunding.
    \250\ See proposed Instruction 1 to paragraph (a) of proposed
Rule 203 of Regulation Crowdfunding. We anticipate that issuers
seeking to engage in an offering in reliance on Section 4(a)(6) may
likely work with an intermediary to prepare the disclosure that
would be provided on the intermediary's platform and filed on EDGAR.
In some cases, intermediaries may offer, as part of their service,
to file the disclosure on EDGAR on behalf of the issuer.
    \251\ See proposed Instruction 2 to paragraph (a) of proposed
Rule 203 of Regulation Crowdfunding.
    \252\ Id.
    \253\ See note 55.
    \254\ See note 225. To the extent that intermediaries have the
email addresses of investors and potential investors (e.g., as a
result of investors and potential investors opening an account with
the intermediary), intermediaries could provide an issuer's
disclosures to investors and potential investors through email.
---------------------------------------------------------------------------

Request for Comment
    92. Should we require a specific format that issuers must use to
disclose the information required by Section 4A(b)(1) and the related
rules?
    93. Should issuers be required to file the Form C with the
Commission in electronic format only, as proposed? Alternatively,
should we permit issuers to file the Form C in paper format? What are
the relative costs and benefits of permitting the filing of the Form C
in paper format? Should issuers be precluded from relying on the
hardship exemptions in Rules 201 and 202 of Regulation S-T? \255\ Why
or why not?
---------------------------------------------------------------------------

    \255\ 17 CFR 232.201 and 232.202. These hardship exemptions
allow filers, under certain conditions, to submit their filings and
exhibits in paper form instead of electronically.
---------------------------------------------------------------------------

    94. In what format would the information about an issuer be
presented on an intermediary's platform? Will there be written text,
graphics, charts or graphs, or video testimonials by the founder or
other key stakeholders? Will the information be presented in a way that
would allow for the filing of the information as an exhibit to Form C
on EDGAR? If not, how should the rules address these types of
materials?
    95. Should we require different forms for each type of required
filing? Would the use of one form with different EDGAR tags for each
type of filing create confusion among investors who review the issuer's
filings? Would it create confusion for issuers that are filing the
forms? Please explain.
    96. Should we allow issuers to refer investors and potential
investors to the information on the intermediary's platform? Are the
proposed methods (Web site posting or email) to refer investors
effective and appropriate? Would issuers have access to the investors'
email addresses? Are there other methods we should consider? If so,
what methods and why?
4. Prohibition on Advertising Terms of the Offering
    Section 4A(b)(2) provides that an issuer shall ``not advertise the
terms of the offering, except for notices which direct investors to the
funding portal or broker.'' We received a number of comments regarding
this provision. One commenter stated that the inability to market an
offering will prevent startups from reaching their desired goal.\256\
One commenter suggested that we should allow issuers unrestricted use
of advertising, both on the Internet and through conventional forms of
advertising.\257\ Another commenter suggested that communications
between the issuer and investors should be limited to communication
channels controlled by the intermediary and that direct communications
between an issuer and investors should be discouraged.\258\ Another
commenter stated that it is unclear what constitutes a notice for these
purposes and that issuers should be able to promote their offerings as
long as investors register with the intermediary and participate in the
offering through that intermediary.\259\ Another commenter suggested
that issuers should be able to promote their offerings through ``their
own platforms'' as long as all such notices include a link directly to
the registered intermediary.\260\ One commenter suggested that an
issuer should be permitted to place a notice consisting of the basic
terms of the offering on the issuer's Web site or at its place of
business.\261\ Alternatively, the commenter suggested an issuer should
be permitted to include such notice in correspondence to its customers
or mailing list subscribers.\262\
---------------------------------------------------------------------------

    \256\ See VTNGLOBAL Letter.
    \257\ See Loofbourrow Letter.
    \258\ See CommunityLeader Letter.
    \259\ See Crowdfunding Offerings Ltd. Letter 5.
    \260\ See CFIRA Letter 2.
    \261\ See NCA Letter (stating that the Commission should clarify
whether the rules will permit notices to state the offering period,
whether investors may contact the issuer's management to discuss the
offering or whether the notices may include names of accredited
investors participating in the offering).
    \262\ Id.
---------------------------------------------------------------------------

    Another commenter stated that the advertising prohibition should
not be read to restrict notices that: (1) Alert the public to the
issuer's project or company; (2) state that the public may participate
in the fundraising; or (3) direct the public to the funding
platform.\263\ Another commenter suggested notices should be allowed to
include: (1) The type of security being offered; (2) the offering
amount; (3) the opening and closing date of the offering; and (4) the
issuer's line of business or whether the offering will fund a new line
of business.\264\ One commenter suggested that, given the limitations
on the number of characters allowed by some social media sites, we
should allow notices that do not require lengthy legends or
disclosure.\265\ Another commenter suggested that we define the term
``advertising'' and provide a model form that can be used by issuers to
direct investors to the intermediary.\266\ Another commenter suggested
that we require issuers to file all advertising and other materials
that the issuers create relating to offerings made in reliance on
Section 4(a)(6).\267\ One commenter suggested that we allow advertising
of non-financial elements of a transaction in the case of offerings
conducted through an intermediary that is a community development
financial institution.\268\
---------------------------------------------------------------------------

    \263\ See RocketHub Letter 1.
    \264\ See NSBA Letter.
    \265\ See CFIRA Letter 1 (providing examples of notices varying
in length from zero to 1,500 characters).
    \266\ See CompTIA Letter.
    \267\ See Commonwealth of Massachusetts Letter.
    \268\ See City First Letter.
---------------------------------------------------------------------------

    Under the proposed rules, an issuer could publish a notice
advertising the terms of an offering in reliance on Section 4(a)(6),
provided that the notice includes the address of the intermediary's
platform on which additional information about the issuer and the
offering may be found.\269\ Consistent with Section 4A(b)(2), an issuer
would not otherwise be permitted to advertise, directly or indirectly,
the terms of an offering made in reliance on Section 4(a)(6). While we
understand

the importance that potential issuers likely will place on the ability
to advertise, the statute specifically restricts the ability of issuers
to advertise the terms of offerings made in reliance on Section
4(a)(6). Limiting the advertising of the terms of the offering to the
information permitted in the notice is intended to direct investors to
the intermediary's platform and to make investment decisions with
access to the disclosures necessary for them to make informed
investment decisions.
---------------------------------------------------------------------------

    \269\ See proposed Rule 204 of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules would allow notices advertising the terms of the
offering to include no more than the following: (1) A statement that
the issuer is conducting an offering, the name of the intermediary
through which the offering is being conducted and a link directing the
potential investor to the intermediary's platform; (2) the terms of the
offering; and (3) factual information about the legal identity and
business location of the issuer, limited to the name of the issuer of
the security, the address, phone number and Web site of the issuer, the
email address of a representative of the issuer and a brief description
of the business of the issuer.\270\ Under the proposed rules, ``terms
of the offering'' would include: (1) The amount of securities offered;
(2) the nature of the securities; (3) the price of the securities; and
(4) the closing date of the offering period.\271\
---------------------------------------------------------------------------

    \270\ See proposed Rule 204(b) of Regulation Crowdfunding. While
notices would not be required to include all of this information,
they would be required to, at a minimum, direct investors and
potential investors to the intermediary's platform on which
additional information about the issuer and the offering may be
found. See proposed Rule 204(a) of Regulation Crowdfunding.
    \271\ See proposed Instruction to proposed Rule 204 of
Regulation Crowdfunding.
---------------------------------------------------------------------------

    The permitted notices would be similar to the ``tombstone ads''
permitted under Securities Act Rule 134,\272\ except that the notices
would be required to direct investors to the intermediary's platform
through which the offering is being conducted,\273\ such as by
including a link directing the potential investor to the platform.\274\
We are not proposing to impose limitations on how the issuer
distributes the notices. For example, issuers could place notices in
newspapers or could post notices on social media sites. We believe this
approach would allow issuers to leverage social media to attract
potential investors, while at the same time protecting potential
investors by limiting the ability of issuers to advertise the terms of
the offering without providing the required disclosures.
---------------------------------------------------------------------------

    \272\ 17 CFR 230.134.
    \273\ See proposed Rule 204(a) of Regulation Crowdfunding.
    \274\ See proposed Rule 204(b)(1) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules also would allow an issuer to communicate with
investors and potential investors about the terms of the offering
through communication channels provided by the intermediary on the
intermediary's platform, so long as the issuer identifies itself as the
issuer in all communications. We believe that one of the central tenets
of the concept of crowdfunding is that the members of the crowd decide
whether or not to fund an idea or business after sharing information
with each other. As part of those communications, we believe it is
important for the issuer to be able to respond to questions about the
terms of the offering or even challenge or refute statements made
through the communication channels provided by the intermediary.
Therefore, we have not proposed to restrict issuers from participating
in those communications.
    The proposed rules would not restrict an issuer's ability to
communicate other information that does not refer to the terms of the
offering. We believe that this is consistent with the statute because
Section 4A(b)(2) only appears to impose a restriction on the
advertising of the terms of the offer. To prohibit communications that
do not refer to the terms of the offering would place a greater burden
on issuers relying on Section 4(a)(6) than on issuers in registered
offerings. For example, Securities Act Rule 169 \275\ permits non-
Exchange Act reporting issuers engaged in an initial public offering to
continue to publish, subject to certain exclusions and conditions,
regularly released factual business information that is intended for
use by persons other than in their capacity as investors or potential
investors.\276\ We believe that permitting issuers to continue to
engage in communications that do not refer to the terms of the offering
during the pendency of offering made in reliance on Section 4(a)(6)
would increase the likelihood of the success of an issuer's business
because the issuer could continue to advertise its products or
services, so long as it does so without discussing the terms of the
offering.
---------------------------------------------------------------------------

    \275\ 17 CFR 230.169.
    \276\ Id. See also Securities Offering Reform, Release No. 33-
8591 (July 19, 2005) [70 FR 44722 (Aug. 3, 2005)].
---------------------------------------------------------------------------

Request for Comment
    97. Should we require issuers to file with the Commission or
provide to the intermediary a copy of any notice directing investors to
the intermediary's platform? Why or why not?
    98. The proposed rules would define ``terms of the offering'' to
include: (1) The amount of securities offered; (2) the nature of the
securities; (3) the price of the securities; and (4) the closing date
of the offering period. Is this definition appropriate? Why or why not?
Should the definition be modified to eliminate or include other items?
If so, which ones and why? Should we provide further guidance as to the
meaning of ``terms of the offering?'' Please explain.
    99. Should we restrict the media that may be used for the
advertising of notices (e.g., prohibit advertising via television,
radio or phone calls)? If so, why and what media should we restrict?
What media should we permit? Please explain.
    100. Should we require a specific format for issuer notices? Should
we provide examples of notices that would comply with the requirements?
    101. Should we further restrict or specify the information that
could be included in a notice of the offering? If so, how and why? Is
the information that we have proposed to permit in notices sufficient
to inform potential investors of an offering? Should we permit the
issuer to include any additional information in the notice if, for
example, the offering aims to promote a particular social cause, such
as driving economic growth in underinvested communities, as one
commenter suggested? \277\ If so, what information and why? Should we
allow any additional information to be included in the notices for all
offerings made in reliance on Section 4(a)(6)? Please explain. Should
we impose restrictions on the timing or frequency of notices? Why or
why not? If so, what restrictions would be appropriate?
---------------------------------------------------------------------------

    \277\ See City First Letter.
---------------------------------------------------------------------------

    102. Should we limit the issuer's participation in communication
channels provided by the intermediary on the intermediary's platform?
Why or why not? If so, what limitations would be appropriate?
    103. The proposed rules would allow an issuer to communicate with
investors and potential investors about the terms of an offering
through communication channels provided by the intermediary on the
intermediary's platform, so long as the issuer identifies itself as the
issuer in all communications. Is this approach appropriate? Why or why
not? If not, why not?
    104. The proposed rules would not restrict an issuer's ability to
communicate information that does not refer to the terms of the
offering. Is this

approach appropriate? Why or why not? If not, what limitations should
we include on an issuer's communications that do not refer to the terms
of the offering and why?
5. Compensation of Persons Promoting the Offering
    Section 4A(b)(3) provides that an issuer shall ``not compensate or
commit to compensate, directly or indirectly, any person to promote its
offerings through communication channels provided by a broker or
funding portal, without taking such steps as the Commission shall, by
rule, require to ensure that such person clearly discloses the receipt,
past or prospective, of such compensation, upon each instance of such
promotional communication.''
    We received comments offering varying views on this provision. One
commenter noted that it is unclear precisely what this provision
attempts to prohibit or protect against.\278\ Another commenter
suggested the rules should distinguish between an issuer hiring an
individual or entity for promotion, where investors may not be aware of
the commercial relationship between the parties, and more standard web-
based advertising, including through search engines or trending
topics.\279\ This commenter suggested that we should not adopt rules
that may interfere with promotional compensation, but rather, we should
require simple disclosure of a commercial relationship when it would
not otherwise be apparent. One commenter suggested that the rules
should provide that a clear statement of the compensation amount paid
to promoters (or a formula for determining the same) in the disclosure
document would satisfy this disclosure obligation.\280\ Another
commenter suggested that if the issuer will use any promoters in
connection with the offering, the issuer should identify the promoters
and disclose the amount and structure of promoter compensation.\281\
---------------------------------------------------------------------------

    \278\ See Crowdfunding Offerings Ltd. Letter 5 (asking a number
of questions about what constitutes direct or indirect compensation,
whether it is acceptable to promote offerings if no compensation is
paid and whether the provision covers third parties who may have an
interest in the offering and who pay for the promotion).
    \279\ See RocketHub Letter 1.
    \280\ See Schwartz Letter.
    \281\ See Commonwealth of Massachusetts Letter.
---------------------------------------------------------------------------

    Consistent with the statute, the proposed rules \282\ 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 the person clearly
discloses the receipt (both past and prospective) of compensation each
time the person makes a promotional communication.\283\ In this regard,
we anticipate that an issuer could, for example, contractually require
any promoter to include the required statement about receipt of
compensation, confirm that the promoter is adhering to the
intermediary's terms of use that require promoters to affirm whether or
not they are compensated by the issuer, monitor communications made by
such persons and take the necessary steps to have any communications
that do not have the required statement removed promptly from the
communication channels, or retain a person specifically identified by
the intermediary to promote all issuers on its platform. We anticipate
that communication channels provided by the intermediary would provide
a forum through which potential investors could share information to
help the members of the crowd decide whether or not to fund the issuer.
---------------------------------------------------------------------------

    \282\ See proposed Rule 205 of Regulation Crowdfunding. See also
proposed Rule 303(c)(4) and the discussion in Section II.C.5.c below
for requirements on intermediaries as they relate to disclosure in
intermediary-provided communication channels of certain compensation
and promotional activities.
    \283\ The receipt of transaction-based compensation in
connection with the offer and sale of a security could cause a
person to be a broker required to register with us under Exchange
Act Section 15(a)(1) [15 U.S.C. 78o(a)(1)]. Issuers also would need
to consider the application of Securities Act Section 17(b) [15
U.S.C. 77q] to these activities. Section 17(b) provides that ``[i]t
shall be unlawful for any person, by the use of any means or
instruments of transportation or communication in interstate
commerce or by the use of the mails, to publish, give publicity to,
or circulate any notice, circular, advertisement, newspaper,
article, letter, investment service, or communication which, though
not purporting to offer a security for sale, describes such security
for a consideration received or to be received, directly or
indirectly, from an issuer, underwriter, or dealer, without fully
disclosing the receipt, whether past or prospective, of such
consideration and the amount thereof.''
---------------------------------------------------------------------------

    We believe that it would be important for potential investors to
know whether persons using these communication channels are the issuer,
persons acting on behalf of the issuer or persons receiving
compensation from the issuer to promote the issuer's offering because
of the potential for self-interest or bias in communications by these
persons. As such, the proposed rules would apply broadly to persons
acting on behalf of the issuer, regardless of whether or not they are
compensated or they receive compensation specifically for the
promotional activities. For example, the proposed rules would apply to
persons hired specifically to promote the offering, as well as to
individuals who are otherwise employed by the issuer or who undertake
promotional activities on behalf of the issuer. A founder or an
employee of the issuer who engages in promotional activities on behalf
of the issuer through the communication channels provided by the
intermediary would be required to disclose, with each posting, that he
or she is engaging in those activities on behalf of the issuer.
    The proposed rules also would specify that the issuer shall not
compensate or commit to compensate, directly or indirectly, any person
to promote its offerings outside of the communication channels provided
by the intermediary, unless the promotion is limited to notices that
comply with the advertising rules discussed above in Section
II.B.4.\284\ This prohibition should prevent issuers from circumventing
the restrictions on advertising by compensating a third party to do
what the issuer cannot do directly.
---------------------------------------------------------------------------

    \284\ See proposed Rule 205(b) of Regulation Crowdfunding.
---------------------------------------------------------------------------

Request for Comment
    105. The proposed rules would prohibit an issuer from compensating
or committing to compensate, directly or indirectly, any person to
promote its offering outside of the communication channels provided by
the intermediary, unless the promotion is limited to notices that
direct investors to the intermediary's platform. Is this approach
appropriate? Why or why not?
    106. The proposed rules would require issuers to take reasonable
steps to ensure that persons promoting the issuer's offering through
communication channels provided by the intermediary disclose the
receipt (both past and prospective) of direct or indirect compensation
each time they make a promotional communication. Is this an appropriate
approach to the statutory requirement for issuers to ensure that
promoters make the required disclosures? If not, what standard should
we apply and why?
    107. Should we require that any person who receives compensation
from the issuer to promote an issuer's offering through communication
channels provided by the intermediary register with, or otherwise
provide notice to, the intermediary? If so, should we require that
person to disclose the amount of the compensation and the structure of
the compensation arrangement to the intermediary? Why or why not? If
so, what would be the purpose of such a requirement?

    108. Should the issuer provide disclosure of any person who
receives compensation from the issuer to promote an issuer's offering?
Why or why not?
6. Other Issuer Requirements
    Some commenters addressed issues relating to oversubscriptions, the
offering price, the type of securities that may be offered and how
those securities should be valued.\285\