the information in the issuer's federal income tax return, we do not
expect this change from the proposal to impose substantial additional
costs on officers or issuers given the limited scope of the required
certification.
---------------------------------------------------------------------------

    \1419\ See, e.g., AICPA Letter (stating that disclosure of an
issuer's tax return ``. . . has the potential to cause serious
problems. Tax returns are intended to be confidential and should
remain so.''); Public Startup Letter 2; RocketHub Letter; SBM
Letter; Wilson Letter (suggesting that personal income tax
information should be on a voluntary basis only); Zhang Letter.
    \1420\ See Rule 201(t)(1) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Moreover, the final rules specify that if an issuer is offering
securities in reliance on Section 4(a)(6) before filing a tax return
for the most recently completed fiscal year, the issuer may use
information from the tax return filed for the prior year, on the
condition that the issuer provides information from the tax return for
the most recently completed fiscal year when it is filed, if it is
filed during the offering period.\1421\ This accommodation is expected
to benefit issuers by enabling them to engage in transactions during
the time period between the end of their fiscal year and when they file
their tax return for that year. This may impose a cost on investors
because they might not receive the most up-to-date tax information
about the issuer.
---------------------------------------------------------------------------

    \1421\ See Instruction 6 to paragraph (t) of Rule 201 of
Regulation Crowdfunding.
---------------------------------------------------------------------------

    The proposed rules would have required financial statements for
offerings exceeding $100,000 but not exceeding $500,000 to be reviewed
by a public accountant independent of the issuer and financial
statements for offerings exceeding $500,000 to be audited by a public
accountant independent of the issuer. The final rules specify that the
required financial statements must be reviewed by a public accountant
that is independent of the issuer for offerings exceeding $100,000 but
not exceeding $500,000.\1422\ If, however, financial statements of the
issuer are available that have been audited by a public accountant that
is independent of the issuer, the issuer must provide those financial
statements instead and need not include the reviewed financial
statements.\1423\
---------------------------------------------------------------------------

    \1422\ See Rule 201(t)(2) of Regulation Crowdfunding.
    \1423\ Id.
---------------------------------------------------------------------------

    Similar to the proposal, issuers in offerings exceeding $500,000
must provide audited financial statements. In a change from the
proposal, the final rules specify that issuers that have not previously
sold securities in reliance on Section 4(a)(6) and are conducting
offerings with a target offering amount exceeding $500,000 but not
exceeding $1,000,000 can provide reviewed financial statements, unless
audited financial statements are otherwise available.\1424\ Audited
financial statements can benefit investors in evaluating offerings by
issuers with substantive prior business activity by providing them with
potentially higher-quality financial statements. However, as noted by a
number of commenters \1425\ and discussed above, requiring audited
financial statements could significantly increase the cost to issuers
compared to requiring reviewed financial statements.\1426\ Further, for
issuers that are newly formed, with no or very limited operations, and
for small issuers, the benefit of the audit may not justify its cost.
---------------------------------------------------------------------------

    \1424\ See Rule 201(t)(3) of Regulation Crowdfunding. See also
Section II.B.1.a.ii.
    \1425\ See, e.g., AEO Letter; Angel Letter 1; AWBC Letter; CFIRA
Letter 5; CfPA Letter; CrowdFundConnect Letter; EarlyShares Letter;
EMKF Letter; EY Letter; Finkelstein Letter; FundHub Letter 1;
Generation Enterprise Letter; Grassi Letter; Graves Letter; Guzik
Letter 1; Hakanson Letter; Holland Letter; Johnston Letter;
Kickstarter Coaching Letter; McGladrey Letter; Milken Institute
Letter; NACVA Letter; NFIB Letter; NPCM Letter; NSBA Letter; PBA
Letter; Reed Letter; RocketHub Letter; Saunders Letter; SBA Office
of Advocacy Letter; SBEC Letter; SBM Letter; Seyfarth Letter;
Verrill Dana Letter; WealthForge Letter; Wefunder Letter; Woods
Letter; Zeman Letter.
    \1426\ See also Section III.B.3.a.
---------------------------------------------------------------------------

    As discussed above \1427\ the approach in the final rules of
requiring reviewed financial statements rather than audited financial
statements, unless otherwise

available, for first-time crowdfunding issuers that undertake offerings
of more than $500,000 but not more than $1,000,000 is expected to
reduce the costs associated with financial statements for such first-
time issuers compared to the proposed requirement of audited financial
statements for all issuers in offerings of more than $500,000. This
accommodation is expected to alleviate the significant upfront cost of
an audit for first-time issuers that have not yet raised capital in a
crowdfunding offering and may be more financially constrained. To the
extent that their financing needs have not been met through alternative
financing methods, first-time crowdfunding issuers are likely to be
more financially constrained than issuers that have already established
a track record of successful crowdfunding offerings. We recognize,
however, that there are costs associated with this accommodation. Not
requiring audited financial statements for offerings of more than
$500,000 but not more than $1,000,000 by first-time issuers may reduce
the quality of financial disclosure, which may be a more significant
concern for new crowdfunding issuers due to the fact that their more
limited track record may translate into a higher level of information
asymmetry between issuers and investors. The potentially reduced
quality of financial disclosure associated with offerings of more than
$500,000 by first-time issuers may affect the likelihood of detecting
fraud, which would decrease investor protection. To the extent that
investors anticipate such increased risks, issuers may face a higher
cost of capital or be unable to raise the entire amount offered, which
would diminish the capital formation benefits of the final rule. We
note that some first-time issuers in offerings of more than $500,000
but not more than $1,000,000 may have audited statements otherwise
available, which could partly mitigate the described effects. We also
note that some first-time issuers concerned about investor confidence
in the quality of their financial statements may voluntarily provide
audited financial statements.
---------------------------------------------------------------------------

    \1427\ Id.
---------------------------------------------------------------------------

    Tiered disclosure requirements aim to partially mitigate the impact
of the fixed component of compliance costs on issuers in smaller
securities-based crowdfunding offerings. However, it is possible that
the thresholds may have an adverse competitive effect on some issuers.
For example, the cost of reviewed financial statements may cause
issuers in offerings exceeding but close to $100,000 to incur
significantly higher offering costs as a percentage of the amount
offered compared to issuers offering less than but close to $100,000.
Similarly, the cost of audited financial statements may cause issuers
in follow-on crowdfunding offerings exceeding but close to $500,000 to
incur significantly higher offering costs as a percentage of the amount
offered compared to issuers in offerings of less than but close to
$500,000. We note, however, that the issuer has the ability to select
its offering amount, and since the choice of offering amount determines
which financial statement requirements will apply to its offering, the
issuer, by choosing its offering amount, effectively also chooses its
financial statement requirements.
    We considered the alternative of exempting issuers with no
operating history or issuers that have been in existence for fewer than
12 months from the requirement to provide financial statements. We
believe that financial statements contain valuable information that can
aid investors in making better informed decisions, particularly, when
evaluating early-stage issuers characterized by a high degree of
information asymmetry. We also expect that other accommodations in the
final rules will help alleviate some of these issuer compliance costs.
    Similar to the proposed rules, financial statements must be
reviewed in accordance with SSARS issued by the AICPA.\1428\ Although
we could have chosen to develop a new review standard for purposes of
the final rules, we believe that issuers will benefit from using the
AICPA's widely-utilized review standard. We believe that many
accountants reviewing financial statements of issuers raising capital
in reliance on Section 4(a)(6) are familiar with the AICPA's standards
and procedures for review, which should help to partly mitigate review
costs.
---------------------------------------------------------------------------

    \1428\ See Rule 201(t)(2) of Regulation Crowdfunding. See also
Instruction 8 to paragraph (t) of Rule 201 of Regulation
Crowdfunding.
---------------------------------------------------------------------------

    As described above, the final rules require certain financial
statements to be reviewed or audited by a public accountant that is
independent of the issuer.\1429\ In a change from the proposed rules,
the final rules permit the use of independence standards set forth in
Rule 2-01 of Regulation S-X or the independence standards of the
AICPA.\1430\ This change to allow the use of AICPA standards may reduce
issuer compliance costs to the extent that there are higher costs
associated with engaging an accountant that satisfies the independence
standards set forth in Rule 2-01 of Regulation S-X. The change also
will increase the number of public accountants able to perform the
reviews or audits, which may lead to a decrease in the price of their
services and thus a decrease in the direct issuance costs to issuers
compared with the proposal. The benefit from this change will accrue to
issuers making offerings of $100,000 to $1,000,000. To the extent that
the AICPA independence standards impose fewer restrictions with respect
to potential conflicts of interest than the independence standards in
Rule 2-01 of Regulation S-X, however, this accommodation may weaken
investor protection. Moreover, any decrease in investor confidence in
the reliability of financial statements as a result of this change will
limit the capital formation benefits of the final rules.
---------------------------------------------------------------------------

    \1429\ See Section II.B.1 above.
    \1430\ See Instruction 10 to paragraph (t) of Rule 201 of
Regulation Crowdfunding.
---------------------------------------------------------------------------

    In addition, the final rules require an issuer to file a signed
review report or audit report, whichever is applicable, and notify the
public accountant of the issuer's intended use of the report in the
offering.\1431\ This can impose an additional cost on issuers to the
extent that the accountant or auditor increases the fee associated with
the review or audit to compensate for any additional liability that may
result from the requirement to file the report. As discussed
above,\1432\ in a change from the proposal, the final rules do not
permit qualified audit reports. This change may impose an additional
cost on issuers, which we are not able to quantify. However, this
change is expected to provide investors with more reliable financial
statements, which should enable investors to better evaluate the
prospects of issuers relying on Section 4(a)(6) and thus make better
informed investment decisions. By providing investors with a greater
degree of confidence in the reliability of the financial information,
audited financial statements will reduce the information asymmetry
about the issuer's financial condition that exists between issuers and
potential investors. This decrease in information asymmetry may lead to
greater capital formation.
---------------------------------------------------------------------------

    \1431\ See Instructions 8 and 9 to paragraph (t) of Rule 201 of
Regulation Crowdfunding.
    \1432\ See Section II.B.1.a.(ii)(b) above.
---------------------------------------------------------------------------

    In a change from the proposed rules, the final rules do not require
financial statements in the annual report that meet a standard of
review equal to the highest standard provided in a prior
offering.\1433\ The final rules require an annual report to include
financial statements of the issuer to be certified

by the principal executive officer of the issuer as true and complete
in all material respects.\1434\ Issuers that otherwise have available
financial statements that have been reviewed or audited by an
independent certified public accountant, must provide them and will not
be required to have the principal executive officer
certification.\1435\ As discussed above, these changes will reduce the
compliance costs to issuers compared with the proposal.\1436\ At the
same time, they may reduce the quality of the ongoing financial
statements, resulting in a potential decrease in investor protection
and investor confidence in the quality of these financial statements.
We note that some issuers may have reviewed or audited financial
statements otherwise available, which would partly mitigate this
concern. In addition, an issuer is able to voluntarily provide
financial statements that meet a higher standard, so if an issuer is
concerned about investor confidence in the quality of financial
statements, it can choose to provide reviewed or audited financial
statements.
---------------------------------------------------------------------------

    \1433\ See Section II.B.2.c above.
    \1434\ See Rule 202(a) of Regulation Crowdfunding.
    \1435\ Id.
    \1436\ See Section III.B.3.a. above.
---------------------------------------------------------------------------

d. Issuer Filing Requirements
    As discussed above, issuers will incur costs to prepare and file
the various disclosures required under Regulation Crowdfunding.\1437\
The statute requires issuers to file and provide to investors certain
specified information at the time of offering, such as information
about the issuer, officers and directors, and certain shareholders, a
description of the business, a description of the purpose and intended
use of proceeds, target offering amount and the deadline to reach it,
offering price (or the method for determining the price) and other
terms of the offering, a description of the financial condition of the
issuer, as well as certain other disclosures.\1438\ These disclosure
requirements are expected to strengthen investor protection and enable
investors to make better informed investment decisions. The statute
does not specify a format that issuers must use to present the required
disclosures to the Commission. As noted above, the final rules require
issuers to file the mandated disclosure on EDGAR using new Form
C.\1439\
---------------------------------------------------------------------------

    \1437\ See Section III.B.3.a. above.
    \1438\ See Rule 201 of Regulation Crowdfunding. See also Section
II.B.1 above.
    \1439\ See Rule 203(a) of Regulation Crowdfunding. See also
Section II.B.3 above.
---------------------------------------------------------------------------

    Form C requires certain disclosures to be submitted using an XML-
based filing,\1440\ while allowing the issuer to customize the
presentation of other required disclosures. This approach provides
issuers with the flexibility to present the required disclosures in a
cost-effective manner, while also requiring the disclosure of certain
key offering information in a standardized format, which we believe
will benefit investors and help facilitate capital formation.
---------------------------------------------------------------------------

    \1440\ See Instruction to paragraph (a)(1) of Rule 203 of
Regulation Crowdfunding. See also Section II.B.3 above.
---------------------------------------------------------------------------

    We expect that requiring certain disclosures to be submitted using
XML-based filings will produce benefits for issuers, investors and the
Commission. For instance, using information filed pursuant to these
requirements, investors can track capital generated through
crowdfunding offerings without manually inspecting each filing. The
ability to efficiently collect information on all issuers also can
provide an incentive for data aggregators or other market participants
to offer services or analysis that investors can use to compare and
choose among different offerings. For example, reporting key financial
information using XML-based filings will allow investors, analysts and
data aggregators to more easily compile, analyze and compare
information about the capital structure and financial position of
various issuers. XML-based filings also will provide the Commission
with data about the use of the new crowdfunding exemption that will
allow the Commission to evaluate whether the rules implementing the
exemption include appropriate investor protections and are effectively
facilitating capital formation.
    Certain provisions of the filing requirements in the final rules
provide flexibility and potentially reduce the compliance burden
compared with the proposal. The final rules allow issuers to customize
the presentation of their non-XML disclosures and file those
disclosures as exhibits to Form C in PDF format as official filings,
consistent with the suggestions of some commenters.\1441\ In addition,
the final rules include an optional Question and Answer (``Q&A'')
format that issuers may opt to use to provide the disclosures that are
not required to be filed in XML format.\1442\ Relative to some other
possible formats, this Q&A format may facilitate the preparation of the
Form C disclosures by crowdfunding issuers. To the extent that this
provision lowers the compliance cost for issuers, it may encourage
greater use of Regulation Crowdfunding for raising capital.
---------------------------------------------------------------------------

    \1441\ See, e.g., CFIRA Letter 6; CFIRA Letter 7; CrowdCheck
Letter 1; Grassi Letter; Hackers/Founders Letter; RocketHub Letter;
Wefunder Letter; Wilson Letter.
    \1442\ See Item 1 of General Instruction III to Form C.
---------------------------------------------------------------------------

    The final rules require that issuers file a Form C-U: Progress
Update to describe the progress of the issuer in meeting the target
offering amount.\1443\ In a change from the proposed rules, based on
concerns expressed by commenters, the final rules permit issuers to
satisfy the progress update requirement by relying on the relevant
intermediary to make publicly available on the intermediary's platform
frequent updates about the issuer's progress toward meeting the target
offering amount. This change is expected to mitigate some of the direct
cost for the issuer without reducing the amount of contemporaneous
information available to investors. However, an issuer relying on the
intermediary to make publicly available frequent progress updates must
still file a Form C-U at the end of the offering to disclose the total
amount of securities sold in the offering.\1444\ Although the final
offering information likely will be available on the registered
intermediary's Web site, having the information available on EDGAR will
allow comparisons across platforms and provide ongoing access to
historical information for future investor analyses that may otherwise
be difficult or impossible to perform by accessing information from
each individual portal. We expect the costs of preparing updates on
Form C-U to vary among issuers but to be relatively small.\1445\
---------------------------------------------------------------------------

    \1443\ See Rule 203(a)(3) of Regulation Crowdfunding. See also
Sections II.B.1.b and II.B.3 above.
    \1444\ See Rule 203(a)(3)(iii) of Regulation Crowdfunding.
    \1445\ For purposes of the PRA, we estimate that an issuer's
compliance with the Form C-U requirement will result, on average, in
approximately 0.50 burden hours per issuer. See Section IV.C.1.a
below.
---------------------------------------------------------------------------

    As noted above, the statute also requires an issuer to file and
provide to investors information about the issuer's financial condition
on at least an annual basis, as determined by the Commission.\1446\
Ongoing disclosure requirements are expected to strengthen investor
protection. Ongoing disclosure requirements are also expected to
facilitate better informed investment decisions in secondary market
transactions and enhance the informational efficiency of prices of
crowdfunding securities, should a secondary market for such securities
develop. To implement this statutory requirement, the final rules
require any

issuer that has sold securities in a crowdfunding transaction in
reliance on Section 4(a)(6) to file annually with the Commission a new
Form C-AR: Annual Report, no later than 120 days after the end of each
fiscal year covered by the report.\1447\ We believe that annual reports
will inform investors in their portfolio decisions and can enhance
price efficiency. Moreover, as discussed above, under the statute and
the final rules, the securities will be freely tradable after one
year,\1448\ and therefore, this information also will benefit potential
future holders of the issuer's securities by enabling them to update
their assessments as new information is made available through the
annual updates, potentially allowing for more efficient pricing. More
generally, these continued disclosures also may help facilitate the
transfer of securities in secondary markets after the one-year
restricted period ends, which can mitigate some of the potential
liquidity issues that are unique to the securities-based crowdfunding
market, as discussed above.
---------------------------------------------------------------------------

    \1446\ See Section 4A(b)(4).
    \1447\ See Rule 202(a) of Regulation Crowdfunding. See also
Section II.B.2 above for a discussion of the disclosure requirements
of Form C-AR.
    \1448\ See Section 4A(e). See also Rule 501 of Regulation
Crowdfunding.
---------------------------------------------------------------------------

    As an alternative, we could have added a current reporting
requirement, consistent with the view of some commenters that there may
be major events that occur between annual reports about which investors
would want to be updated.\1449\ Such an alternative could result in
better informed investment decisions. We are concerned, however, that
the benefits of a current reporting requirement may not justify the
additional compliance costs associated with such a requirement,
especially given the size and early stage of development of the issuers
likely to be involved in offerings in reliance on Section 4(a)(6).
---------------------------------------------------------------------------

    \1449\ See, e.g., ABA Letter; Angel Letter 1; Denlinger Letter
1; EY Letter; Grassi Letter; Hackers/Founders Letter; RocketHub
Letter.
---------------------------------------------------------------------------

    Any issuer terminating its annual reporting obligations will be
required to file a notice under cover of Form C-TR: Termination of
Reporting to notify investors and the Commission that it will no longer
file and provide annual reports pursuant to the requirements of
Regulation Crowdfunding.\1450\ The final rules enable issuers to
terminate reporting if: (1) The issuer becomes a reporting company
required to file reports under Exchange Act Sections 13(a) or 15(d);
(2) the issuer or another party repurchases all of the securities
issued pursuant to Securities Act Section 4(a)(6), including any
payment in full of debt securities or any complete redemption of
redeemable securities; or (3) the issuer liquidates or dissolves its
business in accordance with state law.\1451\ We expect the costs of
preparing Form C-TR to vary among issuers but to be relatively
small.\1452\
---------------------------------------------------------------------------

    \1450\ See Rule 203(b)(3) of Regulation Crowdfunding.
    \1451\ See Rule 202(b) of Regulation Crowdfunding.
    \1452\ For the purposes of the PRA, we estimate that issuers
will spend, on average, approximately 1.5 burden hours to complete
this task. See Section IV.C.1.a below.
---------------------------------------------------------------------------

    In a change from the proposed rules, after considering the
comments, the final rules also permit termination of ongoing reporting
in two additional circumstances: (1) The issuer has filed at least one
annual report and has fewer than 300 holders of record, or (2) the
issuer has filed annual reports for at least the three most recent
years and has total assets not exceeding $10,000,000.\1453\ This change
is expected to mitigate some of the compliance cost for small issuers
and make the final rules a more attractive option for capital formation
among small issuers, and at the same time, help to ensure that larger
issuers with a significant number of investors continue to provide
relevant disclosure.
---------------------------------------------------------------------------

    \1453\ Id.
---------------------------------------------------------------------------

    This change may, however, make relevant information about the
financial condition of certain issuers no longer available to
investors, resulting in less informed investor decisions. This change
may affect a large number of securities-based crowdfunding offerings,
since it is likely that many crowdfunding issuers will either have
fewer than 300 holders of record or assets below $10 million.
Termination of ongoing reporting may result in a decrease in investor
protection, particularly in the presence of an investor base with a
limited degree of sophistication. Allowing issuers to terminate ongoing
reporting can make monitoring of the issuer more difficult for
investors and can potentially make it more difficult to detect fraud.
We note, however, that the investment limits in the final rules serve
to limit the amount of each investor's capital that is exposed to these
and other risks of securities-based crowdfunding offerings. We further
note that the investment amounts involved in these transactions might
limit a typical investor's incentives to analyze the information
contained in ongoing disclosures and to monitor issuers, even if all
issuers are required to provide ongoing disclosures.
    Nevertheless, the risk that an issuer in a securities-based
crowdfunding offering may terminate ongoing reporting in the future may
discourage prospective investors from making an initial investment in
offerings in reliance on Section 4(a)(6) or may cause issuers to obtain
lower valuations for the securities they offer, which may limit some of
the capital formation benefits of the final rules. We note that issuers
who believe that increased investor confidence justifies the cost of
annual reporting would be able to continue ongoing reporting
voluntarily.
    Termination of ongoing reporting may also reduce the informational
efficiency of prices and secondary market liquidity, making it more
difficult for investors to exit their holdings after the expiration of
resale restrictions. A lack of ongoing reporting may reduce the
likelihood that a secondary market for such securities develops. We
recognize, however, that a secondary market for securities in offerings
in reliance on Section 4(a)(6) may not develop even if all issuers are
required to provide ongoing reports.
    The asset size cap in one of the termination thresholds may create
adverse competitive effects for issuers close to but above the
termination threshold.
e. Advertising--Notice of Offering
    The statute and the final rules prohibit an issuer from advertising
the terms of the offering, except for notices that direct investors to
an intermediary's platform.\1454\ The terms of the offering include the
amount offered, the nature of the securities, price of the securities
and length of the offering period.\1455\ The final rules allow an
issuer to publish a notice about the terms of the offering made in
reliance on Section 4(a)(6), subject to certain limitations on the
content of the notice.\1456\ The notices are similar to the ``tombstone
ads'' permitted under Securities Act Rule 134,\1457\ except that the
final rules require the notices to direct investors to the
intermediary's platform, through which the offering made in reliance on
Section 4(a)(6) is being conducted.
---------------------------------------------------------------------------

    \1454\ See Section 4A(b)(2). See also Rule 204 of Regulation
Crowdfunding.
    \1455\ See Instruction to Rule 204 of Regulation Crowdfunding.
    \1456\ See Rule 204(b) of Regulation Crowdfunding. See also
Section II.B.4 above.
    \1457\ 17 CFR 230.134.
---------------------------------------------------------------------------

    We believe this approach will allow issuers to generate interest in
offerings and to leverage the power of social media to attract
investors, potentially resulting in enhanced capital formation. At the
same time, we believe it also will protect investors by limiting the
ability of issuers to provide certain advertising materials without
also directing

investors to the disclosures, available on the intermediary's platform,
that are required for an offering made in reliance on Section 4(a)(6).
Moreover, this requirement is not expected to impose costs on market
participants.
    As an alternative, we could have required communications about the
offering to be conducted through the intermediary, as suggested by some
commenters.\1458\ To the extent that an issuer might be able to inform
more investors about its offering if it is not limited to
communications through the intermediary's platform, this alternative
might limit the issuer's ability to inform a wide range of investors
about its offering. Limited recognition among prospective investors
might be a particularly significant hurdle for early-stage or small
issuers. As another alternative, we could have required issuers to file
advertising notices with the Commission and/or the relevant
intermediary, as suggested by other commenters.\1459\ While this could
increase the likelihood of issuer compliance with advertising
restrictions, it also would impose an additional cost on the issuer.
Overall, in light of the restrictions on advertising already in place,
it is not clear to what extent, if any, additional restrictions would
enhance investor protection.
---------------------------------------------------------------------------

    \1458\ See Hackers/Founders Letter (supporting the issuer being
able to repost the communications elsewhere so long as it first
appeared through the intermediary); Joinvestor Letter.
    \1459\ See, e.g., Commonwealth of Massachusetts Letter; CFIRA
Letter 6.
---------------------------------------------------------------------------

    Some commenters, suggesting that advertising restrictions are
unnecessary because sales must occur through an intermediary's
platform,\1460\ recommended allowing the issuer more leeway to
publicize its business or offering on its own Web site or social media
platform so long as the specific terms of the offering could be found
only through the intermediary's platform,\1461\ and recommended
allowing advertising notices to have a section for supplemental
information highlighting certain intangible purposes such as a
particular social cause.\1462\ The alternative of relaxing or
eliminating restrictions on advertising could enhance capital formation
efforts of issuers. However, it might also result in a cost to
investors if they make less informed investment decisions based on
incomplete or selectively presented information about the offering
contained in advertising materials.
---------------------------------------------------------------------------

    \1460\ See, e.g., FundHub Letter 1; Seed&Spark Letter (noting
the proposed advertising restrictions will restrict the ability of
filmmakers to market and raise money for their films); Arctic Island
Letter 5; PeoplePowerFund Letter.
    \1461\ See Fryer Letter.
    \1462\ See RocketHub Letter.
---------------------------------------------------------------------------

f. Compensation of Persons Promoting the Offering
    The statute and the final rules prohibit an issuer from
compensating, or committing to compensate, directly or indirectly, any
person to promote the issuer's offering through communication channels
provided by the intermediary unless the issuer takes reasonable steps
to ensure that such person clearly discloses the receipt of such
compensation (both past and prospective) each time a promotional
communication is made.\1463\
---------------------------------------------------------------------------

    \1463\ See Section 4A(b)(3). See also Rule 205 of Regulation
Crowdfunding and Section II.B.5 above.
---------------------------------------------------------------------------

    We believe this requirement will benefit the securities-based
crowdfunding market by allowing investors to make better informed
investment decisions. Although the requirement to take steps to ensure
disclosure of compensation paid to persons promoting the offering will
impose compliance costs on issuers, we believe that investors will
benefit from knowing if the comments about the investment they are
considering are being made by a promoter who is compensated by the
issuer and therefore may not be providing an independent, disinterested
perspective.
    The final rules also require that an issuer 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.\1464\ We believe this will similarly serve
to improve investors' ability to make informed judgments about the
information they encounter through various communication channels about
the issuer, and thus, to make better informed investment decisions.
---------------------------------------------------------------------------

    \1464\ See Rule 205 of Regulation Crowdfunding. See also Section
II.B.5 above.
---------------------------------------------------------------------------

g. Oversubscription and Offering Price
    The final rules permit an issuer to accept investments in excess of
the target offering amount, subject to the $1 million limitation, but
require the issuer to disclose the maximum amount the issuer will
accept and how shares in oversubscribed offerings will be
allocated.\1465\ We continue to believe that permitting
oversubscriptions will provide flexibility to issuers so that they can
raise the amount of capital they deem necessary to finance their
businesses. Given the uncertainty on the part of the issuer about
potential market demand for the issuer's securities, we believe it is
valuable for issuers to have the option to permit oversubscriptions.
For example, permitting oversubscriptions will allow an issuer to raise
more funds, while lowering compliance costs as a proportion of the
amount raised, if the issuer discovers during the offering process that
there is greater investor interest in the offering than initially
anticipated or if the cost of capital is lower than initially
anticipated. As an alternative, we could have limited the maximum
oversubscription amount to a certain percentage of the target offering
amount, as suggested by one commenter.\1466\ However, such a
restriction might reduce valuable flexibility and potentially limit
capital formation without appreciably enhancing investor protection.
---------------------------------------------------------------------------

    \1465\ See Rule 201(h) of Regulation Crowdfunding. See also
Section II.B.6.a above.
    \1466\ See Joinvestor Letter; RFPIA Letter.
---------------------------------------------------------------------------

    The final rules do not require issuers to set a fixed price, as
suggested by one commenter.\1467\ While such an alternative might
reduce an investor's cost of evaluating the investment, it would reduce
flexibility for issuers while providing only limited benefits to
investors in light of other disclosures required in the final rules.
Further, the required disclosure of the pricing method used and the
final prices for the securities before an offering closes,\1468\
coupled with the investor's ability to cancel his or her investment
commitment,\1469\ can mitigate potential concerns that dynamic pricing
can be used to provide preferential treatment to certain investors
(e.g., when an issuer offers better prices to relatives or insiders).
We also believe that the cancellation rights afforded by the rules will
help to address the concerns about time pressure on the investment
decision because investors will have the opportunity to cancel their
investment commitments if they decide to do so.
---------------------------------------------------------------------------

    \1467\ See RocketHub Letter.
    \1468\ See Rule 201(l) of Regulation Crowdfunding.
    \1469\ See Rule 201(j) of Regulation Crowdfunding.
---------------------------------------------------------------------------

h. Types of Securities Offered and Valuation
    The final rules do not limit the type of securities that may be
offered in reliance on Section 4(a)(6). This provision gives issuers
the flexibility to offer the types of securities that are most
compatible with their desired capital structure and financing needs.
Such flexibility may benefit issuers to the extent that capital
structure decisions can be relevant for an issuer's firm value.

    The final rules do not prescribe a method for valuing the
securities but instead require issuers to describe the terms of the
securities and the valuation method in their offering materials. The
required disclosure of valuation method is intended to facilitate
informed investment decisions. As an alternative, as suggested by
commenters, we could have prescribed the use of particular valuation
standards,\1470\ required issuers to base the valuation of their
securities on the price at which the issuer previously sold
securities,\1471\ or considered other standards designed to ensure that
securities are fairly valued and that approaches to valuation that put
investors at a disadvantage are prohibited.\1472\ If we required a
specific valuation methodology, such as one of the suggested
alternatives, and it were appropriate for a particular issuer, it could
mitigate the likelihood of inaccurate valuations and result in more
informed decisions by investors. However, specific valuation
requirements that do not accommodate inherent differences among
companies, particularly in light of the uncertainty related to the
valuation of early-stage companies, might result in inaccurate
valuations and less informed investor decisions. Also, potential
additional calculations and analysis that might be required to
implement a prescribed valuation methodology could impose additional
costs on issuers, compared to letting issuers select a valuation method
that fits the particular circumstances of their offering.
---------------------------------------------------------------------------

    \1470\ See, e.g., 11 Wells Letter; Active Agenda Letter; Borrell
Letter; Ellenbogen Letter; Greer Letter; Mountain Hardwear Letter;
Moyer Letter; NaviGantt Letter; Vidal Letter.
    \1471\ See, e.g., Public Startup Letter 3; Wefunder Letter.
    \1472\ See Consumer Federation Letter.
---------------------------------------------------------------------------

i. Restrictions on Resales
    The statute and the final rules include restrictions on the
transfer of securities for one year, subject to limited exceptions
(e.g., for transfers to the issuer of the securities, in a registered
offering, to an accredited investor or to certain family
members).\1473\ As we discussed in the proposal, we believe that
including such proposed restrictions is important for investor
protection. By restricting the transfer of securities for a one-year
period, the final rules give investors in a business a defined period
to observe the performance of the business and to potentially obtain
more information about the potential success or failure of the business
before trading occurs. The final rules permit transfers to trusts
controlled by, or held for the benefit of, covered family
members.\1474\ In a change from the proposed rules, the restrictions
apply to any purchasers and not only to the initial purchasers,
consistent with the suggestions of commenters.\1475\ This change
addresses the possibility of the initial purchaser selling securities
to an eligible purchaser and such eligible purchaser reselling them to
the public within the first year, resulting in the securities becoming
widely traded within the first year.
---------------------------------------------------------------------------

    \1473\ See Section 4A(e). See also Rule 501(a) of Regulation
Crowdfunding.
    \1474\ See Rule 501(a)(4) of Regulation Crowdfunding.
    \1475\ See CrowdCheck Letter 3; Moskowitz Letter.
---------------------------------------------------------------------------

    We recognize that resale restrictions will impose costs. The one-
year restriction on transfers of securities purchased in a transaction
conducted in reliance on Section 4(a)(6) may impede price discovery,
raise capital costs to issuers and limit investor participation,
particularly among investors who are unable or unwilling to risk
locking up their investments for this period. The illiquidity cost
resulting from the resale restriction may be mitigated, in part, by
provisions that allow investors to transfer the securities within one
year of issuance by reselling the securities to accredited investors,
back to the issuer or in a registered offering or transferring them to
certain family members or trusts of those family members. The effect of
resale restrictions on the extent to which investors make informed
investment decisions is unclear. While resale restrictions may
disincentivize investors from continuing to gather and analyze
information about the issuer after investing while the resale
restrictions are in effect, resale restrictions may also strengthen the
incentive to conduct due diligence on the issuer and gather and analyze
information before the initial investment. Nevertheless, at the
investment amounts involved in these transactions, a typical
purchaser's incentives to gather and analyze information before or
after investing likely will remain limited, regardless of the presence
of resale restrictions.
4. Intermediary Requirements
    The statute and the final rules require that offerings in reliance
on Section 4(a)(6) be conducted through an intermediary that is a
registered broker-dealer or registered funding portal. The use of a
registered intermediary to match issuers and investors will cause
issuers to incur certain transaction costs associated with the
intermediation activity \1476\ but also will provide centralized venues
for crowdfunding activities that are expected to lower investor and
issuer search costs. As discussed earlier, existing lending-based,
reward-based, and donation-based crowdfunding platforms already engage
in a large volume of transactions in North America,\1477\ demonstrating
that the use of platforms for crowdfunding may be familiar to investors
and issuers.
---------------------------------------------------------------------------

    \1476\ See Section III.B.3.a above for a discussion of
intermediary fees.
    \1477\ See Section III.A.3 above.
---------------------------------------------------------------------------

    We believe that existing non-securities-based crowdfunding
platforms will initially be the primary funding portals in the
securities-based crowdfunding market. The entry of registered broker-
dealers and new funding portals in the securities-based crowdfunding
market will increase competition among existing non-securities-based
crowdfunding intermediaries and potentially lower the cost of
intermediation to issuers. One commenter stated that it has ``a serious
concern with Broker/Dealers having an unfair advantage in the market,
by already being regulated and registered with the Commission as well
as FINRA. Therefore, they may be able to service the market well ahead
of Portals.'' \1478\
---------------------------------------------------------------------------

    \1478\ See RocketHub Letter. Several other commenters expressed
concern about funding portals being at a competitive disadvantage to
registered broker-dealers. See, e.g., Joinvestor Letter; City First
Letter; Seed&Spark Letter; Guzik Letter 1.
---------------------------------------------------------------------------

    We acknowledge that, to the extent that it may take less time and
cost for registered broker-dealers to comply with the requirements of
Regulation Crowdfunding as compared to funding portals, registered
broker-dealers may be at a competitive advantage compared to new
entities that seek to register as funding portals and enter the
crowdfunding market. However, as we discuss below, the registration
requirements for funding portals are tailored to the more limited scope
of funding portal activities and are thus expected to result in a lower
compliance cost for these entities. Further, the effective dates of the
final rules are expected to provide time for funding portals to
register and comply with the other requirements of Regulation
Crowdfunding before crowdfunding offerings can occur.\1479\ We
recognize, however, that registered broker-dealers can retain a
competitive advantage relative to funding portals due to their

ability to engage in a wider range of activities in the securities-
based crowdfunding market.\1480\ In this regard we note that the final
rules permit funding portals to compensate a registered broker-dealer
and to receive compensation from a registered broker-dealer for
services in connection with the funding portal's offer or sale of
securities in reliance on Section 4(a)(6),\1481\ which may enable
funding portals to partly mitigate the impact of restrictions on
funding portal activities in the statute and final rules. Moreover,
even if funding portals remain at a competitive disadvantage to
registered broker-dealers in the securities-based crowdfunding market,
overall the expected participation of multiple registered broker-
dealers as intermediaries in offerings in reliance on Section 4(a)(6)
may nevertheless result in a considerable level of competition in the
securities-based crowdfunding marketplace.
---------------------------------------------------------------------------

    \1479\ The time period between the effective date of the final
rules pertaining to funding portal registration as compared to the
later effective date for rules governing crowdfunding offerings is
expected to mitigate some of these effects. See also Section
II.C.2.a above.
    \1480\ See also note 607.
    \1481\ See Rule 402(b)(7) and Rule 402(b)(8) of Regulation
Crowdfunding. See also Section II.D.3.g.
---------------------------------------------------------------------------

    Both existing non-securities-based crowdfunding platforms and
registered broker-dealers will need to invest resources to comply with
the requirements of the statute and final rules. In addition,
registered broker-dealers will need to develop Internet-based
crowdfunding platforms while existing non-securities-based crowdfunding
platforms will need to register as funding portals or broker-dealers
and modify their existing platforms to conform to the requirements of
the statute and the final rules. Although the eventual extent of
broker-dealer involvement in the securities-based crowdfunding market
is difficult to estimate, we believe that some broker-dealers may
acquire or form partnerships with funding portals to obtain access to a
new and diverse investor base. In addition, some existing non-
securities-based crowdfunding platforms may eventually form
partnerships with registered broker-dealers or funding portals. It is
challenging to exactly predict the future number of persons (or
entities) who will register as either broker-dealers or funding portals
to act as intermediaries in securities-based crowdfunding transactions.
For purposes of the PRA,\1482\ we estimate that intermediaries will
number approximately 110, including approximately 10 intermediaries
that will register as broker-dealers in order to engage in securities-
based crowdfunding; approximately 50 intermediaries that are already
registered as broker-dealers and that will choose to serve as
crowdfunding intermediaries; and approximately 50 intermediaries that
are not already registered as broker-dealers and that will register as
funding portals.\1483\ It is possible that the actual number of
participants will deviate significantly from these estimates, and it is
likely that there will be significant competition between existing
crowdfunding venues and new entrants that may result in further changes
in the number and types of intermediaries as the market develops and
matures. It also is likely that there will be significant developments
in the types and ranges of crowdfunding products and services offered
by intermediaries to potential issuers and investors, particularly as
competitors gain additional experience in this new marketplace.
Moreover, the business models of successful crowdfunding intermediaries
are likely to change over time as they grow in size or market share or
if they are forced to differentiate from other market participants in
order to maintain their position in the market.
---------------------------------------------------------------------------

    \1482\ See Section IV.B.2 and Section IV.B.3 below.
    \1483\ These estimates are based, in part, on recent indications
of interest, which may change as the market develops. According to
FINRA, as of October 3, 2013, approximately 36 entities have
submitted the voluntary Interim Form for Funding Portals to FINRA to
indicate their intention to act as funding portals under Title III
of the JOBS Act. See Press Release, Financial Industry Regulatory
Authority, FINRA Issues Voluntary Interim Form for Crowdfunding
Portals (Jan. 10, 2013), available at http://www.finra.org/Newsroom/NewsReleases/2013/P197636; Financial Industry Regulatory Authority,
Crowdfunding Portals, available at http://www.finra.org/industry/issues/crowdfunding. Based on these recent indications of interest,
we expect that the number of funding portals that will ultimately
register with the Commission will be approximately 50.
     We note that these estimates are the same as the estimates of
potential crowdfunding intermediaries set forth in the Proposing
Release. We did not receive comments about these estimates.
---------------------------------------------------------------------------

    As a result of the uncertainty over how the market may develop, any
estimates of the potential number of market participants, their
services or fees charged are subject to significant estimation error.
While we recognize that there are benefits as well as costs associated
with the statutory requirements and the final rules pertaining to
intermediaries, there are significant limitations to our ability to
estimate these potential benefits and costs.
    The statute requires that the offer or sale of securities in
reliance on Securities Act Section 4(a)(6) be conducted through a
broker-dealer or a funding portal that complies with the requirements
of Securities Act Section 4A(a).\1484\ Among other things, the
intermediary must register with the Commission as a broker-dealer or a
funding portal, and it also must register with a registered national
securities association.\1485\ The final rules implement these statutory
requirements, including by requiring an intermediary to be a member of
FINRA or any other applicable registered national securities
association.
---------------------------------------------------------------------------

    \1484\ See Section 4(a)(6)(C).
    \1485\ See Section 4A(a)(2).
---------------------------------------------------------------------------

    While the benefits and costs are described in further detail below,
the following tables summarize the estimated direct costs to
intermediaries, including broker-dealers and funding portals. Some of
the direct costs of the rules will be incurred by all intermediaries,
while others are specific to whether the intermediary is a new entrant
(registering as a broker-dealer or a funding portal) or is already
registered as a broker-dealer.
    Although we have attempted to estimate the direct costs of the
statute and the final rules on intermediaries, we recognize that some
costs can vary significantly across intermediaries, and within
categories of intermediaries. For example, some intermediaries may
choose to leverage existing platforms or systems and so may not need to
incur significant additional expenses to develop a platform or comply
with specific requirements of Regulation Crowdfunding. In the Proposing
Release we provided cost estimates for the various intermediary
requirements and requested comment on our estimates. Several commenters
discussed the estimates of the costs associated with intermediaries or
provided cost estimates of their own.\1486\ Below we discuss the
comments received on each of these costs and any revisions to our
estimates made in response.
---------------------------------------------------------------------------

    \1486\ See, e.g., ASSOB Letter (suggesting that the cost to
establish a funding portal would run at least $480,000); Arctic
Island Letter 8 (referring to the cost of establishing and managing
escrow accounts); CapSchedule Letter (citing costs of managing
securityholder records); Joinvestor Letter (suggesting in reference
to records to be kept by funding portals that ``[u]nder the
expectation that crowdfunding portals will be online operations and
will almost certainly retain records through digital methods, the
burden of collection should be minimal'' but not providing a
specific estimate of the cost of compliance). Various commenters
expressed concern with the cost imposed on intermediaries. See,
e.g., Heritage Letter (suggesting that the ``costs incurred by the
intermediary in dealing with an issuer, doing the required due
diligence and background screening, establishing a Web page
describing the offering and so on do not vary linearly with the
offering size''); Seed&Spark Letter; SBEC Letter (suggesting that
there will be ``extensive staff, technology and operational costs''
in addition to the compliance costs estimated in the Proposing
Release).

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

    We estimate that the cost for an entity to register as a broker-
dealer and become a member of a national securities association in
order to engage in crowdfunding pursuant to Section 4(a)(6) will be
approximately $275,000, with an ongoing annual cost of approximately
$50,000 to maintain this registration and membership.\1487\ In
addition, we estimate that the cost to comply with the various
requirements that apply to registered broker-dealers engaging in
transactions pursuant to Section 4(a)(6) for these new registrants will
be approximately $245,000 initially and approximately $180,000 in each
year thereafter. In making this estimate, we assume that broker-dealers
acting as intermediaries in transactions pursuant to Section 4(a)(6)
will provide a full range of brokerage services in connection with
these transactions, including certain services such as providing
investment advice and recommendations, soliciting investors, and
managing and handling customer funds and securities, that funding
portals cannot provide.\1488\
---------------------------------------------------------------------------

    \1487\ We recognize that the cost of registering and becoming a
member of a national securities association varies significantly
among broker-dealers, depending on facts and circumstances. The cost
can vary, among other factors, based on the number of associated
persons of the broker-dealer entity and their licensing
requirements, the scope of the brokerage activities, and the means
by which the broker-dealer administers the registration process
(e.g., it may choose to hire outside counsel to assist with the
process). We also recognize that the time required for a broker-
dealer to become a member of a national securities association
varies and can take six months to one year. We estimate the range of
this cost to be between $50,000 and $500,000, and so we have chosen
the average amount of $275,000 for purposes of this analysis.
    \1488\ Among other things, a broker-dealer providing
recommendations and investment advice is required to comply with
FINRA rules on suitability. See FINRA Rule 2111. A broker-dealer
soliciting through advertisements is required to comply with FINRA
rules relating to communications with the public. See FINRA Rule
2210. Broker-dealers handling customer funds and securities also are
required to maintain net capital, segregate customer funds and
comply with Exchange Act Rule 15c2-4. See Exchange Act Rules 15c3-1,
15c3-3 and 15c2-4 [17 CFR 240.15c3-1, 15c3-3 and 15c2-4].
---------------------------------------------------------------------------

    If instead an entity were to register as a funding portal and
become a funding portal member of a national securities association, we
estimate the initial registration and membership cost will be
approximately $100,000, with an ongoing cost of approximately $10,000
in each year thereafter to maintain this registration and
membership.\1489\ We estimate that the initial cost for a registered
funding portal to comply with the requirements of the final rules will
be approximately $67,000, with an ongoing cost of approximately $40,000
in each year thereafter.
---------------------------------------------------------------------------

    \1489\ In making these estimates, we assume that the membership
process will take approximately sixty days and that there will be no
related licensing requirement for associated persons of the funding
portal. In the Proposing Release, we estimated that the membership
process will take approximately one month. While it does not affect
our estimate of direct costs, we note that a longer membership
process can result in incremental indirect costs to funding portals
(e.g., opportunity costs due to not being able to serve as an
intermediary in crowdfunding offerings while registration
requirements are not met and competitive costs due to requiring
additional time to register compared to registered broker-dealers.
The time period between the effective date of the final rules
pertaining to funding portal registration as compared to the later
effective date for rules governing crowdfunding offerings is
expected to mitigate these effects.
    We also only include domestic entities in these estimates, which
do not need to comply with the requirements in Regulation
Crowdfunding that apply to nonresident funding portals. Nonresident
funding portals are subject to an additional cost of completing
Schedule C to Form Funding Portal, hiring and maintaining an agent
for service of process and providing the required opinion of
counsel. See Section IV.C.2.a. below (discussing burden estimates of
these additional requirements for purposes of the PRA).
---------------------------------------------------------------------------

    Finally, we estimate that the incremental initial cost for an
intermediary that is already registered as a broker-dealer to comply
with the requirements of the final rules will be approximately $45,000,
with an ongoing cost of approximately $30,000 in each year thereafter.
    These estimated costs are consistent with those set forth in the
Proposing Release and are exclusive of the cost of establishing and
maintaining a platform and related functionality. For purposes of the
PRA, we estimate that for the average intermediary, the mid-range
initial external platform development cost will be approximately
$425,000 and the ongoing cost will be approximately $85,000 per
year.\1490\ However, we anticipate considerable variation among
intermediaries depending on whether they already have in place
platforms and systems that can be adapted to meet the requirements of
the final rules. We expect that intermediaries (whether broker-dealers
or funding portals) that already have in place platforms and related
systems that will need only to tailor their existing platform and
systems to comply with the requirements of Regulation Crowdfunding,
resulting in a lower initial cost on average of $250,000. We expect the
ongoing cost to remain approximately $85,000 per year for an
intermediary that already has in place a platform and related systems.
Commenters did not provide estimates of the cost of establishing a
platform or tailoring an existing platform to comply with the
requirements of Title III. One commenter suggested that the cost of
operating a funding portal and regulatory compliance would be at least
$480,000 per year but did not break out this estimate into separate
cost components.\1491\
---------------------------------------------------------------------------

    \1490\ These estimates are based on intermediaries that use a
third party to develop the platform. Intermediaries that develop the
platform in-house may incur lower costs. For purposes of the PRA, we
estimate that intermediaries that develop the platform in-house
instead of using a third-party provider will spend an average of
1,500 hours for initial planning, programming and implementation and
300 hours per year in ongoing internal burden. For purposes of the
PRA we estimate that approximately half of the intermediaries will
use a third party to develop the platform and the other half will
develop their platforms in-house. See Section IV.C.2.b below.
    \1491\ See ASSOB Letter.
    \1492\ As discussed above, these costs include, among others,
the costs to the broker-dealer of having associated persons who have
licensing requirements, suitability requirements, requirements
relating to advertisements, net capital requirements, and compliance
with Exchange Act Rule 15c2-4 (17 CFR 240.15c2-4), as well as the
costs of complying with Subpart C of Regulation Crowdfunding. See
Section IV.C.2 below for further detail on our estimates, for PRA
purposes, of the costs associated with the requirements under
Subpart C.
    \1493\ See Section IV.C.2.b below for further detail on our
estimates, for PRA purposes, of the costs of developing a platform.

   Estimated Costs of Final Rules for Intermediaries That Register as
                             Broker-Dealers
------------------------------------------------------------------------
                                                  Estimated costs
                                         -------------------------------
                                           Initial cost    Ongoing cost
                                             (year 1)        per year
------------------------------------------------------------------------
Form BD Registration and National               $275,000         $50,000
 Securities Association Membership......
Complying with Requirements to Act as an         245,000         180,000
 Intermediary in, and to Engage in
 Broker-Dealer Activities Related to,
 Transactions pursuant to Section
 4(a)(6) \1492\.........................
Platform Development \1493\.............         425,000          85,000
                                         -------------------------------
    Total...............................         945,000         315,000
------------------------------------------------------------------------

   Estimated Costs of Final Rules for Intermediaries That Register as
                             Funding Portals
------------------------------------------------------------------------
                                                  Estimated costs
                                         -------------------------------
                                           Initial cost    Ongoing cost
                                             (year 1)        per year
------------------------------------------------------------------------
Form Funding Portal Registration and            $100,000         $10,000
 National Securities Association
 Membership \1494\......................
Complying with Requirements to Act as an          67,000          40,000
 Intermediary \1495\ in Transactions
 pursuant to Section 4(a)(6)............
Platform Development \1496\.............         425,000          85,000
                                         -------------------------------
    Total...............................         592,000         135,000
------------------------------------------------------------------------

  Estimated Incremental Costs of Final Rules for Intermediaries Already
                      Registered as Broker-dealers
------------------------------------------------------------------------
                                                  Estimated costs
                                         -------------------------------
                                           Initial cost    Ongoing cost
                                             (year 1)        per year
------------------------------------------------------------------------
Complying with Requirements to Act as an         $45,000         $30,000
 Intermediary in Transactions pursuant
 to Section 4(a)(6) \1497\..............
Platform Development \1498\.............         425,000          85,000
                                         -------------------------------
    Total...............................         470,000         115,000
------------------------------------------------------------------------

    Commenters suggested that funding portals should not be required to
register with the Commission or become FINRA members (or members of any
other registered national securities association), because unlike
broker-dealers, they serve only as an ``information delivery service.''
\1499\ One commenter stated that the Commission's estimates in initial
costs of registration as a funding portal and for ongoing expenses
create a significant burden given that potential funding portals
operate on modest budgets and with thin margins.\1500\ As we note
above, however, registration is a statutory requirement under
Securities Act Section 4A(a)(1).\1501\ While the registration
requirements will necessarily impose costs on intermediaries, we
believe they also will be effective in providing investor protection
for the crowdfunding market while taking into account the more limited
activities of funding portals. Among other things, in addition to the
Commission's oversight and rulemaking functions with regard to broker-
dealers, FINRA currently is responsible for conducting most broker-
dealer examinations, mandating certain disclosures by its members,
writing rules governing the conduct of its members and associated
persons, and informing and educating the investing public. Similarly,
we believe that in addition to the benefits of the Commission's
oversight with regard to funding portals, the regulatory framework that
a registered national securities association--initially FINRA--will be
required to create for funding portals will play an important role in
the oversight of these entities.
---------------------------------------------------------------------------

    \1494\ As described above, this estimate reflects a streamlined
process of becoming a member of a national securities association,
which we assume will take approximately sixty days and not involve
application or licensing of associated persons.
    \1495\ This includes the costs of complying with the
requirements of Subparts C and D of Regulation Crowdfunding. See
Section IV.C.2 below for further detail on our estimates, for PRA
purposes, of these costs.
    \1496\ See Section IV.C.2.b below for further detail on our
estimates, for PRA purposes, of the costs of developing a platform.
    \1497\ This includes the incremental costs of complying with the
requirements of Subpart C of Regulation Crowdfunding, but it
excludes any registration or membership requirements. See Section
IV.C.2 below for further detail on our estimates, for PRA purposes,
of these costs.
    \1498\ See Section IV.C.2.b below for further detail on our
estimates, for PRA purposes, of the costs of developing a platform.
    \1499\ See Perfect Circle Letter.
    \1500\ See Seed&Spark Letter.
    \1501\ See Section II.C.2.a above.
---------------------------------------------------------------------------

    The estimated costs in the tables above reflect the direct costs
that intermediaries will incur in connection with registering as a
broker-dealer on Form BD or as a funding portal on Form Funding Portal,
submitting amendments to registrations and withdrawing registrations.
For the purposes of the PRA, we estimate that approximately 50
intermediaries will be broker-dealers that have already registered with
the Commission \1502\ and, as such, these broker-dealers will not incur
additional SEC registration costs associated with the final rules.
Additionally, intermediaries that are not otherwise registered with
FINRA or any other registered national securities association will need
to register, and the estimated cost for such registration is included
in the tables above. We anticipate that the cost for a funding portal
to become a member of a registered national securities association will
be lower than the cost for a broker-dealer to do so because of the more
limited nature of a funding portal's permissible activities and the
streamlined set of rules that an association is likely to impose on
funding portals. In this regard, we note that FINRA has solicited
public comment on a set of proposed rules and related forms for
registered funding portals that become FINRA members pursuant to the
crowdfunding provisions of the JOBS Act.\1503\
---------------------------------------------------------------------------

    \1502\ See Section IV.C.2 below.
    \1503\ See Proposed Funding Portal Rules, available at http://www.finra.org/sites/default/files/NoticeAttachment/p369763.pdf. See
also FINRA Requests Comment on Proposed Funding Portal Rules and
Related Forms, FINRA Regulatory Notice 13-34, available at http://www.finra.org/sites/default/files/NoticeDocument/p370743.pdf. (``The
rule is based on the current NASD Rule 1010 Series membership rules
that apply to broker-dealers. However, the process for funding
portals is simplified to reflect the limited nature of their
business.'')
---------------------------------------------------------------------------

    The final rules also require that an intermediary execute
transactions exclusively through its online platform. This requirement
may lower the potential for abusive sales practices. However, it may
also prevent investors who lack Internet access from investing through
crowdfunding, as suggested by one commenter.\1504\ We believe that the
use of an online platform will enhance the ability of issuers and
investors to communicate transparently as compared to the alternative
of allowing transactions to occur offline. This requirement also is
expected to help issuers gain exposure to a wide range of investors,
who also may benefit from

having numerous investment opportunities aggregated in one place,
resulting in lower search costs or burdens related to identifying
suitable investment opportunities.
---------------------------------------------------------------------------

    \1504\ See, e.g., Projecteureka Letter.
---------------------------------------------------------------------------

    The final rules further require that an issuer conduct an offering
or concurrent offerings in reliance on Section 4(a)(6) using a single
intermediary.\1505\ We recognize that this requirement may impose costs
by limiting the set of investors, as well as communication about a
transaction, to the extent that some investors do not use a specific
crowdfunding platform.\1506\ However, it may also enhance communication
between issuers and investors, as suggested by some commenters,\1507\
and enable investors to access investor discussions about a particular
transaction on a single platform. This requirement may also reduce the
risk of issuers circumventing the aggregate offering limit.
---------------------------------------------------------------------------

    \1505\ See Instruction 1 to Rule 100(a)(3) of Regulation
Crowdfunding. See also Section II.A.3.
    \1506\ See, e.g., Graves Letter.
    \1507\ See, e.g., CFA Institute Letter; RocketHub Letter.
---------------------------------------------------------------------------

    Some commenters suggested that the statutory and rule requirements
for establishing a funding portal and ongoing maintenance and
compliance expenses create a significant burden on funding
portals.\1508\ Among other concerns, commenters highlighted potential
liability for intermediaries \1509\ under Securities Act Section 4A(c)
and the cost of conducting background checks \1510\ pursuant to Rule
301(c) as particularly burdensome for funding portals. We are mindful
of the potentially significant costs as a percentage of offering size
incurred by intermediaries, especially funding portals, in securities-
based crowdfunding offerings. However, intermediary requirements are
designed to provide a measure of investor protection from the risk of
fraud in small offerings by relatively unknown issuers. Concentration
of certain due diligence tasks at the intermediary level may yield
efficiency gains relative to having each small investor incur the cost
to perform such tasks. In addition, although funding portals may be
subject to issuer liability, the changes we have implemented in the
final rules will give them greater ability to control which issuers
conduct offerings on their platforms and thus to mitigate to some
degree the risks of liability arising from such offerings.
---------------------------------------------------------------------------

    \1508\ See, e.g., ASSOB Letter (suggesting that the cost to
establish a funding portal could be at least $480,000).
    \1509\ See, e.g., ABA Letter; AngelList Letter; BetterInvesting
Letter; CFIRA Letter 10; City First Letter; EarlyShares Letter; EMKF
Letter; FSI Letter; Graves Letter; Guzik Letter 1; IAC
Recommendation; Inkshares Letter; Milken Institute Letter; PPA
Letter; RocketHub Letter; SBA Office of Advocacy Letter; SBEC
Letter; SeedInvest Letter 3; Seyfarth Letter; StartupValley Letter;
Wefunder Letter; Winters Letter. See also Section II.E.5.
    \1510\ See, e.g., RocketHub Letter; Anonymous Letter 4; Zhang
Letter. See also Section II.C.3.c above.
---------------------------------------------------------------------------

a. Disclosure and Dissemination Requirements
    The statute and final rules include disclosure and dissemination
provisions designed to provide information to security-based
crowdfunding investors. These provisions, together with the issuer
disclosure provisions discussed above, are expected to limit
information asymmetries and promote the efficient allocation of capital
amongst crowdfunding offerings. These provisions also will provide
information intended to ensure that investors are aware of the risks
associated with their investment, which can enhance investor
protection. As discussed above, many of the costs and benefits of these
provisions are difficult to quantify or estimate with any degree of
certainty, especially considering that securities-based crowdfunding
will constitute a new method for raising capital in the United States.
Although we are not able to quantify the direct costs specifically
associated with each of these requirements, these costs are reflected
in our general estimates of the initial and ongoing costs for
intermediaries to register, comply with their obligations under the
final rules and develop a crowdfunding platform, as reflected in the
tables above.
    The final rules prohibit an intermediary or its associated persons
from accepting an investment commitment until the investor has opened
an account with the intermediary and the intermediary has obtained the
investor's consent to electronic delivery of materials.\1511\ This
requirement will help ensure that certain basic information about the
investor is on file with the intermediary and that all investors are on
notice of the primary method of delivery for communications from the
intermediary. To the extent that an intermediary uses a third party to
establish account opening functionality, the costs relevant to this
requirement will be incorporated into the cost to develop the
platform.\1512\
---------------------------------------------------------------------------

    \1511\ See Rule 302(a) of Regulation Crowdfunding.
    \1512\ See also Section IV.C.2.d below.
---------------------------------------------------------------------------

    The statute requires intermediaries to provide disclosures related
to risks and other investor education materials. The final rules
implement this statutory mandate by requiring intermediaries to deliver
educational materials that explain how the offering process works and
the risks associated with investing in crowdfunding securities.\1513\
The educational requirements will help make investors aware of the
limits and risks associated with purchasing crowdfunding securities and
facilitate the selection of investments suited to their level of risk
tolerance. They also may help ensure that offerings proceed more
efficiently as investors will be better informed by the time they
decide to make their investment commitments and receive required
notices. However, we recognize that the effectiveness of the
educational materials in enhancing investor protection will vary
depending upon the quality of the educational materials and the
education and experience of retail investors.\1514\ In addition,
materials that highlight the risks of securities-based crowdfunding can
discourage investor participation, which may limit potential capital
formation.
---------------------------------------------------------------------------

    \1513\ See Rule 302(b) of Regulation Crowdfunding.
    \1514\ See Jennifer E. Bethel and Allen Ferrell, Policy Issues
Raised by Structured Products, Harv. L. & Econ. Discussion Paper No.
560, 2007, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=941720.
---------------------------------------------------------------------------

    Under the final rules, the educational materials can be in any
electronic format, including video format, and the intermediary will
have the flexibility to determine how best to communicate the contents
of the educational material. Accordingly, the cost for intermediaries
to develop educational materials is expected to vary widely. For
purposes of the PRA, we estimate that the initial cost for an
intermediary using a third-party firm to develop and produce
educational materials will be approximately $10,000 to $30,000 and the
ongoing cost will be approximately $5,000 to $15,000 per year.\1515\
---------------------------------------------------------------------------

    \1515\ For the purposes of the PRA, we estimate that development
of educational materials in-house will be associated with an average
initial burden of approximately 20 hours and an average annual
burden of approximately 10 hours. See Section IV.C.2.e below.
---------------------------------------------------------------------------

    The final rules also require that intermediaries obtain
representations from investors about their review of the investor
education materials and their understanding of the risks.\1516\ This
requirement is expected to improve investors' understanding of
investments in securities-based crowdfunding offerings. The direct
costs of this requirement to an intermediary are reflected in the
tables above as part of the costs of developing a crowdfunding
platform, and we believe that the

ongoing burden to comply will be minimal after the intermediary has
systems in place to obtain such representations. This requirement also
may limit capital formation to the extent that it deters investors from
making investment commitments or otherwise participating in offerings
made in reliance on Section 4(a)(6).
---------------------------------------------------------------------------

    \1516\ See Rule 303(b)(2) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Under the final rules, an intermediary must clearly disclose the
manner in which the intermediary is compensated in connection with
offers and sales of securities in reliance on Section 4(a)(6).\1517\ As
explained above, we believe that investors will benefit by having
information about how intermediaries are compensated, such as through
compensation arrangements with affiliates. We believe that the costs of
complying with this requirement generally will be included in the
overall cost for intermediaries to develop their platforms, as it will
entail adding an item of disclosure to the functionality of their
platforms.\1518\ While the requirement to disclose compensation
arrangements may give rise to indirect costs due to the intermediary's
competitors learning about the compensation arrangements, we do not
expect such indirect costs to be significant since the intermediary's
competitors can generally infer information about the intermediary's
compensation arrangements from other sources.
---------------------------------------------------------------------------

    \1517\ See Rule 302(d) of Regulation Crowdfunding.
    \1518\ See also Section IV.C.2.f below.
---------------------------------------------------------------------------

    The statute and the final rules further require that intermediaries
make available certain issuer-provided information.\1519\ We recognize
that requiring intermediaries to provide prospective investors with
information about the issuer will impose costs. We expect that
intermediaries will incur costs to develop the functionality that will
allow the uploading and downloading of issuer information. We believe
that the direct costs of complying with this requirement will be
included in the overall cost to intermediaries to develop their
platforms and that this requirement will impose only nominal
incremental costs on intermediaries on an ongoing basis, primarily
because the functionality necessary to upload the required issuer
disclosure information is a standard feature offered on many Web sites
and would not require frequent updates.\1520\
---------------------------------------------------------------------------

    \1519\ See Rule 303(a) of Regulation Crowdfunding.
    \1520\ See also Section IV.C.2.g below.
---------------------------------------------------------------------------

    The issuer disclosure requirements are expected to benefit
investors by enabling them to better evaluate the issuer and the
offering. Requiring intermediaries to make the issuer information
publicly available and easily accessible on their platforms will reduce
information asymmetries between issuers and investors and will enhance
both transparency and efficiency of the crowdfunding market. Greater
accessibility of issuer information may reduce incremental costs to
investors of locating issuer information and may increase their
willingness to participate in a securities-based crowdfunding offering,
thereby enhancing capital formation.
    The final rules also require an intermediary to provide
communication channels on its platform, meeting certain conditions,
which will allow investors who have opened accounts with intermediaries
and representatives of the issuer to interact and exchange comments
about the issuer's offering on that intermediary's platform, and which
will be publicly available for viewing (i.e., by those who may not have
opened accounts with the intermediary).\1521\
---------------------------------------------------------------------------

    \1521\ See Rule 303(c) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Compared with the alternative of not requiring intermediaries to
provide communication channels, we believe this requirement will allow
investors, particularly those who may be less familiar with online
social media, to participate in online discussions about ongoing
offerings without having to actively search for such discussions on
external Web sites. Moreover, the requirement that promoters be clearly
identified on these channels will enhance transparency, allowing those
investors that draw information from an intermediary's online platform
to make potentially better informed investment decisions. The direct
costs of this requirement are reflected in the tables above as part of
costs of developing a crowdfunding platform, and we believe that once
the platform has been set up, the ongoing burden to comply will be
minimal. We recognize, however, that this requirement will not assure
that participants in online discussions on the intermediary's online
platform convey accurate or relevant information in their postings, and
it will not preclude investors from participating in discussions on
external Web sites or other external social media.
    The final rules also require intermediaries, upon receipt of an
investment commitment from an investor, promptly to provide or send to
the investor a notification of that investment commitment.\1522\ This
requirement will provide investors with key information about their
investment commitments, including notice of the opportunity, as
relevant, to cancel their investment commitments. Investors will
benefit from these requirements because they will be provided with
additional information with which to evaluate their investment
commitments, their securities transactions and the intermediaries that
are effecting those transactions. The direct costs of these
requirements are reflected in the tables above as part of the costs of
developing a crowdfunding platform.\1523\
---------------------------------------------------------------------------

    \1522\ See Rule 303(d) of Regulation Crowdfunding.
    \1523\ See also Section IV.C.2.h below.
---------------------------------------------------------------------------

    The final rules implement the statutory requirement for
intermediaries to allow investors to cancel their commitments to
invest, by requiring investors to have until 48 hours prior to the
deadline identified in the issuer's offering materials to cancel their
investment commitments.\1524\ If an issuer reaches its target offering
amount prior to the target offering deadline, the final rules permit
early closing of the offering under certain conditions, including a
requirement that the intermediary send notices to investors informing
them of the closing and the deadline for the opportunity to
cancel.\1525\ The final rules also set forth notice requirements and
requirements related to the intermediary directing payments in the
event of cancellations and material changes to offerings.\1526\
Additionally, the final rules impose specific obligations on
intermediaries related to informing investors about their right to
cancel an investment commitment.\1527\
---------------------------------------------------------------------------

    \1524\ See Rule 304(a) of Regulation Crowdfunding.
    \1525\ See Rule 304(b) of Regulation Crowdfunding.
    \1526\ See Rule 304(c) and Rule 304(d) of Regulation
Crowdfunding.
    \1527\ See Rule 302(b) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We believe that investors will benefit from receiving these notices
because the notifications and accompanying information will keep
investors informed about the status of the offering and thereby
facilitate better investment decisions. This approach also will benefit
investors by providing them with a specified period of time to review
and assess information and communications about the issuer.
    We recognize that allowing investors to cancel their investment
commitments up to 48 hours prior to the deadline identified in the
issuer's offering materials may impose a cost on issuers who, because
of investors cancelling commitments late in the offering period, may
fall below the target offering amount and so decide to cancel the
offering or to extend the offering period. Accordingly, we recognize
that this requirement may reduce the overall amount of capital raised
in offerings in

reliance on Section 4(a)(6) and thus have an adverse effect on capital
formation. Intermediaries are expected to incur direct costs in
developing and maintaining systems to send the relevant notices to
investors. These costs are reflected in the tables above as part of the
cost of developing a crowdfunding platform.\1528\
---------------------------------------------------------------------------

    \1528\ See also Section IV.C.2.h below.
---------------------------------------------------------------------------

b. Measures To Reduce the Risk of Fraud
    The statute and final rules require intermediaries to have a
reasonable basis for believing that an issuer seeking to offer and sell
securities in reliance on Section 4(a)(6) through the intermediary's
platform complies with the requirements in the final rules \1529\ and
has established means to keep accurate records of holders of the
securities.\1530\ Under the final rules, an intermediary must deny
access to an issuer if it has a reasonable basis for believing that the
issuer or the offering presents the potential for fraud or otherwise
raises concerns about investor protection \1531\ or that the issuer or
any of its officers, directors (or any person occupying a similar
status or performing a similar function) or 20 Percent Beneficial
Owners was subject to a disqualification under the final rules.\1532\
The intermediary also must conduct a background and securities
enforcement check on each of these persons.\1533\ We believe that these
requirements will increase investor protection in connection with the
offering.\1534\
---------------------------------------------------------------------------

    \1529\ See Rule 301(a) of Regulation Crowdfunding.
    \1530\ See Rule 301(b) of Regulation Crowdfunding.
    \1531\ See Rule 301(c)(2) of Regulation Crowdfunding.
    \1532\ See Rule 301(c)(1) of Regulation Crowdfunding.
    \1533\ Id.
    \1534\ See also Section II.C.3 above.
---------------------------------------------------------------------------

    As noted above, the specific costs and benefits of these provisions
are difficult to quantify or estimate with any degree of certainty.
However, we have attempted to reflect the direct costs of these
provisions in the tables above as part of our general estimates for the
cost of complying with requirements to act as an intermediary in
transactions pursuant to Section 4(a)(6). For purposes of the PRA, the
cost for an intermediary to fulfill the required background checks and
securities enforcement regulatory history checks is estimated to be
approximately $13,818 to $34,546 in the first year and approximately
the same in subsequent years.\1535\
---------------------------------------------------------------------------

    \1535\ See Section IV.C.2.c below.
---------------------------------------------------------------------------

    Each of these requirements is intended to help reduce the risk of
fraud in securities-based crowdfunding. As a result of these
requirements, investors will be able to rely on the efforts of the
intermediary that conducted a background and securities enforcement
check, solving a collective action problem that would be prohibitively
costly if left to individual investors. To the extent that these checks
help prevent fraudulent activity, they may increase investor
willingness to participate in crowdfunding offerings, thereby
facilitating capital formation. We anticipate that most intermediaries
will employ third parties to perform these background checks.
    We received several suggestions from commenters aimed at reducing
or scaling the costs of the proposed requirements. One commenter
suggested that the checks be required only after an issuer has met its
target offering amount, so as to prevent unnecessary expense to the
intermediary.\1536\ Requiring a background check only after an issuer
has reached its target may reduce the total cost of performing
background checks for intermediaries; however, it also may result in
intermediaries having to cancel offerings by issuers who fail the
background checks, resulting in additional transactional and
reputational costs for the intermediary. Overall, relative to this
alternative, we believe that an intermediary performing a background
check on an issuer prior to the securities offering will improve
investor confidence in using a given intermediary.
---------------------------------------------------------------------------

    \1536\ Anonymous Letter 4.
---------------------------------------------------------------------------

    While intermediaries are required to take certain steps to reduce
the risk of fraud, the final rules provide intermediaries with the
flexibility to decide the specific steps to take, consistent with some
of the commenters' suggestions.\1537\ We believe this may reduce
intermediary costs relative to establishing a more stringent or more
specific standard for intermediaries. For example, deeming an
intermediary to have satisfied the Rule 301(b) requirement if the
issuer has engaged the services of a transfer agent that is registered
under Section 17A of the Exchange Act will reduce the intermediary cost
while at the same time potentially improving investor protection.\1538\
In addition, intermediaries may rely on the representations of the
issuer unless they have reason to question the reliability of those
representations. Overall, a more rigorous review requirement represents
a tradeoff between enhanced investor confidence in the portal and
higher compliance costs for intermediaries. We recognize that
permitting an intermediary to rely on an issuer's representations
unless the intermediary has reason to question the reliability of the
representations can potentially lessen the incentive for an
intermediary to thoroughly investigate the issuers and securities to be
offered on its platform. Such an outcome may result in higher levels of
fraud compared to a requirement that intermediaries perform an
independent investigation to ensure that the issuer complied with all
the requirements. A higher level of fraud will negatively affect both
investors in crowdfunding offerings and non-fraudulent issuers. While
we recognize this potential adverse effect, we note that intermediaries
may be subject to liability as ``issuers,'' and this liability,
together with potential reputational harm, is expected to provide
significant incentives for intermediaries to monitor and investigate
the offerings on their platforms. We also note that the communication
channels provided on these platforms can provide a potential source of
information for intermediaries, further facilitating their evaluation
of prospective issuers.
---------------------------------------------------------------------------

    \1537\ See, e.g., StartupValley Letter; Vann Letter.
    \1538\ We note that while for purposes of this provision, the
issuer is not required to continue to engage the services of a
registered transfer agent on an ongoing basis, since the use of a
registered transfer agent is a condition for the Section 12(g)
exemption, issuers with a large number of shareholders of record are
expected to have an incentive to continue to engage the services of
a registered transfer agent. See Section III.B.8. below.
---------------------------------------------------------------------------

c. Other Limitations on Intermediaries
    The statute and final rules place certain limitations on
intermediaries. These limitations are expected to increase investor
protection in the securities-based crowdfunding market.
    The final rules require an intermediary before accepting an
investment commitment to have a reasonable basis for believing that an
investor has not exceeded the final rules' investment limits but permit
an intermediary to rely on investor representations concerning
compliance unless the intermediary has reason to question the
reliability of the representations.\1539\ While we realize that
investors may make inaccurate representations, we believe that this
provision represents a reasonable approach to implement the statutory
requirement, appropriately considering the need for investors to adhere
to investment limitations while mitigating the costs incurred by
intermediaries.

The cost to update the required functionality for processing issuer
disclosure and investor acknowledgment information is reflected in the
tables above as part of the costs to develop a crowdfunding platform,
and we believe that the ongoing burden to comply would be minimal.
---------------------------------------------------------------------------

    \1539\ See Rule 303(b)(1) of Regulation Crowdfunding. See also
Section II.C.5.b above.
---------------------------------------------------------------------------

    Under the final rules, intermediaries must require any person, when
posting a comment in the communication channels, to clearly disclose
with each posting whether he or she is a founder or an employee of an
issuer engaging in promotional activities on behalf of the issuer or a
compensated promoter \1540\ We believe that these disclosure
requirements will benefit investors by promoting a transparent
information sharing process. We further believe that intermediaries are
in an appropriate position to take such steps as part of designing
communication channels on their platform.
---------------------------------------------------------------------------

    \1540\ See Rule 303(c)(4) of Regulation Crowdfunding. See also
Section II.C.5.c above.
---------------------------------------------------------------------------

    Under the final rules, intermediaries will incur direct costs in
complying with the requirements to disclose compensation to promoters,
and certain additional costs from time to time to ensure continued
compliance. These costs are reflected in the table above as part of the
costs of complying with the requirements to act as an intermediary in a
Section 4(a)(6) transaction. In addition, if this requirement
discourages the use of promoters by issuers, it may limit the investor
pool for an offering made in reliance on Section 4(a)(6), thus limiting
the ability of an issuer to raise capital.\1541\
---------------------------------------------------------------------------

    \1541\ See Rule 300(b) of Regulation Crowdfunding and Section
II.C.2.b.
---------------------------------------------------------------------------

    The statute prohibits the directors, officers or partners of an
intermediary, or any person occupying a similar status or performing a
similar function, from having any financial interest in an issuer that
uses the services of the intermediary. The final rules implement this
statutory requirement. In a change from the proposed rules, the final
rules provide exceptions to the prohibition on an intermediary having a
financial interest in a crowdfunding issuer. The intermediary may hold
a financial interest in the crowdfunding issuer if the financial
interest represents compensation for the services provided to or for
the benefit of the issuer in connection with the offer or sale of
securities in a crowdfunding offering and consists of securities of the
same class and having the same terms, conditions and rights as the
securities being offered or sold in the crowdfunding offering through
the intermediary's platform. By not extending the prohibition from
having any financial interest in an issuer to intermediaries in all
instances, the final rules allow for more flexibility in the payment
arrangements between issuers and intermediaries. This additional option
by which the issuer may pay an intermediary for its services may be
beneficial for issuers by allowing them to use more of the capital
raised in an offering for future investments rather than paying a
portion of it as a fee to the intermediaries. It also allows funding
portals to share in the upside of successful issuers, generating
potentially larger revenue than the offering fee. While allowing
intermediaries to have a financial interest in issuers can align
incentives between intermediaries and investors,\1542\ it can
alternatively lead to potential conflicts of interest between
intermediaries and investors.\1543\ While we believe that such
conflicts of interest are possible and may reduce investor protection,
they will be significantly mitigated by the requirement that an
intermediary's financial interest in an issuer consist of securities of
the same class and having the same terms, conditions and rights as the
securities being offered or sold in the crowdfunding offering through
the intermediary's platform. Such limitations on an intermediary's
financial interest, combined with reputational concerns and the
accompanying disclosure requirements, will likely curb the incentives
of intermediaries to act in a way that harms the interests of
crowdfunding investors.
---------------------------------------------------------------------------

    \1542\ See, e.g., AngelList Letter (``So long as the program was
consistently applied without judgment by the intermediary, the net
effect would purely be to align the interests of the intermediary
with the investor.''). See also EMKF Letter; Hackers/Founders
Letter; Heritage Letter; Milken Institute Letter; RoC Letter;
RocketHub Letter; Thomas Letter 1.
    \1543\ See Jacobson Letter.
---------------------------------------------------------------------------

    The statute requires that intermediaries ensure that all offering
proceeds are provided to the issuer only when the aggregate capital
raised from all investors is equal to or greater than a target offering
amount.\1544\ The final rules implement this requirement by requiring
intermediaries that are registered as broker-dealers to comply with the
existing requirements of Exchange Act Rule 15c2-4 and by requiring
intermediaries that are registered funding portals to direct investors
to transmit the funds or other consideration directly to a qualified
third party that has agreed in writing to hold the funds for the
benefit of the investors and the issuer and to promptly transmit or
return the funds to the persons entitled to such funds.\1545\ Based on
several commenters' suggestions,\1546\ we modified the proposed
definition of qualified third parties in Rule 303(e) also to include
registered broker-dealers that carry customer or broker or dealer
accounts and hold funds or securities for those persons and credit
unions insured by the NCUA.\1547\ The final rules also require a
funding portal to direct the qualified third party to transmit funds to
the issuer once the target offering amount is reached and the
cancellation period has elapsed; to return funds to an investor when an
investment commitment has been cancelled; and to return funds to
investors when the offering has not been completed.
---------------------------------------------------------------------------

    \1544\ See Section 4A(a)(7).
    \1545\ See Rule 303(e) of Regulation Crowdfunding.
    \1546\ See, e.g., Growthfountain Letter; Vann Letter; Ex24
Letter; FOLIOfn Letter.
    \1547\ See Rule 303(e) of Regulation Crowdfunding. See also
Section II.C.5.b above.
---------------------------------------------------------------------------

    These requirements will benefit investors and issuers by helping
ensure that funds are appropriately refunded or transmitted in
accordance with the terms of the offering. In particular, the
requirement that the account in which funds are deposited be
exclusively for the benefit of investors and the issuer will help
prevent the intermediary or other parties from claiming or otherwise
unlawfully appropriating funds from that account. Expanding the
definition of ``qualified third parties'' will increase the number of
third parties available to hold funds in an escrow or in an account for
the benefit of investors and the issuer, potentially reducing the cost
of the service due to increased competition. We do not expect any
significant costs due to this change from the proposed rules because
credit unions insured by the NCUA offer similar protections to banks
while registered broker-dealers that carry customer or broker or dealer
accounts and hold funds or securities for those persons are subject to
various regulatory obligations, which are designed to provide
protection of investor funds through the imposition of capital and
other requirements.\1548\
---------------------------------------------------------------------------

    \1548\ See note 868.
---------------------------------------------------------------------------

    Under the statute, intermediaries may not compensate promoters,
finders or lead generators for providing broker-dealers or funding
portals with the personally identifiable information of any potential
investor. The final rules implement this statutory requirement by
prohibiting an intermediary from

compensating any person for providing the personally identifiable
information of any crowdfunding investor to intermediaries.\1549\
Investors will benefit from the privacy protection provided by this
prohibition. Intermediaries will incur a cost because the rule will not
allow them to use personally identifiable information to target and
seek out specific investors, thus reducing the potential investor pool
for certain offerings. However, subject to this restriction, the final
rules permit an intermediary to compensate a person for directing
issuers or investors to the intermediary's platform in certain
situations.\1550\ This provision will provide intermediaries with an
alternative means to attract more investors to their crowdfunding
platforms, thereby mitigating some of the costs associated with the
restriction on paying for personally identifiable information.
---------------------------------------------------------------------------

    \1549\ See Rule 305(a) of Regulation Crowdfunding.
    \1550\ See Rule 305(b).
---------------------------------------------------------------------------

5. Additional Funding Portal Requirements
    Under the final rules, a funding portal must register with the
Commission by filing a complete Form Funding Portal with information
concerning the funding portal's operation.\1551\ The final rules also
include the statutory requirement that a funding portal be a member of
a registered national securities association. In the table above, we
estimate the costs that intermediaries will incur related to
registering as a funding portal on Form Funding Portal and becoming a
member of a national securities association to be approximately
$100,000 in the initial year and $10,000 thereafter.
---------------------------------------------------------------------------

    \1551\ See Rule 400(a) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The requirement that funding portals register with the Commission
and become a member of a national securities association will benefit
investors by providing regulatory oversight for these new entities,
which will help to reduce the risk for fraud. Although there are costs
associated with this requirement, we believe that the protections
deriving from this requirement will benefit investors, issuers and
potentially intermediaries by helping to create a marketplace in which
investors are more willing to participate and issuers are more
comfortable using this method of capital formation.
    The final rules also require that funding portals use Form Funding
Portal to provide updates whenever information on file becomes
inaccurate for any reason, to register successor funding portals and to
withdraw from funding portal registration. Although funding portals
would incur time and compliance costs to update Form Funding Portal, we
expect funding portals will have experience with the filing process for
Form Funding Portal from their registration and, as a result, will be
familiar with the filing process by the time they update the form. In
the tables above, this cost is reflected in the $10,000 annual
compliance cost associated with registering on Form Funding Portal and
becoming a member of a registered national securities association.
    The final rules allow nonresident funding portals to register with
the Commission, provided that certain conditions are met.\1552\ The
final rules require a nonresident funding portal to appoint an agent
for service of process in the United States and to certify both that it
can, as a matter of law, and will provide the Commission and any
national securities association of which it becomes a member with
prompt access to its books and records and submit to onsite inspection
and examination by the Commission and the national securities
association. The funding portal also must provide an opinion of counsel
attesting to the funding portal's ability to comply with these
requirements under home country law. As discussed above, the final
rules condition nonresident funding portal registration on the presence
of an information sharing arrangement between the Commission and the
regulator in the funding portal's jurisdiction.\1553\ This provision is
expected to facilitate Commission oversight of registered nonresident
funding portals, with the potential benefit of stronger protection of
investors in offerings conducted on such portals. However, it may limit
the ability of some nonresident funding portals to register,
potentially resulting in adverse competitive effects on nonresident
portals in jurisdictions without an information sharing agreement.
---------------------------------------------------------------------------

    \1552\ See Rule 400(f) of Regulation Crowdfunding.
    \1553\ See Rule 400(f) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Compared to the alternative of not allowing nonresident entities to
operate as funding portals in the U.S. crowdfunding market, the final
rules may increase competition among crowdfunding intermediaries, which
in turn may reduce the fees that intermediaries charge to issuers.
Lower costs of raising capital can also attract more potential issuers
to the crowdfunding market, thus enhancing capital formation. Due to
lack of data, we are not able to estimate the magnitude of these
potential effects.
    Although the requirements with respect to the appointment of an
agent for service of process, a certification and a legal opinion will
impose costs on nonresident funding portals, these requirements are
expected to enhance investor protection by requiring steps designed to
ensure that the books and records of funding portals that are not based
in the United States, or that are subject to laws other than those of
the United States, nevertheless are accessible to the Commission and
other relevant regulators for purposes of conducting examinations of,
and enforcing U.S. laws and regulations against these entities. For PRA
purposes, we estimate that nonresident intermediaries will face an
additional cost for outside professional services of $25,179 per
intermediary to retain an agent for service of process and provide an
opinion of counsel to register as a nonresident funding portal.\1554\
---------------------------------------------------------------------------

    \1554\ For the purposes of the PRA, we estimate that entities
that register as nonresident funding portals also will incur an
additional internal burden of half an hour to complete Schedule C,
half an hour to hire an agent for the service of process, and one
hour to provide an opinion of counsel. See Section IV.C.2.a.
---------------------------------------------------------------------------

    The statute also provides an exemption from broker-dealer
registration for funding portals. The final rules implement the
statutory requirement by stating that a registered funding portal is
exempt from the broker-dealer registration requirements of Exchange Act
Section 15(a)(1) in connection with its activities as a funding
portal.\1555\ We believe this approach of exempting funding portals
from broker-dealer registration and its accompanying regulations will
benefit the market and its participants. The activities of funding
portals will be more limited than those of broker-dealers. Thus, the
final rules require funding portals to comply with registration
requirements that are more appropriate for their limited, permissible
activities, rather than the more extensive and higher cost requirements
that accompany broker-dealer registration. Lower registration costs for
funding portals may translate into lower fees charged to issuers that
use these portals, thus possibly benefiting issuers of crowdfunding
securities and potentially increasing capital formation. Due to lack of
data, we are unable to quantify these potential benefits.
---------------------------------------------------------------------------

    \1555\ See Rule 401 of Regulation Crowdfunding.

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

a. Safe Harbor for Certain Activities
    Exchange Act Section 3(a)(80) prohibits funding portals from (1)
offering investment advice or recommendations, (2) soliciting
purchases, sales or offers to buy securities offered or displayed on
the funding portal's platform, (3) compensating employees, agents or
other such persons for solicitation or based on the sale of securities
displayed or referenced on the funding portal's platform, or (4)
holding, managing, possessing or otherwise handling investor funds or
securities. The final rules give funding portals, their associated
persons, affiliates and business associates, a measure of clarity on
activities that are permissible without violating these statutory
prohibitions, while also helping to protect investors from activities
that create potential conflicts of interest.\1556\ Thus, compared with
the alternative that we could have chosen, that of not providing the
safe harbor, the safe harbor provisions in the final rules may
facilitate regulatory compliance for funding portals, potentially with
corresponding benefits for both issuers and investors. Some safe harbor
provisions have additional benefits and costs, which we discuss below.
Other safe harbor provisions may facilitate the implementation of other
provisions of the final rules in instances where the crowdfunding
intermediary is a funding portal, in which case the benefits and costs
of such safe harbor provisions will be inseparable from the benefits
and costs of the other provisions of the final rules as applied to
instances where the crowdfunding intermediary is a funding portal.
---------------------------------------------------------------------------

    \1556\ See Rule 402 of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The safe harbor for a funding portal to provide communication
channels on its platform \1557\ will facilitate the realization of the
benefits of the provision in the final rules that requires the
intermediary to provide communication channels on its platform \1558\
in instances where the crowdfunding intermediary is a funding portal.
The provision of communication channels by the funding portal has the
potential to attract a greater number of investors to crowdfunding
transactions through funding portals than otherwise would be the case,
thereby encouraging capital formation. The provision of communication
channels may enhance information sharing among investors, although the
relevance and accuracy of the information shared by investors on these
communication channels will likely vary from offering to offering.
---------------------------------------------------------------------------

    \1557\ See Rule 402(b)(4) of Regulation Crowdfunding.
    \1558\ See Rule 303(c) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    In a change from the proposal, the final rules include a
conditional safe harbor that will permit funding portals, consistent
with the prohibitions under Exchange Act Section 3(a)(80), to determine
whether and under what circumstances to allow an issuer to offer and
sell securities in reliance on Section 4(a)(6) of the Securities Act
(15 U.S.C. 77d(a)(6)) through their platforms.\1559\ Allowing funding
portals to decide which securities to offer through their platforms
will potentially decrease compliance costs for funding portals because
limiting the offerings available on their platform can help decrease
the risk of statutory liability under Section 4A(c) of the Securities
Act, consistent with the suggestions of some commenters.\1560\ The
ability to determine which issuers may offer and sell securities
through their platforms may also make it easier for funding portals to
bar potentially fraudulent offerings from their platforms, thereby
potentially enhancing investor protection, consistent with the
suggestions of various commenters,\1561\ as well as screen out
offerings by issuers that are unprepared or not ``crowdfund-ready.''
\1562\ A reduction in the prevalence of potentially fraudulent
offerings, in turn, may increase investor confidence and facilitate
capital formation in the securities-based crowdfunding market. However,
we recognize that, depending on the funding portal, the ability to
exercise discretion with respect to which offerings to include on the
platform may result in the exclusion of some issuers that do not pose a
risk of fraud, potentially limiting capital formation and investor
access to crowdfunding investment opportunities in those instances.
This concern is expected to be mitigated, in part, by the reputational
incentives of intermediaries and competition within the crowdfunding
market. We also recognize that, while funding portals remain subject to
more limitations concerning their activities in the crowdfunding market
relative to registered broker-dealers, the ability to exercise
discretion with respect to which offerings to include on their
platforms is expected to partly mitigate the competitive disadvantage
of funding portals relative to registered brokers, as suggested by
several commenters.\1563\
---------------------------------------------------------------------------

    \1559\ See Rule 402(b)(1) of Regulation Crowdfunding.
    \1560\ See e.g., CrowdCheck 2 Letter; Milken Institute Letter;
RocketHub Letter. See also Section II.D.3.a.
    \1561\ See e.g., ABA Letter; CrowdCheck 2 Letter; Graves Letter;
Seyfarth Letter.
    \1562\ See EMKF Letter; SBEC Letter.
    \1563\ See e.g., BetterInvesting Letter; EMKF Letter; SBA Office
of Advocacy Letter; ABA Letter; CfPA Letter; CrowdCheck 2 Letter;
Graves Letter; Seyfarth Letter; IAC Recommendation; CFIRA Letter 12.
---------------------------------------------------------------------------

    The final rules also allow a funding portal to highlight particular
issuers or offerings of securities made in reliance on Section 4(a)(6)
on its platform based on objective criteria, for example: (1) The type
of securities being offered (e.g., common stock, preferred stock or
debt securities); (2) the geographic location of the issuer; (3) the
industry or business segment of the issuer; (4) the number or amount of
investment commitments made; (5) the progress in meeting the target
offering amount or, if applicable, the maximum offering amount, and (6)
the minimum or maximum investment amount.\1564\ The final rules require
that these criteria be objective and reasonably designed to highlight a
broad selection of issuers and offerings and be applied consistently to
all potential issuers and offerings. They also specify that such
criteria may not be related to the advisability of investing in the
issuer or offering and may not give the impression of an investment
recommendation.\1565\ Under the final rules, funding portals may
provide search functions or other tools on its platform that users may
use to search, sort or categorize available offerings according to
objective criteria.\1566\
---------------------------------------------------------------------------

    \1564\ See Rule 402(b)(2) of Regulation Crowdfunding.
    \1565\ Id.
    \1566\ See Rule 402(b)(3) Regulation Crowdfunding.
---------------------------------------------------------------------------

    A funding portal may choose to categorize offerings into general
subject areas or provide search functions that, for example, allowing
an investor to sort through offerings based on a combination of
different objective criteria. We believe that these safe harbor
provisions will benefit investors by facilitating investor access to
information about offerings characterized by certain broad, objective
criteria, to the extent that funding portals provide such features and
tools in reliance on the final rules. By enabling issuers to utilize
technology to lower the costs of each investor to search for
information about a particular category of offerings, these provisions
also may enhance efficiency. To the extent that the availability of
these features and tools encourages investor participation in
crowdfunding offerings, these provisions may have a beneficial effect
on capital formation in the crowdfunding market.
    The final rules prohibit a funding portal from receiving any
special or additional compensation for

highlighting (or offering to highlight) one or more issuers or
offerings on its platform.\1567\ This prohibition is expected to
benefit investors by helping prevent conflicts of interest and
incentives for funding portals to favor certain issuers over others.
The final rules also make clear that such objective criteria may not
include the advisability of investing in the issuer or its offering or
an assessment of any characteristic of the issuer, its business plan,
its management, or risks associated with an investment.\1568\
---------------------------------------------------------------------------

    \1567\ See Rule 402(b)(2) of Regulation Crowdfunding.
    \1568\ See Rule 402(b)(2) and Rule 402(b)(3) of Regulation
Crowdfunding.
---------------------------------------------------------------------------

    Under the final rules, funding portals are permitted to provide
advice to an issuer on the structure and content of its offerings,
including assistance to the issuer in preparing offering
documentation.\1569\ This will allow issuers to obtain guidance that
may not typically be available to them and thereby help to lower
funding costs. Many potential issuers seeking to offer and sell
crowdfunding securities are unlikely to be familiar with how to
structure offerings so as to raise capital in the most cost effective
manner, and they may not have the capital, knowledge or resources to
hire outside advisors. Given that an issuer will be required to conduct
its securities-based crowdfunding offerings through an intermediary, we
believe that permitting funding portals to provide these services to
issuers will lower overall transaction costs for issuers, as they will
not need to engage additional parties to provide these services. This
effect will in turn help enhance market efficiency.
---------------------------------------------------------------------------

    \1569\ See Rule 402(b)(5) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    The final rules also provide a safe harbor for a funding portal to
compensate a third party for referring a person to the funding portal
in certain circumstances.\1570\ This enables funding portals to realize
the benefits of the provision in the final rules that permits an
intermediary to compensate a person for directing issuers or investors