regulation crowdfunding - aca · rules for regulation crowdfunding that will enable all investors...

REGULATIONCROWDFUNDINGYourInsideGuidetotheFinalRules

November20,2015

BACKDROPOnOctober30,2015theU.S.SecuritiesandExchangeCommission(SEC)votedinfavorofthefinalrulesforRegulationCrowdfundingthatwillenableallinvestorstheopportunitytoinvestinprivatecompaniesintheUnitedStates.ThisconcludestheworkthatweatCCAbeganin2010andhelpedusherthroughCongress.WewerehonoredtoattendthebillsigningceremonyintheRoseGardenoftheWhiteHouseforourcontributiontotheJOBSAct.CrowdfundCapitalAdvisors(CCA)incorporatedshortlythereafterandhasworkedwithentrepreneurs,investors,crowdfundingplatforms,governments,financialregulatorsandmultilateralorganizationsin35countriestoconstructandimplementstrategyforequityanddebtcrowdfundingecosystems.ThisreportismeanttosupplementourbestsellingHowtoCrowdfundbookavailableonAmazon.comandouronlineeducationseriesSuccessWithCrowdfunding.Thebookisastep-by-stepguideonhowtoputtogetheracrowdfundingcampaignandleveragesourexperienceassuccessfulentrepreneurswhomhavebuiltINC500companiesandraisedmillionsofdollarsfrominvestors.Italsoleveragesourexperienceatputtingtogetherdebt,equity,donationandrewardscrowdfundingcampaignsandsuccessfullyassistingthemraisemoney.Forthepast5years,wehavebeenworkinginthetrenchesofthecrowdfundingindustryandanalyzingwhycampaignssucceedandfail.Wehavetriedtoincorporateallofthisinformationintooureducationmaterials.Soweencourageyoutocheckthemout.Asanentrepreneur,raisingmoneyisneveraneasythingtodoandknowingtherulesandregulationsisjustoneimportantpartofbeingsuccessful.Othersincludeknowinghowtobuildacrowd,createasuccessfulpitchforyourbusiness,manageacampaignandthenmanaginginvestors.

2 Copyright:CrowdfundCapitalAdvisors,2015

Whatisprovidedbelowisanoverviewsummaryanditisstronglyadvisedthatyousupplementthisdocumentwithprofessionallegaladvicewhenconsideringmakinganofferingofsecuritiesviacrowdfunding.SincetheSECbasesallitslegalactiononfactsandcircumstances,weencourageyoutoseeklegalcounselwhenputtingtogetheracrowdfundoffering.Asapotentialinvestor,allinvestmentshaveacomponentofrisk.Forthosethatchoosetoinvestincrowdfundingopportunities,itshouldbeunderstoodthattheseopportunitiescomewithsignificantrisk.Investorsneedtounderstandtheserisksandproceedwithcaution.Werecommendusingthisdocumentalongwithothereducationalmaterialsandprofessionaladvicefromyourinvestmentadvisorsand/orattorneys,totrytomitigatesomeoftherisksifyouareinvestinginoneofthesecrowdfundingofferings.Andonefinalthoughtforinvestors:Buyingandsellingsecurities(asyouwillsee)isahighlyregulatedactivityandcanbeveryconfusing.Asaninvestor,consideradditionalhelpandmakesureyoudiversifyyourinvestmentstoprotectyourselffromlossandconductproperduediligencebeforeinvesting.TalkingwithaprofessionalfinancialadvisorcanbeaprudentfirststepwhenconsideringaRegulationCrowdfundinginvestmentaspartofyourportfolio.

RegulationCrowdfundingComponents

UnderRegulationCrowdfundingtheserulesarebrokendowninto4categories;theExemptionitself,requirementsforissuersseekingtheexemption,intermediaryrequirementsandadditionalrequirements.AllthefollowisabbreviatedandpulleddirectlyfromthefinalrulesissuedbytheSEC1. 1) CrowdfundingExemption–

Consideranexemptionanexceptiontotherules.InregardstotheprocessofraisingcapitalitisanexemptionfromregisteringwiththeU.S.SECprovidedissuersfollowcertainrules.a) LimitonCapitalRaised-Anissuerispermittedtoraiseamaximumaggregateamountof

$1millionthroughcrowdfundingofferingsina12-monthperiod.Onlythecapitalraisedinrelianceontheexemptionshouldbecountedtowardthelimit.Capitalraisedthroughothermeansshouldnotbecountedindeterminingtheaggregateamountsold.AnofferingmadeinrelianceonSection4(a)(6)2shouldnotbeintegratedwithanotherexemptofferingmadebytheissuer,providedthateachofferingcomplieswiththerequirements.

b) InvestmentLimits-Individualinvestors,overthecourseofa12-monthperiod,arepermittedtoinvestintheaggregateacrossallcrowdfundingofferingsupto:i) Ifeithertheirannualincomeornetworthislessthan$100,000,thenthegreaterof:

1Toreadthefinalrulesclickhere:http://www.sec.gov/rules/final/2015/33-9974.pdf2Section4(6)(a)states:“Theprovisionsofsection5shallnotapplyto…transactionsinvolvingtheofferorsaleofsecuritiesbyanissuer(includingallentitiescontrolledbyorundercommoncontrolwiththeissuer),providedthat—theaggregateamountsoldtoallinvestorsbytheissuer,includinganyamountsoldinrelianceontheexemptionprovidedunderthisparagraphduringthe12-monthperiodprecedingthedateofsuchtransaction,isnotmorethan$1,000,000;”


(1) $2,000or(2) 5percentofthelesseroftheirannualincomeornetworth.

ii) Ifboththeirannualincomeandnetworthareequaltoormorethan$100,000,then10percentofthelesseroftheirannualincomeornetworth;and

iii) Duringthe12-monthperiod,theaggregateamountofsecuritiessoldtoaninvestorthroughallcrowdfundingofferingsmaynotexceed$100,000.

Ifyouwishtoseehowmuchyoucaninvest,wecreatedthiseasytousecalculatorforyoutouse.TheSECalsoprovidedthefollowingcharttoexemplifytheabove:

c) TransactionConductedThroughanIntermediary-Transactionsmustbeconductedthroughanintermediarythateitherisregisteredasabroker-dealerorisregisteredasanewtypeofentitycalleda“fundingportal.”TherulesrequireanissuertouseonlyoneintermediarytoconductanofferingorconcurrentofferingsinrelianceonSection4(a)(6)tohelpfosterthecreationofa“crowd”andbetteraccomplishthepurposeofthestatute.Inorderforacrowdtoeffectivelyshareinformation,theSECbelievesitwouldbemostbeneficialtohaveonemeetingplaceforthecrowdtoobtainandshareinformation.thusavoidingdilutionordispersementofthe“crowd.”Thefinalrulesdefine“platform”as“aprogramorapplicationaccessibleviatheInternetorothersimilarelectroniccommunicationmediumthroughwhicharegisteredbrokeroraregisteredfundingportalactsasanintermediaryinatransactioninvolvingtheofferorsaleofsecuritiesinrelianceonSection4(a)(6)oftheSecuritiesAct.

d) ExclusionofCertainIssuersfromEligibilityunderSection4(a)(6)CertaincompaniesarenoteligibletousetheRegulationCrowdfundingexemption.Ineligiblecompaniesincludenon-U.S.companies,companiesthatalreadyareExchangeActreportingcompanies,certaininvestmentcompanies,companiesthataredisqualifiedunderRegulationCrowdfunding’sdisqualificationrules,companiesthathavefailedtocomplywiththeannualreportingrequirementsunderRegulationCrowdfundingduringthetwoyearsimmediatelyprecedingthefilingoftheofferingstatement,andcompaniesthathavenospecificbusinessplanorhaveindicatedtheirbusinessplanistoengageinamergeroracquisitionwithanunidentifiedcompanyorcompanies.Securitiespurchasedinacrowdfundingtransactiongenerallycannotberesoldforaperiodofoneyear.HoldersofthesesecuritiesdonotcounttowardthethresholdthatrequiresanissuertoregisteritssecuritieswiththeCommissionunderSection12(g)oftheExchangeActiftheissueriscurrentinitsannualreporting


obligation,retainstheservicesofaregisteredtransferagentandhaslessthan$25millioninassets.

2) IssuerRequirements-IssuersconductinganofferingpursuanttoRegulationCrowdfundingmustfilecertaininformationwiththeCommissionandprovidethisinformationtoinvestorsandtherelevantintermediaryfacilitatingthecrowdfundingoffering.ThisinformationistobecompletedonFormC(seeAppendixA)inXMLformatwhichwillallowtheSECtoelectronicallyreceiveandstoretheinformationontheform.(YoushouldconfirmwithourintermediarythattheywilltransmitthisinformationtotheSECorelseyouwillneedtodoit).a) DisclosureRequirements–Theinformationrequiredincludes:

i) Thename,legalstatus,physicaladdressandwebsiteaddressoftheissuer,includingitsformoforganization,jurisdictioninwhichitisorganizedanddateoforganization;

ii) Thenamesofthedirectorsandofficers(andanypersonsoccupyingasimilarstatusorperformingasimilarfunction),andeachpersonholdingmorethan20percentofthesharesoftheissuer.Thenamesofthedirectorsandofficers,includinganypersonsoccupyingasimilarstatusorperformingasimilarfunction,allpositionsandofficeswiththeissuerheldbysuchpersons,theperiodoftimeinwhichsuchpersonsservedinthepositionsorofficesandtheirbusinessexperienceduringthepastthreeyears,including:eachperson’sprincipaloccupationandemployment,includingwhetheranyofficerisemployedbyanotheremployer;andthenameandprincipalbusinessofanycorporationorotherorganizationinwhichsuchoccupationandemploymenttookplace.Finalrulesrequirethedisclosureonlytotheextentanissuerhasindividualsservinginthesecapacitiesorperformingsimilarfunctions.

iii) Adescriptionoftheissuer’sbusinessandtheuseofproceedsfromtheoffering.TheSECanticipatesthatissuersengagingincrowdfundingtransactionsmayhavebusinessesatvariousstagesofdevelopmentindifferentindustries,andtherefore,believesthattherulesshouldprovideflexibilityfortheseissuersregardingwhatinformationtheydiscloseabouttheirbusinesses.Anissuerwillberequiredtoprovideareasonablydetaileddescriptionofthepurposeoftheoffering,suchthatinvestorsareprovidedsufficientinformationtomakeaninformedinvestmentdecision.Ifanissuerdoesnothavedefinitiveplansfortheproceeds,butinsteadhasidentifiedarangeofpossibleuses,thentheissuershouldidentifyanddescribeeachprobableuseandthefactorstheissuermayconsiderinallocatingproceedsamongthepotentialuses.Ifanissuerindicatesthatitwillacceptproceedsinexcessofthetargetofferingamount,theissuermustprovideareasonablydetaileddescriptionofthepurpose,methodforallocatingoversubscriptions,andintendeduseofanyexcessproceedswithsimilarspecificity.

iv) Adescriptionofthefinancialconditionoftheissuer.Financialstatementsoftheissuerthatare,dependingontheamountofferedandsoldduringa12-monthperiod,accompaniedbyinformationfromtheissuer’staxreturns,reviewedbyanindependentpublicaccountant,orauditedbyanindependentauditor.Anissuerrelyingontheserulesforthefirsttimeispermittedtoprovidereviewedratherthanauditedfinancialstatements,unlessfinancialstatementsoftheissuerareavailablethathavebeenauditedbyanindependentauditor.Thefinancialdescriptionmustinclude,totheextentmaterial,adiscussionofliquidity,capitalresourcesandhistoricalresultsofoperations.Issuerswillberequiredtoincludeadiscussionofeachperiodforwhichfinancialstatementsareprovidedandadiscussionofanymaterialchangesortrendsknowntomanagementinthefinancialconditionandresultsofoperationsoftheissuer


subsequenttotheperiodforwhichfinancialstatementsareprovided.Ifanissuerdoesnothaveaprioroperatinghistory,thediscussionshouldfocusonfinancialmilestonesandoperational,liquidityandotherchallenges.Ifanissuerhasaprioroperatinghistory,thediscussionshouldfocusonwhetherhistoricalearningsandcashflowsarerepresentativeofwhatinvestorsshouldexpectinthefuture.Anissuer’sdiscussionofitsfinancialconditionshouldtakeintoaccounttheproceedsoftheofferingandanyotherknownorpendingsourcesofcapital.Issuersalsoshoulddiscusshowtheproceedsfromtheofferingwillaffecttheirliquidity,whetherthesefundsandanyotheradditionalfundsarenecessarytotheviabilityofthebusinessandhowquicklytheissueranticipatesusingitsavailablecash.Inaddition,issuersshoulddescribetheotheravailablesourcesofcapitaltothebusiness,suchaslinesofcreditorrequiredcontributionsbyprincipalshareholders.Totheextenttheseitemsofdisclosureoverlapwiththeissuer’sdiscussionofitsbusinessorbusinessplan,issuersarenotrequiredtomakeduplicatedisclosures.

v) Financialstatementdisclosuresastheyrelatedtotheaggregatetargetofferingamounts.(1) Forissuersoffering$100,000orless:disclosureoftheamountoftotalincome,

taxableincomeandtotaltaxasreflectedintheissuer’sfederalincometaxreturnscertifiedbytheprincipalexecutiveofficertoreflectaccuratelytheinformationintheissuer’sfederalincometaxreturns(inlieuoffilingacopyofthetaxreturns),andfinancialstatementscertifiedbytheprincipalexecutiveofficertobetrueandcompleteinallmaterialrespects.If,however,financialstatementsoftheissuerareavailablethathaveeitherbeenreviewedorauditedbyapublicaccountantthatisindependentoftheissuer,theissuermustprovidethosefinancialstatementsinsteadandneednotincludetheinformationreportedonthefederalincometaxreturnsorthecertificationoftheprincipalexecutiveofficer.

(2) Issuersofferingmorethan$100,000butnotmorethan$500,000:financialstatementsreviewedbyapublicaccountantthatisindependentoftheissuer.If,however,financialstatementsoftheissuerareavailablethathavebeenauditedbyapublicaccountantthatisindependentoftheissuer,theissuermustprovidethosefinancialstatementsinsteadandneednotincludethereviewedfinancialstatements.

(3) Issuersofferingmorethan$500,000:(a) Forissuersofferingmorethan$500,000butnotmorethan$1millionof

securitiesinrelianceonRegulationCrowdfundingforthefirsttime:financialstatementsreviewedbyapublicaccountantthatisindependentoftheissuer.If,however,financialstatementsoftheissuerareavailablethathavebeenauditedbyapublicaccountantthatisindependentoftheissuer,theissuermustprovidethosefinancialstatementsinsteadandneednotincludethereviewedfinancialstatements.

(4) ForallissuersthathavepreviouslysoldsecuritiesinrelianceonRegulationCrowdfunding:financialstatementsauditedbyapublicaccountantthatisindependentoftheissuer

(5) AllissuersarerequiredtofilewiththeCommissionandprovidetoinvestorsandtherelevantintermediaryacompletesetoftheirfinancialstatements(balancesheets,incomestatements,statementsofcashflowsandstatementsofchangesinowners’equity),preparedinaccordancewithU.S.generallyacceptedaccountingprinciples(“U.S.GAAP”).Toqualifyasindependentoftheissuer,apublic


accountantisrequiredtocomplywiththeCommission’sindependencerules.Thefinancialstatementsarerequiredtocovertheshorterofthetwomostrecentlycompletedfiscalyearsortheperiodsinceinceptionofthebusiness.Financialstatementsthatareunauditedmustbelabeledassuch.

(6) Financialstatementsmustcovertheshorterofthetwomostrecentlycompletedfiscalyearsortheperiodsincetheissuer’sinception.Thereisnorequirementforinterimfinancialstatementshoweveranymaterialchangesortrendsknowntomanagementinthefinancialconditionandresultsofoperationsmustbediscussed.

(7) Whereauditsareperformed,issuersmustfilewiththeCommissionandprovidetoinvestorsandtherelevantintermediaryasignedrevieworauditreportontheissuer’sfinancialstatementsbyanindependentpublicaccountant.Anauditreportthatincludesanadverseopinionordisclaimeroropinionwillnotbeincompliancewiththeauditrequirements.

vi) Issuersarerequiredtoamendtheofferingdocumentduringtheofferingperiodtoreflectmaterialchangesandprovideupdatesontheissuer’sprogresstowardreachingthetargetofferingamount.Suchchangesmaybenotedontheintermediary.AllissuersmustfileaFormC-Utoreportthetotalamountofsecuritiessoldintheoffering.AnyamendmentstotheofferingneedtobefiledwithFormC/A.Materialchangesrequirereconfirmationbyinvestorsoftheirinvestmentcommitmentswithinfivebusinessdays.

vii) Adescriptionofthestatedpurposeandintendeduseoftheproceedsoftheofferingsoughtbytheissuerwithrespecttothetargetofferingamount;

viii) Thetargetofferingamount,thedeadlinetoreachthetargetofferingamountandregularupdatesabouttheprogressoftheissuerinmeetingthetargetofferingamount;Theissuerisrequiredtodisclose,atthecommencementoftheoffering,howsharesinoversubscribedofferingswouldbeallocated.Describetheprocesstocancelaninvestmentcommitmentortocompletethetransactiononcethetargetamountismet,includingastatementthat:(1) Investorsmaycancelaninvestmentcommitmentuntil48hourspriortothe

deadlineidentifiedintheissuer’sofferingmaterials;(2) Theintermediarywillnotifyinvestorswhenthetargetofferingamounthasbeen

met;(3) Ifanissuerreachesthetargetofferingamountpriortothedeadlineidentifiedinits

offeringmaterials,itmayclosetheofferingearlyifitprovidesatleastfivebusinessdays’noticepriortothatnewdeadline(absentamaterialchangethatrequiresanextensionoftheofferingandreconfirmationoftheinvestmentcommitment);and

(4) Ifaninvestordoesnotcancelaninvestmentcommitmentbeforethe48-hourperiodpriortotheofferingdeadline,thefundswillbereleasedtotheissueruponclosingoftheofferingandtheinvestorwillreceivesecuritiesinexchangeforhisorherinvestment.

Inaninstancewhereanissuerreachesthetargetofferingamountpriortothedeadlineidentifiedinitsofferingmaterials,itmayclosetheofferingearlyifitprovidesatleastfivebusinessdays’noticeaboutthenewofferingdeadline.

ix) Thepricetothepublicofthesecuritiesorthemethodfordeterminingtheprice;andadescriptionoftheownershipandcapitalstructureoftheissuer.Thisdisclosureshouldinclude:(1) Thetermsofthesecuritiesbeingofferedandeachotherclassofsecurityofthe

issuer,includingthenumberofsecuritiesbeingofferedandthoseoutstanding,


whetherornotsuchsecuritieshavevotingrights,anylimitationsonsuchvotingrights,howthetermsofthesecuritiesbeingofferedmaybemodifiedandasummaryofthedifferencesbetweensuchsecuritiesandeachotherclassofsecurityoftheissuer,andhowtherightsofthesecuritiesbeingofferedmaybemateriallylimited,dilutedorqualifiedbytherightsofanyotherclassofsecurityoftheissuer;

(2) Adescriptionofhowtheexerciseoftherightsheldbytheprincipalshareholdersoftheissuercouldaffectthepurchasersofthesecurities;

(3) Thenameandownershiplevelofpersonswhoare20PercentBeneficialOwners;(4) Howthesecuritiesbeingofferedarebeingvalued,andexamplesofmethodsfor

howsuchsecuritiesmaybevaluedbytheissuerinthefuture,includingduringsubsequentcorporateactions;

(5) Theriskstopurchasersofthesecuritiesrelatingtominorityownershipintheissuerandtherisksassociatedwithcorporateactionsincludingadditionalissuancesofsecurities,issuerrepurchasesofsecurities,asaleoftheissuerorofassetsoftheissuerortransactionswithrelatedparties;and

(6) Adescriptionoftherestrictionsonthetransferofthesecurities.x) Certainrelated-partytransactions;Todiscloseanypotentialconflictsofinterest.xi) AdditionalDisclosureRequirementsinclude:

(1) Discloseanymaterialinformationnecessaryinordertomakethestatementsmade,inlightofthecircumstancesunderwhichtheyweremade,notmisleading;

(2) Disclosureofthename,SECfilenumberandCentralRegistrationDepositorynumber(“CRDnumber”)(asapplicable)oftheintermediarythroughwhichtheofferingisbeingconducted;

(3) Disclosureoftheamountofcompensationpaidtotheintermediaryforconductingtheoffering,includingtheamountofanyreferralorotherfeesassociatedwiththeoffering;itcouldbedisclosedeitherasadollaramountorpercentageoftheofferingamountorasagoodfaithestimateiftheexactamountisnotavailableatthetimeofthefiling.Anycompensationpaidtotheintermediaryintheformofinterestsratherthancash;

(4) Disclosethelocationontheissuer’swebsitewhereinvestorswillbeabletofindtheissuer’sannualreportandthedatebywhichsuchreportwillbeavailableontheissuer’swebsite;

(5) Certainlegendsintheofferingstatementthatreinforcetherisktoinvestors;(6) Disclosureofthecurrentnumberofemployeesoftheissuer;(7) Adiscussionofthematerialfactorsthatmakeaninvestmentintheissuer

speculativeorrisky;adescriptionofthematerialtermsofanyindebtednessoftheissuer,includingtheamount,interestrate,maturitydateandanyothermaterialterms;

(8) Disclosureofanyexemptofferingsconductedwithinthepastthreeyears;(9) Disclosewhethertheissueroranyofitspredecessorspreviouslyhasfailedto

complywiththeongoingreportingrequirementsofRegulationCrowdfunding;and(10) Disclosureofrelated-partytransactionssincethebeginningoftheissuer’slast

fiscalyearinexcessoffivepercentoftheaggregateamountofcapitalraisedbytheissuerinrelianceonSection4(a)(6)duringthepreceding12-monthperiod,inclusiveoftheamounttheissuerseekstoraiseinthecurrentoffering.

Anissuerwillnotberequiredtorepeatwhatisalreadyprovidedelsewhereintheissuer’sdisclosure,includingthefinancialstatements.


b) OngoingReportingRequirements–Issuersarerequiredtofileanannualreportwiththe

Commissionandprovideittoinvestorsnolaterthan120daysaftertheendofthefiscalyear.SeeAppendixBforongoingreportingrequirements.Suchreportsaretobepostedontheissuer’swebsite.Issuerswillberequiredtofiletheannualreportuntiltheearliestofthefollowingeventsoccurs:i) TheissuerisrequiredtofilereportsunderExchangeActSections13(a)or15(d);ii) Theissuerhasfiledatleastoneannualreportandhasfewerthan300holdersofrecord;iii) Theissuerhasfiledatleastthreeannualreportsandhastotalassetsthatdonotexceed

$10million;iv) Theissueroranotherpartypurchasesorrepurchasesallofthesecuritiesissued

pursuanttoSection4(a)(6),includinganypaymentinfullofdebtsecuritiesoranycompleteredemptionofredeemablesecurities;or

v) Theissuerliquidatesordissolvesinaccordancewithstatelaw.

c) FormCandFilingRequirements–SeeAppendixAforFormCandInstructiononhowtocomplete.

d) ProhibitiononAdvertisingTermsoftheOffering-issuershallnotadvertisethetermsoftheoffering,exceptfornoticeswhichdirectinvestorstothefundingportalorbroker.Thenoticecouldincludenomorethan:i) Astatementthattheissuerisconductinganoffering,thenameoftheintermediary

throughwhichtheofferingisbeingconductedandalinkdirectingtheinvestortotheintermediary’splatform;

ii) Thetermsoftheoffering;andiii) Factualinformationaboutthelegalidentityandbusinesslocationoftheissuer,limited

tothenameoftheissuerofthesecurity,theaddress,phonenumberandwebsiteoftheissuer,thee-mailaddressofarepresentativeoftheissuerandabriefdescriptionofthebusinessoftheissuer.The,“termsoftheoffering”shouldinclude:

(1) theamountofsecuritiesoffered;(2) thenatureofthesecurities;(3) thepriceofthesecurities;and(4) theclosingdateoftheofferingperiod.

iv) Thepermittednoticeswillbesimilarto“tombstoneads”exceptthatthenoticeswillberequiredtodirectaninvestortotheintermediary’splatformthroughwhichtheofferingisbeingconducted,suchasthroughalinkdirectingtheinvestortotheplatform.Anissuercancommunicatewithinvestorsaboutthetermsoftheofferingthroughcommunicationchannelsprovidedbytheintermediaryontheintermediary’splatform,solongastheissueridentifiesitselfastheissuerinallcommunications.AnypersonsactingonbehalfoftheissuerarerequiredunderRule204(c)toidentifytheiraffiliationwiththeissuerinallcommunicationsontheintermediary’splatform.

e) CompensationofPersonsPromotingtheOffering–RegulationCrowdfundingprohibitsanissuerfromcompensating,orcommittingtocompensate,directlyorindirectly,anypersontopromotetheissuer’sofferingthroughcommunicationchannelsprovidedbytheintermediary,unlesstheissuertakesreasonablestepstoensurethatthepersonclearlydisclosesthereceipt(bothpastandprospective)ofcompensationeachtimethepersonmakesapromotionalcommunication.Thisappliesbroadlytoallpersonsactingonbehalfof


theissuer,regardlessofwhetherornotthecompensationtheyreceiveisspecificallyforthepromotionalactivities.Issuersshouldnotcircumventtherestrictionsonadvertisingbycompensatingathirdpartytodowhattheissuercannotdodirectly.

f) OtherIssuerRequirements–i) Oversubscriptions–Issuerscanacceptinvestmentsinexcessofthetargetoffering

amount,aslongastheyaresubjecttothe$1millionannuallimitii) OfferingPrice-Issuermustdisclosetheofferingpriceofthesecuritiesor,inthe

alternative,themethodfordeterminingtheprice,providedthatpriortoanysaleofsecurities,eachinvestorisprovidedinwritingthefinalpriceandallrequireddisclosure.Therulesdonotrequireissuerstosetafixedpriceorprohibitdynamicpricing.

iii) TypesofSecuritiesOfferedandValuation–Nolimittothetypeofsecuritiesthatmaybeofferednorprescribeamethodforvaluingthesecurities

3) IntermediaryRequirements-OneofthekeyinvestorprotectionsofTitleIIIoftheJOBSActistherequirementthatRegulationCrowdfundingtransactionstakeplacethroughanSECregisteredintermediary,eitherabroker-dealerorafundingportal.UnderRegulationCrowdfunding,offeringsmustbeconductedexclusivelythroughaplatformoperatedbyaregisteredbrokerorafundingportal,whichisanewtypeofSECregistrant.Therulesrequiretheseintermediariesto:a) Provideinvestorswitheducationalmaterials-RegulationCrowdfundingrequires

intermediariestodelivertoinvestors,ataccountopening,educationalmaterialsthatareinplainlanguageandotherwisedesignedtocommunicateeffectivelyandaccuratelycertainspecifiedinformation.Therulerequiresthematerialstoinclude:i) Theprocessfortheoffer,purchaseandissuanceofsecuritiesthroughtheintermediary;ii) Therisksassociatedwithinvestinginsecuritiesofferedandsold;iii) Thetypesofsecuritiesthatmaybeofferedontheintermediary’splatformandtherisks

associatedwitheachtypeofsecurity,includingtheriskofhavinglimitedvotingpowerasaresultofdilution;

iv) TherestrictionsontheresaleofsecuritiesofferedandsoldinrelianceonSection4(a)(6);

v) Thetypesofinformationthatanissuerisrequiredtoprovideinannualreports,thefrequencyofthedeliveryofthatinformation,andthepossibilitythattheissuer’sobligationtofileannualreportsmayterminateinthefuture;

vi) Thelimitsontheamountsinvestorsmayinvest,assetforthinSection4(a)(6)(B);vii) Thecircumstancesinwhichtheissuermaycancelaninvestmentcommitment;•the

limitationsonaninvestor’srighttocancelaninvestmentcommitment;viii) Theneedfortheinvestortoconsiderwhetherinvestinginasecurityofferedandsoldin

relianceonSection4(a)(6)isappropriateforhimorher;ix) Thatfollowingcompletionofanoffering,theremayormaynotbeanyongoing

relationshipbetweentheissuerandintermediary.Therulesfurtherrequireintermediariestomakethecurrentversionoftheeducationalmaterialsavailableontheirplatforms,andtomakerevisedmaterialsavailabletoallinvestorsbeforeacceptinganyadditionalinvestmentcommitmentsoreffectinganyfurthertransactionsinsecuritiesofferedandsoldinrelianceonSection4(a)(6);


x) Intermediaries,ratherthantheCommissionarerequiredtoprovidesuchdisclosures,includingdisclosuresrelatedtorisksandotherinvestoreducationmaterialsastheCommissiondeterminestobeappropriate;

xi) Educationalmaterialsmustindicatethatundercertaincircumstancesanissuermayceasetopublishannualreportsand,therefore,aninvestormaynotcontinuallyhavecurrentfinancialinformationabouttheissuer;

xii) (NotethatFINRAmightinstituteothereducationrequirementssoyouneedtocheckwiththem);

xiii) Educationalmaterialsmustbekeptuptodate;andxiv) Anintermediaryisrequiredtoobtainarepresentationthataninvestorhasreviewed

theintermediary’smostrecenteducationalmaterialsbeforeacceptinganinvestmentcommitmentfromtheinvestor.

b) Takemeasurestoreducetheriskoffraud;Thisincludesobtainingabackgroundandsecuritiesenforcementregulatoryhistorycheckoneachofficer,director,andpersonholdingmorethan20percentoftheoutstandingequityofeveryissuerwhosesecuritiesareofferedbysuchperson.AnintermediarymusthaveareasonablebasisforbelievingthatanissuerseekingtoofferandsellsecuritiesinrelianceonSection4(a)(6)throughtheintermediary’splatformcomplieswiththerequirementsinSecuritiesActSection4A(b)andtherelatedrequirementsinRegulationCrowdfunding.

c) Makeavailableinformationabouttheissuerandtheoffering;Allinformationabouttheissuerandofferingmustbelistedontheintermediary.

d) Providecommunicationchannelstopermitdiscussionsaboutofferingsontheplatform-Anintermediarythatisafundingportalisbeprohibitedfromparticipatingincommunicationsinthesechannels.Theintermediarymust:i) Makethecommunicationschannelspubliclyavailable;ii) Permitonlythosepersonswhohaveopenedaccountstopostcomments;andiii) Requireanypersonpostingacommentinthecommunicationchannelstodisclose

whetherheorsheisafounderoranemployeeofanissuerengaginginpromotionalactivitiesonbehalfoftheissuer,orisotherwisecompensated,whetherinthepastorprospectively,topromotetheissuer’soffering.

e) Facilitatetheofferandsaleofcrowdfundedsecurities-Uponreceiptofaninvestmentcommitmentfromaninvestor,anintermediarymustpromptlygiveorsendtotheinvestoranotificationdisclosing:i) Thedollaramountoftheinvestmentcommitment;ii) Thepriceofthesecurities,ifknown;iii) Thenameoftheissuer;andiv) Thedateandtimebywhichtheinvestormaycanceltheinvestmentcommitment.This

notificationmustbeprovidedbye-mailorotherelectronicmedia,andshouldbedocumentedinaccordancewithapplicablerecordkeepingrules

Therulesprohibitfundingportalsfrom:i) Offeringinvestmentadviceormakingrecommendations;ii) Solicitingpurchases,salesorofferstobuysecuritiesofferedordisplayedonits

platform;


iii) Compensatingpromotersandothersforsolicitationsorbasedonthesaleofsecurities;and

iv) Holding,possessing,orhandlinginvestorfundsorsecurities.

f) DefinitionsofFundingPortalsandAssociatedPersons.Apersonassociatedwithafundingportalorassociatedpersonofafundingportalmeansanypartner,officer,directorormanagerofafundingportal(oranypersonoccupyingasimilarstatusorperformingsimilarfunctions),anypersondirectlyorindirectlycontrollingorcontrolledbyafundingportal,oranyemployeeofafundingportal,otherthanpersonswhosefunctionsaresolelyclericalorministerial.

g) GeneralRequirementsforIntermediaries.Theintermediary,aswellasitsdirectors,officersorpartners(oranypersonoccupyingasimilarstatusorperformingasimilarfunction),fromhaving:i) Afinancialinterestinanissuerusingitsservices;andii) Fromreceivingafinancialinterestintheissuerascompensationforservicesprovided

to,orforthebenefitof,theissuer,inconnectionwiththeofferandsaleofitssecurities.Afinancialinterestinanissuermeansadirectorindirectownershipof,oreconomicinterestin,anyclassoftheissuer’ssecurities.HOWEVERanintermediarymayreceiveafinancialinterestprovidedthat:(1) Theintermediaryreceivesthefinancialinterestfromtheissuerascompensation

fortheservicesprovidedto,orforthebenefitof,theissuerinconnectionwiththeofferorsaleofsuchsecuritiesbeingofferedorsoldinrelianceonSection4(a)(6)throughtheintermediary’splatform;and

(2) Thefinancialinterestconsistsofsecuritiesofthesameclassandhavingthesameterms,conditionsandrightsasthesecuritiesbeingofferedorsoldinrelianceonSection4(a)(6)throughtheintermediary’splatform.

h) TakeMeasurestoReduceRiskofFraud;Thisincludesbackgroundchecks,vettingofmaterialsandrequiringallcommunicationregardingthebuyingandsellingofsecuritiestotakeplaceontheintermediary.

i) AccountOpening–RegulationCrowdfundingprohibitsanintermediaryoritsassociatedpersonsfromacceptinganinvestmentcommitmentinatransactioninvolvingtheofferorsaleofsecuritiesinrelianceonSection4(a)(6)unlesstheinvestorhasopenedanaccountwiththeintermediary,andtheintermediaryhasobtainedfromtheinvestorconsenttoelectronicdeliveryofmaterials.AnintermediarymustprovideallinformationrequiredbySubpartCofRegulationCrowdfunding,including,butnotlimitedto,educationalmaterials,noticesandconfirmations,throughelectronicmeans.Anintermediarymustprovidesuchinformationthroughanelectronicmessagethateithercontainstheinformation,includesaspecificlinktotheinformationaspostedontheintermediary’splatform,orprovidesnoticeofwhattheinformationisandthatitislocatedontheintermediary’splatformortheissuer’swebsite.Electronicmessagesinclude,butarenotbelimitedto,messagessentviae-mail.Theintermediarymustprovidetheinformationeitherthroughi) Anelectronicmessagethatcontainstheinformation,ii) Anelectronicmessagethatincludesaspecificlinktotheinformationaspostedonthe

intermediary’splatform,or


iii) Anelectronicmessagethatprovidesnoticeofwhattheinformationisandnotifiesinvestorsthatthisinformationislocatedontheintermediary’splatformorontheissuer’swebsite.

j) RequirementswithRespecttoTransactions–IntermediarymustmakeavailabletotheCommissionandinvestors,notlaterthan21dayspriortothefirstdayonwhichsecuritiesaresoldtoanyinvestor(orsuchotherperiodastheCommissionmayestablish),anyinformationprovidedbytheissuerpursuanttoSection4A(b).749Accordingly,eachintermediaryinatransactioninvolvingtheofferorsaleofsecuritiesinrelianceonSection4(a)(6)isrequiredtomakeavailabletotheCommissionandtoinvestorsanyinformationrequiredtobeprovidedbytheissuerofRegulationCrowdfunding.TheRulerequiresthatthisinformation:i) Bepubliclyavailableontheintermediary’splatform,inamannerthatreasonably

permitsapersonaccessingtheplatformtosave,downloadorotherwisestoretheinformation;

ii) Bemadepubliclyavailableontheintermediary’splatformforaminimumof21daysbeforeanysecuritiesaresoldintheoffering,duringwhichtimetheintermediarymayacceptinvestmentcommitments;and

iii) Remainpubliclyavailableontheintermediary’splatformuntiltheofferandsaleofsecuritiesiscompletedorcancelled(includinganyadditionalinformationprovidedbytheissuer).

iv) Inaddition,anintermediaryisprohibitedfromrequiringanypersontoestablishanaccountwiththeintermediaryinordertoaccessthisinformation.

k) CompliancewithInvestmentLimits–TherulelimitstheaggregateamountofsecuritiesthatcanbesoldbyanissuertoaninvestorinrelianceonSection4(a)(6)duringa12-monthperiod.SecuritiesActSection4A(a)(8)requiresthatintermediaries“makesucheffortsastheCommissiondeterminesappropriate,byrule”toensurethatnoinvestorhasmadepurchasesintheaggregate,fromallissuers,thatexceedthelimitsinSection4(a)(6).TheRuleimplementsthisprovisionbyrequiringthat,eachtimebeforeacceptinganinvestmentcommitmentonitsplatform(includinganyadditionalinvestmentcommitmentfromthesameperson),anintermediarymusthaveareasonablebasisforbelievingthattheinvestorsatisfiestheinvestmentlimitsestablishedbySection4(a)(6)(B).Theruleallowsanintermediarytorelyonaninvestor’srepresentationsconcerningannualincome,networthandtheamountoftheinvestor’sotherinvestmentsinsecuritiessoldinrelianceonSection4(a)(6)throughotherintermediariesunlesstheintermediaryhasareasonablebasistoquestionthereliabilityoftherepresentation.

l) AcknowledgementofRisk–Anintermediarymustensurethateachinvestor:i) Reviewseducationalmaterials;ii) Positivelyaffirmsthattheinvestorunderstandsthatheorsheisriskingthelossofthe

entireinvestmentandthattheinvestorcouldbearsuchaloss;andiii) Completedaquestionnairedemonstratinganunderstandingofthelevelofrisk

generallyapplicabletoinvestmentsinstartups,emergingbusinessesandsmallissuers,theriskofilliquidity.

m) CompletionofOfferings,CancellationsandReconfirmations–Anintermediarymustensurethatallofferingproceedsareonlyprovidedtotheissuerwhentheaggregatecapital


raisedfromallinvestorsisequaltoorgreaterthanatargetofferingamount.Becauseafundingportalcannotreceiveanyfunds,itisrequiredtodirectinvestorstotransmitmoneyorotherconsiderationdirectlytoa“qualifiedthirdparty”thathasagreedinwritingtoholdthefundsforthebenefitoftheinvestorsandtheissuerandtopromptlytransmitorreturnthefundstothepersonsentitledtosuchfunds.A“qualifiedthirdparty”meansaregisteredbrokerordealerthatcarriescustomerorbrokerordealeraccountsandholdsfundsorsecuritiesforthosepersons,abank,oracreditunioninsuredbytheNationalCreditUnionAdministration(“NCUA”)thathasagreedinwritingtoeither:i) Holdthefundsinescrowforthepersonswhohavethebeneficialinterestsinthefunds

andtotransmitorreturnthefundsdirectlytothepersonsentitledtothemwhentheappropriateeventorcontingencyhasoccurred;or

ii) Establishabankaccount(oraccounts)fortheexclusivebenefitofinvestorsandtheissuer.

Innoeventmaythefundingportaldirectthetransmissionoffundsearlierthan21daysafterthedateonwhichtheintermediarymakespubliclyavailableonitsplatformtheinformationrequiredtobeprovidedbytheissuerunderotherRules.Anintermediarycan,initsdiscretion,declinetoacceptcertainpaymentmethods,suchascreditcards,oracceptthemonlyincertaincircumstances.Anintermediary,atorbeforethecompletionofatransactionmadepursuanttoSection4(a)(6),mustgiveorsendtoeachinvestoranotificationdisclosing:

(1)thedateofthetransaction;(2)thetypeofsecuritythattheinvestorispurchasing;(3)theidentity,priceandnumberofsecuritiespurchasedbytheinvestor,aswellasthenumberofsecuritiessoldbytheissuerinthetransactionandtheprice(s)atwhichthesecuritiesweresold;(4)certainspecifiedtermsofthesecurity,ifitisadebtorcallablesecurity;and(5)thesourceandamountofanyremunerationreceivedortobereceivedbytheintermediaryinconnectionwiththetransaction,whetherfromtheissuerorfromotherpersons.Thisnotificationisrequiredtobeprovidedbye-mailorotherelectronicmedia,andmustbedocumentedinaccordancewithapplicablerecordkeepingrules.Thesourceisdefinedasanyremunerationreceivedortobereceivedbytheintermediaryinconnectionwiththetransaction,includinganyremunerationreceivedortobereceivedbytheintermediaryfrompersonsotherthantheissuer.

Anintermediaryisrequiredtogiveinvestorsanunconditionalrighttocancelaninvestmentcommitmentforanyreasonuntil48hourspriortothedeadlineidentifiedintheissuer’sofferingmaterials.Aninvestorshouldnotbeabletocancelanyinvestmentcommitmentsmadewithinthefinal48hoursoftheoffering(exceptintheeventofamaterialchangetotheoffering).Ifanissuerreachedthetargetofferingamountpriortothedeadlineidentifiedinitsofferingmaterials,itcouldclosetheofferingoncethetargetofferingamountwasreached,providedthat:

(1)theofferinghadbeenopenforaminimumof21days;(2)theintermediaryprovidednoticeaboutthenewofferingdeadlineatleastfivebusinessdayspriortothenewofferingdeadline;(3)investorsshouldbegiventheopportunitytoreconsidertheirinvestmentdecisionandtocanceltheirinvestmentcommitmentuntil48hourspriortothenewofferingdeadline;and


(4)atthetimeofthenewofferingdeadline,theissuercontinuedtomeetorexceedthetargetofferingamount.

Inaddition,iftherewasamaterialchangetothetermsofanofferingortotheinformationprovidedbytheissuerabouttheoffering,theintermediaryisrequiredtogiveorsendtoanyinvestorswhohavemadeinvestmentcommitmentsnoticeofthematerialchange,statingthattheinvestor’sinvestmentcommitmentwillbecancelledunlesstheinvestorreconfirmshisorhercommitmentwithinfivebusinessdaysofreceiptofthenotice.Iftheinvestorfailedtoreconfirmhisorherinvestmentwithinthosefivebusinessdays,theintermediaryisrequired,withinfivebusinessdaysthereafter,to:

(1)provideorsendtheinvestoranotificationdisclosingthattheinvestmentcommitmentwascancelled,thereasonforthecancellationandtherefundamountthattheinvestorshouldexpecttoreceive;and(2)directtherefundofinvestorfunds.Thisnotification,likeothernotificationsfromanintermediary,isrequiredtobeprovidedbye-mailorotherelectronicmedia,andtobedocumentedinaccordancewithapplicablerecordkeepingrules.

Ifanissuerdidnotcompleteanoffering,becausethetargetwasnotreachedortheissuerdecidedtoterminatetheoffering,theintermediaryisrequired,withinfivebusinessdays,theintermediarymust:

(1)giveorsendtoeachinvestorwhohadmadeaninvestmentcommitmentanotificationdisclosingthecancellationoftheoffering,thereasonforthecancelation,andtherefundamountthattheinvestorshouldexpecttoreceive;(2)directtherefundofinvestorfunds;and(3)preventinvestorsfrommakinginvestmentcommitmentswithrespecttothatofferingonitsplatform.Thisnotification,likeothernotificationsfromanintermediary,isrequiredtobeprovidedbye-mailorotherelectronicmedia,andtobedocumentedinaccordancewithapplicablerecordkeepingrules.

NOTE-Investorsassociatedwiththeissuer,aresubjecttotheantifraudprovisionsofthesecuritieslaws.Soiftheycanceltheirsubscriptiontonullifyanofferingthatcouldbeconsideredfraudontheirpart

o) PaymentstoThirdParties–Allofthisneedstobedisclosedincludingthecompensationtheintermediarywillreceive.

p) RecordsofSecuritiesHolders–Intermediarymusthaveareasonablebasisforbelievingthatanissuerhasestablishedmeanstokeepaccuraterecordsoftheholdersofthesecuritiesitoffersandsellsthroughtheintermediary’splatform.Insatisfyingthisrequirement,anintermediarymayrelyontherepresentationsoftheissuerconcerningitsmeansofrecordkeepingunlesstheintermediaryhasreasontoquestionthereliabilityofthoserepresentations.AnintermediarywillbedeemedtohavesatisfiedthisrequirementiftheissuerhasengagedtheservicesofatransferagentthatisregisteredunderSection17AoftheExchangeAct.Therecordkeepingfunctionmaybeprovidedbytheissuer,abroker,atransferagentorsomeother(registeredorunregistered)person.


q) DenialofPlatformAccess–Anintermediarymustdenyaccessbyanissuertoitsplatformifithasareasonablebasisforbelievingthatanissuer,oranyofitsofficers,directorsoranypersonoccupyingasimilarstatusorperformingasimilarfunction,orany20PercentBeneficialOwnerissubjecttoadisqualification.Anintermediarymustdenyaccesstoitsplatformiftheintermediaryhasareasonablebasisforbelievingtheissuerorofferingpresentsthepotentialforfraudorotherwiseraisesconcernsaboutinvestorprotection.Insatisfyingthisrequirement,thetherulerequiresthatanintermediarydenyaccessifitbelievesthatitisunabletoadequatelyoreffectivelyassesstheriskoffraudoftheissueroritspotentialoffering.Inaddition,ifanintermediarybecomesawareofinformationafterithasgrantedaccessthatcausesittoreasonablybelievetheissuerortheofferingpresentsthepotentialforfraudorotherwiseraisesconcernsaboutinvestorprotection,theintermediaryisrequiredtopromptlyremovetheofferingfromitsplatform,canceltheoffering,andreturn(or,forfundingportals,directthereturnof)anyfundsthathavebeencommittedbyinvestorsintheoffering.

2) AdditionalFundingPortalRequirementsa) RegistrationRequirement-Apersonactingasanintermediaryinacrowdfunding

transactionmustregisterwiththeCommissionasabrokerorasafundingportal.ThisprocessmaybedoneonEDGAR.Anintermediarytoregisterwithanyapplicableself-regulatoryorganization(“SRO”)whichisotherwiseknown(atthemoment)asFINRA.FundingPortalsmustregisterusingFormFundingPortalwhichincludesanarrativeexplainingthefundingportal’sprincipalplaceofbusiness,itslegalstatusanditsdisciplinaryhistory,ifany;businessactivities,includingthetypesofcompensationthefundingportalreceives;controlaffiliatesofthefundingportalanddisclosureoftheirdisciplinaryhistory,ifany;FINRAmembershipormembershipwithanyotherregisterednationalsecuritiesassociation;andthefundingportal’swebsiteaddress(es)orothermeansofaccess.IfanyinformationabouttheFundingPortalchanges,anamendmenttoFormFundingPortalmustbesubmittedwithin30days.FormFundingPortalconsistsofeightsections:identifyinginformation,formoforganization,successions,controlpersons,disclosureinformation,non-securitiesrelatedbusiness,escrow,compensationarrangements,andwithdrawal.Theseitemsrequireanapplicanttoprovidecertainbasicidentifyingandcontactinformationconcerningitsbusiness;listitsdirectownersandexecutives;identifypersonsthatdirectlyorindirectlycontrolthefundingportal,controlthemanagementorpoliciesofthefundingportalandpersonsthefundingportalcontrols;andsupplyinformationaboutitslitigationanddisciplinaryhistoryandthelitigationanddisciplinaryhistoryofitsassociatedpersons.Afundingportalisabletooperatemultiplewebsiteaddressesunderasinglefundingportalregistration,providedthefundingportaldisclosedonFormFundingPortalallthewebsitesandnamesunderwhichitdoesbusiness.Anapplicantmustdescribeanynonsecuritiesrelatedbusinessactivitiesandsupplyinformationaboutitsescrowarrangements,andcompensationarrangementswithissuers.Uponafilingtowithdrawfromregistration,afundingportalisrequiredtoprovidecertainbooksandrecordsinformation.


ApplicantsthatareincorporatedinororganizedunderthelawsofajurisdictionoutsideoftheUnitedStatesoritsterritories,orwhoseprincipalplaceofbusinessisnotintheUnitedStatesoritsterritories,arerequiredtocompleteScheduleCtoFormFundingPortal,whichrequiresinformationabouttheapplicant’sarrangementstohaveanagentforserviceofprocessintheUnitedStates,aswellasacertificationandanopinionofcounseladdressingtheabilityoftheapplicanttoprovidetheCommissionandthenationalsecuritiesassociationofwhichitisamemberwithpromptaccesstoitsbooksandrecordsandtosubmittoonsiteinspectionandexaminationbytheCommissionandthenationalsecuritiesassociation.ThefundingportalwillreceiveanSECfilenumberafteritfilesitsFormFundingPortalinitialapplication,andthereaftermustthatfilenumberwhensubmittinganamendmentorwithdrawalfromregistrationonFormFundingPortal.

b) NonresidentFundingPortals-A“nonresidentfundingportal”isconditionedupontherebeinganinformationsharingarrangementinplacebetweentheCommissionandthecompetentregulatorinthejurisdictionunderthelawsofwhichthenonresidentfundingportalisorganizedorwhereithasitsprincipalplaceofbusinessthatisapplicabletothenonresidentfundingportal.Therulerequiresanonresidentfundingportalregisteredorapplyingforregistrationto:

(1)obtainawrittenconsentandpowerofattorneyappointinganagentforserviceofprocessintheUnitedStates(otherthantheCommissionoraCommissionmember,officialoremployee),uponwhommaybeservedanyprocess,pleadings,orotherpapersinanyaction;(2)furnishtheCommissionwiththenameandaddressofitsagentforservicesofprocessonScheduleCofFormFundingPortal;and(3)certifyonScheduleCofFormFundingPortalandprovideanopinionofcounselthatitcan,asamatteroflaw,providetheCommissionandanyregisterednationalsecuritiesassociationofwhichitbecomesamemberwithpromptaccesstoitsbooksandrecordsandcan,asamatteroflaw,andwillsubmittoonsiteinspectionandexaminationbytheCommissionandsuchnationalsecuritiesassociation

Anychangesmustbenotifiedtothecommission.TheForeignFundingPortalmusthavearegisteredU.S.agent.

c) ExemptionfromBroker-DealerRegistration–FundingPortalsareexempt,conditionallyorunconditionally,fromtherequirementtoregisterasabrokerordealerunderExchangeActSectionprovidedthatthefundingportal:

i. Remainssubjecttotheexamination,enforcementandotherrulemakingauthorityoftheCommission;

ii. Isamemberofaregisterednationalsecuritiesassociation;andiii. IssubjecttootherrequirementsthattheCommissiondetermines

appropriate.b. SafeHarborforCertainActivities-Afundingportalisdefinedasan

intermediarythatdoesnot:i. Offerinvestmentadviceormakerecommendations;ii. Solicitpurchases,salesorofferstobuythesecuritiesofferedor

displayedonitsplatformorportal;


iii. Compensateemployees,agentsorotherpersonsforsuchsolicitationorbasedonthesaleofsecuritiesdisplayedorreferencedonitsplatformorportal;

iv. Hold,manage,possessorotherwisehandleinvestorfundsorsecurities;or

v. EngageinsuchotheractivitiesastheCommission,byrule,determinesappropriate

Thepermissibleactivitiesinthesafeharborinvolve:(i)limitingofferingsontheplatform;(ii)highlightinganddisplayingofferingsontheplatform;(iii)providingcommunicationchannels;(iv)providingsearchfunctions;(v)advisingissuers;(vi)compensatingothersforreferringpersonstothefundingportal;(vii)payingorofferingtopaycompensationtoregisteredbrokersor

dealers;(viii)receivingcompensationfromaregisteredbrokerordealer;(ix)advertisingthefundingportalandoffering;(x)denyingaccessto,orcancelling,offeringsduetofraudorinvestor

protectionconcerns;(xi)acceptinginvestmentcommitmentsonbehalfoftheissuer;(xii)directingthetransmissionofinvestorfunds;and(xiii)directingaqualifiedthirdparty’stransmissionofinvestorfunds.

Afundingportalmay,consistentwiththeprohibitionsunderExchangeAct(includingtheprohibitionagainstofferinginvestmentadviceorrecommendations),determinewhetherandunderwhattermstoallowanissuertoofferandsellsecuritiesinrelianceonSecuritiesActSection4(a)(6)throughitsplatform.Thisisdesignedtomakeitclearthatafundingportalmayexerciseitsdiscretion,subjecttotheprohibitioninthestatuteonprovidinginvestmentadviceorrecommendations,tolimittheofferingsandissuersthatitallowsonitsplatformunderthesafeharbor,aslongasitcomplieswithallotherprovisionsofRegulationCrowdfunding.

c. Afundingportalcannotadvertise,makestatementsorotherwise

representthattheofferingslistedonitsplatformaresaferorbetterinvestmentsthanthoselistedonotherplatforms.Giventhisstatutoryrestriction,afundingportalmustprovideadisclaimerstatingthatlimitingtheofferingsonitsplatformdoesnotconstituteinvestmentadviceorarecommendation.

Afundingportalmayapplyobjectivecriteriatohighlightofferingsonthefundingportal’splatformwhere:

(i)Thecriteriaarereasonablydesignedtohighlightabroadselectionofissuersofferingsecuritiesthroughthefundingportal’splatform,areappliedconsistentlytoallissuersandofferingsandareclearlydisplayedonthefundingportal’splatform;


(ii)Thecriteriamayinclude,amongotherthings,thetypeofsecuritiesbeingoffered(forexample,commonstock,preferredstockordebtsecurities);thegeographiclocationoftheissuer;theindustryorbusinesssegmentoftheissuer;thenumberoramountofinvestmentcommitmentsmade,progressinmeetingtheissuer’stargetofferingamountor,ifapplicable,themaximumofferingamount;andtheminimumormaximuminvestmentamount;providedthatafundingportalmaynothighlightanissuerorofferingbasedontheadvisabilityofinvestingintheissueroritsoffering;and(iii)Thefundingportaldoesnotreceivespecialoradditionalcompensationsforhighlightingoneormoreissuersorofferingsonitsplatform.

Afundingportalmaynothighlightanissuerorofferingbasedontheadvisabilityofinvestingintheissuerorofferingorgivetheimpressionthatthefundingportalisprovidinganimplicit(orexplicit)recommendationonwhethertoinvestintheissueroroffering.Afundingportalmaynotreceiveanyspecialoradditionalcompensationforhighlighting(orofferingtohighlight)oneormoreissuersorofferingsonitsplatform.

d. Search-Afundingportalmayprovidesearchfunctionsorothertoolsthat

investorscanusetosearch,sort,orcategorizetheofferingsavailablethroughthefundingportal’splatformaccordingtoobjectivecriteriawhere:

(i)Thecriteriamayinclude,amongotherthings,thetypeofsecuritiesbeingoffered(forexample,commonstock,preferredstockordebtsecurities);thegeographiclocationoftheissuer;theindustryorbusinesssegmentoftheissuer;thenumberoramountofinvestmentcommitmentsmade,progressinmeetingtheissuer’stargetofferingamountor,ifapplicable,themaximumofferingamount;andtheminimumormaximuminvestmentamount;and(ii)Thecriteriamaynotinclude,amongotherthings,theadvisabilityofinvestingintheissueroritsoffering,oranassessmentofanycharacteristicoftheissuer,itsbusinessplan,itskeymanagementorrisksassociatedwithaninvestment.Thisdoesnotprecludetheuseofcomputationalsortingalgorithmsusingobjectivesearchingandsortingcriteria.However,afundingportalmusttakecarenottoindicatethattheplatform’ssearchresultsortools,directlyorindirectly,correlatetosuccessfulinvestments.Likewise,themoreparticular,biasedorweightedafundingportal’salgorithmorassessmentis,thelesslikelythecriteriaasawholewillbeobjective.However,thisdoesnotprecludeafundingportalfrompermittinginvestorswithaccesstoitscommunicationchannelsfromratingissuersorofferings(e.g.,astarrating)onitsplatformorsearchingsuchratings,aslongasafundingportal(includingitsassociatedpersons,suchasitsemployees)doesnotparticipateintheratingprocess


e. Communicationchannels-Afundingportalshouldprovidecommunicationchannelsbywhichinvestorscancommunicatewithoneanotherandwithrepresentativesoftheissuerthroughthefundingportal’splatformaboutofferingsconductedthroughtheplatform,asrequired.Asafeharborappliessolongasthefundingportal(anditsassociatedpersons):

(i)Doesnotparticipateinthesecommunications,otherthantoestablishguidelinesforcommunicationandremoveabusiveorpotentiallyfraudulentcommunications;(ii)Permitspublicaccesstoviewthediscussionsmadeinthecommunicationchannels;(iii)Restrictspostingofcommentsinthecommunicationchannelstothosepersonswhohaveopenedanaccountonitsplatform;and(iv)requiresthatanypersonpostingacommentinthecommunicationchannelsclearlydisclosewitheachpostingwhetherheorsheisafounderoranemployeeofanissuerengaginginpromotionalactivitiesonbehalfoftheissuer,orisotherwisecompensated,whetherinthepastorprospectively,topromoteanissuer’soffering.

Afundingportalmayadviseanissueraboutthestructureorcontentoftheissuer’soffering,includingpreparingofferingdocumentation.Afundingportalcan,forexample,providepre-draftedtemplatesorformsforanissuertouseinitsofferingthatwillhelpitcomplywithitsdisclosureobligations.Otherexamplesofpermissibleassistancecanincludeadviceaboutthetypesofsecuritiestheissuercanoffer,thetermsofthosesecuritiesandtheproceduresandregulationsassociatedwithcrowdfunding.

f. Broker-dealer/FundingPortalRelationships-Afundingportalmaypayor

offertopaycompensationtoaregisteredbrokerordealerforservices,includingforreferringapersontothefundingportal,inconnectionwiththeofferorsaleofsecuritiesbythefundingportalinrelianceonSection4(a)(6)oftheSecuritiesAct,providedthat

(i)suchservicesareprovidedpursuanttoawrittenagreementbetweenthefundingportalandtheregisteredbrokerordealer;(ii)suchcompensationispermittedunderRegulationCrowdfunding;and(iii)suchcompensationcomplieswiththerulesofanyregisterednationalsecuritiesassociationofwhichthefundingportalisamember.

Allsucharrangementsmustbeinwriting.Afundingportalmay,payabroker-dealerforcertainservices,suchasinformationtechnologyservices,qualifiedthirdpartyservicesorreferralservices,pursuanttoawrittenagreement.Eachpartytothistypeofarrangementwillneedtocomplywithallapplicableregulations,includingtherulesoftheregisterednationalsecuritiesassociationofwhichitisamember.


Thesameholdstrueforrelationshipsbetweenbroker-dealersandfundingportalsprovidingitiswithinthescopeofservicesavailableforfundingportalstoallow.

g. Compliance–Afundingportalmustimplementwrittenpoliciesand

proceduresreasonablydesignedtoachievecompliancewiththefederalsecuritieslawsandtherulesandregulationsthereunder,relatingtoitsbusinessasafundingportal.Afundingportalmayrelyontherepresentationsofotherstoformareasonablebasis,thefundingportalshouldhavepoliciesandproceduresregardingunderwhatcircumstancesitcanreasonablyrelyonsuchrepresentationsandwhenadditionalinvestigativestepsmaybeappropriate.Afundingportal’spoliciesandproceduresshouldcovernotonlypermittedactivities,butalsoaddressprohibitedactivities.Forexample,afundingportalshouldhavepoliciesandproceduresonthecriteriausedtolimit,highlightandadvertiseissuersandofferings.

Portalsmustmaintaintheprivacyofpersonalinformation.

h. RecordstobeCreatedandMaintainedbyFundingPortals–Funding

portalsmustpreservecertainrecordsforfiveyears,withtherecordsretainedinareadilyaccessibleplaceforatleastthefirsttwoyears.Therequiredrecordsincludethefollowing:

i. Allrecordsrelatingtoinvestorswhopurchaseorattempttopurchasesecuritiesthroughthefundingportal;

ii. Allrecordsrelatingtoissuersthatofferandsell,orattempttoofferandsell,securitiesthroughthefundingportalandtopersonshavingcontrolwithrespecttothoseissuers;

iii. Recordsofallcommunicationsthatoccuronorthroughitsplatform;iv. Allrecordsrelatedtopersonsthatusecommunicationservices

providedbyafundingportaltopromoteanissuer’ssecuritiesortocommunicatewithpotentialinvestors;

v. Allrecordsdemonstratingafundingportal’scompliancewithrequirementsofSubpartsC(intermediaryobligations)andD(additionalfundingportalrequirements);

vi. Allnoticesprovidedbythefundingportalstoissuersandinvestorsgenerallythroughthefundingportal’splatformorotherwise;

vii. Allwrittenagreements(orcopiesthereof)enteredintobyafundingportal,relatingtoitsbusinessassuch;

viii. Alldaily,monthlyandquarterlysummariesoftransactionseffectedthroughthefundingportal;and

ix. Alogreflectingtheprogressofeachissuerwhooffersandsellssecuritiesthroughthefundingportaltowardmeetingthetargetofferingamount.

Afundingportalmustpreserveitsorganizationaldocumentsduringitsoperationasafundingportalandalsothoseofanysuccessorfundingportal.Theseinclude,butnotbelimitedto:

(1)partnershipagreements;


(2)articlesofincorporationorcharter;(3)minutebooks;and(4)stockcertificatebooks(orothersimilartypedocuments).

Therecordsarerequiredtobemaintainedandpreservedbeproduced,reproduced,andmaintainedintheoriginal,non-alterableformatinwhichtheywerecreatedoraspermittedundertheExchangeAct.Thirdpartiesmayprepareormaintaintherequiredrecordsonbehalfofthefundingportal,providedthatthereisawrittenundertakinginplacebetweenthefundingportalandthethirdpartystatingthattherequiredrecordsarethepropertyofthefundingportalandwillbesurrenderedpromptly,onrequestbythefundingportal,totheCommissionorthenationalsecuritiesassociationofwhichthefundingportalisamember.Thefundingportalalsoisalsorequiredtofile,withtheregisterednationalsecuritiesassociationofwhichitisamember,thiswrittenundertaking,signedbyadulyauthorizedrepresentativeofthethirdparty.Anagreementbetweenafundingportalandathirdpartydoesnotrelievethefundingportalofitsresponsibilitytoprepareandmaintainrecords,asrequiredunderRule404ofRegulationCrowdfunding.

FundingportalsaresubjecttoSEC’sexaminationauthorityto,amongotherthings,relyonanyexemptionsfrombroker-dealerregistrationthattheyimpose.Afundingportalisrequiredtopermittheexaminationandinspectionofallofitsbusinessandbusinessoperationsthatrelatetoitsactivitiesasafundingportal,suchasitspremises,systems,platformsandrecords,bytheirrepresentativesandbyrepresentativesoftheregisterednationalsecuritiesassociationofwhichitisamember.i. MiscellaneousProvisions

i. InsignificantDeviationsfromRegulationCrowdfunding–Therulesprovideasafeharborforinsignificantdeviationsfromaterm,conditionorrequirementofRegulationCrowdfunding.Toqualifyforthesafeharbor,theissuerrelyingontheexemptionhastoshowthat:

1. Thefailuretocomplywithaterm,conditionorrequirementwasinsignificantwithrespecttotheofferingasawhole;and

2. Theissuermadeagoodfaithandreasonableattempttocomplywithallapplicableterms,conditionsandrequirementsofRegulationCrowdfunding;and

3. Theissuerdidnotknowofthefailuretocomply,wherethefailuretocomplywithaterm,conditionorrequirementwastheresultofthefailureoftheintermediarytocomplywiththerequirementsofSection4A(a)andtherelatedrules,orsuchfailurebytheintermediaryoccurredsolelyinofferingsotherthantheissuer’soffering.Notwithstandingthissafeharbor,anyfailuretocomplywithRegulationCrowdfundingwouldnonethelessbeactionablebytheCommission.

ii. RestrictionsonResales-securitiesissuedinrelianceonSection4(a)(6)maynotbetransferredbythepurchaserforoneyearafterthedateofpurchase,exceptwhentransferred:

1. totheissuerofthesecurities;


2. toanaccreditedinvestor;3. aspartofanofferingregisteredwiththeCommission;or4. toafamilymemberofthepurchaserortheequivalent,orin

connectionwithcertainevents,includingdeathordivorceofthepurchaser,orothersimilarcircumstances.Afamilymemberincludesa“child,stepchild,grandchild,parent,stepparent,grandparent,spouseorspousalequivalent,sibling,mother-in-law,father-in-law,son-in-law,daughter-in-law,brother-in-law,orsister-in-lawofthepurchaser,andshallincludeadoptiverelationships.”

One-yearresalerestrictionappliestoanypurchaserduringtheone-yearperiodbeginningwhenthesecuritieswerefirstissued,notjusttheinitialpurchaser.

iii. InformationAvailabletoStates–TheSECshallmakeavailable,or

shallcausetobemadeavailablebytherelevantintermediary,theinformationrequiredunderSection4A(b)andsuchotherinformationastheCommission,byrule,determinesappropriatetothesecuritiescommission(oranyagencyorofficeperforminglikefunctions)ofeachstateandterritoryoftheUnitedStatesandtheDistrictofColumbia.IssuersarerequiredtofileonEDGAR.InformationfiledonEDGARispubliclyavailableandwould,therefore,beavailabletoeachstate,territoryandtheDistrictofColumbia.ThiswillsatisfythestatutoryrequirementtomaketheinformationavailabletoeachstateandterritoryoftheUnitedStates,andtheDistrictofColumbia.

iv. ExemptionfromSection12(g)-SecuritiesissuedpursuanttoanofferingmadeunderSection4(a)(6)areexemptedfromthe500recordholdercountunderSection12(g),providedthattheissueriscurrentinitsongoingannualreports,hastotalassetsasoftheendofitslastfiscalyearnotinexcessof$25million,andhasengagedtheservicesofatransferagentregistered.

v. ScopeofStatutoryLiability–TheSECisspecificallydecliningto

exemptfundingportals(oranyintermediaries)fromthestatutoryliabilityprovisionofSection4A(c)ortointerpretthisprovisionascategoricallyexcludingsuchintermediaries.Theydonotbelievethattheyshouldprecludetheabilityofinvestorstobringprivaterightsofactionagainstfundingportals(oranyintermediaries).Theybelievesuchacategoricalexemptionorexclusioncouldposeundueriskstoinvestorsbyprovidinginsufficientincentivesforintermediariestotakestepstopreventtheirplatformsfrombecomingvehiclesforfraud.Congressprovidedadefensetoanysuchliabilityifanintermediarydidnotknow,andintheexerciseofreasonablecarecouldnothaveknown,oftheuntruthoromission.TheSECbelieves,thatthereareappropriatestepsthatintermediariesmighttakeinexercisingreasonablecareinlightofthisliabilityprovision.Thesestepsmay


includeestablishingpoliciesandproceduresthatarereasonablydesignedtoachievecompliancewiththerequirementsofRegulationCrowdfunding,andconductingareviewoftheissuer’sofferingdocuments,beforepostingthemtotheplatform,toevaluatewhethertheycontainmateriallyfalseormisleadinginformation.

vi. DisqualificationProvisions–Thedisqualificationprovisionsmustbe“substantiallysimilar”tothe“badactor”disqualificationprovisionsoftheDodd-FrankActandtheyalsomustcovercertainactionsbystateregulators.Thedisqualifyingeventsinclude:

1. Felonyandmisdemeanorconvictionswithinthelastfiveyearsinthecaseofissuers,theirpredecessorsandaffiliatedissuers,and10yearsinthecaseofothercoveredpersonsinconnectionwiththepurchaseorsaleofasecurity,involvingthemakingofafalsefilingwiththeCommission;orarisingoutoftheconductofthebusinessofanunderwriter,broker,dealer,municipalsecuritiesdealer,investmentadviser,fundingportalorpaidsolicitorofpurchasersofsecurities;

2. Injunctionsandcourtorderswithinthelastfiveyearsagainstengaginginorcontinuingconductorpracticesinconnectionwiththepurchaseorsaleofsecurities;involvingthemakingofanyfalsefilingwiththeCommission;orarisingoutoftheconductofthebusinessofanunderwriter,broker,dealer,municipalsecuritiesdealer,investmentadviser,fundingportalorpaidsolicitorofpurchasersofsecurities;

3. Certainfinalordersandbarsofcertainstateandotherfederalregulators;

4. Commissioncease-and-desistordersrelatingtoviolationsofscienter-basedanti-fraudprovisionsofthefederalsecuritieslawsorSection5oftheSecuritiesAct;

5. Filing,orbeingnamedasanunderwriterin,aregistrationstatementorRegulationAofferingstatementthatisthesubjectofaproceedingtodeterminewhetherastoporderorsuspensionshouldbeissued,orastowhichastoporderorsuspensionwasissuedwithinthelastfiveyears;

6. UnitedStatesPostalServicefalserepresentationorderswithinthelastfiveyears;1195and•forcoveredpersonsotherthantheissuer:

a. beingsubjecttoaCommissionorder:i. revokingorsuspendingtheirregistrationasa

broker,dealer,municipalsecuritiesdealer,investmentadviserorfundingportal;

ii. placinglimitationsontheiractivitiesassuch;iii. barringthemfromassociationwithany

entity;oriv. barringthemfromparticipatinginan

offeringofpennystock;or


b. beingsuspendedorexpelledfrommembershipin,orsuspendedorbarredfromassociationwithamemberof,aregisterednationalsecuritiesexchangeornationalsecuritiesassociationforconductinconsistentwithjustandequitableprinciplesoftrade.

c. IntermediarieswillbesubjecttothesamestatutorydisqualificationstandardregardlessofwhetherornottheyareengagingintransactionsinvolvingtheofferorsaleofsecuritiesinrelianceonSection4(a)(6),andnotethatapplyingconsistentstandardsforallbrokersandfundingportalswillalsoassistFINRAoranyotherregisterednationalsecuritiesassociationinitsoversightofitsmembers.

vii. SecondaryMarketTrading–ItisallowedandtheSECisreviewingthedevelopmentofsecondarymarkettrading.

TheaboveruleswillgointoeffectMay16,2016.IfyouhaveanyquestionsaboutRegulationCrowdfunding,theteamatCrowdfundCapitalAdvisorscaneasilyaddressthem.FeelfreetocontactusviaSherwood@theccagroup.com.AboutCrowdfundCapitalAdvisors

CrowdfundCapitalAdvisors(CCA)deliversstrategicservicesandimplementationprogramsthatcreateproprietarydealflowforprofessionalinvestors,actionablestrategiesforcompaniesinthecrowdfundingindustry,andpolicyandregulatoryinnovationforgovernments.Wearepassionateaboutcreatinginnovation,entrepreneurship,andjobsthroughtheuseofcrowdfunding.CCAalsoadvisesandinvestsintheemergingecosystemofcrowdfunding,includingsolutionsbeingcreatedthatwillimpactthebroaderprivatecapitalmarkets.

CCAco-foundersandManagingPartnersSherwoodNeissandJasonBestcreatedtheoriginalStartupExemptionregulatoryframeworkthatbecamecrowdfundinglanguageintheU.S.JOBSAct.Theythenstartedagrassroots,self-fundedcampaigntomakeoneofthelargestchangestosecuritiesregulationsin80years.Their460-daycampaignconcludedApril5th2012whentheyattendedtheWhiteHouseRoseGardenceremonywherePresidentObamasignedTheJOBSActintolaw.OnOctober30,2015theSecuritiesandExchangeCommission(SEC)finalizedtherulesfordebtandequitycrowdfundingintheUSAandtheindustrywillbegintransactingvolumeinMay2016.

Since2012,CCAhasgoneontoworkwithover35governmentsandsecurityregulatorsgloballyoncreatingcrowdfundingpolicy.CCAwrotetheWorldBankreportPotentialforCrowdfundingintheDevelopingWorld,(reference)theMultilateralInvestmentFund(MIF)reportCreatingaCrowdfundingEcosysteminChile,andthefirst“howto”crowdfundbookforentrepreneurs.CCAiscurrentlyengagedina2-yearMIFadvisoryproject,‘AcceleratingtheCrowdfundingEcosysteminMexicotoPromoteEntrepreneurship,InnovationandEconomicInclusion.’CCAprincipalsaretheco-foundersoftheUCBerkeleyResearchProgramonInnovationinEntrepreneurialandSocialFinance,thetopresearchprogramintheworldincrowdfinanceandthehostoftheannualGlobalAcademicandPolicySymposiumonCrowdfunding.


APPENDIXA–FORMC&INSTRUCTIONSTOUSE


APPENDIXB–ONGOINGREPORTINGREQUIREMENTS

regulation crowdfunding - aca · rules for regulation crowdfunding that will enable all investors...

Documents