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.
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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;”
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(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
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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
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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
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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,
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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.
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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
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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);
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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;
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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
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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
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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
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(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.
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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.
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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;
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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;
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(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
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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.
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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;
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(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;
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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
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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
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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.
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APPENDIXA–FORMC&INSTRUCTIONSTOUSE
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APPENDIXB–ONGOINGREPORTINGREQUIREMENTS