[Federal Register Volume 85, Number 89 (Thursday, May 7, 2020)]
[Rules and Regulations]
[Pages 27116-27133]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-09806]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 227 and 239
[Release No. 33-10781]
Temporary Amendments to Regulation Crowdfunding
AGENCY: Securities and Exchange Commission.
ACTION: Temporary final rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
adopting temporary final rules to facilitate capital formation for
small businesses impacted by coronavirus disease 2019 (COVID-19). The
temporary final rules are intended to expedite the offering process for
smaller, previously established companies directly or indirectly
affected by COVID-19 that are seeking to meet their funding needs
through the offer and sale of securities pursuant to Regulation
Crowdfunding. The temporary final rules are designed to facilitate this
offering process by providing tailored, conditional relief from certain
requirements of Regulation Crowdfunding relating to the timing of the
offering and the availability of financial statements required to be
included in issuers' offering materials while retaining appropriate
investor protections.
DATES:
Effective date: The amendments are effective from May 4, 2020,
through March 1, 2021.
Applicability date: The amendments apply to securities offerings
initiated under Regulation Crowdfunding between May 4, 2020, and August
31, 2020.
FOR FURTHER INFORMATION CONTACT: Jennifer Zepralka, Office of Small
Business Policy, Division of Corporation Finance, at (202) 551-3460;
U.S. Securities and Exchange Commission, 100 F Street NE, Washington,
DC 20549-3628.
SUPPLEMENTARY INFORMATION: We are adopting amendments to 17 CFR 227.100
(``Rule 100''), 17 CFR 227.201 (``Rule 201''), 17 CFR 227.301 (``Rule
301''), 17 CFR 227.303 (``Rule 303'') and 17 CFR 227.304 (``Rule 304'')
of 17 CFR part 227 (``Regulation Crowdfunding'') under 15 U.S.C. 77a et
seq. (the ``Securities Act'') and to 17 CFR 239.900 (``Form C'') as
temporary final rules.
I. Introduction
The outbreak of COVID-19 has had far-reaching effects, with small
businesses being particularly affected by the closures and safety
measures designed to slow the spread of COVID-19.\1\ The Commission
recognizes that, in the current environment, many small businesses are
facing challenges accessing urgently needed capital in a timely and
cost-effective manner. A securities offering under Regulation
Crowdfunding may be an attractive fundraising option for some small
businesses at this time, particularly as a means of allowing an issuer
to make use of the internet to reach out to its customers or members of
its local community as potential investors as well as to existing
investors. However, based on feedback that the Commission has received
from its Small Business Capital Formation Advisory Committee and other
outreach conducted by SEC staff, the Commission understands that
certain Regulation Crowdfunding requirements may make it difficult for
an issuer affected by COVID-19 to launch an offering and see it to
completion within a time frame that meets its urgent capital needs.\2\
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\1\ See, e.g., MetLife & U.S. Chamber of Commerce Special Report
on Coronavirus and Small Business (April 3, 2020), available at
https://www.uschamber.com/sites/default/files/metlife_uscc_coronavirus_and_small_business_report_april_3.pdf
(``With high levels of concern about COVID-19 reported in every
sector and region of the country, one in four small businesses (24
percent) report having already temporarily shut down. Among those
who haven't shut down yet, 40 percent report it is likely they will
shut temporarily within the next two weeks. Forty-three percent
believe they have less than six months until a permanent shutdown is
unavoidable.'').
\2\ See Transcript of SEC Small Business Capital Formation
Advisory Committee (April 2, 2020), available at https://www.sec.gov/info/smallbus/acsec/sbcfac-transcript-040220.pdf, at 30-
32 (expressing the view that Regulation Crowdfunding is ``the only
mechanism'' for private businesses to access ``non-accredited
investors, really the community members'' and suggesting relief from
the financial statement requirements of Regulation Crowdfunding) and
39-41 (suggesting financial statement relief and relief from the
requirement to wait 21 days before disbursement of funds raised in a
Regulation Crowdfunding offering). See also Transcript for Online
Investment Capital Raising Virtual Coffee Break (April 3, 2020),
available at https://www.sec.gov/files/OS-018-20-403-full.pdf.
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In light of the challenges facing small businesses, the Commission
has determined that temporary relief from certain requirements of
Regulation Crowdfunding is necessary and appropriate to provide issuers
with the opportunity to access capital on an expedited basis while
maintaining investor protections. The temporary
[[Page 27117]]
rules provide flexibility for issuers who meet certain eligibility
criteria \3\ to assess interest in a Regulation Crowdfunding offering
prior to preparation of full offering materials,\4\ and then once
launched, to close such an offering and have access to funds sooner
than would be possible in the absence of the temporary relief.\5\ The
temporary rules also provide an exemption from certain financial
statement review requirements for issuers offering $250,000 or less in
reliance on Regulation Crowdfunding within a 12-month period.\6\ The
following table summarizes the amendments:
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\3\ See temporary 17 CFR 227.100(b)(7) (``Rule 100(b)(7)''). To
rely on the temporary rules, an issuer must meet the requirements of
temporary Rule 100(b)(7) in addition to the current eligibility
requirements of 17 CFR 227.100(b)(1) through (6).
\4\ See temporary 17 CFR 227.201(z)(2) (``Rule 201(z)(2)'').
\5\ See temporary 17 CFR 227.303(g) (``Rule 303(g)'') and
temporary 17 CFR 227.304(e) (``Rule 304(e)'').
\6\ See temporary 17 CFR 227.201(z)(3) (``Rule 201(z)(3)'').
Note that Instruction 1 to paragraph (t) continues to apply in
connection with the determination of the offering amount. See supra
Note 21.
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Existing regulation
Requirement crowdfunding Temporary amendment
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Eligibility................. The exemption is not To rely on the
available to:. temporary rules,
Non-U.S. issuers must meet
issuers;. the existing
Issuers eligibility
that are required criteria PLUS:
to file reports The issuer
under Section 13(a) cannot have been
or 15(d) of the organized and
Securities Exchange cannot have been
Act of 1934;. operating less than
Investment six months prior to
companies;. the commencement of
Blank check the offering; and
companies;. An issuer
Issuers that has sold
that are securities in a
disqualified under Regulation
Regulation Crowdfunding
Crowdfunding's offering in the
disqualification past, must have
rules; and. complied with the
Issuers requirements in
that have failed to section 4A(b) of
file the annual the Securities Act
reports required and the related
under Regulation rules.
Crowdfunding during
the two years
immediately
preceding the
filing of the
offering statement.
Offers permitted............ After filing of After filing of
offering statement offering statement,
(including but financial
financial statements may be
statements). initially omitted
(if not otherwise
available).
Investment commitments After filing of After filing of
accepted. offering statement offering statement
(including that includes
financial financial
statements). statements or
amended offering
statement that
includes financial
statements.
Financial statements Financial statements Financial statements
required when issuer is of the issuer of the issuer and
offering more than $107,000 reviewed by a certain information
and not more than $250,000 public accountant from the issuer's
in a 12-month period. that is independent Federal income tax
of the issuer. returns, both
certified by the
principal executive
officer.
Sales permitted............. After the As soon as an issuer
information in an has received
offering statement binding investment
is publicly commitments
available for at covering the target
least 21 days. offering amount
(note: commitments
are not binding
until 48 hours
after they are
given).
Early closing permitted..... Once target amount As soon as binding
is reached if:. commitments are
The received reaching
offering remains target amount if:
open for a minimum The issuer
of 21 days;. has complied with
The the disclosure
intermediary requirements in
provides notice temporary Rule
about the new 201(z);
offering deadline The
at least five intermediary
business days prior provides notice
to the new offering that the target
deadline;. offering amount has
Investors been met; and
are given the At the time
opportunity to of the closing of
reconsider their the offering, the
investment decision issuer continues to
and to cancel their meet or exceed the
investment target offering
commitment until 48 amount.
hours prior to the
new offering
deadline; and.
At the time
of the new offering
deadline, the
issuer continues to
meet or exceed the
target offering
amount.
Cancellations of investment For any reason until For any reason for
commitments permitted. 48 hours prior to 48 hours from the
the deadline time of the
identified in the investor's
issuer's offering investment
materials. commitment (or such
Thereafter, an later period as the
investor is not issuer may
able to cancel any designate). After
investment such 48 hour
commitments made period, an
within the final 48 investment
hours of the commitment may not
offering (except in be cancelled unless
the event of a there is a material
material change to change to the
the offering). offering.
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Section 28 of the Securities Act \7\ provides the Commission with
general exemptive authority to conditionally or unconditionally exempt
any person, security, or transaction, or any class or classes of
persons, securities, or transactions, from any provision or provisions
of the Securities Act, or of any rule or regulation thereunder, to the
extent that such exemption is necessary or appropriate in the public
interest, and is consistent with the protection of investors.
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\7\ 15 U.S.C. 77z-3.
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The Commission intends to monitor the current situation and may, if
necessary, extend the time period during which this relief applies,
with any additional conditions the Commission deems appropriate and/or
issue other relief.
II. Eligibility Requirements for Reliance on Temporary Rules
The temporary relief we are providing in this release will be
available to issuers who meet certain eligibility
[[Page 27118]]
criteria. Specifically, in addition to the current eligibility
requirements for Regulation Crowdfunding,\8\ to rely on the temporary
rules for an offering an issuer must have been organized and have had
operations for no less than six months prior to the commencement of
such offering.\9\ We believe that this limitation on eligibility is
appropriate because the temporary relief is intended primarily to
assist existing businesses that require additional funds because of
adverse effects caused by the closures and safety measures designed to
slow the spread of COVID-19. In addition, limiting the relief to
issuers that had been organized and had operations for at least six
months prior to the offering should help mitigate risk to investors
associated with use of the temporary accommodations by newly formed
businesses. New businesses are not foreclosed from conducting an
offering under Regulation Crowdfunding, but will need to comply with
existing rules.
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\8\ 15 U.S.C. 77d-1 (``Section 4A'') of the Securities Act
specifically excludes non-U.S. issuers, issuers that are required to
file reports under Section 13(a) or 15(d) of the Securities Exchange
Act of 1934, investment companies, as defined in Section 3 of the
Investment Company Act of 1940 or excluded from the definition of
investment company by Section 3(b) or Section 3(c) of that Act; and
other issuers that the Commission, by rule or regulation, determines
appropriate. 15 U.S.C. 77d-1(f). In addition, the Commission's rules
further exclude: Issuers that are disqualified under Regulation
Crowdfunding's disqualification rules, issuers that have failed to
comply with the annual reporting requirements under Regulation
Crowdfunding during the two years immediately preceding the filing
of the offering statement, and blank check companies. 17 CFR
227.100(b). These eligibility requirements remain unchanged under
the temporary relief.
\9\ See temporary 17 CFR 227.100(b)(7)(i). Because of the wide
variety in the types of businesses that may rely on Regulation
Crowdfunding, the activities that constitute operations and the
level of operations will vary from issuer to issuer. Examples of
issuers who would be considered to have operations include but are
not limited to those that: Have assets, revenue, operating expenses
(such as rent, salaries, or utilities), or interest expense; have
paid taxes or incurred business debt; or have previously filed a
Form C for a Regulation Crowdfunding offering.
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In addition, an issuer will be ineligible to rely on the temporary
rules for an offering if the issuer has previously sold securities
under Regulation Crowdfunding and, in connection with such prior
offering(s), did not comply with the requirements in 15 U.S.C. 77d-1(b)
(``Section 4A(b)'') of the Securities Act and the related requirements
of Regulation Crowdfunding.\10\ This limitation will prevent an issuer
with a history of non-compliance in Regulation Crowdfunding offerings
from taking advantage of the temporary exemptions.
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\10\ See temporary 17 CFR 227.100(b)(7)(ii). An issuer must meet
the eligibility criteria at the time it initiates an offering in
reliance on the temporary rules. Therefore, an issuer that was
delinquent in its filing obligations that becomes current prior to
initiating a new offering would be eligible to rely on the temporary
rules. An issuer relying on the temporary relief that is
subsequently found to be non-compliant in connection with prior
offerings (other than insignificant deviations covered by the safe
harbor of 17 CFR 227.502(a)) would not have been eligible for the
temporary relief, with the result that the Regulation Crowdfunding
exemption would not be available for the offering.
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In connection with this temporary amendment, we are making a
related amendment to Rule 301 to require that an intermediary \11\
involved in an offering by an issuer that is relying on the temporary
relief must have a reasonable basis for believing that the issuer has
complied with the requirements of Section 4A(b) and the related
requirements of Regulation Crowdfunding in prior offerings.\12\ For
this requirement, the intermediary may reasonably rely on the
representations of the issuer concerning compliance with these
requirements unless the intermediary has reason to question the
reliability of those representations.
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\11\ For purposes of Regulation Crowdfunding, an intermediary
means a registered broker-dealer or funding portal. See 17 CFR
227.300(c)(3).
\12\ See temporary 17 CFR 227.301(d) (``Rule 301(d)'').
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III. Temporary Relief From Certain Financial Information Requirements
In order to conduct a Regulation Crowdfunding offering, an issuer
must electronically file its offering statement on Form C with the
Commission and provide it to the intermediary facilitating the
crowdfunding offering prior to commencing its offering.\13\ The
offering statement must include specified information, including a
discussion of the issuer's financial condition and financial
statements.\14\ The financial statement requirements are based on the
amount offered and sold in reliance on Regulation Crowdfunding within
the preceding 12-month period: \15\
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\13\ See Rule 201.
\14\ See id.
\15\ See 17 CFR 227.201(t) (``Rule 201(t)'').
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For issuers offering $107,000 or less: Financial
statements of the issuer and certain information from the issuer's
Federal income tax returns, both certified by the principal executive
officer. If, however, financial statements of the issuer are available
that have either been reviewed or audited by a public accountant that
is independent of the issuer, the issuer must provide those financial
statements instead and will not need to include the information
reported on the Federal income tax returns or the certification by the
principal executive officer.
Issuers offering more than $107,000 but not more than
$535,000: Financial statements reviewed by a public accountant that is
independent of the issuer. If, however, financial statements of the
issuer are available that have been audited by a public accountant that
is independent of the issuer, the issuer must provide those financial
statements instead and will not need to include the reviewed financial
statements.
Issuers offering more than $535,000:
[cir] For first-time Regulation Crowdfunding issuers: Financial
statements reviewed by a public accountant that is independent of the
issuer, unless financial statements of the issuer are available that
have been audited by an independent auditor.
[cir] For issuers that have previously sold securities in reliance
on Regulation Crowdfunding: Financial statements audited by a public
accountant that is independent of the issuer.\16\
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\16\ See id.
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In light of the challenges that small businesses are experiencing
as a result of COVID-19, we believe that temporary, limited exemptive
relief from certain Regulation Crowdfunding requirements for issuers
that meet the enhanced eligibility requirements discussed above may
help provide timely access to capital, while maintaining appropriate
investor protections.
A. Omission of Financial Statements From Initial Form C Filing
An issuer that seeks to conduct an offering under Regulation
Crowdfunding to address urgent funding needs arising from or relating
to COVID-19 but that does not have current financial statements
available, or that is facing challenges in obtaining reviewed or
audited financial statements due to COVID-19, may find it difficult to
prepare the required financial statements in order to launch a timely
offering. Further, the issuer may be more reluctant to undertake the
cost of the preparation of such financial statements during the
pandemic without some indication that the securities offering has a
chance of succeeding. In light of this, we are providing temporary
relief from certain financial information requirements in an issuer's
initial Form C filing. The temporary relief will allow an issuer to
provide offering information through the intermediary's platform and
informally gauge investor interest in an offering before going through
the effort and expense of preparing financial statements.
[[Page 27119]]
Temporary Rule 201(z)(2) allows an issuer that meets the
eligibility requirements described above to (i) omit the financial
statements required by Rule 201(t) in its initial Form C filed with the
Commission, to the extent such financial statements are not otherwise
available; and (ii) commence its offering of securities through the
intermediary's platform. Such financial statements are, however,
required to be included in an amendment to the Form C and provided to
investors and the intermediary before the intermediary accepts any
investment commitments in the offering.\17\
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\17\ Because no investment commitments may be made until
complete financial statements are provided, the filing of the
amendment including such financial statements will not trigger the
reconfirmation requirements of 17 CFR 227.304(c) (``Rule 304(c)'').
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An issuer relying on this temporary rule must prominently disclose
that:
The financial information that has been omitted is not
otherwise available and will be provided by an amendment to the
offering materials;
The investor should review the complete set of offering
materials, including previously omitted financial information, prior to
making an investment decision; and
No investment commitments will be accepted until after
such financial information has been provided.\18\
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\18\ See temporary 17 CFR 227.201(z)(1) (``Rule 201(z)(1)'').
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We believe that this clear disclosure to potential investors, along
with the enhanced eligibility requirements and the inability of an
intermediary to accept any investment commitment prior to an investor's
receipt of all required information, will provide appropriate
protections to investors involved in such offerings.
B. Increase in Offering Threshold Requiring Reviewed Financial
Statements
Market participants have indicated to the Commission that a
temporary change to the offering threshold that triggers the
requirement to include financial statements that are reviewed by a
public accountant that is independent of the issuer could facilitate
capital raising by issuers affected by COVID-19.\19\ In response, we
are adopting temporary Rule 201(z)(3), that would apply to an eligible
issuer \20\ in an offering or offerings that, together with all other
amounts sold in Regulation Crowdfunding offerings within the preceding
12-month period, have, in the aggregate, a target offering amount of
more than $107,000, but not more than $250,000.\21\ Such an issuer may
provide financial statements of the issuer and certain information from
the issuer's Federal income tax returns, both certified by the
principal executive officer, in accordance with 17 CFR 227.201(t)(1)
(``Rule 201(t)(1)''), instead of the financial statements reviewed by a
public accountant that is independent of the issuer that would
otherwise be required by 17 CFR 227.201(t)(2) (``Rule 201(t)(2)'').
This temporary relief would apply only if reviewed or audited financial
statements of the issuer are not otherwise available.
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\19\ See supra note 2.
\20\ See temporary Rule 100(b)(7).
\21\ Note that Instruction 1 to paragraph (t) continues to apply
in connection with the determination of the offering amount (``To
determine the financial statements required under this paragraph
(t), an issuer must aggregate amounts sold in reliance on section
4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6)) within the
preceding 12-month period and the offering amount in the offering
for which disclosure is being provided. If the issuer will accept
proceeds in excess of the target offering amount, the issuer must
include the maximum offering amount that the issuer will accept in
the calculation to determine the financial statements required under
this paragraph (t).'').
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An issuer relying on this temporary rule would be required to
provide prominent disclosure that financial information certified by
the principal executive officer of the issuer has been provided instead
of financial statements reviewed by a public accountant that is
independent of the issuer.\22\
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\22\ See temporary 17 CFR 227.201(z)(1)(iii) (``Rule
201(z)(1)(iii)'').
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We are of the view that the financial statement requirements of
Rule 201(t)(1), although less rigorous than Rule 201(t)(2), provide
appropriate information and protection to investors in offerings up to
the higher $250,000 threshold, when considered in conjunction with the
prominent disclosure to investors and other conditions to an issuer's
reliance on the temporary rule.
IV. Temporary Relief From Certain Timing Requirements for Offerings
Under Regulation Crowdfunding
Regulation Crowdfunding requires that the information in an
offering statement be publicly available on the intermediary's platform
for at least 21 days before any securities may be sold, although the
intermediary may accept investment commitments during that time.\23\ In
addition, Regulation Crowdfunding includes specific requirements with
respect to cancellation of investment commitments and the ability to
close an offering prior to the originally announced deadline once the
target amount is met.\24\
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\23\ See Securities Act Section 4A(a)(6); 17 CFR 227.303(a)
(``Rule 303(a)''). See also 17 CFR 227.303(e)(3)(i) (``Rule
303(e)(3)(i)'') and 17 CFR 227. 304(b) (``Rule 304(b)'').
\24\ See Rule 304.
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Market participants have indicated that these timing requirements,
in light of business disruptions resulting from COVID-19, may make it
difficult for issuers with urgent funding needs to make use of
Regulation Crowdfunding to receive funds promptly.\25\ As a result, we
are adopting the following temporary relief from these timing
requirements for offerings initiated between May 4, 2020, and August
31, 2020.
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\25\ See supra note 2.
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A. Suspension of 21-Day Requirement
Rule 303(a) of Regulation Crowdfunding sets forth the requirements
applicable to an intermediary with respect to the availability of
specified issuer information to the Commission and to investors. This
includes a requirement that the information be made publicly available
on the intermediary's platform for a minimum of 21 days before any
securities are sold in the offering. During this time, the intermediary
may accept investment commitments.\26\ In addition, Rule 303(e)(3)(i)
similarly imposes a 21-day requirement with respect to the availability
of issuer information when a funding portal is directing a qualified
third party to transmit funds to an issuer. Rule 304(b), as discussed
below, also requires that an offering remain open for a minimum of 21
days pursuant to Rule 303(a).
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\26\ 17 CFR 227.303(a)(2) (``Rule 303(a)(2)'').
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This 21-day time period, particularly when considered alongside the
time required for an issuer to prepare its offering materials and
commence an offering under Regulation Crowdfunding, may diminish the
utility of Regulation Crowdfunding for issuers with urgent capital
needs as a result of COVID-19. Therefore, we are adopting temporary
Rule 303(g), under which an intermediary is not required to comply with
Rule 303(a)(2)'s 21-day requirement, but instead must make the required
issuer information publicly available on the intermediary's platform
before any securities are sold in the offering.\27\ The intermediary
may accept investment commitments beginning when such information is
made available, but only if the issuer has provided the financial
information
[[Page 27120]]
required by Rule 201(t).\28\ Similarly, a funding portal is not
required to comply with the 21-day requirement in Rule 303(e)(3)(i)
with respect to directing a transmission of funds after a sale has
occurred and the cancellation period has elapsed.
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\27\ Notwithstanding the waiver of the 21-day requirement, we
note that no offering under these temporary rules will be able to
close within the first 48 hours, as a result of the right to
cancellation described in Section IV.B.
\28\ An issuer relying on the temporary relief from the
requirement to have financial statements be reviewed by a public
accountant, will be deemed to have provided the financial
information required by Rule 201(t). See Section III.B and temporary
Rule 201(z)(3). However, an issuer that has omitted financial
statements pursuant to temporary Rule 201(z)(2) will not be able to
accept investment commitments until it includes such financial
statements. See Section III.A.
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An issuer may not rely on the temporary rules unless it meets the
temporary eligibility requirements and provides prominent disclosure
that the offering is being conducted on an expedited basis due to
circumstances relating to COVID-19 and pursuant to this temporary
relief.
While the Commission continues to believe that the 21-day time
period provides important investor protections by helping to ensure
that an investor has an adequate opportunity to evaluate an investment
opportunity,\29\ we believe the prominent disclosure required by the
temporary rules will make clear to potential investors that there may
be a compressed time frame for the offering, and allow them to take
that information into consideration when determining whether or not to
invest. For instance, the disclosure will put investors on notice that
they may have a shortened time frame within which to consider
information about the type of offering the issuer is conducting.\30\
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\29\ See Crowdfunding, Release No. 33-9974 (Oct. 30, 2015) [80
FR 71387 (Nov. 16, 2015)] at 71442.
\30\ SEC staff previously published an investor bulletin that
discusses the differences between certain types of securities that
may be offered. See SEC Office of Investor Education and Advocacy,
Investor Bulletin: Be Cautious of SAFEs in Crowdfunding (May 9,
2017), available at https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_safes.
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B. Changes to Cancellation Process
Section 4A(b)(1)(G) of the Securities Act requires an issuer, prior
to sale, to provide investors ``a reasonable opportunity to rescind the
commitment to purchase the securities.'' Rule 304(a) of Regulation
Crowdfunding gives investors an unconditional right to cancel an
investment commitment for any reason until 48 hours prior to the
deadline identified in the issuer's offering materials. Thereafter, an
investor is not able to cancel any investment commitments made within
the final 48 hours of the offering (except in the event of a material
change to the offering).
Rule 304(b) provides that if an issuer reaches the target offering
amount prior to the deadline identified in its offering materials, it
may close the offering once the target offering amount is reached,
provided that: (1) The offering remains open for a minimum of 21 days;
(2) the intermediary provides notice about the new offering deadline at
least five business days prior to the new offering deadline; (3)
investors are given the opportunity to reconsider their investment
decision and to cancel their investment commitment until 48 hours prior
to the new offering deadline; and (4) at the time of the new offering
deadline, the issuer continues to meet or exceed the target offering
amount.
These requirements relating to an investor's ability to cancel an
investment commitment and an issuer's ability to close an offering once
the target offering amount has been met provide protections to
investors by enabling them to reconsider investment decisions with the
benefit of the views of the crowd or other information that may come to
light during the offering period. However, these requirements may, like
the 21-day requirement, diminish the utility of Regulation Crowdfunding
for issuers with urgent capital needs as a result of COVID-19.
To facilitate the use of Regulation Crowdfunding to address urgent
funding needs, we are adopting temporary Rule 304(e) and a related
disclosure requirement in temporary Rule 201(z)(1)(iv). These rules
would permit an investor in an offering conducted under the temporary
rules to cancel an investment commitment for any reason within 48 hours
from the time of his or her investment commitment (or such later period
as the issuer may designate).\31\ After such 48-hour period, an
investment commitment may be cancelled only if there is a material
change to the terms of an offering or to the information provided by
the issuer, as provided in Rule 304(c). In addition, once an issuer has
received binding investment commitments (that is, investment
commitments for which the 48-hour cancellation period has run) that
equal or exceed the target offering amount, the issuer may close the
offering on a date earlier than the deadline identified in its offering
materials.\32\ In order to do so, the issuer must comply with
additional disclosure requirements described below and the intermediary
must provide notice that the target offering amount has been met. The
intermediary is not required to provide five business days' notice of
the earlier closing deadline, as would normally be required under Rule
304(b). At the time of the closing of the offering, the issuer must
continue to have binding investment commitments that meet or exceed the
target offering amount.
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\31\ Under Rule 303(d), an intermediary must promptly, upon
receipt of an investment commitment from an investor, give or send
to the investor a notification disclosing certain information,
including the date and time by which the investor may cancel the
investment commitment.
\32\ As is currently the case, an issuer that decides to do a
``min/max'' offering in which offered securities will be sold if a
minimum is met, but subject to a cap on the overall amount sold, may
engage in a ``rolling close'' in which, once a specified minimum
threshold is met, investors are notified by the intermediary that
that minimum portion of the issue will be closed and funds are
released to the issuer. After this initial close, the issuer may
make additional closes until the maximum offering amount is
received.
---------------------------------------------------------------------------
We believe that it is appropriate to provide temporary relief from
these requirements so that issuers can more readily raise capital to
meet their urgent funding needs, while providing protections in the
form of prominent, clear disclosure to investors of the changes in the
process and preserving the rules that permit cancellations when there
has been a material change in the offering.
The temporary rule requires the issuer to provide a prominent
description of the process to complete the transaction or cancel an
investment commitment, including a statement that:
Investors may cancel an investment commitment for any
reason within 48 hours from the time of their investment commitment (or
such later period as the issuer may designate);
The intermediary will notify investors when the target
offering amount has been met;
[[Page 27121]]
The issuer may close the offering at any time after it has
aggregate investment commitments for which the 48-hour right to cancel
(or such later period as the issuer may designate) has elapsed that
equal or exceed the target offering amount (absent a material change
that would require an extension of the offering and reconfirmation of
the investment commitment); \33\ and
---------------------------------------------------------------------------
\33\ If there is a material change to the terms of the offering
or to the information provided by the issuer that would require an
extension of the offering and reconfirmation of the investment
commitment, the intermediary must give or send to any investor who
has made an investment commitment notice of the material change and
that the investor's investment commitment will be cancelled unless
the investor reconfirms his or her investment commitment within five
business days of receipt of the notice, in accordance with Rule
304(c). An investor that reconfirms his or her investment commitment
will have 48 hours to cancel such reconfirmed investment commitment.
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If an investor does not cancel an investment commitment
within 48 hours from the time of the binding investment commitment, the
funds will be released to the issuer upon closing of the offering and
the investor will receive securities in exchange for his or her
investment.
V. Disclosure of Reliance on Temporary Relief
As described above, a condition to each aspect of the temporary
relief we are adopting is clear disclosure to investors with respect to
the issuer's reliance on such relief. We believe this disclosure is
necessary to inform investors of the fact that the mechanics of the
offering are different than the investors may be expecting, as well as
to ensure that investors are aware that that the issuer is being
affected by COVID-19.
To assist issuers with compliance with these requirements, the
following table summarizes the disclosure requirements. Where
applicable, prominent disclosure of each of the following is required:
\34\
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\34\ We are temporarily amending the introductory paragraphs to
the section of Form C entitled ``Optional Question & Answer Format
for an Offering Statement'' by adding a new paragraph reminding
issuers that are relying on these temporary rules to review and
tailor their responses to certain questions in the Form C
appropriately.
------------------------------------------------------------------------
Requirement: Applicable to:
------------------------------------------------------------------------
A statement that the offering is being Any issuer relying on any of
conducted on an expedited basis due to the temporary rules.
circumstances relating to COVID-19 and
pursuant to the SEC's temporary
regulatory COVID-19 relief. [Rule
201(z)(1)(i)].
A statement that: An issuer relying on temporary
The financial information that Rule 201(z)(2) to omit
has been omitted is not currently financial statements from
available and will be provided by an initial Form C filing.
amendment to the offering materials;
The investor should review the
complete set of offering materials,
including previously omitted financial
information, prior to making an
investment decision; and
No investment commitments will
be accepted until after such financial
information has been provided. [Rule
201(z)(1)(ii)]
A statement that: An issuer that does not have
Financial information available financial statements
certified by the principal executive that have either been reviewed
officer of the issuer has been or audited by a public
provided instead of financial accountant that is independent
statements reviewed by a public of the issuer and is relying
accountant that is independent of the on the temporary Rule
issuer. [Rule 201(z)(1)(iii)] 201(z)(3) relief from
providing reviewed financial
statements.
A description of the process to An issuer relying on temporary
complete the transaction or cancel an Rules 303(g) and 304(e) for
investment commitment, including a relief from the timing
statement that: requirements.
Investors may cancel an
investment commitment for any reason
within [48 hours] ** from the time of
their investment commitment;
The intermediary will notify
investors when the target offering
amount has been met;
The issuer may close the
offering at any time after it has
aggregate investment commitments for
which the [48-hour] ** right to cancel
has elapsed that equal or exceed the
target offering amount (absent a
material change that would require an
extension of the offering and
reconfirmation of the investment
commitment); and
If an investor does not cancel
an investment commitment within [48
hours] ** from the time of the initial
investment commitment, the funds will
be released to the issuer upon closing
of the offering and the investor will
receive securities in exchange for his
or her investment.
** Under the temporary rules, 48 hours
is the minimum cancellation period,
but an issuer may designate a later
period. If the issuer has designated a
period later than 48 hours, such later
period must be disclosed. [Rule
201(z)(1)(iv)]
------------------------------------------------------------------------
VI. Economic Analysis
A. Broad Economic Considerations, Baseline, and Affected Parties
As discussed above, in light of the considerable challenges facing
small businesses, the Commission is providing temporary relief from
certain requirements of Regulation Crowdfunding to issuers seeking
funding on an expedited basis due to circumstances relating to COVID-
19. We are mindful of the costs and benefits of the temporary
rules.\35\ Below we discuss the costs and benefits of each provision of
the temporary rules, as well as their effects on efficiency,
competition, and capital formation.
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\35\ Section 2(b) of the Securities Act [15 U.S.C. 77b(b)]
requires the Commission, when engaging in rulemaking where it is
required to consider or determine whether an action is necessary or
appropriate in the public interest, to consider, in addition to the
protection of investors, whether the action will promote efficiency,
competition, and capital formation.
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1. Broad Economic Considerations
Below we summarize the expected economic effects of the final
temporary rules. These temporary rules will allow eligible issuers
greater flexibility to access capital under Regulation Crowdfunding on
an expedited basis. We expect the temporary rules to facilitate capital
formation for eligible issuers. Further, relief from certain
[[Page 27122]]
timing and information requirements and the introduction of the option
to solicit investor interest before preparing financial disclosures are
expected to reduce some of the barriers to Regulation Crowdfunding,
making the capital raising process more efficient for eligible issuers.
By providing targeted relief in a market segment that primarily
attracts small businesses, which are disproportionately affected by
downturns, we expect the temporary rules to incrementally enhance
competition between small businesses and larger companies (which tend
to be less financially constrained).\36\ The temporary rules may also
facilitate capital formation for small companies that previously raised
capital from small investors but that have additional financing needs
as the result of the COVID-19 shock.
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\36\ Research has related small size to financing constraints,
and conversely, larger size to being less financially constrained.
See, e.g., Nathalie Moyen (2004) Investment--Cash Flow
Sensitivities: Constrained versus Unconstrained Firms, Journal of
Finance 59(5), 2061-2092; Christopher Hennessy, Amnon Levy, and Toni
Whited (2007) Testing Q Theory with Financing Frictions, Journal of
Financial Economics 83(3), 691-717. Other studies also show that
diversified firms can rely on internal capital markets to mitigate
financing constraints. See, e.g., Venkat Kuppuswamy and Bel[eacute]n
Villalonga (2016) Does Diversification Create Value in the Presence
of External Financing Constraints? Evidence from the 2007-2009
Financial Crisis, Management Science 62(4), 905-923 (showing that
``the value of corporate diversification increased during the 2007-
2009 financial crisis'' and that ``conglomerates' access to internal
capital markets became more valuable'').
---------------------------------------------------------------------------
We recognize that the effects of the temporary rules on capital
formation may be relatively limited if the issuers relying on the
provided relief would have otherwise pursued a Regulation Crowdfunding
offering and raised a similar amount of financing in the absence of the
relief. However, reliance on the relief might still enable such issuers
to optimize their financing cost and benefit from a more efficient and
streamlined offering process.
We recognize that temporarily relaxing certain substantive and
disclosure requirements of Regulation Crowdfunding may incrementally
raise concerns about investor losses, either due to the investors'
reduced time period within which to make an informed decision about an
offering or the increased ability of opportunistic issuers seeking to
exploit COVID-19 concerns to raise capital from investors through
crowdfunding in an expedited timeframe. Generally, however, the
aggregate incremental effect of the temporary rules on retail investor
losses is likely limited by various factors, including the tailoring of
the relief (e.g., the eligibility requirements) and the modest size of
the Regulation Crowdfunding market compared to other market segments
that draw small investors. In one potential scenario, investors that
receive less information about issuers as a result of the temporary
relief from reviewed financial statement requirements may provide a
lower amount of financing or financing at a higher cost, which may
deter relatively more established, higher-potential issuers from
relying on the temporary rules, resulting in adverse selection. At the
same time, the substantial, market-wide nature of the negative shock to
small issuers' cash flows and financing needs may prompt both low- and
high-potential issuers to rely on the temporary relief in order to
raise funds on an expedited basis, which might counteract such adverse
selection. It is difficult to predict which effect will dominate.
Importantly, several conditions of the temporary rules are expected
to preserve investor protection. As discussed below, the eligibility
requirements exclude issuers that were noncompliant with the
requirements of Regulation Crowdfunding in previous offerings that
resulted in sales. Further, to the extent that investors know less
about newly formed issuers with a limited track record, the incremental
risk of the temporary relief to investors is reduced by the exclusion
from eligibility of issuers formed less than six months prior to the
offering. This limitation on eligibility will tailor the relief to
assist existing issuers that require additional funds because of
adverse effects caused by the closures and safety measures designed to
slow the spread of COVID-19. Issuers are required to disclose reliance
on the temporary rules to investors, enabling more informed decisions.
While issuers may solicit investor interest after an initial Form C
filing lacking financial disclosures, intermediaries are not allowed to
accept investor commitments before the issuer provides all required
financial information.
In addition, several essential safeguards contained in the existing
Regulation Crowdfunding rules, including offering and investment
limits, will continue to apply. Crucially, investment limits serve to
limit the potential magnitude of investor losses, irrespective of
cause. Further, Regulation Crowdfunding offerings will continue to be
conducted through registered crowdfunding intermediaries, which remain
subject to Commission and FINRA oversight. Crowdfunding intermediaries
remain required to take measures to reduce the risk of fraud, provide
investor education materials and issuer disclosures to investors, and
meet other substantive requirements of Regulation Crowdfunding.
Intermediaries remain required to provide communications channels on
the online platform to allow investors to draw on the wisdom of the
crowd, particularly in analyzing dynamic information about short-term
offerings. Issuers remain subject to the extensive disclosure
requirements of Form C as well as annual report obligations. While the
temporary rules provide exceptions to certain timing requirements of
Regulation Crowdfunding for eligible issuers, investors remain able to
rescind their commitments within 48 hours from the time of making their
commitment, and of a material change to the offering.
In light of the temporary nature of the relief, tailored
eligibility criteria, and targeted, conditional relief provisions, we
expect the aggregate economic effects of these temporary rules to be
modest relative to the economic effects of the 2015 Regulation
Crowdfunding rules. Further, the temporary rules may have a limited
effect compared to the overall economic effects of the COVID-19 shock
and the associated changes in market conditions on affected issuers. In
particular, diminished aggregate and industry outlook, investor
confidence, and risk tolerance, as well as negative wealth effects of
the market downturn on investor portfolios and reduced disposable
income due to labor market disruptions may have a negative effect on
investors' willingness to participate in offerings, the likelihood of
offering success, the amount of capital raised, and the offering terms
under Regulation Crowdfunding, irrespective of the temporary rules.
However, it is also possible that some investors in crowdfunding
offerings are more motivated by nonmonetary considerations, such as a
desire to invest in the local community or loyalty to a small business
whose products they buy. Under such circumstances, the deterioration of
financing conditions in the Regulation Crowdfunding market would be
modest relative to that in the market for small cap registered
offerings. Similarly, the temporary rules may have minimal effects on
investor performance in Regulation Crowdfunding offerings, which,
regardless of the temporary relief, may decline as a result of the
effects of the shock on business risk and survival rates of small
firms, particularly in industries heavily represented in the Regulation
Crowdfunding market, the probability of follow-on financing or
[[Page 27123]]
exit, and the valuations obtained as a result of such transactions.
We evaluate the economic effects specific to each provision of the
temporary rules relative to the baseline in greater detail in Sections
VI.B through VI.D below.
2. Baseline and Affected Parties
The baseline is composed of existing Regulation Crowdfunding
regulations and industry practices.\37\ Given the exemption's offering
limit, since Regulation Crowdfunding became effective in 2016, it has
been primarily utilized by small businesses (which typically lack
significant internal cash flows or access to other securities market
financing options). Table 1 below presents data on the characteristics
of issuers in Regulation Crowdfunding offerings.
---------------------------------------------------------------------------
\37\ For a more detailed discussion, see Facilitating Capital
Formation and Expanding Investment Opportunities by Improving Access
to Capital in Private Markets (Mar. 4, 2020), Release No. 33-10763
[85 FR 17956 (Mar. 31, 2020)]; Report to the Commission: Regulation
Crowdfunding (Jun. 18, 2019), available at: https://www.sec.gov/files/regulation-crowdfunding-2019_0.pdf (``2019 Regulation
Crowdfunding Report'').
\38\ The estimates are based on data from Form C or the latest
amendment to it and exclude withdrawn offerings.
Table 1--Characteristics of Issuers in Regulation Crowdfunding
Offerings: May 16, 2016-December 31, 2019 \38\
------------------------------------------------------------------------
Average Median
------------------------------------------------------------------------
Age in years............................ 2.9 1.8
Number of employees..................... 5.3 3.0
Total assets............................ $455,280 $29,982
Total revenues.......................... $325,481 $0
------------------------------------------------------------------------
The median crowdfunding offering was by an issuer that was
incorporated approximately two years earlier and that employed about
three people. The median issuer had total assets of approximately
$30,000 and no revenues (just over half of the offerings were by
issuers with no revenues). Approximately ten percent of offerings were
by issuers that had attained profitability in the most recent fiscal
year prior to the offering.
Small businesses often face significant financing constraints.\39\
Financing constraints make firms more vulnerable to economic downturns
and other adverse shocks.\40\
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\39\ Small businesses often lack access to securities markets
and rely on personal savings, business profits, personal and
business credit, and friends and family as sources of capital. See
U.S. Department of Treasury (2017) A Financial System That Creates
Economic Opportunities: Banks and Credit Unions, June 2017, https://www.treasury.gov/press-center/press-releases/Documents/A%20Financial%20System.pdf (``Treasury Report''). According to one
study relying on the data from the 2014 Annual Survey of
Entrepreneurs, approximately 64 percent of small businesses relied
on personal or family savings, compared to 0.6 percent receiving VC
capital. About one-third of businesses used banks and other
financial institutions as a source of capital for financing business
operations in 2014. A significant share of businesses that
established new funding relationships continued to have unmet credit
needs. See Alicia Robb (2018) Financing Patterns and Credit Market
Experiences: A Comparison by Race and Ethnicity for U.S. Employer
Firms, Working Paper. See also Alicia M. Robb and David Robinson
(2014) The Capital Structure Decisions of New Firms, Review of
Financial Studies 27(1), 153-179 (showing that, while
entrepreneurial firms frequently rely on outside loans, outside
equity use is uncommon); Rebel Cole and Tatyana Sokolyk (2013) How
Do Start-Up Firms Finance Their Assets? Evidence from the Kauffman
Firm Surveys, Working Paper (showing, based on the 2004 Kauffman
Firm Survey, that at start-up 76 percent of firms relied on credit,
including 24 percent that used trade credit, 44 percent--business
credit, and 55 percent--personal credit (percentages do not add up
to 100 percent because firms may use multiple types of credit)).
\40\ Studies of the 2008-2009 financial crisis have documented
disproportionate impacts of the crisis on the outcomes and
employment of financially constrained small businesses. See, e.g.,
Michael Siemer (2019) Employment Effects of Financial Constraints
during the Great Recession, Review of Economics and Statistics
101(1), 16-29; Arthur Kennickell, Myron Kwast, and Jonathan Pogach
(2017) Small Businesses and Small Business Finance during the
Financial Crisis and the Great Recession: New Evidence from the
Survey of Consumer Finances, In: J. Haltiwanger, E. Hurst, J.
Miranda, and A. Schoar (Eds.), Measuring Entrepreneurial Businesses:
Current Knowledge and Challenges, University of Chicago Press, 291-
349; Burcu Duygan-Bump, Alexey Levkov, and Judit Montoriol-Garriga
(2015) Financing Constraints and Unemployment: Evidence from the
Great Recession, Journal of Monetary Economics 75, 89-105. Various
studies of traded small-cap companies show that small firms, which
tend to be most financially constrained, are disproportionately
affected by downturns or tightening credit conditions. See, e.g.,
Gabriel Perez[hyphen]Quiros and Allan Timmermann (2000) Firm Size
and Cyclical Variations in Stock Returns, Journal of Finance 55(3),
1229-1262 (showing that ``small firms display the highest degree of
asymmetry in their risk across recession and expansion states, which
translates into a higher sensitivity of their expected stock returns
with respect to variables that measure credit market conditions'');
Murillo Campello and Long Chen (2010) Are Financial Constraints
Priced? Evidence from Firm Fundamentals and Stock Returns, Journal
of Money, Credit, and Banking 42(6), 1185-1198 (finding that
financially constrained firms' business fundamentals are
significantly more sensitive to macroeconomic movements than
unconstrained firms' fundamentals). See also Eugene Fama and Kenneth
French (1993) Common Risk Factors in the Returns on Stocks and
Bonds, Journal of Financial Economics 3, 3-56.
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Table 2 summarizes amounts sought and capital reported raised in
offerings under Regulation Crowdfunding since its inception through the
end of 2019 (the most recently completed full calendar year of data).
Table 2--Regulation Crowdfunding Offering Amounts and Reported Proceeds, May 16, 2016-December 31, 2019
----------------------------------------------------------------------------------------------------------------
Number Average Median Aggregate
----------------------------------------------------------------------------------------------------------------
Target amount sought in initiated 2,003 $63,791 $25,000 $126.9 million.
offerings.
Maximum amount sought in initiated 2,003 599,835 535,000 1,174.2 million.
offerings.
Amounts reported as raised in 795 213,678 106,900 169.9 million.
completed offerings.
----------------------------------------------------------------------------------------------------------------
During that period, based on the analysis of EDGAR filings, we
estimate that 2,003 offerings were initiated, seeking an aggregate
target amount of $126.9 million and up to an aggregate maximum amount
of $1,174.2 million, and 795 offerings reported aggregate proceeds of
$169.9 million.\41\
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\41\ Issuers that have not raised the target amount or not filed
a report on Form C-U are not included in the estimate of proceeds.
See also 2019 Regulation Crowdfunding Report, at 15, footnote 40.
---------------------------------------------------------------------------
The baseline also includes the recent and ongoing effects of the
disruption to
[[Page 27124]]
the U.S. and global economy related to COVID-19, interventions aimed at
mitigating its effects, and adverse changes in macroeconomic and
financing market conditions (collectively referred to as ``the shock''
or ``the COVID-19'' shock below). As part of the baseline, small
businesses eligible under the existing rules have been facing and are
expected to continue to face significant adverse effects of the shock,
including, but not limited to, declines in consumer demand and
revenues, particularly in consumer-facing industries, such as
restaurants, recreation/lifestyle, and retail \42\ (e.g., as a result
of changes in consumer confidence, commuting and travel patterns,
declines in purchasing power, and explicit restrictions on the
operation of certain businesses); disruptions to workforce and supply
chains; and declines in investor sentiment that affect the availability
of financing, valuations, and potential for exits.\43\ At the same
time, small issuers eligible under the temporary rules may also qualify
for emergency relief under other economic assistance programs, which
may mitigate some of the adverse impacts described above and the
financing constraints stemming from the shock.\44\
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\42\ See, e.g., Devin Thorpe (2019) Startup Restauranteurs Find
Willing Investors via Crowdfunding, Forbes, September 28, 2019, and
2019 US Equity Crowdfunding Stats--Year in Review, available at:
https://crowdwise.org/funding-portals/2019-equity-crowdfunding-stats-data/.
\43\ See supra note 2.
\44\ See infra note 50 and accompanying text.
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We expect the temporary rules to affect issuers, intermediaries,
and investors in Regulation Crowdfunding offerings. As of December
2019, we estimate that 1,827 issuers initiated 2,003 Regulation
Crowdfunding offerings, excluding withdrawn offerings.\45\ As discussed
below, eligibility criteria of the temporary rules exclude (1) issuers
that were organized and had operations for less than six months prior
to the commencement of the offering and (2) issuers that were not
compliant with Regulation Crowdfunding requirements with regard to any
prior offerings in which they sold securities.
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\45\ These figures are based on the three-and-a-half-year period
since inception of Regulation Crowdfunding, with offering activity
accelerating in the second half of the sample period. It is
difficult to predict how many of the past issuers will conduct a
follow-on offering in reliance on the relief as well as how existing
market conditions, which affect both supply and demand of capital,
will affect the flow of new crowdfunding offerings relative to
historical data, thus it is difficult to extrapolate from these
numbers the flow of new crowdfunding offerings projected during the
approximately four-month time frame during which temporary relief
will be available.
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Turning to the first eligibility requirement, historical data
provides an indication of the potential share of offerings eligible for
temporary relief among all offerings: From inception of Regulation
Crowdfunding through the end of December 2019, we estimate that 1,537
(approximately 77 percent) offerings were initiated by 1,407 eligible
issuers.\46\
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\46\ In addition, we recognize that many of the issuers that
initiated past Regulation Crowdfunding offerings as of the end of
2019 may meet the six-month eligibility criterion as of the
effective date of the temporary rules, should they wish to avail
themselves of the temporary relief for a follow-on offering under
Regulation Crowdfunding.
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We lack the data or a methodology to predict how many issuers will
be rendered ineligible as a result of the second eligibility
requirement because it is difficult to estimate the percentage of prior
Regulation Crowdfunding issuers that will seek to conduct a follow-on
offering and that were not compliant with one or more of the
requirements of Regulation Crowdfunding with regard to a prior offering
in which they sold securities. Based on historical data, this
percentage may be modest because relatively few Regulation Crowdfunding
issuers have initiated follow-on offerings in the past. We estimate
that, from inception through the end of 2019, there were 149 repeat
Regulation Crowdfunding issuers, including 116 such issuers that had
reported successful completion of at least one Regulation Crowdfunding
offering on Form C-U as of the end of 2019.\47\
---------------------------------------------------------------------------
\47\ This figure likely provides a lower bound on the number of
issuers that have initiated a follow-on offering after successfully
completing a prior offering due to incomplete reporting of offering
proceeds on Form C-U. See supra note 41.
---------------------------------------------------------------------------
Staff's experience with, and analysis of, filings has revealed
differences among issuers' compliance with financial statement
requirements, the requirement to file an annual report on Form C-AR
(for issuers that have sold securities under the exemption and have not
terminated their reporting obligations), and the requirement to file a
final progress update on Form C-U.\48\ We further recognize that the
rate of participation of repeat issuers based on historical Regulation
Crowdfunding data may underestimate the rate of repeat issuers likely
to seek capital under Regulation Crowdfunding while the temporary rules
are in effect because: (1) Follow-on Regulation Crowdfunding offerings
have become more frequent in the latter part of the historical sample
period since more initial offerings had been conducted, and we expect
the number of repeat issuers to continue to increase as time elapses
and more issuers, intermediaries, and investors gain experience with
Regulation Crowdfunding; (2) financing needs of issuers affected by the
shock may be greater than predicted by historical data, leading to
increased reliance on follow-on external financing, compared to
historical rates; and (3) the relief provided by the temporary rules
may make a Regulation Crowdfunding offering a more attractive and
viable financing alternative for small issuers.
---------------------------------------------------------------------------
\48\ See 2019 Regulation Crowdfunding Study, at 28.
---------------------------------------------------------------------------
We estimate that, as of the end of 2019, there were 45 registered
funding portals, excluding funding portals that had withdrawn their
registration. In addition, 16 registered broker-dealers have
participated in crowdfunding offerings, excluding withdrawn offerings.
Information on the number of investors per offering is not available
for the full sample of Regulation Crowdfunding offerings, and it is not
required to be reported in progress updates on Form C-U.\49\
---------------------------------------------------------------------------
\49\ See 2019 Regulation Crowdfunding Report, at 21, footnote 54
and accompanying text. According to one industry report, the total
number of investors in successful offerings increased from 77,558 in
2017 to 147,448 in 2018.
---------------------------------------------------------------------------
We are unable to predict the number of issuers likely to rely on
the temporary rules while they are in effect. On the one hand, the
number of issuers seeking capital under Regulation Crowdfunding may
exceed the estimates based on extrapolation from historical data
because of the significant increase in small businesses' external
financing needs as a result of the economic shock of COVID-19. Further,
the flexibility and offering process efficiencies afforded by the
temporary rules may draw additional issuers to Regulation Crowdfunding.
On the other hand, some issuers eligible under the temporary rules,
particularly better established issuers or issuers that are more
connected to angel investors, may choose to pursue another exempt
offering, such as an offering under 17 CFR 230.506 (Rule 506 of
Regulation D), to meet their financing needs. Other such issuers may
choose to pursue a Regulation Crowdfunding offering but forgo the
temporary relief in an attempt to send a favorable signal of their
financial soundness in the face of the COVID-19 shock to prospective
investors. The latter point may not be as significant for the
likelihood of issuer uptake of the temporary relief to the extent that
issuers not reliant on the temporary relief may still have to disclose
material information about
[[Page 27125]]
business and financial risks, including as a result of the COVID-19
shock, in their offering and periodic disclosures. The prominent
disclosures of offering process and disclosure accommodations that an
issuer is relying upon under the temporary rules due to being impacted
by COVID-19 may cause some investors to forgo investing in those
offerings out of concern about business risk, which may in turn deter
some issuers from relying on the temporary rules. Further, some small
businesses eligible under the temporary rules also may be eligible for
other emergency relief or financial assistance,\50\ which may reduce
their reliance on the temporary rules.
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\50\ See COVID-19 Resources for Small Businesses, https://www.sec.gov/page/covid-19-resources-small-businesses.
---------------------------------------------------------------------------
B. Conditions of the Temporary Rules: Eligibility Criteria and
Disclosure of Reliance on Temporary Relief
The temporary rules include several conditions for using the
relief. First, to be eligible under the temporary rules, issuers must
have been organized and had operations for at least six months prior to
the commencement of the offering. This condition is intended to target
relief towards issuers that were in existence prior to the COVID-19
shock and suffered its adverse effects on their business, resulting in
a need for financing to be raised on an expedited basis. This provision
will prevent more recently formed issuers from realizing the benefits
of the temporary relief, which could limit the benefits of the rule on
capital formation and efficiency. As discussed above, from inception
through the end of 2019, we estimate that 77 percent of offerings were
initiated by issuers that would have met this eligibility
criterion.\51\
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\51\ The fraction of offerings eligible based on this criterion
is estimated, given data availability, on the basis of the issuer
having been organized for at least six months as of the initial Form
C filing and having reported positive cash or other assets,
revenues, net profits, employees, debt, cost of goods sold, or taxes
paid for the most recent fiscal period shown in the initial Form C
filing. See supra note 9. We recognize that this estimate may not be
a precise reflection of the number of eligible issuers to the extent
that an issuer may have had operations over the past six months but
may not yet have reported positive financial statement activity
based on the above metrics.
---------------------------------------------------------------------------
We recognize that some issuers that are organized within six months
prior to the offering, and thus ineligible under the temporary rules,
may also experience adverse effects of the shock, including being
unable to raise adequate financing in an initial crowdfunding offering
or experiencing challenges in executing their business plan as a result
of the shock. This eligibility condition might place newly organized
issuers at an incremental competitive disadvantage. Issuers whose age
is approaching six months might postpone the offering until they are
eligible under the temporary rules. Generally, any effect of this
provision on competition is likely limited compared to such issuers'
potential competitive disadvantage stemming from limited investor
recognition as a result of being recently formed and having a limited
track record.
Second, issuers that previously sold securities in a Regulation
Crowdfunding offering and were not in compliance with Regulation
Crowdfunding requirements are not eligible to rely on the temporary
rules. To the extent that an expedited offering process might
incrementally reduce the ability of investors to analyze information
about the offering, the exclusion of such previously noncompliant
issuers from an expedited offering process is expected to mitigate
potential effects on investors and reinforce investor protection. This
condition may also incrementally incentivize issuers to remain
compliant with Regulation Crowdfunding requirements, further
strengthening investor protection. As a result of the provision, some
issuers that have failed to comply with Regulation Crowdfunding
requirements will not realize the benefits of the temporary rules,
which would incrementally limit the capital formation benefits of the
temporary rules. Some of the noncompliance might be due to the issuer's
lack of securities market experience and inability to afford outside
securities counsel and a dedicated accounting staff to prepare
compliant offering materials or ongoing disclosure, rather than
intentional noncompliance. However, we believe that applying the
exclusion to noncompliant issuers that had raised capital in a prior
offering appropriately balances such considerations with the need to
preserve investor protection, particularly in an environment of
heightened market risk.
Relatedly, the temporary rules amend the intermediary requirements
of Rule 301 and specify that intermediaries must have a reasonable
basis for believing that an issuer seeking to rely on the temporary
rules that has previously sold securities in a Regulation Crowdfunding
offering has complied with the requirements of Regulation Crowdfunding.
This provision is expected to reinforce the investor protection
benefits of the described eligibility condition while imposing an
incremental cost on intermediaries that facilitate offerings reliant on
the temporary rules. The provision that allows intermediaries to rely
on the representations of the issuer concerning compliance, unless the
intermediary has reason to question the reliability of those
representations, is expected to moderate the economic effects of this
intermediary requirement.
Third, the temporary rules specify that a condition to each aspect
of the temporary relief is clear disclosure to investors with respect
to the issuer's reliance on the temporary relief. Relatedly, the
temporary rules make conforming amendments to intermediary requirements
to ensure that investors are apprised of issuer reliance on the
temporary rules. By conveying the fact that certain offering process
mechanics may differ from those of a typical Regulation Crowdfunding
offering, as well as the fact that the issuer is being affected by
COVID-19, this disclosure requirement is expected to benefit investors
and allow them to make a better informed investment decision. Further,
to the extent that it provides clarity as to the modified offering
process terms, it is expected to facilitate competition for investor
capital among issuers that rely on the temporary relief and issuers
that are ineligible for, or choose not to rely on, the temporary
relief. We recognize that some investors may fail to fully consider the
described disclosure when making their investment decisions. However,
the incremental effects of this failure to fully factor in the issuer's
reliance on temporary relief may be modest given the continued
application of other essential investor protection safeguards and the
fact that, under the baseline, these same investors may fail to fully
process information contained in other substantive disclosures under
Regulation Crowdfunding and materials about the offering process.
Finally, the relief under these rules is limited to eligible
issuers seeking to conduct a Regulation Crowdfunding offering on an
expedited basis due to circumstances relating to COVID-19 during the
period specified in the temporary rules. The time-limited, tailored
nature of the relief is expected to limit the aggregate economic
effects of the rule while also targeting the benefits to small issuers
that are most affected by the shock.
We have considered alternatives to the described conditions of the
temporary rules. As an alternative, we could relax the issuer age
requirement (e.g., removing the requirement for the issuer to have
operations or shortening the period from six to three months) or waive
it but preserve the exclusion of noncompliant issuers in prior
offerings. As another alternative, we could extend
[[Page 27126]]
the relief under the temporary rules to all first-time Regulation
Crowdfunding issuers or to all issuers below a certain size, such as $1
million in total assets. These alternatives could expand the capital
formation benefits compared to the temporary rules and extend the
benefits to a larger pool of financially constrained issuers that may
seek capital on an expedited basis from retail investors. As of the end
of 2019, we estimate that 78 percent of offerings were by issuers
organized at least six months and 86 percent of offerings--by issuers
organized at least three months--prior to the initial Form C filing for
that offering, irrespective of whether they had operations; 91 percent
of offerings were by first-time crowdfunding issuers; and 93 percent of
offerings were by crowdfunding issuers with total assets below $1
million (these are overlapping subsets of issuers). However, relaxing
or waiving the issuer age requirement or extending the relief to all
initial Regulation Crowdfunding offerings would result in offering
process and disclosure relief being temporarily extended to less well-
known issuers with shorter track records, potentially increasing risks
to investors and adverse selection, compared to the temporary rules.
As another alternative, we could waive the requirement to
prominently disclose reliance on the relief as a condition of using the
relief provided in the temporary rules. Compared to the temporary
rules, this alternative may increase the attractiveness of the relief
to prospective Regulation Crowdfunding issuers and decrease issuer
concerns about prominently signaling to investors the vulnerability of
their business to the effects of COVID-19 (however, issuers not relying
on the temporary relief may have to disclose some related information
about the effects of COVID-19 in offering materials and periodic
reports if it materially affects the risks facing their business), and
the modified information and offering process requirements of their
offering. At the same time, by failing to provide relevant disclosure
to investors about material modifications to offering process and
disclosures applicable to a given offering, this alternative may result
in less informed investor decisions, compared to the temporary rules.
As another alternative, we could shorten or extend the period of
the temporary relief. Such an alternative would decrease or increase,
respectively, the aggregate economic effects of the rules and the
number of issuers eligible to qualify for the relief, compared to the
temporary rules.
C. Temporary Relief From Certain Financial Information Requirements
1. Temporary Omission of Financial Statements From Initial Form C
Filing
The temporary rules provide flexibility for eligible issuers to
assess the probable interest in a Regulation Crowdfunding offering
prior to preparation of full offering materials that include financial
statement information.\52\ The temporary rules are expected to benefit
issuers by allowing greater flexibility to communicate with prospective
investors about the contemplated offering and to gauge market interest
prior to incurring the full cost of preparation of financial statement
disclosures. The temporary rules are expected to particularly benefit
prospective issuers that do not have current financial statements
available and that may otherwise find it difficult to prepare the
required financial statements in order to launch a timely offering.
This is expected to have favorable incremental effects on capital
formation and the efficiency of the capital raising process for
eligible issuers that choose to rely on this provision. These benefits
are expected to be particularly important in the current environment of
increased market uncertainty as a result of the COVID-19 shock, which
can make it more difficult for issuers to gauge prospective investor
demand for their offering. Further, issuers with binding financing
constraints and scarce cash reserves may hesitate to incur the upfront
costs of preparation of financial statement disclosures for an offering
that may fail to draw prospective investor interest. Among various
issuers eligible under the temporary rules, this benefit is likely to
be especially valuable for smaller, less well known, and first-time
issuers that may not have financial statement disclosures otherwise
available and that may lack an accurate understanding of prospective
investor demand for their securities, have a high degree of information
asymmetry, or operate in lines of business characterized by a
considerable degree of uncertainty and/or more pronounced effects of
the COVID-19 shock.
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\52\ See temporary Rule 201(z)(2).
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If, after communicating with investors, the issuer is not confident
that it would attract sufficient investor interest, the issuer could
amend offering plans or the target amount of the offering, reconsider
the contemplated offering structure and terms, postpone the offering,
or explore alternative methods of raising capital. The temporary rules
may attract some eligible issuers that may be uncertain about the
prospects of raising investor capital through a Regulation Crowdfunding
offering, thus potentially promoting competition for investor capital
as well as capital formation in this market segment. The temporary
rules are expected to reduce uncertainty about whether a Regulation
Crowdfunding offering could be completed successfully before the issuer
incurs the costs of preparing financial statement disclosures. While
this provision can reduce the risk of a failed offering after an issuer
has incurred financial statement costs, an issuer that solicits
interest on the basis of a public filing of an initial offering
circular may still incur some reputational costs of failure to attract
sufficient investor commitments.
We recognize that there may also be potential costs associated with
the temporary rules. In particular, if financial statement information
is omitted at the investor interest solicitation stage, it may result
in an incomplete representation of the risk of an offering. If
investors later fail to read the offering circular that is subsequently
amended to include financial information disclosures before making the
investment decision, they may make less informed investment decisions.
In the specific context of the COVID-19 shock, to the extent that
issuer financial disclosures are historical in nature (although issuers
must disclose certain material subsequent events in the notes to
financial statements), such disclosures may be relatively less
meaningful for purposes of assessing the current financial condition
and future growth prospects of an issuer that has experienced
significant adverse effects of the COVID-19 shock. In some cases,
investors may be members of a local community that know the business
well, which may give them insight into the issuer's prospects during
and after the COVID-19 shock. Further, historical financial disclosures
may be incrementally less meaningful for evaluating the business of a
relatively recently formed or development-stage issuer (e.g., an issuer
organized more than six months but less than a year prior to the
commencement of an offering or an issuer that has not yet developed
substantial business operations). Finally, intermediaries for issuers
relying on the temporary rules would not be allowed to accept investor
commitments until financial information disclosures are provided.
Overall, potential investor protection concerns discussed above are
expected to be substantially alleviated by several factors: The
application of the anti-fraud
[[Page 27127]]
provisions of the Federal and state securities laws; \53\ prominent
disclosures to investors regarding reliance on the temporary rules; the
requirement that financial disclosures be available before investor
commitments may be accepted, providing investors (and the Commission)
with the ability to review financial information; the availability of
investor education materials required to be provided by crowdfunding
intermediaries before investing; the continued application of other
provisions of Regulation Crowdfunding, including ones expected to
provide additional investor protection, such as investment limits,
offering limits, crowdfunding intermediary obligations to take measures
to reduce the risk of fraud and other intermediary requirements,
periodic reporting requirements, and issuer eligibility restrictions;
and the reputational incentives of issuers and intermediaries, as well
as the potential risk of litigation.
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\53\ The initial offering circular used to solicit investors
under the temporary rules will continue to be treated as an offer of
securities.
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Because the filing of the initial offering circular used to solicit
investor interest will be a requirement, this provision will provide
information to investors and allow them to compare the initial offering
circular with any amended offering statement disclosures, leading to
potentially more informed investment decisions. In addition, the
requirement in the temporary rules that the initial offering circular
used to solicit investor interest contain all offering disclosures as
specified in Regulation Crowdfunding, except financial statement
information, is expected to maintain investor protection. Moreover,
prominent disclosure regarding reliance on the temporary rules that
reminds investors to review the amended offering circular augmented
with financial disclosures, also required to be filed, is expected to
encourage investors to make informed decisions after considering the
full financial picture of the issuer.
As an alternative to the temporary rules, we could permit eligible
issuers to avail themselves, on a temporary, conditional basis, of the
option to engage in a broader range of pre-offering communications than
what is permitted under the temporary rules, such as by allowing pre-
filing solicitations of interest. Such an alternative would afford
greater flexibility to issuers and potentially result in larger capital
formation benefits, compared to the temporary rules. However, we
believe that a more limited approach is appropriate in the context of
temporary, conditional relief we are adopting to assist issuers
affected by the COVID-19 shock.
2. Temporary Relief From the Review Report Requirement for Smaller
Offerings
As discussed in Section III above, we are providing temporary,
conditional exemptive relief from the independent accountant review
report requirement to issuers in Regulation Crowdfunding offerings of
up to $250,000, inclusive of amounts sold in the prior 12 months, in
reliance on Regulation Crowdfunding. Under the existing rules, issuers
are not required to submit an independent accountant's review report if
they are offering up to $107,000. Issuers seeking to conduct an
offering under Regulation Crowdfunding in excess of $107,000 at this
time may be facing challenges in obtaining reviewed financial
statements in a time frame that would be helpful to an issuer with
immediate capital needs due to the COVID-19 shock. By allowing issuers
to gain more timely access to capital, the temporary rules are expected
to facilitate capital formation and benefit eligible issuers affected
by the COVID-19 shock that may be facing unexpected financing
constraints or delays in raising capital due to a temporary inability
to retain an independent accountant.\54\ Temporary Rule 201(z)(3)
allows eligible issuers in offerings of up to $250,000, rather than
$107,000, to provide financial statements and certain information from
the issuer's Federal income tax returns, both certified by the
principal executive officer, in accordance with Rule 201(t)(1)
requirements, if reviewed or audited financial statements of the issuer
are not then available.
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\54\ This may be a particularly salient concern for small
issuers that sought to use an individual Certified Public Accountant
(``CPA'') or a small accounting firm to obtain a review report as
such accounting firms' operations and business may themselves be
adversely impacted by the COVID-19 shock, resulting in potential
reductions in service, extended delays, and additional costs for
small issuers that require a review report.
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We expect this relief to allow issuers to raise capital without
incurring costs and delays involved in an independent accountant's
review of their financial statements. This may incrementally enhance
the efficiency of conducting the offering and yield capital formation
benefits for eligible issuers that find themselves financially
constrained and in need of financing in excess of $107,000 but up to
$250,000 on an expedited basis as a result of the COVID-19 shock. To
the extent that issuers relying on the relief under these temporary
rules are likely to be small businesses, this provision is expected to
incrementally promote competition between such smaller issuers and
larger issuers.
The upfront costs of obtaining a review report may be nontrivial
for small issuers, particularly issuers experiencing declines in
internal cash flows as a result of the COVID-19 shock. Available filing
data does not allow us to estimate the cost of obtaining a review
report. In the 2015 Regulation Crowdfunding Adopting Release, the
Commission estimated review costs to be approximately $1,500 to
$18,000.\55\ We also consider more recent information about the costs
of a review report available from commenters and industry sources. For
example, one industry source estimates the cost of a review as $2,000
to $2,450 for a single-owner LLC/S-Corp/Sole Proprietor issuer that has
not previously had a review or audit but is in possession of full
financial records.\56\ If the same single-owner issuer that has not
previously had a review or audit instead tracks financials in a
spreadsheet format (e.g., because it lacks an in-house accountant), the
same source estimates the review cost as approximately $2,400 to
$2,950.\57\ A commenter on the 2019 Harmonization Concept Release \58\
states that it has ``interviewed dozens of CPA firms and found that the
average cost of reviewing a company that has two years of financial
history is at least $6,000'' and that ``[f]or a company with no
history, this quote (from many CPA firms) has been in the $1,500 to
$2,500 range.'' \59\
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\55\ See Crowdfunding, Release No. 33-9974 (Oct. 30, 2015) [80
FR 71387 (Nov. 16, 2015)] (``2015 Regulation Crowdfunding Adopting
Release''), at 71499.
\56\ See CrowdfundCPA Crowdfunding Audit/Review Cost Calculator,
available at: http://crowdfundcpa.com/cost-estimate_calculator.html
(retrieved April 22, 2020). These are estimates based on a
hypothetical issuer. Costs may vary depending on the accountant and
the issuer's circumstances.
\57\ See id.
\58\ See Concept Release on Harmonization of Securities Offering
Exemptions, Release No. 33-10649 (Jun. 18, 2019) [84 FR 30460 (Jun.
26, 2019).
\59\ See Letter from Mainvest (Sep. 24, 2019), available at:
https://www.sec.gov/comments/s7-08-19/s70819-6193357-192513.pdf.
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It is difficult to estimate how many of the eligible issuers will
elect to avail themselves of this relief. Based on data from inception
through the end of 2019, we estimate that 59 offerings by eligible
issuers (76 offerings by all issuers, irrespective of age) sought above
$107,000 but no more than $250,000.\60\
[[Page 27128]]
It is possible that some of the issuers within the eligible range will
forgo reliance on the temporary rules in order to more credibly signal
to prospective investors the quality of their financial disclosures.
From a costly signaling standpoint, eligible issuers with lower
information asymmetries or higher potential might incur the review
report cost in order to differentiate themselves from eligible issuers
that choose to provide a principal executive officer certification with
their financial disclosures in lieu of a review report. This might
introduce adverse selection among eligible issuers that choose to avail
themselves of the relief from the review report requirement in reliance
on the temporary rules, which in turn might limit investor willingness
to back such offerings and moderate the capital formation benefits of
the temporary relief. At the same time, such quality-based separation
may not occur if the business and cash flow disruptions due to the
COVID-19 shock cause a number of both low- and high-potential eligible
issuers to be unable to incur the upfront costs and delays associated
with obtaining a review report and thus elect to forgo it. Further, if
the market volatility and recent business disruptions due to the COVID-
19 shock effectively render historical financial disclosures and
associated proxies for their reliability less relevant for projecting
an issuer's future growth potential, risks, and cash flows, a review
report may become a noisier and less informative signal of quality for
affected issuers.
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\60\ The above counts are based on XML data in Form C filings.
See supra note 51 for the definition of eligible issuers. Amounts
sought are based on data either in the initial Form C filing, or the
latest amendment to it at the offering level, if the offering has
been amended. Withdrawn offerings are excluded. The above estimates
are calculated at the offering level and do not adjust for issuers
with follow-on offerings within 12 months of prior financing raised
under Regulation Crowdfunding. In cases of offerings that accept
oversubscriptions, the maximum offer amount is used to estimate the
number of issuers eligible under the temporary rules. See also supra
note 45 and accompanying and following text.
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We recognize that the number of issuers seeking up to $250,000 in
reliance on the temporary rules may be greater than suggested by the
historical data on the distribution of Regulation Crowdfunding offering
amounts if the exemptive relief from the review report requirement
under the temporary rules leads issuers that would otherwise cap their
offering size at a lower threshold under the existing rules (to avoid
the costs of a review report) to offer a larger amount in reliance on
the temporary rules. For example, there was some bunching around the
review report threshold in the historical distribution of offerings as
of December 2019, with an estimated 275 offerings by eligible issuers
(356 offerings by all issuers) seeking amounts equal to the review
report offer size threshold that was in effect at the time of the
offering.\61\ Some of the issuers in that category might elect to avail
themselves of the temporary rules and seek larger amounts up to
$250,000 under the temporary rules.
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\61\ The above counts are based on XML data in Form C filings.
See id. The estimates consider offerings with offer size of $107,000
in the period following the April 2017 amendments and offerings with
offer size of $100,000 in the period prior to the amendments. See
Inflation Adjustments and Other Technical Amendments under Titles I
and III of the JOBS Act (Technical Amendments; Interpretation),
Release No. 33-10332 (Mar. 31, 2017) [82 FR 17545 (Apr. 12, 2017)].
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Although a review report provides a more limited level of assurance
compared to an audit report, reviewed financial statements confer
valuable informational benefits to investors.\62\ Thus, temporarily
exempting a broader range of issuers from the review report
requirement, particularly in an environment of heightened market
uncertainty, may result in less information for investor decisions and
additional risks to investor protection. Exemptive relief from the
review report requirement might weaken the incentives of some issuers
to provide compliant financial statement disclosures since they no
longer would be required to undergo a review by an independent
accountant and to provide such a report to investors, resulting in
potentially less informative financial disclosures provided to
investors in affected offerings. For example, some financial statement
disclosures provided by issuers below the existing review report
threshold are not prepared in a U.S. GAAP-compliant manner.\63\ As
discussed above, however, in the specific context of the COVID-19
shock, to the extent that issuer financial disclosures are historical
in nature, such disclosures might be relatively less meaningful for
purposes of assessing the current financial condition and growth
prospects of an issuer that was financially sound but has experienced
significant adverse effects as a result of the COVID-19 shock. Further,
historical financial disclosures may be incrementally less meaningful
for evaluating the business of a recently formed or development-stage
issuer.\64\
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\62\ See, e.g., Brad Badertscher, Jaewoo Kim, William Kinney,
and Edward Owens (2018) Verification Services and Financial
Reporting Quality: Assessing the Potential of Review Procedures,
Working Paper (``[b]oth reviews and audits yield significantly
better reporting quality scores and lower cost of debt than zero-
verification compilations. However, model-based reporting quality
scores of reviews and audits are indistinguishable statistically, on
average. Regarding broader economics, we find that relative to
compilations, reviews yield more than half the added interest rate
benefit associated with an audit, at considerably less than half the
added cost. Overall, our results suggest reviews may provide a cost-
effective verification alternative to audits, and the potential of
analytical procedures warrants more attention by audit researchers
and regulators.'')
\63\ See, e.g., Letter from CrowdCheck (Oct. 30, 2019)
commenting on the 2019 Harmonization Concept Release, available at:
https://www.sec.gov/comments/s7-08-19/s70819-6368811-196431.pdf
(stating that its belief that ``the larger concern for Regulation CF
is the fact that, as we discovered in the course of the Compliance
Survey, issuers making offerings for under $107,000 do not appear to
be producing financial statements in a format anything close to
GAAP'').
Separately, one of the intermediary respondents to the
Regulation Crowdfunding survey stated that ``smaller issuers that do
not have reviewed or audited financial statements may find it
difficult to prepare a statement of changes of equity, because the
typical accounting software does not print it automatically. This
respondent stated that these issuers also often have trouble
accurately preparing a cash flow statement or accounting for stock
issuances or issuances of stock options and warrants.'' See 2019
Regulation Crowdfunding Report, at 32.
\64\ See, e.g., Letter from Mainvest (stating that ``a company
with no operating history simply does not have historical financial
information that can be reviewed. Issuers on our platform
unfortunately are required to get CPA reviews of a balance sheet
with almost no zeros [sic]. This adds practically no value to
investor protections and significantly increases up-front costs to
companies.'').
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Importantly, several provisions of the temporary rules are expected
to mitigate potential risks to investors. Issuers relying on the
temporary rules must still provide financial statement disclosures at
the time of the offering, certified by the principal executive officer.
Further, an issuer relying on this temporary rule would be required to
provide prominent disclosure to that end. Moreover, temporary exemptive
relief from the review report requirement does not preclude liability
in instances of materially misleading financial disclosures provided at
the time of the offering, and general anti-fraud provisions and
liability for offers under Regulation Crowdfunding will continue to
apply. Finally, as discussed in Section VI.A above, the remaining
investor protections of Regulation Crowdfunding would generally
continue to provide significant safeguards for investors in offerings
reliant on the temporary rules.
We have considered several alternatives to the temporary rules. The
temporary rules provide exemptive relief from the review requirement
for qualifying offerings by eligible issuers. As one alternative, we
could implement a temporary deferral (e.g., for 90 days after the
closing of the offering), rather than a waiver of the review report
requirement for qualifying offerings.
[[Page 27129]]
Compared to the temporary rules, such an alternative would result in
significantly more modest benefits for issuers, which would still have
to incur the costs of a review report (as discussed above, such costs
may be nontrivial compared to the typical amounts of offering
proceeds). Obtaining a review report, even after a deferral, may be
challenging for issuers facing significant financing constraints as a
result of the COVID-19 shock. This alternative might lead fewer issuers
to rely on the temporary relief and result in smaller capital formation
benefits, compared to the temporary rules. Compared to the temporary
rules, the review report required under this alternative would provide
informational benefits to investors (especially since reviewed
financial statements are not required in annual reports unless
otherwise available) and on the margin could incentivize issuers to
provide investors with compliant and accurate financial disclosures at
the time investors make an investment decision. However, because
Regulation Crowdfunding securities have transferability restrictions
and generally are not traded in a secondary market, the benefits of a
review report provided ex post to investors might be relatively limited
since investors cannot readily use this information to divest or
reallocate their investment in crowdfunding securities.\65\
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\65\ See 2019 Regulation Crowdfunding Report, at 53-54.
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As a different alternative, we could lower (increase) the offering
size threshold used in conjunction with the temporary relief for
issuers eligible under the temporary rules or for all issuers eligible
under Regulation Crowdfunding. Table 3 below summarizes the potential
effects of these alternatives based on historical data on offering size
distribution.\66\
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\66\ See supra note 60.
\67\ See id.
Table 3--Potential Number of Offerings Eligible for Temporary Relief
From the Review Report Requirement Under Alternative Offering Size
Thresholds \67\
------------------------------------------------------------------------
Offerings by
Offerings seeking above $107,000 and up eligible Offerings by
to issuers all issuers
------------------------------------------------------------------------
$200,000................................ 33 44
$250,000................................ 59 76
$300,000................................ 96 125
$400,000................................ 140 183
$500,000................................ 248 324
------------------------------------------------------------------------
As noted above, the number of issuers electing to avail themselves
of the relief under such alternatives may exceed the number of affected
issuers on the basis of historical data if issuers previously seeking
amounts equal to the review report threshold elect to increase offering
size as a result of the relief. Compared to the temporary rules, the
alternatives of lowering (increasing) the offering size threshold would
decrease (increase) the number of issuers eligible for the review
report exemption and the resulting capital formation and efficiency
benefits but also lead to a smaller (larger) aggregate reduction in the
information available to investors.
D. Temporary Suspension of Certain Timing Requirements for Offerings
Under Regulation Crowdfunding
The temporary rules provide eligible issuers with greater
flexibility to close a Regulation Crowdfunding offering early and
access capital sooner than would be possible in the absence of the
temporary relief.
1. Temporary Suspension of 21-Day Requirement
Existing Rule 303 of Regulation Crowdfunding specifies that the
information in an offering statement must be publicly available for at
least 21 days before securities may be sold, although the intermediary
may accept investment commitments during that time, as well as imposes
a 21-day requirement with respect to the availability of issuer
information when a funding portal is directing a qualified third party
to transmit funds to an issuer. As discussed in Section IV above, in
light of the need for expedited access to capital among small business
issuers affected by the COVID-19 shock, the temporary rules we are
adopting would replace the 21-day requirement with the requirement that
the intermediary make the required issuer information publicly
available on the online platform before securities are sold in the
offering.\68\ The intermediary will be allowed to accept investment
commitments during the time such information is made available, but
only if the issuer has provided complete financial information
disclosures.\69\ In addition, the temporary rules will waive the 21-day
requirement in Rule 303(e)(3)(i) for funding portals with respect to
directing a transmission of funds.
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\68\ Market participants have indicated that these timing
requirements, in light of business disruptions resulting from COVID-
19, may make it difficult for issuers with urgent funding needs to
make use of Regulation Crowdfunding to receive funds promptly. See
supra note 2.
\69\ See Section III.A for a discussion of an issuer's ability
to omit financial statements pursuant to temporary Rule 201(z)(2).
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The temporary rules will provide faster access to capital for
eligible issuers that are able to reach the target amount quickly,
resulting in potential capital formation benefits and greater
efficiency of the capital raising process for such issuers. It is
difficult to predict how many issuers will be affected. While
historical data suggests that the typical offering duration was longer
than the 21-day period,\70\ it is likely that these estimates may not
be representative of the offering duration time frames sought by
financially constrained issuers affected by the COVID-19 shock under
the temporary rules that enable an expedited offering process. Some
issuers absorbing unexpected significant shocks to their internal cash
flows and carrying limited, if any, cash reserves,\71\ might be facing
binding liquidity constraints or risk of insolvency after a few weeks
without additional funding, resulting in a heightened value of
expedited access to capital.
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\70\ Based on the analysis of Form C data from inception of
Regulation Crowdfunding through the end of 2019, we estimate that
the average (median) duration of a Regulation Crowdfunding offering
from initial Form C filing to offering deadline was approximately
four months (three months).
\71\ Based on the data from inception through the end of 2019,
the median (average) Regulation Crowdfunding offering was made by an
issuer with $4,655 ($78,867) in cash holdings.
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We recognize that waiving the 21-day period may reduce the time
afforded to investors to evaluate the information about the issuer
before making the investment decision. It is important to note,
however, that investors seeking to participate in an offering may
continue to evaluate information about the offering after the offering
begins accepting commitments and before the offering closes. Further,
the requirement that all required disclosures be made available before
the intermediary may begin accepting commitments is expected to enable
investors to reach an informed decision. Finally, the requirement that
prominent disclosure be provided to indicate that the offering is being
conducted on an expedited basis is expected to inform investors about
the modified offering process. Other important Regulation Crowdfunding
safeguards, including extensive issuer disclosure requirements and most
intermediary requirements of Regulation Crowdfunding, will continue to
apply, as discussed in Section VI.A above.
As an alternative, we considered shortening rather than eliminating
the
[[Page 27130]]
21-day period. Compared to the temporary rules, preserving a waiting
period before investment commitments may be accepted would provide less
flexibility to financially constrained issuers to quickly access
capital. At the same time, compared to the temporary rules, it would
provide investors with additional time to evaluate information about
the issuer. The incremental effect of such a provision for the ability
of investors to make informed decisions about the offering is likely to
vary across investors and issuers.
2. Temporary Changes to the Cancellation Process
Under the existing rules investors may rescind their commitment up
until the final 48 hours of the offering (except in the event of a
material change to the offering, where investors may rescind the
commitment later on). As discussed above, the temporary rules would
narrow the rescission window to 48 hours from the time of their
investment commitment (or such later period as the issuer may
designate), or a material change to the offering, if it occurs at a
later time. Further, once an issuer has received binding investment
commitments (that is, investment commitments for which the 48-hour
cancellation period has run) covering the target offering amount, the
issuer will be allowed to close the offering prior to the deadline
identified in its offering materials, but the issuer would be required
to provide the relevant disclosure to that effect and notice that the
target offering amount has been met. The temporary rules would waive
the requirement that the intermediary provide notice to investors at
least five business days prior to the new offering deadline.
The temporary rules are expected to benefit eligible issuers by
giving them the flexibility to close the offering and to receive access
to the raised funds sooner, which may be particularly valuable for
issuers facing unexpected financing constraints as a result of the
COVID-19 shock. Reduced incidence of late investor commitment
cancellations and the ability to more easily close an offering that has
reached the target amount prior to the deadline can increase the
efficiency of the offering process. As a result of expedited offering
completion, we also expect the temporary rules to provide incremental
benefits for capital formation and, to the extent that small issuers
are relatively more likely to rely on these rules, we expect favorable
effects on competition.
By restricting investor ability to rescind commitments, the
temporary rules will reduce investor flexibility to adjust their
crowdfunding investments based on supplemental information (other than
a material change to the offering) arriving more than 48 hours after
their commitment, including the flow of other investors' commitments
and communications on the online platform that occur more than 48 hours
after the investor's own commitment,\72\ or based on changes in the
investor's opinion of the issuer, financial circumstances, or other
factors. Some investors that would have sought to cancel their
commitment after 48 hours may find themselves unable to do so. We
expect the prominent disclosure regarding the different cancellation
process for issuers relying on the temporary rules to provide adequate
notice to investors, allowing investors to adjust their initial
commitment decisions accordingly. It is difficult to predict how a
typical investor will adjust behavior in response to this change. Some
investors may exercise greater caution with respect to the amount
invested, hesitate to invest early in the offering, opting to observe
the wisdom of the crowd, or be more inclined to cancel the commitment
if the ``wisdom of the crowd'' (offering progress or communications
from other investors on the online platform) within 48 hours of the
commitment reveals mixed signals. Other investors may engage in more
due diligence in light of the reduced ability to rely on the gradual
accumulation of the wisdom of the crowd. These adjustments in investor
behavior may also be affected by issuer choices with respect to
offering duration and early closing of offerings. For example, the
short offering duration or the possibility that an offering may close
early may induce some investors to participate in an offering early on,
which may counteract some of the conservatism discussed above. Thus,
changes in investor behavior and their impacts on the likelihood of
offering success and performance of crowdfunding investments are likely
to vary across investors and issuers.
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\72\ Predictions in prior research studies regarding the impact
of social interaction akin to ``wisdom of the crowd'' on investor
decisions are mixed. See 2015 Regulation Crowdfunding Adopting
Release, at 71495, footnote 1346.
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Besides the required disclosure of the modified cancellation
process and the 48-hour period for rescission of commitments for any
reason, the ability of investors to rescind commitments in the event of
a material change to the offering will remain as a crucial investor
protection. Further, as discussed in Section VI.A above, various
safeguards will continue to apply to all Regulation Crowdfunding
offerings, including offerings relying on the temporary rules, which is
expected to mitigate potential effects of the temporary rules on the
risk of investor losses.
It is difficult to predict how many issuers and investors will be
affected by these changes. Information on amounts invested by investors
in each offering is not available in required Regulation Crowdfunding
disclosure. Based on a subset of data made available by one
crowdfunding intermediary,\73\ we find that: (i) Among all investor-
initiated cancellations, the median and average cancellation time was
approximately five and 25 days, respectively, and cancellations after
48 hours were relatively common (58 percent of investor-initiated
cancellations); (ii) approximately 88 percent of offerings had at least
one investor-initiated cancellation after 48 hours, and the aggregate
amount of such cancellations accounted for approximately 48 percent of
all investor-initiated cancellations in dollar terms but only eight
percent of aggregate net investor commitments in dollar terms; (iii)
approximately nine percent of investors had initiated at least one
cancellation, including an estimated six percent of investors that
initiated at least one cancellation after 48 hours, however, investors
with cancellations participated in significantly more offerings on
average. Based on this data, while cancellations after 48 hours appear
to be a fairly common occurrence, they were concentrated among
relatively few investors and accounted for a small share of net
aggregate commitments in dollar terms. We are unable to assess whether
these data are representative of commitment cancellations for other
issuers, platforms, and time periods, particularly in light of the
significant market uncertainty related to the COVID-19 shock, which
might increase investor willingness to cancel commitments as a result
of evolving market conditions or personal financial
[[Page 27131]]
circumstances. Further, we cannot gauge what proportion of eligible
issuers will elect to restrict commitment cancellations after 48 hours,
permitted by the temporary rules. Finally, as discussed above, investor
behavior with respect to initial commitments and their cancellations is
likely to adjust at least to some extent in response to changes
introduced by the temporary rules.
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\73\ We examine investor-initiated cancellations outside of the
48-hour window using a subset of data made available by Wefunder for
a period from May 2016 through September 2018. Given the focus on
investor cancellations, to avoid biasing the estimates, we include
all offerings and investments, including failed and ongoing
offerings, in the provided subset of data. Investments and investors
have unique identifiers in the provided subset of data. We use the
``investor canceled'' cancellation reason to differentiate investor-
initiated cancellations from cancellations due to failure to
reconfirm a commitment following material changes, oversubscription,
or offering expiration or termination by the issuer. These estimates
use the full sample. Restricting the sample to offerings by eligible
issuers in a sensitivity analysis has little effect on the discussed
estimates.
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As an alternative, we considered extending the minimum time frame
during which investors are able to rescind their commitments for any
reason beyond 48 hours. Alternatively, we could shorten or even
eliminate the 48-hour period for rescinding the commitments for any
reason, absent a material change to the offering. The alternatives of
shortening (extending) the time period for canceling commitments would
provide greater (lesser) certainty to issuers with respect to interim
progress towards the offering target and the likelihood of offering
success, potentially making the process of raising financing under
Regulation Crowdfunding relatively more efficient and more attractive
to prospective issuers, compared to the temporary rules. At the same
time, the alternatives of shortening (extending) the time period for
canceling commitments would provide less (more) flexibility to
investors to gradually process information about the offering and
incorporate the gradually accumulating wisdom of the crowd in their
final investment decision, compared to the temporary rules. It is
likely, however, as discussed above, that at least some investors will
adjust their behavior in response to the changes to the cancellation
process in ways that may counteract some of these effects.
VII. Procedural and Other Matters
The Administrative Procedure Act (``APA'') generally requires an
agency to publish notice of a rulemaking in the Federal Register and
provide an opportunity for public comment. This requirement does not
apply, however, if the agency ``for good cause finds . . . that notice
and public procedure are impracticable, unnecessary, or contrary to the
public interest.'' \74\ The APA also generally requires that an agency
publish an adopted rule in the Federal Register at least 30 days before
it becomes effective. This requirement does not apply, however, if the
agency finds good cause for making the rule effective sooner.\75\
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\74\ 5 U.S.C. 553(b)(3)(B).
\75\ 5 U.S.C. 553(d)(3).
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Given the temporary nature of the relief contemplated by the
temporary final rules and the significant, unprecedented, and immediate
impact of COVID-19 on affected issuers, as discussed above, the
Commission finds that good cause exists to dispense with notice and
comment as impracticable, unnecessary, or contrary to the public
interest, and to act immediately to amend Rules 100, 201, 301, 303 and
304 of Regulation Crowdfunding.\76\ In particular, small businesses
affected by the closures and safety measures designed to slow the
spread of COVID-19 may face urgent funding needs \77\ that could be
addressed by use of the internet to reach potential investors. In the
current circumstances, a delay in implementation would substantially
undermine the relief intended by the temporary rules and could
exacerbate the existing challenges faced by many small businesses in
urgent need of capital to continue their operations.
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\76\ This finding also satisfies the requirements of 5 U.S.C.
808(2), allowing the temporary final rules to become effective
notwithstanding the requirement of 5 U.S.C. 801 (if a Federal agency
finds that notice and public comment are impractical, unnecessary or
contrary to the public interest, a rule shall take effect at such
time as the Federal agency promulgating the rule determines). The
temporary final rules also do not require analysis under the
Regulatory Flexibility Act. See 5 U.S.C. 604(a) (requiring a final
regulatory flexibility analysis only for rules required by the APA
or other law to undergo notice and comment).
\77\ See supra note 1.
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The temporary final rules will provide relief from certain
financial information requirements of Regulation Crowdfunding. In
addition, the temporary final rules will require issuers relying on the
temporary relief to provide certain additional disclosures, although we
expect the burden of those disclosures to be minimal. Overall, we
expect the temporary final rules to result in a net decrease in
compliance burden per form for Form C (OMB Control No. 3235-0307);
however, because of a possible increase in the number of issuers
relying on Regulation Crowdfunding, we believe that the net change in
paperwork burden will be minimal.\78\ Accordingly, we are not adjusting
the burden or cost estimates associated with existing collections of
information under Regulation Crowdfunding for purposes of the Paperwork
Reduction Act of 1995.\79\
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\78\ We note that the temporary nature of the amendments and the
inherent uncertainty in estimating how many issuers will take
advantage of the temporary relief makes estimation of the net change
in paperwork burden difficult.
\79\ 44 U.S.C. 3501 et seq.
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Pursuant to the Congressional Review Act,\80\ the Office of
Information and Regulatory Affairs has designated these amendments as
``a major rule,'' as defined by 5 U.S.C. 804(2).
---------------------------------------------------------------------------
\80\ 5 U.S.C. 801 et seq.
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Statutory Basis and Text of Amendments
We are adopting temporary amendments to Rules 100, 201, 301, 303,
and 304 of Regulation Crowdfunding and Form C under the authority set
forth in the Securities Act (15 U.S.C. 77a et seq.), particularly,
Section 28 thereof.
List of Subjects
17 CFR Part 227
Crowdfunding, Funding Portals, Intermediaries, Reporting and
recordkeeping requirements, Securities.
17 CFR Part 239
Administrative practice and procedure, Reporting and recordkeeping
requirements, Securities.
In accordance with the foregoing, title 17, chapter II of the Code
of Federal Regulations is amended as follows:
PART 227--REGULATION CROWDFUNDING, GENERAL RULES AND REGULATIONS
0
1. The authority citation for part 227 continues to read as follows:
Authority: 15 U.S.C. 77d, 77d-1, 77s, 77z-3, 78c, 78o, 78q, 78w,
78mm, and Pub. L. 112-106, secs. 301-305, 126 Stat. 306 (2012).
0
2. Amend Sec. 227.100 by adding paragraph (b)(7) to read as follows:
Sec. 227.100 Crowdfunding exemption and requirements.
* * * * *
(b) * * *
(7) Seeks to rely on Sec. 227.201(z) to conduct an offering on an
expedited basis due to circumstances relating to coronavirus disease
2019 (COVID-19), where such offering is initiated between May 4, 2020,
and August 31, 2020, and:
(i) Was organized and had operations less than six months prior to
the commencement of the offering; or
(ii) Sold securities in reliance on section 4(a)(6) of the
Securities Act and has not complied with the requirements in section
4A(b) of the Securities Act (15 U.S.C. 77d-1(b)) and the related
requirements in this part.
* * * * *
0
3. Amend Sec. 227.201 by adding paragraph (z) to read as follows:
Sec. 227.201 Disclosure requirements.
* * * * *
(z) Between May 4, 2020, and August 31, 2020, an issuer may
initiate an offering intended to be conducted on an expedited basis due
to circumstances relating to COVID-19. Such issuer:
[[Page 27132]]
(1) Must prominently provide the following information:
(i) A statement that the offering is being conducted on an
expedited basis due to circumstances relating to COVID-19 and pursuant
to the SEC's temporary regulatory COVID-19 relief set out in this part;
(ii) If the issuer is relying on paragraph (z)(2) of this section
to omit the information required by paragraph (t) of this section in
the initial Form C: Offering Statement (Form C) (Sec. 239.900 of this
chapter) filed with the Commission and provided to investors and the
relevant intermediary in accordance with Sec. 227.203(a)(1), a
statement that:
(A) The financial information that has been omitted is not
currently available and will be provided by an amendment to the
offering materials;
(B) The investor should review the complete set of offering
materials, including previously omitted financial information, prior to
making an investment decision; and
(C) No investment commitments will be accepted until after such
financial information has been provided; and
(iii) If the issuer is relying on paragraph (z)(3) of this section
to provide financial statement information required by paragraph (t)(1)
of this section, a statement that financial information certified by
the principal executive officer of the issuer has been provided instead
of financial statements reviewed by a public accountant that is
independent of the issuer; and
(iv) In lieu of the information required by paragraph (j) of this
section, a description of the process to complete the transaction or
cancel an investment commitment, including a statement that:
(A) Investors may cancel an investment commitment for any reason
within 48 hours from the time of his or her investment commitment (or
such later period as the issuer may designate);
(B) The intermediary will notify investors when the target offering
amount has been met;
(C) The issuer may close the offering at any time after it has
aggregate investment commitments for which the right to cancel pursuant
to paragraph (z)(1)(iv)(A) of this section has lapsed that equal or
exceed the target offering amount (absent a material change that would
require an extension of the offering and reconfirmation of the
investment commitment); and
(D) If an investor does not cancel an investment commitment within
48 hours from the time of the initial investment commitment, the funds
will be released to the issuer upon closing of the offering and the
investor will receive securities in exchange for his or her investment;
(2) May omit the information required by paragraph (t) of this
section in the initial Form C: Offering Statement (Form C) (Sec.
239.900 of this chapter) filed with the Commission and provided to
investors and the relevant intermediary in accordance with Sec.
227.203(a)(1) if such information is unavailable at the time of filing,
but the intermediary may not accept any investment commitments until
complete information required under paragraph (t) of this section is
provided through an amendment to the Form C in accordance with Sec.
227.203(a)(2); and
(3) May comply with the requirements of paragraph (t)(1) of this
section instead of paragraph (t)(2) for an offering or offerings that,
together with all other amounts sold under section 4(a)(6) of the
Securities Act (15 U.S.C. 77d(a)(6)) within the preceding 12-month
period, have, in the aggregate, a target offering amount of more than
$107,000, but not more than $250,000, and financial statements of the
issuer that have either been reviewed or audited by a public accountant
that is independent of the issuer are unavailable at the time of
filing.
0
4. Amend Sec. 227.301 by adding paragraph (d) to read as follows:
Sec. 227.301 Measures to reduce risk of fraud.
* * * * *
(d) Have a reasonable basis for believing that an issuer seeking to
initiate an offering of securities between May 4, 2020, and August 31,
2020, in reliance on section 4(a)(6) of the Securities Act through the
intermediary's platform on an expedited basis due to circumstances
relating to COVID-19 that has previously sold securities in reliance on
section 4(a)(6) of the Securities Act has complied with the
requirements in section 4A(b) of the Act (15 U.S.C. 77d-1(b)) and the
related requirements in this part. In satisfying the requirement in
this paragraph (d), an intermediary may rely on the representations of
the issuer concerning compliance with the requirements in this
paragraph (d) unless the intermediary has reason to question the
reliability of those representations.
0
5. Amend Sec. 227.303 by adding paragraph (g) to read as follows:
Sec. 227.303 Requirements with respect to transactions.
* * * * *
(g) Temporary requirements. (1) An intermediary in a transaction
involving the offer or sale of securities initiated between May 4,
2020, and August 31, 2020, in reliance on section 4(a)(6) of the
Securities Act by an issuer that is conducting an offering on an
expedited basis due to circumstances relating to COVID-19:
(i) Shall prominently make publicly available on the intermediary's
platform the issuer information required pursuant to Sec.
227.201(z)(1);
(ii) Shall not be required to comply with paragraph (a)(2) of this
section; and
(iii) Shall make the issuer information described in paragraph
(g)(1)(i) of this section publicly available on the intermediary's
platform before any securities are sold in the offering. The
intermediary may accept investment commitments during the time such
information is made available, but only if the issuer has provided the
information required by Sec. 227.201(t) or, if applicable, Sec.
227.201(z)(3) in either the initial Form C: Offering Statement (Form C)
(Sec. 239.900 of this chapter) filed with the Commission and provided
to investors and the relevant intermediary in accordance with Sec.
227.203(a)(1) or through an amendment to the Form C in accordance with
Sec. 227.203(a)(2); and
(2) A funding portal that is an intermediary in a transaction
involving the offer or sale of securities initiated between May 4,
2020, and August 31, 2020, in reliance on section 4(a)(6) of the
Securities Act (15 U.S.C. 77d(a)(6)) by an issuer that is conducting an
offering on an expedited basis due to circumstances relating to COVID-
19 shall not be required to comply with the requirement in paragraph
(e)(3)(i) of this section that a funding portal not direct a
transmission of funds earlier than 21 days after the date on which the
intermediary makes publicly available on its platform the information
required to be provided by the issuer under Sec. Sec. 227.201 and
227.203(a).
0
6. Amend Sec. 227.304 by adding paragraph (e) to read as follows:
Sec. 227.304 Completion of offerings, cancellations and
reconfirmations.
* * * * *
(e) Temporary requirements. The following shall apply in lieu of
paragraphs (a) and (b) of this section with respect to an offering
initiated between May 4, 2020, and August 31, 2020, that is intended to
be conducted on an expedited basis due to circumstances relating to
COVID-19:
(1) An investor may cancel an investment commitment for any reason
within 48 hours from the time of his or her investment commitment (or
such later period as the issuer may designate). After such 48 hour
period, an investment commitment may not be
[[Page 27133]]
cancelled except as provided in paragraph (c) of this section; and
(2) If an issuer has received aggregate investment commitments for
which the right to cancel pursuant to paragraph (e)(1) has lapsed
covering the target offering amount prior to the deadline identified in
its offering materials pursuant to Sec. 227.201(g), the issuer may
close the offering on a date earlier than the deadline identified in
its offering materials pursuant to Sec. 227.201(g), provided that:
(i) The issuer has complied with Sec. 227.201(z);
(ii) The intermediary provides notice to any potential investors,
and gives or sends notice to investors that have made investment
commitments in the offering, that the target offering amount has been
met; and
(iii) At the time of the closing of the offering, the issuer
continues to meet or exceed the target offering amount.
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
0
7. The general authority citation for part 239 continues to read as
follows:
Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3,
77sss, 78c, 78l, 78m,78n, 78o(d), 78o-7 note, 78u-5, 78w(a), 78ll,
78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24, 80a-26,
80a-29, 80a-30, and 80a-37; and sec. 107, Pub. L. 112-106, 126 Stat.
312, unless otherwise noted.
* * * * *
0
8. Amend Form C (referenced in Sec. 239.900) by adding a new second
paragraph to the introductory paragraphs in the Optional Question and
Answer Format for an Offering Statement to read as follows:
Note: The text of Form C does not, and this amendment will not,
appear in the Code of Federal Regulations.
FORM C
UNDER THE SECURITIES ACT OF 1933
* * * * *
OPTIONAL QUESTION AND ANSWER FORMAT FOR AN OFFERING STATEMENT
Respond to each question in each paragraph of this part. Set forth
each question and any notes, but not any instructions thereto, in their
entirety. If disclosure in response to any question is responsive to
one or more other questions, it is not necessary to repeat the
disclosure. If a question or series of questions is inapplicable or the
response is available elsewhere in the Form, either state that it is
inapplicable, include a cross-reference to the responsive disclosure,
or omit the question or series of questions.
If you are seeking to rely on the Commission's temporary rules to
initiate an offering between May 4, 2020, and August 31, 2020 intended
to be conducted on an expedited basis due to circumstances relating to
coronavirus disease 2019 (COVID-19), you will likely need to provide
additional or different information than described in questions 2, 12,
and 29. When preparing responses to such questions, please carefully
review temporary Rules 100(b)(7), 201(z), and 304(e) and tailor your
responses to those requirements.
* * * * *
By the Commission.
Dated: May 4, 2020.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020-09806 Filed 5-4-20; 4:15 pm]
BILLING CODE 8011-01-P