2018 Rules 300-304 Supporitng Statement

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission for
Rules 300-304 of Crowdfunding (Intermediaries)
This submission is being made pursuant to the Paperwork Reduction Act of 1995, 44
U.S.C. Section 3501 et seq.
A.

JUSTIFICATION
1.

Information Collection Necessity

The Jumpstart our Business Startups Act (the “JOBS Act”) 1 enacted on April 5, 2012
established the foundation for a regulatory structure for startups and small businesses to conduct
securities offerings using the Internet through crowdfunding under new Section 4(a)(6) of the
Securities Act of 1933 (“Section 4(a)(6)”). The crowdfunding provisions of the JOBS Act
require persons who act as intermediaries in a transaction involving the offer or sale of securities
pursuant to Section 4(a)(6) to register with the Securities and Exchange Commission (the
“Commission”) as a broker or a funding portal.
On October 23, 2013, the Commission proposed Rules 300-304 under the Securities Act
of 1933 (“Securities Act”) to impose certain burdens and recordkeeping requirements on
intermediaries. 2 On October 30, 2015, the Commission adopted rules and forms to implement
Rules 300-304 of Regulation Crowdfunding. 3 The rules are based on an intermediary
developing an electronic platform to offer or sell securities in reliance on Section 4(a)(6).
Rule 300 requires an intermediary to be registered with the Commission as a broker or as
a funding portal and be a member of a registered national securities association. 4 Registration
for brokers requires the filing of Form BD and, if withdrawing from registration, the filing of
Form BDW. Brokers must also promptly amend Form BD when information changes or
becomes inaccurate. 5
Rule 301 requires intermediaries to have a reasonable basis for believing that an issuer
seeking to offer and sell securities in reliance on Section 4(a)(6) through the intermediary’s
platform complies with the requirements in Section 4A(b) of the Securities Act and the related
1

Pub. L. No. 112-106, 126 Stat. 306 (2012).

2

See Regulation Crowdfunding, Exchange Act Release No. 70741, (Oct. 23, 2013) 78 Fed.
Reg. 66428, 66559-62 (Nov. 5, 2013) (“Proposing Release”).

3

See Regulation Crowdfunding, Exchange Act Release No. 76324 (Oct. 30, 2015), 80 Fed.
Reg. 71387 (Nov. 16, 2015) (Final Rule) (“Regulation Crowdfunding”).

4

Currently, FINRA is the only registered national securities association.

5

Registration of funding portals is addressed in a different PRA submission.

requirements in Regulation Crowdfunding. In satisfying this requirement, an intermediary may
rely on the representations of the issuer concerning compliance with these requirements unless
the intermediary has reason to question the reliability of those representations. Rule 301 further
requires intermediaries to have a reasonable basis for believing that an issuer has established
means to keep accurate records of the holders of the securities it will offer and sell through the
intermediary’s platform, provided that an intermediary may rely on the representations of the
issuer concerning its means of recordkeeping unless the intermediary has reason to question the
reliability of those representations. Rule 301 also requires intermediaries to conduct a
background and securities enforcement regulatory history check on each issuer whose securities
are to be offered by the intermediary and on each officer, director or beneficial owner of 20
percent or more of the issuer’s outstanding voting equity securities to determine whether the
issuer or specified person is subject to a disqualification.
Rule 302 provides that no intermediary or associated person of an intermediary may
accept an investment commitment in a transaction involving the offer or sale of securities made
in reliance on Section 4(a)(6) until the investor has opened an account with the intermediary and
the intermediary has obtained from the investor consent to electronic delivery of materials. The
rule further requires intermediaries to deliver educational materials to such investors.
Additionally, an intermediary is required to inform investors that any person who promotes an
issuer’s offering for compensation, whether past or prospective, or who is a founder or an
employee of an issuer that engages in promotional activities on behalf of the issuer on the
intermediary’s platform, must clearly disclose in all communications on the intermediary’s
platform, respectively, the receipt of the compensation and that he or she is engaging in
promotional activities on behalf of the issuer.
Rule 303 requires an intermediary to make publicly available on its platform the
information that an issuer of crowdfunding securities is required to provide to potential investors,
in a manner that reasonably permits a person accessing the platform to save, download or
otherwise store the information, for a minimum of 21 days before any securities are sold in the
offering, during which time the intermediary may accept investment commitments. This
information, including any additional information provided by the issuer, must remain publicly
available on the intermediary’s platform until the offer and sale of securities is completed or
cancelled. Rule 303 also requires intermediaries to comply with the requirements related to the
maintenance and transmission of funds. An intermediary that is a registered broker is required to
comply with the requirements of Rule 15c2-4 of the Securities Exchange Act of 1934
(“Exchange Act”) (Transmission or Maintenance of Payments Received in Connection with
Underwritings). 6 An intermediary that is a registered funding portal must direct investors to
transmit the money or other consideration directly to a qualified third party that has agreed in
writing to hold the funds for the benefit of, and to promptly transmit or return the funds to, the
persons entitled thereto in accordance with Regulation Crowdfunding. For purposes of
Regulation Crowdfunding, a qualified third party means (i) a registered broker or dealer that
carries customer or broker or dealer accounts and holds funds or securities for those persons or
(ii) a bank or credit union (where such credit union is insured by National Credit Union
6

17 CFR 240.15c2-4.

2

Administration) that has agreed in writing either to hold the funds in escrow for the persons who
have the beneficial interests therein and to transmit or return such funds directly to the persons
entitled thereto when so directed by the funding portal as described in Regulation Crowdfunding.
A funding portal is also required to promptly direct the qualified third party to either (i) transmit
funds from the qualified third party to the issuer when the aggregate amount of investment
commitments from all investors is equal to or greater than the target amount of the offering; (ii)
return to funds to an investor when an investment commitment has been cancelled or (iii) return
funds to investors when an issuer does not complete the offering.
The rules also require intermediaries to implement and maintain systems to comply with
the information disclosure, communication channels, and investor notification requirements.
These requirements include providing disclosure about compensation at account opening (Rule
302), obtaining investor acknowledgements to confirm investor qualifications and review of
educational materials (Rule 303), providing investor questionnaires (Rule 303), providing
communication channels with third parties and among investors (Rule 303), notifying investors
of investment commitments (Rule 303), confirming completed transactions (Rule 303) and
confirming or reconfirming offering cancellations (Rule 304).
2.

Information Collection Purpose and Use

The provisions of Rule 301 helps ensure that intermediaries take measures to reduce the
risk of fraud with respect to transactions made in reliance on Section 4(a)(6). Specifically, the
duty placed on intermediaries to have a reasonable basis for believing that an issuer complies
with applicable requirements provides an additional layer of assurance that issuers had followed
regulations. Likewise, the requirement that intermediaries have a reasonable basis for believing
that an issuer has established a means to keep accurate records of security holders aids in
ensuring that records exist and can be accessed by regulators, if requested. The requirement that
intermediaries conduct a background and securities enforcement regulatory history check on
each issuer and specified persons to determine whether the issuer or person is subject to a
disqualification helps ensure that Section 4(a)(6) can be appropriately relied upon by the issuer.
The requirement under Rule 302 that an investor open an account with the intermediary
provides the intermediary with basic information about the investor and helps ensure that the
intermediary knows the identity of the person using its platform. An intermediary’s obligation to
provide information through electronic delivery of materials helps ensure the timely transmission
of information necessary under the proposed rules. The provisions requiring intermediaries to
provide educational materials to investors and to inform investors about disclosures relating to
promoters aid investors in understanding risks and making appropriate investment decisions.
Likewise, the requirement that an intermediary disclose the manner in which it is compensated
further informs investors about the offering and any potential conflicts of interest.
Rule 303’s provision requiring an intermediary to make publicly available on its platform
the information that an issuer of crowdfunding securities is required to provide to potential
investors helps ensure that investors have full and continuing access to this information. The
requirements that an intermediary must have a reasonable basis for believing that the investor
satisfies investment limitations, obtain certain representations from investors, and obtain a
3

questionnaire demonstrating certain aspects of an investor’s understanding of the investment
serve to protect investors. The obligation that intermediaries comply with the requirements
related to the maintenance and transmission of funds assists in safeguarding investor funds.
Finally, the requirement that intermediaries send notices of investment commitments and
confirmations enables investors to track their investments.
The requirements under Rules 302 through 304 mandating that intermediaries implement
and maintain systems to comply with information disclosure requirements and communication
channels aid information flow to investors. Additionally, an intermediary’s development of an
electronic platform to offer or sell securities in reliance on Section 4(a)(6) helps facilitate
transactions expeditiously and in the manner contemplated by Congress in Title III of the JOBS
Act.
3.

Consideration Given to Information Technology

The rules require that all crowdfunding transactions under Section 4(a)(6) be conducted
through a registered intermediary on an Internet website or other similar electronic medium to
help ensure that the offering is accessible to the public and that members of the crowd can share
information and opinions. The rules do not permit offerings to be conducted through means
other than the Internet or similar electronic medium because allowing other non-electronic
means will be inconsistent with the underlying principles of crowdfunding and the statute.
Under the rules, all information to be provided by intermediaries must be provided
electronically, and investors are permitted to participate only if they agree to accept electronic
delivery of all documents in connection with the offering. Requiring investors to consent to
electronic delivery of documents relating to the offering, and requiring that intermediaries
provide information electronically, facilitates the ability of the investor, intermediary, and issuer
to comply with, and act in a timely manner, with respect to certain requirements of Regulation
Crowdfunding.
4.

Duplication

Intermediaries are involved in a new market sector. Intermediaries that are brokers will
be subject to existing broker-dealer requirements; however, Regulation Crowdfunding was
drafted taking into account existing regulation so as to avoid any duplication. Funding portals,
in particular, are also subject to FINRA’s funding portal rules. FINRA’s rules are streamlined to
reflect the limited scope of activity permitted by funding portals and do not duplicate
information collected by the Commission. As detailed below, the regulatory scheme for
intermediaries has been crafted from existing broker rules which are either expressly applied to
intermediaries or tailored to fit the new market.
Rule 302 requires intermediaries to open an account for investors, to provide educational
materials, and to disclose information about promoters’ and the intermediary’s compensation.
The requirement to open an account is standard practice by brokers in the securities industry.
The additional requirements under Rule 302 provide a regulatory framework for the new,
Internet-based market and are not duplicative of rules currently in effect.
4

Rule 303 requires intermediaries to make certain issuer information available, make
determinations as to investor qualifications, provide communication channels, give investor
notifications concerning commitments, maintain and transmit funds in accordance with the rule,
and send confirmations. To avoid duplication, the Commission did not impose obligations on
brokers regarding the maintenance and transmission of investor funds beyond those currently
required by existing Rule 15c2-4, to which they are already subject. To tailor the regulatory
scheme to the new market, however, Rule 303(f)(2) allows an intermediary to be exempt from
the confirmation requirements of Exchange Act Rule 10b-10 7 (Confirmation of Transactions) if
the intermediary satisfies certain requirements outlined in Regulation Crowdfunding. All other
requirements under Rule 303 are new requirements and not duplicative.
Rule 301 (requiring an intermediary to take measures to reduce the risk of fraud) and
Rule 304 (requiring intermediaries to give notices regarding certain events related to an offering)
are tailored to the new crowdfunding market for which rules are not yet in place.
5.

Effect on Small Entities

The Commission’s rules do not define “small business” or “small organization” for
purposes of intermediaries involved in the offer or sale of securities in reliance on Section
4(a)(6). Intermediaries are required by statute to register with the Commission. As such, the
final rules and forms affect intermediaries, which c be small entities. The Commission does not
believe differing compliance or reporting requirements or an exemption from coverage of the
final rules and forms, or any part thereof, for small entities is appropriate or consistent with
investor protection or with the Commission’s understanding of Congress’s intent to have the
Commission register intermediaries and oversee their activities. Thus, the rules and forms are
designed to impose only those burdens necessary to accomplish the objectives of the JOBS Act
and minimize any significant adverse impact on small entities.
6.

Consequences of Not Conducting Collection

The collection of information under the rules and forms is designed to establish a regulatory
framework for intermediaries. The registration regime allows the Commission to retrieve and
analyze the data it needs more efficiently, which enhances the Commission’s ability to carry out
its mission with respect to intermediaries involved in the offer and sale of securities in reliance
on Section 4(a)(6) effectively. Absent this registration regime, funding portals would not have a
permanent mechanism through which to satisfy the requirement in the JOBS Act that they
register with the Commission. Additionally, the consequence of not imposing other obligations
on intermediaries would be contrary to the purposes of the JOBS Act.
7.

7

Inconsistencies with Guidelines in 5 CFR 1320.5(d)(2)

17 CFR 240.10b-10.

5

There are no special circumstances. This collection is consistent with the guidelines in 5
CFR 1320.5(d)(2).
8.

Consultations Outside the Agency

The required Federal Register notice with a 60-day comment period soliciting comments
on this collection of information was published. No public comments were received.
9.

Payment or Gift

Not applicable.
10.

Confidentiality

The records required by Rules 301 through 304 are available only for the examination of the
SEC staff, state securities authorities, and self-regulatory organizations. Subject to the provisions of
the Freedom of Information Act, 5 U.S.C. § 552 (2012), and the SEC’s rules thereunder (17 CFR
200.80(b)(4)(iii)), the SEC does not generally publish or make available information contained in
any reports, summaries, analyses, letters, or memoranda arising out of, in anticipation of, or in
connection with an examination or inspection of the books and records of any person or any other
investigation. This information is useful in connection with the Commission’s enforcement and
examination functions pursuant to Section 15B(c) of the Exchange Act. Nonetheless, as stated in
the instructions to the Form BD, social security numbers (“SSNs”) are not required to be given.
Furthermore, SSNs are not included in publicly available versions of the form.
11.

Sensitive Questions

No information of a sensitive nature, including social security numbers, will be required
under this collection of information. The information collection does not collect personally
identifiable information (“PII”). The agency has determined that a system of records notice
(“SORN”) and privacy impact assessment (“PIA”) are not required in connection with the
collection of information.
12.

Information Collection Burden

The rules require intermediaries to register with us as either a broker or funding portal.
Based on information collected from Forms C-U collected from the date of effectiveness of the
rules through June 30, 2018, there are 52 intermediaries registered with the Commission,
including 43 funding portals and 9 broker-dealers. We also believe that 5 intermediaries per year
that are not already registered as brokers will choose to be registered as funding portals in Y2
and Y3 and 5 intermediaries in Y2 and Y3 that are already registered as brokers with the
Commission will choose to add to their current service offerings by also becoming crowdfunding
intermediaries. For purposes of this PRA analysis, we have assumed that there are 48 funding
portal registrants, 5 of which are new intermediaries and 14 broker-dealer registrants, 5 of which
are new to crowdfunding.

6

a.

Development and Maintenance of Intermediary Platform

The rules are based on an intermediary developing an electronic platform to engage in
transactions involving the offer or sale of securities in reliance on Section 4(a)(6). A broker or
funding portal that develops its initial platform in-house incurs an initial time burden associated
with setting up its system. We estimate that intermediaries creating the initial platform in-house
typically have a team of approximately 4 to 6 developers that work on all aspects of platform
development, including, but not limited to, front-end programming, data management, systems
analysis, communication channels, document delivery, and Internet security. To develop a
platform in-house, we estimate that intermediaries spend an average of 1,500 hours for planning,
programming and implementation. 8
If we assume that half of the 10 newly-registered intermediaries each year develop their
initial platforms in-house, the total number of intermediary respondents is 10 9 with a total initial
one-time burden of 15,000 hours over the three-year period. 10
We estimate that annually updating the features and functionality of an intermediary’s
platform requires approximately 20% of the hours required to initially develop the platform, for
an average burden of 300 hours per year. We assume that each year half of the intermediaries
update their systems accordingly. The total ongoing burden will be 27,900 hours over the threeyear period including the newly-registered intermediaries from each year before. 11
In summary, the Commission estimates that, over a three-year period, the total burden
for the development and maintenance of an intermediary platform will be 42,900 hours, or
14,300 hours per year 12 when annualized over three years. We estimate that approximately
half of this burden is a recordkeeping burden, and half is a third-party disclosure burden.
b.

Measures to Reduce the Risk of Fraud

The rules require intermediaries to have a reasonable basis for believing that an issuer
seeking to offer and sell securities in reliance on Section 4(a)(6) through the intermediary’s
8

This average takes into account intermediaries that will develop a brand new platform
and those that will modify an existing platform to function in accordance with Regulation
Crowdfunding.

9

5 (estimated number of intermediaries Y2) + 5 (estimated number of intermediaries Y3) =
10.

10

Y2 (1,500 hours × 5 new intermediaries) + Y3 (1,500 hours × 5 new intermediaries) =
15,000 hours.

11

(300 hours × 31 intermediaries) ×3 years = 27,900 hours.

12

15,000 hours (burden for developing an intermediary platform in-house, over three years)
+ 29,700 hours (burden to update system, over three years) = 42,900 hours ÷ 3 = 14,300
hours per year.

7

platform complies with the requirements in Section 4A(b) and the related requirements in
Regulation Crowdfunding. 13 The rules also require intermediaries to have a reasonable basis for
believing that an issuer has established means to keep accurate records of the holders of the
securities it offers and sells through the intermediary’s platform. For both requirements, an
intermediary may reasonably rely on the representations of the issuer, unless the intermediary
has reason to question the reliability of those representations.
For the purposes of the PRA analysis, we expect that 100% of intermediaries will rely on
the representations of issuers. This imposes an estimated time burden in the first year of five
hours per intermediary to establish standard representations it will request from issuers, and 6
minutes per intermediary per issuer to obtain the issuer representation. These estimates are
consistent with estimates we have used for other regulated entities to obtain similar
documentation, such as consents, from customers. Based on our estimate that there will be
approximately 480 14 offerings per year, and that there will be approximately 62 intermediaries 15,
we calculate that each intermediary will facilitate approximately 8 offerings per year. 16
Therefore, we estimate that for the 20 new intermediary respondents, the total initial one-time
burden will be 116 hours over the three-year period. 17
We believe that the ongoing time burdens for this requirement will be approximately one
hour per intermediary per year to review and check that the standard representations it requests
from issuers remain appropriate, and 6 minutes per intermediary per issuer to obtain the
representation. Therefore, we estimate that the ongoing total burden hours necessary for
intermediaries to rely on the representations of the issuers will be approximately 335 hours over
the three-year period. 18

13

See Rule 301(a) of Regulation Crowdfunding.

14

According to filings made on Form C-U with the Commission, 960 crowdfunding
offerings were initiated from May 16, 2016 to June 30, 2018 for an average of
approximately 480 offerings conducted over approximately two years.

15

Y1 (52 intermediaries) + Y2 (62 intermediaries) + Y3 (72 intermediaries) = 186
intermediaries/3=62 intermediaries

16

480 offerings ÷ 62 = 7.7.

17

Y2 ((5 hours/intermediary x 10 new intermediaries) + (6 minutes/issuer x 8 offerings x
(10 new intermediaries)) + Y3 ((5 hours/intermediary x 10 new intermediaries) + (6
minutes/issuer x 8 offerings x (10 new intermediaries)) = 116 hours.

18

(1 hour/intermediary x 62 intermediaries) + (6 minutes/issuer x 8 offerings x (62
intermediaries)) x 3 = 335 hours.

8

In summary, the Commission estimates that, over a three-year period, the total
recordkeeping burden associated with measures taken to reduce the risk of fraud will be 451
hours or 150 hours per year 19 when annualized over three years.
c.

Account Opening: Accounts and Electronic Delivery

The rules provide that no intermediary or associated person of an intermediary may
accept an investment commitment in a transaction involving the offer or sale of securities made
in reliance on Section 4(a)(6) until the investor has opened an account with the intermediary and
consented to electronic delivery of materials. 20 This requirement imposes certain information
gathering and recordkeeping burdens on intermediaries. For the purposes of the PRA, we
expect that the functionality required for an investor to open an account with an intermediary and
obtain consents will result in an initial time burden of approximately 10 hours per intermediary
in the first year. Therefore, for the 20 new intermediaries there will be a total initial one-time
burden of 200 hours over the three-year period. 21
We believe that the ongoing time burdens for this requirement is significantly less than
the initial time burden, and thus we are estimating approximately two hours per intermediary per
year, to review and assess the related processes. Therefore, we estimate that the ongoing total
burden hours necessary for this functionality will be approximately 372 hours over the three-year
period. 22
In summary, the Commission estimates that, over a three-year period, the total
recordkeeping burden associated with account opening will be 572 hours, or 191 hours per
year 23 when annualized over three years.
d.

Account Opening: Educational Materials

The rules require intermediaries to provide educational materials to investors 24 about the
risks and costs of investing in securities offered and sold in reliance on Section 4(a)(6). Given
that the intermediary determines what electronic format will prove most effective in
19

116 hours (burden to develop and obtain standard issuer representations, over three
years) + 335 hours (burden associated with ongoing review of representations, over three
years) = 451 hours ÷ 3 = 150.33 hours per year.

20

See Rule 302(a) of Regulation Crowdfunding.

21

Y2 (10 hours/intermediary x 10 new intermediaries) + Y3 (10 hours/intermediary x 10
new intermediaries) = 200 hours.

22

(2 hours/intermediary x 62 intermediaries) x 3 = 372 hours.

23

200 hours (burden associated with opening accounts and obtaining consents to electronic
delivery of materials, over three years) + 372 hours (burden associated with ongoing
reviews, over three years) = 572 hours ÷ 3 = 191 hours per year.

24

See Rule 302(b) of Regulation Crowdfunding.

9

communicating the requisite contents of the educational material, the costs for intermediaries to
develop the educational material varies widely. For the purposes of the PRA, we are assuming
that half of the intermediaries will develop their educational materials in-house, potentially
including online presentations and written documents, and that the other half will employ thirdparties to produce educational materials, such as professional-quality online video presentations.
We estimate that, to develop their non-video educational materials in-house, each intermediary
will incur an initial time burden of approximately 20 hours. Therefore, we estimate that the total
number of new intermediary respondents will be 10 with a total initial one-time burden of 200
hours over the three-year period. 25
Assuming that half of the intermediaries will develop their educational materials inhouse, we expect that these intermediaries also will update their educational materials in-house,
as needed. We estimate that to update their educational materials in-house, each intermediary
will incur an ongoing time burden of approximately 10 hours per year. Therefore, we estimate
that the ongoing total burden hours will be approximately 930 hours over the three-year period. 26
In summary, the Commission estimates that, over a three-year period, the total thirdparty disclosure burden associated with educational materials will be 1,130 hours, or 377
hours per year 27 when annualized over three years. This is a third-party disclosure burden.
e.

Account Opening: Promoters

The rules require an intermediary, at the account opening stage, to disclose to users of its
platform that any person who receives compensation to promote an issuer’s offering, or who is a
founder or employee of an issuer engaging in promotional activities on behalf of the issuer, must
clearly disclose the receipt of compensation and his or her engagement in promotional activities
on the platform. 28 For purposes of the PRA, we expect that this requirement will result in an
estimated time burden of five hours per new intermediary in the first year, to prepare this
particular disclosure and incorporate it into the account opening process. Therefore, we estimate
that for the 20 new intermediary respondents, the total initial one-time burden of 100 hours over
the three-year period. 29
25

Y2 (20 hours/intermediary x 5 new intermediaries) + Y3 (20 hours/intermediary x 5 new
intermediaries) = 200 hours.

26

(10 hours/intermediary x 31 intermediaries) x 3 = 930 hours.

27

20 hours (burden on intermediaries engaged in developing educational materials inhouse, over three years) + 930 hours (burden on intermediaries engaged in updating
educational materials in-house, over three years) = 930 hours ÷ 3 = 376.67 hours per
year.

28

See Rule 302(c) of Regulation Crowdfunding.

29

Y2 (5 hours/intermediary x 10 new intermediaries) + Y3 (5 hours/intermediary x 10 new
intermediaries) = 100 hours.

10

We believe that the ongoing time burdens for this requirement will be approximately one
hour per intermediary per year to review and check that the disclosures remain appropriate.
Therefore, we estimate that the ongoing total burden hours will be approximately 186 hours over
the three-year period. 30
In summary, the Commission estimates that, over a three-year period, the total burden
associated with preparing the initial disclosure and ongoing reviews of the disclosure will be
286 hours, or 95 hours 31 per year when annualized over three years. This is a third-party
disclosure burden.
f.

Issuer Disclosures to be Made Available

The rules requires an intermediary to make publicly available on its platform the
information that an issuer of crowdfunding securities is required to provide to potential investors,
in a manner that reasonably permits a person accessing the platform to save, download or
otherwise store the information, until the offer and sale of securities is completed or cancelled. 32
For purposes of the PRA, our estimate of the hourly burdens related to the public
availability of the issuer information is included as part of our estimate of the third-party
disclosure hourly burdens associated with overall platform development, as discussed above.
The platform functionality includes not only the ability to display, upload and download issuer
information as required under the rules, but also the ability to provide users with required online
disclosures, as discussed below.
We recognize that, over time, intermediaries may need to update their systems that allow
issuer information to be uploaded to their platforms. We do not expect a significant ongoing
burden for providing issuer disclosures, primarily because the functionality required for required
issuer disclosure information to be uploaded is a standard feature offered on many websites and
will not require frequent or significant updates.
g.

Other Disclosures to Investors and Potential Investors

Intermediaries are required to implement and maintain systems to comply with the
information disclosure, communication channels and investor notification requirements of
Regulation Crowdfunding. These requirements include providing disclosure about
compensation at account opening, obtaining investor acknowledgements to confirm investor
qualifications and review of educational materials, providing investor questionnaires,
maintaining communication channels with third parties and among investors, notifying investors
30

(1 hour/intermediary x 62 intermediaries) x 3= 186 hours.

31

100 hours (burden on intermediaries associated with preparing the initial disclosure, over
three years) + 186 hours (burden on intermediaries associated with ongoing reviews of
disclosure, over three years) = 286 hours ÷ 3 = 95 hours per year.

32

See Rule 303(a) of Regulation Crowdfunding.

11

of investment commitments, confirming completed transactions and confirming or reconfirming
offering cancellations. We expect these functionalities will generally be part of the overall
platform development process and costs. We discuss platform development costs above, and
note that these include developing the functionality that allow intermediaries to comply with
disclosure and notification requirements.
We do not expect a significant ongoing burden for providing disclosures, as required by
the final rules, because the functionality required to provide information and communication
channels are not likely to require frequent updates. We incorporate the total burden to update the
required functionality for processing issuer disclosure and investor acknowledgment information
in the total burden estimates relating to platform development discussed above
h.

Maintenance and Transmission of Funds

Intermediaries are required to comply with the requirements related to the maintenance
and transmission of funds. An intermediary that is a registered broker will be required to comply
with the requirements of Rule 15c2-4 of the Exchange Act. 33 An intermediary that is a
registered funding portal is required to enter into a written agreement with a qualified third party
that has agreed to hold its client funds, or to open a bank account for the exclusive benefit of the
investors and issuer, and it also is required to send directions to the qualified third party
depending on whether an investing target is met or an investment commitment or offering is
cancelled. For purposes of the PRA, we are providing an estimate for the time that a funding
portal will incur to enter into on an initial basis, and review and update on an ongoing basis, a
written agreement with the qualified third party. We expect that the burden associated with the
website functionality required to send directions to third parties is included as part of the
platform development discussed above. Based on discussion with industry participants, we
estimate that 5 new funding portals will incur an initial burden of approximately 20 hours each to
comply with these requirements. Therefore, we estimate that the total number of intermediary
respondents is 10, 34 with a total initial one-time burden of 200 hours over the three-year
period. 35
We expect that, on an ongoing basis, a registered funding portal has to periodically
review and update its written agreement with the qualified third party to hold its client funds. A
33

For purposes of this PRA discussion, the burdens associated with this rule, as well as for
any other rule to which brokers are subject regardless of whether they engage in
transactions pursuant to Section 4(a)(6), are not addressed here; rather, they are included
in any OMB approvals for the relevant rule. Rule 15c2-4, however, does not include any
information collection requests for purposes of the PRA, and so there is no relevant
approval or control number from OMB for this rule.

34

5 (estimated number of funding portals Y2) + 5 (estimated number of funding portals Y3)
= 10.

35

Y2 (20 hours/funding portal x 5 new funding portals) + Y3 (20 hours/funding portal x 5
new funding portals) = 200 hours.

12

registered funding portal also is required to send directions on an ongoing basis to a qualified
third party depending on whether an investing target is met or an investment commitment or
offering is cancelled. We estimate that funding portals will incur an ongoing annual burden of
approximately 5 hours each to comply with these requirements. Therefore, we estimate that the
ongoing total burden hours will be approximately 720 hours over the three-year period. 36
In summary, the Commission estimates that, over a three-year period, the total thirdparty disclosure burden associated with maintenance and transmission of funds will be 920
hours, or 307 hours per year 37 when annualized over three years.
i. Summary of Hourly Burdens
The table below summarizes the Commission’s estimates of the total hourly reporting
burden for intermediaries under Rules 300 to 304 except burdens associated with registration for
funding portals, which are included in a separate submission.

Nature of Information
Collection Burden

a. Initial

ii. Third-Party Disclosure
i. Recordkeeping
ii. Third-Party Disclosure
b. Initial

Measures to Reduce the Risk
of Fraud

Ongoing
c. Initial

Small Business
Entities
Affected 38

6

Type of Burden

Number of
Respondents

Recordkeeping

10

1

250

2,500

Third-Party
Disclosure
Recordkeeping

10

1

250

2,500

6

31

1

150

4,650

18

Third-Party
Disclosure

31

1

150

4,650

18

1

1.93

39

12

1

1.8

112

37

1

3.33

67

12

1

2

124

37

1

6.67

67

6

1

10

310

18

1

5

100

12

Recordkeeping
Recordkeeping

Account Opening: Accounts
and Electronic Delivery

Ongoing

Recordkeeping
Recordkeeping

20
62
20
62

Third-Party
Disclosure

10

Ongoing

Third-Party
Disclosure

31

e. Initial

Third-Party
Disclosure

20

d. Initial

Annualized
Hourly
Burden
Estimate
IndustryWide

Development and Maintenance
of the Intermediary Platform
i. Recordkeeping

Ongoing

Annualized
Burden
Estimate Per
Respondent

Number of
Responses
Per Year

Account Opening: Educational
Materials

Account Opening: Promoters

36

Y1 (5 hours/funding portal x 43 funding portals) + Y2 (5 hours/funding portal x 48
funding portals) + Y3 (5 hours/funding portal x 53 funding portals) = 720 hours.

37

200 hours (burden on funding portal intermediaries associated with initially entering into
a written agreement with a qualified third party, over three years) + 720 hours (burden on
funding portal intermediaries associated with periodic reviews of written agreements and
the ongoing sending of directions, over three years) = 920 hours ÷ 3 = 307hours per year.

38

For PRA purposes, the number of small business entities is calculated by multiplying the
number of respondents by the 30/50 percentage or 60%.

13

Third-Party
Disclosure

Ongoing

62

1

1

62

37

Estimate included in a.
Development of the Intermediary
Platform
Estimate included in a.
Development of the Intermediary
Platform

f.

Issuer Disclosures to be Made
Available

Third-Party
Disclosure

g.

Other Disclosures to Investors
and Potential Investors

Recordkeeping

h. Initial

Maintenance and Transmission
of Funds

Third-Party
Disclosure

20

1

20

200

12

Third-Party
Disclosure

48

1

5

240

29

Ongoing
TOTAL

15,621

13.

Costs to Respondents

a.

Development and Maintenance of Intermediary Platform

There is a cost to developing a platform for an intermediary that hires a third-party to
develop its platform rather than developing it in-house. We estimate that it will cost an
intermediary approximately $250,000 to $600,000 to build a new Internet-based crowdfunding
portal and all of its basic functionality. For purposes of this PRA, we will use an average of these
two numbers or $425,000. 39 Assuming that half of the 20 newly-registered intermediaries hire
outside developers to build or to tailor their platforms, the total initial one-time cost will be
$4,250,000 over the three-year period. 40
We estimate that it will typically cost an intermediary approximately one-fifth of the
initial development cost per year to use a third-party developer to provide annual maintenance on
an Internet-based crowdfunding portal, including updating and basic functionality, or $85,000
per year on average. 41 We assume that half of the intermediaries updated their systems
accordingly. Therefore, we estimate that the ongoing total cost will be approximately $7,905,000
over the three-year period. 42

39

Our estimate of the average initial external cost per intermediary to develop a
crowdfunding platform is the average of the cited range of $250,000 to $600,000, or
(($250,000 + $600,000) ÷ 2) = $425,000.

40

Y2 ($425,000 × 5 new intermediaries) + Y3 ($425,000 × 5 new intermediaries) =
$4,250,000.

41

Our estimate of the average initial external cost per intermediary to develop a
crowdfunding platform is the average of the cited range of $250,000 to $600,000, or
(($250,000 + $600,000) ÷ 2) = $425,000. One-fifth of the cost of $425,000 is ($425,000
÷ 5) = $85,000.

42

($85,000/intermediary x 31 intermediaries) x 3 = $7,905,000

14

In summary, the Commission estimates that, over a three-year period, the total cost
for intermediaries to develop a platform will be approximately $12,155,000, or $4,051,667
per year 43 when annualized over three years.
b.

Measures to Reduce the Risk of Fraud

The rules require intermediaries to conduct a background and securities enforcement
regulatory history check on each issuer and each officer, director or beneficial owner of 20
percent or more of the issuer’s outstanding voting equity securities to determine whether the
issuer or such person is subject to a disqualification. We believe most intermediaries employ
third parties to perform background and securities enforcement regulatory history checks, and
for the purposes of this PRA discussion, we assume that 100% of intermediaries use these thirdparty service providers in light of the costs of developing the capability to conduct background
and securities enforcement regulatory history checks in-house. The cost to perform a
background check is estimated to be between $200 and $500, depending on the nature and extent
of the information provided. 44 We recognize that some issuers require more than one
background check (e.g., for officers or directors of the issuer), and we estimate that
intermediaries perform four background checks per issuer, on average. We base this number on
the assumption that most crowdfunding issuers are startups and small businesses with small
management teams and few owners. For purposes of this PRA, we use an average of these two
numbers, or $350. 45 Assuming there is an average of approximately 480 offerings made in
reliance on Section 4(a)(6) per year, the total estimated initial cost to fulfill the required
background and securities enforcement regulatory history checks is $672,000 per year. 46
Therefore, we estimate that the total number of intermediary respondents is 62 with a total initial
cost of $2,016,000 over the three-year period. 47
We believe that, on an ongoing basis, intermediaries will continue to use third-party
services to conduct background and securities enforcement regulatory history checks. We also
believe that the total estimated ongoing cost for all intermediaries to fulfill the required
43

$4,250,000 (costs associated with developing an intermediary platform, over three years)
+ $7,905,000 (costs associated with updating an intermediary platform, over three years)
= $12,155,000 ÷ 3 = $4,051,667 per year.

44

See, e.g., A Matter of Fact, Background Check FAQ: Frequently Asked Questions,
available at http://www.amof.info/faq.htm. (Matter of Fact is a background check
provider accredited by the National Association of Professional Background Screeners
and the Background Screening Credentialing Council and states that the cost for a
comprehensive background check is $200 to $500).

45

Our estimated initial cost for all intermediaries to fulfill the required background and
securities enforcement regulatory history checks is the average of the cited range of $200
to $500, or (($200 + $500) ÷ 2) = $350.

46

480 offerings x $350 x 4 background checks = $672,000 per year.

47

Y1 ($672,000) + Y2 ($672,000) + Y3 ($672,000) = $2,016,000.

15

background and securities enforcement regulatory history checks is the same as the estimated
initial cost of $672,000 per year. Therefore, we estimate that the ongoing cost is approximately
$2,016,000 over the three-year period. 48
In summary, the Commission estimates that, over a three-year period, the total cost
for intermediaries to fulfill obligations regarding background and securities enforcement
regulatory history checks will be approximately $4,032,000, or $1,344,000 per year 49 when
annualized over three years. The total cost per intermediary is approximately $65,032, or
$21,677 per year 50 when annualized over three years.
c.

Account Opening: Accounts and Electronic Delivery

To the extent an intermediary uses a third party to establish account opening
functionality, the initial costs relevant to this requirement will be incorporated into the cost of
hiring a third party to develop the platform, discussed above. We do not believe that there are
any ongoing costs relevant to this requirement.
d.

Account Opening: Educational Materials

For the purposes of this PRA analysis, we assume that half of the intermediaries employ
third-party companies to produce educational materials, such as professional-quality online
video presentations, instead of developing materials in-house. Public sources indicate that the
typical cost to produce a professional corporate training video ranges from approximately $1,000
to $3,000 per production minute. 51 For purposes of this PRA, we will use an average of these
two numbers or $2,000. 52 We assume that, on average, half of the intermediaries will produce a
48

Y1 ($672,000) + Y2 ($672,000) + Y3 ($672,000) = $2,016,000.

49

$2,016,000 (estimated initial cost for all intermediaries to fulfill the required background
and securities enforcement regulatory history checks, over three years) + $2,016,000
(estimated ongoing cost for all intermediaries to fulfill the required background and
securities enforcement regulatory history checks, over three years) = $4,032,000÷ 3 =
$1,344,000 per year.

50

$4,032,000 (total initial and ongoing cost for all intermediaries to fulfill the required
background and securities enforcement regulatory history checks, over three years) ÷ 186
(estimated number of intermediaries which fulfill the requirements regarding
background and securities enforcement regulatory history checks, over three years) =
$65,032 ÷ 3 = $21,677 per respondent.

51

See, e.g., Lee W. Frederiksen, What Is the Cost of Video Production for the Web?, Hinge
Marketing, available at http://www.hingemarketing.com/library/article/what-is-the-costof-video-production-for-the-web.

52

Our estimate of the average initial cost for an intermediary to develop and produce
educational materials is the average of the cited range of $1,000 to $3,000, or (($1,000 +
$3,000) ÷ 2) = $2,000.

16

series of short educational videos that will cover all of the requirements of the final rules, and
that the video material is 10 minutes long in total. Based on this assumption, we estimate that
the total number of intermediary respondents is 10, 53 with a total initial one-time cost of
$200,000, or $66,667 annualized over the three-year period. 54
We estimate that, on an ongoing basis, when using a third-party company to update their
video educational materials, each intermediary spends approximately half of the initial average
cost. We estimate, therefore, that the average ongoing annual cost for an intermediary to update
its video educational materials ranges from approximately $5,000 to $15,000. For purposes of
this PRA, we will use an average of these two numbers or $10,000. 55 Therefore, we estimate
that the ongoing total cost is approximately $310,000 each year, or $930,000 over the three-year
period. 56
In summary, the Commission estimates that, over a three-year period, the total cost
for intermediaries which use a third-party company to develop and update their video
educational material will be approximately $1,130,010, or $376,667 per year 57 when
annualized over three years.
e.

Account Opening: Promoters

To the extent an intermediary uses a third party to develop the functionality for this
requirement, the initial costs relevant to this requirement will be incorporated into the cost of
hiring a third party to develop the platform, discussed above. We do not believe that there are
any ongoing costs relevant to this requirement.
f.

Issuer Disclosures to be Made Available

We do not expect a significant ongoing cost for providing issuer disclosures, primarily
because the functionality required to upload required issuer disclosure information is a standard
feature offered on many websites and will not require frequent updates. Because we are
including the burdens that are associated with providing issuer disclosures as part of our
53

10 (estimated number of intermediaries Y2) + 10 (estimated number of intermediaries Y3)
= 10.

54

Y2 ($2,000 × 10 min × 5 new intermediaries) + Y3 ($2,000 × 10 min × 5 new
intermediaries) = $20,000.

55

Our estimate of the cost for an intermediary to update their educational materials is the
average of the cited range of $5,000 to $15,000, or (($5,000 + $15,000) ÷ 2) = $10,000.

56
57

($10,000/intermediary x 31 intermediaries) x 3 = $310,000.
$66,667 (estimated initial costs for intermediaries using third-party companies to produce
professional-quality video materials, over three years) + $93,000 (estimated ongoing
costs for intermediaries using a third-party company to update their video educational
materials, over three years) = $159,667 ÷ 3 = $53,222 per year.

17

estimates for overall platform development, we discuss our cost estimates for ongoing platform
development and updates in that section, above.
g.

Other Disclosures to Investors and Potential Investors

We recognize that some intermediaries may add the required functionality for processing
issuer disclosure and investor acknowledgments by using a third-party developer. We also do
not expect there to be a significant ongoing cost for developing the functionality to process these
disclosures and acknowledgments, primarily because this functionality will likely not require
frequent updates by third-party developers. The total cost to add the required functionality for
processing issuer disclosure and investor acknowledgments, as well as to update the required
functionality for processing issuer disclosure and investor acknowledgments, is incorporated into
the total cost estimates discussed above relating to platform development.
h.

Maintenance and Transmission of Funds

For purposes of the PRA, we are not providing any cost estimate for this requirement,
because we expect that the cost associated with developing the functionality to send instructions
to third parties is included as part of the platform development discussed above.
i.

Summary of Cost Burdens

The table below summarizes the Commission’s estimate of the annual cost burdens for
intermediaries under Rules 300 to 304 except burdens associated with registration for funding
portals, which are included in a separate submission.
Nature of Information
Collection Burden

a.
Initial

Number of
Respondents

Number
of
Responses
Per Year

Annualized Cost
Estimate Per
Respondent

Annualized Hourly
Cost Estimate
Industry-Wide

Small
Business
Entities
Affected

Recordkeeping

10

1

$70,833

$708,330

6

Third-Party
Disclosure

10

1

$70,833

$708,330

6

Recordkeeping

31

1

$42,500

$1,317,500

19

Third-Party
Disclosure

31

1

$42,500

$1,317,500

19

Recordkeeping

62

1

$21,677.42

$1,344,000

37

Development and Maintenance of
the Intermediary Platform
i. Recordkeeping
ii. Third-Party Disclosure

Ongoing

Type of Burden

i. Recordkeeping
ii. Third-Party Disclosure

b.

Measures to Reduce the Risk of
Fraud

c.

Account Opening: Accounts and
Electronic Delivery

Recordkeeping

d. Initial

Account Opening: Educational
Materials

Third-Party
Disclosure

10

1

Ongoing

Third-Party
Disclosure

31

1

e.

Account Opening: Promoters

Third-Party
Disclosure

Estimate included in a. Development of the
Intermediary Platform

f.

Issuer Disclosures to be Made
Available

Third-Party
Disclosure

Estimate included in a. Development of the
Intermediary Platform

g.

Other Disclosures to Investors
and Potential Investors

Recordkeeping

Estimate included in a. Development of the
Intermediary Platform

h.

Maintenance and Transmission
of Funds

Third-Party
Disclosure

Estimate included in a. Development of the
Intermediary Platform

Estimate included in a. Development of the
Intermediary Platform

18

$6,667

$66,667

6

$10,000

$310,000

19

$5,772,327

TOTAL

14.

Costs to Federal Government

There will be no additional costs to the Federal Government.
15.

Changes in Burden

The burden declined because (1) in the adopting release, the Commission overestimated
the number of entities that would become crowdfunding intermediaries, and (2) the 52 existing
intermediaries have already incurred the initial burdens of developing their platforms, opening
accounts, etc.
16.

Information Collection Planned for Statistical Purposes

Not applicable. The information collection is not used for statistical purposes.
17.

Approval to Omit OMB Expiration Date

We request authorization to omit the expiration date on the electronic version of the
form. Including the expiration date on the electronic version of this form will result in increased
costs, because the need to make changes to the form may not follow the application’s scheduled
version release dates. The OMB control number will be displayed.
18.

Exceptions to Certification for Paperwork Reduction Act Submissions

This collection complies with the requirements in 5 CFR 1320.9.
B.

COLLECTION OF INFORMATION EMPLOYING STATISTICAL METHODS
This collection does not involve statistical methods.

19