Temporary Amendments to Regulation Crowdfunding; Extension, 54483-54490 [2020-19468]
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[FR Doc. 2020–19299 Filed 9–1–20; 8:45 am]
BILLING CODE 4910–13–P
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Parts 227 and 239
[Release No. 33–10829]
Temporary Amendments to Regulation
Crowdfunding; Extension
Securities and Exchange
Commission.
ACTION: Temporary final rule; extension.
AGENCY:
The Securities and Exchange
Commission (‘‘Commission’’) is
extending the effective date and
applicability dates of our temporary
final rules under Regulation
Crowdfunding 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
SUMMARY:
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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
in this rule are effective from August 31,
2020, through September 1, 2021. The
expiration date for the temporary final
rules published May 7, 2020 (85 FR
27116) is extended from March 1, 2021,
to September 1, 2021.
Applicability date: The temporary
final rules apply to securities offerings
initiated under Regulation
Crowdfunding between May 4, 2020,
and February 28, 2021.
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. Background
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 Recognizing that, as a result, many
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
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Federal Register / Vol. 85, No. 171 / Wednesday, September 2, 2020 / Rules and Regulations
small businesses were facing challenges
accessing urgently needed capital in a
timely and cost-effective manner, on
May 4, 2020, the Commission adopted
temporary final rules intended to
address feedback received from its
Small Business Capital Formation
Advisory Committee and others.2 That
feedback noted that certain Regulation
Crowdfunding requirements may have
been making it difficult for an issuer
affected by COVID–19 to launch an
offering and see it to completion within
issuers offering $250,000 or less of
securities in reliance on Regulation
Crowdfunding within a 12-month
period.7 In addition, a condition to each
aspect of the temporary relief is a
requirement to provide clear disclosure
to investors with respect to the issuer’s
reliance on such relief.8 The following
table summarizes the amendments. For
a detailed description of the temporary
final rules, see the Temporary
Amendments Adopting Release.
Requirement
Existing regulation crowdfunding
Temporary amendment
Eligibility ...............................
The exemption is not available to:
• 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;
• Blank check companies;
• Issuers that are disqualified under Regulation
Crowdfunding’s disqualification rules; and
To rely on the temporary rules, issuers must meet the
existing eligibility criteria PLUS:
• The issuer cannot have been organized and cannot
have been operating for less than six months prior to
the commencement of the offering; and
• An issuer that has sold securities in a Regulation
Crowdfunding offering in the past, must have complied with the requirements in 15 U.S.C. 77d–1(b)
(‘‘Section 4A(b)’’) of the Securities Act and the related rules.
Offers permitted ...................
• Issuers that have failed to file the annual reports required under Regulation Crowdfunding during the two
years immediately preceding the filing of the offering
statement.
After filing of offering statement (including financial
statements)
Investment commitments accepted.
After filing of offering statement (including financial
statements)
Financial statements required when issuer is offering more than $107,000
and not more than
$250,000 in a 12-month
period.
Sales permitted ....................
Financial statements of the issuer reviewed by a public
accountant that is independent of the issuer
Early closing permitted ........
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a time frame that would meet its urgent
capital needs.3 The temporary final
rules provide flexibility for eligible
issuers 4 to assess interest in a
Regulation Crowdfunding offering prior
to preparation of full offering materials,5
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.6 The
temporary rules also provide an
exemption from certain financial
statement review requirements for
After the information in an offering statement is publicly
available for at least 21 days
Once target amount is reached if:
• The offering remains open for a minimum of 21 days;
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.’’). See also
MetLife & U.S. Chamber of Commerce Small
Business Coronavirus Impact Poll (July 29, 2020),
available at https://www.uschamber.com/sites/
default/files/metlife_uscc_sbi_coronavirus_impact_
poll_july.pdf (reporting that in July 2020, 86% of
small businesses surveyed report they are either
fully (52%) or partially (34%) open, but ‘‘most
small businesses are concerned about financial
hardship due to prolonged closures (70%) and more
than half worry about having to permanently close
(58%).’’).
2 See Transcript of SEC Small Business Capital
Formation Advisory Committee (April 2, 2020),
available at https://www.sec.gov/info/smallbus/
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After filing of offering statement, but financial statements may be initially omitted (if not otherwise available).
After filing of offering statement that includes financial
statements or amended offering statement that includes financial statements.
Financial statements of the issuer and certain information from the issuer’s Federal income tax returns,
both certified by the principal executive officer.
As soon as an issuer has received binding investment
commitments covering the target offering amount
(note: Commitments are not binding until 48 hours
after they are given)
As soon as binding commitments are received reaching
target amount if:
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.
3 See Temporary Amendments to Regulation
Crowdfunding, Release No. 33–10781 (May 4, 2020)
[85 FR 27116 (May 7, 2020)] (‘‘Temporary
Amendments Adopting Release’’).
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4 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).
5 See temporary 17 CFR 227.201(z)(2) (‘‘Rule
201(z)(2)’’).
6 See temporary 17 CFR 227.303(g) (‘‘Rule
303(g)’’) and temporary 17 CFR 227.304(e) (‘‘Rule
304(e)’’).
7 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.
8 See temporary 17 CFR 227.201(z)(1) (‘‘Rule
201(z)(1)’’).
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Requirement
Cancellations of investment
commitments permitted.
Existing regulation crowdfunding
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II. Amendment of Applicability and
Expiration Dates of the Temporary
Final Rules
As noted above, the temporary final
rules currently apply to offerings
initiated under Regulation
Crowdfunding between May 4, 2020,
and August 31, 2020. The Commission
has continued to monitor the COVID–19
outbreak and its impact on small
businesses. At this time, COVID–19 still
presents significant challenges for small
businesses and is likely to continue to
do so for some time.9 We continue to
9 See infra note 25. See also McKinsey & Co.,
Tracking US small and medium-sized business
sentiment during COVID–19 (May 29, 2020),
available at https://www.mckinsey.com/industries/
financial-services/our-insights/tracking-us-smalland-medium-sized-business-sentiment-duringcovid-19; MetLife & U.S. Chamber of Commerce
Small Business Coronavirus Impact Poll, supra note
1 (‘‘Over the long term, small businesses show signs
of guarded optimism, but feel it will be some time
before things return to normal. More than half of
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16:51 Sep 01, 2020
Temporary amendment
• The intermediary provides notice about the new offering deadline at least five business days prior to the
new offering deadline;
• The issuer has complied with the disclosure requirements in temporary Rule 201(z);
• The intermediary provides notice that the target offering amount has been met; and
• At the time of the closing of the offering, the issuer
continues to meet or exceed the target offering
amount.
• 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
• At the time of the new offering deadline, the issuer
continues to meet or exceed the target offering
amount.
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).
The temporary rules as adopted
applied to offerings initiated under
Regulation Crowdfunding between May
4, 2020, and August 31, 2020. However,
the Commission indicated in the
Temporary Amendments Adopting
Release that it intended to monitor the
situation and might, if necessary, extend
the time period during which this relief
applies, with any additional conditions
the Commission deems appropriate,
and/or issue other relief. In light of the
continuing challenges facing small
businesses, and for the reasons detailed
below, the Commission has determined
that it is necessary and appropriate to
extend the applicability and
effectiveness dates of the temporary
final rules.
Jkt 250001
For any reason for 48 hours from the time of the investor’s investment commitment (or such later period as
the issuer may designate). After such 48 hour period,
an investment commitment may not be cancelled unless there is a material change to the offering.
believe that 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.
Overall, as discussed below, the
temporary final rules have been well
received by the market and have proven
effective for some issuers to raise capital
under the current conditions. We
believe it is important to maintain the
flexibility provided by the temporary
final rules for small businesses that
continue to face difficulties as a result
of COVID–19.
Based on feedback that the
Commission has received through
comment letters on our proposing
release, Facilitating Capital Formation
and Expanding Investment
Opportunities by Improving Access to
Capital in Private Markets 10 and other
outreach conducted by Commission
staff, the Commission understands that
small businesses believe it will take six months to
a year before the small business climate returns to
normal . . .’’). Minority-owned businesses are
considered to be particularly at risk of closing their
businesses. See MetLife & U.S. Chamber of
Commerce, Special Report on Race and Inequality
on Main Street (Aug. 4, 2020), available at https://
www.uschamber.com/sites/default/files/sbi_
inequality_on_main_street_8.4.pdf (finding that two
in three (66%) minority-owned small businesses are
concerned about having to permanently close their
business versus 57% for non-minority small
businesses).
10 Facilitating Capital Formation and Expanding
Investment Opportunities by Improving Access to
Capital in Private Markets, Release Nos. 33–10763;
34–88321 (Mar. 4, 2020) [85 FR 17956 (Mar. 31,
2020)] (‘‘Access to Capital Proposing Release’’).
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54485
the temporary amendments generally
have been helpful not only to those
issuers that have initiated a Regulation
Crowdfunding offering under the rules
thus far, but also to those issuers that
continue to consider their financing
options during the pandemic.11
Members of the Small Business Capital
Formation Advisory Committee also
expressed positive views of the
temporary amendments after they were
adopted.12 As of July 31, 2020, the latest
11 See, e.g., letters from NextSeed dated July 19,
2020 (‘‘NextSeed letter’’), available at https://
www.sec.gov/comments/s7-05-20/s70520-7449553220993.pdf; and Republic dated June 1, 2020
(‘‘Republic-1 letter’’), available at https://
www.sec.gov/comments/s7-05-20/s70520-7258471217640.pdf. Market participants in discussions with
Commission staff also have noted that the flexibility
provided by the temporary final rules may make a
Regulation Crowdfunding offering a more realistic
choice for an issuer seeking financing in the current
market environment. One commenter stated that it
had not yet listed an offering under the temporary
final rules, but noted its ‘‘shared enthusiasm with
dozens of small businesses in [its] network actively
evaluating the possibility of availing the Temporary
Relief to fundraise.’’ See letter from Republic dated
August 22, 2020 (‘‘Republic-2 letter’’), available at
https://www.sec.gov/comments/s7-05-20/s705207677531-222676.pdf. This commenter urged the
Commission to expand the relief to allow small
businesses to ‘‘test the waters’’ prior to filing the
offering statement ‘‘so that they can determine
where it is worthwhile to undertake the effort of
preparing an offering statement.’’ But see letter from
Better Markets dated June 1, 2020 (‘‘Better Markets
letter’’), available at https://www.sec.gov/
comments/s7-05-20/s70520-7261530-217652.pdf
(stating its view that the temporary amendments
would expose investors to greater risks and less
information).
12 See, e.g., Transcript of SEC Small Business
Capital Formation Advisory Committee (May 8,
2020), available at https://www.sec.gov/info/
smallbus/acsec/sbcfac-transcript-050820.pdf, at 17–
19 (noting positive feedback from small businesses
intending to take advantage of the relief).
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Federal Register / Vol. 85, No. 171 / Wednesday, September 2, 2020 / Rules and Regulations
available full month of data, we find
that, of the 248 new offerings on Form
C by eligible issuers (out of 292 total
offerings), 94, or 38% (32%), relied on
one or more of the provisions of the
temporary relief.13 The commenters
who found the temporary amendments
helpful also have urged the Commission
to extend the relief to offerings initiated
after August 31, 2020.14
In light of the continuing challenges
facing small businesses and the
feedback received on the temporary
final rules, the Commission has
determined that it is necessary and
appropriate to extend the applicability
and effectiveness dates of the temporary
final rules. The temporary final rules, as
extended, will apply to offerings
initiated under Regulation
Crowdfunding through February 28,
2021 and will be effective until
September 1, 2021. This extension will
continue to provide issuers with the
opportunity to access capital on an
expedited basis while maintaining
appropriate investor protections.
III. Economic Analysis
As discussed above, in light of the
continued, considerable financing
constraints and challenges facing small
businesses as a result of the COVID–19
crisis, the Commission is extending
temporary relief from certain
requirements of Regulation
Crowdfunding to issuers seeking
funding on an expedited basis due to
circumstances relating to COVID–19.
Several commenters have expressed
support for the temporary rules.15
The temporary rules were originally
adopted in response to the
unprecedented adverse impact of the
COVID–19 crisis on small businesses.
Since the adoption of the temporary
rules, small businesses have continued
to experience significant disruption,
across a wide range of individual
industries as well as the broader
economy.16 In light of ongoing adverse
financing conditions for small
businesses as a result of the COVID–19
crisis, we believe that the relief remains
necessary and appropriate. Preliminary
evidence from the period of the
temporary rules’ effectiveness indicates
that a significant proportion of eligible
issuers conducting offerings in reliance
on Regulation Crowdfunding have
relied on one or more provisions of the
relief in their capital raising.17
We have considered the costs and
benefits of the temporary rules.18 After
examining recent evidence on the state
of the crowdfunding market and the
ongoing effects of the COVID–19 crisis
summarized in Section III.A., we believe
that the general economic
considerations related to the benefits,
costs, and effects on efficiency,
competition, and capital formation of
the individual provisions discussed in
the May 4, 2020 Temporary
Amendments Adopting Release
continue to apply. In particular, we
continue to believe that issuers eligible
under the temporary rules continue to
face adverse economic conditions and
significant difficulties with raising
external financing as a result of COVID–
19. Extending the temporary relief will
avoid a loss of targeted relief from
certain requirements of Regulation
Crowdfunding and enable eligible
issuers affected by the COVID–19 crisis
to continue to avail themselves of a
more flexible and efficient offering
process. Extending the temporary relief
also will prevent competitive
disadvantages for issuers that initiate
their offerings after the expiration of the
existing temporary relief.
Except as specified below, we
incorporate the earlier economic
analysis by reference.19 However, the
adoption of the temporary relief on May
4, 2020 has also resulted in some
economic effects that are discussed in
Section III.A below. These effects are
now part of the current baseline from
which we evaluate the economic effects
of the extension of these temporary
rules.
A. Baseline
The baseline for this extension
includes existing Regulation
Crowdfunding regulations and industry
practices 20 and the existing temporary
relief adopted on May 4, 2020.
Given the exemption’s offering limit,
since Regulation Crowdfunding became
effective in 2016, it has been utilized
primarily 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 as of July 31,
2020 (the most recent available full
month of data).
TABLE 1—CHARACTERISTICS OF ISSUERS IN REGULATION CROWDFUNDING OFFERINGS: MAY 16, 2016—JULY 31, 2020 21
Average
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Age in years .............................................................................................................................................................
Number of employees .............................................................................................................................................
Total assets .............................................................................................................................................................
Total revenues .........................................................................................................................................................
3.0
5.3
$430,400
$347,124
Median
1.9
3.0
$37,194
$226
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 $37,000 and close to zero
revenues (approximately 49% of
offerings were by issuers with no
revenues). Approximately 11% of
13 For this estimate, eligibility was estimated
based on the issuer having been formed at least six
months prior to the filing date of the offering and
having had (1) either positive assets, revenues, net
income, debt, accounts receivable, cost of goods
sold, taxes paid, or employees in the most recent
fiscal year reported on Form C, or (2) a prior
Regulation Crowdfunding offering. See also infra
notes 31 and 36.
14 See, e.g., NextSeed letter; Republic-1 letter
(noting the relief relating to financial statement
requirements and encouraging the Commission to
extend the relief, ‘‘as the economic harm caused by
the COVID–19 Pandemic is likely to be far
reaching’’); Republic-2 letter (encouraging the
Commission to consider incorporating the
temporary relief into Access to Capital Proposing
Release or extending the relief for at least 12
months).
15 See supra note 11 and accompanying text. See
also https://www.sec.gov/info/smallbus/acsec/
sbcfac-transcript-050820.pdf. But see Better Markets
letter (opposing the temporary rules).
16 See infra note 25.
17 See infra note 36.
18 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.
19 See Temporary Amendments Adopting
Release, at 27121–31.
20 For a more detailed discussion of the
crowdfunding market, see Access to Capital
Proposing Release; Report to the Commission:
Regulation Crowdfunding (Jun. 18, 2019), available
at https://www.sec.gov/files/regulationcrowdfunding-2019_0.pdf (‘‘2019 Regulation
Crowdfunding Report’’).
21 The estimates are based on data from Form C
or the latest amendment to it and exclude
withdrawn offerings.
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offerings were by issuers that had
attained profitability in the most recent
fiscal year prior to the offering.
Table 2 summarizes EDGAR filings
data on amounts sought and capital
reported raised in offerings under
Number
Target amount sought in initiated offerings .....................................................
Maximum amount sought in initiated offerings ................................................
Amounts reported as raised in completed offerings 22 ....................................
The baseline also includes the recent
and ongoing effects of the disruption to
the U.S. and global economy related to
COVID–19, interventions aimed at
mitigating its effects, and adverse
changes in macroeconomic and
financial market conditions (collectively
referred to as ‘‘the COVID–19 crisis’’).
Small businesses often face significant
financing constraints.23 Financing
constraints make small firms more
vulnerable to economic downturns and
other negative shocks.24 The COVID–19
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22 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.
23 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, available at https://
www.treasury.gov/press-center/press-releases/
Documents/A%20Financial%20System.pdf.
According to one study relying on the data from the
2014 Annual Survey of Entrepreneurs,
approximately 64% of small businesses relied on
personal or family savings, compared to 0.6%
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 stage 76% of firms relied on
credit, including 24% that used trade credit, 44%
that used business credit, and 55% that used
personal credit (percentages do not add up to 100%
because firms may use multiple types of credit)). As
a general caveat, working papers have not
undergone peer review and may be subject to
revision at a future date.
24 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
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2,525
1,005
crisis has resulted in a substantial
deterioration in financing and business
conditions for small businesses.25 Small
businesses eligible under the existing
rules have been facing and are expected
to continue to face significant adverse
effects of the crisis, including, but not
limited to, declines in consumer
demand and revenues, particularly in
consumer-facing industries, such as
restaurants, recreation/lifestyle, and
retail 26 (e.g., as a result of changes in
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-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.
25 See supra notes 1, 2, and 9. See also, e.g.,
several recent working papers examining impacts of
the COVID–19 crisis on small businesses:
Alexander W. Bartik, Marianne Bertrand, Zoe¨ B.
Cullen, Edward L. Glaeser, Michael Luca, and
Christopher T. Stanton (2020) How Are Small
Businesses Adjusting to COVID–19? Early Evidence
from a Survey, NBER Working Paper No. 26989;
Jose Maria Barrero, Nicholas Bloom, and Steven J.
Davis (2020) COVID–19 Is Also a Reallocation
Shock, NBER Working Paper No. 27137; John Eric
Humphries, Christopher Neilson, and Gabriel
Ulyssea (2020) The Evolving Impacts of COVID–19
on Small Businesses Since the CARES Act, Cowles
Foundation Discussion Paper No. 2230; Robert W.
Fairlie (2020) The Impact of COVID–19 on Small
Business Owners: The First Three Months after
Social-Distancing Restrictions, NBER Working
Paper No. 27462.
26 See, e.g., Devin Thorpe, Startup Restauranteurs
Find Willing Investors via Crowdfunding, Forbes
(Sept. 28, 2019) and 2019 US Equity Crowdfunding
Stats—Year in Review, available at https://
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Regulation Crowdfunding since its
inception (May 16, 2016) through July
31, 2020.
Average
$60,089
607,503
230,219
Median
$25,000
535,000
107,000
Aggregate
(million)
$150.9
1,494.2
231.4
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.27 Some 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
crisis.28 However, a recent report
indicates that ‘‘[b]ased on the number of
firms that reference COVID–19, many
companies are coming online to search
for capital where they can’t get it from
banks or government programs like the
Payroll Protection Program (PPP).’’ 29
We expect the temporary rules to
affect issuers, intermediaries, and
investors in Regulation Crowdfunding
offerings. As of July 31, 2020, we
estimate that 2,276 issuers had initiated
2,525 Regulation Crowdfunding
offerings, excluding withdrawn
offerings.30 As discussed below,
eligibility criteria of the temporary rules
exclude (1) issuers that were organized
or 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
crowdwise.org/funding-portals/2019-equitycrowdfunding-stats-data/.
27 See supra notes 1–2.
28 See COVID–19 Resources for Small Businesses,
https://www.sec.gov/page/covid-19-resources-smallbusinesses.
29 See Crowdfund Capital Advisors, https://
mailchi.mp/3f278c568278/crowdfunding-update2019-state-of-regulation-crowdfunding-2638840.
30 These figures reflect data from the
approximately 4.2 years 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 time
frame during which temporary relief will be
extended.
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Federal Register / Vol. 85, No. 171 / Wednesday, September 2, 2020 / Rules and Regulations
to any prior offerings in which they sold
securities.
Historical data provides an indication
of the potential share of offerings
eligible for temporary relief among all
offerings. From inception of Regulation
Crowdfunding through July 31, 2020,
we estimate that 2,074 (approximately
82%) offerings were initiated by 1,867
issuers that were eligible or would have
been eligible for the temporary relief.31
With respect to the eligibility
requirements related to follow-on
offerings under Regulation
Crowdfunding, i.e., that the issuer
complied with Regulation
Crowdfunding with respect to any prior
offering in which they sold securities, it
is difficult to estimate the percentage of
prior Regulation Crowdfunding issuers
that were not compliant with one or
more of the requirements of Regulation
Crowdfunding in a prior offering. From
inception through July 31, 2020, we
estimate that there were 209 repeat
Regulation Crowdfunding issuers,
including 160 such issuers that had
reported successful completion of at
least one Regulation Crowdfunding
offering on Form C–U.32
We estimate that there are 57
registered funding portals, excluding
funding portals that have withdrawn
their registration.33 Information on the
number of investors per offering is not
available for the full sample of
Regulation Crowdfunding offerings, as it
is not required to be reported in
progress updates on Form C–U.34
We are unable to predict precisely the
number of issuers likely to rely on the
temporary rules while they are in
effect.35 A review of new filings made
on Form C on or after May 4, 2020
provides some information about issuer
reliance on the temporary rules. As of
July 31, 2020, we find that, of the 248
new offerings on Form C by eligible
issuers (out of 292 total offerings), 94, or
38% (32%) relied on one or more of the
provisions of the temporary relief.36
The temporary relief, which took
effect on May 4, 2020, was accompanied
by an increase in Regulation
Crowdfunding offering activity through
the end of the period of analysis (July
31, 2020), as illustrated in Table 3
below. The increase was observed in
comparison to both the pre-rule period
of equivalent length (89 days from
February 5, 2020 to May 3, 2020) and
the same period in the previous year
(May 4, 2019 to July 31, 2019). The
increase was most pronounced for
issuers that had been formed at least six
months prior to the offering and thus
would have been eligible under the
temporary rules.
TABLE 3—NEW REGULATION CROWDFUNDING ACTIVITY, MAY 4, 2020–JULY 31, 2020 37
Number of new filings
Aggregate target amount
($ million)
292 ................................................
15.5 ...............................................
173.4
199 ................................................
10.0 ...............................................
110.9
47% ...............................................
128 ................................................
56% ...............................................
7.9 .................................................
56%
72.6
128% .............................................
98% ...............................................
139%
251 ................................................
13.4 ...............................................
156.1
161 ................................................
7.8 .................................................
86.6
56% ...............................................
100 ................................................
72% ...............................................
5.7 .................................................
80%
58.8
151% .............................................
137% .............................................
165%
Period
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All issuers:
Post (May 4, 2020–July 31,
2020).
Pre (Feb. 5, 2020–May 3,
2020).
Change Post vs. Pre ..............
2019 (May 4, 2019–July 31,
2019).
Change Post vs. 2019 ............
Issuers formed at least six months
before the offering:
Post (May 4, 2020–July 31,
2020).
Pre (Feb. 5, 2020–May 3,
2020).
Change Post vs. Pre ..............
2019 (May 4, 2019—July 31,
2019).
Change Post vs. 2019 ............
Aggregate maximum amount
($ million)
Important caveats apply: (1) The postMay 4, 2020 period coincided with a
significant strengthening of the broader
market sentiment, compared to the
market sentiment in the preceding
months; 38 (2) due to the time required
for the closing of an offering and lags in
Form C–U filing, we lack systematic
data on the success rate and proceeds
realized in offerings initiated under the
temporary rules.39 We cannot infer
causal effects because the regulatory
change coincided with potential
confounding aggregate factors. It is also
possible that the trends in the number
of initiated offerings reflect a general
increase in issuer interest in
crowdfunding over time independent of
31 See infra note 13. In addition, we recognize
that many of the past Regulation Crowdfunding
issuers may meet the six-month eligibility criterion
as of the effective date of these amendments, should
they wish to avail themselves of the temporary
relief for a follow-on offering under Regulation
Crowdfunding.
32 This figure likely provides a lower bound on
the number of issuers that have initiated a followon offering after successfully completing a prior
offering due to incomplete reporting of offering
proceeds on Form C–U. See supra note 22. Followon issuance activity may differ from historical data
due to changes in the crowdfunding market as a
result of confounding market factors and continued
uptake of the relief under the temporary rules by
past issuers. See also Temporary Amendments
Adopting Release, at 27124.
33 See https://www.finra.org/about/fundingportals-we-regulate (retrieved Aug. 22, 2020).
34 See also Temporary Amendments Adopting
Release, at 27124.
35 For a more detailed discussion, see Temporary
Amendments Adopting Release, at 27124–5.
36 Among those 94 offerings, 50 offerings initially
omitted financial statements, 38 relied on the
shorter closing time, and 27 provided certified
rather than reviewed financial statements. (Some
offerings relied on multiple provisions.) These
estimates may represent a lower bound because
reliance on the provisions is not disclosed in a
structured data or standardized format and was
evaluated based on manual review of filings for
mention of the temporary rules. See supra note 13.
37 Based on staff analysis of EDGAR filings on
Form C, excluding amendments.
38 Based on Bloomberg data, between May 4 and
July 31, 2020, Russell 3000 gained approximately
16%. This is in contrast to the 16% decline in the
index between February 5 and May 4, 2020.
39 As of July 31, 2020, only a handful of reports
of proceeds on Form C–U were filed for offerings
initiated on or after May 4, 2020. Issuers generally
file Form C–U upon completion of an offering. The
typical issuer that has filed Form C–U has filed it
over two months after the initial filing of Form C.
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We recognize that the alternative of
allowing the temporary rules to expire
could incrementally decrease concerns
about investor protection,42 either due
B. Economic Effects
to the investors’ reduced time period
The temporary final rules currently in within which to make an informed
effect serve as the economic baseline
decision about an offering or the
against which the costs and benefits, as
increased ability of opportunistic
well as the impact on efficiency,
issuers seeking to exploit COVID–19
competition, and capital formation, of
concerns to raise capital from investors
the amendments are measured. Because through crowdfunding in an expedited
the extension of the expiration dates in
timeframe. Generally, however, the
the temporary final rules maintains the
aggregate incremental effect of the
status quo, we do not expect additional
temporary rules on retail investor
significant costs or benefits to result
protection is likely limited by various
from the extension. We also do not
factors, including the tailoring of the
expect the extension to have additional
relief (through the eligibility
significant effects on efficiency,
requirements and the narrow scope and
competition, or capital formation. In
time-limited nature of the relief) and the
addition, while we expect the extension modest size of the Regulation
of the temporary relief to benefit small
Crowdfunding market compared to
businesses, it will not eliminate the
other market segments that draw retail
large-scale challenges facing small
investors. Importantly, the eligibility
businesses as a result of the COVID–19
requirements exclude issuers that were
crisis and ensuing disruptions to
noncompliant with the requirements of
individual industries, the broader
Regulation Crowdfunding in previous
economy, purchasing power of these
offerings in which they sold securities.
businesses’ consumers, and investor
Further, to the extent that investors
confidence.
know less about newly formed issuers
In the alternative, we could have
with a limited track record, the
allowed the temporary final rules to
incremental risk of the temporary relief
expire. Not extending the relief would
to investors is reduced by the exclusion
impose costs and reduce the flexibility
from eligibility of issuers formed, or
for small issuers adversely affected by
with operations for, less than six
COVID–19 seeking to meet their
months prior to the offering. This
financing needs through Regulation
limitation on eligibility will tailor the
Crowdfunding. It also would create
relief to assist existing issuers that
competitive disparities for otherwise
require additional funds because of
similar issuers that initiate offerings
adverse effects caused by the closures
before and after the expiration of the
and safety measures designed to slow
existing relief (August 31, 2020). As a
the spread of COVID–19. Further,
general matter, the flexibility to access
issuers are required to disclose reliance
capital under Regulation Crowdfunding on the temporary rules to investors,
on an expedited basis facilitates capital
enabling more informed decisions.
formation and reduces some of the
Moreover, while issuers may solicit
barriers to accessing capital markets for
investor interest after an initial Form C
small issuers, allowing some issuers to
filing without certain financial
raise additional capital or to optimize
disclosures, intermediaries are not
their financing cost through a more
allowed to accept investor commitments
efficient and streamlined offering
before the issuer provides all required
process.40 By providing targeted relief in financial information.
a market segment that primarily attracts
In addition, we note that several
small businesses, which are
essential safeguards contained in the
disproportionately affected by
2015 Regulation Crowdfunding rules
downturns, the temporary rules also
continue to apply to issuers that rely on
serve to incrementally enhance
the temporary rules. Crucially, offering
competition between small businesses
and investment limits serve to limit the
and larger businesses (which tend to be
potential magnitude of investor losses,
less financially constrained).41
the temporary rules. Small sample sizes
warrant further caution in interpreting
the changes.
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40 See
also supra notes 11, 12, and 14.
41 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
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capital markets to mitigate financing constraints.
See, e.g., Venkat Kuppuswamy and Bele´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’’). See also supra note 25.
42 See also Temporary Amendments Adopting
Release, at 27122; Better Markets letter.
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54489
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 from the time of a
material change to the offering. These
safeguards, as well as various other
requirements of Regulation
Crowdfunding offerings may have
served as key deterrents to potential
misconduct. Since the inception of
Regulation Crowdfunding, there have
been relatively few enforcement actions
taken against issuers and intermediaries
in the crowdfunding market.43 Staff is
not aware of an increase in misconduct
due to the adoption of the temporary
rules. However, this inference is
inherently limited by the difficulty of
identifying misconduct.
As another alternative, we could
extend the relief for a shorter or longer
time period than specified in these
amendments. The alternative of
extending the relief for a shorter (longer)
time period would lead to fewer (more)
potential issuers being afforded the
flexibility in capital raising under the
temporary rules, compared to the
amendments. Because of the severe and
continuing economic impact of the
COVID–19 crisis, we believe that the
extension of the temporary rules is
appropriate.44
43 See
2019 Regulation Crowdfunding Report, at
5.
44 As another alternative, we could extend some
but not all of the provisions of the temporary rules,
or modify further some of the provisions of the
temporary relief. For a detailed discussion of the
economic effects of the individual provisions and
the alternatives involving modifications of the
provisions in the temporary rules, see Temporary
Amendments Adopting Release, at 27121–31.
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IV. 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.’’ 45 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.46
Given the temporary nature of both
the relief contemplated by the
temporary final rules and the extension
of such relief, as well as 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
extend the applicability and expiration
dates of the temporary amendments to
Rules 100, 201, 301, 303 and 304 of
Regulation Crowdfunding.47 In
particular, small businesses continue to
be affected by the closures and safety
measures designed to slow the spread of
COVID–19 and may face urgent funding
needs 48 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
provided by the temporary rules and
could exacerbate the existing challenges
faced by many small businesses in
45 5
U.S.C. 553(b)(3)(B).
U.S.C. 553(d)(3).
47 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).
One commenter expressed concern that the
Commission adopted the temporary final rules
without public input. See Better Markets letter.
However, consistent with the discussion above, we
believe this approach was warranted given the
extraordinary challenges faced by many issuers
under the current circumstances as well as the fact
that any delay in implementation would have
substantially undermined the intended benefits of
the temporary relief.
48 See supra note 1.
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urgent need of capital to continue their
operations.
The temporary final rules provide
relief from certain financial information
requirements of Regulation
Crowdfunding. In addition, the
temporary final rules require issuers
relying on the temporary relief to
provide certain additional disclosures,
although, as we stated in the Temporary
Amendments Adopting Release, we
expect the burden of those disclosures
to be minimal. We also stated in the
Temporary Amendments Adopting
Release that 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.49
Accordingly, we did not adjust the
burden or cost estimates associated with
existing collections of information
under Regulation Crowdfunding for
purposes of the Paperwork Reduction
Act of 1995.50 The extension of the
applicability and expiration dates of the
temporary final rules does not change
our analysis.
Pursuant to the Congressional Review
Act,51 the Office of Information and
Regulatory Affairs has designated the
temporary final rules as a ‘‘major rule,’’
as defined by 5 U.S.C. 804(2).
V. Statutory Basis
We are temporarily amending 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 as
follows, and the expiration date for the
temporary final rules published May 7,
2020 (85 FR 27116) is extended from
March 1, 2021, to September 1, 2021.
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.
49 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.
50 44 U.S.C. 3501 et seq.
51 5 U.S.C. 801 et seq.
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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
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).
§ 227.100
[Amended]
2. In § 227.100(b)(7) introductory text,
remove the date ‘‘August 31, 2020’’ and
add in its place the date ‘‘February 28,
2021’’.
■
§ 227.201
[Amended]
3. In § 227.201(z) introductory text,
remove the date ‘‘August 31, 2020’’ and
add in its place the date ‘‘February 28,
2021’’.
■
§ 227.301
[Amended]
4. In § 227.301(d), remove the date
‘‘August 31, 2020’’ and add in its place
the date ‘‘February 28, 2021’’.
■
§ 227.303
[Amended]
5. In § 227.303(g)(1) introductory text
and (2), remove the date ‘‘August 31,
2020’’ and add in its place the date
‘‘February 28, 2021’’.
■
§ 227.304
[Amended]
6. In § 227.304(e) introductory text,
remove the date ‘‘August 31, 2020’’ and
add in its place the date ‘‘February 28,
2021’’.
■
PART 239—FORMS PRESCRIBED
UNDER THE SECURITIES ACT OF 1933
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.
*
*
*
*
*
8. In Form C (referenced in § 239.900)
remove the words ‘‘August 31, 2020’’ in
the second paragraph to the
introductory paragraphs in the Optional
Question and Answer Format for an
Offering Statement and add, in their
place, the words ‘‘February 28, 2021’’.
■
By the Commission.
Dated: August 28, 2020.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020–19468 Filed 8–31–20; 11:15 am]
BILLING CODE 8011–01–P
E:\FR\FM\02SER1.SGM
02SER1
]]>Agencies
[Federal Register Volume 85, Number 171 (Wednesday, September 2, 2020)]
[Rules and Regulations]
[Pages 54483-54490]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-19468]
=======================================================================
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 227 and 239
[Release No. 33-10829]
Temporary Amendments to Regulation Crowdfunding; Extension
AGENCY: Securities and Exchange Commission.
ACTION: Temporary final rule; extension.
-----------------------------------------------------------------------
SUMMARY: The Securities and Exchange Commission (``Commission'') is
extending the effective date and applicability dates of our temporary
final rules under Regulation Crowdfunding 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 in this rule are effective from
August 31, 2020, through September 1, 2021. The expiration date for the
temporary final rules published May 7, 2020 (85 FR 27116) is extended
from March 1, 2021, to September 1, 2021.
Applicability date: The temporary final rules apply to securities
offerings initiated under Regulation Crowdfunding between May 4, 2020,
and February 28, 2021.
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. Background
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\ Recognizing that,
as a result, many
[[Page 54484]]
small businesses were facing challenges accessing urgently needed
capital in a timely and cost-effective manner, on May 4, 2020, the
Commission adopted temporary final rules intended to address feedback
received from its Small Business Capital Formation Advisory Committee
and others.\2\ That feedback noted that certain Regulation Crowdfunding
requirements may have been making it difficult for an issuer affected
by COVID-19 to launch an offering and see it to completion within a
time frame that would meet its urgent capital needs.\3\ The temporary
final rules provide flexibility for eligible issuers \4\ to assess
interest in a Regulation Crowdfunding offering prior to preparation of
full offering materials,\5\ 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.\6\ The temporary rules also provide an
exemption from certain financial statement review requirements for
issuers offering $250,000 or less of securities in reliance on
Regulation Crowdfunding within a 12-month period.\7\ In addition, a
condition to each aspect of the temporary relief is a requirement to
provide clear disclosure to investors with respect to the issuer's
reliance on such relief.\8\ The following table summarizes the
amendments. For a detailed description of the temporary final rules,
see the Temporary Amendments Adopting Release.
---------------------------------------------------------------------------
\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.''). See also MetLife & U.S. Chamber of Commerce Small
Business Coronavirus Impact Poll (July 29, 2020), available at
https://www.uschamber.com/sites/default/files/metlife_uscc_sbi_coronavirus_impact_poll_july.pdf (reporting that in
July 2020, 86% of small businesses surveyed report they are either
fully (52%) or partially (34%) open, but ``most small businesses are
concerned about financial hardship due to prolonged closures (70%)
and more than half worry about having to permanently close
(58%).'').
\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.
\3\ See Temporary Amendments to Regulation Crowdfunding, Release
No. 33-10781 (May 4, 2020) [85 FR 27116 (May 7, 2020)] (``Temporary
Amendments Adopting Release'').
\4\ 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).
\5\ See temporary 17 CFR 227.201(z)(2) (``Rule 201(z)(2)'').
\6\ See temporary 17 CFR 227.303(g) (``Rule 303(g)'') and
temporary 17 CFR 227.304(e) (``Rule 304(e)'').
\7\ 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.
\8\ See temporary 17 CFR 227.201(z)(1) (``Rule 201(z)(1)'').
----------------------------------------------------------------------------------------------------------------
Requirement Existing regulation crowdfunding Temporary amendment
----------------------------------------------------------------------------------------------------------------
Eligibility.......................... The exemption is not available to: To rely on the temporary
Non-U.S. issuers; rules, issuers must meet the
existing eligibility
criteria PLUS:
Issuers that are required to file The issuer cannot
reports under Section 13(a) or 15(d) of have been organized and
the Securities Exchange Act of 1934; cannot have been operating
for less than six months
prior to the commencement of
the offering; and
Investment companies; An issuer that has
Blank check companies; sold securities in a
Issuers that are disqualified Regulation Crowdfunding
under Regulation Crowdfunding's offering in the past, must
disqualification rules; and have complied with the
requirements in 15 U.S.C.
77d-1(b) (``Section 4A(b)'')
of the Securities Act and
the related rules.
Issuers that have failed to file
the annual reports required under
Regulation Crowdfunding during the two
years immediately preceding the filing of
the offering statement.
Offers permitted..................... After filing of offering statement After filing of offering
(including financial statements) statement, but financial
statements may be initially
omitted (if not otherwise
available).
Investment commitments accepted...... After filing of offering statement After filing of offering
(including financial statements) statement that includes
financial statements or
amended offering statement
that includes financial
statements.
Financial statements required when Financial statements of the issuer Financial statements of the
issuer is offering more than reviewed by a public accountant that is issuer and certain
$107,000 and not more than $250,000 independent of the issuer information from the
in a 12-month period. issuer's Federal income tax
returns, both certified by
the principal executive
officer.
Sales permitted...................... After the information in an offering As soon as an issuer has
statement is publicly available for at received binding investment
least 21 days commitments covering the
target offering amount
(note: Commitments are not
binding until 48 hours after
they are given)
Early closing permitted.............. Once target amount is reached if: As soon as binding
The offering remains open for a commitments are received
minimum of 21 days; reaching target amount if:
[[Page 54485]]
The intermediary provides notice
about the new offering deadline at least
five business days prior to the new
offering deadline;
The issuer has complied with the
disclosure requirements in temporary Rule
201(z);
The intermediary provides notice
that the target offering amount has been
met; and
At the time of the closing of the
offering, the issuer continues to meet or
exceed the target offering amount.
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
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 48 hours prior to the For any reason for 48 hours
commitments permitted. deadline identified in the issuer's from the time of the
offering materials. Thereafter, an investor's investment
investor is not able to cancel any commitment (or such later
investment commitments made within the period as the issuer may
final 48 hours of the offering (except in designate). After such 48
the event of a material change to the hour period, an investment
offering). commitment may not be
cancelled unless there is a
material change to the
offering.
----------------------------------------------------------------------------------------------------------------
The temporary rules as adopted applied to offerings initiated under
Regulation Crowdfunding between May 4, 2020, and August 31, 2020.
However, the Commission indicated in the Temporary Amendments Adopting
Release that it intended to monitor the situation and might, if
necessary, extend the time period during which this relief applies,
with any additional conditions the Commission deems appropriate, and/or
issue other relief. In light of the continuing challenges facing small
businesses, and for the reasons detailed below, the Commission has
determined that it is necessary and appropriate to extend the
applicability and effectiveness dates of the temporary final rules.
II. Amendment of Applicability and Expiration Dates of the Temporary
Final Rules
As noted above, the temporary final rules currently apply to
offerings initiated under Regulation Crowdfunding between May 4, 2020,
and August 31, 2020. The Commission has continued to monitor the COVID-
19 outbreak and its impact on small businesses. At this time, COVID-19
still presents significant challenges for small businesses and is
likely to continue to do so for some time.\9\ We continue to believe
that 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.
Overall, as discussed below, the temporary final rules have been well
received by the market and have proven effective for some issuers to
raise capital under the current conditions. We believe it is important
to maintain the flexibility provided by the temporary final rules for
small businesses that continue to face difficulties as a result of
COVID-19.
---------------------------------------------------------------------------
\9\ See infra note 25. See also McKinsey & Co., Tracking US
small and medium-sized business sentiment during COVID-19 (May 29,
2020), available at https://www.mckinsey.com/industries/financial-services/our-insights/tracking-us-small-and-medium-sized-business-sentiment-during-covid-19; MetLife & U.S. Chamber of Commerce Small
Business Coronavirus Impact Poll, supra note 1 (``Over the long
term, small businesses show signs of guarded optimism, but feel it
will be some time before things return to normal. More than half of
small businesses believe it will take six months to a year before
the small business climate returns to normal . . .''). Minority-
owned businesses are considered to be particularly at risk of
closing their businesses. See MetLife & U.S. Chamber of Commerce,
Special Report on Race and Inequality on Main Street (Aug. 4, 2020),
available at https://www.uschamber.com/sites/default/files/sbi_inequality_on_main_street_8.4.pdf (finding that two in three
(66%) minority-owned small businesses are concerned about having to
permanently close their business versus 57% for non-minority small
businesses).
---------------------------------------------------------------------------
Based on feedback that the Commission has received through comment
letters on our proposing release, Facilitating Capital Formation and
Expanding Investment Opportunities by Improving Access to Capital in
Private Markets \10\ and other outreach conducted by Commission staff,
the Commission understands that the temporary amendments generally have
been helpful not only to those issuers that have initiated a Regulation
Crowdfunding offering under the rules thus far, but also to those
issuers that continue to consider their financing options during the
pandemic.\11\ Members of the Small Business Capital Formation Advisory
Committee also expressed positive views of the temporary amendments
after they were adopted.\12\ As of July 31, 2020, the latest
[[Page 54486]]
available full month of data, we find that, of the 248 new offerings on
Form C by eligible issuers (out of 292 total offerings), 94, or 38%
(32%), relied on one or more of the provisions of the temporary
relief.\13\ The commenters who found the temporary amendments helpful
also have urged the Commission to extend the relief to offerings
initiated after August 31, 2020.\14\
---------------------------------------------------------------------------
\10\ Facilitating Capital Formation and Expanding Investment
Opportunities by Improving Access to Capital in Private Markets,
Release Nos. 33-10763; 34-88321 (Mar. 4, 2020) [85 FR 17956 (Mar.
31, 2020)] (``Access to Capital Proposing Release'').
\11\ See, e.g., letters from NextSeed dated July 19, 2020
(``NextSeed letter''), available at https://www.sec.gov/comments/s7-05-20/s70520-7449553-220993.pdf; and Republic dated June 1, 2020
(``Republic-1 letter''), available at https://www.sec.gov/comments/s7-05-20/s70520-7258471-217640.pdf. Market participants in
discussions with Commission staff also have noted that the
flexibility provided by the temporary final rules may make a
Regulation Crowdfunding offering a more realistic choice for an
issuer seeking financing in the current market environment. One
commenter stated that it had not yet listed an offering under the
temporary final rules, but noted its ``shared enthusiasm with dozens
of small businesses in [its] network actively evaluating the
possibility of availing the Temporary Relief to fundraise.'' See
letter from Republic dated August 22, 2020 (``Republic-2 letter''),
available at https://www.sec.gov/comments/s7-05-20/s70520-7677531-222676.pdf. This commenter urged the Commission to expand the relief
to allow small businesses to ``test the waters'' prior to filing the
offering statement ``so that they can determine where it is
worthwhile to undertake the effort of preparing an offering
statement.'' But see letter from Better Markets dated June 1, 2020
(``Better Markets letter''), available at https://www.sec.gov/comments/s7-05-20/s70520-7261530-217652.pdf (stating its view that
the temporary amendments would expose investors to greater risks and
less information).
\12\ See, e.g., Transcript of SEC Small Business Capital
Formation Advisory Committee (May 8, 2020), available at https://www.sec.gov/info/smallbus/acsec/sbcfac-transcript-050820.pdf, at 17-
19 (noting positive feedback from small businesses intending to take
advantage of the relief).
\13\ For this estimate, eligibility was estimated based on the
issuer having been formed at least six months prior to the filing
date of the offering and having had (1) either positive assets,
revenues, net income, debt, accounts receivable, cost of goods sold,
taxes paid, or employees in the most recent fiscal year reported on
Form C, or (2) a prior Regulation Crowdfunding offering. See also
infra notes 31 and 36.
\14\ See, e.g., NextSeed letter; Republic-1 letter (noting the
relief relating to financial statement requirements and encouraging
the Commission to extend the relief, ``as the economic harm caused
by the COVID-19 Pandemic is likely to be far reaching''); Republic-2
letter (encouraging the Commission to consider incorporating the
temporary relief into Access to Capital Proposing Release or
extending the relief for at least 12 months).
---------------------------------------------------------------------------
In light of the continuing challenges facing small businesses and
the feedback received on the temporary final rules, the Commission has
determined that it is necessary and appropriate to extend the
applicability and effectiveness dates of the temporary final rules. The
temporary final rules, as extended, will apply to offerings initiated
under Regulation Crowdfunding through February 28, 2021 and will be
effective until September 1, 2021. This extension will continue to
provide issuers with the opportunity to access capital on an expedited
basis while maintaining appropriate investor protections.
III. Economic Analysis
As discussed above, in light of the continued, considerable
financing constraints and challenges facing small businesses as a
result of the COVID-19 crisis, the Commission is extending temporary
relief from certain requirements of Regulation Crowdfunding to issuers
seeking funding on an expedited basis due to circumstances relating to
COVID-19.
Several commenters have expressed support for the temporary rules.\15\
---------------------------------------------------------------------------
\15\ See supra note 11 and accompanying text. See also https://www.sec.gov/info/smallbus/acsec/sbcfac-transcript-050820.pdf. But
see Better Markets letter (opposing the temporary rules).
---------------------------------------------------------------------------
The temporary rules were originally adopted in response to the
unprecedented adverse impact of the COVID-19 crisis on small
businesses. Since the adoption of the temporary rules, small businesses
have continued to experience significant disruption, across a wide
range of individual industries as well as the broader economy.\16\ In
light of ongoing adverse financing conditions for small businesses as a
result of the COVID-19 crisis, we believe that the relief remains
necessary and appropriate. Preliminary evidence from the period of the
temporary rules' effectiveness indicates that a significant proportion
of eligible issuers conducting offerings in reliance on Regulation
Crowdfunding have relied on one or more provisions of the relief in
their capital raising.\17\
---------------------------------------------------------------------------
\16\ See infra note 25.
\17\ See infra note 36.
---------------------------------------------------------------------------
We have considered the costs and benefits of the temporary
rules.\18\ After examining recent evidence on the state of the
crowdfunding market and the ongoing effects of the COVID-19 crisis
summarized in Section III.A., we believe that the general economic
considerations related to the benefits, costs, and effects on
efficiency, competition, and capital formation of the individual
provisions discussed in the May 4, 2020 Temporary Amendments Adopting
Release continue to apply. In particular, we continue to believe that
issuers eligible under the temporary rules continue to face adverse
economic conditions and significant difficulties with raising external
financing as a result of COVID-19. Extending the temporary relief will
avoid a loss of targeted relief from certain requirements of Regulation
Crowdfunding and enable eligible issuers affected by the COVID-19
crisis to continue to avail themselves of a more flexible and efficient
offering process. Extending the temporary relief also will prevent
competitive disadvantages for issuers that initiate their offerings
after the expiration of the existing temporary relief.
---------------------------------------------------------------------------
\18\ 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.
---------------------------------------------------------------------------
Except as specified below, we incorporate the earlier economic
analysis by reference.\19\ However, the adoption of the temporary
relief on May 4, 2020 has also resulted in some economic effects that
are discussed in Section III.A below. These effects are now part of the
current baseline from which we evaluate the economic effects of the
extension of these temporary rules.
---------------------------------------------------------------------------
\19\ See Temporary Amendments Adopting Release, at 27121-31.
---------------------------------------------------------------------------
A. Baseline
The baseline for this extension includes existing Regulation
Crowdfunding regulations and industry practices \20\ and the existing
temporary relief adopted on May 4, 2020.
---------------------------------------------------------------------------
\20\ For a more detailed discussion of the crowdfunding market,
see Access to Capital Proposing Release; 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'').
---------------------------------------------------------------------------
Given the exemption's offering limit, since Regulation Crowdfunding
became effective in 2016, it has been utilized primarily 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 as of July 31, 2020 (the most recent available
full month of data).
---------------------------------------------------------------------------
\21\ 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--July 31, 2020 21
------------------------------------------------------------------------
Average Median
------------------------------------------------------------------------
Age in years............................ 3.0 1.9
Number of employees..................... 5.3 3.0
Total assets............................ $430,400 $37,194
Total revenues.......................... $347,124 $226
------------------------------------------------------------------------
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
$37,000 and close to zero revenues (approximately 49% of offerings were
by issuers with no revenues). Approximately 11% of
[[Page 54487]]
offerings were by issuers that had attained profitability in the most
recent fiscal year prior to the offering.
Table 2 summarizes EDGAR filings data on amounts sought and capital
reported raised in offerings under Regulation Crowdfunding since its
inception (May 16, 2016) through July 31, 2020.
----------------------------------------------------------------------------------------------------------------
Aggregate
Number Average Median (million)
----------------------------------------------------------------------------------------------------------------
Target amount sought in initiated offerings..... 2,525 $60,089 $25,000 $150.9
Maximum amount sought in initiated offerings.... 2,525 607,503 535,000 1,494.2
Amounts reported as raised in completed 1,005 230,219 107,000 231.4
offerings \22\.................................
----------------------------------------------------------------------------------------------------------------
The baseline also includes the recent and ongoing effects of the
disruption to the U.S. and global economy related to COVID-19,
interventions aimed at mitigating its effects, and adverse changes in
macroeconomic and financial market conditions (collectively referred to
as ``the COVID-19 crisis'').
Small businesses often face significant financing constraints.\23\
Financing constraints make small firms more vulnerable to economic
downturns and other negative shocks.\24\ The COVID-19 crisis has
resulted in a substantial deterioration in financing and business
conditions for small businesses.\25\ Small businesses eligible under
the existing rules have been facing and are expected to continue to
face significant adverse effects of the crisis, including, but not
limited to, declines in consumer demand and revenues, particularly in
consumer-facing industries, such as restaurants, recreation/lifestyle,
and retail \26\ (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.\27\ Some 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
crisis.\28\ However, a recent report indicates that ``[b]ased on the
number of firms that reference COVID-19, many companies are coming
online to search for capital where they can't get it from banks or
government programs like the Payroll Protection Program (PPP).'' \29\
---------------------------------------------------------------------------
\22\ 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.
\23\ 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, available at
https://www.treasury.gov/press-center/press-releases/Documents/A%20Financial%20System.pdf. According to one study relying on the
data from the 2014 Annual Survey of Entrepreneurs, approximately 64%
of small businesses relied on personal or family savings, compared
to 0.6% 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 stage 76% of firms relied on credit,
including 24% that used trade credit, 44% that used business credit,
and 55% that used personal credit (percentages do not add up to 100%
because firms may use multiple types of credit)). As a general
caveat, working papers have not undergone peer review and may be
subject to revision at a future date.
\24\ 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.
\25\ See supra notes 1, 2, and 9. See also, e.g., several recent
working papers examining impacts of the COVID-19 crisis on small
businesses: Alexander W. Bartik, Marianne Bertrand, Zo[euml] B.
Cullen, Edward L. Glaeser, Michael Luca, and Christopher T. Stanton
(2020) How Are Small Businesses Adjusting to COVID-19? Early
Evidence from a Survey, NBER Working Paper No. 26989; Jose Maria
Barrero, Nicholas Bloom, and Steven J. Davis (2020) COVID-19 Is Also
a Reallocation Shock, NBER Working Paper No. 27137; John Eric
Humphries, Christopher Neilson, and Gabriel Ulyssea (2020) The
Evolving Impacts of COVID-19 on Small Businesses Since the CARES
Act, Cowles Foundation Discussion Paper No. 2230; Robert W. Fairlie
(2020) The Impact of COVID-19 on Small Business Owners: The First
Three Months after Social-Distancing Restrictions, NBER Working
Paper No. 27462.
\26\ See, e.g., Devin Thorpe, Startup Restauranteurs Find
Willing Investors via Crowdfunding, Forbes (Sept. 28, 2019) and 2019
US Equity Crowdfunding Stats--Year in Review, available at https://crowdwise.org/funding-portals/2019-equity-crowdfunding-stats-data/.
\27\ See supra notes 1-2.
\28\ See COVID-19 Resources for Small Businesses, https://www.sec.gov/page/covid-19-resources-small- businesses.
\29\ See Crowdfund Capital Advisors, https://mailchi.mp/3f278c568278/crowdfunding-update-2019-state-of-regulation-crowdfunding-2638840.
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We expect the temporary rules to affect issuers, intermediaries,
and investors in Regulation Crowdfunding offerings. As of July 31,
2020, we estimate that 2,276 issuers had initiated 2,525 Regulation
Crowdfunding offerings, excluding withdrawn offerings.\30\ As discussed
below, eligibility criteria of the temporary rules exclude (1) issuers
that were organized or 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
[[Page 54488]]
to any prior offerings in which they sold securities.
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\30\ These figures reflect data from the approximately 4.2 years
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
time frame during which temporary relief will be extended.
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Historical data provides an indication of the potential share of
offerings eligible for temporary relief among all offerings. From
inception of Regulation Crowdfunding through July 31, 2020, we estimate
that 2,074 (approximately 82%) offerings were initiated by 1,867
issuers that were eligible or would have been eligible for the
temporary relief.\31\ With respect to the eligibility requirements
related to follow-on offerings under Regulation Crowdfunding, i.e.,
that the issuer complied with Regulation Crowdfunding with respect to
any prior offering in which they sold securities, it is difficult to
estimate the percentage of prior Regulation Crowdfunding issuers that
were not compliant with one or more of the requirements of Regulation
Crowdfunding in a prior offering. From inception through July 31, 2020,
we estimate that there were 209 repeat Regulation Crowdfunding issuers,
including 160 such issuers that had reported successful completion of
at least one Regulation Crowdfunding offering on Form C-U.\32\
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\31\ See infra note 13. In addition, we recognize that many of
the past Regulation Crowdfunding issuers may meet the six-month
eligibility criterion as of the effective date of these amendments,
should they wish to avail themselves of the temporary relief for a
follow-on offering under Regulation Crowdfunding.
\32\ 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 22. Follow-on issuance activity
may differ from historical data due to changes in the crowdfunding
market as a result of confounding market factors and continued
uptake of the relief under the temporary rules by past issuers. See
also Temporary Amendments Adopting Release, at 27124.
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We estimate that there are 57 registered funding portals, excluding
funding portals that have withdrawn their registration.\33\ Information
on the number of investors per offering is not available for the full
sample of Regulation Crowdfunding offerings, as it is not required to
be reported in progress updates on Form C-U.\34\
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\33\ See https://www.finra.org/about/funding-portals-we-regulate
(retrieved Aug. 22, 2020).
\34\ See also Temporary Amendments Adopting Release, at 27124.
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We are unable to predict precisely the number of issuers likely to
rely on the temporary rules while they are in effect.\35\ A review of
new filings made on Form C on or after May 4, 2020 provides some
information about issuer reliance on the temporary rules. As of July
31, 2020, we find that, of the 248 new offerings on Form C by eligible
issuers (out of 292 total offerings), 94, or 38% (32%) relied on one or
more of the provisions of the temporary relief.\36\
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\35\ For a more detailed discussion, see Temporary Amendments
Adopting Release, at 27124-5.
\36\ Among those 94 offerings, 50 offerings initially omitted
financial statements, 38 relied on the shorter closing time, and 27
provided certified rather than reviewed financial statements. (Some
offerings relied on multiple provisions.) These estimates may
represent a lower bound because reliance on the provisions is not
disclosed in a structured data or standardized format and was
evaluated based on manual review of filings for mention of the
temporary rules. See supra note 13.
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The temporary relief, which took effect on May 4, 2020, was
accompanied by an increase in Regulation Crowdfunding offering activity
through the end of the period of analysis (July 31, 2020), as
illustrated in Table 3 below. The increase was observed in comparison
to both the pre-rule period of equivalent length (89 days from February
5, 2020 to May 3, 2020) and the same period in the previous year (May
4, 2019 to July 31, 2019). The increase was most pronounced for issuers
that had been formed at least six months prior to the offering and thus
would have been eligible under the temporary rules.
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\37\ Based on staff analysis of EDGAR filings on Form C,
excluding amendments.
Table 3--New Regulation Crowdfunding Activity, May 4, 2020-July 31, 2020 37
----------------------------------------------------------------------------------------------------------------
Aggregate target amount Aggregate maximum
Period Number of new filings ($ million) amount ($ million)
----------------------------------------------------------------------------------------------------------------
All issuers:
Post (May 4, 2020-July 31, 2020). 292.................... 15.5................... 173.4
Pre (Feb. 5, 2020-May 3, 2020)... 199.................... 10.0................... 110.9
Change Post vs. Pre.............. 47%.................... 56%.................... 56%
2019 (May 4, 2019-July 31, 2019). 128.................... 7.9.................... 72.6
Change Post vs. 2019............. 128%................... 98%.................... 139%
Issuers formed at least six months
before the offering:
Post (May 4, 2020-July 31, 2020). 251.................... 13.4................... 156.1
Pre (Feb. 5, 2020-May 3, 2020)... 161.................... 7.8.................... 86.6
Change Post vs. Pre.............. 56%.................... 72%.................... 80%
2019 (May 4, 2019--July 31, 2019) 100.................... 5.7.................... 58.8
Change Post vs. 2019............. 151%................... 137%................... 165%
----------------------------------------------------------------------------------------------------------------
Important caveats apply: (1) The post-May 4, 2020 period coincided
with a significant strengthening of the broader market sentiment,
compared to the market sentiment in the preceding months; \38\ (2) due
to the time required for the closing of an offering and lags in Form C-
U filing, we lack systematic data on the success rate and proceeds
realized in offerings initiated under the temporary rules.\39\ We
cannot infer causal effects because the regulatory change coincided
with potential confounding aggregate factors. It is also possible that
the trends in the number of initiated offerings reflect a general
increase in issuer interest in crowdfunding over time independent of
[[Page 54489]]
the temporary rules. Small sample sizes warrant further caution in
interpreting the changes.
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\38\ Based on Bloomberg data, between May 4 and July 31, 2020,
Russell 3000 gained approximately 16%. This is in contrast to the
16% decline in the index between February 5 and May 4, 2020.
\39\ As of July 31, 2020, only a handful of reports of proceeds
on Form C-U were filed for offerings initiated on or after May 4,
2020. Issuers generally file Form C-U upon completion of an
offering. The typical issuer that has filed Form C-U has filed it
over two months after the initial filing of Form C.
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B. Economic Effects
The temporary final rules currently in effect serve as the economic
baseline against which the costs and benefits, as well as the impact on
efficiency, competition, and capital formation, of the amendments are
measured. Because the extension of the expiration dates in the
temporary final rules maintains the status quo, we do not expect
additional significant costs or benefits to result from the extension.
We also do not expect the extension to have additional significant
effects on efficiency, competition, or capital formation. In addition,
while we expect the extension of the temporary relief to benefit small
businesses, it will not eliminate the large-scale challenges facing
small businesses as a result of the COVID-19 crisis and ensuing
disruptions to individual industries, the broader economy, purchasing
power of these businesses' consumers, and investor confidence.
In the alternative, we could have allowed the temporary final rules
to expire. Not extending the relief would impose costs and reduce the
flexibility for small issuers adversely affected by COVID-19 seeking to
meet their financing needs through Regulation Crowdfunding. It also
would create competitive disparities for otherwise similar issuers that
initiate offerings before and after the expiration of the existing
relief (August 31, 2020). As a general matter, the flexibility to
access capital under Regulation Crowdfunding on an expedited basis
facilitates capital formation and reduces some of the barriers to
accessing capital markets for small issuers, allowing some issuers to
raise additional capital or to optimize their financing cost through a
more efficient and streamlined offering process.\40\ By providing
targeted relief in a market segment that primarily attracts small
businesses, which are disproportionately affected by downturns, the
temporary rules also serve to incrementally enhance competition between
small businesses and larger businesses (which tend to be less
financially constrained).\41\
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\40\ See also supra notes 11, 12, and 14.
\41\ 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''). See also supra note 25.
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We recognize that the alternative of allowing the temporary rules
to expire could incrementally decrease concerns about investor
protection,\42\ 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 protection is likely limited by
various factors, including the tailoring of the relief (through the
eligibility requirements and the narrow scope and time-limited nature
of the relief) and the modest size of the Regulation Crowdfunding
market compared to other market segments that draw retail investors.
Importantly, the eligibility requirements exclude issuers that were
noncompliant with the requirements of Regulation Crowdfunding in
previous offerings in which they sold securities. 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, or with operations for, 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. Further, issuers are required to disclose
reliance on the temporary rules to investors, enabling more informed
decisions. Moreover, while issuers may solicit investor interest after
an initial Form C filing without certain financial disclosures,
intermediaries are not allowed to accept investor commitments before
the issuer provides all required financial information.
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\42\ See also Temporary Amendments Adopting Release, at 27122;
Better Markets letter.
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In addition, we note that several essential safeguards contained in
the 2015 Regulation Crowdfunding rules continue to apply to issuers
that rely on the temporary rules. Crucially, offering and 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 from the time of a material
change to the offering. These safeguards, as well as various other
requirements of Regulation Crowdfunding offerings may have served as
key deterrents to potential misconduct. Since the inception of
Regulation Crowdfunding, there have been relatively few enforcement
actions taken against issuers and intermediaries in the crowdfunding
market.\43\ Staff is not aware of an increase in misconduct due to the
adoption of the temporary rules. However, this inference is inherently
limited by the difficulty of identifying misconduct.
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\43\ See 2019 Regulation Crowdfunding Report, at 5.
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As another alternative, we could extend the relief for a shorter or
longer time period than specified in these amendments. The alternative
of extending the relief for a shorter (longer) time period would lead
to fewer (more) potential issuers being afforded the flexibility in
capital raising under the temporary rules, compared to the amendments.
Because of the severe and continuing economic impact of the COVID-19
crisis, we believe that the extension of the temporary rules is
appropriate.\44\
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\44\ As another alternative, we could extend some but not all of
the provisions of the temporary rules, or modify further some of the
provisions of the temporary relief. For a detailed discussion of the
economic effects of the individual provisions and the alternatives
involving modifications of the provisions in the temporary rules,
see Temporary Amendments Adopting Release, at 27121-31.
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[[Page 54490]]
IV. 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.'' \45\ 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.\46\
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\45\ 5 U.S.C. 553(b)(3)(B).
\46\ 5 U.S.C. 553(d)(3).
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Given the temporary nature of both the relief contemplated by the
temporary final rules and the extension of such relief, as well as 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 extend the applicability and expiration dates of the temporary
amendments to Rules 100, 201, 301, 303 and 304 of Regulation
Crowdfunding.\47\ In particular, small businesses continue to be
affected by the closures and safety measures designed to slow the
spread of COVID-19 and may face urgent funding needs \48\ 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 provided 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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\47\ 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). One commenter expressed
concern that the Commission adopted the temporary final rules
without public input. See Better Markets letter. However, consistent
with the discussion above, we believe this approach was warranted
given the extraordinary challenges faced by many issuers under the
current circumstances as well as the fact that any delay in
implementation would have substantially undermined the intended
benefits of the temporary relief.
\48\ See supra note 1.
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The temporary final rules provide relief from certain financial
information requirements of Regulation Crowdfunding. In addition, the
temporary final rules require issuers relying on the temporary relief
to provide certain additional disclosures, although, as we stated in
the Temporary Amendments Adopting Release, we expect the burden of
those disclosures to be minimal. We also stated in the Temporary
Amendments Adopting Release that 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.\49\
Accordingly, we did not adjust the burden or cost estimates associated
with existing collections of information under Regulation Crowdfunding
for purposes of the Paperwork Reduction Act of 1995.\50\ The extension
of the applicability and expiration dates of the temporary final rules
does not change our analysis.
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\49\ 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.
\50\ 44 U.S.C. 3501 et seq.
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Pursuant to the Congressional Review Act,\51\ the Office of
Information and Regulatory Affairs has designated the temporary final
rules as a ``major rule,'' as defined by 5 U.S.C. 804(2).
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\51\ 5 U.S.C. 801 et seq.
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V. Statutory Basis
We are temporarily amending 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 as follows, and the expiration date for the temporary final
rules published May 7, 2020 (85 FR 27116) is extended from March 1,
2021, to September 1, 2021.
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).
Sec. 227.100 [Amended]
0
2. In Sec. 227.100(b)(7) introductory text, remove the date ``August
31, 2020'' and add in its place the date ``February 28, 2021''.
Sec. 227.201 [Amended]
0
3. In Sec. 227.201(z) introductory text, remove the date ``August 31,
2020'' and add in its place the date ``February 28, 2021''.
Sec. 227.301 [Amended]
0
4. In Sec. 227.301(d), remove the date ``August 31, 2020'' and add in
its place the date ``February 28, 2021''.
Sec. 227.303 [Amended]
0
5. In Sec. 227.303(g)(1) introductory text and (2), remove the date
``August 31, 2020'' and add in its place the date ``February 28,
2021''.
Sec. 227.304 [Amended]
0
6. In Sec. 227.304(e) introductory text, remove the date ``August 31,
2020'' and add in its place the date ``February 28, 2021''.
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. In Form C (referenced in Sec. 239.900) remove the words ``August
31, 2020'' in the second paragraph to the introductory paragraphs in
the Optional Question and Answer Format for an Offering Statement and
add, in their place, the words ``February 28, 2021''.
By the Commission.
Dated: August 28, 2020.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020-19468 Filed 8-31-20; 11:15 am]
BILLING CODE 8011-01-P
