Report to the Commission

Regulation Crowdfunding

This is a report by the staff of the U.S. Securities and Exchange Commission. The 

Commission has expressed no view regarding the analysis, findings, or conclusions 

contained herein.

June 18, 2019
2

Table of Contents

I. Executive Summary ..................................................................................................... 3

II. Background.................................................................................................................. 5

A. Overview of Regulation Crowdfunding......................................................................... 6

B. Overview of the Study and Report to the Commission ..................................................11

III. Experience with Regulation Crowdfunding ..................................................................13

A. Regulation Crowdfunding Offerings Issuers, and Investors...........................................14

1. Capital formation in the crowdfunding market........................................................14

2. Characteristics of crowdfunding issuers and offerings.............................................17

3. Costs to issuers of undertaking a crowdfunding offering .........................................23

B. Regulation Crowdfunding Intermediaries.....................................................................27

C. Impact of Regulation Crowdfunding on Capital Formation and Investor Protection .......27

1. Issuer and intermediary compliance........................................................................27

2. Issuer offering limits and investor investment limits ...............................................34

3. Incidence of fraud, investor losses, and compliance with investor aggregates...........42

4. Intermediary fee and compensation structures.........................................................47

5. Measures intermediaries have taken to reduce the risk of fraud, including reliance on 

issuer and investor representations .........................................................................49

6. The concept of a centralized database of investor contributions...............................51

7. Intermediary policies and procedures .....................................................................52

8. Intermediary recordkeeping practices.....................................................................52

9. Secondary trading market practices........................................................................53

10. Other aspects of the Regulation Crowdfunding experience......................................57
3

I. Executive Summary

The Jumpstart Our Business Startups Act (the “JOBS Act”),1 enacted on April 5, 2012, 

established a regulatory structure for startups and small businesses to raise capital through 

securities offerings through crowdfunding.2 On October 30, 2015, the Commission adopted the 

final rules for Regulation Crowdfunding to implement Title III of the JOBS Act (“Title III”). 3 In 

the Adopting Release, the Commission stated that “staff will undertake to study and submit a 

report to the Commission no later than three years following the effective date of Regulation 

Crowdfunding on the impact of the regulation on capital formation and investor protection.”4 

Consistent with the Adopting Release, staff has undertaken a study of the available 

information on the capital formation and investor protection impacts of Regulation 

Crowdfunding. This report has summarized quantitative information, where it was available to 

the staff, as well as qualitative observations of SEC staff and FINRA staff, and input from 

market participants regarding their experience with Regulation Crowdfunding. In some 

instances, the analysis was limited by a lack of data or confined to secondary sources. Further, 

due to the time frame of the study and market size to date, the analysis involved a relatively 

small number of issuers and a relatively short time period, which coincided with favorable 

economic conditions. Thus, the study’s findings may not be informative about future trends in 

the crowdfunding market.

 

1

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

2

 In this report, the term “crowdfunding” is generally used to refer to securities-based crowdfunding under 

Regulation Crowdfunding and Section 4(A)(6) of the Securities Act, except where specified otherwise. 

3 See Crowdfunding, Rel. No. 33-9974 (Oct. 30, 2015) [80 FR 71387 (Nov. 16, 2015)] (“Adopting Release”), at 

71388.

4

 Adopting Release, at 71390.
4

Certain information is summarized below, and our detailed analysis and findings are 

discussed more fully in the body of this report. 

• The number of crowdfunding offerings as well as the total amount of funding during 

the considered period was relatively modest. Between May 16, 2016 and December 

31, 2018, we estimate that there were 1,351 offerings, excluding withdrawn filings, 

seeking in the aggregate a target, or minimum, amount of $94.3 million and a 

maximum amount of $775.9 million. 

• The market exhibited growth over time: 292 offerings initiated during the first year, 

557 during the second year, and approximately 502 during the first part of the third 

year (from May 16, 2018 through December 31, 2018) since the rules went into 

effect. While most issuers undertook one offering during this period, some issuers 

(105) returned to the crowdfunding market for follow-on offerings. 

• The typical offering was small and raised less than the 12-month offering limit. The 

median target amount sought was $25,000 and the median maximum amount sought 

was $500,000. We estimate that 539 offerings reported raising at least the minimum 

(target) amount. Of the offerings that were reported completed, the average offering 

sought a target amount of approximately $52,428 and a maximum amount of 

approximately $577,385 and raised approximately $208,300 per offering and 

approximately $107.9 million in the aggregate, which does not include investor 

commitments in ongoing offerings. The median amount reported raised was 

approximately $107,367. We estimate that 29 offerings reported raising at least $1.07 

million from May 16, 2016 through December 31, 2018. In reviewing issuers 

conducting multiple offerings, we observed only three issuers that reported raising
5

more than $1.07 million during the approximately 2.5 years since Regulation 

Crowdfunding went into effect. 

• The majority of issuers that sought financing under Regulation Crowdfunding during 

the considered period were relatively small and early in their lifecycle. Based on 

information in offering statement filings, the median offering was by an issuer that 

was incorporated approximately two years prior to the offering and employed about 

three people. The median issuer had total assets of approximately $30,000, cash 

holdings of approximately $4,000, and no revenues (just over half of the offerings 

were by issuers with no revenues).

• During the considered period, there were relatively few enforcement actions taken 

against issuers and intermediaries in the crowdfunding market. However, this 

inference is inherently limited by the potential latency of misconduct as well as a 

relatively short period of observation.

II. Background

The JOBS Act crowdfunding provisions were intended to help startups and small 

businesses raise capital in a less costly manner by making relatively low dollar offerings of 

securities to a “crowd” of interested investors.5 On October 30, 2015, the Commission adopted 

the final rules for Regulation Crowdfunding, which went into effect on May 16, 2016, with the 

 

5

 See Crowdfunding, Rel. No. 33-9974 (Oct. 30, 2015) [80 FR 71387 (Nov. 16, 2015)] (“Adopting Release”), at 

71388.
6

exception of the provisions governing funding portal registration, which became effective on 

January 29, 2016.6 

A. Overview of Regulation Crowdfunding

Title III added new Section 4(a)(6) to the Securities Act of 1933,

7 which provides an 

exemption from the registration requirements of Securities Act Section 58 for certain 

crowdfunding transactions. Regulation Crowdfunding, which prescribes the rules governing the 

offer and sale of securities under Section 4(a)(6), permits an issuer to raise a maximum aggregate 

amount of $1.07 million in a 12-month period,

9 limits the amount individuals may invest in 

offerings under the exemption,10 requires issuers to disclose certain information about their 

business and the offering,

11 and creates a regulatory framework for the intermediaries that 

facilitate the crowdfunding transactions.12

Limits on how much each investor may invest over the course of a 12-month period in 

the aggregate across all crowdfunding offerings depend on the investor’s annual income or net 

worth. If either the investor’s annual income or net worth is less than $107,000, the limit equals 

the greater of $2,200 or five percent of the lesser of the annual income or net worth. If both the 

 

6

 FINRA also has adopted rules regarding funding portals. See http://www.finra.org/industry/funding-portals.

7 15 U.S.C. 77d(a)(6).

8 15 U.S.C. 77e.

9

 17 CFR 227.100(a)(1). When Regulation Crowdfunding was adopted, the maximum aggregate amount an 

issuer was permitted to raise in a 12-month period was $1 million. On March 31, 2017, the Commission 

adjusted for inflation certain thresholds in Regulation Crowdfunding, as required by Title III of the JOBS Act, 

including the limit on capital raised. See Inflation Adjustments and Other Technical Amendments under Titles I 

and III of the JOBS Act (Technical Amendments; Interpretation), Rel. No. 33-10332 (Mar. 31, 2017) [82 FR 

17545 (Apr. 12, 2017)] (“2017 Amendments”). Inflation adjustment is required not less frequently than every 

five years.

10 17 CFR 227.100(a)(2).

11 17 CFR 227.201-203.

12 17 CFR 227.100(a)(3), 227.300-305, 227.400-404.
7

investor’s annual income and net worth are at least $107,000, then the limit equals ten percent of 

the lesser of the annual income or net worth, up to a maximum of $107,000.13

Certain categories of companies are ineligible to use the Regulation Crowdfunding

exemption, including: (1) non-U.S. companies; (2) companies subject to the requirement to file 

reports under Section 13 or 15(d) of the Securities Exchange Act of 1934; (3) certain investment 

companies; (4) companies disqualified under the bad actor disqualification provisions of 

Regulation Crowdfunding;14 (5) companies that have failed to comply with the annual reporting 

requirements under Regulation Crowdfunding during the two years immediately preceding the 

filing of the offering statement; and (6) companies that have no specific business plan or have 

indicated their business plan is to engage in a merger or acquisition with an unidentified 

company or companies.15

Securities purchased in a crowdfunding transaction generally cannot be resold for a 

period of one year, with certain exceptions. 16 Holders of these securities do not count toward the 

record holder threshold that requires an issuer to register its securities with the Commission 

under Section 12(g) of the Exchange Act so long as the issuer is current in its annual reporting 

 

13 17 CFR 227.100(a). The investment limits prior to the 2017 inflation adjustments were the greater of $2,000 or 

5 percent of the lesser of the annual income or net worth, if either annual income or net worth was less than 

$100,000 or 10 percent of the lesser of the annual income or net worth if both annual income and net worth 

were $100,000 or more.

14 17 CFR 227.503.

15 17 CFR 227.100(b).

16 17 CFR 227.501(a).
8

obligation, retains the services of a registered transfer agent, and has less than $25 million in 

assets as of the end of its most recently completed fiscal year.17

Regulation Crowdfunding requires issuers to file certain information with the 

Commission on Form C and provide this information to investors and the relevant intermediary 

facilitating the crowdfunding offering. The information must be publicly available for at least 21 

days before any securities may be sold, although the intermediary may accept investment 

commitments during that time.18

The issuer is required to disclose in its offering statement, among other things,

information about its officers and directors as well as owners of 20% or more of the issuer; a

description of the issuer’s business and the use of proceeds from the offering; the price to the 

public of the securities or the method for determining the price, the target offering amount, the 

deadline to reach the target offering amount, and whether the issuer will accept investments in 

excess of the target offering amount; certain related-party transactions; a discussion of the 

issuer’s financial condition; and financial statements.19

Requirements applicable to financial statements included in Form C depend on the 

amount offered and sold during a 12-month period:

20

• For issuers offering no more than $107,000 in a 12-month period, the principal executive 

officer must certify that the financial statements are true and complete in all material 

 

17 17 CFR 240.12g-6. Section 12(g) provides that an issuer must register its securities once it has total assets 

exceeding $10 million and a class of securities held of record by either 2,000 persons or 500 person that are not 

accredited investors.

18 See 17 CFR 227.303(a).

19 17 CFR 227.201.

20 17 CFR 227.201(t).
9

respects and the disclosure must contain certain information from the issuer’s federal 

income tax return. However, if financial statements are available that have been 

reviewed or audited by an independent accountant, those must be provided instead. 

• Issuers offering more than $107,000 but not more than $535,000 in a 12-month period (or 

up to $1,070,000 for the issuer’s first crowdfunding offering) must have their financial 

statements reviewed by an independent accountant and file the accountant’s review report

with the Form C. 

• Issuers offering more than $535,000 in a 12-month period in a follow-on crowdfunding 

offering must have their financial statements audited by an independent accountant and 

file the accountant’s audit report with the Form C. 

Issuers are required to amend the offering document during the offering period to reflect 

material changes.21 In addition, issuers must provide updates on the issuer’s progress toward 

reaching the target offering amount.22 Issuers that have sold securities in reliance on the 

Regulation Crowdfunding exemption also are required to file an annual report with the 

Commission on Form C-AR and provide it to investors.23 

Transactions must take place exclusively through a platform operated by a crowdfunding

intermediary that is registered with the Commission (either a registered broker-dealer or a 

 

21 17 CFR 227.203(a)(2).

22 17 CFR 227.203(a)(3). Issuers are not required to file interim progress updates if the crowdfunding

intermediary makes publicly available on the intermediary's platform frequent updates regarding the progress of 

the issuer in meeting the target offering amount. In practice, consistent with this provision, we have observed 

that issuers generally rely on the intermediary to provide interim updates on its platform. However, issuers 

relying on this provision remain required to file a final offering update on Form C-U to disclose the total 

amount of securities sold in the offering no later than five business days after the offering deadline.

23 17 CFR 227.202; 227.203(b)(1). Financial statements enclosed in annual report must be accompanied by 

principal executive officer certification, unless reviewed or audited financial statements are otherwise available.
10

registered funding portal). 24 The rules require these intermediaries to provide investors with 

educational materials;25 to take measures to reduce the risk of fraud;26 to make available 

information about the issuer and the offering;27 to provide communication channels to permit 

investors to communicate with each other and with representatives of the issuer about offerings 

on the platform;28 and to satisfy other safeguards and requirements related to the offer and sale of 

crowdfunded securities, including having a reasonable basis for believing that the investor 

satisfies the investment limits.29 

Regulation Crowdfunding introduced a new category of registered intermediary, a 

funding portal, which may facilitate transactions under the exemption subject to certain 

restrictions.30 The statute and the rules provide a safe harbor from broker-dealer registration 

under which funding portals can engage in certain activities conditioned on complying with the 

restrictions imposed by Regulation Crowdfunding.31 For example, a funding portal may not 

offer investment advice or make recommendations; solicit purchases, sales or offers to buy 

securities offered or displayed on its platform; compensate promoters and others for solicitations 

or based on the sale of securities; or hold, possess, or handle investor funds or securities.32

 

24 17 CFR 227.100(a)(3).

25 17 CFR 227.302(b).

26 17 CFR 227.301.

27 17 CFR 227.303(a).

28 17 CFR 227.303(c).

29 17 CFR 227.303(b). See generally 17 CFR 227.300-305.

30 17 CFR 227.400-404.

31 17 CFR 227.402.

32 17 CFR 227.402(a).
11

B. Overview of the Study and Report to the Commission

In the Adopting Release, the Commission stated that the staff’s report would include, but 

not be limited to, a review of: (1) issuer and intermediary compliance; (2) issuer offering limits 

and investor investment limits; (3) incidence of fraud, investor losses, and compliance with 

investor aggregates; (4) intermediary fee and compensation structures; (5) measures 

intermediaries have taken to reduce the risk of fraud, including reliance on issuer and investor 

representations; (6) the concept of a centralized database of investor contributions; (7) 

intermediary policies and procedures; (8) intermediary recordkeeping practices; and (9) 

secondary market trading practices.33

We believe that the economic tradeoffs discussed in the Adopting Release generally 

continue to apply.34 Below we discuss and analyze data on Regulation Crowdfunding that has 

become available since the rules went into effect in May 2016, focusing on the areas listed 

above. We present quantitative information where it is available. In certain cases, only 

qualitative information is available, or we lack sufficient data or information to perform an 

analysis from which to make reliable inferences. In some cases, our analysis is limited due to the 

nature of information required to be disclosed in Commission filings, made available by market 

participants, or otherwise available to Commission staff. 

We summarize qualitative observations based on information available to the 

Commission staff, including: information from crowdfunding filings; data collected from 

crowdfunding intermediaries through the staff’s look-back survey (described below); industry

 

33 Adopting Release, at 71390.

34 See id, at 71482-71522 for a detailed discussion of the economic effects of Regulation Crowdfunding, 

http://www.gpo.gov/fdsys/pkg/FR-2015-11-16/pdf/2015-28220.pdf. 
12

reports regarding the crowdfunding market; letters to the Commission and its staff about the 

crowdfunding market; transcripts from the Commission’s annual Government-Business Forum 

on Small Business Capital Formation (“Small Business Forum”);35 enforcement actions; 

information provided by the North American Securities Administrators Association (“NASAA”); 

and discussions with FINRA staff that conduct examinations of crowdfunding intermediaries. 

Where applicable, we discuss limitations that may significantly affect our analysis. For 

instance, the relatively short period of observation, which coincides with favorable economic 

conditions and other regulatory changes36 affecting the exempt and public markets, may limit the 

ability to extrapolate our observations to future periods, and particularly, to periods of market 

downturns. While the number of crowdfunding offerings has continued to grow, the total

number of crowdfunding offerings has remained relatively small when compared to the 

significantly larger number of other exempt offerings. This relatively small sample size further 

limits our ability to make inferences from the data. In addition, it is difficult to draw rigorous 

conclusions about the average magnitude of investor gains and losses or the risk of fraud in this 

market given the following factors that affect the Regulation Crowdfunding offering data: the 

 

35 The Small Business Investment Incentive Act of 1980 directed the Commission to conduct an annual 

government-business forum to undertake an ongoing review of the financing problems of small businesses. See

15 U.S.C. 80c-1. The Small Business Forum has met annually since 1982 to provide a platform to highlight 

perceived unnecessary impediments to small business capital formation and address whether they can be 

eliminated or reduced. Each forum seeks to develop recommendations for government and private action to 

improve the environment for small business capital formation, consistent with other public policy goals, 

including investor protection. Information about the Small Business Forum is available at 

https://www.sec.gov/corpfin/infosmallbussbforum-2shtml. 

36 For example, in 2015, the Commission adopted amendments expanding Regulation A. See Amendments for 

Small and Additional Issues Exemptions under the Securities Act(Regulation A), Rel. No. 33-9741 (Mar. 25, 

2015) [80 FR 21805 (Apr. 20, 2015)]. The Commission further amended Regulation A in 2018. See 

Amendments to Regulation A,Rel. No. 33-10591 (Dec. 19, 2018) [84 FR 520 (Jan. 31, 2019)]. In 2016, to 

facilitate intrastate and regional securities-based crowdfunding, the Commission adopted amendments to Rules 

147 and Rule 504 and adopted new Rule 147A. See Exemptions to Facilitate Intrastate and Regional Securities 

Offerings, Rel. No. 33-10238 (Oct. 26, 2016) [81 FR 83494 (Nov. 21, 2016)].
13

relatively short period of time since the first crowdfunding offering for the typical issuer in the 

sample, the long period of time typically required for a startup issuer to experience a liquidity 

event or close its business, the absence of initial public offerings (“IPOs”) or exchange listings 

by crowdfunding issuers during the considered period, the lack of a secondary trading market in 

crowdfunding securities, the lack of data on the rate of repayment for debt securities issued in 

crowdfunding offerings, and the often considerable latency of fraud schemes. Data obtained 

under the existing Regulation Crowdfunding regime may not predict the evolution of the market 

if the regulatory regime is modified because such changes may affect the types of issuers, 

investors, and intermediaries drawn to this market. Relatedly, our analysis does not capture 

companies that do not pursue crowdfunding offerings today because of particular features of the 

existing regulatory regime.

As part of this report, the staff engaged in outreach to market participants, including 

intermediaries, for information on the impact of Regulation Crowdfunding on capital formation 

and investor protection. In furtherance of this goal and to facilitate its study, the staff formulated 

a questionnaire (the “look-back survey”) and requested data and other information to inform the 

staff’s study, including data covering periods since the date of effectiveness of Regulation 

Crowdfunding, from a small number of crowdfunding intermediaries. Participation in the lookback survey was voluntary.

III. Experience with Regulation Crowdfunding

We have examined available data and other information on the experience of issuers, 

intermediaries, investors, and Commission staff with Regulation Crowdfunding during the period 
14

from May 16, 2016 (the effective date) through December 31, 2018 (the “considered period”), 

unless otherwise specified.37 

A. Regulation Crowdfunding Offerings, Issuers, and Investors

1. Capital formation in the crowdfunding market

Based on the analysis of information in Form C filings, the considered period was 

characterized by interest in Regulation Crowdfunding from a diverse range of early-stage issuers. 

We estimate that there were 1,351 offerings,38 excluding withdrawn filings, seeking in the 

aggregate a target, or minimum, amount of $94.3 million and a maximum amount of $775.9

million. While most issuers undertook one offering during this period, some issuers (105) 

returned to the crowdfunding market for follow-on offerings. 

During this period, there appeared to be growing interest in the use of the Regulation 

Crowdfunding exemption. We estimate that there were 292 offerings initiated (excluding 

withdrawn offerings) during the first year of Regulation Crowdfunding, 557 during the second 

year, and approximately 502 during the first part of the third year (May 16, 2018 – December 31, 

2018). 

 

37 For early experience with Regulation Crowdfunding offerings during May 2016-December 2016, see U.S. 

Securities-based Crowdfunding under Title III of the JOBS Act, DERA White Paper, 

https://www.sec.gov/dera/staff-papers/white-papers/28feb17_ivanov-knyazeva_crowdfunding-under-titleiiijobs-act.html(“2017 White Paper”).

38 This information is based on data as reported by filers in filings on the Commission’s Electronic Data 

Gathering, Analysis and Retrieval(“EDGAR”) system. For offerings that have been amended, the statistics use 

the latest amendment as of the end of the considered period. The offering statistics exclude 107 withdrawn 

offerings (involving a Form C-W filing or an intermediary that has withdrawn its registration as of the report 

date). Form C-W does not contain information on the reason for the withdrawal. Some withdrawn offerings 

may be failed offerings. Several offerings were classified withdrawn due to the withdrawal of registration of 

the funding portal. Amounts raised may be lower than the target or maximum amounts sought. 
15

The majority of issuers raised significantly less than the existing offering limit or the 

maximum amount specified in their offering statements. Between May 2016 and December 31, 

2018, we estimate that 29 offerings reported raising at least $1.07 million. Only three issuers 

have reported raising more than $1.07 million, but in two or more offerings during the 

approximately 2.5 years since Regulation Crowdfunding went into effect (aggregating multiple 

offerings for issuers that conducted more than one offering). Because Regulation Crowdfunding 

requires that an issuer obtain commitments totaling at least the target amount in order to sell 

securities in a crowdfunding offering,39 almost all offerings elected to accept oversubscriptions, 

adopting a minimum-maximum structure. We summarize statistics of the offer amounts and 

reported proceeds in the table below.40

Table 1. Offering amounts and reported proceeds during May 16, 2016 - December 31, 

2018

Number Average Median Aggregate

(in millions)

Target amount sought in 

initiated offerings

1,351 $69,800 $25,000 $94.3

Maximum amount sought in 

initiated offerings41

1,351 $602,200 $500,000 $775.9

Amounts reported as raised 

in completed offerings

519 $208,400 $107,367 $108.2

 

39 See 17 CFR 227.201(g); 17 CFR 227.304.

40 The aggregate amounts of reported proceeds in the table are a lower bound on the aggregate amounts raised. 

Industry statistics report significantly higher aggregate amounts of investor commitments during this time 

period. For instance, one industry source reports approximately $194 million raised in total as of the end of 

2018, including $109.3 million raised during 2018. See https://www.crowdfundinsider.com/2019/02/144537-

there-are-47-finra-regulated-reg-cf-portals-in-2018-109-3-million-was-raised-using-this-security-exemption/

(citing a report by Crowdfund Capital Advisors (“CCA”)). The cited estimates may exceed filings-based 

estimates for several reasons. Almost all issuers rely on the intermediary to fulfill the requirement of providing 

interim progress updates and only file a final progress update. Thus, filings-based estimates have a lag, 

proportionate to the pipeline of ongoing offerings. Some issuers in offerings reported to have met the target 

amount based on industry data either did not file or did not timely file a final progress update on Form C-U. 

41 It is capped at the offering limit for issuers undertaking multiple offerings in a 12-month period.
16

To put the magnitude of the capital raising in the U.S. crowdfunding market, and the 

potential for future growth, in context, we compare it to amounts raised in crowdfunding markets 

in several other countries, reflected in the following table. 

Table 2. Amounts Raised in non-U.S. Crowdfunding Markets in 2016

Country Exemption Adopted Amount Raised in 2016

United Kingdom 2011 $335 million

(£272 million)42

Germany 2011 $49 million

(€47 million)43

Sweden 2011 $48 million

(€46 million)44

France 2014 $45 million

(€43 million)45

China 2014 $460 million46

In the U.K., the largest European crowdfunding market, which started in 2011, 

crowdfunding issuers raised approximately £333 million ($450 million) in 2017, significantly 

larger than the reported amounts raised by U.S. crowdfunding issuers over the period May 16, 

2016 – December 31, 2018. The amount of capital raised through equity-only crowdfunding in 

China in 2017 was approximately $225 million. Caution is due when interpreting the differences 

in amounts raised between the U.S. and other countries because of differences in regulatory 

 

42 See The 3rd European Alternative Finance Industry Report (2017), Cambridge Center for Alternative Finance, 

University of Cambridge, available at: https://www.jbs.cam.ac.uk/faculty-research/centres/alternativefinance/publications/expanding-horizons/#.XKeZSK_4fcs. To convert Euros to USD, we used the exchange 

rate as of the end of each calendar year. 

43 See id.

44 See id.

45 See id.

46 See The 3rd Asia Pacific Region Alternative Finance Industry Report (2018), Cambridge Center for Alternative 

Finance, University of Cambridge, available at: https://www.jbs.cam.ac.uk/faculty-research/centres/alternativefinance/publications/3rd-asia-pacific-region-alternative-finance-industry-report/#.XKdyaa_4fcs. 
17

regimes and tax treatments of crowdfunding securities investments. For example, crowdfunding 

investors in the U.K. are subject to more favorable tax treatment compared to their U.S. peers.47 

In addition, as noted, the U.K. crowdfunding market is older and more developed than the U.S. 

crowdfunding market. U.K. regulations also generally permit issuers to raise larger amounts of 

capital through crowdfunding offerings compared to the offering thresholds in Regulation 

Crowdfunding.48

2. Characteristics of crowdfunding issuers and offerings 49

a. Crowdfunding issuers

While there was variation among issuers undertaking Regulation Crowdfunding offerings

during the considered period, the typical issuer was small and at an early stage of its lifecycle.50 

Statistics of issuer characteristics are presented in Table 3. Approximately 64% of issuers were 

organized as corporations; most of the remaining ones were organized as LLCs. The median 

offering was by an issuer that was incorporated approximately two years prior to the offering and 

employed about three people.51 The median issuer had total assets of approximately $30,000, 

cash holdings of approximately $4,000, and no revenues (just over half of the offerings were by 

issuers with no revenues). Approximately 59% of issuers had some debt prior to the offering 

 

47 For example, the Enterprise Investment Scheme (EIS) offers income tax relief of 30 percent on investments of 

up to £1million in a given tax year. Shares are free from capital gains tax if they are held for at least three years 

and income tax relief was claimed on them.

48 See The Financial Services and Markets Act 2000 (Prospectus and Markets in Financial Instruments) 

Regulations 2018 No. 786. 

49 Unless specified otherwise, information was based on the XML portion of Form C and was not checked against 

information in the offering circular exhibits or on campaign websites.

50 A small number of issuers are older or larger, resulting in a right tail or right-skewed distribution with means 

that tend to be higher than medians.

51 If a filing has been amended, we use the financial statements and issuer information provided in the most recent 

Form C/A associated with the offering.
18

(approximately 51% had some short-term debt and approximately 36% had some long-term 

debt). Approximately 10% of offerings were by issuers that had attained profitability in the most 

recent fiscal year prior to the offering. Due to the young age of the issuers, approximately half of 

the crowdfunding issuers disclosed a prior year of financial statements. The typical rate of asset 

and revenue growth experienced in the fiscal year leading up to the crowdfunding offering by an 

issuer providing this information was substantial, perhaps in part because these issuers are very 

small and start from very small asset and revenue values. 

Table 3. Issuer characteristics52

Mean Median

%: Legal status is “corporation” 63.9%

Issuer age (months since incorporation) 35.4 21.1

%: Issuer age is ≤3 months 9.3%

Employees 5.2 3.0

Assets ($000s) 324.2 29.1

%: Issuer has no assets 24.3%

Revenue ($000s) 301.1 0.0

%: Issuer is pre-revenue 52.7%

Net income or loss ($000s) -182.5 -11.2

%: Issuer has a positive net income 9.6%

Cash ($000s) 78.5 4.4

Debt ($000s) 338.4 12.1

Long-term debt ($000s) 198.1 0.0

Debt/assets 55.4 0.86

%: Issuer has debt 59.0%

Asset growth 2,953.2% 20.7%

Sales growth 857.4% 40.6%

 

52 This issuer data is computed on the basis of 1,246 issuers, except for asset growth, which is computed on the 

basis of 575 issuers and sales growth, which is computed on the basis of 358 issuers. For newly formed issuers, 

asset and sales growth rates are not available. Averages of growth rates reported in the table are affected by 

extreme values to the extent that the previous period’s assets or sales were close to zero, in which case medians 

of growth rates may be more informative.
19

b. Crowdfunding offerings

The average offering lasted approximately four months; the median offering duration was 

three months. The distribution of security types in crowdfunding offerings, based on number of 

offerings (Figure 1a) and based on target amount sought (Figure 1b), is summarized in the 

figures below. 53

Figure 1a. Security types in Regulation Crowdfunding offerings (number of offerings)

 

53 Equity is comprised of common and preferred equity (including partnership/membership units and interests). 

Approximately a third of offerings were by issuers organized as limited liability companies or as partnerships. 

Debt is comprised of straight and convertible debt. Analysis of XML data from Form C does not allow a 

granular breakdown of debt security types. In addition, some of the revenue share agreements remaining in the 

“other security type” category may have quasi-debt features. 

Simple agreements for future equity (“SAFEs”) are identified by keyword from “other security type 

description”. See infra note 59for a discussion of SAFEs.

Anecdotal review suggests that some equity and debt offerings were denoted as “other” in the form. Where 

detected, such instances were re-classified manually based on the “other security type description” field. 

Examples of “other” are, for instance, tokens, simple agreement for future tokens (“SAFTs”), and revenue 

participation agreements.

48%

27%

21%

4%

Equity

Debt

SAFE

Other
20

Figure 1b. Security types in Regulation Crowdfunding offerings (target amount sought)

Offerings were geographically concentrated, with just under a third of the offerings made 

by issuers located in California (approximately 32%), followed by New York (approximately 

11%) and Texas (approximately 7%). Figure 2 reflects the geographic concentration of offerings 

based on the number of offering statement filings by issuer location.

Figure 2. Number of Offerings by Issuer Location

*U.S. 48 states

42%

30%

25%

3%

Equity

Debt

SAFE

Other
21

c. Crowdfunding investors and potential investor risks

According to one industry report, the total number of investors in successful offerings 

increased from 77,558 in 2017 to 147,448 in 2018.54 Information on average amounts invested 

or the number of investors per offering is not available for the full sample of Regulation 

Crowdfunding offerings, and it is not required to be reported in progress updates. For completed 

offerings on three large funding portals during the period December 2017 – December 2018, we 

estimate the average number of investors per offering to be 113. Information on crowdfunding 

investors and per-investor investment amounts, where available from other sources, is 

summarized in Section III.C.2.b below.

Regulation Crowdfunding offerings exhibited similar characteristics commonly identified 

in the context of other unregistered offerings, but we lack data to assess how these characteristics 

may relate to investor risks and losses in the Regulation Crowdfunding market.55 Similar to 

securities issued in unregistered offerings by other startups, crowdfunding securities were 

characterized by minimal liquidity.56 Further, the separation between ownership and control 

was likely more pronounced for investors in crowdfunding issuers than for other private 

investors in traditional angel- or venture-backed startups due to the highly dispersed nature of 

crowdfunding holdings relative to the concentrated holdings held by founders, other officers, and

large private investors, as well as the frequently more limited nature of voting rights of 

crowdfunding securities (due to use of debt and SAFE securities that generally do not have 

 

54 See https://cdn.crowdfundinsider.com/wp-content/uploads/2019/02/CCA-2018-State-of-RegulationCrowdfunding-Summary-FINAL.pdf.

55 See supra Section III.A.2.a and infra note 74.

56 During the considered period, a secondary trading market for crowdfunding securities was generally nonexistent. See infra Section III.C.9.
22

voting rights, as well as classes of equity securities that lack voting rights).57 Further, small and 

less well-known issuers with a limited track record, which crowdfunding issuers often are,

generally tend to be associated with greater information asymmetries (instances where investors 

have less information about the issuer’s prospects than the issuer or the issuer’s executives), 

particularly when reporting is scaled and there is a lack of independent research coverage.58 

Certain payoff structures and contractual terms common in securities issued in 

crowdfunding offerings may be more difficult for retail investors to evaluate, particularly those 

facing high information asymmetries about issuers and their future prospects. In particular, some 

concern has been expressed about the risks to retail investors of SAFEs in crowdfunding 

offerings.59 We recognize that some of these contractual features may be associated with higher 

 

57 Equity and equity-linked crowdfunding securities tended to have limited or no voting rights, resulting in 

separation of cash flow and control rights. See, e.g., What's Market: Federal Crowdfunding Offerings, by 

Practical Law Corporate & Securities, https://content.next.westlaw.com/w-002-5319. See also 

https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_safes; http://www.finra.org/investors/highlights/5-

things-you-need-know-about-safe-securities-and-crowdfunding. In their responses to the look-back survey 

some market participants report that crowdfunding issuers are hesitant to offer voting rights to crowdfunding 

investors because the logistical challenges of seeking any required shareholder vote pose too high a risk to later 

financing and governance of the issuer. See infra Section III.C.10.

58 See supra Section III.A.2.a. See also, e.g., Healy, Paul M. and Krishna G. Palepu, 2001, Information 

asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature, 

Journal of Accounting and Economics 31(1–3), 405–440; Welker, Michael, 1995, Disclosure policy, 

information asymmetry, and liquidity in equity markets, Contemporary Accounting Research11(2), 801–827; 

Frankel, Richard and Xu Li, 2004, Characteristics of a firm's information environment and the information 

asymmetry between insiders and outsiders, Journal of Accounting and Economics 37(2), 229–259; Sufi, Amir, 

2007, Information asymmetry and financing arrangements: Evidence from syndicated loans, Journal of Finance

62(2), 629–668; Fu, Renhui, Arthur Kraft, and Huai Zhang, 2012, Financial reporting frequency, information 

asymmetry, and the cost of equity, Journal ofAccounting and Economics 54(2–3), 132–149; Brüggemann, Ulf, 

Aditya Kaul, Christian Leuz, and Ingrid M. Werner, 2018, The Twilight Zone: OTC regulatory regimes and 

market quality, Review of Financial Studies 31(3), 898–942.

59 See Office of the Investor Advocate, Report on Activities for Fiscal Year 2016, 

https://www.sec.gov/advocate/reportspubs/annual-reports/sec-investor-advocate-report-on-activities-2016.pdf; 

https://www.crowdcheck.com/blog/buyer-beware-securities-are-not-always-what-they-seem; Green, Joseph, 

and John Coyle, 2016, Crowdfunding and the not-so-safe SAFE, 102 Virginia Law Review 168. But see

Wroldsen, Jack, 2017, Crowdfunding investment contracts, 11 Virginia Law & Business Review. See also 2017 

White Paper; https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_safes.
23

investment returns, but we are unable to perform an analysis of risk-adjusted returns to such 

investments due to a lack of subsequent liquidity events by issuers and the lack of a secondary 

trading market for crowdfunding securities during the considered period. 

3. Costs to issuers of undertaking a crowdfunding offering

An important factor in a small issuer’s decision to undertake a crowdfunding offering is 

the cost of the offering. There are several types of costs associated with a crowdfunding 

campaign: platform fees, legal, accounting, marketing expenses, etc. We discuss platform fees

in Section III.C.3 below.

We have limited information on costs incurred by issuers in the process of conducting an 

offering because issuers are not required to disclose costs related to their offerings in 

Commission filings. We have estimated the type and magnitude of the offering costs based on 

information contained in a survey by a consulting company60 and information provided by 

market participants to the staff.

According to the survey, the average issuer employed three people who collectively spent 

241 hours to launch a crowdfunding campaign. Based on the survey estimates, the total cost of 

creating a campaign page, issuer disclosures, film, and video, and hiring a marketing firm, a 

lawyer, and an accountant amounts to approximately 5.3% of the amount raised. 

In terms of human capital, as Figure 1 suggests, the largest average use of resources is for 

the creation of the campaign video (3 persons on average), and the lowest is for legal services (1 

 

See also https://www.crowdcheck.com/blog/compliance-reg-cf-when-failure-becomes-fraud and

http://www.finra.org/investors/highlights/5-things-you-need-know-about-safe-securities-and-crowdfunding.

60 See How Much Does a Regulation Crowdfunding Campaign Actually Cost?, August 2018, available at: 

http://crowdfundcapitaladvisors.com/how-much-does-a-regulation-crowdfunding-campaign-actually-cost

(“CCA survey”). The survey targeted 485 crowdfunding issuers and obtained a 16.7% response rate. 

Definitions of cost categories may differ across various sources.
24

person). On the other hand, disclosure preparation requires the largest number of hours, on 

average 86 hours (Figure 2), while legal and accounting services require 15 and 17 hours, 

respectively. Disclosure preparation is also most expensive in dollar terms, averaging $6,218 per 

campaign, followed by marketing expenses and legal expenses (Figure 3).

Figure 3a. Average resources (individuals) required per activity61

 

61 Id. The figure was createdusing data from the CCA survey.

0 0.5 1 1.5 2 2.5 3 3.5

Video

Campaign Copy

Campaign Disclosures

Marketing

Accounting

Legal
25

Figure 3b. Average time (hours) allocated per activity62

Figure 3c. Average breakdown of costs (in dollars) per activity63

 

62 Id. The figure was createdusing data from the CCA survey. 

63 Id. The figure was createdusing data from the CCA survey.

86

54

44

25

17

15

0 20 40 60 80 100

Campaign Disclosures

Campaign Copy

Marketing

Video

Accounting

Legal

$6,218

$4,468

$3,297

$3,289

$3,018

$2,189

$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000

Campaign Disclosures

Marketing

Legal

Accounting

Video

Campaign Copy
26

In comparison, one market participant estimated costs as follows:64

Type of cost Magnitude (in dollars)

Accounting costs $2,000-$10,000

Legal costs $3,000-$10,000

Bank/transaction fees 

(escrow/payments/transfer agent fees))

$3,000-$5,000

According to this market participant, marketing costs tend to vary by issuer, totaling up to 

20% of the target offering amount. For example, a high-quality videographer usually costs about

$2,000-$5,000 dollars. This is not surprising, given that another industry study has documented 

the importance of having a high-quality video for the success of a crowdfunding campaign.65 

Also according to this market participant, bank and transaction fees also may vary depending on 

the type of back-end infrastructure developed by the intermediary and the type of securities 

offered (e.g., equity vs. debt). Some fees, such as transfer agent fees, could be on an annual 

basis, while others could be on a per-investor basis.

One intermediary responding to the look-back survey also estimated that issuers spent 

approximately three to four weeks to prepare their Form C. Additionally, this intermediary 

stated that most issuers use cash accounting and spent thousands of dollars both to prepare 

financial statements that instead comply with U.S. generally accepted accounting principles 

(“U.S. GAAP”) and then to have those financial statements reviewed or audited by an

independent auditor. 

 

64 Definitions of cost categories may differ across various sources.

65 See http://crowdfundcapitaladvisors.com/crowdfunding-video-hurting-campaign/. The study further indicates 

that “a professionally executed video can be done for as little as $5,000.”
27

B. Regulation Crowdfunding Intermediaries

As of the end of the considered period, there were 45 funding portals registered with 

FINRA, most of which had facilitated at least one offering.66 In addition, nine registered brokerdealers participated in at least one crowdfunding offering (other than withdrawn offerings). 

Most offerings (just under 90%) were conducted through funding portals, suggesting 

specialization in the market. There also was a considerable amount of concentration. The 

majority of initiated and completed offerings were conducted through the three largest funding 

portals. The three platforms with the greatest number of initiated offerings accounted for 

approximately two-thirds of all initiated offerings and proceeds raised reported on Form C-U. It 

is possible that smaller intermediaries may exit the crowdfunding market if they fail to attract 

sufficient deal flow to sustain their business model.67 

C. Impact of Regulation Crowdfunding on Capital Formation and Investor 

Protection

In addition to the general data provided above about the experiences of issuers, investors, 

and intermediaries with Regulation Crowdfunding, this section separately addresses each of the

items that the Commission identified in the Adopting Release for inclusion in the staff report. 

1. Issuer and intermediary compliance 

Below we summarize observations regarding compliance by issuers and intermediaries.

 

66 See http://www.finra.org/about/funding-portals-we-regulate.

67 As of February 15, 2019, seven funding portals have withdrawn their registrations. See

https://www.finra.org/about/funding-portals-we-regulate/former-funding-portal-members. See also infra note 

106.
28

a. Issuer compliance

Offering statements filed on Form C are not subject to staff review before the issuer may 

sell securities. Staff’s experience with and analysis of filings has revealed differences among 

issuers’ compliance,68 primarily in the following areas: (1) financial statement requirements; (2) 

the requirement to file an annual report on Form C-AR (for issuers that have sold securities 

under the exemption and have not terminated their reporting obligations);69 and (3) the 

requirement to file a final progress update on Form C-U. 70 

Observations regarding compliance with disclosure requirements may be attributable in 

part to the fact that the majority of issuers have had no, or very limited, prior experience with 

securities offerings and Commission filings.71 These observations also are consistent with the 

likely more limited involvement of specialized outside counsel and independent auditors in the 

preparation of issuer filings as compared to larger offerings under other exemptions, and the 

 

68 Staff observations have identified certain instances where issuers appear not to have provided compliant 

financial statement disclosures, have failed to file or timely file required annual reports, or have failed to file 

progress updates. See also, e.g., https://www.crowdcheck.com/blog/compliance-reg-cf-financial-statementsunder-rule-201; https://www.crowdcheck.com/blog/regulation-cf-annual-filing-season-starts-batting-200; 

https://www.crowdcheck.com/blog/investor-alert-2-has-your-company-provided-you-updates. 

69 From May 16, 2016 through December 31, 2018, among issuers that reported completed offerings (see Table 1), 

we estimate that 252 issuers filed annual reports and 20 terminated reporting. Issuers that have sold securities 

in reliance on the Regulation Crowdfunding exemption are required to file an annual report on Form C-AR no 

later than 120 days after the end of the fiscal year covered by the report. See 17 CFR 227.203(b)(1). Because 

almost all issuers during the considered period had a calendar fiscal year, annual reports are required to be filed 

in April for the majority of issuers. 

70 One industry observer also pointed to possible failures to update Form C with changes in material information 

and to possible inconsistencies in complying with the terms of SAFEs issued under the exemption,such as in 

instances of changes in control. See https://www.crowdcheck.com/blog/compliance-reg-cf-when-failurebecomes-fraud.

71 The majority of new Form C filers (approximately 85%) had not made prior filings with the Commission. 

Among issuers that had made prior filings with the Commission, many had only filed a notice on Form D, 

which requires very limited information about a Regulation D offering.
29

potentially limited experience of outside counsel and other professional service providers with 

Regulation Crowdfunding, given the newness of the exemption. 

A typical issuer using Regulation Crowdfunding has going concern risks, so it is possible

that issuers that fail to file annual reports on Form C-AR have ceased operations because of 

business failures or because the capital that they raised was not sufficient to fund operations and 

remain as a going concern. Thus, to some extent, the failure to file periodic reports may reflect

business failures rather than noncompliance. 72 

A potential check on issuer noncompliance is the intermediary through which the 

crowdfunding offering is conducted. In addition to reputational concerns, intermediaries have an 

incentive to ensure that issuers and their disclosures are compliant because intermediaries are 

required under Regulation Crowdfunding to have a reasonable basis for believing that an issuer 

complies with the requirements of Section 4A(b).73 In their responses to the look-back survey, 

intermediaries stated that they play a gatekeeper role with respect to issuer compliance and 

reported rejecting some offerings, for instance, by ineligible categories of issuers or issuers that 

the intermediaries believed were not compliant with Regulation Crowdfunding requirements.

 

72 An issuer that liquidates or otherwise becomes eligible to terminate reporting (17 CFR 227.202(b)), must file a 

notice of termination of reporting on Form C-TR (17 CFR 203(b)(3)). Some issuers that fail to file annual 

reports might be eligible to terminate reporting but might have failed to file a Form C-TR. We cannot ascertain 

the prevalence of such cases due to data constraints. No crowdfunding issuers have become Exchange Act 

reporting companies during the considered period. We lack data on issuers that liquidated or issuers that 

repurchased all of the crowdfunding securities they issued. While we can observe asset size at the issuer level, 

we lack issuer-level information on the number of shareholders of record because it is not required to be 

reported onForm C-U and the availability of such information from other sources is limited. An issuer seeking 

to terminate reporting because it has fewer than 300 shareholders of record must still file at least one annual 

report on Form C-AR, and an issuer seeking to terminate reporting because its assets do not exceed $10 million 

must file at least three annual reports, before terminating reporting. See 17 CFR 227.202(b).

73 See also Adopting Release at 71477 (regarding potential “issuer” liability for material misstatements or 

omissions in a crowdfunding offering).
30

We recognize that potential failures to comply with disclosure requirements could pose 

risks to investors. We cannot assess the general magnitude of such risks in this market due to the 

limited data available to us at this time.74 

Some studies and market participants have expressed concern about the cost and 

complexity of relying on Regulation Crowdfunding.75 Market participants have stated that many 

issuers face significant challenges due to the time and cost required to comply with the 

regulations, including complying with U.S. GAAP financial statement requirements, obtaining a 

review report, and preparing a Form C, and that many new companies are not able to bear those 

costs given the uncertainty regarding whether they would raise capital successfully.76 

 

74 Secondary trading for crowdfunding securities was virtually non-existent during the considered period, and 

market price information was therefore not available, thus we cannot evaluate returns of primary market 

investors through this approach. We lack information on issuer repayments, liquidations, or acquisitions and 

whether investors obtained any recovery in those instances. None of the issuers proceeded to a follow-on 

registered offering, and while some proceeded to a follow-on Regulation Crowdfunding or Regulation A 

offering, valuations may be difficult to compare to those in the initial offering due to differences in security 

design and terms. Further, it is similarly difficult to determine whether valuations in follow-on Regulation 

Crowdfunding offerings are based on an informed analysis of fundamental value. Some crowdfunding issuers 

proceeded to an offering under Regulation D, but similar points apply, compounded by the lack of information 

about valuations in offerings under Regulation D.

75 See, e.g.,A Financial System That Creates Economic Opportunities Capital Markets, U.S. Department of 

Treasury (2017), https://www.treasury.gov/press-center/press-releases/documents/a-financial-system-capitalmarkets-final-final.pdf(“Treasury Report”), at 40 (stating that “market participants have expressed concerns 

about the cost and complexity of using crowdfunding compared to private placement offerings”); Report of the 

2018 SEC Government-Business Forum on Small Business CapitalFormation, 

https://www.sec.gov/files/gbfor37.pdf(“2018 Small Business Forum Report”); Statement of the U.S. Chamber 

of Commerce to HFSC, March 22, 2017, https://docs.house.gov/meetings/BA/BA16/20170322/105717/HHRG115-BA16-Wstate-QuaadmanT-20170322.pdf, at 12-13; Lindsay M. Abate (2016) One Year of Equity 

Crowdfunding: Initial Market Developments and Trends, U.S. Small Business Administration Office of 

Advocacy Economic Research Series, 

https://www.sba.gov/sites/default/files/advocacy/Crowdfunding_Issue_Brief_2018.pdf(“SBA Study”), at 12 

(suggesting that “exempting businesses seeking very small amounts of capital from certain requirements may 

make crowdfunding a more attractive and worthwhile option for small and young firms that are otherwise a 

good fit for this capital raising method”).

76 See, e.g., Report of the 2017 SEC Government-Business Forum on Small Business Capital Formation, available 

at: https://www.sec.gov/files/gbfor36.pdf(“2017 Small Business Forum Report”).
31

To help reduce issuer cost and regulatory complexity, market participants have 

recommended several revisions to the rules. For example, the 2015 Small Business Forum 

recommended permitting crowdfunding issuers to provide reviewed rather than audited financial 

statements in subsequent offerings unless audited financial statements of the issuer that have 

been audited by an independent auditor are available.77 In addition, the 2017 Small Business 

Forum recommended that the Commission allow crowdfunding issuers to test-the-waters prior to 

filing their Form C,78 allowing issuers to determine the potential market interest in their 

securities prior to expending the time and cost required to comply with the regulations. Most 

recently, the 2018 Small Business Forum recommended loosening the advertising restrictions to 

allow issuers to market their projects more effectively, suggesting that the rules are difficult for 

issuers to understand and “run counter to the intent of the law: to promote the democratization of 

investing”.79 In the look-back survey, several intermediaries recommended that the Commission 

consider one or more of the above Small Business Forum recommendations. Market participants 

also have raised concerns about the requirements for issuers seeking to raise smaller amounts in 

compliance with Regulation Crowdfunding. For example, the 2017 and 2018 Small Business 

Forums recommended easing the requirements for smaller and debt-only crowdfunding offerings

under $250,000, including limiting the ongoing reporting obligations to actual noteholders (not 

to the general public); and scaling regulation to reduce relatively inelastic accounting, legal and 

 

77 See Report of the 2015 SEC Government-Business Forum on Small Business Capital Formation, available at: 

https://www.sec.gov/info/smallbus/gbfor34.pdf(“2015 Small Business Forum Report”).

78 See 2017 Small Business Forum Report, at 18.

79 See 2018 Small Business Forum Report. 
32

other costs.80 In addition, one intermediary stated concerns about what it viewed as the high cost 

of annual reports, as well as the risk of disclosure of proprietary information, because of the 

requirement to file annual reports publicly on EDGAR. Another intermediary stated that smaller 

issuers that do not have reviewed or audited financial statements may find it difficult to prepare a 

statement of changes of equity, because the typical accounting software does not print it 

automatically. This respondent stated that these issuers also often have trouble accurately 

preparing a cash flow statement or accounting for stock issuances or issuances of stock options 

and warrants. Another intermediary similarly stated that many issuers are unfamiliar with the 

statement of stockholders’ equity. Yet another intermediary stated that the issuer requirements 

of Regulation Crowdfunding are more appropriate for larger equity offerings and recommended 

scaling them for smaller (sub-$107,000) offerings, particularly, for small debt offerings, to avoid 

what it described as unnecessary complexity. Market participants have also expressed concerns 

about the burden for issuers of complying with the requirement that 21 days elapse before a 

security can be sold, particularly for issuers that need funds quickly. 

b. Intermediary compliance 

Staff’s analysis of intermediary compliance practices is based largely on information 

obtained through the look-back survey and through discussions with FINRA staff that conduct

examinations of funding portals. Regulation Crowdfunding requirements, including measures to 

reduce the risk of fraud (see also Section III.C.5 below), appropriate policies and procedures (see 

also Section III.C.7), and recordkeeping practices (see also Section III.C.8), constitute important 

investor protections by providing a required framework to prevent intermediary misconduct.

 

80 See, e.g., 2017 Small Business Forum Report, at 18; 2018 Small Business Forum Report.
33

FINRA staff, in conversations with the Commission staff, has stated that they believe that 

funding portals are generally aware of their compliance and recordkeeping obligations, but 

cautions that this is a novel area of the securities laws and therefore many of the participants are 

new to regulation and oversight. FINRA staff stated that in some instances, examinations 

revealed that funding portals were attempting to comply with Regulation Crowdfunding 

requirements, but FINRA staff believed the funding portals were only in partial compliance. In 

various instances, FINRA staff issued comments regarding revisions to advertising 

communications to help ensure compliance with FINRA rules or Regulation Crowdfunding. 

SEC staff is aware of four FINRA actions involving funding portals’ alleged

noncompliance with the intermediary requirements of Regulation Crowdfunding or FINRA 

rules.81 Aside from these three actions, FINRA staff stated that they generally have found that 

funding portal founders and officers are aware of their regulatory obligations and are attempting 

to comply with them.

The 2017 and 2018 Small Business Forums recommended that the Commission lead a 

joint effort with FINRA to provide guidance to participants in crowdfunding offerings.82 Some 

intermediary respondents to the look-back survey stated that they generally have not experienced 

significant challenges complying with Regulation Crowdfunding requirements. However, some 

intermediary respondents indicated that compliance with current rules can be costly, including 

complying with FINRA requirements and examinations. One of those respondents stated that 

“the most expensive requirement is keeping up with the [significant][...] volume of FINRA 

 

81 See infra note 106.

82 See 2017 Small Business Forum Report; 2018 Small Business Forum Report. 
34

communications, which requires a full-time employee to communicate with them, and a 

dedicated engineering resource,” which are costs passed on to issuers in the form of higher fees. 

A different intermediary stated that the prohibition against funding portals handling investor 

funds significantly increased costs for funding portals, as well as for issuers and investors, while 

reducing the quality and timeliness of the investment and fund transfer process, with what it 

viewed as only limited investor protection benefits.

That same intermediary respondent to the look-back survey stated that all offerings are 

reviewed by its Chief Compliance Officer (“CCO”) and are monitored throughout the offering 

process. In addition, the intermediary explained that the CCO instructs each employee that 

specific events must be reported, including but not limited to: material discrepancies in 

information; altered documents or signatures; contradictions in information; inability or 

unwillingness to provide information; business model based on unrealistic assumptions; and any 

indication that the issuer has been rejected by another intermediary without reasonable 

explanation.

2. Issuer offering limits and investor investment limits

a. Issuer offering limits

From the inception of Regulation Crowdfunding in May 2016 through December 31, 

2018, for the majority of issuers, cumulative amounts reported raised did not reach the existing 

Regulation Crowdfunding 12-month offering limits.83 This is consistent with the small size and 

early-stage nature of the issuers and information asymmetries about issuer prospects in relation 

to offered valuations. We estimate that 29 offerings reported raising at least $1.07 million from 

 

83 See Section III.A.1.
35

May 2016 through December 31, 2018. Only three issuers have reported raising more than $1.07 

million, but in two or more offerings during the approximately 2.5 years since Regulation 

Crowdfunding went into effect (aggregating across multiple offerings for issuers that conducted 

more than one offering). 

We may draw some inference about potential capital formation effects of a higher limit

based on the experience of Regulation Crowdfunding issuers with other offering methods that 

either do not have an offering limit or have a higher offering limit. Crowdfunding issuers may 

rely on Regulation D for various reasons, such as to ensure that the Regulation Crowdfunding

offering remains within the required limit,84 to draw a different investor pool (such as accredited 

investors), or to avoid investment limits. Issuers may opt to initially rely on Regulation D rather 

than Regulation Crowdfunding, to postpone having to provide the disclosures required by Form 

C. We summarize the reported Regulation D offerings by Regulation Crowdfunding issuers in 

the table below.

 

84 Pursuant to the concurrent offering guidance provided in the Adopting Release, some crowdfunding issuers 

conduct side-by-side offerings under Regulation Crowdfunding and Rule 506(c) to allow accredited investors to 

invest in a Rule 506 offering, rather than the concurrent Regulation Crowdfunding offering, in order to ensure 

that the Regulation Crowdfunding offering remains within the conditions of the exemption. See Adopting 

Release, at 71392.
36

Table 4. Regulation D offerings during the period January 1, 2009 through December 31, 

2018 by Regulation Crowdfunding Issuers

Timing of filing of Form D

Number 

of 

Issuers85

Amount raised per 

offering Regulation D 

exemption used

Average Median 

Rule 

506(b)

Rule 

506(c)

Rule 

504

Prior to Issuer’s First 

Regulation Crowdfunding 

offering

188 $851,877 $195,500 73% 19% 7%

Subsequent to Issuer’s First 

Regulation Crowdfunding 

offering

85 $1,589,137 $199,860 50% 47% 3%

Prior or subsequent to 

Issuer’s First Regulation 

Crowdfunding offering86

244 $908,780 $200,000 68% 25% 7%

Comparisons to other types of offering that either do not have an offering limit or have a 

higher offering limit, such as traditional registered offerings or Regulation A offerings,

87 may be 

of limited use because of the differences in the structure of the market for those offerings and the 

types of issuers that are likely to rely on those offering methods. For instance, during the 

considered period, very few Regulation Crowdfunding issuers subsequently had a Regulation A 

offering statement qualified,

88 and none has subsequently offered securities in a registered 

 

85 This number reflects the number of issuers that filed at least one Form D during the period indicated.

86 Some of the issuers filed Form D both prior to, and subsequent to, the first Regulation Crowdfunding offering. 

Therefore, the number of issuers in the third row does not equal the sum of the numbers in the first two rows 

(adding up the numbers in the first two rows would lead to double counting of some crowdfunding issuers that 

filed Form D).

87 As of December 31, 2018, 91% of qualified Regulation A offerings sought to raise up to $1 million and 73% 

qualified offerings sought to raise up to $5 million. 

88 Approximately ten Form C filers have also had a Regulation A offering statement qualified, either before, or in 

most of those cases, following their Regulation Crowdfunding offering. Because most such Regulation A 
37

offering or filed an Exchange Act registration statement to become a reporting company.89 This 

is consistent with crowdfunding issuers typically being in the early stage of their lifecycle (often 

at the idea or seed stage, and in some cases, having been organized a number of years earlier but 

not having begun substantial operations) and lacking a sufficient track record of product market 

and financial performance, or sufficient scale or potential to scale up their business, that would 

make an IPO, or an offering under Regulation A, a viable path to accessing the public markets. 

We have received feedback from several market participants on the statutorily based 

issuer offering limits. The 2017 Small Business Forum, the Treasury Report, and several 

respondents to the look-back survey have stated that the offering limit should be higher, 

recommending limits from $5 million to $20 million.90 On the other hand, one intermediary

stated that the current $1.07 million offering limit is appropriate, noting that most offerings are 

well below that level. A different intermediary stated that very few potential issuers expressed 

interest in raising over $107,000. Some of the intermediaries that recommended an increased 

offering limit stated their view that while few offerings reach the current limit, many issuers 

choose not to rely on the crowdfunding exemption because the limit is too low. According to 

some of these intermediaries, some issuers choose to raise funds needed in excess of the offering 

 

offerings remain ongoing, we lack data to evaluate the amounts of financing raised. Approximately 15 Form C 

filers had filed a Regulation A offering statement, before or after their Regulation Crowdfunding offering, but 

those offering statements either had not been qualified or had been withdrawn as of the end of the considered 

period. 

89 Two issuers that had filed a registration statement several years prior to conducting a Regulation Crowdfunding 

offering had either withdrawn it or had not had that registration statement declared effective during the 

considered period. Several of the issuers had filed Exchange Act reports in prior years but have since ceased 

Exchange Act reporting.

90 See, e.g.,Treasury Report, at 41 (recommending “increasing the limit on how much can be raised over a 12-

month period from $1 million to $5 million, as it will potentially allow companies to lower the offering costs 

per dollar raised”) and 2017 Small Business Forum Report, at 18 (recommending a $5 million limit). 
38

limit through a separate offering, which they consider to be a less optimal experience for 

investors and a more costly and potentially riskier approach for issuers. Another market 

participant stated that many early-stage issuers require more than $1.07 million and that, but for 

the offering limit, Regulation Crowdfunding would provide a better solution than other available 

exemptions. Some of these market participants stated that the existing offering limit may deter 

some high-quality, high-growth issuers with substantial financing needs from relying on 

Regulation Crowdfunding, thereby lowering the average quality of issuers in the Regulation 

Crowdfunding market. One intermediary respondent stated that raising the offering limit could 

attract more issuers and expand opportunities for non-accredited investors. A different 

intermediary stated that the few issuers that had raised the maximum offering amount through its 

platform would have sought to raise additional capital had they been permitted to do so, and that 

high-quality issuers may have significant upfront capital needs that exceed the existing limit.

b. Investor investment limits

Information on amounts invested by an average investor or the number of investors per 

offering is not available for the full sample of Regulation Crowdfunding offerings.91 

Information on offerings from one intermediary from May 2016 through September 2018 

provides some insight into the typical investment size, investor composition, and number of 

investors in crowdfunding offerings. 92 All issuers in funded offerings, had at least one 

 

91 This information is not required to be reported in progress updates.

92 There were approximately 31,500 unique crowdfunding investors in this sample utilizing the platform during 

this period. 
39

accredited investor in their crowdfunding offering.93 Accredited investors comprised 

approximately 9% of investors in this sample but accounted for approximately 40% of amounts 

invested in funded offerings due to investing higher amounts on average. The table below 

provides statistics on total amounts of commitments per investor in offerings funded through that 

platform during the entire May 2016-September 2018 period, by accredited investor status. 94

Table 5. Total commitments in offerings funded on the platform during the considered 

period95

Total per investor, per issuer Median Average

All investors $260 $830

Non-accredited investors $250 $600

Accredited investors $840 $2,030

Total per investor, across issuers Median Average

All investors $490 $1,340

Non-accredited investors $300 $890

Accredited investors $2,200 $5,750

Total per investor, across issuers as % of 12-month limit96 Median Average % investors 

≥100%

All investors 17% 34% 6%

Non-accredited investors 18% 33% 6%

Accredited investors 13% 35% 7%

Number of investors per issuer Median Average

All investors 258 416

Non-accredited investors 214 349

Accredited investors 41 67

 

93 We exclude investments redirected to a Rule 506(c) offering; offerings that were not funded (i.e., were either 

canceled or ongoing) or had missing data; observations where an investor made but subsequently withdrew the 

commitments, yielding a cumulative investment of zero; and investor observations with missing accredited 

investor status. 

94 Id. Dollar amounts rounded to ten-dollar increments.

95 The sample included 111 issuers in funded offerings. 

96 Totals include commitments during the entire considered 2.5-year period and thus over the entire 2.5-year 

period a fraction of investors exceeded the amounts provided in the 12-month investment limit.
40

For most investors with available data on annual income and net worth (approximately 

30% of investors in offerings funded on the platform), cumulative amounts invested during the 

entire considered period (almost 2.5 years) through this intermediary’s platform did not reach the 

investment limit, with fewer than 10% of investors on the platform investing amounts exceeding 

their 12-month investment limit over the entire 2.5-year period. 

According to information provided by another intermediary respondent to the look-back

survey, the median (average) crowdfunding investment through its platform was $1,335 ($500), 

with investors making an average of 2.7 investments and approximately 40% of investors 

making two or more investments. According to information provided by a different intermediary 

respondent, the average investment was approximately $992, and investors made an average of 

1.5 investments. Based on available data, we are unable to determine whether these investors 

also invested in crowdfunding offerings through other crowdfunding platforms; thus, these 

estimates are likely to represent a lower bound on average investment amounts. 

A number of market participants have expressed concerns about the statutorily-based 

investment limits. 97 The 2018 Small Business Forum recommended increasing the investor 

limits for all investors, suggesting that doing so would help the market grow and allow more 

individual investments into the marketplace.98 The 2017 Small Business Forum and some 

intermediary respondents to the look-back survey recommended that the investor limits should 

apply on a per-investment basis rather than across all crowdfunding offerings.99 Several market 

 

97 See, e.g., Treasury Report, 2018 Small Business Forum Report. 

98 See 2018 Small Business Forum Report,

99 See 2017 Small Business Forum Report, at 17 (also recommending the investment limit be rationalized by 

entity type rather than income). 
41

participants and the 2015 Small Business Forum recommended basing the 5% or 10% limit on 

the greater of the investor’s net worth or income rather than the lesser of those two amounts. 100 

Some stated that allowing investors to invest the higher 10% amount only if both their net worth 

and income exceed the $107,000 threshold is inconsistent with the accredited investor definition 

where the investor is required only to meet either the net worth or the income standard. One 

market participant stated that requiring both net worth and income to meet the $107,000 

threshold could result in an accredited investor being subject to the lower 5% investment limit. 

Several market participants and the 2017 and 2018 Small Business Forums recommended 

that the investment limits not apply to accredited investors, who face no such limits under other 

exemptions. 101 The 2018 Small Business Forum stated that removing the individual accredited 

investor limits would make crowdfunding offerings more attractive to accredited investors and 

make it easier for offerings to reach their maximum offering goals.102 In conjunction with 

removing the investment limits for individual accredited investors, the 2018 Small Business 

Forum recommended verification of accredited investor status.103 Similarly, some intermediaries 

recommended that intermediaries be required to verify accredited investor status, income, or net 

worth for certain larger investments, such as those over $25,000 in a 12-month period.104 

Additionally, some intermediaries stated that conducting a separate Regulation D offering to 

 

100 See Treasury Report, at 41; 2015 Small Business Forum. 

101 See, e.g., Treasury Report, at 41; 2018 Small Business Forum Report; 2017 Small Business Forum Report, at 

17. See also 2015 Small Business Forum Report (recommending increasing the investment limit for accredited 

investors). 

102 See 2018 Small Business Forum Report.

103 See 2018 Small Business Forum Report.

104 See 2018 Small Business Forum Report.
42

allow accredited investors to invest greater amounts was unnecessarily confusing to investors

and more costly to issuers. 

3. Incidence of fraud, investor losses, and compliance with investor aggregates

a. Incidence of fraud

During the considered period, there were few instances of legal proceedings (involving 

FINRA or the Commission) referencing Regulation Crowdfunding, so we cannot infer a 

systematic relation between any particular characteristics of the offerings and the incidence of 

such legal actions. In particular, a search of publicly available information in the Commission’s 

litigation releases has not identified civil complaints or administrative proceedings filed against 

Regulation Crowdfunding issuers or intermediaries.105 We have, however, identified four

actions initiated by FINRA against a funding portal member that involved alleged violations of 

Regulation Crowdfunding or FINRA rules.106 

In addition, NASAA provided some information from a small number of state regulators 

on those states’ experience with Regulation Crowdfunding in their jurisdictions. One state 

reported two instances where the state regulator alerted an issuer about potentially misleading 

statements or content in their offering materials, one of which was in response to a complaint 

submitted to the regulator. The state noted that one of those issuers ultimately raised no funds, 

 

105 We excluded results where the term “crowdfunding” was determined to have been used more generally and a 

violation related to Regulation Crowdfunding or a violation of another Securities Act or Exchange Act 

provision related to a Regulation Crowdfunding offering was not alleged.

106 See http://www.finra.org/sites/default/files/fda_documents/2016051563901_FDA_JG411996.pdf and

http://www.finra.org/sites/default/files/fda_documents/2017053428201%20DreamFunded%20Marketplace%20

CRD%20283594%20and%20Manuel%20Fernandez%20CRD%206639970%20Extended%20Hearing%20Panel

%20Decision%20va.pdf. See also

https://www.finra.org/sites/default/files/publication_file/Disciplinary_Actions_April_2019.pdf and 

https://www.finra.org/sites/default/files/publication_file/Disciplinary_Actions_May_2019.pdf.
43

and the other promptly removed the content in question. The information provided by NASAA 

revealed no enforcement actions against Crowdfunding issuers or intermediaries taken by the 

small number of state regulators that provided information.

We also received anecdotal information about potential fraud or misconduct through the 

look-back survey. One intermediary respondent stated that it had received “few investor 

complaints of a serious nature regarding potential fraud, lack of disclosures, or loss of an 

investment.” Another intermediary respondent stated that it was not aware of any investor 

complaints related to inadequate disclosure, loss of investment, or fraud. It further stated that it 

was not aware of any instances of fraud or other concerns about investor protection in the 

crowdfunding industry other than one funding portal whose registration as a funding portal was 

terminated.107 A different intermediary similarly stated that it had not rejected any offerings due 

to a belief that the issuer or offering presented the potential for fraud or investor protection 

concerns and that it has not received any related investor complaints. As discussed in Section 

III.C.1 above, we also have received feedback from other market participants outside of the lookback survey expressing concerns about potentially insufficient information in offering statements 

and other potential instances of non-compliance.

We reiterate that such observations do not account for instances of potential misconduct 

that were not detected or not subject to an enforcement action. While factors such as the public 

nature of crowdfunding campaigns, the requirement to use an intermediary, and various other 

requirements of Regulation Crowdfunding offerings may have served as deterrents to potential 

misconduct, we cannot distinguish the low incidence of observed potential misconduct from the 

 

107 See http://www.finra.org/sites/default/files/fda_documents/2016051563901_FDA_JG411996.pdf.
44

possibility of high latency of potential misconduct among crowdfunding issuers and 

intermediaries. Commission enforcement staff continues to monitor the securities-based 

crowdfunding market for investor protection risks and instances of potential misconduct. 

b. Investor losses

As discussed above in Section III.C.1, we are not aware of any information on losses 

incurred by investors in crowdfunding offerings. Even if such information were available, 

because of the high level of ordinary business risk and failure for small and startup issuers, in the 

absence of documented instances of misconduct, it may be difficult to attribute a cause to the 

losses. 

A few intermediaries stated that they lacked data on crowdfunding investor losses and 

returns at this time. While one intermediary referenced the current status of the crowdfunding 

issuers that have listed on its platform, the status of many of these investments is listed as “alive”

with no additional information available. This status is broadly consistent with the illiquidity 

associated with the securities of startup issuers that this exemption was intended to benefit.

Intermediaries that historically have only listed debt securities under the exemption reported that 

investors have received a positive rate of return for securities that had begun repayments.108

We can draw some inference about the issuer survival rate based on whether an issuer 

returned to the crowdfunding market for a follow-on offering, filed an annual report on Form CAR, or made another filing with the Commission, after the initial offering. Approximately twothirds of issuers that reported completing a crowdfunding offering in 2016-2017 made at least 

 

108 In addition, one intermediary expressed the view that there is a difference in expectations and risk tolerance 

between debt and equity investors, with debt investors reacting more strongly, as opposed to equity investors, 

after an issuer declared bankruptcy or was consistently late with payments. 
45

one filing on EDGAR in 2018 (typically, an annual report or a filing in connection with a followon offering).109 Among issuers with no EDGAR filing activity in 2018, however, we cannot 

distinguish between issuers that ceased operations and issuers that remained in business but 

failed to file periodic reports. For example, among issuers that reported completed 

crowdfunding offerings in 2016-2017 with no subsequent filing activity in 2018, approximately 

four-fifths of the websites listed in their prior Form C filing remained available. In addition,

most of the issuers with websites that remained accessible appeared to be offering products or 

services, although we cannot determine if those issuers were generating substantial business. 

Further, we did not find indications of bankruptcy proceedings among issuers that reported 

completed crowdfunding offerings in 2016-2017 with no subsequent EDGAR filing activity in 

2018.110 Conversely, crowdfunding issuers with EDGAR filing activity in 2018 may fail in 

subsequent years. The limited period of observation and the concentration of crowdfunding 

offerings in the second half of the considered period preclude a systematic medium- to long-term 

analysis of issuer outcomes. Further, any inference related to this market should be considered

in the context of the survival rate of startup businesses generally. For example, based on Bureau 

of Labor Statistics (BLS) data on establishment survival rates, one-, three-, and five-year survival 

 

109 We exclude filings of Form C-TR to terminate reporting and filings withdrawing offering filings.

110 Name-based searches of information in S&P Capital IQ for issuers that reported completing crowdfunding 

offerings in 2016-2017 with no subsequent filing activity in 2018 yielded profile information for over ninety 

percent of issuers. None of those profiles contained mentions of bankruptcy filings. We repeated the namebased search in Lexis Advance for issuers that reported completing crowdfunding offerings in 2016-2017 with 

no subsequent filing activity in 2018 and similarly did not identify any bankruptcy filings. Name-based 

searches, however, may not yield comprehensive results. In addition, small startup issuers that fail may not 

need to file for bankruptcy protection. For instance, such an issuer might elect not to file for bankruptcy 

protection if it does not have outstanding debt and conducted a non-debt offering; has outstanding debt, but has 

minimal assets; or lacks funds for attorney and filing fees.
46

rates for private sector establishments formed in March 2013 were approximately 80%, 61%, and 

51%, respectively.111

c. Compliance with investor aggregates

As discussed in Section III.C.2.b above, based on limited information about investment 

amounts available from a few intermediaries, average amounts invested on a given platform were 

substantially below the existing investment limits. Because we do not have information on 

whether investors invested through multiple crowdfunding platforms, we cannot evaluate the 

extent of compliance with the investment limits. 

In response to the look-back survey, crowdfunding intermediaries stated that they 

generally rely on information provided by the individual investors to assess compliance with 

investor aggregates. Several intermediaries stated that their software requires investors to

disclose their net worth and income and then calculates the investment limit for each investor. 

The software takes into account any other investments on that platform and allows an investor to 

enter any other investments made under Regulation Crowdfunding on other platforms. The 

software does not allow an investment to proceed if the amount an investor seeks to invest is 

greater than the individual’s investment limit. If the individual’s investments are higher than 

$25,000, one intermediary takes steps to verify, similar to Rule 506(c), the individual’s net worth 

and income. Another intermediary stated that its compliance personnel spot-checks 

representations at random and also spot-checks any representation that provides for an 

investment limit over $10,000.

 

111 See BLS Business Employment Dynamics Establishment Age and Survival Data, available at

https://www.bls.gov/bdm/bdmage.htmand https://www.bls.gov/bdm/us_age_naics_00_table7.txt.
47

FINRA staff stated that funding portals generally rely solely on investor representations 

regarding annual income and net worth. Some funding portals maintain their own databases 

comprised of information submitted by investors prior to each investment about their income and

net worth as well as investor recertification prior to a follow-on investment. Based on 

discussions with FINRA staff, we understand that funding portals generally do not rely on thirdparty providers for verification of annual income and net worth. 

4. Intermediary fee and compensation structures

Based on the analysis of Form C filings during the considered period, most intermediaries 

received a percentage fee paid in cash and/or securities contingent on the completion of the 

offering.112 The average (median) cash compensation in these crowdfunding offerings was 5.7% 

(6%) of the offering proceeds. Intermediary cash compensation reported in Form C filings 

ranged from 0.1% to 10% of the offering proceeds. Approximately 37% of offerings reported an 

intermediary receiving securities of the issuer as part of intermediary compensation. When an 

intermediary received securities as part of its compensation in a crowdfunding offering, the 

average (median) amount was 2.9% (2%) of the offering proceeds. In addition to the 

compensation in the form of cash and securities, sometimes intermediaries required that issuers 

reimburse them for out-of-pocket third-party expenses incurred on behalf of the issuer in 

connection with the offering. Such reimbursements occurred in about 23% of the crowdfunding 

offerings. 

 

112 There is some variation in how issuers present information on intermediary compensation in Form C filings. 

We have made adjustments to improve consistency of the estimate but noise may remain.
48

Based on staff analysis of Form C data, compensation generally differed between 

intermediaries that were funding portals and intermediaries that were broker-dealers. The 

average (median) fee that broker-dealer-affiliated intermediaries charged was 7.1% (7.5%), 

higher than the fee that funding portals charged, which was 5.5% (6%). The difference could be 

explained by several potential factors, including differences in pricing practices or reputation, the

greater range of services that may be offered by registered broker-dealers, or economies of scale 

(because most of the crowdfunding deal flow during the considered period happened through

funding portals and has been concentrated in a small number of those funding portals). Brokerdealer-affiliated platforms also more frequently take securities as part of their compensation (in 

88% of crowdfunding campaigns) compared to the 29% for funding portals. When they take 

securities, broker-dealer-affiliated platforms take on average 4.4%, more than double that of 

funding portals (2%). The median securities interest for broker-dealer-affiliated platforms is also 

more than double that taken by funding portals – 5% versus 2%.

Some intermediary respondents to the look-back survey reported charging only a cash 

fee. Some intermediary respondents reported assessing fees for additional services rendered to 

issuers, such as assisting the issuer with the preparation of offering materials and crowdfunding 

filings with the Commission, or in the event the issuer withdraws its offering. Some 

intermediary respondents reported assessing additional per-investor fees as a percentage of the 

amount invested, with some of those intermediaries applying minimum and/or maximum levels 

of fees per investor.

Market participants have provided some feedback on the restrictions on intermediary 

compensation under Regulation Crowdfunding. The 2017 and 2018 Small Business Forums

recommended that the Commission allow portals to receive compensation on different terms than 
49

the investor (e.g., warrants to purchase on the same terms as the investors) as well as to co-invest 

in offerings they facilitate.113

5. Measures intermediaries have taken to reduce the risk of fraud, including 

reliance on issuer and investor representations

Staff’s analysis of intermediary measures to reduce the risk of fraud, including reliance 

on issuer and investor representations, is based on responses to the look-back survey and 

discussions with FINRA staff.

In response to the look-back survey, one intermediary stated that it has often decided not 

to list prospective offerings due to the potential for fraud or investor protection concerns but that 

such issuers are usually identified before an issuer launches on its platform. In the few instances 

where such issuers are not identified until after they launch, the intermediary cancels the offering 

and returns funds to investors. This intermediary described its current process to address the risk 

of fraud related to offerings as having two team members interview the founder of an issuer at 

different times, looking for depth of understanding in the market and challenges they are facing. 

In addition to background checks, as required by the rules, this intermediary looks for other red 

flags, shutting down offerings as necessary. 

Another intermediary stated that its application requires a certification that there have 

been no instances of fraud by the issuer or its predecessors, officers, directors, promoters, or 

greater than 20% owners and that the intermediary performs due diligence by reviewing relevant 

financial information and operating agreements to ensure consistency. This intermediary also 

stated that it hired a third party to perform background checks and that it did not have any 

 

113 See 2017 Small Business Forum Report; 2018 Small Business Forum Report.
50

instances where an issuer was prevented from selling securities due to a disqualification event. 

The intermediary stated that it had prevented a small number of prospective issuers that it 

believed were not complying with Regulation Crowdfunding disclosure requirements or that 

were ineligible under Regulation Crowdfunding from listing on its platform. This intermediary 

stated that it did not have to cancel or delist any offerings due to fraud, investor losses, or 

compliance with investor aggregates. 

A different intermediary stated that in addition to its due diligence and initial screening 

process, which includes background checks, it conducts spot checks for every issuer and, if a fact 

or figure cannot be verified, it must be removed or corrected. Another intermediary stated that 

its screening process included bad actor checks and a number of issuer documents and checks to 

screen out other ineligible issuers. This intermediary also performed due diligence prior to 

disbursing funds to address investor protection concerns. 

Commission staff discussions with FINRA staff suggest that, to verify issuer 

representations in Form C disclosures, most funding portals have an onboarding process for 

prospective issuers whereby the funding portal may request information about the issuer’s 

business plan, corporate formation documentation, and other materials. Funding portals also 

complete checklists and undertake discussions with prospective issuers. Funding portals reject 

some prospective issuers as part of their measures to reduce the risk of fraud. 

Some intermediaries provide education and guidance to issuers regarding their 

obligations under Regulation Crowdfunding, including disclosure obligations and ongoing 

reporting. However, staff is unaware of steps taken by any intermediary to ensure that issuers 

verify the independence of an accountant, verify compliance with advertising restrictions, or 

remain compliant with ongoing reporting obligations after an offering has concluded. Some 
51

intermediaries stated that it is difficult to ensure compliance once an offering is over. One 

intermediary suggested that a database viewable only by intermediaries to share information on 

possibly fraudulent issuers could be of great benefit.

6. The concept of a centralized database of investor contributions

To our knowledge, a centralized database of investor information has not been created for 

Regulation Crowdfunding. Staff received input regarding the concept of a centralized database 

of investor contributions in our discussions with crowdfunding intermediaries and in response to

the look-back survey. Of the intermediaries surveyed, none identified any benefits from such a 

database, but all cited potential drawbacks or described why there was no need for the database. 

Several intermediaries stated that such a database would be difficult to implement, could increase 

compliance costs due to the need to verify information and to secure investor data, and could add 

friction to what they described as an already costly process and diminish the appeal of 

crowdfunding. 

One intermediary stated that a centralized database was neither necessary nor practical 

given the small portion of investors they estimated were reaching their investment limits. In 

addition, this intermediary stated that given the amount of data that would be shared, resolving 

discrepancies in the data would be unduly burdensome. Several intermediaries expressed 

privacy and security concerns with sharing personally identifiable information. These factors 

may also impose costs on investors. Several intermediaries cautioned that investors would likely 

be wary of having their information shared and that those concerns might dissuade them from 

investing. 

In addition, because information about an investor’s historical contributions through a

crowdfunding intermediary’s platform may have proprietary value, any requirement to share 
52

information about investor commitments by submitting it to a centralized database may have 

competitive effects on intermediaries. For example, at least one intermediary cited the risk that 

intermediaries already compete for issuers and that a centralized database would increase the 

potential for “poaching” investors.

7. Intermediary policies and procedures

Staff’s analysis of intermediary policies and procedures is based on intermediary 

responses to the look-back survey as well as discussions with FINRA staff. Intermediary 

respondents to the look-back survey generally did not report problems with the development and 

implementation of policies and procedures to ensure compliance with federal securities laws, 

Regulation Crowdfunding, and FINRA funding portal rules. One intermediary respondent stated 

that the original implementation of the policies and procedures was time-consuming but not 

technically difficult and stated that FINRA staff provided helpful additional guidance. This 

intermediary stated that it performed an internal audit every quarter in conjunction with its 

written supervisory procedures as well as maintained several checklists that it used before 

launching an issuer.

Staff’s discussions with FINRA staff indicate that as part of the new member application

process, FINRA staff reviews an entity’s policies and procedures. In some instances, more 

robust or specific procedures are suggested. A registrant’s policies and procedures are also 

within the scope of FINRA examinations. 

8. Intermediary recordkeeping practices

Staff’s analysis of intermediary recordkeeping practices is based on intermediary 

responses to the look-back survey as well as staff discussions with FINRA staff. One 

intermediary respondent to the look-back survey stated that it had not experienced issues with 
53

meeting recordkeeping requirements, which it handled using its software rather than a third 

party. Another intermediary respondent similarly stated that it had not experienced issues with 

record retention or considered it necessary to retain a third party to assist with recordkeeping, 

given current volumes and technology employed. This intermediary stated that creating and 

retaining records had not been burdensome. A different intermediary respondent stated that the 

recordkeeping requirements were adequate and that it has not encountered issues related to 

record retention. Another intermediary cited software licensing costs incurred as part of the 

burden of meeting the recordkeeping requirements. Several other intermediaries referenced 

retaining a third party as part of their recordkeeping compliance.

FINRA staff stated that, in their view, funding portals are generally aware of their 

recordkeeping obligations, but given that this is a new requirement for a new type of entity –

funding portals – and that many of the participants are new to regulation and oversight, there 

may be a need for further education as to what constitutes a record (in particular, social media 

posts). In some instances funding portals were unable to produce certain records during an 

exam, but FINRA staff expressed the belief that most examined portals were complying with 

recordkeeping requirements. 

9. Secondary trading market practices

During the considered period, a secondary trading market for crowdfunding securities 

was generally non-existent. Securities Act Section 4(a)(6) and Regulation Crowdfunding restrict 

transferability of securities sold under the exemption for one year after issuance, with a few 
54

exceptions. 114 A secondary trading market has not emerged for securities of most issuers in 

crowdfunding offerings that occurred during the considered period, including for securities of 

issuers for which the one-year transferability restriction has expired.115 While a lack of 

secondary market liquidity for the typical crowdfunding startup may make it more difficult for 

issuers to attract sufficient investor interest in primary offerings,116 it is broadly consistent with 

the illiquidity of other startup securities.

Staff observations are consistent with look-back survey responses. One intermediary 

respondent to the look-back survey stated that it is not aware of any investor in offerings through 

its platform that has resold its stake in a crowdfunding issuer. Another intermediary respondent 

to the look-back survey similarly stated that it was not aware of any secondary market that has 

developed in the industry but stated that users occasionally transfer their shares from one owner 

to another, a practice for which it has recently enabled a feature on its platforms.

 

114 Secondary offers and sales of crowdfunding securities must be registered with the Commission or eligible for an 

exemption. In addition, crowdfunding securities cannot be resold for a period of one year, except to the issuer, 

an accredited investor, in a registered offering, or to certain family members or trusts or in connection with the 

death or divorce of the purchaser or other similar circumstance. See 17 CFR 227.501(a).

115 We have identified very few instances of crowdfunding issuers that also had a class of shares quoted on the 

OTC market but we could not confirm whether the class of shares is the same as the class issued in the 

crowdfunding offering. We are not aware of crowdfunding intermediaries that conducted secondary trading of 

crowdfunding securities during the considered period. One intermediary’s website provides information 

resources to aid buyers and sellers interested in secondary trading of a few of the past issuers that conducted a 

crowdfunding offering through its platform. All resales are conducted through a registered broker-dealer. See 

https://www.startengine.com/secondary; Vallabh Rao, “StartEngine is democratising startup investment in the 

US through OPOs and ICOs, Your Story” (27 February 2018) (mentioning StartEngine’s secondary 

crowdfunding market). The intermediary notes on its website that the websites serves only “as a 

communication tool and information resource for buyers and sellers of securities originally purchased through 

securities crowdfunding” and that no transactions are conducted through it. Rather, resale transactions must be 

conducted through a registered broker-dealer. Due to data constraints, we are unable to estimate deal volume 

associated with such resales.

116 Joan MacLeod Hemingway (2017) Selling Crowdfunded Equity: A New Frontier. Oklahoma Law Review

70(1); Austin, J., 2018. How Do I Sell My Crowdfunded Shares? Developing Exchanges and Markets to Trade 

Securities Issued by Start-ups and Small Companies. Harvard Business Law ReviewVol. 8 (2017-2018).
55

We lack sufficient information to attribute the lack of secondary trading in crowdfunding 

securities to a specific cause. It may be due to a combination of factors related to a lack of 

interest in secondary trading of crowdfunding securities from registered broker-dealers, issuers, 

and prospective secondary market investors. Broker-dealers may be unwilling to quote 

crowdfunding securities because of low potential transaction fees per quoted issuer as a result of 

likely low trading volume in such securities, as compared to high fixed costs of due diligence 

and compliance with Rule 15c2-11.117 A funding portal could not facilitate a secondary market 

in crowdfunding securities because by definition, a funding portal can act as an intermediary 

only in connection with a transaction involving the offer or sale of securities for the account of 

others “solely” pursuant to the crowdfunding exemption for primary offerings under Section 4(6) 

of the Securities Act.118 There may not be enough investor interest in buying the securities of 

issuers that participate in crowdfunding today at prevailing valuations (e.g., the average primary 

market offering has not reached the maximum offered), and investors interested in crowdfunding 

securities may prefer the primary market (where they may be able to collect nonfinancial 

awards). Information asymmetries between new and existing investors about the valuation of 

crowdfunding securities can also limit secondary market trading. Crowdfunding issuers may not 

want to solicit a broker-dealer to quote their securities on the OTC market. Some issuers or their 

founders may prefer a longer-term investor base or may seek to avoid the downside valuation 

risk of securities trading lower on the OTC market. Other issuers might plan to terminate 

reporting and not make periodic information available. Some issuers may be ineligible for the 

 

117 See generally https://www.finra.org/sites/default/files/notice_comment_file_ref/17-

14_OTCmarkets_comment.pdf. 

118 See Section 3(a)(80) of the Exchange Act (definition of “funding portal”).
56

upper tiers of the OTC market but unwilling to have their securities quoted on the lower tier of 

the OTC market. 

One intermediary respondent to the look-back survey observed that the difficulty in 

attracting “high-quality” issuers to the primary crowdfunding market and the “low adoption of 

investors” make it premature to expect a secondary market. This intermediary, which 

recommended certain changes to Regulation Crowdfunding that it believes would draw “higher

quality” issuers, stated that, with such changes, it could take at least five years for a critical mass 

of investors to have enough liquidity for a secondary market to begin to function, and that such a

secondary market would first begin with the most valuable, high-growth issuers. Another 

intermediary respondent to the look-back survey stated that challenges in supporting a secondary 

market for Regulation Crowdfunding securities would be similar to those faced by current public 

markets, and that in order for any such secondary market to thrive, it would require sufficient 

trading volume (ideally supported by market makers), quality third-party research, analysis, and 

content, and continued access to current information about issuers in the market. A different 

intermediary similarly cited the limited scale of the present crowdfunding market as a barrier to 

the development of a secondary trading market. Another intermediary stated that state blue sky 

restrictions on secondary trading likely deter the development of a secondary market in 

crowdfunding securities.119

 

119 Section 18 of Securities Act preempts state registration and qualification requirements for the offers and sales of 

securities under Section 4(a)(6). See 15 U.S.C. 77r(b)(4)(C). However, Section 18 does not preempt state 

registration and qualification for resales of those securities.
57

10. Other aspects of the Regulation Crowdfunding experience

We also received feedback and suggestions from market participants regarding, or are 

otherwise aware of reports and studies that have addressed, various aspects of Regulation 

Crowdfunding and how it may be improved. We summarize these observations below.

Some intermediaries that responded to the look-back survey commented that certain

issuer requirements may be preventing issuers from raising capital through Regulation 

Crowdfunding. These intermediaries recommended allowing non-US issuers and Exchange Act 

reporting issuers120 to engage in crowdfunding; and allowing intermediaries to file Form C-U on 

behalf of the issuer after funds are released from escrow.

Several intermediaries informed the staff that issuers also were concerned that a large 

number of shareholders would result in the issuer becoming required to register its securities 

under Section 12(g) of the Exchange Act once it failed to meet the conditional exemption under 

Regulation Crowdfunding.121 Several of these reported that, because of the risk of mandatory 

registration under Section 12(g) issuers are often reluctant to accept more than 500 investors in a 

crowdfunding offering or they retain repurchase rights to the securities offered. A number of 

market participants recommended expanding Regulation Crowdfunding’s exemption from 

Section 12(g).

Another issue frequently raised by market participants is the prohibition against 

conducting a crowdfunding offering through a special purpose vehicle or fund organized to 

invest in, or lend money to, a single company (an “SPV”). Section 4A(f) of the Securities Act 

 

120 See also https://www.sec.gov/rules/petitions/2016/petn4-699.pdf, at note 6.

121 See also Treasury Report, at 41 (recommending “that the conditional exemption from Section 12(g) be modified 

by raising the maximum revenue requirement from $25 million to $100 million”).
58

and Regulation Crowdfunding exclude certain types of issuers from relying on the crowdfunding 

exemption, including certain investment companies. As a result of the investment company 

exclusion, SPVs are not eligible to raise funds under Regulation Crowdfunding.122 Some 

intermediaries have told the staff that many issuers have elected not to pursue an offering under 

Regulation Crowdfunding because, without an SPV, a large number of investors on an issuer’s 

capitalization table can be unwieldy and potentially impede future financing.123 Similarly, some 

intermediaries report that crowdfunding issuers are hesitant to offer voting rights to 

crowdfunding investors because the logistical challenges of seeking any required shareholder 

vote are too high a risk in the event of later financing and governance of the issuer.124 The 

Treasury Report and the 2016 and 2017 Small Business Forums recommended allowing the use 

of SPVs to promote simplification of the capitalization table by aggregating investors with 

appropriate conditions.125 Market participants cited other potential investor protections an SPV 

structure could provide, such as allowing small investors to invest alongside a sophisticated lead 

investor who may negotiate better terms, protect against dilution by negotiating during 

subsequent financings, mentor the company, and represent smaller investors on the board. The 

Treasury Report recommended allowing the use of SPVs advised by a registered investment 

 

122 See Section 4A(f), 17 CFR 227.100(b), and Adopting Release, at 71397.

123 See also Nicholas Tommarello, Until Congress Acts, Don’t Invest in Startups to Make Money (July 22, 2016), 

Fortune; Letter from Wefunder dated June 8, 2016; Letter from Wefunder dated May 16, 2017.

124 See id.

125 See Treasury Report, at 41 (recommending “allowing single-purpose crowdfunding vehicles advised by a 

registered investment adviser”); 2015 Small Business Forum Report (recommending that the Commission 

permit investments by SPVs, including those that share an adviser or sub-adviser, and determine that such SPVs 

are not investment companies for purposes of the Investment Company Act ); 2016 SEC Government-Business 

Forum on Small Business Capital Formation, https://www.sec.gov/files/gbfor35.pdf; 2017 Small Business 

Forum Report, at 18.
59

adviser, which may mitigate issuers’ concerns about vehicles having an unwieldy number of 

shareholders and tripping the registration thresholds of Section 12(g).126 However, in light of 

what it cited as potential conflicts of interest between the issuer, lead investors, and other 

investors, including non-accredited investors, the Treasury Report recommended that any 

rulemaking in this area prioritize: (1) alignment of interests between the lead investor and the 

other investors participating in the vehicle; (2) regular dissemination of information from the 

issuer; and (3) minority voting protections with respect to significant corporate actions.127

One study also expressed concern about low participation in crowdfunding among issuers 

that are currently underrepresented (e.g., rural businesses and businesses in other areas not 

already considered technology and finance hubs, as well as female entrepreneurs).128

 

126 See Treasury Report.

127 See id.

128 See SBA Study, at 13. The study, based on the first year of Regulation Crowdfunding, observed low 

crowdfunding participation among firms that are currently underrepresented: For example, it found that there 

was less crowdfunding activity among businesses located in states and metropolitan areas that are not already 

considered technology and finance hubs. The study also found that women were underrepresented among 

equity crowdfunding issuers in its analysis.