Rule XXX. Model Crowdfunding Exemption.
(a) Definitions. For purposes of this rule, the following definitions shall apply:
(1) “Executive officer” shall mean the president; any vice president in charge of a
principal business unit, division or function (such as sales, administration or finance); any
other officer who performs a policy making function; or, any other person who performs
similar policy making functions for the issuer.
(2) “Institutional investors” shall have the same meaning as provided in Section XXX
[Section 102(11) of USA 2002].
(3) “Intermediary” shall mean an entity that facilitates the offer and sale of securities by
issuers to investors through an internet-based system that is open to and accessible by the
general public.
(4) “Management” shall mean the issuer’s directors, executive officers, or the persons
that perform such functions for the issuer.
(5) “Qualified custodian” shall mean one of the following entities that is not affiliated
with the issuer by any direct or indirect common control and has not had a material
business relationship with the issuer in the previous two years:
(A) A bank or savings association that has deposits insured by the Federal
Deposit Insurance Corporation; or
(B) A registered broker-dealer other than the intermediary.
(b) Transactional exemption from securities registration requirements. The offer or sale of a
security by an issuer in a transaction that meets the requirements of this rule is exempted from
Sections XXX through XXX [Sections 301 through 306 of USA 2002] and Section XXX
[Section 504 of USA 2002] and is subject to the limitations contained herein.
(1) Aggregate sales limit. The aggregate amount of securities sold to all investors by the
issuer during the 12-month period preceding the date of the offer or sale, including any
amount sold in reliance upon this exemption, shall not exceed $500,000, other than:
(A) Securities sold to institutional investors; and
(B) Securities sold to the issuer’s management.
(2) Individual investment limitation. The aggregate amount sold to any investor in
reliance upon this exemption within the previous 12-month period shall not exceed $1,000.
For purposes of this individual investment limitation, the following investors shall be
treated as one investor:
(A) Any relative, spouse or relative of the spouse of an investor who
has the same principal residence as the investor;
(B) Any trust or estate in which an investor and any related person as specified in
paragraph (b)(2)(A) or (b)(2)(C) collectively have more than 50 percent of the
beneficial interest (excluding contingent interests); and
(C) Any corporation or other organization of which an investor and any related
person as specified in paragraph (b)(2)(A) or (b)(2)(C) collectively are beneficial
owners of more than 50 percent of the equity securities (excluding directors'
qualifying shares) or equity interests.
(3) Use of an intermediary. All offers and sales of securities in reliance upon this
exemption shall be made through an intermediary’s website in compliance with the
provisions of this rule.
(4) Notice to home state Administrator. Prior to the offer of any security in this state in
reliance upon this exemption, the issuer shall file a notice electronically or in writing on
Form CF. The notice shall be filed with the Securities Administrator of the state in which
the issuer maintains its principal place of business, and an amended notice shall be filed
within 30 days of any change in the information provided on the Form CF.
(5) Disclosure to investors. Prior to any offer of securities, the issuer shall provide the
following materials to the intermediary, and these materials shall be made available to
each offeree through the intermediary’s website:
(A) The information required in Parts 2 and 3 of Form CF; and
(B) Information describing the financial condition of the issuer, including, at a
minimum, unaudited financial statements prepared in accordance with generally
accepted accounting principles in the United States.
(6) Restrictions on advertising and communications. The issuer shall not advertise the
specific details of the offering, except for notices which direct investors to the
intermediary’s website. Potential investors that have reviewed the information
maintained on the intermediary’s website shall have the opportunity to ask questions and
receive answers concerning the terms and conditions of the offering and to obtain any
additional information which the issuer possesses or can acquire without unreasonable
effort or expense that is necessary to verify the accuracy or clarify the information
provided on the intermediary’s website. If such additional information is material, the
issuer and the intermediary shall immediately amend the information contained on the
intermediary’s website to provide such information. The intermediary may also maintain
a forum on its website whereby potential investors may ask questions of and receive
answers from the issuer. Such forum shall be available to all potential investors as well
as state securities regulators as provided in paragraph (c)(5).
(7) Target amount, offering period, and escrow requirements. The issuer shall establish
a target offering amount and an offering period of not more than 12 months from the date
of filing the notice as set forth in paragraph (b)(4). All offering proceeds shall be held in
an escrow account maintained by a qualified custodian until offering proceeds (less any
offering proceeds from the issuer, its management or affiliates) totaling at least the target
offering amount are received. If the target offering amount is not received by the end of
the offering period, the proceeds shall be returned to the investors within thirty days. All
investors shall have the right to withdraw their investment, without deduction of any
kind, until such time as offering proceeds (less any offering proceeds from the issuer, its
management or affiliates) totaling at least the target offering amount are received and the
offering proceeds are released by the qualified custodian from the escrow account to the
issuer.
(8) Compensation restrictions. Neither the issuer nor the intermediary may employ or
compensate promoters, finders, lead generators, or other persons to attract or provide the
personal information of any potential investor.
(9) Disqualification. This exemption shall not be available if any of the following
persons is subject to a disqualifying event as described in the regulations adopted in
accordance with section 926 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act:
(A) The issuer or its management; or
(B) The intermediary or any of its executive officers or directors, or persons
occupying similar roles.
(10) Restricted securities. A security issued in a transaction that is exempt under this
rule may not be sold by the purchaser during the 12 month period beginning on the date
of purchase, unless the security is sold:
(A) to the issuer, an institutional investor, or a family member of the purchaser;
(B) as part of a registered offering; or
(C) in connection with the death of the purchaser.
(11) Exclusions. This exemption shall be available only to business organizations duly
organized and registered under the laws of a state. This exemption shall not be available
to any of the following:
(A) A foreign issuer;
(B) An investment company, as defined in Section 3 of the Investment Company
Act of 1940;
(C) A development stage company that either has no specific business plan or
purpose or has indicated that its business plan is to engage in a merger or
acquisition with an unidentified company or companies, or other entity or person;
or
(D) A company with a class of securities registered under the Securities
Exchange Act of 1934.
(12) Sales Reports. Upon request from the Administrator, the issuer shall provide a sales
report detailing the amount of securities sold in this state from the beginning of the
offering to the most recently completed fiscal quarter, unless the issuer has already
provided this information to the Securities Administrator in the state in which the issuer
filed its notice under paragraph (b)(4).
(13) Offering Price. The offering price of the securities offered and sold pursuant to this
exemption shall be the same for all investors, and shall not be increased during the
offering period. The offering price may be lowered, but only if all previous investors in
the particular offering are notified of the change and allowed to rescind their previous
investment and participate at the lower offering price.
(c) Requirements for intermediaries in connection with offerings of securities pursuant to this
exemption. An intermediary shall comply with each of the following requirements.
(1) Investor screening. Before a security is sold through the intermediary, the
intermediary shall ensure that the investor does all of the following:
(A) Reviews the information provided in Part 3 of Form CF; and
(B) Positively affirms that the investor understands that the investor is risking the
loss of the entire investment, and that the investor has the capacity to bear such a
loss.
(2) Reduction of fraud risk. The intermediary shall take reasonable measures to reduce
the risk of fraud in connection with the offer or sale of the securities. Such measures
shall include obtaining a criminal background check and securities enforcement
regulatory check on the issuer and the issuer’s management, and notifying the issuer of
any information that may disqualify the issuer from using this exemption pursuant to
paragraph (b)(9). Upon request from the Administrator, the intermediary shall provide
the results of the background check and securities enforcement regulatory check, unless
the intermediary has already provided this information to the Securities Administrator in
the state in which the issuer filed its notice under paragraph (b)(4).
(3) Enforcement of investment limits. The intermediary shall take reasonable measures
to ensure that no investor exceeds the investment limits set forth in subsection (b)(2). In
addition, the intermediary shall take reasonable measures to ensure that no investor has
purchased securities in multiple offerings conducted in reliance upon this exemption that,
in the aggregate, would exceed the greater of:
(A) $2,000, if the investor has an annual income of less than $50,000;
(B) Four percent of the annual income of the investor, if the investor has an
annual income of at least $50,000 but less than $100,000; or
(C) Eight percent of the annual income of the investor, if the investor has an
annual income of at least $100,000.
(4) Conflicts of interest. The intermediary and its management shall have no ownership
or other financial interest in the issuer.
(5) Administrator access. The intermediary shall provide the Administrator with
continuous investor-level access to the intermediary’s website.
(d) Registration requirements for intermediaries. An intermediary is a broker-dealer that is
subject to the registration requirements of [Section 401 of the 2002 USA], but if an
intermediary’s activity as a broker-dealer is limited to offerings conducted in accordance with
this rule, the intermediary is exempt from the requirements of the following rules:
(1) Rule XXX [any rule that incorporates by reference or is the substantial equivalent of
section 15(b)(8) of the Securities Exchange Act of 1934, which pertains to membership in
a self-regulatory organization];
(2) Rule XXX [any rule that incorporates by reference or is the substantial equivalent of
section 15(e) of the Securities Exchange Act of 1934, which pertains to customer notices
regarding short sales];
(3) Rule XXX [any rule that incorporates by reference or is the substantial equivalent of
section 15(h) of the Securities Exchange Act of 1934, which pertains to sales of penny
stocks];
(4) Rule XXX [paragraph 1.c. of the NASAA Model Rule on Dishonest or Unethical
Business Practices of Broker-Dealers and Agents, which requires a determination of
suitability]; and
(5) Rule XXX [paragraph 1.j. of the NASAA Model Rule on Dishonest or Unethical
Business Practices of Broker-Dealers and Agents, which requires prospectus delivery].