Subject: File No. S7-22-15

November 17, 2015

To Whom It May Concern,

As a registered broker dealer, and one of the few practitioners attempting to utilize new state-level crowdfunding exemptions, there are a few items to address with the proposed amendments to Rule 147 and Regulation D, Rule 504. 

• Ensure that FINRA treats all crowdfunding offerings and private placements the same. The staff states that their proposal would establish a new exemption under Rule 147. If it is the case that this exemption will still fall under Section 3(a)(11) of the Securities Act, the staff should work with FINRA to ensure that the treatment of this new exemption does not fall under the 5110 Corporate Financing Rule for Public Offerings. Currently all exemptions for intrastate crowdfunding, while exempt from registration, are treated as Public Offerings at FINRA under Rule 5110. As a broker dealer and registered FINRA member, all of our Regulation D offerings (including generally solicited 506(c) offerings) fall under FINRA Rule 5123, the Private Placement rule, but intrastate crowdfunding offerings are treated differently, requiring pre-filings with FINRA and expensive up-front fees for these small offerings. Further, most states require a pre-filing to be made and fee to paid prior to offering securities under these exemptions, there does not need to be a duplicate effort made at FINRA for these offerings. This is a substantial hurdle in being able to utilize this exemption and makes it more costly to facilitate these offerings as a broker dealer than using an unregistered entity and filing as a website operator within the state.

• Adopt a policy at the federal level that standardizes the use of an escrow agent. Another reason that intrastate offerings are rarely used is due to the difficulties in finding an escrow agent. In almost all cases, the escrow agent is required to be a bank that is registered within the state in which the offer is being made, and the funds may not leave the state at any point during the fundraising process. We have found it very difficult, and in some cases impossible, to find an escrow agent that meets these requirements and is interested or willing to provide these services. In many cases, eligible escrow agents have refused to provide this service, making it impossible to utilize the intrastate crowdfunding exemptions available.Further, when looking to utilize these exemptions in multiple states, a new escrow agent must be found in every state. The staff should work with the states or use language at the federal level that allows for any US escrow agent to be utilized when using these exemptions.

• Provide guidance on the verification of residency requirement for investors. The staff should work with states to standardize requirements for determining state of residency for allowing investor participation in an offering. In the past, since this has been required at the point of an offer instead of point of sale, states have taken varying views on what is required, ranging from asking for a zip code of residence to requiring verification of a valid driver’s license. Standardization or clearer guidance on this topic would go a long way in helping to ensure compliance with the requirement of verifying residency.

• Provide guidance that offerings made under the new exemption will not be integrated. As mentioned in the Final Rules for Federal Crowdfunding under Section 4(a)(6), the staff states that “an offering made in reliance on Section 4(a)(6) should not be integrated with another exempt offering made by the issuer, provided that each offering complies with the requirements of the applicable exemption that is being relied upon for the particular offering.” This guidance should be extended to the new exemption established under the proposed rules, for the same reasons that it was included in Section 4(a)(6).

• Require that all states provide an option to be used in conjunction with the Regulation D, Rule 504 exemption. While the Staff is to be commended for reviewing this underutilized exemption, many states have not adopted exemptions at the state level to allow for the use of this exemption, requiring instead that an offering being registered. In order for this exemption to be effective in capital formation efforts, there needs to at a minimum be an exemption available at the state level that would allow for the use of this Federal exemption.
• Provide clear guidance on what constitutes an offer. Many exemptions from registration under Regulation D and Crowdfunding offerings (state and federal) have rules specific to the time when an offer occurs. With the current state of technology, the Staff needs to come out with clear guidance on what constitutes an offer. For instance, if a business is engaged in a back-and-forth discussion with potential investors as to what proposed terms of an offer should be (as happens with a term sheet in the offline world), has an offer occurred? What if terms have been made available to investors, but investors are not able to sign an agreement to commit to investing on those terms? There are endless permutations that can be made with technology to adapt to changing circumstances, and in order for these new exemptions to be used effectively, clear guidance needs to be provided on this topic.

Best regards,

Brandon Smith
Managing Principal
Localstake Marketplace LLC