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CrowdCheck, Inc. Comment On Regulatory Notice 23-09

Sara Hanks
CrowdCheck, Inc.

1423 Leslie Avenue Alexandria, VA 22301 August 7, 2023 Jennifer Piorko Mitchell Office of the Corporate Secretary FINRA 1735 K Street, NW Washington DC 20006-1506 RE: Rule 5110 and Regulatory Notice 23-09 Dear Ms. Mitchell: Thank you for the opportunity to comment on FINRA rules impacting capital formation. CrowdCheck, together with its affiliated law firm, CrowdCheck Law, was formed for the express purpose of serving small and early-stage companies relying on various exemptions from registration available under the Securities Act of 1933. Since 2012, we have experienced all facets of these exemptions in practice, from issuer and intermediary compliance, to behavior of investors, to regulatory uncertainty. We were happy to note that FINRA requests general comment on its rules relating to capital raising. Two issues that we would particularly like to flag are (1) the changes that have occurred in early-stage capital formation, both in the types of offering that may be made and in the services that issuers need to raise capital in modern offerings; and (2) the timeliness of FINRA’s 5110 review process. With respect to the types of offering, the various exemptions present a completely different playing field to the one that existed when FINRA’s fee model was established several decades ago. At that time, other than the seldom-used Regulation A, offerings fell into a binary mode: they were private, in which case FINRA did not dictate fees, or they were public, in which case member firms would file a Form 5110 and seek to establish the fairness of the fees to be charged. Issuers did not generally make public and private offerings at the same time; SEC rules regarding “integration” made doing so very complex. Now, not only are there several more types of offering -- exempt public offerings under Regulation CF or revitalized Regulation A, and generally solicited private offerings under Rule 506(c) of Regulation D – but it is not uncommon for an issuer to be making offerings under several exemptions at the same time. The services provided by member firms under the new exemptions also differ significantly from the services provided in the 1990s. These offerings are largely conducted online, and brokers do not pick up the phone and talk to potential investors. Investors find their way to an offering page hosted by a member firm, and are presented there with offering materials and streamlined investment processing. These services are technology-driven, and member firms compete to provide the most efficient user experience for both issuers and investors. Many of the services necessary for online capital formation (publicity services, payment processes, and analytics, for example) did not exist when FINRA’s fee structure was developed. We further note the disparity between Regulation CF and Regulation A insofar as intermediary fees are disclosed. There is no equivalent to the Form 5110 process in Regulation CF. The member firm merely states in the Form C what commission is to be charged, and related or ancillary fees are not typically disclosed. We are not aware of any compelling reason why Regulation A offerings should be treated differently from Regulation CF offerings in this regard. We are concerned that treating services that are related to but not a part of sales initiatives as “underwriting compensation” could either result in certain services being outsourced to non-affiliated parties (creating a less efficient process for issuers) or result in discouraging FINRA members from innovation and from offering issuers an integrated set of services, which in our experience, early-stage issuers value. Issuers do not want to seek out alternative service providers, who may be subject to no regulatory oversight, or have to work with them to integrate those alternative services into the platform that the issuer has chosen. Our other major concern with respect to FINRA’s role in Regulation A transactions is the time is takes to get a “No Objections” Letter. We have been involved in several transactions where the SEC has no further comments and the transaction has not been cleared by FINRA, even when the underwriting arrangements are with the same FINRA member firm and are no different than in previous deals with the same member. These delays have caused our clients, which are generally small companies with limited resources, significant problems. While waiting for clearance, audit opinions and even the issuers’ entire financial statements became “stale” and required additional filings with the SEC. Further, in some instances, the issuer has lost access to favorable timing windows for their offering. These were significant harms caused by delays during the FINRA review, without meaningful benefits or protections provided to the issuers or investors because the terms were substantially the same as terms that had been cleared by FINRA in prior circumstances with the same FINRA member firm. We would be happy to discuss these issues with you in more detail. Sincerely, /s/ Sara Hanks CEO