Proposed Rule Amendments for Small and Additional Issues Exemptions Under Section 3(b) of the Securities Act, 3925-4065 [2013-30508]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 79, Number 15 (Thursday, January 23, 2014)]
[Proposed Rules]
[Pages 3925-4065]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-30508]



[[Page 3925]]

Vol. 79

Thursday,

No. 15

January 23, 2014

Part II





Securities and Exchange Commission





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17 CFR Parts 230, 232, 239, et al.





Proposed Rule Amendments for Small and Additional Issues Exemptions 
Under Section 3(b) of the Securities Act; Proposed Rule

Federal Register / Vol. 79 , No. 15 / Thursday, January 23, 2014 / 
Proposed Rules

[[Page 3926]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230, 232, 239, 240 and 260

[Release Nos. 33-9497; 34-71120; 39-2493; File No. S7-11-13]
RIN 3235-AL39


Proposed Rule Amendments for Small and Additional Issues 
Exemptions Under Section 3(b) of the Securities Act

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rules.

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SUMMARY: We are proposing rule amendments to Regulation A to implement 
Section 401 of the Jumpstart Our Business Startups Act. Section 401 of 
the JOBS Act added Section 3(b)(2) to the Securities Act, which directs 
the Commission to adopt rules exempting offerings of up to $50 million 
of securities annually from the registration requirements of the 
Securities Act. The proposed rules include issuer eligibility 
requirements, content and filing requirements for offering statements 
and ongoing reporting requirements for issuers.

DATES: Comments should be received by March 24, 2014.

ADDRESSES: Comments may be submitted by any of the following methods:
    Electronic Comments:
     Use the Commission's Internet comment forms (https://www.sec.gov/rules/proposed.shtml);
     Send an email to rule-comments@sec.gov. Please include 
File Number S7-11-13 on the subject line; or
     Use the Federal Rulemaking Portal (https://www.regulations.gov). Follow the instructions for submitting comments.
    Paper Comments:
     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number S7-11-13. This file 
number should be included on the subject line if email is used. To help 
us process and review your comments more efficiently, please use only 
one method. The Commission will post all comments on the Commission's 
Internet Web site (https://www.sec.gov/rules/proposed.shtml). Comments 
also are available for public inspection and copying in the 
Commission's Public Reference Room, 100 F Street NE., Room 1580, 
Washington, DC 20549. All comments received will be posted without 
change; we do not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly.

FOR FURTHER INFORMATION CONTACT: Zachary O. Fallon, Special Counsel; 
Shehzad K. Niazi, Attorney-Advisor; or Karen C. Wiedemann, Attorney 
Fellow; Office of Small Business Policy, Division of Corporation 
Finance, at (202) 551-3460, U.S. Securities and Exchange Commission, 
100 F Street NE., Washington, DC 20549-3628.

SUPPLEMENTARY INFORMATION: We propose to amend Rules 251 through 263 
\1\ under Regulation A.\2\
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    \1\ 17 CFR 230.251 through 230.263.
    \2\ 17 CFR 230.251 through 230.263.
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    We also propose to revise Form 1-A,\3\ rescind Form 2-A,\4\ and 
create four new forms, Form 1-K (annual updates), Form 1-SA (semiannual 
updates), Form 1-U (current reporting), and Form 1-Z (exit report).
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    \3\ 17 CFR 239.90.
    \4\ 17 CFR 239.91.
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    We further propose to revise Rule 4a-1 \5\ under the Trust 
Indenture Act \6\ to increase the dollar ceiling of the exemption from 
the requirement to issue securities pursuant to an indenture, and to 
amend Rule 15c2-11 \7\ of the Securities Exchange Act of 1934 (the 
``Exchange Act'') \8\ to permit an issuer's ongoing reports filed under 
Regulation A to satisfy a broker-dealer's obligations to review and 
maintain certain information about an issuer's quoted securities. In 
addition, we propose a technical amendment to Exchange Act Rule 15c2-11 
to amend subsection (d)(2)(i) of the rule to update the outdated 
reference to the ``Schedule H of the By-Laws of the National 
Association of Securities Dealers, Inc.'' which is now known as the 
``Financial Industry Regulatory Authority, Inc.'' and to reflect the 
correct rule reference.
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    \5\ 17 CFR 260.4a-1.
    \6\ 15 U.S.C. 77aaa et seq.
    \7\ 17 CFR 240.15c2-11.
    \8\ 15 U.S.C. 78a et seq.
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    As a result of the proposed revisions to Regulation A, conforming 
and technical amendments would be made to Rule 157(a),\9\ in order to 
reflect amendments to Section 3(b) of the Securities Act, and Rule 
505(b)(2)(iii),\10\ in order to reflect the proposed changes to Rule 
262 of Regulation A. Additionally, Item 101(a) \11\ of Regulation S-T 
\12\ would be revised to reflect the mandatory electronic filing of all 
issuer initial filing and ongoing reporting requirements under proposed 
Regulation A. The portion of Item 101(c)(6) \13\ of Regulation S-T 
dealing with paper filings related to a Regulation A offering, and Item 
101(b)(8) \14\ of Regulation S-T dealing with the optional electronic 
filing of Form F-X by Canadian issuers, would therefore be rescinded.
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    \9\ 17 CFR 230.157(a).
    \10\ 17 CFR 230.505(b)(2)(iii).
    \11\ 17 CFR 232.101(a).
    \12\ 17 CFR 232.10 et seq.
    \13\ 17 CFR 232.101(c)(6).
    \14\ 17 CFR 232.101(b)(8).
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Table of Contents

I. Introduction and Background
    A. JOBS Act Section 401
    B. Current Regulation A
    C. Use of Regulation A
    D. The Section 3(b)(2) Exemption
II. Proposed Amendments to Regulation A
    A. Overview
    B. Scope of Exemption
    1. Eligible Issuers
    2. Eligible Securities
    3. Offering Limitations and Secondary Sales
    4. Investment Limitation
    5. Integration
    6. Treatment Under Section 12(g)
    7. Liability Under Section 12(a)(2)
    C. Offering Statement
    1. Electronic Filing; Delivery Requirements
    2. Non-Public Submission of Draft Offering Statements
    3. Form and Content
    4. Continuous or Delayed Offerings and Offering Circular 
Supplements
    5. Qualification
    D. Solicitation of Interest (``Testing the Waters'')
    E. Ongoing Reporting
    1. Continuing Disclosure Obligations
    2. Exchange Act Rule 15c2-11 and Other Implications of Ongoing 
Reporting Under Regulation A
    3. Exchange Act Registration of Regulation A Securities
    4. Exit Report on Form 1-Z
    F. Insignificant Deviations From a Term, Condition or 
Requirement
    G. Bad Actor Disqualification
    H. Relationship With State Securities Law
    I. Regulation A in Comparison to Other Methods of Capital 
Formation
    J. Additional Considerations Related to Smaller Offerings
    K. Regulation A Offering Limitation
    L. Technical and Conforming Amendments
III. General Request for Comment
IV. Economic Analysis
    A. Economic Baseline
    1. Current Methods of Raising up to $50 Million of Capital
    2. Liquidity Considerations
    3. Investors in Offerings of up to $50 Million
    B. Analysis of Proposed Rules
    1. General Considerations
    2. Scope of Exemption
    3. Offering Statement
    4. Solicitation of Interest (``Testing the Waters'')
    5. Ongoing Reporting Requirements
    6. Bad Actor Disqualification

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    7. Relationship With State Securities Law
    8. Effect of Regulation A on OTC Markets and Dealer 
Intermediation
    C. Request for Comment
V. Paperwork Reduction Act
    A. Background
    B. Estimate of Issuers
    C. Estimate of Issuer Burdens
    1. Regulation A (Form 1-A and Form 2-A)
    2. Form 1-K: Annual Report
    3. Form 1-SA: Semiannual Report
    4. Form 1-U: Current Reporting
    5. Form 1-Z: Exit Report
    6. Form ID Filings
    D. Collections of Information Are Mandatory
    E. Request for Comment
VI. Initial Regulatory Flexibility Act Analysis
    A. Reasons for the Proposed Action
    B. Objectives
    C. Legal Basis
    D. Small Entities Subject to the Proposed Rules
    E. Reporting, Recordkeeping, and Other Compliance Requirements
    F. Duplicative, Overlapping or Conflicting Federal Rules
    G. Significant Alternatives
    H. Request for Comment
VII. Small Business Regulatory Enforcement Fairness Act
VIII. Statutory Basis and Text of Proposed Amendments

I. Introduction and Background

A. JOBS Act Section 401

    This rulemaking would implement a statutory directive under the 
Jumpstart Our Business Startups Act (the ``JOBS Act'') \15\ to create a 
new exemption from registration under the Securities Act of 1933 (the 
``Securities Act'') for small offerings. Section 401 of the JOBS Act 
amended Section 3(b) of the Securities Act by designating existing 
Section 3(b), the Commission's exemptive authority for offerings of up 
to $5 million, as Section 3(b)(1), and creating a new Section 3(b)(2). 
New Section 3(b)(2) directs the Commission to adopt rules adding a 
class of securities exempt from the registration requirements of the 
Securities Act for offerings of up to $50 million of securities within 
a twelve-month period. Issuers conducting offerings in reliance on 
Section 3(b)(2) would be required to follow terms and conditions 
established by the Commission, and, where applicable, to make ongoing 
disclosure.
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    \15\ Public Law 112-106, 126 Stat. 306.
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    Congress enacted Section 3(b)(2) against a background of public 
commentary suggesting that Regulation A, an exemption for small issues 
originally adopted by the Commission in 1936 under the authority of 
Section 3(b) of the Securities Act,\16\ should be expanded and updated 
to make it more useful to small companies.\17\ Section 3(b)(2) requires 
us to engage in rulemaking that is meant to increase the use of 
Regulation A, thereby helping to make capital available to small 
companies.\18\
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    \16\ SEC Release No. 33-632 (Jan. 21, 1936). Prior to 
codification as such, Regulation A was a collection of individual 
rules issued by the Federal Trade Commission and the Commission 
during the period of 1933-1936. Each such rule exempted particular 
classes of securities from registration under the Securities Act. 
Regulation A's initial annual offering limit was raised from 
$100,000 to $300,000 in 1945, $500,000 in 1970, $1.5 million in 
1978, and to its current level of $5 million in 1992.
    \17\ H.R. Rep. No. 112-206 (2011), at 3-4. See also Remarks and 
prepared statements of William Hambrecht, CEO of WR Hambrecht + Co., 
(``A confluence of . . . reasons . . . has made Regulation A a poor 
alternative for small growth-oriented companies seeking to raise 
development capital and also explains why the offering mechanism has 
virtually disappeared from the capital raising landscape.''), and 
Michael Lempres, Asst. General Counsel, SVB Financial Group, 
(``Regulation A has not proved to be a useful capital raising 
vehicle for small issuers. . . . An average of eight filings a year, 
with a maximum amount of $5 million each, proves the irrelevance of 
Regulation A as it stands today. It simply is not a viable vehicle 
for raising funds and is providing benefit to neither companies nor 
investors.'') before the H. Comm. on Fin. Serv. for the 111th 
Congress, Serial No. 111-168 (December 8, 2010), available at: 
https://archives.financialservices.house.gov/Hearings/hearingDetails.aspx?NewsID=1381; Remarks and prepared statement of 
David Weild, Sr. Advisor, Grant Thorton, (``[A]n increase to the 
Regulation A [offering] ceiling will provide a less costly and more 
effective alternative for smaller, entrepreneurial companies that 
want to access the public capital markets. It may also enable 
smaller, growth-oriented companies to access the public market at an 
earlier stage in their growth cycle.'') before the H. Comm. on Fin. 
Serv., Subcommittee on Capital Markets and Gov't Sponsored Entities 
for the 112th Congress, Serial No. 112-19 (March 16, 2011), 
available at: https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=231755; Remarks and prepared statements of 
Professor John C. Coffee, Columbia Law School (``[I]n 2010 only 
seven offerings went effective under Regulation A (which is based on 
Section 3(b)). Most issuers saw Section 3(b) as unattractive (in 
comparison to a private placement under Regulation D) both because 
of Section 3(b)'s low ceiling (i.e., $5 million) and the need to 
file an offering document that is reviewed by the SEC.''), before 
the U.S. Senate Comm. on Banking, Housing and Urban Affairs 
(December 1, 2011), available at: https://www.banking.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&Hearing_ID=a96c1bc1-b064-4b01-a8ad-11e86438c7e5; U.S. Government Accountability Office 
(GAO), Factors that May Affect Trends in Regulation A Offerings 
(July 2012) (available at: https://www.gao.gov/assets/600/592113.pdf).
    \18\ H.R. Rep. No. 112-206, at 3 (2011) (``The low number of 
Regulation A filings--each for the maximum amount of $5 million--
demonstrates that a revision to Regulation A is necessary. To 
increase the use of Regulation A offerings and help make capital 
available to small companies, Representative Schweikert introduced 
H.R. 1070, which increases the offering threshold to $50 
million.'').
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    To implement Section 401 of the JOBS Act, as mandated by Section 
3(b)(2), we have endeavored to craft a workable revision of Regulation 
A that would both promote small company capital formation and provide 
for meaningful investor protection. We propose to amend Regulation A to 
create two tiers of offerings: Tier 1, for offerings of up to $5 
million in a twelve-month period, and Tier 2, for offerings of up to 
$50 million in a twelve-month period. Both Tiers would be subject to 
basic requirements as to issuer eligibility, disclosure, and other 
matters, drawn from the current provisions of Regulation A and updated 
in some areas to align Regulation A with current practice for 
registered offerings. In addition to these basic requirements, Tier 2 
offerings would be subject to additional requirements, including the 
provision of audited financial statements, ongoing reporting 
obligations, and certain limitations on sales.

B. Current Regulation A

    Currently, Regulation A permits unregistered public offerings of up 
to $5 million of securities in any twelve-month period by non-reporting 
U.S. and Canadian companies, including no more than $1.5 million of 
securities offered by securityholders of the company.\19\ The exemption 
requires that an offering statement on Form 1-A be filed with the 
Commission.\20\ Filings are made on paper,\21\ rather than 
electronically, and are subject to staff review. The offering statement 
must be ``qualified,'' \22\ which, in the absence of a delaying 
notation, would occur without Commission action on the 20th calendar 
day after filing.\23\ The core of the offering statement is the 
offering circular, a disclosure document much like an abbreviated 
version of the prospectus in a registered offering.\24\ The offering 
circular, which must be delivered to prospective purchasers,\25\ can be 
in a

[[Page 3928]]

question-and-answer format or a more traditional narrative disclosure 
format.\26\
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    \19\ 17 CFR 230.251(a), (b). Under Rule 251(b), affiliates 
resales are prohibited unless the issuer has had net income from 
continuing operations in at least one of its last two fiscal years.
    \20\ 17 CFR 230.251(d), 17 CFR 230.252.
    \21\ 17 CFR 232.101(c)(6).
    \22\ 17 CFR 230.251(g). See also 17 CFR 200.30-1(b)(2) 
(delegated authority to authorize the qualification of offering 
statements under Regulation A to the Director of the Division of 
Corporation Finance).
    \23\ The qualification process under Regulation A is similar to 
the process of a registration statement being declared effective 
under the Securities Act. As with registration, the staff review 
process for an offering circular generally takes more than the 20 
calendar days provided by rule, even taking into account that pre-
qualification amendments to an offering statement restart the 20 
calendar-day period. Issuers include a delaying notation on Form 1-A 
to ensure that both the issuer and staff reviewing the offering 
statement have completed the review process before an offering 
statement is qualified.
    \24\ 17 CFR 230.253.
    \25\ 17 CFR 230.251(d).
    \26\ Form 1-A, Part II (Offering Circular), 17 CFR 239.90.
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    Regulation A permits issuers to communicate with potential 
investors, or ``test the waters'' for potential interest in the 
offering, before filing the offering statement.\27\ Any solicitation 
material used to test the waters must be submitted to the Commission 
not later than the time of first use and must contain a required legend 
or disclaimer.\28\
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    \27\ 17 CFR 230.254.
    \28\ 17 CFR 230.254(b)(2). Testing the waters solicitation 
materials must state: (i) That no money is being solicited or will 
be accepted, if sent in response; (ii) that no sales will be made or 
commitment to purchase accepted until delivery of an offering 
circular that includes complete information about the issuer and the 
offering; (iii) that an indication of interest by a prospective 
purchaser is non-binding; and (iv) the identity of the chief 
executive officer of the issuer and a brief description of the 
issuer's business and products.
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    Regulation A offering circulars are required to contain issuer 
financial statements,\29\ but the financial statements are not required 
to be audited unless the issuer otherwise has audited financial 
statements available.\30\ Qualification of a Regulation A offering 
statement does not trigger reporting obligations under the Exchange 
Act. A Regulation A offering is a public offering, with no prohibition 
on general solicitation and general advertising. Securities sold under 
Regulation A are not ``restricted securities'' under the Securities Act 
and, therefore, are not subject to the limitations on resale that apply 
to securities sold in private offerings.\31\
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    \29\ 17 CFR 230.253(a).
    \30\ Form 1-A, Part F/S, 17 CFR 239.90. Market participants have 
indicated that the laws of some states may require audited financial 
statements for offerings conducted under Regulation A.
    \31\ See, e.g., 17 CFR 230.502(d); see also Rule 144 (17 CFR 
230.144).
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    Because Regulation A offerings are exempt from the registration 
requirements of the Securities Act, issuers and other offering 
participants are not subject to the liability provisions of Section 11 
of the Securities Act. Instead, other anti-fraud and civil liability 
provisions of the securities laws, including Sections 12(a)(2) and 17 
of the Securities Act, Section 10(b) of the Exchange Act and Exchange 
Act Rule 10b-5, apply to the offer and sale of securities in reliance 
upon Regulation A.\32\ Securities offerings conducted pursuant to 
Regulation A are subject to state securities law registration and 
qualification requirements, unless an exemption is available under 
state law.
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    \32\ See SEC Rel. No. 33-6924 (March 20, 1992) [57 FR 9768], at 
fn. 57 (discussing the anti-fraud and civil liability provisions 
applicable to Regulation A).
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C. Use of Regulation A

    In recent years, Regulation A offerings have been rare in 
comparison to offerings conducted in reliance on other Securities Act 
exemptions or on a registered basis. From 2009 through 2012, there were 
19 qualified Regulation A offerings for a total offering amount of 
approximately $73 million.\33\ During the same period, there were 
approximately 27,500 offerings of up to $5 million (i.e., at or below 
the cap on Regulation A offering size), for a total offering amount of 
approximately $25 billion, claiming a Regulation D exemption, and 373 
offerings of up to $5 million, for a total offering amount of 
approximately $840 million, conducted on a registered basis. In 2012 
alone, there were eight qualified Regulation A offerings for a total 
offering amount of approximately $34.5 million, compared to 
approximately 7,700 Regulation D offerings of up to $5 million for a 
total offering amount of approximately $7 billion, and 52 registered 
offerings of up to $5 million for a total offering amount of 
approximately $132 million.\34\
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    \33\ One qualified offering involved a dividend reinvestment 
plan by an issuer that did not include an offering amount.
    \34\ The figures cited above are derived from information 
contained in the Commission's EDGAR database and the S&P Capital IQ 
database. See also Section IV. below for a discussion on the usage 
of current methods of raising capital of up to $50 million.
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    Section 402 of the JOBS Act required the Comptroller General to 
conduct a study on the impact of state ``Blue Sky'' laws on offerings 
conducted under Regulation A, and to report its findings to Congress. 
The resulting U.S. Government Accountability Office (``GAO'') report to 
Congress indicates that various factors may have influenced the use of 
Regulation A, including the type of investors businesses seek to 
attract, the process of filing the offering statement with the 
Commission, state securities law compliance, and the cost-effectiveness 
of Regulation A relative to other exemptions.\35\
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    \35\ Factors that May Affect Trends in Regulation A Offerings, 
GAO-12-839 (July 2012) (available at: https://www.gao.gov/assets/600/592113.pdf). The GAO report concludes that it is unclear whether 
increasing the Regulation A offering ceiling from $5 million to $50 
million will improve the utility of the exemption.
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D. The Section 3(b)(2) Exemption

    Section 401 of the JOBS Act imposes a number of requirements for 
the rules the Commission must adopt under Section 3(b)(2), and also 
provides for the exercise of Commission discretion in setting 
additional terms and conditions for the exemption.
    The mandatory provisions, in addition to the $50 million annual 
offering limit, include:
     Features based on the current provisions of Regulation A:
     the securities may be offered and sold publicly;
     the securities are not ``restricted securities'' within 
the meaning of federal securities laws and regulations;
     the civil liability provisions of Section 12(a)(2) of the 
Securities Act would apply to offers and sales of the securities; and
     issuers may solicit interest in the offering before filing 
an offering statement;
     A new requirement for issuers to file audited financial 
statements with the Commission annually; \36\ and
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    \36\ JOBS Act Section 401(a)(2).
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     A limitation on the types of securities eligible for 
exemption under Section 3(b)(2) to equity securities, debt securities, 
and debt securities convertible into or exchangeable for equity 
interests, including any guarantees of such securities.
    The Commission, in its discretion, may determine to include other 
terms, conditions, or requirements, including:
     electronic filing of offering materials, the form and 
content of which would be prescribed by the Commission, including 
audited financial statements, issuer business description, issuer 
financial condition, issuer corporate governance principles, use of 
investor funds, and other appropriate matters;
     ``bad actor'' disqualification provisions (which, if 
included, must be substantially similar to the regulations adopted 
under Section 926 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (the ``Dodd-Frank Act'')); \37\ and
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    \37\ Public Law 111-203, Sec.  926, 124 Stat. 1376, 1851 (July 
21, 2010). Among other things, Section 926 required the issuance of 
disqualifying rules substantially similar to the ``bad actor'' 
disqualification provisions of Rule 262 of existing Regulation A.
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     periodic disclosures regarding the issuer, its business 
operations, financial condition, corporate governance principles, use 
of investor funds, and other appropriate matters.\38\
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    \38\ JOBS Act Section 401(a)(2).
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    Section 401 of the JOBS Act also requires the Commission to review 
the $50 million offering limit not later than two years after enactment 
of the JOBS Act and every two years thereafter and, if the Commission 
decides not to increase the amount, requires that it report its 
reasoning to Congress.

[[Page 3929]]

II. Proposed Amendments to Regulation A

A. Overview

    Title IV of the JOBS Act amended Section 3(b) of the Securities Act 
to add Section 3(b)(2), which, subject to various terms and conditions, 
directs the Commission to enact rules that add a class of securities 
exempt from the registration provisions of the Securities Act. Prior to 
the amendment, Section 3(b) contained the statutory authority relied 
upon to establish current Regulation A. Although the JOBS Act amended 
Section 3(b) to designate this existing authority as Section 3(b)(1) 
and add new Section 3(b)(2), it did not amend the existing statutory 
authority of Regulation A or direct the Commission to amend specific 
rules adopted thereunder.\39\ We propose to implement this JOBS Act 
mandate by expanding Regulation A into two tiers: Tier 1, for offerings 
of up to $5 million; and Tier 2, for offerings of up to $50 
million.\40\ The proposals for offerings under Tier 1 and Tier 2 build 
on current Regulation A, and preserve, with some modifications, 
existing provisions regarding issuer eligibility, offering circular 
contents, testing the waters, and ``bad actor'' disqualification. We 
also propose to modernize the Regulation A filing process for all 
offerings and align practice in certain areas with prevailing practice 
for registered offerings, to create additional flexibility and 
streamline compliance for Regulation A issuers. Issuers in Tier 2 
offerings would be required to include audited financial statements in 
their offering documents and to file annual, semiannual and current 
reports with the Commission, and purchasers in Tier 2 offerings would 
be subject to certain limitations on their investment. The differences 
between Tier 1 and Tier 2 offerings are described more fully below.
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    \39\ Cf. Title II of the JOBS Act, Public Law 112-106, Sec.  201 
(directing the Commission to amend Rule 506 of Regulation D, 17 CFR 
230.506).
    \40\ An issuer of $5 million or less of securities could elect 
to proceed under either Tier 1 or Tier 2.
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    In developing the current proposals, we considered the statutory 
language of JOBS Act Section 401, the legislative history, the current 
Regulation A exemption, comment letters received to date on Title IV of 
the JOBS Act \41\ and recent recommendations of the Commission's 
Government-Business Forum on Small Business Capital Formation,\42\ the 
Advisory Committee on Small and Emerging Companies,\43\ and the Equity 
Capital Formation Task Force.\44\
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    \41\ To facilitate public input on JOBS Act rulemaking before 
the issuance of rule proposals, the Commission has invited members 
of the public to make their views known on various JOBS Act 
initiatives in advance of any rulemaking by submitting comment 
letters to the Commission's Web site at https://www.sec.gov/spotlight/jobsactcomments.shtml. Comment letters received to date on 
Title IV of the JOBS Act are available at: https://www.sec.gov/comments/jobs-title-iv/jobs-title-iv.shtml.
    \42\ Prior recommendations of the Commission's Government-
Business Forum on Small Business Capital Formation (``Small Business 
Forum'') are available at: https://www.sec.gov/info/smallbus/sbforum.shtml.
    \43\ Prior recommendations of the Advisory Committee on Small 
and Emerging Companies (``Advisory Committee'') are available at: 
https://www.sec.gov/info/smallbus/acsec.shtml.
    \44\ Equity Capital Task Force, From the On-Ramp to the Freeway: 
Refueling Job Creation and Growth by Reconnecting Investors with 
Small-Cap Companies, presentation to the U.S. Dep't. of Treasury 
(November 11, 2013), available at: https://www.equitycapitalformationtaskforce.com/ (``ECTF Report'').
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    Following are the key provisions of the proposed amendments to 
Regulation A:
    Scope of the exemption:
     Tier 1: annual offering limit of $5 million, including no 
more than $1.5 million on behalf of selling securityholders.
     Tier 2: annual offering limit of $50 million, including no 
more than $15 million on behalf of selling securityholders.
     Update the restrictions on issuer eligibility to exclude 
from Regulation A issuers that are or have been subject to any order of 
the Commission pursuant to Section 12(j) of the Exchange Act entered 
within five years before the filing of the offering statement.
     Update the restrictions on issuer eligibility to exclude 
from Regulation A issuers that have not filed with the Commission the 
ongoing reports required by the proposed rules during the two years 
immediately preceding the filing of an offering statement.
     Limit the amount of securities an investor can purchase in 
a Tier 2 offering to no more than 10% of the greater of annual income 
and net worth.
     Exclude asset-backed securities, as defined in Regulation 
AB, from the list of eligible securities.
     Update the safe harbor from integration and provide 
additional guidance on the potential integration of offerings conducted 
concurrently with, or close in time after, a Regulation A offering.
    Solicitation materials:
     Permit issuers to ``test the waters'' or solicit interest 
in a potential offering with the general public either before or after 
the filing of the offering statement, so long as any solicitation 
materials used after publicly filing the offering statement are 
preceded or accompanied by a preliminary offering circular or contain a 
notice informing potential investors where and how the most current 
preliminary offering circular can be obtained. This requirement could 
be satisfied by providing the uniform resource locator (``URL'') where 
the preliminary offering circular or the offering statement may be 
obtained on EDGAR.
    Qualification, communications, and offering process:
     Require issuers and intermediaries in the prequalification 
period to deliver a preliminary offering circular to prospective 
purchasers at least 48 hours in advance of sale.
     Modernize the qualification, communications, and offering 
process in Regulation A to reflect analogous provisions of the 
Securities Act registration process: \45\
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    \45\ See Securities Offering Reform, SEC Rel. No. 33-8591 (July 
19, 2005) [70 FR 44722].
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     Permit issuers and intermediaries to satisfy their 
delivery requirements as to the final offering circular under an 
``access equals delivery'' model when the final offering circular is 
filed and available on EDGAR;
     Require issuers that sell to prospective purchasers in 
reliance on the delivery of a preliminary offering circular to, not 
later than two business days after completion of the sale, provide the 
purchasers with a copy of the final offering circular or a notice that 
the sale occurred pursuant to a qualified offering statement that 
includes the URL where the final offering circular or to the offering 
statement of which such final offering circular is part may be obtained 
and contact information sufficient to notify a purchaser where a 
request for a final offering circular can be sent and received in 
response; and
     Permit issuers to file offering circular supplements after 
qualification of the offering statement in certain circumstances in 
lieu of post-qualification amendments, including to provide the types 
of information that may be excluded from a prospectus under Rule 430A.
     Permit continuous or delayed offerings under the proposed 
rules, but require issuers in continuous or delayed Tier 2 offerings to 
be current in their annual and semiannual reporting obligations.
     Permit issuers to qualify additional securities in 
reliance on Regulation A by filing a post-qualification amendment to a 
qualified offering statement.
    Offering statement:

[[Page 3930]]

     Require issuers to electronically file offering statements 
with the Commission.
     Permit the non-public submission of offering statements 
and amendments for review by Commission staff before filing such 
documents with the Commission, so long as all such documents are 
publicly filed not later than 21 calendar days before qualification.
     Eliminate the Model A (Question-and-Answer) disclosure 
format under Part II (Offering Circular) of Form 1-A.
     Update and clarify the Model B (Narrative) disclosure 
format under Part II of Form 1-A (renaming it as Offering Circular), 
while continuing to permit the use of Part I of Form S-1 narrative 
disclosure as an alternative.
     Allow an offering statement to be qualified only by order 
of the Commission rather than, in the absence of a delaying notation on 
the offering statement, without Commission action on the 20th calendar 
day after filing.
     Require issuers in a Tier 2 offering to include audited 
financial statements in their offering circulars.
     Require all issuers to file balance sheets for the two 
most recently completed fiscal year ends (or for such shorter time that 
they have been in existence).
     Permit issuers to provide financial statements in Form 1-A 
that are dated not more than nine months before the date of non-public 
submission or filing, and require issuers to include financial 
statements in Form 1-A that are dated not more than nine months before 
qualification, with the most recent annual or interim balance sheet not 
older than nine months. If interim financial statements are required, 
they must cover a period of at least six months.
    Ongoing reporting:
     Require issuers that conduct a Tier 1 offering to 
electronically file a Form 1-Z exit report with the Commission not 
later than 30 calendar days after termination or completion of a 
qualified Regulation A offering to provide information about sales in 
such offering and to update certain issuer information.
     Require issuers that conduct a Tier 2 offering to 
electronically file with the Commission annual and semiannual reports, 
as well as current event updates.
     Require issuers that conduct a Tier 2 offering to, where 
applicable, provide special financial reports to provide information to 
investors in between the time the financial statements are included in 
Form 1-A and the issuer's first periodic report due after qualification 
of the offering statement.
     Permit the ongoing reports filed by an issuer conducting a 
Tier 2 offering to be used to satisfy a broker-dealer's obligations 
under Exchange Act Rule 15c2-11.
     Provide that issuers conducting Tier 2 offerings would 
exit the Regulation A ongoing reporting regime when they become subject 
to the ongoing reporting requirements of Section 13 of the Exchange 
Act, and may exit the Regulation A reporting regime at any time by 
filing a Form 1-Z exit report after completing reporting for the fiscal 
year in which the offering statement was qualified, so long as the 
securities of each class to which the offering statement relates are 
held of record by fewer than 300 persons and offers or sales made in 
reliance on a qualified Regulation A offering statement are not 
ongoing.
     Require issuers that conduct a Tier 2 offering to include 
in their first annual report after termination or completion of a 
qualified Regulation A offering, or in their Form 1-Z exit report, 
information about sales in the terminated or completed offering and to 
update certain issuer information.
     Eliminate the requirement that issuers file a Form 2-A 
with the Commission to report sales and the termination of sales made 
under Regulation A every six months after qualification and within 30 
calendar days after the termination, completion, or final sale of 
securities in the offering.
    ``Bad actor'' disqualification provisions:
     Substantially conform the ``bad actor'' disqualification 
provisions of Rule 262 to new Rule 506(d) and add a new disclosure 
requirement similar to Rule 506(e).
    Application of state securities laws:
     In light of the total package of investor protections 
proposed to be included in the implementing rules for Regulation A, 
provide for the preemption of state securities law registration and 
qualification requirements for securities offered or sold to 
``qualified purchasers,'' defined to be all offerees of securities in a 
Regulation A offering and all purchasers in a Tier 2 offering.

B. Scope of Exemption

1. Eligible Issuers
    Section 401 of the JOBS Act does not include any express issuer 
eligibility requirements.\46\ Currently, Regulation A is limited to 
companies organized in and with their principal place of business 
inside the United States or Canada. It is unavailable to:
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    \46\ Section 3(b)(2)(G)(ii) specifies that if the Commission 
chooses to enact so-called ``bad actor'' disqualification 
provisions, such provisions must be substantially similar to the 
regulations adopted in accordance with Section 926 of the Dodd-Frank 
Act. Proposed ``bad actor'' disqualification provisions are 
discussed below in Section II.F.
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     companies subject to the ongoing reporting requirements of 
Section 13 or 15(d) of the Exchange Act (``reporting companies'');
     companies registered or required to be registered under 
the Investment Company Act of 1940 (``investment companies''); \47\
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    \47\ 15 U.S.C. 80a-1 et seq. (``Investment Company Act''). The 
proposed rules would clarify the current exclusion of business 
development companies from Regulation A. See SEC Rel. No. 33-6924, 
at fn. 65 (noting that companies registered or required to be 
registered under the Investment Company Act of 1940, including 
business development companies, are prohibited from using Regulation 
A).
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     development stage companies that have no specific business 
plan or purpose or have indicated their business plan is to engage in a 
merger or acquisition with an unidentified company or companies 
(``blank check companies''); \48\ and
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    \48\ Rule 251(a)(3); see also SEC Rel. No. 33-6949 [57 FR 36442] 
(July 30, 1992), at fn. 50 (clarifying that blank check companies 
regardless of whether they are issuing penny stock are precluded 
from relying on Regulation A).
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     issuers of fractional undivided interests in oil or gas 
rights, or similar interests in other mineral rights.\49\
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    \49\ Regulation B formerly provided exemptive relief for such 
issuers. Regulation B was rendered obsolete in light of other 
exemptions, such as those afforded issuers under Section 4(a)(2) of 
the Securities Act and Regulation D, and was rescinded in May 1996. 
See SEC Release No. 33-7300 [61 FR 30398] (May 31, 1996).
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    Several commenters have suggested that the expanded exemption 
should continue to be unavailable to blank check companies,\50\ two of 
which also suggested that the exemption should be unavailable to 
special purpose acquisition companies (``SPACs'').\51\ Two commenters 
suggested that business development companies (``BDCs'') should be 
permitted to rely on

[[Page 3931]]

the exemption,\52\ and also suggested that shell companies should no 
longer be permitted to rely on Regulation A.\53\ One commenter 
expressed concern over allowing BDCs, as well as real estate investment 
trusts (``REITs''), to rely on the exemption without additional entity-
specific disclosure requirements,\54\ while another suggested that 
REITs should be allowed to rely on the exemption without additional 
disclosure obligations.\55\ One commenter suggested that the Commission 
permit reporting companies, and foreign private issuers \56\ that 
expressly consent to Exchange Act Section 10(b) liability, to rely on 
the exemption.\57\ One commenter proposed limiting the availability of 
the exemption to non-reporting companies, and to operating companies, 
while continuing to make the exemption unavailable to pooled investment 
funds.\58\
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    \50\ Letter from Catherine T. Dixon, Chair, Federal Regulation 
of Securities Committee, American Bar Association, Sept. 7, 2012 
(``ABA Letter''); Letter from William R. Hambrecht, Chairman and 
CEO, WR Hambrecht + Co., Jan. 4, 2013 (``WR Hambrecht + Co. 
Letter''); Letter from A. Heath Abshure, President, North American 
Securities Administrators Association (``NASAA''), April 10, 2013 
(``NASAA Letter 2''); see also Letter from Robert R. Kaplan, Jr. and 
Mark A. Cleaves, Kaplan Voekler Cunningham & Frank PLC (``Kaplan 
Voekler''), May 14, 2013 (Kaplan Voekler Letter 2'').
    \51\ NASAA Letter 2; WR Hambrecht + Co. Letter; see also Kaplan 
Voekler Letter 2 (noting that there are important distinctions 
between SPACs, blank check companies, and shell companies). A SPAC 
is a type of blank check company created specifically to pool funds 
in order to finance a merger or acquisition opportunity within a set 
timeframe.
    \52\ ABA Letter (suggesting that permitting BDCs to rely on 
Regulation A would be consistent with the policy goals behind 
enactment of Section 3(b)(2) of the Securities Act, and Commission 
staff guidance on the JOBS Act and the treatment of BDCs as emerging 
growth companies under Title I of the JOBS Act); WR Hambrecht + Co. 
Letter (suggesting that permitting BDCs to rely on Regulation A 
would be consistent with the policy goals behind enactment of 
Section 3(b)(2) of the Securities Act). A BDC is a closed-end 
company that, among other things, is operated for the purpose of 
making investments in certain types of securities, and makes 
available to issuers of such securities significant managerial 
assistance. See Section 2(a)(48) of the Investment Company Act.
    \53\ ABA Letter; WR Hambrecht + Co. Letter. A shell company is a 
company that has, or at any time previously has had, no or nominal 
operations, and either no or nominal assets, assets consisting 
solely of cash or cash equivalents, or assets consisting of any 
amount of cash and cash equivalents and nominal other assets. 17 CFR 
230.405; see also 17 CFR 144(i)(1)(i).
    \54\ NASAA Letter 2 (citing the unique ``nature and timing of 
[such companies'] capital formation and investment strategies, fee 
structures, and liquidity, necessitate disclosure fitting for these 
specific entities.''). We solicit comment on potential BDC- and 
REIT-specific disclosure in Section II.C.3.b. below.
    \55\ Kaplan Voekler Letter 2. A REIT is a company that owns and 
generally operates income-producing real estate or real estate-
related assets. See Sections 856 through 859 of Internal Revenue 
Code, 26 U.S.C. 856-859; see also general discussion of REIT 
characteristics in SEC Rel. No. IC-29778 (Aug. 31, 2011) [76 FR 
55300], at 55302. Among other things, a REIT must have the bulk of 
its assets and income connected to real estate investment and must 
distribute at least 90 percent of its taxable income to shareholders 
annually in the form of dividends.
    \56\ Under Rule 405 (17 CFR Sec.  230.405), a foreign private 
issuer is any foreign issuer--other than a foreign government--
except an issuer meeting the following conditions as of the last 
business day of its most recently completed second fiscal quarter:
    (i) More than 50 percent of the outstanding voting securities of 
such issuer are directly or indirectly owned of record by residents 
of the United States; and
    (ii) Any of the following:
    (A) The majority of the executive officers or directors are 
United States citizens or residents;
    (B) More than 50 percent of the assets of the issuer are located 
in the United States; or
    (C) The business of the issuer is administered principally in 
the United States.
    \57\ ABA Letter.
    \58\ WR Hambrecht + Co. Letter.
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    We propose to add two new categories of ineligible issuers to, but 
to otherwise maintain, Regulation A's existing issuer eligibility 
requirements. As proposed, the exemption would continue to be available 
to companies organized in, and with their principal place of business 
inside, the United States or Canada. Under the proposal, the exemption 
would continue to be unavailable to Exchange Act reporting companies, 
investment companies, blank check companies, certain issuers 
disqualified from participation in such offerings under the ``bad 
actor'' provisions of Rule 262, as proposed to be amended,\59\ and to 
issuers of fractional undivided interests in oil or gas rights, or 
similar interests in other mineral rights.\60\
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    \59\ See discussion in Section II.G. below.
    \60\ See proposed Rules 251(b) and 262.
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    Additionally, we propose to make the exemption unavailable to 
issuers that have not filed with the Commission the ongoing reports 
required by the proposed rules during the two years immediately 
preceding the filing of a new offering statement (or for such shorter 
period that the issuer was required to file such reports).\61\ We 
recently proposed a similar eligibility requirement for issuers in our 
proposed rules for securities-based crowdfunding transactions pursuant 
to Section 4(a)(6) of the Securities Act.\62\ We believe that our rules 
for ongoing reporting in Regulation A, as proposed to be amended, would 
benefit investors by enabling them to consider updated information 
about the issuer, make informed investment decisions, facilitate the 
development of an efficient secondary market in such securities, and 
would enhance our ability to analyze and monitor the Regulation A 
market. We therefore believe fulfilling an obligation to file ongoing 
reports pursuant to proposed Regulation A is an important investor 
protection that should be a factor in determining issuer eligibility.
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    \61\ See Section II.E.1. below for a discussion on proposed 
ongoing reporting requirements applicable to Tier 1 and Tier 2 
offerings.
    \62\ See SEC Rel. No. 33-9470 (Oct. 23, 2013), at 36 [78 FR 
66427] (proposed rules for Regulation Crowdfunding under Title III 
of the JOBS Act) and proposed Rule 100(b)(5) of Regulation 
Crowdfunding.
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    We further propose to exclude from the category of eligible issuers 
under Regulation A issuers that are or have been subject to an order by 
the Commission denying, suspending, or revoking the registration of a 
class of securities pursuant to Section 12(j) of the Exchange Act that 
was entered within five years before the filing of the offering 
statement. Under Section 12(j) of the Exchange Act, an issuer's 
securities registered under the Exchange Act may be subject to a 
denial, suspension, or revocation of registration pursuant to an order 
by the Commission if, after notice and opportunity for a hearing, the 
Commission finds that the issuer of such securities has failed to 
comply with any of the provisions of, or the rules and regulations 
enacted under, the Exchange Act. We do not believe that issuers that, 
after notice and opportunity for a hearing, are or have been subject to 
such orders by the Commission within a five-year period immediately 
preceding the filing of the offering statement should benefit from the 
provisions of Regulation A, as proposed to be amended. We would 
therefore exclude such issuers from the category of eligible issuers.
    We solicit comment on the proposed issuer eligibility requirements, 
the suggestions made in the advance comments to date, and on the issues 
discussed below.
Request for Comment
    1. As proposed, in addition to the two newly proposed issuer 
eligibility requirements, should we otherwise maintain the existing 
categories of Regulation A issuer eligibility requirements? Why or why 
not? If not, which categories of issuer eligibility requirements should 
we alter, and why? Please explain.
    2. As proposed, should we add an additional issuer eligibility 
requirement to exclude issuers that have not filed with the Commission 
the ongoing reports required by the proposed rules during the two years 
immediately preceding the filing of a new offering statement (or for 
such shorter period that the issuer was required to file such reports)? 
If so, should we only require issuers to be current in their Regulation 
A ongoing reporting at the time of the filing of a new offering 
statement in order to be eligible? Alternatively, should we consider a 
time period other than two years? Why or why not?
    3. As proposed, should we add an additional issuer eligibility 
requirement to exclude issuers that are or have been subject to an 
order by the Commission denying, suspending, or revoking the 
registration of a class of securities pursuant to Section 12(j) of the 
Exchange Act that was entered within five years before the filing of 
the offering

[[Page 3932]]

statement? Why or why not? If not, please explain. Alternatively, 
should we alter the proposed five-year period during which an issuer 
could not have been subject to an order by the Commission pursuant to 
Section 12(j) to cover a longer or shorter period of time? Why or why 
not? If so, please explain.
a. U.S. Nexus Other Than Organization and Domicile
    We are seeking comment on whether we should expand availability of 
the Regulation A exemption to issuers that may not satisfy domicile-
based requirements, particularly those that have a substantial United 
States nexus, such as certain foreign companies with domestic 
operations, or domestic subsidiaries of foreign multinational 
companies.\63\
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    \63\ A domestic subsidiary of a foreign multinational company 
(i.e., one organized in the United States or Canada) would be 
eligible to rely on Regulation A if its principal place of business 
were located in the United States or Canada.
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    As its name suggests, one goal of the JOBS Act was the creation of 
jobs within the United States.\64\ Expansion of issuer eligibility to 
include foreign issuers with a substantial U.S. nexus may serve to 
better implement the JOBS Act goal of domestic job creation. According 
to statistics from the U.S. Department of Commerce's Bureau of Economic 
Analysis (``BEA''), many American jobs are created not only by U.S. 
companies, but by the U.S. affiliates of foreign multinational 
companies.\65\ According to the report, total U.S. employment by 
majority-owned U.S. affiliates of foreign multinational companies rose 
in 2011 at nearly twice the rate of employment in the U.S. private-
industry sector as a whole.\66\ As the BEA data suggest, domestic job 
creation is not necessarily dependent on company domicile or principal 
place of business.\67\
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    \64\ See, e.g., H.R. Rep. No. 112-206, at 4 (2012) (``Small 
companies are critical to economic growth in the United States. 
Amending Regulation A to make it viable for small companies to 
access capital will permit greater investment in these companies, 
resulting in economic growth and jobs. By reducing the regulatory 
burden and expense of raising capital from the investing public, 
[Title IV of the JOBS Act] will boost the flow of capital to small 
businesses and fuel America's most vigorous job-creation 
machine.'').
    \65\ See Anderson, Thomas, U.S. Dep't of Commerce, Bureau of 
Econ. Analysis, Summary Estimates for Multinational Companies: 
Employment, Sales, and Capital Expenditures for 2011 (Apr. 18, 2013) 
(``BEA Release 13-16''), at Table 3, available at: https://www.bea.gov/newsreleases/international/mnc/2013/_pdf/mnc2011.pdf. 
The BEA's advance summary estimates for 2011 show total employment 
of approximately 22.9 million workers by U.S. parents of 
multinational companies (some of which are themselves foreign-
owned), accounting for approximately one-fifth of total U.S. private 
sector employment, and total employment of approximately 5.6 million 
workers by majority-owned U.S. affiliates of foreign multinational 
companies, accounting for approximately five percent of total U.S. 
private sector employment. Id. at 1-2. As some U.S. parents of 
multinational companies are themselves foreign-owned, there is some 
overlap between the employment figures of U.S. parents of 
multinational companies and U.S. affiliates of foreign multinational 
companies. For more information on multinational companies, see 
https://www.bea.gov/iTable/index_MNC.cfm.
    \66\ BEA Release 13-16, at 2.
    \67\ See id.; see also Matthew J. Slaughter, American Companies 
and Global Supply Networks: Driving U.S. Economic Growth and Jobs by 
Connecting with the World, Business Roundtable et al. (January 
2013), at 9, available at: https://businessroundtable.org/uploads/studies-reports/downloads/BRT-SlaughterPaper-singles-Dec21.pdf 
(noting that both U.S.-headquartered multinational companies and 
foreign-headquartered multinational companies that operate in the 
U.S. create tens of millions of well-paying jobs domestically).
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    Currently, Regulation A is limited to companies organized, and with 
their principal place of business, in the United States or Canada.\68\ 
The Commission could make the Regulation A exemption available to all 
non-U.S. issuers, rather than only Canadian issuers. Additionally, we 
could subject issuers to conditions intended to ensure that the capital 
raised in the offering is put to work in the United States. For 
example, we could add a requirement that a minimum percentage of the 
offering proceeds be used in the United States, in connection with the 
issuer's domestic operations.\69\ Such a requirement could, however, be 
difficult to administer because of challenges in delineating domestic 
versus foreign operations and in tracing use of proceeds.
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    \68\ The Commission originally proposed the elimination of 
Canadian issuers from the Regulation A exemptive scheme in 1992 on 
the grounds that such issuers rarely used the exemption. See SEC 
Rel. No. 33-6924, at 19. In response to public comment, however, 
this proposal was not adopted. SEC Rel. No. 33-6949, at 36443. No 
Canadian issuers have qualified an offering in reliance on 
Regulation A since 2002.
    \69\ Cf. Rule 147. 17 CFR 230.147. Rule 147 is a safe harbor 
from registration under Section 3(a)(11) of the Securities Act. 
Section 3(a)(11) is more commonly known as the intrastate exemption, 
and requires, among other things, that issuers conducting an 
intrastate offering use at least 80% of the net proceeds of the 
offering in connection with their business operations in the 
relevant state.
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    Alternatively, issuer eligibility under Regulation A could be 
extended to ``domestic issuers,'' defined as any issuer that is not a 
foreign government or a ``foreign private issuer.'' \70\ Domestic 
issuers would, in general, have a demonstrated presence in the United 
States, which could increase the likelihood that proceeds from the 
offering are used within the United States.\71\ We could limit issuer 
eligibility further by adding a condition that most of the offering 
proceeds be used in connection with the issuer's U.S. domestic 
operations.
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    \70\ In Regulation S (17 CFR 230.901 et seq.), a ``domestic 
issuer'' is defined as any issuer other than a ``foreign 
government'' or ``foreign private issuer.'' 17 CFR 230.902(e). A 
``foreign government'' means the government of any foreign country 
or of any political subdivision of a foreign country. See 17 CFR 
230.405. See fn. 56. above for the definition of a ``foreign private 
issuer.''
    \71\ The Commission previously used the term ``domestic 
issuers'' in the proposed amendments to Regulation A in 1992 to 
refer to entities organized and with a principal place of business 
in the United States. See SEC Rel. No. 33-6924, at 19, 156.
---------------------------------------------------------------------------

Request for Comment
    4. Should issuer eligibility to rely on Regulation A continue to 
require an issuer to be organized under the laws of the United States 
or Canada with a principal place of business in the United States or 
Canada? Or should Regulation A be limited to issuers organized and with 
a principal place of business in the United States, thereby excluding 
Canadian issuers? Should Regulation A be made available to ``domestic 
issuers'' as described above, or to all issuers, including foreign 
private issuers? Is there a reason to treat Canadian issuers 
differently from other foreign issuers? What would the impact be on 
issuers, investors, and other market participants if the issuer 
eligibility criteria were broadened? Please explain.
    5. If we modify or eliminate current requirements regarding 
domicile and principal place of business, should we limit availability 
of the exemption in some other way that reflects a U.S. nexus? If so, 
how should we define, or in what ways should we limit the availability 
of the exemption to issuers that demonstrate, a U.S. nexus? Are there 
criteria we could use that would be easy to administer? If so, what 
criteria?
    6. If we extend issuer eligibility to include foreign private 
issuers, should we require express consent from such issuers to 
Exchange Act Section 10(b) liability? \72\ Should we consider requiring 
additional or alternative conditions for the eligibility of such 
issuers? Why or why not? Should we make other changes in Regulation A 
to accommodate such issuers? For example, as proposed with respect to 
Canadian issuers,\73\ should we permit all non-U.S. issuers to prepare 
their financial statements using International Financial Reporting 
Standards (IFRS) as issued by the International Accounting

[[Page 3933]]

Standards Board (IASB), rather than U.S. Generally Accepted Accounting 
Principles (U.S. GAAP)?
---------------------------------------------------------------------------

    \72\ In 2010, the U.S. Supreme Court held that Section 10(b) of 
the Exchange Act, 15 U.S.C. 78j(b), covers only transactions in 
securities listed on domestic exchanges, and securities purchased or 
sold domestically. Morrison v. National Australia Bank Ltd., 130 S. 
Ct. 2869 (2010). But see, Section 929P(b) of the Dodd-Frank Act, 
Public Law 111-203, Sec.  929P(b).
    \73\ See discussion in Section II.C.3.b(2). below.
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b. Additional and Alternative Types of Issuers
    As noted above, we propose not to amend Regulation A's existing 
prohibitions on use of the exemption by investment companies registered 
or required to be registered under the Investment Company Act, 
including BDCs; blank check companies and SPACs; and issuers of 
fractional undivided interests in oil or gas rights, or similar 
interests in other mineral rights. As proposed, shell companies that do 
not meet the definition of ``blank check company'' would continue to be 
able to rely on the exemption.\74\ We seek comment on whether to permit 
BDCs, blank check companies and SPACs, and oil, gas and mineral 
interest rights issuers to rely on Regulation A, as well as on the 
potential exclusion of shell companies.
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    \74\ A shell company that is a development stage company with no 
specific business plan or purpose would not be an eligible issuer 
under the exclusion for blank check companies.
---------------------------------------------------------------------------

    BDCs. BDCs are a type of closed-end company operated for the 
purpose of making investments in small, developing, or financially 
troubled companies. Typically, BDCs are subject to the registration and 
reporting requirements of the Securities Act and Exchange Act. The 
Investment Company Act requires BDCs to have at least 70% of their 
investment portfolio in eligible portfolio companies and certain other 
assets at the time they make any new investment.\75\ Rules 2a-46 and 
55a-1 of the Investment Company Act define eligible portfolio companies 
to include all private companies and companies whose securities are 
listed on a national securities exchange but have an aggregate market 
value of less than $250 million, or that met such requirements at the 
time of the BDC's initial investment in such company.\76\ Currently, 
BDCs are able to rely on Regulation E \77\ for offerings of up to $5 
million in any twelve-month period. Extension of Regulation A issuer 
eligibility to BDCs could assist small companies with capital formation 
by indirectly providing such companies--otherwise qualifying as 
eligible portfolio companies--with greater access to investment 
capital. As noted above, however, one commenter expressed concern about 
the potential extension of Regulation A to BDCs absent disclosure 
requirements that are more appropriately tailored for these 
issuers.\78\
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    \75\ See Section 2(a)(48) of the Investment Company Act.
    \76\ 17 CFR 270.2a-46; 17 CFR 270.55a-1.
    \77\ 17 CFR 230.601 et seq.
    \78\ NASAA Letter 2; see also fn. 54 above.
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    Blank Check Companies and SPACs. By its terms, the definition of 
blank check companies under the federal securities laws can include 
early stage and startup companies with no specific business plans.\79\ 
Extension of Regulation A issuer eligibility to include companies with 
characteristics that are similar to blank check companies could 
therefore be consistent with Title IV's goal of increasing the capital 
formation options for smaller companies.\80\ As noted above, however, 
some commenters have expressed concern about, and recommended against, 
permitting blank check companies and SPACs to use Regulation A.\81\ As 
currently proposed, blank check companies and SPACs would not be 
permitted to rely on the exemption. We seek comment on whether the 
Commission should revisit this exclusion, and, if so, on what basis.
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    \79\ A blank check company is a development stage company that 
has no specific business plan or purpose or has indicated its 
business plan is to engage in a merger or acquisition with an 
unidentified company or companies or other entity. See 17 CFR 
230.419.
    \80\ See fn. 85 below. The Commission recently acknowledged, in 
proposing rules for securities-based crowdfunding transactions under 
Section 4(a)(6) of the Securities Act, the challenges associated 
with distinguishing between early stage companies that can provide 
information sufficient to support such transactions and those whose 
business plan is so indeterminate that they may not be able to 
provide adequate information. See SEC Rel. No. 33-9470, at 37.
    \81\ See fn. 89 below; see also fn. 51 above for the definition 
of a SPAC.
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    Shell Companies. A shell company is a company that has, or at any 
time previously has had, no or nominal operations, and either no or 
nominal assets, assets consisting solely of cash or cash equivalents, 
or assets consisting of any amount of cash and cash equivalents and 
nominal other assets.\82\ Shell companies are not expressly excluded 
from Regulation A, although any shell company that met the definition 
of a blank check company would be excluded on that basis. As noted 
above, some commenters have suggested that the Commission consider an 
express exclusion for shell companies.\83\ At their earliest stages of 
development, however, many small early stage and startup companies have 
limited operations and few, if any, assets. We anticipate that some 
Regulation A issuers would be startups where it may be uncertain as to 
whether they fall within the shell company definition.\84\ We believe, 
however, that Regulation A, as proposed to be amended, is intended to 
provide smaller companies, including early stage companies, the 
opportunity to raise capital from the general public in a manner that 
is consistent with the proposed rules. In our view, excluding such 
companies from proposed Regulation A would be contrary not only to the 
provisions of current Regulation A, but also to Title IV of the JOBS 
Act.\85\ We do not therefore propose to exclude shell companies from 
reliance on Regulation A. For the same reasons we are soliciting 
comment on potential blank check companies' access to, or exclusion 
from, the exemptive scheme; however, we also seek comment on whether 
shell companies should be prohibited from relying on Regulation A.
---------------------------------------------------------------------------

    \82\ 17 CFR 230.405; see also 17 CFR 144(i)(1)(i).
    \83\ ABA Letter; WR Hambrecht + Co. Letter (suggesting that 
shell company access to Regulation A is inconsistent with the JOBS 
Act because such companies do not promote job creation).
    \84\ But see SEC Rel. No. 33-8869 (December 6, 2007) at fn. 172 
(``Rule 144(i)(1)(i) is not intended to capture a `startup company,' 
or, in other words, a company with a limited operating history, in 
the definition of a reporting or non-reporting shell company, as we 
believe that such a company does not meet the condition of having 
`no or nominal operations.' '').
    \85\ H.R. Rep. No. 112-206, at 4 (2012) (``Small companies are 
critical to economic growth in the United States. Amending 
Regulation A to make it viable for small companies to access capital 
will permit greater investment in these companies, resulting in 
economic growth and jobs. By reducing the regulatory burden and 
expense of raising capital from the investing public, [Title IV of 
the JOBS Act] will boost the flow of capital to small businesses and 
fuel America's most vigorous job-creation machine.'').
---------------------------------------------------------------------------

    Operating Companies. We are also seeking comment on whether we 
should take a different approach with respect to issuer eligibility 
requirements and, instead of prohibiting blank check company access to 
the exemption (as is currently proposed and consistent with current 
Regulation A), to limit availability of the exemption to companies 
satisfying a new definition of ``operating company.'' \86\ The 
Commission previously proposed to limit Regulation A to operating 
companies in 1992.\87\ Though not adopted at that time, the Commission 
proposed to make the exemption available only ``to raise funds to put 
into the operations of an actual business and not simply for 
investment.'' The proposal would have specifically excluded ``those 
enterprises with the principal business of investing or reinvesting 
funds in securities, properties, commodities, business

[[Page 3934]]

opportunities or similar media of speculative opportunity.'' \88\ Along 
the same lines, we seek comment on whether we should exclude certain 
non-operating companies from Regulation A. We could, for example, limit 
availability of the exemption to operating companies, defined to 
include issuers that have generated total revenue in excess of a 
certain amount (e.g., $1,000,000) over a certain period of time (e.g., 
its prior two fiscal years) through the provision of goods or services, 
or based on similar or different criteria intended to facilitate access 
to the proposed rules by small companies. Adopting an operating company 
definition could more effectively eliminate the types of blank check 
companies, SPACs, and shell companies that are not otherwise the 
intended beneficiaries of Regulation A from eligibility, an issue we 
discuss above, request comment on below, and about which several 
commenters have expressed concern.\89\
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    \86\ An operating company definition would not alter our current 
proposal to continue to prohibit reporting company and investment 
company reliance on Regulation A.
    \87\ See SEC Rel. No. 33-6924, at 20-21.
    \88\ Id. The adopting release noted that partnerships or certain 
other entities organized primarily for investment purposes had 
historically been eligible to use Regulation A, and that after 
consideration of public comment it was appropriate to continue to 
make the exemption available to such issuers. See SEC Rel. No. 33-
6949, at 36443.
    \89\ ABA Letter (``The purpose and goal of Section 3(b)(2) 
should . . . be to expand the capital raising opportunities 
available to operating companies. We are concerned about the 
possibility of abuse should non-operating companies be able to rely 
on the exemption. The Commission's proposed rules should . . . 
provide that Section 3(b)(2) will not be available for use by 
issuers that are blank check companies or shell companies and should 
define ``eligible issuer'' for purposes of Section 3(b)(2) to 
exclude specifically these types of issuers.''); WR Hambrecht + Co. 
Letter (suggesting limiting Regulation A issuers to operating 
companies, and prohibiting reliance on the exemption by blank check 
companies, SPACs, and shell companies); NASAA Letter 2 (indicating 
that offerings by blank check companies and SPACs are generally 
prohibited as fraudulent offerings under state securities laws).
---------------------------------------------------------------------------

    Issuers of Interests in Mineral Rights. Issuers of fractional 
undivided interests in oil or gas rights, or similar interests in other 
mineral rights, have historically been prohibited from relying on 
Regulation A. Instead, such issuers were permitted to conduct offerings 
in reliance on Regulation B.\90\ Regulation B was rescinded in 1996, 
however, as it was deemed no longer necessary in light of other 
exemptions available to these types of issuers, such as Section 4(a)(2) 
of the Securities Act and Regulation D.\91\ In light of the elimination 
of Regulation B and the current ability of such issuers to conduct 
offerings under, e.g., Rule 506 of Regulation D, we seek comment on 
whether such issuers should continue to be ineligible to rely on 
Regulation A, or should now be permitted to conduct offerings under 
Regulation A.
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    \90\ Regulation B was an exemption from registration under the 
Securities Act relating to fractional undivided interests in oil or 
gas. See 17 CFR 230.300-230.346 (1995).
    \91\ See SEC Release No. 33-7300 (May 31, 1996) [61 FR 30397].
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Request for Comment
    7. Should we amend Regulation A to make BDCs eligible to rely on 
it? Why or why not? Would it raise particular concerns about investor 
protection? If so, please explain.
    8. Would extension of Regulation A issuer eligibility to BDCs be 
inconsistent with the exemption's current prohibition on use by 
reporting companies? If so, should we limit the extension of Regulation 
A issuer eligibility to only non-Exchange Act reporting BDCs? If not, 
should we permit BDC ongoing reporting under the Exchange Act to 
satisfy their reporting obligations under Regulation A? \92\ If 
Regulation A eligibility were extended to BDCs, should other rules be 
amended to require additional disclosure about such issuers? If so, 
what specific additional disclosure should we require about BDCs?
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    \92\ See Section II.E. below for a discussion of an issuer's 
ongoing reporting obligations under proposed Regulation A.
---------------------------------------------------------------------------

    9. Should we extend Regulation A issuer eligibility to include 
blank check companies? Or would such an extension be inconsistent with 
the intent of Title IV of the JOBS Act, or the Commission's investor 
protection mandate? Why or why not?
    10. If all or some segment of blank check companies are permitted 
to rely on Regulation A, should we specifically exclude SPACs from 
being able to rely on the exemption? Why or why not?
    11. Should we amend Regulation A to make shell companies ineligible 
to rely on it? Or would the exclusion of shell companies from 
Regulation A be too broad, such that many small companies or startups 
would become ineligible to rely on the exemption?
    12. Should we limit access to Regulation A to issuers that qualify 
as ``operating companies''? If so, should we use the operating company 
definition described above, or some modified version? Please include a 
discussion of the effects on issuer access to the exemption that would 
result from using such a definition as a condition to issuer 
eligibility.
    13. Should we reconsider the continued prohibition on use of the 
Regulation A exemptive scheme by issuers of fractional undivided 
interest in oil or gas rights, or similar interests in other mineral 
rights? If so, please explain. Are there risks associated with this 
type of issuer that merit maintaining Regulation A's current 
prohibition on use by such issuers?
    14. Are there other limitations on issuer eligibility that we 
should consider? Alternatively, are there other types of issuers that 
could benefit from Regulation A, as proposed to be amended? Please 
provide data, if available, on the impact of imposing fewer, more, or 
different limitations on issuer eligibility than we have proposed.
c. Potential Limits on Issuer Size
    Regulation A currently limits the size of offerings that can be 
conducted under the exemption, but not the size of issuers eligible to 
rely on the exemption. We do not currently propose any issuer size-
based limitations and to date we have not received any public comment 
on this issue. While we appreciate that limitations on offering size 
may, to some extent, create a practical limitation on the ability of 
larger issuers to rely on Regulation A, we are soliciting comment on 
potentially limiting access to Regulation A on the basis of issuer 
size.
    We could, for example, look to the standards for ``smaller 
reporting companies'' and limit availability of the exemption to 
issuers with less than $75 million in public float, or, if unable to 
calculate the public float, less than $50 million in annual 
revenue.\93\ Alternatively, consistent with a recent recommendation by 
the Commission's Advisory Committee on Small and Emerging Companies 
(``Advisory Committee'') as to the appropriate size limits for 
``smaller reporting companies,'' \94\ we could limit access to 
Regulation A to companies with a public float of up to $250 million, 
or, if unable to calculate the public float, less than $100 million in 
annual revenue.\95\ Limiting access to the exemption on the basis of 
issuer size might more effectively target the segment of the market 
that Congress sought to assist by

[[Page 3935]]

enacting Title IV of the JOBS Act. We solicit comment below on whether 
the reference to ``public float'' would be an appropriate metric for 
the non-reporting companies using Regulation A.
---------------------------------------------------------------------------

    \93\ See 17 CFR 229.10(f).
    \94\ See SEC Rel. No. 33-9258 (Sept. 12, 2011) [76 FR 57769] 
(the Advisory Committee was formed to provide the Commission with 
advice on its rules, regulations, and policies as they relate to, 
among other things, capital raising by emerging privately-held small 
businesses and publicly traded companies with less than $250 million 
in public float), available at: https://www.sec.gov/rules/other/2011/33-9258.pdf.
    \95\ Recommendations Regarding Disclosure and Other Requirements 
for Smaller Public Companies, Securities and Exchange Commission, 
Advisory Committee on Small and Emerging Companies (February 1, 
2013), at 2-3 (the Advisory Committee recommendation was made in the 
context of potentially revising the definition of a smaller 
reporting company), available at: https://www.sec.gov/info/smallbus/acsec/acsec-recommendation-032113-smaller-public-co-ltr.pdf.
---------------------------------------------------------------------------

Request for Comment
    15. Should we limit availability of the Regulation A exemption to 
smaller issuers? Or does the $50 million annual offering limit 
effectively limit availability of the exemption to smaller issuers such 
that the Commission need not consider issuer size-based limitations? 
Why or why not? Should we use issuer size-based limitations to 
determine the imposition of certain requirements of proposed Regulation 
A such as the on-going disclosure requirements?
    16. If we include size-based issuer eligibility requirements, is a 
test based on the smaller reporting company public float and revenue 
thresholds appropriate for potential Regulation A issuers? Should we 
look to the higher thresholds recommended by the Advisory Committee, or 
other size thresholds? Alternatively, are there better metrics on which 
to determine issuer size-based eligibility (e.g., an assets test)? 
Would the concept of public float have any applicability to non-
reporting companies, or to repeat Regulation A issuers, which could 
develop a trading market for their securities?
d. Reporting Companies
    We do not propose to make Regulation A available to companies that 
are subject to the reporting requirements of Section 13 of the Exchange 
Act.\96\ Before the amendments to Regulation A adopted in 1992, 
reporting companies were permitted to conduct offerings in reliance on 
Regulation A, provided they were current in their public reporting.\97\ 
In 1992, however, the Commission determined that it was no longer 
necessary to permit reporting companies to rely on the exemption in 
light of the small business integrated registration and reporting 
system adopted at that time.\98\ Simplified registration and reporting 
forms under Regulation S-B were presumed to meet the capital raising 
needs of reporting small business issuers.\99\ As a result, reporting 
companies were excluded from the Regulation A exemptive scheme.\100\ 
While the forms and form of the disclosure rules that apply to smaller 
issuers has changed since that time, their content is substantially the 
same as in 1992.\101\
---------------------------------------------------------------------------

    \96\ As discussed in Section II.E.3. below, however, we solicit 
comment on whether we should permit Regulation A issuers to register 
under the Exchange Act by means of a simplified process under 
certain circumstances.
    \97\ 17 CFR 230.252(f) (1992).
    \98\ SEC Rel. No. 33-6949, at 36443.
    \99\ ``Small business issuers'' were defined as companies with 
annual revenues of less than $25 million whose voting stock does not 
have a public float of $25 million or more. Id., at 36446.
    \100\ SEC Rel. No. 33-6924 (March 20, 1992) [57 FR 9768], at 
9771.
    \101\ In 2007, the Commission rescinded Regulation S-B (enacted 
in tandem with the 1992 amendments to Regulation A, see SEC Rel. No. 
33-6949), eliminated the SB forms and the definition of ``small 
business issuer,'' and adopted the current smaller reporting company 
regime. See SEC Rel. No. 33-8876 (Dec. 19, 2007) [73 FR 934].
---------------------------------------------------------------------------

    The two public comments we have received to date on this issue take 
opposing positions on whether Regulation A should be available to 
reporting companies. One commenter suggested that reporting companies 
should be allowed to rely on the exemption because it would permit 
issuers to conduct a public offering of unrestricted securities that is 
less burdensome, quicker and less expensive than a public offering 
subject to full Securities Act registration (e.g., by permitting 
issuers to incorporate by reference Exchange Act reports into an 
abbreviated offering statement).\102\ This commenter suggested that 
reporting company access could be limited on the basis of the issuer's 
size.\103\ The other commenter suggested that reporting companies 
should not be permitted to rely on Regulation A, but companies should 
be permitted to become a reporting company by means of a Regulation A 
offering.\104\
---------------------------------------------------------------------------

    \102\ ABA Letter.
    \103\ Id. (suggesting reporting company access to the exemptive 
scheme should be limited to issuers with less than $1 billion in 
revenue).
    \104\ WR Hambrecht + Co. Letter.
---------------------------------------------------------------------------

    Given the availability of scaled disclosure requirements for 
Securities Act registration and Exchange Act reporting by smaller 
reporting companies, we continue to believe that reporting companies 
would not necessarily benefit from access to Regulation A, as proposed 
to be amended. We therefore do not propose to permit reporting 
companies to rely on the proposed rules. We are soliciting comment, 
however, on whether reporting companies should be permitted to rely on 
Regulation A.
Request for Comment
    17. Should we amend issuer eligibility requirements to permit 
reporting companies to rely on the Regulation A exemption? Why or why 
not? Would reporting companies find Regulation A a useful means of 
raising capital? How would such a change affect issuers, investors, 
financial intermediaries, and other market participants?
    18. If reporting companies were permitted to rely on Regulation A, 
should we impose limitations on their use of the exemption? For 
example, should reporting companies be eligible to use Regulation A 
only for a limited period of time, e.g., a three-year period after they 
begin Exchange Act reporting? Or should we limit reporting company 
access to the exemptive scheme on the basis of issuer size?
    19. If reporting companies are permitted to rely on Regulation A, 
should the availability of the exemption be conditioned on being 
current with Exchange Act reporting requirements,\105\ which would be 
consistent with ongoing use of Regulation A? \106\ Additionally, if 
reporting companies are permitted to rely on the exemption, should such 
companies be permitted to satisfy their disclosure requirements under 
Regulation A through incorporation by reference to their previous or 
ongoing reports filed under the Exchange Act? Or, as proposed with 
respect to issuers of Regulation A securities that register such 
securities under the Exchange Act, if reporting companies are permitted 
to rely on Regulation A, should the Regulation A reporting obligation 
for such issuers be suspended altogether for the duration of any 
obligation to file ongoing reports under the Exchange Act? \107\
---------------------------------------------------------------------------

    \105\ As noted above, before the 1992 amendments to Regulation 
A, reporting companies were permitted to conduct offerings in 
reliance on Regulation A, provided they were current in their 
Exchange Act reporting obligations. See former Rule 252(f), 17 CFR 
230.252(f) (1991).
    \106\ See discussion on proposed issuer eligibility requirements 
in Section II.B.1. above; see also proposed Rule 251(b)(7).
    \107\ See discussion in Section II.E. below.
---------------------------------------------------------------------------

2. Eligible Securities
    Section 3(b)(3) of the Securities Act limits the availability of 
any exemption enacted under Section 3(b)(2) to ``equity securities, 
debt securities, and debt securities convertible or exchangeable into 
equity interests, including any guarantees of such securities.'' \108\ 
On the basis of the statutory language, it is unclear which types of 
securities were meant to be excluded, although there is some evidence 
that suggests the exemption is meant for ordinary--and not exotic--
securities.\109\ We solicit

[[Page 3936]]

comment on the types of securities that should be excluded, if any, 
consistent with the statutory mandate.
---------------------------------------------------------------------------

    \108\ 15 U.S.C. 77c(b)(3).
    \109\ Small Company Capital Formation Act of 2011: Markup of 
H.R. 1070 before the H. Comm. on Fin. Serv. for the 112th Congress, 
157 Cong. Rec. 89, (daily ed. June 21, 2011), available at: https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=247453.
---------------------------------------------------------------------------

    We propose to limit the types of securities eligible for sale under 
both Tier 1 and Tier 2 of Regulation A to the specifically enumerated 
list of securities in Section 3(b)(3), with the exception of asset-
backed securities. Asset-backed securities are subject to the 
provisions of Regulation AB, an appropriately-tailored regulatory 
regime enacted to cover such securities that was not in effect when 
Regulation A was last updated in 1992.\110\ We do not believe that 
Title IV of the JOBS Act was enacted to facilitate the issuance of 
asset-backed securities, nor do we believe that Regulation A's 
disclosure requirements are suitable for offerings of such securities. 
We therefore propose to exclude asset-backed securities from the list 
of eligible securities under Regulation A.
---------------------------------------------------------------------------

    \110\ Regulation AB, 17 CFR 229.1100 et seq., was enacted in 
2005. See SEC Rel. No. 33-8518 (Dec. 22, 2004). Asset-backed 
securities are defined in Rule 1101(c)(1) to generally mean a 
security that is primarily serviced by the cash flows of a discrete 
pool of receivables or other financial asset, either fixed or 
revolving, that by their terms convert into cash within a finite 
time period.
---------------------------------------------------------------------------

Request for Comment
    20. As proposed, should we exclude asset-backed securities from the 
list of eligible securities under Regulation A? Why or why not? If 
asset-backed securities were eligible to be sold under Regulation A, 
what changes would be required to Form 1-A and the other proposed 
Regulation A forms to accommodate these issuers?
    21. Should any additional types of securities be specifically 
excluded from offerings conducted in reliance on Regulation A? If so, 
what types of securities, and why? Should the rules provide more 
specificity as to the types of securities that are included or excluded 
from Regulation A offerings? What effects could excluding specified 
types of securities from Regulation A offerings have on issuers, 
investors, and other market participants?
3. Offering Limitations and Secondary Sales
    Regulation A currently permits offerings of up to $5 million of 
securities in any twelve-month period, including up to $1.5 million of 
securities offered by selling securityholders.\111\ Section 3(b)(2)(A) 
provides that the aggregate offering amount of all securities offered 
and sold within the prior twelve-months in reliance on Section 3(b)(2) 
shall not exceed $50 million. As noted above, we propose to amend 
Regulation A to create two tiers of requirements: Tier 1, for offerings 
of up to $5 million of securities in a twelve-month period; and Tier 2, 
for offerings of up to $50 million of securities in a twelve-month 
period.\112\ Proposed Tier 1 would reflect the same offering size 
limitations that currently apply under Regulation A. Proposed Tier 2 
would reflect the Section 3(b)(2) offering size limitation.\113\ We 
believe issuers raising smaller amounts of capital may benefit from a 
tiered system that affords two options for capital formation based on 
differing disclosure and other requirements.
---------------------------------------------------------------------------

    \111\ Rule 251(b), 17 CFR 230.251(b).
    \112\ If the offering included securities that were convertible, 
exercisable or exchangeable for other securities, the offer and sale 
of the underlying securities would also be required to be qualified 
and the aggregate offering price would include the aggregate 
conversion, exercise, or exchange price of such securities, 
regardless of when they become convertible, exercisable or 
exchangeable. This differs from the approach taken in registered 
offerings that involve similar securities, but we believe would 
simplify compliance.
    \113\ Offerings of up to $5 million could be conducted under 
either Tier 1 or Tier 2.
---------------------------------------------------------------------------

    We believe sales by selling securityholders to be an important part 
of the exemptive scheme and therefore propose to preserve in Tier 1 
Regulation A's current limitation of no more than $1.5 million of 
securities offered by selling securityholders, and permit Tier 2 
offerings to include up to $15 million of securities offered by selling 
securityholders. Sales by selling securityholders have been permissible 
under Regulation A in one form or another since 1940.\114\ Initially, 
sales by an issuer and sales by a ``controlling stockholder'' were 
treated as separate categories of exempt transactions; the offering 
amount of each respective category was not aggregated for purposes of 
determining the maximum offering amount available under the 
exemption.\115\ Later, Regulation A contained a single offering ceiling 
for all sales of an issuer's securities during a twelve-month period, 
while each category of seller had a different permissible maximum 
selling amount.\116\ In 1972, the Commission returned to the concept of 
separate categories of seller transactions, each of which contained an 
independent offering ceiling.\117\ For example, at that time, Rule 
254(a) required issuer and affiliate sales in any twelve-month period 
to be aggregated against the then-current $500,000 offering ceiling 
with any one affiliate being limited to $100,000 in offers in any 
twelve-month period.\118\ Sales by non-affiliates were excluded from 
the $500,000 offering ceiling, and any one such seller was permitted to 
offer up to $100,000, but, in the aggregate with other such non-issuer/
affiliate sellers in an amount of no more than $300,000 in any twelve-
month period.\119\ In 1992, the Commission returned to a single 
offering ceiling for all sales of an issuer's securities in a twelve-
month period, and limited all secondary sales to its current $1.5 
million limit (representing 30% of the maximum offering limit permitted 
in a primary offering), aggregated with issuer sales during the same 
period for a total of up to $5 million.\120\
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    \114\ SEC Rel. No. 33-2410 (December 3, 1940) [5 FR 4749].
    \115\ Id.
    \116\ See, e.g., Rule 254(a), 17 CFR 230.254(a) (1956), cited in 
SEC Rel. No. 33-3663 (July 31, 1956) [21 FR 5739], at 5741. 
Additionally, at this time, secondary sales by certain newly 
organized or unproven entities were prohibited. Id., at 5739.
    \117\ See SEC Rel. No. 33-5225 (Jan 10, 1972) [37 FR 599].
    \118\ Id.
    \119\ Id.
    \120\ See SEC Rel. No. 33-6949, at 36443; see also Rule 251(b).
---------------------------------------------------------------------------

    Two commenters recommended permitting secondary sales by selling 
securityholders in the expanded exemptive scheme.\121\ One such 
commenter suggested that removing the limitation on the amount of 
securities available for resale by selling securityholders would 
decrease the cost of capital for smaller issuers and encourage greater 
investment in companies by increasing a potential investors liquidity 
options.\122\ The other suggested adopting a limitation similar to the 
current Regulation A provision in order to encourage investment in 
companies and improve the liquidity options of investors.\123\ Both 
commenters suggested removing current restrictions on affiliate resales 
in Rule 251(b),\124\ which prohibits such sales when the issuer has not 
had net income from continuing operations in at least one of its last 
two fiscal years.
---------------------------------------------------------------------------

    \121\ ABA Letter; WR Hambrecht + Co. Letter.
    \122\ ABA Letter.
    \123\ WR Hambrecht + Co. Letter.
    \124\ 17 CFR 230.251(b).
---------------------------------------------------------------------------

    Another commenter, however, urged the Commission to prohibit 
selling securityholders, such as venture capital and private equity 
firms, from relying on the expanded exemption.\125\ In this commenter's 
view, superior negotiating power at the time of such parties' initial 
investment and greater access to information about the issuer should 
disqualify such parties from the

[[Page 3937]]

exemption because, while maintaining such advantages, they may seek to 
offload their investment on the general public (and, sometimes against 
the wishes of the issuer itself).\126\ This commenter further argued 
that selling securityholder offerings do not provide capital to the 
issuer or contribute to job creation.\127\ Alternatively, the commenter 
suggested that if selling securityholders are permitted to rely on the 
exemption, the Commission should require approval of a majority of the 
issuer's independent directors as a pre-condition to any sales.\128\
---------------------------------------------------------------------------

    \125\ NASAA Letter 2.
    \126\ Id.
    \127\ Id.
    \128\ Id.
---------------------------------------------------------------------------

    Selling securityholder access to Regulation A has been a 
historically important feature of the exemptive scheme. We believe it 
would continue to be an important part of Regulation A, as proposed to 
be amended. Allowing selling securityholders access to avenues for 
liquidity should encourage investment in companies seeking to raise 
capital.\129\ Thus, we believe that allowing selling securityholders to 
sell securities under Regulation A would facilitate capital formation 
and be consistent with Title IV of the JOBS Act.
---------------------------------------------------------------------------

    \129\ See discussion in Section IV.B.2.c. below.
---------------------------------------------------------------------------

    We do not propose to amend Regulation A to eliminate the ability of 
selling securityholders to conduct secondary offerings.\130\ Consistent 
with the existing provisions of Regulation A, we propose to permit 
sales by selling securityholders up to 30% of the maximum amount 
permitted under the applicable offering limitation ($1.5 million in any 
twelve-month period for Tier 1 and $15 million in any twelve-month 
period for Tier 2). Sales by selling securityholders under either Tier 
would be aggregated with sales of Regulation A securities by the issuer 
and other selling securityholders for purposes of calculating the 
maximum permissible amount of securities that may be sold during any 
twelve-month period.
---------------------------------------------------------------------------

    \130\ See proposed Rule 251(a).
---------------------------------------------------------------------------

    In addition, we propose to eliminate the last sentence of Rule 
251(b), which prohibits affiliate resales unless the issuer has had net 
income from continuing operations in at least one of its last two 
fiscal years. This provision was originally adopted in Regulation A in 
1956 to prohibit secondary sales of securities of certain new companies 
and companies without net income in at least one of their last two 
fiscal years\131\ in order ``to correct . . . the threat of the `bail-
out' by the promoters and insiders of their securities holdings.'' 
\132\ When the Commission amended Regulation A in 1992, it maintained 
these restrictions in modified form, by limiting them to affiliate 
resales where the issuer had no net income from continuing operations 
in at least one of its last two fiscal years.\133\
---------------------------------------------------------------------------

    \131\ See SEC Rel. No. 33-3663, at 5739.
    \132\ SEC Ann. Rep. 29 (1956).
    \133\ See SEC Rel. No. 33-6924, at fn. 59; see also Rule 251(b).
---------------------------------------------------------------------------

    While one commenter has expressed concern that affiliates of an 
issuer could use an informational advantage to sell securities in 
unsuccessful ventures at the expense of the investing public,\134\ we 
are not persuaded that the absence of net income is necessarily a 
meaningful indicator of enhanced risk that this could occur. Further, 
the Commission's current disclosure review and qualification processes 
and enforcement programs are significantly more sophisticated and 
robust than they were in the 1950s. In addition, today's proposed rules 
for Regulation A include revised ``bad actor'' disqualification 
provisions and additional issuer eligibility requirements aimed at 
limiting the market participants that have access to the 
exemption.\135\
---------------------------------------------------------------------------

    \134\ NASAA Letter 2.
    \135\ See discussions in Section II.G. (Bad Actor 
Disqualification) below, and Section II.B.1. (Eligible Issuers) 
above.
---------------------------------------------------------------------------

    We also do not believe that a focus on issuers that have not had 
net income from continuing operations in at least one of its last two 
fiscal years would be appropriately tailored for startup and early 
stage companies that may devote large portions of their resources to 
startup expenses and research and development.\136\ In this market, net 
income from continuing operations may not be a material data point in 
the evaluation of an investment opportunity.\137\ In addition, as 
mentioned above, some commenters have argued that limiting the 
liquidity options of selling securityholders, including sales by 
affiliates of the issuer, may discourage investment in the issuer in 
the first instance and increase the issuer's cost of capital.\138\
---------------------------------------------------------------------------

    \136\ See ABA Letter; WR Hambrecht + Co. Letter.
    \137\ See ECTF Report.
    \138\ See ABA Letter; WR Hambrecht + Co. Letter.
---------------------------------------------------------------------------

    On balance, we believe that investor protections provided by 
Regulation A, as proposed to be amended, support the elimination of the 
current restriction on affiliate resales, particularly in light of the 
potential benefits of permitting secondary sales. We therefore do not 
propose to carry this provision forward in amended Regulation A.
Request for Comment
    22. Should we consider different annual offering thresholds for 
selling securityholder sales than the proposed $1.5 million limitation 
for Tier 1 offerings and $15 million limitation for Tier 2 offerings? 
Why or why not? If so, should sales in reliance on Regulation A by 
selling securityholders be permitted up to the annual offering ceiling 
for each respective Tier, or limited at a different threshold? Should 
we limit sales by selling securityholders to a percentage of the total 
amount offered in conjunction with a primary offering of Regulation A 
securities over a given period of time, or to Regulation A offerings 
where primary securities are offered? Alternatively, should we prohibit 
all sales by selling securityholders in Regulation A? Why or why not?
    23. Should the rules treat sales by non-affiliate selling 
securityholders as a separate category of exempt transaction, as was 
once the case under Regulation A, and not aggregate such sales with 
issuer sales for purposes of determining the maximum offering amount 
available under the exemption? If so, should non-affiliate resales be 
permitted up to the applicable annual offering ceiling, or limited at a 
different threshold?
    24. If selling securityholders are permitted to rely on Regulation 
A, should we impose eligibility requirements or other limitations on 
those securityholders? For example, should we require selling 
securityholders to have owned the securities offered for resale under 
Regulation A for a specified period of time before resale? If so, why 
and what should the relevant holding period be (e.g. six months or 
twelve months before initial submission or filing of the offering 
statement)? If the rules impose a holding period before securities can 
be offered for resale under Regulation A, should the holding period 
only apply to affiliates? Or to all selling securityholders?
    25. Does the existing Rule 251(b) requirement that an issuer have 
net income from continuing operations in each of its last two fiscal 
years, in order for an affiliate to be able to conduct a secondary sale 
in reliance on Regulation A, have continuing validity, and should we 
therefore retain this provision? Why or why not? Please explain.
4. Investment Limitation
    Regulation A does not currently limit the amount of securities an 
investor can purchase in a qualified Regulation A offering. We 
recognize, however, that with the increased annual offering

[[Page 3938]]

limitation provided in Section 3(b)(2) comes a risk of commensurately 
increased investor losses. To address that risk, Title IV of the JOBS 
Act mandates certain investor protections\139\ and suggests that the 
Commission consider others as part of its Section 3(b)(2) 
rulemaking.\140\ Additionally, we believe that Congress recognized in 
Section 3(b)(2) that certain other investor protections--not directly 
contemplated by Title IV of the JOBS Act--may be necessary in the 
revised regulation. To that end, Section 3(b)(2)(G) indicates that the 
Commission may include in the expanded exemption ``such other terms, 
conditions, or requirements . . . necessary in the public interest and 
for the protection of investors . . . .''
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    \139\ See Section 3(b)(2)(D) (expressly providing for Section 
12(a)(2) liability for any person offering or selling Section 
3(b)(2) securities); Section 3(b)(2)(F) (requiring issuers to file 
audited financial statements with the Commission annually).
    \140\ See Section 3(b)(2)(G) (inviting the Commission to 
consider, among other things, requiring audited financial statements 
in the offering statement and implementing bad actor 
disqualification provisions); Section 3(b)(4) (inviting the 
Commission to consider implementing ongoing reporting requirements).
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    Consistent with Section 3(b)(2)(G) and the Commission's investor 
protection mandate, in addition to the disclosure, reporting and other 
requirements of Regulation A, we propose to limit the amount of 
securities investors can purchase in a Tier 2 offering to no more than 
10% of the greater of their annual income and their net worth.\141\ For 
this purpose, annual income and net worth would be calculated for 
individual purchasers as provided in the accredited investor definition 
under Rule 501 of Regulation D.\142\
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    \141\ If securities that are convertible, exercisable or 
exchangeable for other securities are being purchased by an 
investor, the proposed investment limitation would include the 
aggregate conversion, exercise, or exchange price of such 
securities, in addition to the purchase price. This treatment 
corresponds to the treatment of such securities for purposes of 
calculating the offering cap.
    \142\ 17 CFR 230.501.
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    We believe that this proposed new requirement could usefully 
augment the other requirements for Tier 2 offerings. Limiting the 
amount of securities that a potential investor could invest in a Tier 2 
offering to 10% of the greater of the investor's annual income and net 
worth would help to mitigate any concern that an investor may not be 
able to absorb the potential loss of the investment.\143\ The 
additional investor protection afforded by such a loss limitation is 
similar to the provisions for our recently proposed rules for 
securities-based crowdfunding transactions under Section 4(a)(6) of the 
Securities Act.\144\ We believe that an investment limitation for Tier 
2 offerings, coupled with the additional investor protection 
requirements discussed above and more fully below, could protect 
investors in Tier 2 offerings in a similar way as the proposed rules 
for securities-based crowdfunding transactions.
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    \143\ An underwriter in a firm commitment underwritten 
Regulation A offering, or participating broker-dealer that is 
involved in stabilization activities with respect to an offering of 
Regulation A securities would not be considered an investor that is 
subject to the proposed investment limitations.
    \144\ See Section 4(a)(6)(ii) of the Securities Act, 15 U.S.C. 
77d(a)(6)(ii), and SEC Rel. No. 33-9470. In Section 4(a)(6), 
Congress outlined a new exemption for securities-based crowdfunding 
transactions intended to take advantage of the internet and social 
media to facilitate capital-raising by the general public, or crowd. 
In that provision, Congress established limitations on the amount of 
securities an investor could acquire through this type of offering, 
as well as a variety of other investor protections, including 
disclosure requirements and the use of regulated intermediaries. 
See, generally, the requirements for issuers and intermediaries set 
forth in Title III of the JOBS Act, Public Law 112-106, 126 Stat. 
306, Sec. Sec.  301-305.
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    Under the proposal, issuers would be required to make investors 
aware of the investment limitations,\145\ but would otherwise be able 
to rely on an investor's representation of compliance with the proposed 
investment limitation unless the issuer knew, at the time of sale, that 
any such representation was untrue. We are mindful of the privacy 
issues and practical difficulties associated with verifying individual 
income and net worth, and do not therefore propose to require investors 
to disclose personal information to issuers in order to verify 
compliance with the investment limitation.\146\ We are, however, 
soliciting comment below on whether verification of the income and net 
worth limit should be required.
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    \145\ See cover page of the offering circular of proposed Form 
1-A.
    \146\ Investors may, for example, be reluctant to provide 
issuers with their Internal Revenue Service (IRS) Form W-2 (Wage and 
Tax Statement) in order to verify compliance with the proposed 
annual income investment limitation or to disclose documents, such 
as bank or investment account statements, that would verify net 
worth. Relatedly, issuers may have difficulty ascertaining the 
veracity or comprehensiveness of any documentation provided to them 
by investors. Cf. SEC Rel. No. 33-9415 (July 10, 2013) [78 FR 4471], 
at II.B (discussing verification of accredited investor status for 
private offerings under Rule 506(c) of Regulation D).
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Request for Comment
    26. As proposed, should we impose investment limitations on 
investors in Tier 2 offerings? Or does Regulation A, as proposed to be 
amended, have sufficient investor protections for Tier 2 offerings, 
such that an investment limitation for investors is not necessary? Why 
or why not?
    27. Are the proposed investment limitations appropriate in the 
context of a Tier 2 offering? Why or why not? What impact would the 
proposed investment limitation restriction have on issuers and 
investors? Should the proposed limitations on investment not apply to 
accredited investors? Are there other investment limitation criteria we 
should consider? For example, should we impose a limitation based on a 
percentage of total investment assets in addition to, or instead of, 
annual income or net worth?
    28. Alternatively, should the investment limitation be higher or 
lower than the 10% proposed? If so, what percentage and why would that 
percentage be appropriate? Would the proposed investment limitation be 
appropriate for investors that are entities rather than natural 
persons? Should we establish a minimum annual investment amount, 
similar to $2,000 annual investment that would be permitted under our 
proposed crowdfunding rules, that all investors could make in 
Regulation A offerings irrespective of their income and net worth? Why 
or why not?
    29. Should the proposed investment limitation apply on a per 
offering basis, as proposed? Or should the limitation apply on an 
aggregated basis, across all investments in Regulation A securities? 
Why or why not? If the limitation were to apply on an aggregated basis, 
how should the limitation apply? Should we limit the provision so that 
only Regulation A offerings close in time (for example, within a 
twelve-month period), or otherwise related, would be aggregated in the 
10% calculation?
    30. Should we permit issuers, as proposed, to rely on an investor's 
representation of compliance with the 10% investment limitation, unless 
the issuer has knowledge that any such representation was untrue? Why 
or why not? If not, what level of inquiry or verification should 
issuers have to perform in order to ensure compliance with the 
requirement? Should the issuer and its intermediaries be required to 
have a reasonable belief that the investor certification can be relied 
upon (e.g., should they be required to conduct further investigation if 
they have reason to believe that the certification is untrue)? Why or 
why not? If we permit issuers to rely on an investor's representation 
regarding compliance with the 10% investment limitation, as proposed, 
should we require the representation to be made in a particular form, 
such as an investor questionnaire? Should we require the issuer to 
provide disclosure or educational materials in connection with the 
representation?

[[Page 3939]]

5. Integration
    Existing Rule 251(c) of Regulation A governs the integration of 
Regulation A offerings with other offerings.\147\ This provision 
provides that offerings under Regulation A are not to be integrated 
with any of the following:
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    \147\ 17 CFR 230.251(c). The integration doctrine seeks to 
prevent an issuer from improperly avoiding registration by 
artificially dividing a single offering into multiple offerings such 
that Securities Act exemptions would apply to multiple offerings 
that would not be available for the combined offering.
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     prior offers or sales of securities; or
     subsequent offers and sales of securities that are:
     registered under the Securities Act, except as provided in 
Rule 254(d); \148\
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    \148\ Rule 254(d) provides a safe harbor for an issuer that has 
a bona fide change of intention and decides to register an offering 
under the Securities Act after soliciting interest in a Regulation A 
offering, but without having filed the related offering statement. 
To take advantage of the safe harbor, such issuers must wait at 
least 30 calendar days from the date of the last solicitation of 
interest before filing a registration statement for the offering 
with the Commission. 17 CFR 230.254(d). Under existing Regulation A, 
issuers are not allowed to solicit interest in an offering after 
filing the offering statement with the Commission. See discussion in 
Section II.D. below.
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     made in reliance on Rule 701 under the Securities Act;
     made pursuant to an employee benefit plan;
     made in reliance on Regulation S; or
     made more than six months after completion of the 
Regulation A offering.
    We believe Regulation A's existing integration safe harbors provide 
issuers, particularly smaller issuers whose capital needs often change, 
with valuable certainty as to the contours of a given offering and its 
eligibility for an exemption from Securities Act registration. To date, 
the public comment we received on integration suggested we maintain 
Regulation A's existing integration provisions.\149\ We propose, 
subject to certain exceptions discussed below, to generally preserve 
the existing Regulation A integration safe harbors.\150\ We also 
propose to provide additional guidance on the potential integration of 
offerings conducted concurrently with, or close in time after, a 
Regulation A offering.
---------------------------------------------------------------------------

    \149\ ABA Letter.
    \150\ Existing Rule 254(d) of Regulation A would become proposed 
Rule 255(e).
---------------------------------------------------------------------------

    The safe harbor from integration provided by existing Rule 251(c) 
expressly provides that any offer or sale made in reliance on 
Regulation A will not be subject to integration with any other offer or 
sale made either before the commencement of, or more than six months 
after, the completion of the Regulation A offering.\151\ In other 
words, for transactions that fall within the provisions of existing 
Rule 251(c), issuers do not have to conduct an independent integration 
analysis under the provisions of, for example, another rule-based 
exemption in order to determine whether, under the terms of that rule, 
the two offerings would be treated as one for purposes of qualifying 
for an exemption. This bright-line rule assists issuers in analyzing 
certain transactions, but does not address the issue of potential 
offers or sales that occur concurrently with, or close in time after, a 
Regulation A offering.
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    \151\ Contra Rule 502(a) of Regulation D, 17 CFR 230.502(a), 
which states that offers and sales made more than six months before 
the start, or after the completion, of a Regulation D offering will 
not be considered part of that Regulation D offering.
---------------------------------------------------------------------------

    Currently, the note to Rule 251(c) indicates that, if the 
provisions of the safe harbor are unavailable, offers and sales may 
still not be integrated with the Regulation A offering depending on the 
particular facts and circumstances, so there is no presumption that 
offerings outside the integration safe harbors should be 
integrated.\152\ Additionally, we believe that an offering made in 
reliance on Regulation A should not be integrated with another exempt 
offering made by the issuer, provided that each offering complies with 
the requirements of the exemption that is being relied upon for the 
particular offering.\153\ For example, an issuer conducting a 
concurrent exempt offering for which general solicitation is not 
permitted would need to be satisfied that purchasers in that offering 
were not solicited by means of the offering made in reliance on 
Regulation A, including without limitation any ``testing the waters'' 
communications.\154\ Alternatively, an issuer conducting a concurrent 
exempt offering for which general solicitation is permitted could not 
include in any such general solicitation an advertisement of the terms 
of an offering made in reliance on Regulation A that would not be 
permitted under Regulation A. An issuer conducting, for example, a 
concurrent Rule 506(c) offering could not include in its Rule 506(c) 
general solicitation materials an advertisement of a concurrent 
Regulation A offering, unless that advertisement also included the 
necessary legends for, and otherwise complied with, Regulation A.\155\
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    \152\ The note cites to the guidance provided in SEC Rel. No. 
33-4552 (Nov. 6, 1962) [27 FR 11316], which states the Commission's 
traditional five-factor test for integration.
    \153\ We recently proposed a similar approach to integration in 
the context of offerings under the proposed provisions for 
securities-based crowdfunding transactions pursuant to Title III of 
the JOBS Act. See SEC Rel. No. 33-9470, text accompanying fn. 33-34.
    \154\ For a concurrent offering under Rule 506(b), an issuer 
would have to conclude that purchasers in the Rule 506(b) offering 
were not solicited by means of a Regulation A general solicitation. 
For example, the issuer may have had a preexisting substantive 
relationship with such purchasers. Otherwise, the solicitation 
conducted in connection with the Regulation A offering may preclude 
reliance on Rule 506(b). See also SEC Rel. No. 33-8828 (Aug. 3, 
2007) [72 FR 45116].
    \155\ See discussion in Section II.D. below.
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    In addition to this approach to integration, we propose to add to 
the list of safe harbor provisions subsequent offers or sales of 
securities made pursuant to the proposed rules for securities-based 
crowdfunding transactions under Title III of the JOBS Act. Given the 
unique capital formation method available to issuers and investors in 
the proposed rules for securities-based crowdfunding transactions and 
the small dollar amounts involved, we do not propose to integrate 
offers or sales of such securities that occur subsequent to the 
commencement of any offers or sales of securities made in reliance on 
Regulation A.\156\
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    \156\ See SEC Rel. No. 33-9470. An issuer contemplating a 
securities-based crowdfunding transaction pursuant to Section 
4(a)(6) subsequent to any offers or sales conducted in reliance on 
Regulation A, as proposed to be amended, should look to the proposed 
rules for securities-based crowdfunding transactions to ensure 
compliance with the advertising provisions of that proposed 
exemption.
---------------------------------------------------------------------------

    We further propose to amend Rule 254(d) to provide that where an 
issuer decides to register an offering after soliciting interest in a 
contemplated, but abandoned, Regulation A offering, any offers made 
pursuant to Regulation A would not be subject to integration with the 
registered offering, unless the issuer engaged in solicitations of 
interest in reliance on Regulation A to persons other than qualified 
institutional buyers (``QIBs'') and institutional accredited investors 
permitted by Section 5(d) \157\ of the Securities Act.\158\ An issuer 
(and any underwriter, broker, dealer, or agent used by the issuer in 
connection with the proposed offering) soliciting interest in a 
Regulation A offering to persons other than QIBs and institutional 
accredited investors must wait at least 30 calendar days between the 
last such solicitation of interest in the Regulation A offering and the 
filing of the registration statement with the Commission.\159\ We 
believe these updated provisions are necessary, given the broad 
permissible target audience of Regulation A solicitations, the proposed 
expanded use of solicitation materials in Regulation A discussed more 
fully in Section II.D. below, and the addition of

[[Page 3940]]

similar provisions for registered offerings under Section 5(d).
---------------------------------------------------------------------------

    \157\ 15 U.S.C. 77e(d).
    \158\ See proposed Rule 255(e).
    \159\ Id.
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Request for Comment
    31. As proposed, should we adopt an integration safe harbor in 
Regulation A that largely follows the existing provisions of Rule 
251(c), while adding the exemption provided by the proposed JOBS Act 
crowdfunding rules into the list of safe harbors for subsequent offers 
or sales? Why or why not? Should we alter or add additional provisions 
to the list of safe harbors for subsequent offers or sales? If so, 
please provide supporting analysis for your suggestions. For example, 
should we reduce the six-month period in Rule 251(c)(2)(v)?
    32. Should we amend the provisions of Rule 254(d), as 
proposed,\160\ to take into account the expanded use of solicitation 
materials in Regulation A, the ability of emerging growth companies to 
solicit interest from certain types of investors under Title I of the 
JOBS Act, and the potential effect that an abandoned Regulation A 
offering, in which an issuer solicited interest from potential 
investors, may have on that issuer's ability to immediately thereafter 
register the offering under the Securities Act? Why or why not? Are 
there any alternative approaches for the interaction of these two 
provisions in the context of an abandoned Regulation A offering 
followed immediately thereafter by a registered offering? If so, please 
explain.
---------------------------------------------------------------------------

    \160\ See proposed Rule 255(e).
---------------------------------------------------------------------------

6. Treatment Under Section 12(g)
    Exchange Act Section 12(g) requires, among other things, that an 
issuer with total assets exceeding $10,000,000 and a class of equity 
securities held of record by either 2,000 persons, or 500 persons who 
are not accredited investors, register such class of securities with 
the Commission.\161\ Unlike Title III of the JOBS Act, which includes a 
provision regarding the treatment under Section 12(g) of securities 
issued in securities-based crowdfunding transactions pursuant to 
Section 4(a)(6) of the Securities Act, Title IV does not include a 
provision regarding how Regulation A issuers should be treated under 
Section 12(g).
---------------------------------------------------------------------------

    \161\ 15 U.S.C. 78l(g).
---------------------------------------------------------------------------

    Section 12(g) was originally enacted by Congress as a way to ensure 
that investors in over-the-counter securities about which there was 
little or no information, but which had a significant shareholder base, 
were provided with ongoing information about their investment.\162\ As 
discussed more fully below, Regulation A, as proposed to be amended, 
would require issuers that conducted Tier 2 offerings to provide 
ongoing information to their investors, albeit somewhat less than is 
required of an Exchange Act reporting company. If securities issued 
under Regulation A were to be excluded for purposes of determining 
record holders under Section 12(g), a company may never become subject 
to mandatory Exchange Act reporting as a result of selling securities 
under Regulation A, regardless of how many shareholders it has or 
whether such shareholders were accredited investors. Alternatively, if 
Regulation A issuers that conducted Tier 2 offerings were current in 
their ongoing reporting were exempt from registration under Section 
12(g), or their obligations to register were suspended, issuers would 
have the ability to remain in the Regulation A reporting regime on a 
long-term basis, irrespective of growth in their shareholder base.
---------------------------------------------------------------------------

    \162\ See, generally, Report of the Special Study of Securities 
Markets of the Securities and Exchange Commission, House Document 
No. 95, House Committee on Interstate and Foreign Commerce, 88th 
Cong., 1st Sess. (1963), at 60-62.
---------------------------------------------------------------------------

    One commenter suggested we provide a conditional exemption from 
mandatory Exchange Act reporting under Section 12(g) for emerging 
growth companies that have conducted a Regulation A offering and comply 
with its ongoing reporting requirements; otherwise, emerging growth 
companies that may cross the Section 12(g) asset and record holder 
thresholds following a Regulation A offering would be disincentivized 
from relying on the exemption.\163\ In the commenter's view, the 
exemption from Section 12(g) could be temporary and lapse once the 
issuer obtains a non-affiliate market capitalization of $250 
million.\164\
---------------------------------------------------------------------------

    \163\ Letter from Michael L. Zuppone, Paul Hastings LLP, Nov. 
26, 2013 (``Paul Hastings Letter'').
    \164\ The commenter suggested $250 million of non-affiliate 
market capitalization to accord with the threshold the Commission 
set for defining the mandate of its Advisory Committee on Small and 
Emerging Companies. See fn. 94 above.
---------------------------------------------------------------------------

    We believe, however, that the Section 12(g) record holder threshold 
continues to provide an important baseline, above which issuers should 
be subject to the more expansive disclosure and compliance obligations 
of the Exchange Act. We are not proposing to exempt Regulation A 
securities from the requirements of Section 12(g) or to provide that 
issuers that are current in their Regulation A ongoing reporting under 
Tier 2 would be exempt from Section 12(g) or have their obligations to 
register under Section 12(g) suspended. We do, however, solicit comment 
as to whether a Section 12(g) exemption or suspension should be 
provided.
Request for Comment
    33. Should Regulation A securities be exempt from Section 12(g), 
either conditionally or otherwise? Would an exemption from Section 
12(g) encourage Regulation A issuers to continue ongoing reporting 
under the proposed rules for Tier 2 offerings, where such issuers might 
otherwise cease reporting? \165\
---------------------------------------------------------------------------

    \165\ See discussion in Section IV.B.2.f. below.
---------------------------------------------------------------------------

    34. Does Section 12(g) continue to serve as a valuable proxy for 
market interest in the equity securities of an issuer issued pursuant 
to Regulation A, such that an issuer that crosses its asset and record 
holder thresholds should become subject to mandatory Exchange Act 
reporting? Why or why not?
7. Liability Under Section 12(a)(2)
    The liability provisions of Section 12(a)(2) of the Securities Act 
apply to any public offering of securities by use of an oral 
communication or prospectus that includes a material misleading 
statement or material misstatement of fact.\166\ Section 3(b)(2)(D) of 
the Securities Act provides that ``[t]he civil liability provision in 
section 12(a)(2) [of the Securities Act] shall apply to any person 
offering or selling [Regulation A] securities.'' Therefore, consistent 
with current Regulation A,\167\ sellers of Regulation A securities 
would have liability under Section 12(a)(2) to investors for any offer 
or sale by means of an offering circular or an oral communication that 
includes a material misleading statement or material misstatement of 
fact.\168\
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    \166\ 15 U.S.C. 77l(a)(2).
    \167\ See SEC Rel. No. 33-6924, at fn. 57.
    \168\ Regulation A prohibits sales until the Form 1-A has been 
qualified. See Rule 251(d)(2), 17 CFR 230.251(d)(2); cf. Securities 
Offering Reform, SEC Rel. No. 33-8591, at 173 et seq. (discussing 
Section 12(a)(2) liability in the context of information conveyed at 
the time of sale).
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C. Offering Statement

    Section 3(b)(2)(G)(i) gives the Commission discretion to require an 
offering statement in such form and with such content as it determines 
necessary in the public interest and for the protection of investors. 
The provision permits electronic filing of offering statements, and 
provides a non-exhaustive list of potential content that may be 
required in the offering statement, including audited financial 
statements, a description of the issuer's business operations, 
financial condition, corporate governance principles, use of

[[Page 3941]]

investor funds, and other appropriate matters.
1. Electronic Filing; Delivery Requirements
    Currently, Regulation A offering statements are filed with the 
Commission in paper form.\169\ The paper filing process does not align 
with the Commission's electronic filing requirements for issuers in 
registered offerings \170\ or notices in connection with offerings 
under Regulation D.\171\ The Commission has required electronic filing 
of registration statements since 1996,\172\ and of Form D filings since 
2009.\173\ Requiring offering statements to be filed electronically 
rather than on paper may reduce potential logistical problems and 
delays that can occur with the receipt, processing and dissemination of 
paper filings by the Commission for issuers seeking to raise capital 
under Regulation A. Electronic filing would facilitate a more efficient 
review process for such filings by Commission staff by allowing the 
offering and related materials, once submitted or filed, to be rapidly 
processed and disseminated internally. In addition, paper submissions--
while publicly available in a technical sense--are not widely or 
immediately accessible. Electronic filing of offering statements could 
facilitate investor and market access to the information contained in 
offering statements in a more efficient way than paper filings do.
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    \169\ 17 CFR 232.101(c)(6). There are no filing fees associated 
with filing a Form 1-A with the Commission. See Section 6(b) of the 
Securities Act, 15 U.S.C. 77f(b) (permitting the recovery of costs 
of services to the government only with respect to registered 
offerings).
    \170\ Offerings registered under the Securities Act are required 
to be filed electronically on the Commission's Electronic Data 
Gathering, Analysis, and Retrieval System (EDGAR) system. See Rule 
101(a)(1)(i) of Regulation S-T (17 CFR 232.101(a)(1)(i)).
    \171\ Issuers relying on Regulation D are required to 
electronically file a notice of sales on Form D with the Commission. 
See Rule 101(a)(1)(xiii) of Regulation S-T (17 CFR 
232.101(a)(1)(xiii)); see also Rule 503 of Regulation D (17 CFR 
230.503). Form D is also required for offerings under Section 
4(a)(5) of the Securities Act.
    \172\ See SEC Rel. No. 33-6977 (Feb. 23, 1993) [58 FR 14628]. 
Foreign private issuers have been required to file their 
registration statements electronically since 2002. SEC Rel. No. 33-
8099 (May 16, 2002).
    \173\ See SEC Rel. No. 33-8891 (Feb. 6, 2008) [73 FR 10592].
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    In Section 3(b)(2)(G)(i), Congress gave the Commission discretion 
to require issuers to file their offering statements electronically. 
Commenters are generally supportive of electronic filing.\174\ 
Consistent with these comments and the language of Section 
3(b)(2)(G)(i), we propose to require Regulation A offering statements 
to be filed with the Commission electronically on the EDGAR 
system.\175\
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    \174\ ABA Letter; WR Hambrecht + Co.; Kaplan Voekler Letter 2; 
see also Letter from George W. Beard, Managing Member, Beacon 
Investment Partners LLC (DE), Oct. 5, 2012 (``Beacon Investment 
Letter''). See also Final Report of the 30th Annual SEC Government-
Business Forum on Small Business Capital Formation, Recommendation 
16, at 31 (Nov. 17, 2011) (available at: https://www.sec.gov/info/smallbus/gbfor30.pdf).
    \175\ In conjunction with this proposed change, the portion of 
Item 101(c)(6) of Regulation S-T (17 CFR 232.101(c)(6)) dealing with 
filings related to Regulation A offerings would be rescinded.
---------------------------------------------------------------------------

    As proposed, amended Form 1-A would consist of three parts:
     an eXtensible Markup Language (XML) based fillable form, 
which would capture key information about the issuer and its offering 
using an easy to fill out online form, similar to Form D,\176\ with 
drop-down menus, indicator boxes or buttons, and text boxes, while also 
assisting issuers in determining their ability to rely on the 
exemption. The XML-based fillable form would enable the convenient 
provision of information to the Commission, and support the assembly 
and transmission of such information to EDGAR, without requiring the 
issuer to purchase or maintain additional software or technology; \177\
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    \176\ 17 CFR 239.500.
    \177\ Part I (Notification) of Form 1-A. As discussed more fully 
in Section II.C.3.a. below, the cover page and Part I of current 
Form 1-A would be converted into, and form the basis of, the XML-
based fillable form.
---------------------------------------------------------------------------

     a text file attachment containing the body of the 
disclosure document and financial statements, formatted in HyperText 
Markup Language (HTML) or American Standard Code for Information 
Interchange (ASCII) to be compatible with the EDGAR filing system; 
\178\ and
---------------------------------------------------------------------------

    \178\ Part II (Offering Circular) of Form 1-A. See discussion in 
Section II.C.3.b. below.
---------------------------------------------------------------------------

     text file attachments, containing the exhibits index and 
the exhibits to the offering statement, formatted in HTML or ASCII to 
be compatible with the EDGAR filing system.\179\
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    \179\ Part III (Exhibits) of Form 1-A. See discussion in Section 
II.C.3.c. below.
---------------------------------------------------------------------------

    We further propose to require all other documents required to be 
submitted or filed with the Commission in conjunction with a Regulation 
A offering, such as ongoing reports, to be submitted or filed 
electronically on EDGAR.\180\
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    \180\ See discussion regarding proposed ongoing reporting 
requirements at Section II.E. below. Consistent with current 
Regulation A, there would be no filing fees associated with 
Regulation A, as proposed to be amended.
---------------------------------------------------------------------------

    We believe this proposed approach to electronic filing would be 
both practical and useful for issuers of Regulation A securities, 
investors in such securities, other market participants, and the 
Commission staff who work with issuers throughout the qualification 
process. Issuers would maintain better control over their filing 
process, reduce the printing costs associated with filing seven copies 
of the offering statement and any amendments with the Commission, 
obtain immediate confirmation of acceptance of an offering statement, 
and ultimately save time in the qualification process. Investors would 
gain real-time access to the information contained in Regulation A 
filings.\181\ The efficiency of the Regulation A market should improve 
with the increased accessibility of information about Regulation A 
issuers and offerings. Additionally, as with registered offerings, 
EDGAR would allow the Commission to store, process, and disseminate 
filings in a more efficient manner, which may, in turn, improve the 
efficiency of the staff review and qualification processes.
---------------------------------------------------------------------------

    \181\ Investors would not, however, have immediate access to 
non-public submissions of draft offering statements. See discussion 
in Section II.C.2. below.
---------------------------------------------------------------------------

    As proposed, electronic filing would also facilitate the capture of 
important financial and other information about Regulation A issuers 
and offerings that would enable the Commission and market participants 
to monitor and analyze any market that develops in Regulation A 
securities, including, for example, issuer size, issuer location, key 
financial metrics, summary information about securities offered and 
offering amounts, the jurisdictions in which offerings take place, and 
expenses associated with the offering.\182\
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    \182\ The specific disclosure requirements included in the XML-
based fillable form are discussed more fully in Section II.C.3.a. 
below.
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    We appreciate, however, that requiring EDGAR filing would impose 
costs on issuers that currently are not required to enter the EDGAR 
filing system or format their disclosure documents in ways that the 
EDGAR system can accept. For that reason, we are soliciting comment on 
whether electronic filing should be mandated for Regulation A 
offerings.
    If electronic filing on EDGAR is required, one commenter suggested 
that the Commission propose for Regulation A offering circulars an 
analog to the ``access equals delivery'' model for prospectuses under 
Securities Act Rule 172.\183\ Currently, Regulation A prohibits sales 
pursuant to a qualified offering statement unless a preliminary 
offering circular or final offering circular is furnished to an 
investor at least 48

[[Page 3942]]

hours before the mailing of the confirmation of sale, and the final 
offering circular is delivered to the investor with the confirmation of 
sales (unless delivered at any earlier time).\184\ By comparison, under 
Rule 172, a final prospectus in a registered offering is deemed to 
precede or accompany a security for sale for purposes of Section 
5(b)(2) of the Securities Act as long as the final prospectus meeting 
the requirements of Section 10(a) of the Securities Act is filed with 
the Commission on EDGAR.\185\ Additionally, Rule 172(a), which provides 
an exemption from Section 5(b)(1) of the Securities Act, permits 
issuers to send written confirmations and notices of allocations after 
effectiveness of a registration statement without being accompanied or 
preceded by a final prospectus, so long as the registration statement 
is effective and the final prospectus is filed with the 
Commission.\186\
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    \183\ Kaplan Voekler Letter 2.
    \184\ Rule 251(d)(2).
    \185\ 17 CFR 230.172(b); see also Securities Offering Reform, 
SEC Rel. No. 33-8591, at 245 (discussing Rule 172). This provision 
also applies where the issuer will make a good faith and reasonable 
effort to file the final prospectus with the Commission as part of 
the registration statement within the required Rule 424 time period. 
17 CFR 230.172(c)(3). Currently, there is no analog in Regulation A 
to filings permitted in the registered context under Rule 424, 
although one commenter has suggested we consider one. See Kaplan 
Voekler Letter 2; see also discussion in Section II.C.3. below and 
text accompanying fn. 235.
    \186\ 17 CFR 230.172(a); see also Securities Offering Reform, 
SEC Rel. No. 33-8591, at 251 (discussing Rule 172(a)).
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    We are proposing an access equals delivery model for Regulation A 
final offering circulars. The expanded use of the Internet and 
continuing technological developments suggest that we should consider 
alternative methods of final offering circular delivery for Regulation 
A, particularly given that the regulation has not been substantively 
updated since 1992. Where, upon qualification of an offering statement, 
sales of Regulation A securities occur on the basis of offers made 
using a preliminary offering circular, issuers and intermediaries could 
presume that investors have access to the Internet, and would be 
permitted to satisfy their delivery requirements for the final offering 
circular if it is filed and available on EDGAR.\187\ We further propose 
to require issuers to include a notice in any preliminary offering 
circular they use that would inform potential investors that the issuer 
may satisfy its delivery obligations for the final offering circular 
electronically. As with registered offerings, we propose to permit 
dealers, during the aftermarket delivery period, to be deemed to 
satisfy their final offering circular delivery requirements if it is 
filed and available on EDGAR.\188\
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    \187\ Cf. Securities Offering Reform, SEC Rel. No. 33-8591, at 
244.
    \188\ See proposed Rule 251(d)(2)(ii) for the dealer aftermarket 
delivery requirements.
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    Further, consistent with prior Commission releases on the use of 
electronic media for delivery purposes, ``electronic-only'' offerings 
of Regulation A securities would not be prohibited under the proposed 
rules for Regulation A.\189\ In such offerings, however, an issuer and 
its participating intermediaries would have to obtain the consent of 
investors to the electronic delivery of:
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    \189\ An electronic-only offering is an offering in which 
investors are permitted to participate only if they agree to accept 
the electronic delivery of all documents and other information in 
connection with the offering. See SEC Rel. No. 34-37182 (May 9, 
1996) [61 FR 24644] (Use of Electronic Media by Broker-Dealers, 
Transfer Agents and Investment Advisers for Delivery of Information) 
and SEC Rel. No. 34-42728 (Apr. 28, 2000) [65 FR 25843] (Use of 
Electronic Media).
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     the preliminary offering circular and other information, 
but not the final offering circular, in instances where, upon 
qualification, the issuer plans to sell Regulation A securities based 
on offers made using a preliminary offering circular; and
     all documents and information, including the final 
offering circular, when the issuer sells Regulation A securities based 
on offers conducted during the post-qualification period using a final 
offering circular.
    We further propose to maintain the existing requirements of Rule 
251(d)(2)(ii), which requires dealers to deliver a copy of the current 
offering circular to purchasers for sales that take place within 90 
calendar days after qualification,\190\ but to otherwise update and 
amend Rule 251(d)(2)(i), which currently requires that a preliminary or 
final offering circular be furnished to prospective purchasers at least 
48 hours before the mailing of the confirmation of sale. When 
originally adopted in 1973, Regulation A's offering circular delivery 
requirements aligned with the prospectus delivery requirements for 
registered offerings.\191\ In the intervening time, prospectus delivery 
requirements have changed,\192\ with no corresponding updates to 
Regulation A. Notably, the Commission formalized its 48-hour 
preliminary prospectus delivery requirement in 1982 by amending 
Exchange Act Rule 15c2-8 to require only broker-dealers participating 
in a registered offering of securities by a non-reporting issuer to 
deliver a preliminary (and not final) prospectus at least 48 hours in 
advance of the mailing of the confirmation of sale.\193\
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    \190\ See proposed Rule 251(d)(2)(ii). As proposed, this 
provision clarifies the date on which dealer delivery obligations 
commence in the context of continuous or delayed offerings pursuant 
to proposed Rule 251(d)(3).
    \191\ See SEC Rel. No. 33-5277 (July 26, 1972) (noting that 
there should be no distinction in the delivery requirements of 
Regulation A offerings and registered offerings, and therefore 
proposing (and eventually adopting) rules requiring delivery of the 
offering circular 48 hours in advance of mailing of a confirmation 
of sale.); SEC Rel. No. 33-6075 (June 1, 1979) [44 FR 33362], at 
33363-64 (permitting for the first time the use of a preliminary 
offering circular in Regulation A offerings, and imposing the same 
delivery requirements for such preliminary offering circulars as 
were then in effect for registered offerings).
    \192\ See SEC Rel. No. 33-6383 (March 3, 1982) [47 FR 11380] 
(Integrated Disclosure Release, which, among other things, added 
Exchange Act Rule 15c2-8, 17 CFR 240.15c2-8, which requires broker-
dealers participating in a registered offering of securities of a 
non-reporting issuer to deliver a copy of the preliminary prospectus 
to any prospective purchaser at least 48 hours before the mailing of 
the confirmation of sale.); see also Securities Offering Reform, SEC 
Rel. No. 33-8591, at 173 et seq. and 241 et seq. (discussing 
information conveyed at time of sale for purposes of Section 
12(a)(2) liability and prospectus delivery requirement reforms).
    \193\ SEC Rel. No. 33-6383, at 11400. The advance delivery 
requirements do not, however, apply in the context of registered 
offerings by issuers subject to a reporting obligation under Section 
13 or 15(d) of the Exchange Act. Before the addition of Rule 15c2-
8(b), the Commission required assurances that the managing 
underwriter had taken reasonable steps to send investors a 
preliminary prospectus at least 48 hours in advance of mailing 
confirmations of sale before accelerating effectiveness of a 
registration statement. See SEC Rel. No. 33-4968 (May 1, 1969) [34 
FR 7235]. Cf. 17 CFR 230.460 (Distribution of Preliminary Prospectus 
in Registered Offerings).
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    We believe the delivery of the preliminary offering circular to 
potential investors before they make an investment decision remains an 
important investor protection that should be preserved in Regulation A, 
particularly in light of the proposed expanded use of ``testing the 
waters'' solicitation materials to include the period of time after 
non-public submission or filing of the offering statement discussed 
further in Section II.D. below.\194\ We also recognize the need to 
update and amend Regulation A's offering circular delivery requirements 
to accord with the requirements of broker-dealers in the context of 
registered offerings. We therefore propose to amend Rule 251(d)(2)(i) 
to require issuers and participating broker-dealers to deliver only a 
preliminary offering circular to prospective purchasers \195\ at least 
48

[[Page 3943]]

hours in advance of sale when a preliminary offering circular is used 
during the prequalification period to offer such securities to 
potential investors.\196\ Unlike Exchange Act Rule 15c2-8, this 
delivery requirement would apply to both issuers and participating 
broker-dealers.\197\ We believe this is an important investor 
protection that should apply to issuers in advance of sale, and is 
consistent with current Regulation A.\198\ Consistent with current Rule 
251(d)(1)(iii), we propose to continue to require a final offering 
circular to accompany or precede any written communications that 
constitute an offer in the post-qualification period.\199\
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    \194\ Cf. Securities Offering Reform, SEC Rel. No. 33-8591, at 
245 (noting that access equals delivery is not appropriate for 
preliminary prospectus delivery obligations in IPOs because it is 
important for potential investors to be sent the preliminary 
prospectus).
    \195\ Prospective purchasers would include any person that has 
indicated an interest in purchasing the Regulation A securities 
before qualification, including, but not limited to, those investors 
that respond to an issuer's solicitation materials. See proposed 
Rule 251(d)(2)(i).
    \196\ In accordance with time of sale provisions discussed in 
Securities Offering Reform, see SEC Rel. No. 33-8591, at p. 173 et 
seq., we propose to base the 48-hour period in advance of ``sale'' 
rather than the ``mailing of the confirmation of sale.'' See also 
Section II.D. below for a discussion of the delivery requirements 
for solicitation materials used after publicly filing the offering 
statement.
    \197\ Cf. Exchange Act Rule 3a4-1, 17 CFR 240.3a4-1 (Associated 
persons of an issuer deemed not to be brokers). Issuers would be 
able to rely on reasonable assurances of delivery from participating 
broker-dealers to satisfy their delivery obligations.
    \198\ Cf. 17 CFR 230.460 (Distribution of Preliminary Prospectus 
in Registered Offerings). Additionally, with continued improvements 
in information and communication technologies, we believe direct 
public offerings (i.e., offerings conducted by an issuer without the 
involvement of an underwriter) may become a more attractive option 
for certain issuers. For that reason, it is important that the 
advance preliminary offering circular delivery requirements for 
participating broker-dealers apply equally to issuers.
    \199\ See proposed Rule 251(d)(1)(iii). Consistent with Rule 
172(a) in the context of registered offerings, issuers and 
intermediaries sending written confirmations and notices of 
allocation in the post-qualification period would be allowed to rely 
on the EDGAR filing of the final offering circular to satisfy any 
delivery requirements under Rule 251(d)(1)(iii). For a discussion of 
Rule 172(a), see Securities Offering Reform, SEC Rel. No. 33-8591, 
at 251.
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    In addition to the revised delivery requirements discussed above, 
we propose to add a provision analogous to Rule 173.\200\ Currently, 
Regulation A requires the delivery of a final offering circular to the 
purchaser with the confirmation of sale, unless it has been delivered 
already.\201\ The proposed provision would allow issuers and 
participating broker-dealers that satisfy the 48-hour requirement by 
furnishing a preliminary offering circular to, not later than two 
business days after completion of the sale, provide the purchaser with 
a copy of the final offering circular or a notice stating that the sale 
occurred pursuant to a qualified offering statement. As proposed, the 
notice must include the URL \202\ where the final offering circular, or 
the offering statement of which such final offering circular is part, 
may be obtained on EDGAR and contact information sufficient to notify a 
purchaser where a request for a final offering circular can be sent and 
received in response.
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    \200\ 17 CFR 230.173.
    \201\ 17 CFR 230.251(d)(2)(i)(C).
    \202\ In the case of an electronic-only offering, the notice 
must include an active hyperlink to the final offering circular or 
to the offering statement of which such final offering circular is 
part.
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    We propose to allow an issuer to withdraw an offering statement, 
with the Commission's consent, if none of the securities that are the 
subject of such offering statement have been sold and such offering 
statement is not the subject of a Commission order temporarily 
suspending a Regulation A exemption.\203\ Under the proposed rules, the 
Commission also would be able to declare an offering statement 
abandoned if the offering statement has been on file with the 
Commission for nine months without amendment and has not become 
qualified.\204\ These withdrawal and abandonment procedures are similar 
to the ones that apply to reporting companies.
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    \203\ See proposed Rule 259(a).
    \204\ See proposed Rule 259(b).
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Request for Comment
    35. Should the rules require the electronic filing of Regulation A 
offering and related documents on EDGAR, as proposed? Why or why not? 
Please address expected costs of electronic filings and benefits to 
both issuers and investors of having these documents available in 
electronic format. Alternatively, for Tier 1 offerings, what would be 
the benefits, if any, of maintaining Regulation A's current paper 
filing system for offering statements and related documents? Should we 
maintain paper filing for issuers conducting Tier 1 Regulation A 
offerings? Why or why not?
    36. As proposed, should we require issuers to file the body of the 
disclosure document, financial statements, and text file attachments, 
containing the exhibits index and the exhibits to the offering 
statement, electronically in a HTML or ASCII format that is compatible 
with the EDGAR filing system? Or should we permit the filing of 
offering and related materials in Portable Document Format (PDF) or in 
some other format that is readily accessible to smaller issuers to 
constitute an official filing with the Commission under Regulation S-T? 
\205\
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    \205\ See 17 CFR 232.104 (Unofficial PDF copies included in an 
electronic submission).
---------------------------------------------------------------------------

    37. Should we adopt, as proposed, an access equals delivery model 
for final offering circular delivery requirements, in which case 
investors would be presumed to have access to the Internet, and issuers 
and intermediaries could satisfy their delivery requirements if the 
final offering circular were filed with the Commission on EDGAR? \206\ 
Or should we maintain our existing requirement that issuers deliver to 
purchasers a final offering circular with the mailing of the 
confirmation of sale to such purchasers (if not delivered previously)? 
Why or why not?
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    \206\ Kaplan Voekler Letter 2.
---------------------------------------------------------------------------

    38. Should we update, as proposed, the delivery requirements in 
Rule 251(d)(2)(i) to maintain advance delivery requirements of 
preliminary offering circulars, while eliminating the requirement that 
issuers and broker-dealers participating in the distribution of 
Regulation A securities pursuant to an offering statement deliver a 
final offering circular to investors at least 48 hours before sale? Why 
or why not? Would updating this provision, as proposed, be inconsistent 
with the rationale behind similar updates to prospectus delivery 
requirements for registered offerings? Why or why not?
    39. While not currently proposed, should we adopt a provision 
similar to Exchange Act Rule 15c2-8(b), which would only require the 
advance delivery of a preliminary offering circular in the context of 
offerings by issuers not already subject to an ongoing reporting 
obligation under Regulation A? Similarly, should we adopt an analog to 
Rule 174(b),\207\ which applies to registered offerings, so that a 
dealer would not have an aftermarket delivery obligation to purchasers 
of Regulation A securities to the extent the issuer of such securities 
is subject to an ongoing reporting obligation under Regulation A 
immediately before the time of filing the offering statement? Or, in 
such circumstances, should we only require dealer aftermarket delivery 
for a 25 calendar-day period? Why or why not?
---------------------------------------------------------------------------

    \207\ 17 CFR 230.174(b).
---------------------------------------------------------------------------

    40. In conjunction with the proposed access equals delivery model 
for final offering circular delivery requirements, should we adopt, as 
proposed, a provision analogous to Rule 173? If so, should compliance 
with that requirement be made a condition of Regulation A? Why or why 
not? Does the rationale behind Rule 173 apply to Regulation A 
offerings? \208\
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    \208\ See Securities Offering Reform, SEC Rel. No. 33-8591, at 
p. 173 et seq.

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[[Page 3944]]

2. Non-Public Submission of Draft Offering Statements
    Unlike Title I of the JOBS Act,\209\ Title IV does not provide for 
confidential submissions of offering statements under Regulation A. 
Commenters, however, supported providing issuers with the option of 
confidential submission of offering statements under Regulation A.\210\ 
We propose to allow the non-public submission of draft offering 
statements by issuers of Regulation A securities. We note, however, 
that such submissions would not be subject to the statutorily-mandated 
confidentiality of draft IPO registration statements confidentially 
submitted by ``emerging growth companies'' \211\ under Title I of the 
JOBS Act.\212\
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    \209\ Title I of the JOBS Act permits emerging growth companies 
to confidentially submit draft registration statements to the 
Commission for nonpublic review, provided the initial confidential 
submission and all amendments thereto are publicly filed not later 
than 21 calendar days before the issuer conducts its roadshow. See 
Section 106(a) of Title I, which added subsections 5(d) and 6(e) to 
the Securities Act.
    \210\ Letter from Jonathan C. Guest, McCarter & English, LLP, 
July 10, 2012 (``McCarter & English Letter''); ABA Letter; WR 
Hambrecht + Co. Letter.
    \211\ Under Section 2(a)(19) of the Securities Act, an 
``emerging growth company'' is defined as, among other things, an 
issuer that had total annual gross revenues of less than $1 billion 
during its most recently completed fiscal year. 15 U.S.C. 
77b(a)(19).
    \212\ Under Section 6(e)(2) of the Securities Act, confidential 
submissions of draft registration statements by emerging growth 
companies are protected from compelled disclosure under the Freedom 
of Information Act (FOIA) (5 U.S.C. 552). There is no similar 
provision under Section 3(b) of the Securities Act. Issuers 
requesting confidential treatment of draft offering statement 
submissions under Regulation A could submit such documents under 
cover of the Commission's Rule 83. See 17 CFR 200.83.
---------------------------------------------------------------------------

    Under Regulation A's proposed non-public submission of draft 
offering statement provisions, issuers whose securities have not been 
previously sold pursuant to a qualified offering statement under 
Regulation A or an effective registration statement under the 
Securities Act would be permitted to submit to the Commission a draft 
offering statement for non-public review. As with the confidential 
submission of draft registration statements, all non-public submissions 
of draft offering statements would be submitted via EDGAR. The initial 
non-public submission, all non-public amendments thereto, and 
correspondence with Commission staff regarding such submissions would 
be required to be publicly filed as exhibits to the offering statement 
not less than 21 calendar days before qualification of the offering 
statement.\213\ Unlike emerging growth companies, which must publicly 
file any confidential submissions not later than 21 calendar days 
before a road show, the timing requirements for filing by issuers 
seeking qualification under Regulation A would not depend on whether or 
not the issuer conducts a road show.\214\
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    \213\ The timing is consistent with the guidance provided to 
emerging growth companies under Title I of the JOBS Act, where such 
issuers do not ``test the waters'' under Section 5(d) or otherwise 
conduct a traditional road show. See JOBS Act Frequently Asked 
Questions on Confidential Submission Process for Emerging Growth 
Companies, Question 9 (April 10, 2012), available at: https://www.sec.gov/divisions/corpfin/guidance/cfjumpstartfaq.htm.
    \214\ Regulation A's proposed testing the waters provisions 
would encompass a variety of activities, including activities that 
could constitute a traditional road show. See Section II.D. below 
for a discussion on the timing and requirements for the use of 
testing the waters solicitation materials under Rule 254 as proposed 
to be amended.
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Request for Comment
    41. As proposed, should the rules permit the non-public submission 
of draft offering statements under Regulation A? Would there be any 
adverse impact on public investors of permitting the non-public 
submission of offering statements?
    42. Is the proposed requirement of public filing at least 21 
calendar days before qualification appropriate? Should public filing be 
required sooner or later than proposed?
    43. Should the availability of non-public submission of Regulation 
A offering statements be limited, as proposed, to issuers whose 
securities have not been previously sold pursuant to a qualified 
offering statement under Regulation A or an effective registration 
statement under the Securities Act, in a manner similar to the 
limitation under Title I of the JOBS Act on the use of confidential 
submissions to issuers that have not previously sold common equity 
securities pursuant to an effective registration statement? Or should 
issuers be permitted to use the non-public submission provisions more 
than once?
    44. As proposed, should issuers that non-publicly submit an 
offering statement under Regulation A be required to request 
confidential treatment under the cover of the Commission's Rule 83? Or 
should we adopt a new rule relating to confidential treatment of draft 
offering statements in Regulation A?
3. Form and Content
    Section 3(b)(2)(G)(i) of the Securities Act \215\ identifies 
certain requirements that the Commission may include, among others, in 
the requirements for offerings relying on the exemption. The 
requirements largely follow the existing offering statement 
requirements of Form 1-A.\216\ For example, financial statements,\217\ 
a description of the issuer's business operations,\218\ financial 
condition,\219\ and use of investor funds \220\ are all currently 
required disclosures in Form 1-A. Additionally, Form 1-A requires 
issuers to disclose, among other things, their contact information, the 
price or method for calculating the price of the securities being 
offered, information about the issuer's property, results of 
operations, directors, officers, significant employees and certain 
beneficial owners, material agreements and contracts, past securities 
sales, material factors that make an investment in the issuer 
speculative or risky, dilution, the plan of distribution for the 
offering, executive and director compensation, and conflicts of 
interest and related party transactions. As with Regulation A 
generally, however, Form 1-A has not been substantively revised by the 
Commission since 1992.
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    \215\ See JOBS Act Section 401(a)(2).
    \216\ The primary exception is the suggestion that issuers be 
required to submit audited financial statements. Currently, the 
financial statements required under Regulation A are required to be 
audited only if the issuer has them available.
    \217\ See Form 1-A, Part II, Part F/S.
    \218\ Id., Part II, e.g., Model B, Item 6. (Description of 
Business).
    \219\ Id., e.g., Part F/S.
    \220\ Id., e.g., Item 5. (Use of Proceeds to Issuer).
---------------------------------------------------------------------------

    Currently, Form 1-A consists of three parts: Part I (Notification), 
Part II (Offering Circular), and Part III (Exhibits). Part I of Form 1-
A calls for certain basic information about the issuer and proposed 
offering that is necessary to determine the availability of the 
exemption.\221\ For example, the existence of any ``bad actor'' 
disqualifications under Rule 262 and the presence of proposed affiliate 
sales in the absence of issuer net income from operations in at least 
one of the last two fiscal years,\222\ both of which may affect 
availability of the exemption, are required to be disclosed in Part I. 
Part I is filed with the Commission and publicly available, but is not 
required to be provided to investors.\223\
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    \221\ See SEC Rel. No. 33-6275 (Jan. 9, 1981) [46 FR 2637], at 
2638.
    \222\ See Rule 251(b).
    \223\ See Rule 251(d)(2); see also SEC Rel. No. 33-6275, at 
2639.
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    Part II of the offering statement consists of an offering 
circular--similar to the prospectus in a registration statement--which 
serves as the primary disclosure document to investors of the material 
facts about the issuer, its

[[Page 3945]]

securities, and the offering. Issuers organized as corporations are 
given the option of following any one of three disclosure formats in 
Part II:
     Model A (Question-and-Answer Format); \224\
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    \224\ Model A is based on the North American Securities 
Administrators Association's (NASAA) Form U-7, also known as the 
Small Company Offering Registration (SCOR) form, adopted April 28, 
1989. See https://www.nasaa.org/industry-resources/corporation-finance/scor-overview/scor-forms/.
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     Model B, a somewhat scaled version of Form S-1 that 
largely follows the Commission's disclosure standards in effect for 
registration statements when Model B was adopted in 1981; \225\ and
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    \225\ See SEC Rel. No. 33-6275 [46 FR 2637], at 2639-40; SEC 
Rel. No. 33-6924 [57 FR 9768], at 9771.
---------------------------------------------------------------------------

     Part I of Form S-1.\226\
---------------------------------------------------------------------------

    \226\ 17 CFR 239.11. Issuers choosing Part I of Form S-1 must, 
however, follow the financial statement requirements of Form 1-A, 
Part F/S.
---------------------------------------------------------------------------

Issuers organized in non-corporate form, such as limited partnerships 
and limited liability companies, have the option of using either Model 
B or Part I of Form S-1. Part F/S of the offering circular--containing 
financial statements and notes--is required disclosure for all issuers. 
Part III requires an exhibits index and a description of exhibits 
required to be filed as part of the offering statement.
    Commenters generally supported maintaining Regulation A's existing 
Form 1-A, with modifications and updates to implement the provisions of 
the JOBS Act.\227\ While some commenters supported simplifying the form 
or paring it down to focus on matters of greatest significance,\228\ 
one commenter supported a more expansive disclosure regime.\229\ This 
commenter suggested that the Commission coordinate with the States to 
create a single disclosure document that would address disclosure from 
both a federal and state securities law perspective. In the opinion of 
this commenter, a single form with heightened disclosure is better than 
a less-comprehensive federal form that would thereafter require 
additional disclosure items (and review) by state securities 
regulators.\230\ According to this commenter, the need for robust 
disclosure is magnified by the increase in the annual offering amount 
and by an issuer's ability to solicit indications of interest before 
filing the offering statement, engage in general solicitation, and sell 
to investors regardless of investor qualifications.\231\
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    \227\ ABA Letter; WR Hambrecht + Co.; NASAA Letter 2.
    \228\ Letter from Thomas D. O'Rourke, President, Alpine 
Ventures, Sept. 26, 2012 (``Alpine Ventures Letter''); Letter from 
Rutheford B. Campbell, Jr., William L. Matthews Professor of Law, 
University of Kentucky, Nov. 13, 2012 (``Campbell Letter''); see 
also Letter from Richard Lacey, Small Business Owner, April 23, 2012 
(``Lacey Letter'') (suggesting the form should be simple); Letter 
from William Klehm, Fallbrook Technologies, September 23, 2013 
(``Fallbrook Letter'') (suggesting, among other things, that 
Regulation A should be simple and user-friendly); Letter from Og 
Oggilby, Bank Clerk, Jan. 22, 2013 (``Oggilby Letter'') (suggesting 
relaxed regulations on the sale of securities of small companies). 
But see Letter from David R. Burton, General Counsel, National Small 
Business Association (``NSBA''), June 12, 2012 (``NSBA Letter'') 
(suggesting the Commission not modify or update Regulation A other 
than by raising the annual offering limitation to $50 million).
    \229\ Letter from Jack Herstein, President, NASAA, July 3, 2012 
(``NASAA Letter 1'') (suggesting that heightened disclosure is 
better than a less-comprehensive federal form that would thereafter 
require additional disclosure items (and review) by state securities 
regulators); NASAA Letter 2.
    \230\ NASAA Letter 1.
    \231\ NASAA Letter 2.
---------------------------------------------------------------------------

    Separately, one commenter suggested that the Commission implement 
an offering statement scaled on the basis of offering size.\232\ 
Another commenter suggested that the Commission consider requiring the 
scaled disclosure requirements available to smaller reporting companies 
in Form 1-A, while also: (i) Focusing disclosure on matters of the 
greatest significance, (ii) limiting risk factors to those deemed 
important, (iii) requiring disclosure of valuation assessments (for all 
offerings made at a fixed price) and internal projections used to set 
budgets as well as a discussion of management's expectations of future 
performance, (iv) encouraging the use and filing of research reports, 
and (v) if Section 3(b)(2) securities are permitted to list on a 
national securities exchange simultaneously with qualification of the 
offering statement, incorporating some Form 10 \233\ disclosure 
requirements into Form 1-A.\234\
---------------------------------------------------------------------------

    \232\ Campbell Letter (suggesting scaled disclosure in three 
tiers for offerings of: $0-up to $1 million; over $1 million-up to 
$5 million; over $5 million-up to $50 million).
    \233\ 17 CFR 249.210.
    \234\ WR Hambrecht + Co. Letter; see also Letter from Karl M. 
Sjogern, April 25, 2013 (``Sjogern Letter'') (suggesting any issuer 
of equity securities should be required to disclose the valuation it 
has given itself given the terms of the offering, and to discuss the 
factors it considered when setting its valuation).
---------------------------------------------------------------------------

    One commenter suggested that the Commission update its rules 
regarding revisions to the offering statement during the post-
qualification period in light of anticipated continuous, best efforts 
offerings.\235\ The commenter suggested that the current rule, which 
requires any updated or revised offering circular to be filed as an 
amendment to the offering statement and requalified in accordance with 
Rule 252,\236\ places an unnecessary burden on issuers. This commenter 
suggested that the Commission adopt rules analogous to those for 
registered offerings where most information meeting the undertaking 
requirements of Item 512 of Regulation S-K \237\ requires a post-
effective registration statement, and other updates to the prospectus 
in such registration statement may be filed pursuant to Rule 424.\238\
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    \235\ Kaplan Voekler Letter 2. See related requests for comment 
in Section II.C.4. below.
    \236\ See Rule 253(e)(3).
    \237\ 17 CFR 229.512.
    \238\ 17 CFR 230.424.
---------------------------------------------------------------------------

    We propose to maintain Form 1-A's existing three-part structure--
Part I (Notification), Part II (Offering Circular), and Part III 
(Exhibits)--while making various revisions and updates to the Form.
a. Part I (Notification)
    Part I of Form 1-A serves as a notice of certain basic information 
about the issuer and its proposed offering, which also helps to confirm 
the availability of the exemption.\239\ We propose to continue to 
require the disclosure of this information in modified and updated 
form. The current paper version of Part I of Form 1-A would be 
converted into an online XML-based fillable form with indicator boxes 
or buttons and text boxes and filed online with the Commission.\240\ 
The information would be publicly available on EDGAR, as an online data 
cover sheet, but not otherwise required to be distributed to 
investors.\241\ The fillable form would enable issuers to provide 
information in a convenient medium--without the requirement for 
specialty software--that would capture relevant data about the issuer 
and its offering in a structured format to facilitate analysis of the 
Regulation A market and Regulation A issuers by the Commission, other 
regulators, third-party data providers, and market participants. As 
noted above, the XML-based fillable form would enable the convenient 
provision of information to the Commission, and support the assembly 
and transmission of such information to EDGAR. Facilitating the capture 
of important

[[Page 3946]]

financial and other information about Regulation A issuers and 
offerings in the proposed XML-based fillable form would enable the 
Commission and market participants to monitor any developing market in 
Regulation A securities and the types of issuers relying on the 
exemption.
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    \239\ SEC Rel. No. 33-6275 [46 FR 2637], at 2638.
    \240\ As proposed, the cover page to current Form 1-A would be 
eliminated as a standalone requirement, while portions of the 
information required on the cover page would be combined with Item 1 
of Part I of Form 1-A in the XML fillable form.
    \241\ The Commission would disseminate the information in a 
format that provides normal text for reading and XML-tagged data for 
analysis. With the exception of the items that focus issuers on 
eligibility to use Regulation A, much of the information called for 
in the XML-based fillable form is also required to be disclosed to 
investors in Part II of Form 1-A.
---------------------------------------------------------------------------

    The information collected in Part I would continue to focus issuers 
on eligibility to use Regulation A, and would allow Commission staff 
reviewing the filings to more easily make a determination about the 
conditions to the availability of the exemption. If adopted, this could 
conserve issuer time and resources and enhance the efficiency of review 
by Commission staff. If, after compiling the information elicited by 
Part I, an issuer determined that it was ineligible to rely on 
Regulation A, it could choose to register its offering or, if 
available, conduct an exempt offering in reliance on a different 
exemption from registration.
    The proposed notification in Part I of Form 1-A would require 
disclosure in response to the following items:
     Item 1. Issuer Information
     Item 2. Issuer Eligibility
     Item 3. Application of Rule 262 (``bad actor'' 
disqualification and disclosure)
     Item 4. Summary Information Regarding the Offering and 
other Current or Proposed Offerings
     Item 5. Jurisdictions in Which Securities are to be 
Offered
     Item 6. Unregistered Securities Issued or Sold Within One 
Year
    As proposed, Item 1 (Issuer Information), Item 2 (Issuer 
Eligibility), Item 3 (Application of Rule 262 (``bad actor'' 
disqualification and disclosure)), Item 4 (Summary Information 
Regarding the Offering and other Current or Proposed Offerings), and 
Item 6 (Unregistered Securities Issued or Sold Within One Year) would 
represent substantive changes to Part I.
     Item 1 (Issuer Information) would require information 
about the issuer's identity, industry, number of employees, financial 
statements and capital structure, as well as contact information.\242\
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    \242\ As proposed, some of the information in Item 1, such as 
the name of the issuer, jurisdiction of incorporation, contact 
information, primary Standard Industrial Classification Code Number, 
and I.R.S. Employer Identification Number is currently required to 
be included on the cover page of Form 1-A. We propose to eliminate 
the cover page of Form 1-A and to move the relevant information from 
the cover page into Item 1 of Part I.
---------------------------------------------------------------------------

     Item 2 (Issuer Eligibility) would require the issuer to 
certify that it meets various proposed issuer eligibility criteria.
     Item 3 (Application of Rule 262 (``bad actor'' 
disqualification and disclosure)) would require the issuer to certify 
that no disqualifying events have occurred and to indicate whether 
related disclosure is included in the offering circular (i.e., events 
that would have been disqualifying but occurred before the effective 
date of the amendments to Regulation A).\243\
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    \243\ See discussion of proposed Rule 262(a)(3) and (a)(5) in 
Section II.G. below.
---------------------------------------------------------------------------

     Item 4 (Summary Information Regarding the Offering and 
other Current or Proposed Offerings) would include indicator boxes or 
buttons and text boxes eliciting information about the offering 
(including whether the issuer was conducting a Tier 1 or Tier 2 
offering, amount and type of securities offered, proposed sales by 
selling securityholders and affiliates, type of offering, estimated 
aggregate offering price of any concurrent offerings pursuant to 
Regulation A, anticipated fees in connection with the offering, and the 
names of auditors, legal counsel, underwriters, and certain others 
providing services in connection with the offering).
     Item 5 (Jurisdictions in Which Securities are to be 
Offered) would include data collection about the jurisdiction in which 
the securities are to be offered.
     Item 6 (Unregistered Securities Issued or Sold Within One 
Year), which largely restates existing Item 5 to Part I, would 
eliminate the requirement to provide the names and identities of the 
persons to whom unregistered securities were issued.
    We propose to eliminate Item 1 (Significant Parties) of current 
Part I, which requires disclosure of the names, business address, and 
residential address of all the persons covered by current Rule 262. 
Instead, we propose to only require narrative disclosure in Part II of 
Form 1-A, as proposed, when the issuer has determined that a relevant 
party has a disclosable ``bad actor'' event.\244\ We propose to 
eliminate Item 3 of current Part I because we propose to eliminate the 
current restrictions on affiliate resales under Rule 251(b).\245\ 
Information regarding the amount of proposed secondary sales and the 
existence of affiliate sales in the offering, however, would continue 
to be disclosed in Item 4, as proposed. Item 6 (Other Present or 
Proposed Offerings) and Item 9 (Use of a Solicitation of Interest 
Document) of current Part I would be incorporated into proposed Item 4 
(Summary Information Regarding the Offering and Other Current or 
Proposed Offerings). We also propose to eliminate Item 7 (Marketing 
Arrangements) and Item 8 (Relationship with Issuer of Experts Named in 
Offering Statement) of current Part I, as disclosure of this 
information is required in Part II (Offering Circular).
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    \244\ See discussion in Section II.G. below.
    \245\ The primary purpose of current Item 3 (Affiliate Sales) in 
Part I of Form 1-A is to ensure compliance with certain restrictions 
on affiliate resales under Rule 251(b). See discussion in Section 
II.B.3. above.
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b. Part II (Offering Circular)
(1) Narrative Disclosure
    As noted above, Part II (Offering Circular) in existing Form 1-A 
provides issuers with three options for their narrative disclosure: 
Model A, Model B, and Part I of Form S-1.\246\ The use of these three 
options has not been revisited, nor have the Model A and Model B 
formats been substantively revised by the Commission, since their 
introduction in 1992.\247\ In the context of a broader effort to update 
Regulation A and make it more useful for market participants, we 
believe that the form and content of the Regulation A Offering Circular 
is in need of reconsideration. In this regard, we propose to eliminate 
Model A as a disclosure option, to update and retain Model B as a 
disclosure option (renaming it ``Offering Circular''), and to continue 
to permit issuers to rely on Part I of Form S-1 to satisfy the 
disclosure obligations of Part II of Form 1-A.
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    \246\ Non-corporate issuers are not permitted to use Model A.
    \247\ Before the 1992 amendments to Regulation A, Model B was 
the only format permissible in Regulation A. See SEC Rel. No. 33-
6275 [46 FR 2637]. Model A and Part I of Form S-1 were added as 
additional issuer options at that time. Model B has not been 
substantively revised or revisited since it was introduced by the 
Commission in 1981. See SEC Rel. No. 33-6924 [57 FR 9768], at 9771.
---------------------------------------------------------------------------

    Model A. Model A was first introduced as an option for corporate 
issuers' Regulation A offering statements in 1992. The basis for the 
form was the Small Company Offering Registration, or SCOR, form 
developed by NASAA, in coordination with state securities 
administrators and the securities bar, working through the ABA's State 
Regulation of Securities Committee.\248\ Model A was intended to

[[Page 3947]]

provide corporate issuers with a ``balanced approach to the capital 
raising process, providing a registration form that small businesses 
can easily use at a reduced cost while still maintaining investor 
protection.'' \249\ In practice, however, Model A has been used much 
less frequently than Model B, and offerings using Model A have 
generally taken significantly longer to qualify than those using Model 
B or Part I of Form S-1.\250\ Commission staff who review Regulation A 
filings indicate that Model A's question-and-answer disclosure format 
often results in disclosure that lacks uniformity and is hard to 
follow. While the question-and-answer approach taken in Model A may 
help focus corporate issuers on crucial disclosure issues, we are not 
convinced that the disclosure format results in clear and 
understandable disclosure being provided to investors. We therefore 
propose to eliminate Model A from the narrative disclosure options in 
Part II of Form 1-A.
---------------------------------------------------------------------------

    \248\ NASAA's Form U-7 (Small Company Offering Registration) was 
first approved for use in connection with certain securities 
offerings by NASAA in 1989. See NASAA's Web site on SCOR Forms, 
available at: https://www.nasaa.org/industry-resources/corporation-finance/scor-overview/scor-forms/. It was later revised by NASAA in 
1999. The revised version has not been approved for use in 
connection with Regulation A by the Commission. In its comment 
letter, NASAA suggested that the Commission consider allowing 
revised Form U-7 to be used in connection with the Section 3(b)(2) 
exemption. See NASAA Letter 2.
    \249\ SEC Rel. No. 33-6924, at 23-24.
    \250\ From 2002 through 2012, approximately 21% of qualified 
Regulation A offerings have used Model A, 66% have used Model B and 
13% have used Form S-1. During the same period, the average time 
required for an offering to qualify was 301 days for offerings using 
Model A, 220 days for offerings using Model B and 167 days for 
offerings using Form S-1. One reason that Model A is used less 
frequently may be that it was not updated to correspond to the 
version of the SCOR form adopted by NASAA in 1999, so an issuer may 
not be able to use the same disclosure document in connection with 
Regulation A that it can use for state securities regulation 
disclosure.
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    Model B. Model B disclosure was first introduced by the Commission 
in 1981, and was the only available disclosure format at that 
time.\251\ It was preserved as a disclosure option in the 1992 
amendments to Regulation A.\252\ It has not been substantively updated 
or revised since 1981.
---------------------------------------------------------------------------

    \251\ See SEC Rel. No. 33-6275.
    \252\ See SEC Rel. No. 33-6949, at 36444.
---------------------------------------------------------------------------

    Model B was originally the product of a Commission review of the 
disclosure practices of Regulation A issuers under Model B's 
predecessor, Schedule I.\253\ The Commission found that Regulation A's 
then-existing disclosure guidance and rules did not provide 
sufficiently detailed directions for the types of offerings that were 
being conducted under Regulation A.\254\ As a result, issuers and their 
counsel often looked to the existing disclosure guides for the 
preparation of registration statements \255\ for guidance on disclosure 
under Regulation A.\256\ Such disclosure, however, lacked uniformity, 
and caused delays in the Commission staff review and comment 
process.\257\ Model B was a codification by the Commission of the 
disclosure standards that, in practice, were being applied to 
Regulation A offerings at that time.\258\ As enacted, Model B was not 
intended to increase the disclosure obligations of issuers. Rather, in 
addition to removing uncertainty as to the content of required 
disclosures, Model B's more comprehensive and uniform set of disclosure 
standards was intended to reduce an issuer's total time spent preparing 
and amending the offering circular, and the Commission staff's time 
spent reviewing and commenting on it. The result was offering statement 
disclosure that closely followed the disclosure requirements then in 
effect for registration statements, but scaled for smaller 
issuers.\259\
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    \253\ SEC Rel. No. 33-6275, at 2638.
    \254\ Id.
    \255\ See, e.g., SEC Rel. No. 33-4936 (Dec. 9, 1968) [33 FR 
18617] (Guides for Preparation and Filing of Registration 
Statements).
    \256\ SEC Rel. No. 33-6275, at 2638.
    \257\ Id.
    \258\ Id.
    \259\ As an example of the variances between Form 1-A and 
registered offering disclosure, Item 10 of Part II of Form 1-A 
called for disclosure of record ownership of voting securities by 
management and certain securityholders, whereas Form S-18, a 
simplified registration form available to certain corporate issuers 
going public for the first time before 1992, called for broader 
disclosure of beneficial ownership of such securities. See SEC Rel. 
No. 33-6275, at 2640. This distinction between Form 1-A and 
registered offering disclosure (on Form S-1) remains today.
---------------------------------------------------------------------------

    Form S-1. The 1992 amendments to Regulation A also permitted 
issuers to draft offering circular disclosure based on the narrative 
disclosure requirements for registered offerings found in the then-
newly created Form SB-1.\260\ When Form SB-1 was rescinded as part of 
the simplification and modernization of requirements for small 
businesses, including the adoption of the smaller reporting company 
concept, Form 1-A was revised to permit issuers to follow the narrative 
disclosure provisions of Part I of Form S-1.\261\ Thus, issuers are 
currently able to provide narrative disclosure under Part I of Form S-1 
based on the disclosure requirements for smaller reporting companies 
(if applicable) or for larger companies that do not fall within the 
definition of a smaller reporting company.\262\
---------------------------------------------------------------------------

    \260\ Form SB-1 replaced Form S-18. See SEC Rel. No. 33-6949, at 
36442.
    \261\ See SEC Rel. No. 33-8876, at 166.
    \262\ An issuer that qualifies as a smaller reporting company on 
the basis of public float or revenue (see, e.g., Exchange Act Rule 
12b-2, 17 CFR 240.12b-2) may follow the narrative disclosure 
requirements in Part I of Form S-1 that apply to such companies.
---------------------------------------------------------------------------

    Form S-1 and the narrative disclosure requirements of Regulation S-
K have been revised numerous times since the introduction of Model B 
disclosure in 1981 to reflect evolving disclosure requirements and 
standards. Model B disclosure, however, has remained essentially 
unchanged, as a version of Part I of Form S-1 circa 1981, scaled for 
smaller issuers. Thus, while eliciting disclosure of largely the same 
information, Model B and Part I of Form S-1 contain different item 
numbers and language.
    Proposed Offering Circular. We propose to retain Model B (which, in 
light of the proposed elimination of Model A, will be renamed 
``Offering Circular'') as a disclosure option under Part II of Form 1-
A, updated as detailed below in accordance with Title IV of the JOBS 
Act and to reflect developments in disclosure requirements for 
registered offerings since 1981. Updates to the Offering Circular would 
also incorporate the disclosure guidelines in the Securities Act 
Industry Guides and guidance on the disclosure requirements applicable 
to limited partnerships and limited liability companies.\263\ 
Additionally, we propose to continue to permit issuers to comply with 
Part II of Form 1-A by providing the narrative disclosure required in 
Part I of Form S-1.
---------------------------------------------------------------------------

    \263\ See Item 7(c)-(d) to Part II of proposed Form 1-A; see 
also SEC Rel. No. 33-6900 (June 17, 1991) [56 FR 28979] (setting 
forth the Commission's view on the disclosure requirements for 
limited partnerships).
---------------------------------------------------------------------------

    We solicit comment as to whether it would be more appropriate to 
eliminate Model B disclosure altogether, and, in its place, to require 
issuers to follow the disclosure and form requirements of Part I of 
Form S-1, while maintaining Model B-specific disclosures where noted. 
As with the proposed updates to Model B, to the extent the Commission 
chose to require disclosure that tracks Part I of Form S-1, it would 
not increase the disclosure obligations of issuers except where noted 
below.
    We are aware that eliminating Model A and updating Model B may 
raise concerns about an increase in the disclosure required for a 
Regulation A offering. Our proposal would create new requirements for 
audited financial statements (consistent with the JOBS Act requirement 
of the annual filing of audited financial statements) and for a section 
containing management's discussion and analysis (MD&A) of the issuer's 
liquidity, capital resources, and results of operations.\264\ 
Consistent with

[[Page 3948]]

the requirements of current Form 1-A, issuers that have not generated 
revenue from operations during each of the three fiscal years 
immediately before the filing of the offering statement would be 
required to describe their plan of operations for the twelve months 
following qualification of the offering statement.\265\ Otherwise, it 
is not intended to substantially alter current Model B disclosure 
requirements.
---------------------------------------------------------------------------

    \264\ While not currently an express disclosure requirement in 
Model B, some disclosure requirements similar to MD&A are included 
in Form 1-A. Disclosure similar to the MD&A required in registered 
offerings would provide potential investors with meaningful 
information upon which to make an investment decision. The proposed 
MD&A disclosure requirements would provide issuers with 
comprehensive guidance as to the specific requirements of such 
disclosure. The primary differences between the MD&A we propose to 
require in Form 1-A and the MD&A required under Item 303 of 
Regulation S-K, 17 CFR 229.303, are discussed below.
    \265\ See Item 6(3)(i) of Model B of Part II of Form 1-A.
---------------------------------------------------------------------------

    As proposed, Offering Circular disclosure in Part II of Form 1-A 
would cover:
     Basic information about the issuer and the offering, 
including identification of any underwriters and disclosure of any 
underwriting discounts and commissions (Item 1: Cover Page of Offering 
Circular);
     Material risks in connection with the offering (Item 3: 
Summary and Risk Factors);
     Material disparities between the public offering price and 
the effective cash costs for shares acquired by insiders during the 
past year (Item 4: Dilution);
     Plan of distribution for the offering, including the 
disclosure required by Item 7 (Marketing Arrangements) of Part I of 
current Form 1-A and disclosure regarding selling securityholders (Item 
5: Plan of Distribution and Selling Securityholders);
     Use of proceeds (Item 6: Use of Proceeds to Issuer);
     Business operations of the issuer for the prior three 
fiscal years (or, if in existence for less than three years, since 
inception) (Item 7: Description of Business);
     Material physical properties (Item 8: Description of 
Property);
     Discussion and analysis of the issuer's liquidity and 
capital resources and results of operations through the eyes of 
management covering the two most recently completed fiscal years; and, 
for issuers that have not received revenue from operations during each 
of the three fiscal years immediately before the filing of the offering 
statement, the plan of operations for the twelve months following 
qualification of the offering statement, including a statement about 
whether the issuer anticipates that it will be necessary to raise 
additional funds within the next six months (Item 9: Management's 
Discussion and Analysis of Financial Condition and Results of 
Operations);
     Identification of directors, executive officers and 
significant employees with a discussion of any family relationships 
within that group, business experience during the past five years, and 
involvement in certain legal proceedings during the past five years 
(Item 10: Directors, Executive Officers and Significant Employees);
     Executive compensation data for the most recent fiscal 
year for the three highest paid officers or directors (Item 11: 
Compensation of Directors and Officers);
     Beneficial ownership of voting securities by executive 
officers, directors, and 10% owners (Item 12: Security Ownership of 
Management and Certain Securityholders);
     Transactions with related persons, promoters and certain 
control persons (Item 13: Interest of Management and Others in Certain 
Transactions);
     The material terms of the securities being offered (Item 
14: Securities Being Offered);
     Two years of financial statements, which for Tier 2 
offerings would be required to be audited. Tier 1 offerings would be 
required to provide audited financial statements to the extent the 
issuer had prepared them for other purposes; \266\ and
---------------------------------------------------------------------------

    \266\ Financial statement requirements are discussed more fully 
in Section II.C.3.b(2). below.
---------------------------------------------------------------------------

     Any events that would have triggered disqualification of 
the offering under Rule 262 if the issuer could not rely on the 
provisions in proposed Rule 262(b)(1).\267\
---------------------------------------------------------------------------

    \267\ See discussion of disqualification provisions in Section 
II.G. below. We propose to require this ``bad actor'' disclosure 
even if the issuer elects to follow the Part I of Form S-1 
disclosure format.
---------------------------------------------------------------------------

    The proposed content of the Offering Circular would update the 
disclosure requirements in some respects to more closely align 
Regulation A disclosure with the smaller reporting company disclosure 
requirements for registered offerings, while certain scaled elements 
exclusive to Model B would be retained.\268\ The changes would result 
in more detailed instructions on issuer disclosure in the MD&A section 
of the Offering Circular, as well as a description of the issuer's 
business for a period of three years (as opposed to current Model B's 
five-year requirement), with the added disclosure of any legal 
proceedings material to the issuer's business or financial condition. 
These changes would make Offering Circular disclosure more akin to what 
is required of smaller reporting companies in a prospectus, but more 
limited in certain respects. Additionally, as with registered offerings 
by smaller reporting companies, issuers would be required to disclose 
beneficial ownership of their voting securities, as opposed to record 
ownership of voting and non-voting securities. Lastly, as to 
transactions with related persons, promoters and certain control 
persons, issuers would no longer be required to disclose such 
transactions in excess of $50,000 in the prior two years (or similar 
transactions currently contemplated), but rather to follow the 
requirements for smaller reporting company disclosure of transactions 
during the prior two fiscal years that exceed the lesser of $120,000 or 
1% of the average total assets at year end for the last two completed 
fiscal years.\269\
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    \268\ We are not proposing, however, to include in the Offering 
Circular all disclosures required of smaller reporting companies 
under Regulation S-K. For example, we do not propose to include in 
the Offering Circular disclosure required of certain issuers by the 
Dodd-Frank Act regarding conflict minerals, payments made by 
resource extraction issuers, see SEC Rel. No. 34-67717 (Aug. 22, 
2012) [77 FR 56365], pay ratio, pay for performance, hedging, or 
clawbacks. We also do not propose to require Regulation A issuers to 
provide disclosure regarding the market price of and dividends on 
common equity and related stockholder matters under Item 201 of 
Regulation S-K, 17 CFR 229.201, changes in and disagreements with 
accountants under Item 304 of Regulation S-K, 17 CFR 229.304, 
corporate governance matters under Item 407 of Regulation S-K, 17 
CFR 229.407, and the determination of offering price under Item 505 
of Regulation S-K, 17 CFR 229.505.
    \269\ See 17 CFR 229.404(d)(1).
---------------------------------------------------------------------------

    With the exception of the requirements for disclosure of beneficial 
ownership, material legal proceedings, and related party transactions 
for certain issuers,\270\ these proposed updates should not result in 
an overall increase in an issuer's disclosure obligations. For example, 
as mentioned above, issuers would be required to provide fewer years of 
business description and certain issuers would have a higher threshold 
for reporting transactions with related persons than current Model 
B.\271\ Further, issuers would be permitted to provide more streamlined 
disclosure of dilutive transactions with insiders by no longer being 
required to present a dilution table based on the net tangible book 
value per share of the issuer's securities.\272\ Additionally, while 
issuers would be provided with more detailed instructions on MD&A

[[Page 3949]]

disclosure, similar disclosure is already called for under current 
requirements.\273\ The proposed MD&A disclosure would clarify existing 
requirements and save issuers time by providing more express guidance 
regarding the type of information and analysis that should be included. 
We believe the clearer requirements should also lead to improved MD&A 
disclosure, which would provide investors with better visibility into 
management's perspective on the issuer's financial condition and 
operations. Investors would also receive the benefit of disclosure that 
is more consistent across issuers in both registered offerings and 
Regulation A offerings.
---------------------------------------------------------------------------

    \270\ As proposed, issuers that have $5 million (or less) in 
average total assets at year end for the last two completed fiscal 
years would be required to disclose related party transactions at a 
lower threshold (i.e., 1% or more) than under the requirements of 
current Model B, which requires the disclosure of transactions in 
excess of $50,000 in the prior two years.
    \271\ See id.
    \272\ See Item 4 (Dilution) to the Offering Circular in Part II 
of Form 1-A.
    \273\ MD&A disclosure is specifically required by Model A. Model 
B calls for similar information in Item 6, which requires disclosure 
of the characteristics of the issuer's operations or industry that 
may have a material impact upon the issuer's future financial 
performance. Item 6 also requires disclosure of the issuer's plan of 
operations and short-term liquidity if the issuer has not received 
revenue from operations during each of the three fiscal years 
immediately prior to filing the offering statement.
---------------------------------------------------------------------------

    Issuers providing disclosure in the Offering Circular would retain 
most of the scaled disclosure provisions currently found in Model B. We 
propose to continue to permit Regulation A issuers to:
     provide simplified executive compensation data for the 
three highest paid officers and directors in tabular form for the most 
recent fiscal year; \274\
---------------------------------------------------------------------------

    \274\ Cf. Item 402(l)-(r) of Regulation S-K, 17 CFR 229.402(l)-
(r), which requires more extensive disclosure and tabular 
information for the two most recent fiscal years.
---------------------------------------------------------------------------

     disclose 10% beneficial owners of voting securities; \275\ 
and
---------------------------------------------------------------------------

    \275\ Cf. Item 403 of Regulation S-K, 17 CFR 229.403, which 
requires disclosure of beneficial owners of more than 5% of voting 
securities.
---------------------------------------------------------------------------

     follow fewer specific disclosure requirements for the 
description of business section.\276\
---------------------------------------------------------------------------

    \276\ Compare the requirements of Item 6 of Model B, Part II of 
Form 1-A with the more prescriptive requirements of Item 11 of Form 
S-1 and Item 101 of Regulation S-K, 17 CFR 229.101.
---------------------------------------------------------------------------

    Additionally, the Offering Circular would, in comparison to Model B 
of Form 1-A, contain more express MD&A disclosure requirements and 
guidance.\277\ These requirements would not, however, be as extensive 
as those contained in Item 303 of Regulation S-K.\278\ For example, the 
Offering Circular would include detailed guidance and requirements 
similar to Item 303 with respect to liquidity, capital resources, and 
results of operations, including the most significant trend 
information,\279\ but would not require disclosure (in the normal 
course) of off-balance sheet arrangements or contractual 
obligations.\280\ As with the treatment of smaller reporting companies 
under Item 303(d), Regulation A issuers would only be required to 
disclose information about the issuer's results of operations for the 
two most recently completed fiscal years. Further, consistent with 
existing Form 1-A, issuers that have not generated revenue from 
operations during each of the three fiscal years immediately before the 
filing of the offering statement would have to describe their plan of 
operations for the twelve months following qualification of the 
offering statement, including a statement about whether, in the 
issuer's opinion, it will be necessary to raise additional funds within 
the next six months to implement the plan of operations.\281\
---------------------------------------------------------------------------

    \277\ The requirements for financial statements in Part F/S of 
Part II of Form 1-A are discussed in Section II.C.3.b(2). below.
    \278\ 17 CFR 229.303 (Management's discussion and analysis of 
financial condition and results of operations in the context of 
registered offerings).
    \279\ 17 CFR 303(a)(1)-(3). Cf. Form 20-F, at Item 5.
    \280\ During the course of the qualification process, Commission 
staff reviewing the offering statement may request the disclosure of 
such information, where the disclosure of such information would be 
material to an understanding of the issuer's financial condition.
    \281\ See Form 1-A, Model B, at Item 6 (Description of 
Business).
---------------------------------------------------------------------------

    Consistent with the treatment of issuers in registered offerings, 
we further propose to permit issuers to incorporate by reference into 
Part II of the Form 1-A certain items previously submitted or filed on 
EDGAR. Incorporation by reference would be limited to documents 
publicly submitted or filed under Regulation A, such as Form 1-A and 
Form 1-K, and their exhibits. In order to be permitted to incorporate 
by reference, issuers would have to be subject to the ongoing reporting 
obligations for Tier 2 offerings.\282\ Issuers would be required to 
describe the information incorporated by reference, which would be 
required to be accompanied by a separate hyperlink to the relevant 
document on EDGAR, which need not remain active after the filing of the 
related offering statement.
---------------------------------------------------------------------------

    \282\ Issuers following the Offering Circular disclosure model 
would be permitted to incorporate by reference Items 2 through 14, 
whereas issuers following the narrative disclosure in Part I of Form 
S-1 would be permitted to incorporate by reference Items 3 through 
11 of Part I of Form S-1. See General Instruction III to proposed 
Form 1-A. As with Model B, the item numbers in the Offering Circular 
model of proposed Part II of Form 1-A and Part I of Form S-1 do not 
align.
---------------------------------------------------------------------------

(2) Financial Statements
    Part F/S of Form 1-A currently requires issuers in Regulation A 
offerings to provide the following financial statements prepared in 
accordance with U.S. GAAP:
     a balance sheet as of a date within 90 days before filing 
the offering statement (or as of an earlier date, not more than six 
months before filing, if the Commission approves upon a showing of good 
cause) but, for filings made more than 90 days after the end of the 
issuer's most recent fiscal year, the balance sheet must be dated as of 
the end of the fiscal year;
     statements of income, cash flows, and stockholders' equity 
for each of the two fiscal years preceding the date of the most recent 
balance sheet, and for any interim period between the end of the most 
recent fiscal year and the date of the most recent balance sheet;
     financial statements of significant acquired businesses; 
and
     pro forma information relating to significant business 
combinations.
    As noted above, the financial statements are not required to be 
audited unless the issuer has already obtained an audit of its 
financial statements for another purpose. If the issuer has audited 
financial statements, the qualifications and reports of the auditor 
must meet the requirements of Article 2 of Regulation S-X \283\ and the 
audit must be conducted in accordance with U.S. Generally Accepted 
Auditing Standards (GAAS) or the standards of the Public Company 
Oversight Board (PCAOB), but auditors are not required to be registered 
with the PCAOB.\284\
---------------------------------------------------------------------------

    \283\ 17 CFR 210.1 et seq.
    \284\ See Form 1-A, Part F/S.
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    We have not received extensive comment on the potential financial 
statement requirements for issuers under Title IV of the JOBS Act. One 
commenter suggested audited financial statements should be required for 
all offerings.\285\ Another commenter urged the Commission to prohibit 
the use of financial projections unless they are reviewed, and filed 
along with the issuance of an unqualified opinion, by a licensed 
certified public accountant.\286\ Another commenter suggested--while 
discussing offering statements generally--that the Commission should 
consider scaling financial statement requirements on the basis of 
offering size.\287\
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    \285\ WR Hambrecht + Co. Letter.
    \286\ NASAA Letter 2.
    \287\ Campbell Letter.
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    We propose to generally maintain the existing financial statement 
requirements of current Part F/S for Tier 1 offerings, while requiring 
issuers in Tier 2 offerings to file audited financial

[[Page 3950]]

statements in Part F/S.\288\ Specifically, we propose to require all 
issuers to file balance sheets as of the two most recently completed 
fiscal year ends (or for such shorter time that they have been in 
existence), instead of the current requirement to file a balance sheet 
as of only the most recently completed fiscal year end. In light of the 
requirement in Part F/S for issuers to provide statements of income, 
cash flows, and stockholders' equity for each of the two fiscal years 
preceding the date of the most recent balance sheet, we believe issuers 
would already have the additional balance sheet or be in a position to 
easily generate the additional balance sheet at minimal additional 
cost, and that comparison between the two balance sheets would provide 
valuable additional information. Financial statements for U.S.-
domiciled issuers would be required to be prepared in accordance with 
U.S. GAAP, as is currently the case. We propose, however, to permit 
Canadian issuers to prepare financial statements in accordance with 
either U.S. GAAP or International Financial Reporting Standards (IFRS) 
as issued by the International Accounting Standards Board (IASB).\289\
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    \288\ See paragraph (c) of Part F/S of Form 1-A. An issuer 
offering up to $5 million that elects to conduct a Tier 2 offering 
would be required, in addition to filing audited financial 
statements in the offering statement, to provide ongoing reports to 
the Commission on the proposed annual and semiannual basis, with 
interim current event updates, see Section II.E.1. below, and only 
be permitted to terminate their ongoing reporting obligation by 
satisfying the requirements for filing a Form 1-Z described in 
Section II.E.4. below.
    \289\ If the financial statements comply with IFRS as issued by 
the IASB, such compliance must be unreservedly and explicitly stated 
in the notes to the financial statements and the auditor's report 
must include an opinion on whether the financial statements comply 
with IFRS as issued by the IASB. See General Rule (a)(2) to Part F/S 
of proposed Form 1-A. Cf. Item 17(c) of Form 20-F.
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    In general, issuers conducting Tier 1 offerings must follow the 
requirements for the form and content of their financial statements set 
out in Part F/S, rather than following the requirements in Regulation 
S-X. However, in certain less common circumstances, such as for an 
acquired business or subsidiary guarantors, Part F/S directs issuers 
conducting Tier 1 offerings to comply with certain portions of 
Regulation S-X, which provides guidance on the financial statements 
required in such transactions.\290\
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    \290\ We propose to update the requirements for financial 
statements of businesses acquired or to be acquired in Part F/S to 
refer to the requirements of Rule 8-04 of Regulation S-X. We also 
propose to provide specific references to the relevant provisions of 
Regulation S-X regarding the requirements for financial statements 
of guarantors and the issuers of guaranteed securities (Rule 3-10 of 
Regulation S-X), financial statements of affiliates whose securities 
collateralize an issuance of securities (Rule 3-16 of Regulation S-
X), and financial statements provided in connection with oil and gas 
producing activities (Rule 4-10 of Regulation S-X). The financial 
statements provided in these circumstances would only be required to 
be audited to the extent the issuer had already obtained an audit of 
its financial statements for other purposes.
---------------------------------------------------------------------------

    For all Tier 2 offerings, however, issuers would be required to 
follow the financial statement requirements of Article 8 of Regulation 
S-X, as if the issuer conducting a Tier 2 offering were a smaller 
reporting company, unless otherwise noted in Part F/S. This requirement 
would include any financial information with respect to acquired 
businesses required by Rule 8-04 and 8-05 of Regulation S-X.\291\
---------------------------------------------------------------------------

    \291\ Issuers would, however, follow paragraph (a)(3) of Part F/
S of Form 1-A with respect to the age of the financial statements 
and the periods to be presented.
---------------------------------------------------------------------------

    As with current Regulation A, financial statements in a Tier 1 
offering would not be required to be audited. However, we also propose 
to maintain Regulation A's existing requirement that, if an issuer 
conducting a Tier 1 offering has already obtained an audit of its 
financial statements for other purposes, and that audit was performed 
in accordance with U.S. generally accepted auditing standards or the 
auditing standards of the PCAOB, and the auditor was independent 
pursuant to Rule 2-01 of Regulation S-X, then those audited financial 
statements must be filed. The auditor may, but need not be, registered 
with the PCAOB.
    Issuers conducting Tier 2 offerings would, by contrast, be required 
to have their financial statements audited. As with Tier 1 offerings, 
the auditor of financial statements being filed as part of a Tier 2 
offering must be independent under Rule 2-01 of Regulation S-X and must 
comply with the other requirements of Article 2 of Regulation S-X, but 
need not be PCAOB-registered.\292\ Issuers conducting Tier 2 offerings 
would, however, be required to provide financial statements that are 
audited in accordance with the standards of the PCAOB. In addition to 
auditing standards, PCAOB standards include requirements on auditor 
ethics, independence and quality control that, in comparison to the 
auditing standards of U.S. GAAS, could improve the quality of the audit 
and the financial statements provided to investors in potentially 
larger Tier 2 offerings.
---------------------------------------------------------------------------

    \292\ See Part F/S of Form 1-A (referencing Article 2 of 
Regulation S-X, 17 CFR 210.2-01 et seq.).
---------------------------------------------------------------------------

    Additionally, we propose to update the Form 1-A financial statement 
requirements to be consistent with the proposed timetable for ongoing 
reporting.\293\ Under Regulation A, as currently in effect, issuers are 
required to prepare a balance sheet as of a date not more than 90 days 
before filing the offering statement, or not more than six months 
before filing if the Commission approves upon a showing of good 
cause.\294\ If the financial statements are filed more than 90 days 
after the end of the issuer's most recently completed fiscal year, the 
financial statements must include that fiscal year.\295\ In practice, 
however, Commission staff reviewing Form 1-A filings routinely affords 
issuers the six-month accommodation, subject to the requirement that 
financial statements must otherwise be dated as of the end of the most 
recently completed fiscal year if filed more than 90 days after the end 
of such fiscal year.
---------------------------------------------------------------------------

    \293\ Our proposals for ongoing reporting are discussed in 
Section II.E. below.
    \294\ See Form 1-A, Part F/S.
    \295\ Id.
---------------------------------------------------------------------------

    We propose to extend the permissible age of financial statements in 
Form 1-A to nine months, in order to permit the provision of financial 
statements that are updated on a timetable consistent with our proposed 
requirement for semiannual interim reporting.\296\ We also propose to 
add a new limitation on the age of financial statements at 
qualification, under which an offering statement could not be qualified 
if the date of the balance sheet included under Part F/S were more than 
nine months before the date of qualification.\297\ For filings made 
more than three months after the end of the issuer's most recent fiscal 
year, the balance sheet would be required to be dated as of the end of 
the most recent fiscal year.\298\ For filings made more than nine 
months after the end of the issuer's most recent fiscal year, the 
balance sheet would be required to be dated no earlier than as of six 
months after the end of the most recent fiscal year.\299\ If interim 
financial statements are required, they would be required to cover a 
period of at least six months.\300\ Requiring issuers to file

[[Page 3951]]

interim financial statements no older than nine months and covering a 
minimum of six months would have the beneficial effect of eliminating 
what could otherwise be a requirement for certain issuers to provide 
quarterly interim financial statements during the qualification process 
and would be consistent with the timing of our proposed ongoing 
reporting requirements.\301\ We propose to generally maintain the 
timing requirement of existing Form 1-A concerning the date after which 
an issuer must provide financial statements dated as of the most 
recently completed fiscal year, but to change the interval from 90 
calendar days to three months, which we believe would simplify 
compliance.
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    \296\ This age of financial statements requirement is also 
consistent with the treatment of foreign private issuers in the 
context of registered offerings. See Division of Corporation 
Finance's Financial Reporting Manual, at 6620, available at: https://www.sec.gov/divisions/corpfin/cffinancialreportingmanual.pdf#topic6.
    \297\ Currently, Form 1-A does not expressly limit the age of 
financial statements at qualification. In practice, however, 
Commission staff requires issuers to update financial statements 
before qualification to the extent such financial statements no 
longer satisfy Form 1-A's requirements for the age of financial 
statements at the time of filing.
    \298\ See paragraph (a)(3)(i) to Part F/S of proposed Form 1-A.
    \299\ Id.
    \300\ See paragraph (a)(3)(iv) to Part F/S of proposed Form 1-A.
    \301\ See discussion in Section II.E.1.b. below (Semiannual 
Reports on Form 1-SA).
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    We solicit comment below on whether issuers conducting Tier 2 
offerings should be required to provide their financial statements to 
the Commission and on their corporate Web sites in interactive data 
format using the eXtensible Business Reporting Language (XBRL).\302\ We 
have not received any public comment on this issue to date and do not 
propose any such requirement. If the Commission were to adopt any such 
requirement, as with registered offerings, the interactive data would 
have to be provided as an exhibit to the offering statement filed with 
the Commission. On the same basis and subject to the same 
qualifications, interactive data would be required for all periodic and 
current reporting, as well as for the annual audited financial 
statements. Filers would be required to prepare their interactive data 
using the list of tags the Commission specifies and submit them with 
any supporting files the EDGAR Filer Manual prescribes.\303\ 
Interactive data would be required for the complete set of their 
financial statements, which includes the face financial statements and 
all footnotes.\304\ Filers would be required to tag every financial 
statement line item and ``detail tag'' the footnotes by tagging each 
amount.
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    \302\ Data becomes interactive when it is labeled or ``tagged'' 
using a computer markup language such as XBRL that software can 
process for analysis. For a discussion of current financial 
statement interactive data requirements, see SEC Rel. No. 33-9002 
(Jan. 30, 2009) [74 FR 6776]. Financial statements for issuers 
seeking to qualify Tier 1 offerings may be treated differently 
because audited financial statements may not be required in the 
offering statements of such issuers.
    \303\ The EDGAR Filer Manual is available at: https://www.sec.gov/info/edgar/edmanuals.htm.
    \304\ 17 CFR 210.12-01 et seq.
---------------------------------------------------------------------------

c. Part III (Exhibits)
    We have not received any comments about the exhibits that should be 
filed with the offering statement.\305\ We propose to continue to 
permit issuers to incorporate by reference certain information in 
documents filed under Regulation A that is already available on EDGAR, 
but, in addition to the requirement to describe the information 
incorporated by reference, issuers would be required to include a 
hyperlink to such exhibit on EDGAR.\306\ As proposed, such issuers 
would also have to be subject to the ongoing reporting obligations for 
Tier 2 offerings. To the extent post-qualification amendments to 
offering statements must include audited financial statements, the 
consent of the certifying accountant to the use of such accountant's 
certificate in connection with the amended financial statements must be 
included.\307\ Additionally, and consistent with the requirements of 
existing Regulation A, any solicitation materials used by the issuer 
would have to be included as an exhibit to the offering statement at 
the time of non-public submission or filing.
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    \305\ Part III (Exhibits) of Form 1-A currently requires issuers 
to file the following exhibits with the offering statement: 
Underwriting agreement; Charter and by-laws; Instrument defining the 
rights of securityholders; Subscription agreement; Voting trust 
agreement; Material contracts; Material foreign patents; Plan of 
acquisition, reorganization, arrangement, liquidation, or 
succession; Escrow agreements; Consents; Opinion re legality; Sales 
material; ``Test the water'' material; Appointment for agent for 
service of process; and any additional exhibits the issuer may wish 
to file.
    \306\ See General Instruction III to proposed Form 1-A and 
discussion in Section II.C.3.b(1). above regarding incorporation by 
reference in Part II of Form 1-A. The hyperlink must be active at 
the time of filing, but need not remain active after filing.
    \307\ This is consistent with current practice under Regulation 
A, but would be made an express requirement under the proposed 
rules. See proposed Rule 252(h)(1)(ii).
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d. Signature Requirements
    Under current Regulation A, an issuer must file seven copies of the 
offering statement with the Commission, at least one of which must be 
manually signed.\308\ In light of the proposed electronic filing 
requirements for Regulation A offering materials discussed above,\309\ 
however, issuers would no longer be required to file a manually signed 
copy of the Form 1-A with the Commission.\310\ Similar to the 
requirement for issuers in the context of registered offerings, issuers 
would instead be required to manually sign a copy of the offering 
statement before or at the time of filing that would have to be 
retained by the issuer for a period of five years.\311\ Issuers would 
be required to produce the manually signed copy to the Commission, upon 
request.\312\
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    \308\ See Rule 252(e).
    \309\ See discussion in Section II.C.1. above.
    \310\ This proposed requirement would also apply to any Form 1-A 
non-publicly submitted to the Commission.
    \311\ See Instruction 2 to Signatures in Form 1-A; cf. Rule 
402(e), 17 CFR 230.402(e).
    \312\ Id.
---------------------------------------------------------------------------

    Additionally, if the issuer filing a Form 1-A under current 
Regulation A is a Canadian issuer, its authorized representative in the 
United States is required to sign the offering statement.\313\ This 
requirement corresponds to a similar requirement under Section 6 of the 
Securities Act for filings of registration statements by foreign 
issuers.\314\ We propose to eliminate this requirement under Regulation 
A. Offerings qualified under Regulation A are not subject to the 
liability provisions of Section 11 of the Securities Act, and having a 
signatory in the United States does not provide purchasers with 
significant additional protections. In addition, we propose to maintain 
the requirement that Canadian issuers file a Form F-X \315\ to provide 
an express consent to service of process in connection with offerings 
qualified under Form 1-A. This treatment is similar to requirements for 
Canadian companies making filings under the multijurisdictional 
disclosure system.\316\
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    \313\ See Rule 252(f) and Instruction 1 to Signatures of Form 1-
A.
    \314\ 15 U.S.C. 77f(a).
    \315\ 17 CFR 239.42.
    \316\ See SEC Rel. No. 33-6902 (June 21, 1991) [56 FR 30036] 
(adopting the multijurisdictional disclosure system).
---------------------------------------------------------------------------

Request for Comment
    45. Should we continue to require a Part I (Notification) to be 
filed as part of the offering statement on Form 1-A? If so, should we 
require additional (or less) information in Part I than is currently 
required or proposed? If so, provide justifications for such 
disclosure.
    46. As proposed, what would be the costs and benefits associated 
with requiring an issuer, as part of the electronic filing process, to 
enter key information about itself and its securities on a formatted 
cover sheet to accompany the EDGAR-formatted text file attachment?
    47. Some market participants have urged us to simplify the 
disclosure requirements associated with Regulation A in order to 
facilitate more cost-effective capital formation by small 
companies.\317\ Most commenters,

[[Page 3952]]

however, have not made specific suggestions. Are there particular 
disclosure requirements associated with Regulation A that are most in 
need of simplification? Are there currently required disclosures that 
could be modified? Alternatively, are there any disclosure standards, 
not currently required or proposed in Regulation A, that should be 
included as disclosure requirements in the new Form 1-A? If so, which 
disclosure could be reduced or eliminated, or should be included?
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    \317\ Alpine Ventures Letter; Campbell Letter; Lacey Letter; 
Oggilby Letter.
---------------------------------------------------------------------------

    48. As proposed, should we continue to maintain certain disclosure 
requirements in the proposed Offering Circular, while updating others 
to be more in line with the disclosure required of smaller reporting 
companies? If not, why not? Please provide suggestions as to what 
disclosure should be preserved in the Offering Circular or updated to 
accord with the smaller reporting company requirements in the context 
of registered offerings.
    49. Should we provide for scaled narrative disclosure in Form 1-A 
based on the size of the issuer or size of the offering? Why or why 
not? If so, on what size-based attributes of an issuer or the offering 
should we base any such scaled disclosure requirements and what types 
of scaled disclosure would be applicable to each resulting category?
    50. Should we update and provide more specific guidance as to the 
MD&A section required to be included in the Offering Circular, as 
proposed? Is there any additional guidance we should provide?
    51. As proposed, and consistent with the requirements of smaller 
reporting companies under Item 303 of Regulation S-K, should we permit 
Regulation A issuers to provide only two years of information about 
their results of operations? Why or why not? Are there any other 
specific provisions from Item 303 of Regulation S-K that would (or 
would not) be appropriate for the types of issuers likely to rely on 
Regulation A? If so, please explain why any such provision should (or 
should not) apply.
    52. Should we continue to require, as proposed, the disclosure of 
an issuer's plan of operations for the twelve months following 
qualification of the offering statement? Why or why not? Alternatively, 
is this disclosure requirement appropriate for the types of issuers 
likely to rely on Regulation A? If not, why not?
    53. Should we consider adding a disclosure requirement in Part II 
of Form 1-A that would require issuers to disclose the value of the 
issuer prior to the contemplated Regulation A offering (i.e., pre-money 
value)? If so, are there any practical limitations on the ability of 
issuers with complicated capital structures to provide investors with 
an accurate figure or basis for such a calculation? Should we also 
consider requiring disclosure of how the price to the public of the 
securities being offered was determined?
    54. Would it be an efficiency to issuers if we were to eliminate 
the proposed Offering Circular disclosure format, and instead have Form 
1-A refer issuers item-by-item to Form S-1 requirements, while 
preserving--where noted in Form 1-A itself--Model B-specific scaling? 
Alternatively, should we continue to allow issuers to use Part I of 
Form S-1 as a separate disclosure option in Part II of Form 1-A? Why or 
why not?
    55. Should we make changes to the exhibit requirements of Part III 
of Form 1-A in addition to those proposed? For example, should we 
change the standard for filing material contracts by specifically 
excluding certain types of contracts?
    56. As proposed, should we permit issuers that are current in their 
Tier 2 reporting obligations to incorporate by reference certain 
information in documents filed under Regulation A into Part II of the 
offering statement, while also requiring issuers to include a hyperlink 
to such information on EDGAR? Why or why not? If so, should we also 
permit successor entities to incorporate by reference to the extent 
their predecessors were eligible? Why or why not? If we permit the 
incorporation by reference of information already available on EDGAR, 
should we exclude shell companies or any other types of entities from 
being able to rely on any such accommodation? \318\ Why or why not? 
Should issuers be permitted to incorporate by reference to Exchange Act 
reports and documents filed in connection with registered offerings?
---------------------------------------------------------------------------

    \318\ Shell companies (other than business combination shell 
companies) are currently unable to incorporate by reference prior 
Exchange Act reports in Form S-1. See General Instruction VII.D. to 
Form S-1.
---------------------------------------------------------------------------

    57. Should we alter the proposed period of time in which an issuer 
must have been current in their ongoing reporting in order to be able 
to incorporate by reference certain information into Part II of Form 1-
A that is already available on EDGAR? If so, what period of time should 
apply to any requirement that an issuer be current in filing its 
ongoing reports?
    58. Instead of the proposed general requirement that issuers must 
file audited financial statements for Tier 2 offerings, should the 
rules require audited financial statements at a different threshold 
(e.g., for all offerings--whether under Tier 1 or Tier 2--in excess of 
the $500,000 requirement for audited financial statements set forth 
under the Commission's proposed crowdfunding exemption pursuant to 
Section 4(a)(6) of the Securities Act, or for all Regulation A 
offerings)? Are there other characteristics of an offering, other than 
the aggregate offering amount, that should trigger the audited 
financial statement requirement, such as public float or asset size of 
the issuer? If so, which other characteristics?
    59. For Tier 2 offerings, should the financial statement updating 
requirement be changed from the proposed requirements in Part F/S of 
Form 1-A that would permit issuers to file financial statements based 
on a balance sheet dated within nine months of non-public submission or 
filing, but must otherwise be dated as of the end of the most recently 
completed fiscal year, if non-publicly submitted or filed three months 
after the end of such fiscal year? Or should Part F/S of Form 1-A 
require updating for Tier 2 offerings on a schedule similar to what 
would be required in a registered offering by a smaller reporting 
company? Why or why not?
    60. As proposed, should we require issuers to file balance sheets 
for the two most recently completed fiscal years, instead of the 
current requirement to file a balance sheet for only the most recently 
completed fiscal year? Why or why not?
    61. As proposed, should we permit Canadian issuers to prepare their 
financial statements using IFRS as issued by the IASB, rather than U.S. 
GAAP? If so, as noted above in Section II.B.1.a., to the extent we 
extend issuer eligibility to include foreign private issuers, should we 
permit all foreign private issuers to prepare their financial 
statements using IFRS as issued by the IASB, rather than U.S. GAAP?
    62. As proposed, in Tier 1 offerings should we only refer to 
Regulation S-X when describing the auditor independence and compliance 
requirements of Article 2 and the financial statement requirements 
relating to guarantors and issuers of guaranteed securities, affiliates 
whose securities collateralize an issuance, or issuers engaged in oil 
and gas producing activities? Should we clarify the financial statement 
requirements in other specific situations? Instead of referring to 
Regulation S-X, should we develop new standards appropriate for Tier 1 
offerings?
    63. As proposed, should we permit issuers that do not qualify as a 
smaller

[[Page 3953]]

reporting company to only provide two years of audited financial 
statements for Tier 2 offerings? Or should we require such issuers to 
file three years of financial statements? Why or why not?
    64. As proposed, should we require that, when audited financial 
statements are required to be filed in Part F/S for Tier 2 offerings, 
those audits be conducted in accordance with PCAOB standards? 
Alternatively, as with existing Regulation A, should we require the 
financial statements audit to be performed in accordance with U.S. GAAS 
or the PCAOB standards? Should we require auditors to be PCAOB-
registered? Why or why not?
    65. Would there be a cost difference to issuers of requiring audits 
in Tier 2 offerings to be conducted in accordance PCAOB standards, as 
proposed, compared to U.S. GAAS? Would there be a benefit to investors?
    66. Would there be a cost difference to issuers if, in addition to 
requiring auditors to conduct the audits in Tier 2 offerings in 
accordance with PCAOB standards, as proposed, we also required auditors 
to be PCAOB-registered? Would there be a benefit to investors?
    67. Should we require interactive data tagging of financial 
statements included in Regulation A offering statements? If so, should 
we require interactive data for all Regulation A offerings, or only 
Tier 2 offerings? What effect would the cost of compliance with any 
interactive data tagging requirements have on the issuers likely to 
rely on Regulation A? If we require interactive data tagging, should we 
implement a phase-in period for such tagging and detailed footnote and 
schedule tagging?
    68. As noted above in Section II.B.1.b. discussing issuer 
eligibility, in order to address concerns regarding the use of 
Regulation A by REITs (and on the potential use by BDCs) absent 
additional REIT- (or BDC-) specific disclosures, should we require 
additional disclosure by REITs (and BDCs, if ultimately permitted to 
rely on the exemption)? Why or why not? If so, please make specific 
recommendations as to the form and content of any such additional 
disclosure.
    69. As proposed, should we continue to permit issuers to 
incorporate by reference certain information into Part III (Exhibits) 
of the offering statement that was previously filed on EDGAR, while 
also requiring issuers to be subject to a Tier 2 reporting obligation? 
Or, as with current Regulation A, should we permit issuers to 
incorporate by reference in Part III of Form 1-A certain information 
irrespective of their obligation to file ongoing reports under Tier 2 
of Regulation A? Why or why not?
    70. As proposed, should we require issuers to retain manually 
signed copies of the offering statement for a period of five years? Or 
should we consider an alternative retention period? Alternatively, 
should we eliminate the requirement altogether in favor of alternative 
signature methods (e.g., electronic signatures)? Why or why not?
    71. As proposed, should we eliminate the requirement that Form 1-A 
be signed by an authorized representative in the United States when the 
filer is a Canadian issuer? Should we, as proposed, require Canadian 
issuers to file a Form F-X to provide an express consent to service of 
process in connection with offerings qualified under Form 1-A? Why or 
why not? If so, should Form F-X be required to be filed by Canadian 
issuers in connection with other filings under Regulation A, including 
proposed new Form 1-K, Form 1-SA, Form 1-U, or Form 1-Z? \319\ Why or 
why not?
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    \319\ The proposed rules for ongoing reporting, and related 
forms, are discussed in Section II.E.1. below.
---------------------------------------------------------------------------

4. Continuous or Delayed Offerings and Offering Circular Supplements
    Rule 251(d)(3) currently allows for continuous or delayed offerings 
under Regulation A if permitted by Rule 415.\320\ By reference to the 
undertakings of Item 512(a) of Regulation S-K,\321\ Rule 415 does not 
necessarily require every change in the information contained in a 
prospectus to a registration statement in a continuous offering to be 
reflected in a post-effective amendment.\322\ On the other hand, 
Regulation A requires every revised or updated offering circular in a 
continuous offering to be filed as an amendment to the offering 
statement to which it relates and requalified in a process analogous to 
the Commission staff review, comment and qualification process for 
initial offering statements.\323\ The requalification process can be 
costly and time consuming for smaller issuers conducting continuous 
offerings of securities pursuant to Regulation A.\324\ As discussed 
more fully below, we propose to clarify in the proposed rules for 
Regulation A the scope of permissible continuous or delayed offerings 
and the related concept of offering circular supplements.
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    \320\ 17 CFR 230.415.
    \321\ 17 CFR 230.415(a)(3).
    \322\ See 17 CFR 229.512(a)(1) (requiring issuers to file a 
post-effective amendment for purposes of an update under Section 
10(a)(3) of the Securities Act, to reflect any facts or events 
arising after effectiveness that, individually or in the aggregate, 
represent a fundamental change in the information set forth in the 
registration statement, or to include, subject to certain 
exceptions, any material information with respect to the plan of 
distribution not previously disclosed (or material changes to 
information previously disclosed) in the registration statement).
    \323\ See Rule 253(e); Rule 252(h)(1).
    \324\ See Kaplan Voekler Letter 2.
---------------------------------------------------------------------------

    Rule 415 attempts to promote efficiency and cost savings in the 
securities markets by allowing for the registration of certain 
traditional and other shelf offerings.\325\ When Rule 415 was adopted, 
the Commission recognized that certain traditional shelf offerings have 
been allowed by administrative practice for many years despite the 
absence of such a rule.\326\ Since Rule 415 only addresses registered 
offerings, however, the precise scope of continuous or delayed 
offerings under Regulation A has been unclear. We believe that proposed 
Regulation A should continue to allow for certain traditional shelf 
offerings to promote flexibility, efficiency, and to reduce unnecessary 
offerings costs.\327\ However, we propose to condition the ability to 
sell securities in a continuous or delayed offering on being current 
with ongoing reporting requirements at the time of sale. We believe 
this additional condition will not impose incremental costs on issuers, 
which are in any case required to update their offering statement and 
to file such ongoing reports, and will insure parity of information in 
secondary markets.
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    \325\ See SEC Rel. No. 33-6499 [48 FR 52889] (Nov. 23, 1983) 
(noting the efficiency and cost savings issuers experienced during 
the eighteen month trial period for a previous temporary version of 
the rule).
    \326\ Certain ``traditional shelf offerings'' have been allowed 
since at least 1968 by the Commission's guides for the preparation 
and filing of registration statements, such as Guide 4, and related 
administrative practice. See id.; see also SEC Rel. No. 33-4936 [33 
FR 18617] (Dec. 9, 1968) (adopting Guide 4 and other Commission 
guides).
    \327\ See SEC Rel. No. 33-6499, at IV.A. (``[T]he procedural 
flexibility afforded by the Rule enables a registrant to time its 
offering to avail itself of the most advantageous market conditions 
. . . registrants are able to obtain lower interest rates on debt 
and lower dividend rates on preferred stock, thereby benefiting 
their existing shareholders. The flexibility provided by [Rule 415] 
also permits variation in the structure and terms of securities on 
short notice, enabling registrants to match securities with the 
current demands of the marketplace.'').
---------------------------------------------------------------------------

    To provide clarity regarding the application of Rule 415 concepts 
to Regulation A offerings, we propose to add a provision to Regulation 
A similar to Rule 415, but with limitations we believe would be 
appropriate in the context of Regulation A. The provision would 
establish time limits similar to those in Rule 415 and make conforming 
changes as necessary.\328\
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    \328\ Proposed Rule 251(d)(3).

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[[Page 3954]]

    The proposed rule would provide for continuous or delayed offerings 
for the following types of offerings:
     securities offered or sold by or on behalf of a person 
other than the issuer or its subsidiary;
     securities offered and sold pursuant to a dividend or 
interest reinvestment plan or an employee benefit plan of the issuer;
     securities issued upon the exercise of outstanding 
options, warrants, or rights;
     securities issued upon conversion of other outstanding 
securities;
     securities pledged as collateral; or
     securities the offering of which commences within two 
calendar days after the qualification date, will be made on a 
continuous basis, may continue for a period in excess of 30 days from 
the date of initial qualification, and will be offered in an amount 
that, at the time the offering statement is qualified, is reasonably 
expected to be offered and sold within two years from the initial 
qualification date.\329\
---------------------------------------------------------------------------

    \329\ Id.
---------------------------------------------------------------------------

    The Rule 415 offerings we have not proposed to incorporate into 
Regulation A are those that would not have been available under 
existing Regulation A, such as those requiring securities to be 
registered on Form S-3 or Form F-3 or those conducted by issuers 
ineligible to use Regulation A,\330\ as well as certain offerings that 
we do not currently believe would be appropriate to include in the 
Regulation A framework. For example, transactions typically done on 
Form S-4, such as acquisition shelf business combination transactions, 
would be excluded under the proposed rules. Further, we propose to 
prohibit all ``at the market'' offerings under Regulation A.\331\ While 
it is possible that a market in Regulation A securities may develop 
that is capable of supporting primary and secondary at the market 
offerings, rather than permit such offerings at the outset, we believe 
that any Regulation A market that develops on the basis of the proposed 
rules should be monitored in the short term to determine whether the 
exemption would be an appropriate method for such offerings going 
forward. Further, an offering sold at fluctuating market prices may not 
be appropriate within the context of an exemption that is contingent 
upon not exceeding a maximum offering size. We do, however, seek 
comment as to whether the provision should permit primary and/or 
secondary offerings conducted in reliance on Regulation A to be sold at 
market prices.
---------------------------------------------------------------------------

    \330\ Rule 415(a)(1)(xi) discusses investment companies and 
BDCs.
    \331\ See proposed Rule 251(d)(3)(ii).
---------------------------------------------------------------------------

    Under the proposed rules, changes in the information contained in 
the offering statement would no longer necessarily trigger an 
obligation to amend.\332\ Offering circulars for continuous Regulation 
A offerings would continue to be required to be updated, and the 
offering statements to which they relate requalified, annually to 
include updated financial statements, and otherwise as necessary to 
reflect facts or events arising after qualification which, in the 
aggregate, represent a fundamental change in the information set forth 
in the offering statement.\333\ In addition to post-qualification 
amendments to the offering statement that must be qualified, however, 
we also propose to allow issuers to use offering circular supplements 
in certain situations.\334\ Further, we propose to permit issuers in 
continuous offerings to qualify additional securities in reliance on 
Regulation A by a post-qualification amendment.\335\
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    \332\ See proposed Rule 252(h)(1).
    \333\ Proposed Rule 252(h)(2). See also discussion in Section 
II.E.1. below.
    \334\ One commenter suggested that such supplements be 
permitted. See Kaplan Voekler Letter 2.
    \335\ See note to proposed Rule 253(b).
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    The proposed rules would build on Regulation A to create a regime 
similar to what is permissible for registered offerings, and would draw 
from and adapt the language in Rule 424, Item 512 of Regulation S-K, 
and Rule 430A \336\ to do so. Although filing a post-qualification 
amendment and a review by the Commission staff remains appropriate in 
some circumstances, we recognize that additional flexibility could be 
provided in other circumstances. Under the proposed rules, we borrow 
from the experience in registered offerings under Rule 415 to permit 
offering circular supplements for continuous or delayed offerings where 
the offering statement is not required to be amended by Regulation A 
and there is no fundamental change in the offering statement's 
disclosure. We also propose to allow the use of offering circular 
supplements for final pricing information, where the offering statement 
is qualified on the basis of a bona fide price range estimate.\337\ 
Additionally, offering circulars would be permitted to omit information 
with respect to the underwriting syndicate analogous to the provisions 
for registered offerings under Rule 430A.\338\ The volume of securities 
(the number of equity securities or aggregate principal amount of debt 
securities) to be offered would not, however, be allowed to be 
omitted.\339\ As proposed, an offering circular supplement could also 
be used to indicate a decrease in the volume of, or to change the price 
range of, the securities offered in reliance on a qualified offering 
statement under Regulation A, provided that, in the aggregate, such 
changes represent no more than a 20% change from the maximum aggregate 
offering price calculable using the information in the qualified 
offering statement.\340\ In such circumstances, offering circular 
supplements would not be available where the maximum aggregate offering 
price resulting from any changes in the price of the securities would 
exceed the offering amount limitation set forth in proposed Rule 251(a) 
or if the increase in aggregate offering price would result in a Tier 1 
offering becoming a Tier 2 offering. Allowing for the use of offering 
circular supplements in the situations outlined above would not alter 
the legal determination as to whether such information must be provided 
to investors, but would align Regulation A with prevailing market and 
Commission staff practices.\341\
---------------------------------------------------------------------------

    \336\ 17 CFR 230.430A.
    \337\ See proposed Rule 252(h). Relatedly, the Commission noted 
in the 1992 amendments to Regulation A that pricing information 
under Rule 430A did not necessarily need to be included in the final 
offering circular. See SEC Rel. No. 33-6949, at fn. 58. As proposed, 
the bona fide price range estimate could not exceed $2 for offerings 
where the upper end of the range is $10 or less and 20% if the upper 
end of the price range is over $10. See proposed Rule 253(b)(2).
    \338\ See proposed Rule 253(b) (also permitting the omission of 
underwriting discounts or commissions, discounts or commissions to 
dealers, amount of proceeds, conversion rates, call prices and other 
items dependent upon the offering price, delivery dates, and terms 
of the securities dependent upon the offering date, so long as 
certain conditions are met); Cf. Rule 430A, 17 CFR 430A.
    \339\ See proposed Rule 253(b)(4).
    \340\ See note to proposed Rule 253(b); Cf. Instruction to 
paragraph (a) in Rule 430A(a), 17 CFR 230.430A(a).
    \341\ Cf. SEC Rel. No. 33-6714 [52 FR 21252] (June 5, 1987) 
(noting that the adoption of Rule 430A and the related changes to 
the procedures set forth in Rule 424 were ``intended to simplify and 
reduce filing obligations without reducing investor protection.'').
---------------------------------------------------------------------------

    We further propose provisions similar to Rule 424 that would 
require issuers omitting certain information from an offering statement 
at the time of qualification, in reliance on proposed Rule 253(b), to 
file such information as an offering circular supplement no later than 
two business days following the earlier of the date of determination of 
such pricing information or the date of first use of the offering 
circular after qualification.\342\ Further, these proposed provisions 
would require offering circulars that contain substantive

[[Page 3955]]

changes (other than information omitted in reliance on proposed Rule 
253(b)) in information previously provided in the last offering 
circular to be filed within five business days after the date such 
offering circular is first used after qualification.\343\ Offering 
circular supplements that are not filed within the required time frames 
provided by the proposed rules would be required to be filed as soon as 
practicable after the discovery of the failure to file.\344\ We are 
soliciting comment on the scope of changes that should require a post-
qualification amendment instead of an offering circular supplement.
---------------------------------------------------------------------------

    \342\ See proposed Rule 253(g).
    \343\ See proposed Rule 253(g)(2).
    \344\ See proposed Rule 253(g)(4).
---------------------------------------------------------------------------

Request for Comment
    72. Should Regulation A continue to permit traditional shelf 
offerings, as proposed? Are there types of transactions not currently 
covered by Rule 415 that should be included in the rules relating to 
continuous offerings under Regulation A? If so, provide justification 
for including those transactions in Regulation A.
    73. Should we use the time limits for continuous offerings found in 
Rule 415 for similar Regulation A offerings or should we lengthen or 
shorten such requirements? If so, please suggest new time limits and 
explain why they are preferable to the proposed time limits.
    74. As proposed, should we permit continuous offerings that would 
be offered in an amount that, at the time the offering statement is 
qualified, the issuer reasonably expects to offer and sell within two 
years from the initial qualification date? Or should we limit this time 
period to one year from the initial qualification date?
    75. We propose to no longer require issuers to amend an offering 
statement every time any information contained in the offering 
statement is changed, as is currently required in Rule 252(h), and 
instead require amendments to the offering statement to be filed and 
requalified annually to include updated financial statements, and 
otherwise as necessary to reflect facts or events arising after 
qualification which, in the aggregate, represent a fundamental change 
in the information set forth in the offering statement. Are there other 
types of changes in information or disclosure that should require a 
post-qualification amendment that must be qualified, rather than an 
offering circular supplement? Should we use a standard different from 
the ``fundamental change'' standard proposed, which is based on Item 
512(a) of Regulation S-K? Please provide justifications for your 
suggested approach.
    76. As proposed, should we permit issuers to qualify additional 
securities in reliance on Regulation A by filing a post-qualification 
amendment to a qualified offering statement? Why or why not?
    77. As proposed, should we adopt provisions similar to Rule 430A 
that would permit issuers to omit certain information with respect to, 
among other things, the underwriting syndicate and related information 
analogous to the provisions for registered offerings under Rule 430A? 
Why or why not? Additionally, as proposed, should we permit decreases 
to the volume of, or deviations from the price range of, the securities 
offered in reliance on Regulation A within the described limits?
    78. As proposed, should we include in Regulation A provisions 
similar to Rule 424, which would require issuers relying on proposed 
Rule 253(b) to omit certain information from an offering statement at 
the time of qualification to file such information as an offering 
circular supplement no later than two business days following the 
earlier of the date of determination of such pricing information or the 
date of first use of the offering circular after qualification? Why or 
why not? Additionally, as proposed, should we require offering 
circulars that contain substantive changes (other than information 
omitted in reliance on proposed Rule 253(b)) in information previously 
provided in the last offering circular to be filed within five business 
days after the date such offering circular is first used after 
qualification? Why or why not?
    79. Should we consider additional or alternative amendments to the 
proposed provisions for continuous offerings and offering circular 
supplements? Why or why not? If so, please explain.
    80. As proposed, Regulation A is not specifically designed for 
business combination transactions. While such transactions, outside the 
context of acquisition shelf business combination transactions, are not 
prohibited, would Part II of proposed Form 1-A provide for appropriate 
disclosure of business combination transactions? Why or why not? If so, 
what additional narrative or financial disclosure provisions, if any, 
should apply to issuers with respect to such transactions?
    81. As proposed, should the rules preclude primary and secondary at 
the market offerings? Or should the rules only preclude primary at the 
market offerings? Why or why not? If the rules should not prohibit at 
the market offerings how should the offering size be calculated for 
purpose of determining whether the offering exceeds the proposed 
applicable annual offering amount limitations? Please explain.
5. Qualification
    Under Regulation A, an offering statement is generally only 
qualified by order of the Commission in a manner similar to a 
registration statement being declared effective.\345\ In such 
instances, the issuer includes a delaying notation on the cover of the 
Form 1-A that states the offering statements shall only be qualified by 
order of the Commission.\346\ In order to remove a delaying notation, 
an issuer must file an amendment to the offering statement indicating 
that the offering statement will become qualified on the 20th calendar 
day after filing.\347\ An offering statement that does not include a 
delaying notation will be qualified without Commission action on the 
20th calendar day after filing.\348\
---------------------------------------------------------------------------

    \345\ See Rule 252(g)(2).
    \346\ Id.
    \347\ See Rule 252(g)(3).
    \348\ See Rule 252(g)(1).
---------------------------------------------------------------------------

    We propose to alter the qualification process of existing 
Regulation A. As proposed, an offering statement could only be 
qualified by order of the Commission, and the process associated with 
the delaying notation would be eliminated. This not only conforms to 
the general practice of issuers under both Regulation A and registered 
offerings, but eliminates the risk that an issuer may exclude a 
delaying notation either in error or in an effort to become qualified 
automatically without review and comment by the Commission staff. Given 
our proposed electronic filing processes,\349\ scaled disclosure 
requirements for Tier 1 and Tier 2 offerings,\350\ and the preemption 
of state securities law registration and qualification requirements for 
Tier 2 offerings,\351\ we believe it is appropriate to ensure that the 
Commission staff has a chance to review and comment on the offering 
statement before it becomes effective. We do, however, solicit comment 
on whether we should retain provisions for the automatic effectiveness 
of an offering statement in a manner similar to the current rules, in 
order to provide issuers with some flexibility and control over the 
timing of the qualification process.
---------------------------------------------------------------------------

    \349\ See discussion in Section II.C.1. above.
    \350\ See discussion in Section II.C.3. above.
    \351\ See discussion in Section II.H. below.
---------------------------------------------------------------------------

Request for Comment
    82. Should we amend the qualification process, as proposed, so that 
an offering statement can only

[[Page 3956]]

become qualified by order of the Commission? Or should we preserve the 
existing qualification provisions of Regulation A, which permit 
offering statements to become qualified without an order of the 
Commission on the 20th calendar day after filing? Why or why not? What 
effect, if any, would this have on issuers and their ability to control 
the timing of the qualification process?

D. Solicitation of Interest (``Testing the Waters'')

    Under Securities Act Section 3(b)(2)(E), issuers are to be 
permitted to test the waters for interest in an offering before filing 
an offering statement on such terms and conditions as the Commission 
prescribes. Testing the waters is currently permitted under Rule 254 of 
Regulation A, which requires, among other things, that issuers submit 
all solicitation material to the Commission no later than the time of 
first use. Issuers are further required to file all solicitation 
materials used in reliance on Rule 254 as an exhibit under Part III of 
Form 1-A, and are prohibited from making sales under Regulation A until 
20 calendar days after the last publication or delivery of such 
materials. Under Rule 254(b)(3), issuers must cease using test the 
waters solicitation materials after the initial filing of the offering 
statement.
    Testing the waters under Rule 254 of Regulation A is different from 
testing the waters for a registered offering by an emerging growth 
company under Section 5(d) of the Securities Act. Under Section 5(d), 
testing the waters is limited to communications with QIBs and 
institutional accredited investors. Under current Rule 254, however, 
there is no limitation on the type of investors that may be solicited, 
as the provision is meant to assist smaller issuers in evaluating 
potential interest in a public offering before incurring costs 
associated with preparing mandated disclosure documents.\352\ New 
Securities Act Section 3(b)(2)(E) also does not limit the type of 
investors that may be solicited, but instead specifies that we can 
prescribe terms and conditions. We do not believe it is appropriate to 
adopt provisions in proposed Regulation A that are more restrictive 
than currently exist in Rule 254 and therefore do not propose to alter 
the permissible target audience of testing the waters materials.
---------------------------------------------------------------------------

    \352\ SEC Rel. No. 33-6924, at 10-11 (discussing the capital 
needs of smaller companies, and, in comparison to ``limited 
[private] offerings to more sophisticated professional investors,'' 
the need to facilitate greater ``access to the public market[s] for 
startup and developing companies, and . . . lower[] the costs for 
small businesses that undertake to have their securities traded in 
the public market.'').
---------------------------------------------------------------------------

    While one commenter suggested that the Commission permit the use of 
solicitation materials before the filing of an offering statement,\353\ 
another commenter simply suggested that all such solicitation materials 
be made readily available.\354\ Another commenter suggested that, in 
addition to the existing requirements of Rule 254(b)(2), the Commission 
limit the use of testing the waters materials before the filing of an 
offering statement to solicitations conducted by registered broker-
dealers or solicitations in firm commitment underwritings.\355\
---------------------------------------------------------------------------

    \353\ McCarter & English Letter.
    \354\ Beacon Investment Letter.
    \355\ NASAA Letter 2.
---------------------------------------------------------------------------

    Testing the waters was first proposed and approved for use in 
Regulation A in 1992, to address the risk that small companies faced 
when expending funds to prepare for an offering of securities without 
knowing whether there would be any interest in the offering.\356\ We do 
not believe, however, that the existing provisions of Rule 254 have 
proven as useful as originally intended. We are concerned that the 
amount of time that typically elapses between initial filing of the 
Form 1-A and qualification (which, on average, from 2002 through 2012 
was approximately 241 days) may limit the possible benefits of testing 
the waters in advance of initial filing. In addition, we understand 
that testing the waters activities may not be permissible under many 
state securities laws.
---------------------------------------------------------------------------

    \356\ SEC Rel. No. 33-6924, at 12.
---------------------------------------------------------------------------

    To address the potential impact of the review period, we propose to 
permit issuers to use testing the waters solicitation materials both 
before and after the offering statement is filed, subject to issuer 
compliance with the rules on filing and disclaimers.\357\ In our view, 
to do otherwise would unnecessarily limit the intended benefits to 
issuers of testing the waters. As with existing Regulation A, investor 
protections with respect to such solicitation materials would remain in 
place, as these materials remain subject to the antifraud and other 
civil liability provisions of the federal securities laws.\358\ In 
addition, under the proposal, testing the waters materials used by an 
issuer or its intermediaries after publicly filing an offering 
statement would be required to include a current preliminary offering 
circular or contain a notice informing potential investors where and 
how the most current preliminary offering circular can be obtained. 
This requirement could be satisfied by providing the URL where the 
preliminary offering circular or the offering statement may be obtained 
on EDGAR.
---------------------------------------------------------------------------

    \357\ This timing is similar to the ``testing the waters'' 
permitted for emerging growth companies under new Section 5(d) of 
the Securities Act, added by the JOBS Act, which can also be 
conducted both before and after filing of a registration statement. 
Under Section 5(d), no legending or disclaimers are required, but 
testing the waters is limited to potential investors that are 
``qualified institutional buyers'' or institutional ``accredited 
investors.''
    \358\ The Commission's antifraud liability provisions in Section 
17 of the Securities Act, 15 U.S.C. 77q, apply to any person who 
commits fraud in connection with the offer or sale of securities. 
Section 3(b)(2)(D) of the Securities Act, 15 U.S.C. 77c(b)(2)(D), 
states that the civil liability provisions of Section 12(a)(2) apply 
to any person offering or selling securities under Regulation A. See 
also SEC Rel. No. 33-6924, at fn. 48.
---------------------------------------------------------------------------

    Since we propose to require issuers to publicly file their offering 
statements not later than 21 calendar days before qualification, this 
timing requirement would ensure that, at a minimum, any solicitation 
made in the 21 calendar days before the earliest date of potential 
sales of securities would be conducted using the most recent version of 
preliminary offering circular.\359\ While the proposed expansion on use 
of solicitation materials after filing would potentially result in 
investors receiving more sales literature in marketed offerings, in 
such circumstances, potential investors would also be afforded more 
time with the preliminary offering circular before making an investment 
decision.\360\ Issuers and intermediaries that use testing the waters 
materials after publicly filing the offering statement would be 
required to update and redistribute--through any electronic or print 
media or television or radio broadcast distribution channels previously 
relied upon by the issuer or its intermediaries to market the offering 
during this period--such material to the extent that either the 
material itself or the preliminary offering circular attached 
thereafter becomes inadequate or inaccurate in any material 
respect.\361\

[[Page 3957]]

Additionally, whether or not an issuer or its intermediaries tests the 
waters, as provided for by proposed Regulation A, such parties would 
remain obligated in the pre-qualification period to deliver a copy of 
the preliminary offering circular to prospective purchasers at least 48 
hours in advance of sale under proposed Rule 251(d)(2)(i).\362\
---------------------------------------------------------------------------

    \359\ See discussion of non-public submissions of offering 
statements in Section II.C.2. above, which proposes to require an 
issuer to file its offering statement with the Commission not later 
than 21 calendar days before qualification.
    \360\ Cf. The Regulation of Securities Offerings, SEC Rel. No. 
33-7606A, at 78 (Nov. 17, 1998) [63 FR 67174] (discussing the 
importance of providing a preliminary prospectus in conjunction with 
the distribution of sales materials).
    \361\ Issuers would not, however, be required to update and 
redistribute solicitation materials to the extent that: i) any such 
changes occur only with respect to the preliminary offering 
circular, ii) no similar changes are required in the solicitation 
materials previously relied upon, and iii) such materials included 
(when originally distributed) a URL where the preliminary offering 
circular or the offering statement filed on the issuer's EDGAR 
filing page and that URL continues to link to the most recent 
version of the preliminary offering circular.
    \362\ Proposed Rule 251(d)(2)(i) is discussed in Section II.C.1. 
above.
---------------------------------------------------------------------------

    We further propose to amend the Rule 254 requirements for 
submission or filing of solicitation material, so that such material 
would be submitted or filed as an exhibit when the offering statement 
is either submitted for non-public review or filed (and updated for 
substantive changes in such material after the initial non-public 
submission or filing) but would no longer be required to be submitted 
at or before the time of first use. This approach is generally 
consistent with the Commission staff's treatment of solicitation 
materials used by emerging growth companies under Title I of the JOBS 
Act, with two exceptions:
     solicitation materials used in Regulation A offerings 
would be required to be filed; \363\ and
---------------------------------------------------------------------------

    \363\ In practice, however, Commission staff reviewing filings 
by emerging growth companies regularly requests and receives such 
material as part of the review process to ensure consistency between 
the information contained in the solicitation materials and the 
registration statement. See 17 CFR 230.418 (Supplemental 
Information).
---------------------------------------------------------------------------

     solicitation materials used by Regulation A issuers that 
file an offering statement with the Commission would be publicly 
available as a matter of course.\364\
---------------------------------------------------------------------------

    \364\ Where an issuer non-publicly submits an offering statement 
under Regulation A that is later abandoned before filing, and where 
that issuer properly submitted the offering statement pursuant to a 
confidential treatment request pursuant to Commission Rule 83 (17 
CFR 200.83), the offering statement and solicitation materials may, 
under certain circumstances, qualify for an exemption from 
production pursuant to the FOIA. See https://www.sec.gov/foia/conftreat.htm for more information. Such materials, however, will be 
publicly available on EDGAR if, and when, an offering statement is 
eventually filed with the Commission.
---------------------------------------------------------------------------

    We believe this approach would be consistent with the 1992 
amendments to Regulation A that first allowed issuers to test the 
waters, and would make the use of solicitation materials more 
beneficial for issuers and investors, reduce the filing requirements 
for issuers, and entirely eliminate the filing requirement for issuers 
that, after testing the waters, decide not to proceed with an offering. 
Additionally, from an investor protection standpoint, it is important 
to note that sales under Regulation A may occur only under a qualified 
offering statement that reflects staff review and comment, including, 
where appropriate, disclosure addressing potentially incomplete or 
misleading statements made in test the waters solicitation material. 
For this reason, in addition to the statutory language of Section 
3(b)(2)(E), which indicates that ``issuer[s] may solicit interest in 
the offering,'' we do not believe it is necessary, as one commenter 
suggested, to limit the availability of this provision to solicitations 
carried out by registered broker-dealers or by underwriters in firm 
commitment underwritings.\365\
---------------------------------------------------------------------------

    \365\ See NASAA Letter 2 (suggests limiting the use of 
solicitation materials to solicitations made by broker-dealers, or 
in the context of firm commitment underwritten offerings).
---------------------------------------------------------------------------

    Currently, Rule 254(b)(2) requires all soliciting materials to bear 
a legend or disclaimer indicating: (i) That no money or other 
consideration is being solicited, and if sent, will not be accepted; 
(ii) that no sales will be made or commitments to purchase accepted 
until a complete offering circular is delivered; (iii) that a 
prospective purchaser's indication of interest is non-binding; and (iv) 
the identity of the issuer's chief executive officer and a brief 
description of the issuer's business and products.\366\ We propose to 
amend Rule 254(b)(2)(ii) to more closely follow similar provisions in 
the context of registered offerings.\367\ The amended language would 
recognize that, similar to the framework for registered offerings, 
sales made pursuant to Regulation A would be contingent upon the 
qualification of the offering statement, not the delivery of a final 
offering circular. Additionally, to provide greater flexibility when 
using solicitation materials, we propose to eliminate the requirement 
in Rule 254(b)(2)(iv) to identify the issuer's chief executive officer, 
business, and products.
---------------------------------------------------------------------------

    \366\ 17 CFR 230.254(b)(2).
    \367\ See Rule 134(d), 17 CFR 230.134(d), (required disclaimer 
for solicitations of interest in registered offerings).
---------------------------------------------------------------------------

    Further, as noted above, we do not propose to limit testing the 
waters to QIBs and institutional accredited investors (as is currently 
the case with testing the waters under Title I of the JOBS Act), as we 
do not believe it is appropriate to adopt provisions in proposed 
Regulation A that are more restrictive than currently exist in the 
regulation.
Request for Comment
    83. As proposed, should we differentiate between the requirements 
for the use of testing the waters materials before the issuer publicly 
files an offering statement and after filing (when it is proposed that 
a preliminary offering circular would have to be provided)? Why or why 
not? Is the proposed time period during which a preliminary offering 
circular would be required to be provided together with testing the 
waters materials appropriate, or should it be longer or shorter? Is the 
48-hour period for the delivery of a preliminary offering circular 
under proposed Rule 251(d)(2)(i) sufficient to address any concerns 
about the use of solicitation materials at or near the time of 
qualification? \368\ Should we distinguish between the use of testing 
the waters materials after an offering statement is non-publicly 
submitted versus publicly filed?
---------------------------------------------------------------------------

    \368\ See discussion of delivery requirements in Section II.C.1. 
above.
---------------------------------------------------------------------------

    84. Should we amend Rule 254, as proposed, so that solicitation 
material would no longer be required to be submitted to the Commission 
at or before the time of first use? If not, in the absence of a 
confidential treatment request under Commission Rule 83 (17 CFR 
200.83), should solicitation material be made publicly available 
immediately after submission on EDGAR? Or, as proposed, should we only 
require solicitation materials to be publicly available when included 
as an exhibit to an offering statement that is filed with the 
Commission not later than 21 calendar days before the offering 
statement is qualified?
    85. Is the legend or disclaimer required to be included in the 
solicitation materials under proposed Rule 254 appropriately tailored 
for the likely recipients of such materials in Regulation A offerings? 
Why or why not? Should solicitation materials used by the issuer and 
its intermediaries before the initial public filing of the offering 
statement be required to include specific information about the issuer 
or the offering similar to current rules? If so, what information 
should be required?
    86. While not currently proposed, should we limit the use of 
testing the waters materials to communications with QIBs and 
institutional accredited investors in order to be consistent with the 
treatment of emerging growth companies under Title I of the JOBS Act? 
Would QIBs or institutional accredited investors be the likely target 
audience for issuers testing the waters in reliance on Regulation A? 
Why or why not? As proposed, should issuers and intermediaries that use 
testing the waters materials after publicly filing an offering 
statement be required to update and redistribute--through any 
electronic or print media or television or

[[Page 3958]]

radio broadcast distribution channels previously relied upon by the 
issuer or its intermediaries to market the offering during this 
period--such material if either the material itself or the preliminary 
offering circular attached thereafter becomes inadequate or inaccurate 
in any material respect? \369\ Why or why not? Would this requirement 
unduly limit the utility, and potentially raise the costs, of testing 
the waters after publicly filing an offering statement, or would it 
help to ensure that issuers and intermediaries that solicit interest in 
a potential offering during this period of time do so in a measured and 
judicious manner? Please explain.
---------------------------------------------------------------------------

    \369\ But see fn. 361 above for an exception to the general 
requirements for updates and redistribution.
---------------------------------------------------------------------------

    87. Should we make the submission or filing of solicitation 
materials a condition to the Regulation A exemption, such that an 
issuer that fails to submit such materials as part of an offering 
statement submitted for non-public review, or to file such materials as 
part of a filed offering statement, loses its ability to rely on the 
exemption? If so, should we provide for a cure period for inadvertent 
failures to submit or file solicitation materials as an exhibit to an 
offering statement?

E. Ongoing Reporting

    Currently, Regulation A requires issuers to file a Form 2-A with 
the Commission every six months after qualification to report sales 
under Regulation A, with a final filing due within 30 calendar days 
after the termination, completion, or final sale of securities in the 
offering.\370\ Section 3(b)(2) requires issuers to provide annual 
audited financial information on an ongoing basis, and expressly 
provides that the Commission may consider whether additional ongoing 
reporting should be required. Specifically, Section 3(b)(4) grants the 
Commission authority to require issuers ``to make available to 
investors and file with the Commission periodic disclosures regarding 
the issuer, its business operations, its financial condition, its 
corporate governance principles, its use of investor funds, and other 
appropriate matters, and also provide for the suspension and 
termination of such requirement.''
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    \370\ See 17 CFR 230.257; see also 17 CFR 239.91 (Form 2-A).
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    Most commenters agree that the Commission should require some form 
of ongoing reporting in revised Regulation A, but differ on the degree 
and frequency of such reporting.\371\ In general, the comments received 
acknowledge that the Commission's task in determining the appropriate 
level of ongoing reporting requires balancing the risks of imposing 
issuer disclosure requirements that are too prescriptive \372\ or 
onerous \373\ with the risks of providing too little information to 
either support,\374\ or adequately protect investors in,\375\ the 
secondary market. Some commenters suggested that the Commission require 
ongoing reporting only to the extent necessary to support an active 
secondary market, such as by requiring quarterly and material event 
reporting,\376\ or semiannual performance updates.\377\ Alternatively, 
one commenter suggested that the Commission only require annual filings 
under a two-year pilot program to determine whether such reports, 
without more, provide sufficient information to the market.\378\ One 
commenter suggested that ongoing reporting requirements under 
Regulation A should be similar to, but less onerous than, Exchange Act 
reporting.\379\ This commenter suggested that the rules require 
periodic reports that follow the disclosure requirements applicable to 
smaller reporting companies, or those of Exchange Act Rule 15c2-11. In 
its view, though, current reporting in a fashion similar to Form 8-K 
under the Exchange Act might be too burdensome for smaller issuers, 
while the OTC Markets' proprietary Alternative Reporting System might 
be more appropriate. The commenter also suggested that, if required, 
current reporting should be limited to material agreements, financial 
obligations, unregistered sales of securities, changes in accountants, 
changes in and the compensation of directors and officers, and charter 
amendments. Another commenter suggested periodic reporting that is less 
prescriptive than Exchange Act reporting, and using Form 1-A disclosure 
requirements as a base.\380\ Several commenters suggested that--to the 
extent the Commission permits Regulation A offerings to be 
simultaneously listed, or approved for listing, on a national 
securities exchange--it should permit Exchange Act reporting to satisfy 
Title IV's ongoing reporting requirements.\381\ Another commenter 
suggested that any ongoing reporting requirements eventually adopted 
should be meaningful enough to provide investors with current 
information about issuers and to permit better informed investment 
decisions.\382\
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    \371\ See, e.g., Letter from Mike Liles, Jr., Attorney, Karr 
Tuttle Campbell, April 12, 2012 (``Karr Tuttle Letter''); Letter 
from Kurt N. Schacht, CFA, Managing Director, Standards and 
Financial Market Integrity, and Linda L. Rittenhouse, Director, 
Capital Markets Policy, CFA Institute, Aug. 16, 2012 (``CFA 
Institute Letter''); Fallbrook Letter. But see Letter from Robert R. 
Kaplan, Jr., Esq., Kaplan Voekler, May 10, 2012 (``Kaplan Voekler 
Letter 1'') (suggesting that, in light of the relative costs to 
issuers in smaller dollar amount offerings, the Commission not 
require ongoing reports for Regulation A offerings of up to $5 
million in securities annually); NSBA Letter (suggesting the only 
change the Commission should make in Regulation A is raising the 
dollar limitations from $5 million to $50 million); see also ECTF 
Report (suggesting ongoing periodic reporting that is reasonable in 
scope and balances investor protection concerns with regulatory and 
compliance costs).
    \372\ ABA Letter.
    \373\ McCarter & English Letter.
    \374\ Kaplan Voekler Letter 1.
    \375\ NASAA Letter 1; NASAA Letter 2.
    \376\ Kaplan Voekler Letter 1.
    \377\ CFA Institute Letter.
    \378\ Fallbrook Letter.
    \379\ McCarter & English Letter.
    \380\ ABA Letter.
    \381\ ABA Letter; WR Hambrecht + Co. Letter.
    \382\ NASAA Letter 1; NASAA Letter 2.
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    The sole advance comment received on how and when to permit 
terminating ongoing reports suggested that the Commission permit 
automatic termination (or suspension) of ongoing reporting obligations 
in a fashion similar to that permitted under Section 15(d) of the 
Exchange Act.\383\ That is, the Commission should allow ongoing 
reporting to be suspended as to any fiscal year, other than the fiscal 
year in which the offering was qualified, if at the beginning of such 
fiscal year the securities of the class sold in the offering are held 
of record by fewer than 300 persons.
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    \383\ ABA Letter.
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    We are mindful that an ongoing reporting regime that is suitable 
for one type of entity and its investor base may prove too onerous for 
another entity or provide its investors with more or more frequent 
information than they necessarily need or seek, resulting in undue 
costs to the issuer. In the discussion and proposals that follow, we 
have endeavored to address the potential added costs and benefits 
associated with the provision of ongoing information about issuers of 
Regulation A securities to investors in such securities and any market 
that develops as a result.
1. Continuing Disclosure Obligations
    As noted above, Regulation A currently requires issuers to file a 
Form 2-A with the Commission to report sales and the termination of 
sales made under Regulation A every six months after qualification and 
within 30 calendar days after the termination, completion, or final 
sale of securities in

[[Page 3959]]

the offering.\384\ The summary information about the issuer and its 
offering required to be disclosed in the Form 2-A is intended to 
provide the Commission with valuable data about Regulation A offerings 
and the effectiveness of Regulation A as a capital formation tool for 
smaller issuers. Currently, however, issuers of securities under 
Regulation A often neglect to file the form, thereby limiting the 
amount and utility of the data received.\385\ We propose to rescind 
Form 2-A, but to continue to require Regulation A issuers to file the 
information generally disclosed in Form 2-A with the Commission 
electronically on EDGAR.\386\ We believe that summary information and 
data about an issuer and its Regulation A offering, however, is most 
valuable when obtained after the offering is completed or terminated. 
We therefore propose to require issuers to disclose such information 
only after the termination or completion of the offering. Issuers 
conducting Tier 1 offerings would be required to provide this 
information on Part I of proposed new Form 1-Z not later 30 calendar 
days after termination or completion of the offering,\387\ while 
issuers conducting Tier 2 offerings would be required to provide this 
information on either Part I of Form 1-Z at the time of filing an exit 
report or proposed new Form 1-K as part of their annual report.
---------------------------------------------------------------------------

    \384\ See 17 CFR 230.257; see also 17 CFR 239.91 (Form 2-A).
    \385\ Currently, the filing of the Form 2-A is not a condition 
to an issuer's ability to rely on Regulation A. See Rule 257, 17 CFR 
230.257. As proposed, the filing of the information required under 
current Form 2-A would not be a condition to an issuer's ability to 
rely on Regulation A for the current offering, but would affect the 
issuer's ability to conduct a follow-on Regulation A offering in the 
future. See the discussion in Section II.B.1. above regarding 
proposed issuer eligibility requirements.
    \386\ We do not propose to continue to require issuers to 
disclose the use of proceeds currently disclosed in Form 2-A, as 
issuers must disclose this information in Part II of Form 1-A and 
any changes in the use of proceeds after qualification not 
previously disclosed would require issuers to determine whether a 
post-qualification amendment or offering circular supplement is 
necessary. See discussion of continuous or delayed offerings and 
offering circular supplements in Section II.C.4. above.
    \387\ Proposed new Form 1-Z (exit report) is discussed in 
Section II.E.4. below.
---------------------------------------------------------------------------

    As proposed, issuers in Tier 2 offerings would be subject to a 
Regulation A ongoing reporting regime that would, in addition to filing 
summary information on a recently completed offering and annual reports 
on proposed new Form 1-K, require issuers to file semiannual updates on 
proposed new Form 1-SA, current event reporting on proposed new Form 1-
U, and to provide notice to the Commission of the suspension of their 
ongoing reporting obligations on Part II of proposed new Form 1-Z. All 
of these reports would be filed electronically on EDGAR.
    We are concerned that uniform ongoing reporting requirements for 
all issuers of Regulation A securities could disproportionately affect 
issuers in smaller offerings.\388\ For that reason, we do not propose 
to require any ongoing reporting for issuers conducting Tier 1 
offerings, other than the summary information discussed above, which is 
already required under the existing rules.\389\ Section 3(b)(2)(F) 
requires issuers to file audited financial statements with the 
Commission annually, which does not apply to current Regulation A.\390\ 
While Section 3(b)(2) directs the Commission to ``add a class of 
securities exempted pursuant to this section,'' it does not also direct 
the Commission to supplant the provisions associated with the existing 
class of securities exempted under Section 3(b)(1) and Regulation A. We 
therefore propose to preserve this aspect of current Regulation A for 
Tier 1 offerings. As proposed, however, issuers in smaller offerings 
would have the option to conduct a Tier 2 offering and subject 
themselves to the more expansive ongoing reporting regime and otherwise 
comply with the proposed Tier 2 requirements.\391\
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    \388\ See also Kaplan Voekler Letter 1 (recommending that, in 
light of the relative costs to issuers in smaller dollar amount 
offerings, the Commission not require ongoing reports for Regulation 
A offerings of up to $5 million in securities annually).
    \389\ See proposed Rule 257(a).
    \390\ As noted in Section I.A. above, current Regulation A was 
issued under Section 3(b)(1) of the Securities Act.
    \391\ An issuer offering up to $5 million in a Tier 2 offering 
would, in addition to providing ongoing reports to the Commission on 
the proposed annual and semiannual basis, with interim current event 
updates, be required to file audited financial statements in the 
offering statement, see Section II.C.3.b(2). above, and may be 
required to file a Form 1-Z to terminate its ongoing reporting 
obligations as described in Section II.E.4. below.
---------------------------------------------------------------------------

    We believe the proposed approach to ongoing reporting should 
support a regular flow of information about issuers conducting Tier 2 
offerings, which would benefit investors and foster the development of 
a market in such securities, without imposing unnecessary costs on 
issuers that elect to conduct a Tier 1 offering. We believe our 
proposal strikes an appropriate balance between the investor 
protections associated with the provision of ongoing information about 
an existing or contemplated investment to potential investors and our 
goal of facilitating capital formation for smaller companies by not 
requiring too heavy a reporting obligation.
    The following are the proposed ongoing reporting requirements for 
Tier 2 offerings:
a. Annual Reports on Form 1-K
    Proposed new Form 1-K would be comprised of two parts: Part I 
(Notification) and Part II (Information to be included in the report).
(1) Part I (Notification)
    As with Part I of Form 1-A,\392\ Part I of Form 1-K would be an 
online XML-based fillable form that would include certain basic 
information about the issuer, prepopulated on the basis of information 
previously disclosed in Part I of Form 1-A, which can be updated by the 
issuer at the time of filing. Additionally, if, at the time of filing 
the Form 1-K, an issuer has terminated or completed a qualified 
Regulation A offering, we propose to require the issuer to provide 
certain updated summary information about itself and the offering in 
Part I, including, e.g., the date the offering was qualified and 
commenced, the number of securities qualified, the number of securities 
sold in the offering, the price of the securities, any fees associated 
with the offering, and the net proceeds to the issuer. As discussed 
above, this information is generally already required to be disclosed 
under current Regulation A on Form 2-A, which we propose to eliminate.
---------------------------------------------------------------------------

    \392\ See discussion in Section II.C.3.a. above.
---------------------------------------------------------------------------

    The portion of the fillable form relating to a completed Regulation 
A offering would appear when the issuer indicates in Part I that the 
offering has terminated or been completed. Issuers would only be 
required to fill out the XML-based portion of Part I that relates to 
the summary information on a terminated or completed offering once. 
Alternatively, an issuer that elects to terminate its ongoing reporting 
obligation under Regulation A after terminating or completing an 
offering, in a fiscal year other than the fiscal year in which the 
offering statement was qualified, but before reporting the required 
summary information on Form 1-K,\393\ could satisfy its obligation to 
file the summary offering information in Part I of Form 1-K by filing a 
Form 1-

[[Page 3960]]

Z (exit report) that includes such information.\394\
---------------------------------------------------------------------------

    \393\ An issuer that has completed a Regulation A offering under 
Tier 2 in a fiscal year other than the fiscal year in which the 
offering was qualified could, however, continue filing the ongoing 
reports required in Tier 2 offerings in order to, for example, 
continually provide updated information to its shareholder or to 
broker-dealers for purposes of proposed Exchange Act Rule 15c2-11. 
See discussion in Section II.E.2. below.
    \394\ For a discussion of the requirements for terminating an 
ongoing reporting obligation under Regulation A and proposed new 
Form 1-Z, see Section II.E.4. below.
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    The summary information disclosed would facilitate analysis of 
Regulation A offerings by the Commission, other regulators, third-party 
data providers, and market participants, while facilitating the capture 
of important summary information about an offering that would enable 
the Commission to monitor the use and effectiveness of Regulation A as 
a capital formation tool.\395\ The fillable form would enable issuers 
to provide the required information in a convenient medium and only 
capture relevant data about the recently terminated or completed 
Regulation A offering. The required disclosure would be publicly 
available on EDGAR. As with proposed requirements for Part I of Form 1-
A, Part I of Form 1-K would not require the issuer to obtain specialty 
software.
---------------------------------------------------------------------------

    \395\ See also discussion in Section II.E.4.a. below.
---------------------------------------------------------------------------

(2) Part II (Information To Be Included in the Report)
    As with Part II of Form 1-A, Part II of Form 1-K would be submitted 
electronically by the issuer as a text file attachment containing the 
body of the disclosure document and financial statements, formatted in 
HTML or ASCII to be compatible with the EDGAR filing system. Part II 
would contain information about the issuer and its business based on 
the financial statement and narrative disclosure requirements of Form 
1-A. Form 1-K would further permit issuers to incorporate by reference 
certain information previously filed on EDGAR, but require issuers to 
include a hyperlink to such material on EDGAR.\396\ Form 1-K would 
cover:
---------------------------------------------------------------------------

    \396\ The hyperlink to EDGAR need only be active at the time of 
filing of the Form 1-K.
---------------------------------------------------------------------------

     Business operations of the issuer for the prior three 
fiscal years (or, if in existence for less than three years, since 
inception);
     Transactions with related persons, promoters, and certain 
control persons;
     Beneficial ownership of voting securities by executive 
officers, directors, and 10% owners;
     Identities of directors, executive officers, and 
significant employees, with a description of their business experience 
and involvement in certain legal proceedings;
     Executive compensation data for the most recent fiscal 
year for the three highest paid officers or directors;
     MD&A of the issuer's liquidity, capital resources, and 
results of operations covering the two most recently completed fiscal 
years; \397\ and
---------------------------------------------------------------------------

    \397\ As proposed, Form 1-K would not include the additional 
MD&A disclosure required in Form 1-A for issuers that have not 
received revenue from operations during each of the three fiscal 
years immediately before the filing of the offering statement. See 
discussion in Section II.C.3.b(1). above.
---------------------------------------------------------------------------

     Two years of audited financial statements.

We anticipate that issuers would generally be able to use the offering 
materials as a basis to prepare their ongoing disclosure.
    We propose that Form 1-K includes financial statements prepared on 
the same basis, and subject to the same requirements as to audit 
standards and auditor independence, as the financial statements 
required in the Regulation A offering circular for Tier 2 
offerings.\398\ Form 1-K would be required to be filed within 120 
calendar days after the issuer's fiscal year end. A manually-signed 
copy of the Form 1-K would have to be executed by the issuer and 
related signatories before or at the time of filing and retained by the 
issuer for a period of five years.\399\ Issuers would be required to 
produce the manually signed copy to the Commission, upon request.\400\ 
Any amendments to the form would have to comply with the requirements 
of the applicable items and be filed under cover of Form 1-K/A.\401\
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    \398\ See Section II.C.3.b(2). above.
    \399\ See General Instruction C. to proposed Form 1-K.
    \400\ Id.
    \401\ See proposed Rule 257(c) (also requiring the signature on 
behalf of an authorized representative of the issuer and the 
inclusion of any specified certifications).
---------------------------------------------------------------------------

b. Semiannual Reports on Form 1-SA
    We are proposing semiannual interim reporting for Regulation A 
issuers. We believe this would strike an appropriate balance between 
the need to provide information to the market and the cost of 
compliance for smaller issuers. Issuers would be required to provide 
semiannual updates on proposed Form 1-SA that, much like Form 10-Q, 
would consist primarily of financial statements and MD&A.\402\ Unlike 
Form 10-Q, however, Form 1-SA would not, among other things, require 
disclosure about quantitative and qualitative market risk, controls and 
procedures, updates to risk factors, or defaults on senior securities, 
as we believe such disclosure is not applicable to, or appropriately-
tailored for, issuers in the context of an ongoing report under 
Regulation A.\403\ In addition, Form 1-SA would require disclosure of 
updates otherwise reportable on Form 1-U. Financial statements included 
in semiannual reports would not be required to be audited or reviewed 
by independent auditors. Form 1-SA would permit issuers to incorporate 
by reference certain information previously filed on EDGAR, but require 
issuers to include a hyperlink to such material on EDGAR.\404\
---------------------------------------------------------------------------

    \402\ See Part I (Financial Information) of Form 10-Q, 17 CFR 
249.308a.
    \403\ See Item 3 and Item 4 of Part I of Form 10-Q.
    \404\ The hyperlink to EDGAR need only be active at the time of 
filing of the Form 1-SA.
---------------------------------------------------------------------------

    We propose to require that Form 1-SA be filed within 90 calendar 
days after the end of the issuer's second fiscal quarter. A manually-
signed copy of the Form 1-SA would have to be executed by the issuer 
and related signatories before or at the time of filing and retained by 
the issuer for a period of five years.\405\ Issuers would be required 
to produce the manually signed copy to the Commission, upon 
request.\406\ Any amendments to the form would have to comply with the 
requirements of the applicable items and be filed under cover of Form 
1-SA/A.\407\
---------------------------------------------------------------------------

    \405\ See General Instruction C. to proposed Form 1-SA.
    \406\ Id.
    \407\ See proposed Rule 257(c).
---------------------------------------------------------------------------

c. Current Reports on Form 1-U
    In addition to the annual report on Form 1-K and semiannual report 
on Form 1-SA, we further propose to require issuers to submit current 
reports on Form 1-U. Issuers would be required to submit such reports 
in the following events:
     Fundamental changes in the nature of business; \408\
---------------------------------------------------------------------------

    \408\ A fundamental change in the nature of an issuer's business 
would include major and substantial changes in the issuer's business 
or plan of operations or changes reasonably expected to result in 
such changes, such as significant acquisitions or dispositions, or 
the entry into, or termination of, a material definitive agreement 
that has or will result in major and substantial changes to the 
nature of an issuer's business or plan of operations.
---------------------------------------------------------------------------

     Bankruptcy or receivership;
     Material modification to the rights of securityholders;
     Changes in the issuer's certifying accountant;
     Non-reliance on previous financial statements or a related 
audit report or completed interim review;
     Changes in control of the issuer;
     Departure of the principal executive officer, principal 
financial officer, or principal accounting officer; and
     Unregistered sales of 5% or more of outstanding equity 
securities.


[[Page 3961]]


As proposed, the requirement that issuers file a Form 1-U in the event 
they experience, or would reasonably expect to experience, a 
fundamental change in the nature of their business would incorporate 
aspects of each of Item 1.01, 1.02 and 2.01 of Form 8-K under the 
Exchange Act and change the threshold for reporting from a materiality 
to a fundamental change standard.\409\ Under the proposal, Form 1-U 
would be required to be filed within four business days after the 
occurrence of any such event, and, where applicable, permit issuers to 
incorporate by reference certain information previously filed on EDGAR, 
but require issuers to include a hyperlink to such material on 
EDGAR.\410\ A manually-signed copy of the Form 1-U would have to be 
executed by the issuer and related signatories before or at the time of 
filing and retained by the issuer for a period of five years.\411\ 
Issuers would be required to produce the manually signed copy to the 
Commission, upon request.\412\ Any amendments to the Form 1-U would 
have to comply with the requirements of the applicable items, and be 
filed under cover of Form 1-U/A.\413\
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    \409\ See Form 8-K, Item 1.01 (Entry into a Material Definitive 
Agreement), Item 1.02 (Termination of a Material Definitive 
Agreement), and Item 2.01 (Completion of Acquisition or Disposition 
of Assets), 17 CFR 249.308.
    \410\ The hyperlink to EDGAR need only be active at the time of 
filing of the Form 1-U.
    \411\ See General Instruction C to proposed Form 1-U.
    \412\ Id.
    \413\ See proposed Rule 257(c).
---------------------------------------------------------------------------

d. Special Financial Reports on Form 1-K and Form 1-SA
    While not currently a requirement of Regulation A, we propose to 
require issuers conducting Tier 2 offerings to provide special 
financial reports analogous to those required under Exchange Act Rule 
15d-2.\414\ The special financial report would require audited 
financial statements for the issuer's last completed fiscal year to be 
filed not later than 120 calendar days after qualification of the 
offering statement if the offering statement did not include such 
financial statements. The special financial report would require 
semiannual financial statements for the first six months of the 
issuer's fiscal year, which may be unaudited, to be filed 90 calendar 
days after qualification of the offering statement if the offering 
statement did not include such financial statements and the offering 
statement was qualified in the second half of the issuer's current 
fiscal year. The special financial report would be filed under cover of 
Form 1-K if it included audited year-end financial statements and under 
cover of Form 1-SA if it included semiannual financial statements for 
the first six months of the issuer's fiscal year. The financial 
statement and auditing requirements would follow the requirements of 
those forms. Similarly to the special financial report under Exchange 
Act Rule 15d-2, the issuer would indicate on the front page of the 
applicable form that only financial statements are included. This 
report would serve to close lengthy gaps in financial reporting between 
the financial statements included in Form 1-A and the issuer's first 
periodic report due after qualification of the offering statement.
---------------------------------------------------------------------------

    \414\ 17 CFR 240.15d-2.
---------------------------------------------------------------------------

e. Reporting by Successor Issuers
    Where in connection with a succession by merger, consolidation, 
exchange of securities, acquisition of assets or otherwise, securities 
of an issuer that is not subject to the reporting requirements of 
Regulation A, as proposed to be amended, are issued to the holders of 
any class of securities of an issuer that is subject to ongoing 
reporting under Tier 2, we propose to require the issuer succeeding to 
that class of securities to continue filing reports required for Tier 2 
offerings on the same basis as would have been required of the original 
issuer. The successor issuer may, however, suspend or terminate its 
reporting obligations on the same basis as the original issuer under 
proposed Rule 257(d).\415\
---------------------------------------------------------------------------

    \415\ See Section II.E.4. below for a discussion of the 
suspension or termination of disclosure obligations.
---------------------------------------------------------------------------

Request for Comment
    88. Would the proposed requirement that issuers conducting Tier 2 
offerings file annual, semiannual, and current reports provide a 
meaningful benefit for investors by helping to foster a transparent 
market for securities issued under Regulation A? Should this 
requirement apply to all issuers of securities under Regulation A, 
regardless of whether the issuer is conducting a Tier 1 or Tier 2 
offering? Alternatively, should we not impose ongoing reporting 
requirements beyond the statutory mandate of annual audited financial 
statements? Or should we require only annual reporting of the type of 
information required by proposed Form 1-K, without interim periodic 
reporting or current updates? Should we require only annual reporting 
and current updates? If we require interim periodic reporting, should 
it be quarterly instead of the proposed semiannual reporting 
requirement? Should quarterly or semiannual financial statements be 
required to be reviewed by an independent auditor?
    89. While not currently proposed, should we exempt issuers 
conducting Tier 1 offerings from the requirement to report certain 
summary information about the issuer and the offering after termination 
or completion of the offering? Alternatively, should issuers conducting 
Tier 1 offerings be required to report on a more frequent basis than 
currently proposed? Why or why not?
    90. If we exempt some issuers from ongoing reporting, should we do 
so on the basis of criteria other than offering size, such as issuer 
size or whether the issuer has taken steps to foster a secondary market 
for their securities? Why or why not?
    91. Should the rules require issuers that conduct a Tier 2 offering 
to file their annual report on new Form 1-K within 120 calendar days of 
the fiscal year end, and their semiannual report on new Form 1-SA with 
90 calendar days of the end of the second fiscal quarter, as proposed? 
Or should we require such issuers to file reports on a different 
timetable? For example, should the timetable be the same as for non-
accelerated filers under the Exchange Act, who are required to file 
annual reports within 90 calendar days of the fiscal year end and 
interim periodic reports within 45 calendar days of the end of a fiscal 
quarter? What effect, if any, would altering the proposed filing 
deadlines for annual and semiannual reporting have on the costs to 
issuers of preparing such reports? Please provide supporting data, if 
possible.
    92. As proposed, does the new Form 1-K provide for the disclosure 
of adequate information about the issuer on an annual basis? Similarly, 
does the new Form 1-SA provide for the disclosure of adequate 
information about the issuer on a semiannual basis? Or should the 
form(s) require more (or less) disclosure? If so, what additional 
disclosure should the form(s) require, or what items of proposed 
disclosure should not be required? Please explain.
    93. Should we require current updates, as proposed on new Form 1-U? 
If not, please explain why. If we require current reporting, should we 
include more, fewer, or different triggering events for current 
reporting than are currently proposed? Should the requirement to 
provide current reporting apply to all Regulation A issuers? Is there 
an appropriate segment of Regulation A issuers, other than as proposed, 
for which current reporting

[[Page 3962]]

would be the most useful or should otherwise be required?
    94. Does the proposed requirement that issuers disclose material 
transactions that would result in, or would reasonably be expected to 
result in, fundamental changes to the issuer's business or corporate 
events on new Form 1-U provide enough guidance to issuers? If not, 
should we provide more guidance as to what constitutes a material 
transaction or corporate event? If so, please provide suggestions.
    95. As proposed, should we permit issuers to incorporate by 
reference certain information into the Form 1-K, Form 1-SA and Form 1-U 
that was previously filed on EDGAR under Regulation A, while also 
requiring issuers to include a hyperlink to such exhibit on EDGAR? Why 
or why not? Should we permit issuers to incorporate by reference 
information from other documents, such as Exchange Act reports or 
Securities Act registration statements?
    96. As proposed, should we require special financial reporting 
similar to that which is required for a registered offering under 
Exchange Act Rule 15d-2? As proposed, should the rules require audited 
financial statements for the issuer's last completed fiscal year to be 
filed 120 calendar days after qualification of the offering statement 
if the offering statement did not include such financial statements or, 
alternatively, require semiannual financial statements for the first 
six months of the issuer's fiscal year to be filed 90 calendar days 
after qualification of the offering statement if the offering statement 
did not include such financial statements and the issuer's first 
required periodic report would be a Form 1-SA? Why or why not?
    97. As proposed, should issuers that succeed to a class of 
securities, in connection with a succession by merger, consolidation, 
exchange of securities, acquisition of assets or otherwise, that are 
currently subject to a Tier 2 ongoing reporting obligation, as proposed 
to be amended, be required to continue filing reports on the same basis 
as would have been required of the original issuer? Why or why not? 
Please explain.
    98. Would the proposed ongoing reporting requirements and 
termination provisions of Regulation A induce companies to migrate to 
the Regulation A capital raising and reporting regime, such that we may 
see a decline in smaller reporting companies subject to full Exchange 
Act reporting? \416\ If so, what effect would any population shift of 
issuers in the registered and reporting regime under the Securities Act 
and Exchange Act migrating to the Regulation A exemptive scheme have on 
investor protection?
---------------------------------------------------------------------------

    \416\ See discussion of proposed termination of ongoing 
reporting requirements under Regulation A in Section II.E.4. below.
---------------------------------------------------------------------------

2. Exchange Act Rule 15c2-11 and Other Implications of Ongoing 
Reporting Under Regulation A
    Exchange Act Rule 15c2-11 governs broker-dealers' publication of 
quotations for securities in a quotation medium other than a national 
securities exchange.\417\ The Commission adopted Rule 15c2-11 in 1971 
to prevent fraudulent and manipulative trading schemes that had arisen 
in connection with the distribution and trading of certain unregistered 
securities.\418\ The rule prohibits broker-dealers from publishing 
quotations (or submitting quotations for publication) in a ``quotation 
medium'' for covered over-the-counter securities without first 
reviewing basic information about the issuer, subject to certain 
exceptions.\419\ A broker-dealer also must have a reasonable basis for 
believing that the issuer information is accurate in all material 
respects and that it was obtained from a reliable source.
---------------------------------------------------------------------------

    \417\ 17 CFR 240.15c2-11.
    \418\ SEC Rel. No. 34-9310 (Sept. 13, 1971) [36 FR 18641]. See 
17 CFR 240.15c2-11(e)(1) (defining quotation medium as any 
``interdealer quotation system'' or any publication or electronic 
communications network or other device which is used by brokers or 
dealers to make known to others their interest in transactions in 
any security, including offers to buy or sell at a stated price or 
otherwise, or invitations of offers to buy or sell).
    \419\ See SEC Rel. No. 34-29094 (April 17, 1991) [56 FR 19148].
---------------------------------------------------------------------------

    A broker-dealer can, however, satisfy its obligations under Rule 
15c2-11 if it has reviewed and maintained in its records certain 
specified information. The particular information that is required by 
the rule varies depending on the nature of the issuer, including, among 
other things:
     For an issuer that has filed a registration statement 
under the Securities Act, a copy of the prospectus;
     for an issuer that has filed an offering statement under 
the Securities Act pursuant to Regulation A, a copy of the offering 
circular; or
     for an issuer subject to ongoing reporting under Sections 
13 or 15(d) of the Exchange Act, the issuer's most recent annual report 
and any quarterly or current reports filed thereafter.\420\
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    \420\ A broker-dealer can also satisfy its review requirements 
under Rule 15c2-11 by reviewing certain information published 
pursuant to a Rule 12g3-2(b) exemption for foreign issuers that 
claim the registration exemption or information specified in 
paragraph (a)(5) of the Rule for non-reporting issuers.
---------------------------------------------------------------------------

    We believe that the proposed ongoing reports for Tier 2 offerings 
under Regulation A, which would update the narrative and financial 
statement disclosures previously provided in Form 1-A on an annual and 
semi-annual basis, with additional provisions for current reporting, 
should also satisfy a broker-dealer's obligations under Rule 15c2-11 to 
review and maintain records of basic information about an issuer and 
its securities. We propose to amend Rule 15c2-11 to permit an issuer's 
ongoing reports filed in a Tier 2 offering under Regulation A to 
satisfy a broker-dealer's obligations to review specified information 
about an issuer and its security before publishing a quotation for a 
security (or submitting a quotation for publication) in a quotation 
medium.\421\ The single comment we have received to date on the 
interaction of Rule 15c2-11 and Regulation A also advocated this 
approach.\422\
---------------------------------------------------------------------------

    \421\ In addition, we are proposing a technical amendment to 
Rule 15c2-11 to amend subsection (d)(2)(i) of the rule to update the 
outdated reference to the ``Schedule H of the By-Laws of the 
National Association of Securities Dealers, Inc.'' which is now 
known as the ``Financial Industry Regulatory Authority, Inc.'' and 
to reflect the correct rule reference.
    \422\ McCarter & English Letter.
---------------------------------------------------------------------------

    We are also soliciting comment on other potential effects that Tier 
2 ongoing reporting under Regulation A could have under other 
provisions of the federal securities laws. For example, it may be 
appropriate for timely ongoing Regulation A reporting under Tier 2 to 
constitute ``adequate current public information'' for purposes of 
paragraph (c) of Rule 144.\423\ Currently, most non-reporting issuers 
can satisfy the Rule 144 current public information requirement if 
there is publicly available the information specified in paragraphs 
(a)(5)(i) to (a)(5)(xiv) and (a)(5)(xvi) of Rule 15c2-11.\424\ This 
information consists of:
---------------------------------------------------------------------------

    \423\ 17 CFR 230.144(c).
    \424\ 17 CFR 230.144(c)(2). Issuers that are insurance companies 
are subject to different requirements.
---------------------------------------------------------------------------

     The exact name of the issuer and any predecessor;
     The address of its principal executive offices;
     The state of incorporation, if it is a corporation;
     The exact title and class of the security;
     The par or stated value of the security;
     The number of shares or total amount of the securities 
outstanding as of the end of the issuer's most recent fiscal year;
     The name and address of the transfer agent;

[[Page 3963]]

     The nature of the issuer's business;
     The nature of products or services offered;
     The nature and extent of the issuer's facilities;
     The name of the chief executive officer and members of the 
board of directors;
     The issuer's most recent balance sheet and profit and loss 
and retained earnings statements;
     Similar financial information for such part of the two 
preceding fiscal years as the issuer or its predecessor has been in 
existence;
     Whether the broker or dealer initiating or resuming 
quotation or any associated person is affiliated, directly or 
indirectly with the issuer; and
     Whether the quotation is being submitted or published 
directly or indirectly on behalf of the issuer, or any director, 
officer or any person, directly or indirectly the beneficial owner of 
more than 10 percent of the outstanding units or shares of any equity 
security of the issuer, and, if so, the name of such person, and the 
basis for any exemption under the federal securities laws for any sales 
of such securities on behalf of such person.\425\
---------------------------------------------------------------------------

    \425\ 17 CFR 240.15c2-11(a)(5).

With the exception of the last two items, all of this information would 
be included in our proposed ongoing Regulation A reporting for Tier 2 
offerings.
    We are also soliciting comment on whether ongoing Regulation A 
reporting for Tier 2 offerings should satisfy the information 
requirements of paragraph (d)(4) of Rule 144A.\426\ Under that 
provision, holders of Rule 144A securities must have the right to 
obtain from the issuer, upon request, a very brief statement of the 
nature of the issuer's business and the products and services it 
offers, the issuer's most recent balance sheet and profit and loss and 
retained earnings statements, and similar financial statements for each 
of the two preceding fiscal years, which information must be 
``reasonably current.'' \427\
---------------------------------------------------------------------------

    \426\ 17 CFR 230.144A(d)(4).
    \427\ Id.
---------------------------------------------------------------------------

Request for Comment
    99. In a Tier 2 offering, should the review of an issuer's most 
recent annual report and any semiannual or current reports filed under 
Regulation A, as contemplated in this proposal, satisfy a broker-
dealer's obligation to review company information in order to quote a 
security in the over-the-counter market pursuant to Exchange Act Rule 
15c2-11? Why or why not? Should the annual or other forms require 
additional information in order for a broker-dealer to be able to rely 
on such information for purposes of quotations under Rule 15c2-11?
    100. Should ongoing Regulation A reports in Tier 2 offerings be 
deemed to provide ``adequate current public information'' about the 
issuer for purposes of paragraph (c) of Rule 144? Why or why not? What 
impact would broadening Rule 144 in this way have on affiliate resales 
of securities of Regulation A issuers? What impact would broadening 
Rule 144 in this way have on investors?
    101. Should ongoing Regulation A reports in Tier 2 offerings 
satisfy the informational requirements of paragraph (d)(4) of Rule 
144A? Why or why not? Are investors or Regulation A issuers likely to 
benefit?
3. Exchange Act Registration of Regulation A Securities
    Under Section 15(d) of the Exchange Act, an issuer that has had a 
Securities Act registration statement declared effective must comply 
with the periodic reporting requirements of the Exchange Act.\428\ 
Qualification of a Regulation A offering statement does not have the 
same effect. An issuer of Regulation A securities would not take on 
Exchange Act reporting obligations unless it separately registered a 
class of securities under Section 12 of the Exchange Act, or conducted 
a registered public offering.
---------------------------------------------------------------------------

    \428\ While issuers with a Section 15(d) reporting obligation 
are required to file the same periodic reports as issuers that have 
registered a class of securities under Section 12, Section 15(d) 
reporting issuers are not subject to additional Exchange Act 
obligations (e.g., proxy rules, short-swing profit rules, and 
beneficial ownership reporting) that apply to Exchange Act 
registrants.
---------------------------------------------------------------------------

    An issuer registering a class of securities under Section 12 of the 
Exchange Act must file either a Form 10 \429\ or Form 8-A \430\ with 
the Commission. Form 10 is the general form an issuer must use for 
Exchange Act registration, while Form 8-A is a short-form registration 
statement. An issuer must use a Form 10 if, at the time it files its 
registration statement, it is not already subject to a Section 13 or 
Section 15(d) reporting obligation. An issuer may use Form 8-A if it is 
already subject to the provisions of either Section 13 or Section 
15(d). Additionally, when an issuer that is not already subject to the 
provisions of either Section 13 or 15(d) plans to list its securities 
on a national securities exchange contemporaneously with the 
effectiveness of a Securities Act registration statement, the 
Commission staff will not object if that issuer files a Form 8-A in 
lieu of a Form 10, in order for the issuer to avoid having to restate 
the contents of its Securities Act registration statement in its 
Exchange Act registration statement.\431\
---------------------------------------------------------------------------

    \429\ 17 CFR 249.210. Foreign private issuers must file a Form 
20-F, 17 CFR 249.220f, or, where available, a Form 8-A.
    \430\ 17 CFR 249.208a.
    \431\ See SEC Rel. No. 34-38850 (Sept. 2, 1997) [62 FR 39755], 
at 39757 (``[A]n issuer registering an initial public offering will 
be permitted to use Form 8-A even though it will not be subject to 
reporting until after the effectiveness of that Securities Act 
registration statement.'').
---------------------------------------------------------------------------

    Issuers conducting offerings under Regulation A that seek to list 
the securities on a national securities exchange or otherwise enter the 
Exchange Act registration system would be required to file Form 10 in 
order to do so. We solicit comment, however, on whether we should 
provide a simplified means for Regulation A issuers to register a class 
of securities under the Exchange Act by, for example, permitting such 
issuers to file a Form 8-A rather than a Form 10 in conjunction with, 
or following, the qualification of a Regulation A offering statement on 
Form 1-A, as some commenters have suggested.\432\ The 2010 Government-
Business Forum on Small Business Capital Raising made a similar 
recommendation.\433\ Proponents of this approach argue that it would 
facilitate IPOs and encourage Exchange Act registration and the listing 
of securities on national securities exchanges, which would provide 
benefits to both issuers and investors.\434\
---------------------------------------------------------------------------

    \432\ ABA Letter; WR Hambrecht + Co. Letter.
    \433\ See Final Report of the 29th Annual SEC Government-
Business Forum on Small Business Capital Formation, Recommendation 
5, at 18 (Nov. 18, 2010) (suggesting that issuers be permitted to 
file reports under Section 13 of the Exchange Act for a one-year 
period following a Regulation A offering, and thereafter file a Form 
8-A to register the securities under Section 12 of the Exchange Act) 
(available at: https://www.sec.gov/info/smallbus/gbfor29.pdf).
    \434\ ABA Letter; WR Hambrecht + Co. Letter.
---------------------------------------------------------------------------

    We also invite comment on ways to facilitate secondary market 
trading in the securities of Regulation A issuers, such as by 
encouraging the development of ``venture exchanges'' or other trading 
venues that are focused on attracting such issuers. The Commission's 
Advisory Committee on Small and Emerging Companies, for example, has 
recommended the establishment of separate U.S. equity markets for small 
and emerging companies, which it believes could encourage initial 
public offerings of the securities of these companies.\435\ One 
commenter similarly

[[Page 3964]]

expressed support for the creation of an equity market venture exchange 
populated with small and emerging growth companies.\436\ In recent 
years, the Commission has approved more flexible listing standards for 
an exchange designed for smaller issuers,\437\ and some alternative 
trading systems today trade small company stocks.\438\ We solicit 
comment on how these or similar market models might be used by 
Regulation A issuers, and how they can be made more viable for 
facilitating secondary markets for small issuers.
---------------------------------------------------------------------------

    \435\ Recommendation Regarding Separate U.S. Equity Market for 
Securities of Small and Emerging Companies, Securities and Exchange 
Commission, Advisory Committee on Small and Emerging Companies 
(February 1, 2013), available at: https://www.sec.gov/info/smallbus/acsec/acsec-recommendation-032113-emerg-co-ltr.pdf.
    \436\ Paul Hastings Letter.
    \437\ See SEC Rel. No. 34-64437 (May 6, 2011) [76 FR 27710].
    \438\ See, e.g., Global OTC (f/k/a ArcaEdge), Shares Post 
Financial Corporation, Second Market, Inc., and OTC Link LLC.
---------------------------------------------------------------------------

Request for Comment
    102. While not currently proposed, should we permit issuers to 
register under the Exchange Act classes of securities that are 
qualified under Regulation A by allowing them to file a Form 8-A rather 
than a Form 10? Why or why not? Would providing a short form 
registration encourage more Regulation A issuers to list their 
securities on national securities exchanges? Conversely, would 
permitting eligible issuers to use their Regulation A offering 
statement in conjunction with a Form 8-A reduce the likelihood that 
such issuers would use the Securities Act registration process, 
including the ``IPO on-ramp'' provisions of Title I of the JOBS Act? 
Would it serve the intended purpose of Regulation A to make such an 
accommodation?
    103. The disclosure and financial statement requirements of 
Regulation A, currently and as proposed to be amended, require fewer 
items of disclosure or less detailed information than Securities Act 
registrants are required to provide. Would it cause confusion in the 
market or otherwise create risks for investors if issuers could 
transition from Regulation A disclosure in Form 1-A to Exchange Act 
registration without filing Form 10 or providing all the information 
otherwise called for by Form 10 or Form S-1? Alternatively, while not 
currently proposed, should simplified Exchange Act registration be 
available only for issuers that prepare an offering circular based on 
Part I of Form S-1?
    104. What effect, if any, would the ongoing reporting obligations 
of Section 13 of the Exchange Act have on an issuer considering the 
potential use of Form 8-A in conjunction with a Regulation A offering 
as the means by which to become an Exchange Act reporting issuer? Would 
ongoing reporting under Section 13 of the Exchange Act be an attractive 
alternative for Regulation A issuers? Or some subset of Regulation A 
issuers? Please explain.
    105. While not currently proposed, should we make Form 8-A 
available in connection with issuers that are subject to ongoing 
reporting requirements under Regulation A? Why or why not? Do the 
proposed ongoing reporting requirements in Regulation A, in addition to 
the requirement to meet the listing standards of, and be certified by, 
a national securities exchange provide an adequate justification for 
the extension of the Form 8-A accommodation to issuers subject to such 
an obligation? \439\ Or should we provide a different means of 
simplified Exchange Act registration for issuers subject to an ongoing 
reporting obligation under Regulation A? Please explain.
---------------------------------------------------------------------------

    \439\ See discussion of proposed Regulation A ongoing reporting 
requirements in Section II.E. above.
---------------------------------------------------------------------------

    106. Would encouraging the development of ``venture exchanges'' or 
other trading venues that are focused on attracting such issuers 
facilitate secondary market trading in the securities of Regulation A 
issuers? If so, how? How could the Commission adjust the regulatory 
regime to provide for a more viable secondary market for small issuers, 
with sufficient participation by liquidity providers, that maintains 
investor protections and fair and orderly markets?
4. Exit Report on Form 1-Z
a. Summary Information on Terminated or Completed Offerings
    As discussed in Section II.E.1. above, we propose to rescind Form 
2-A, but to continue to require Regulation A issuers to file the 
information generally disclosed in Form 2-A with the Commission 
electronically on EDGAR. Consistent with the related portion of 
proposed new Form 1-K,\440\ the Form 2-A information would be converted 
into an online XML-based fillable form with indicator boxes or buttons 
and text boxes and filed electronically with the Commission as Part I 
of proposed new Form 1-Z (exit report). Issuers conducting Tier 1 
offerings would be required to provide this information on Form 1-Z not 
later 30 calendar days after termination or completion of the offering, 
while issuers conducting Tier 2 offerings would be required to provide 
this information on Form 1-Z at the time of filing the exit report, if 
not previously provided on Form 1-K as part of their annual 
report.\441\ The summary offering information disclosed on Form 1-Z 
would be publicly available on EDGAR, but not otherwise required to be 
distributed to investors.
---------------------------------------------------------------------------

    \440\ See also discussion in Section II.C.1. (Electronic Filing; 
Delivery Requirements) and Section II.C.3.a. (Part I (Notification)) 
above.
    \441\ See Section II.E.1.a. above for a discussion of the 
requirements for proposed new Form 1-K.
---------------------------------------------------------------------------

    The XML-based fillable form would enable issuers to provide 
information in a convenient medium and capture relevant data about the 
recently terminated or completed Regulation A offering. As with the 
related portions of Form 1-K discussed above, the fillable form would 
be available online and not require issuers to obtain specialty 
software. The summary information disclosed would, however, facilitate 
analysis of Regulation A offerings by the Commission, other regulators, 
third-party data providers, and market participants. Additionally, 
facilitating the capture of important summary information about an 
offering would enable the Commission to monitor the use and 
effectiveness of Regulation A as a capital formation tool.
    As noted above in the related proposals for Form 1-K, the summary 
information collected in Form 1-Z would include the date the offering 
was qualified and commenced, the number of securities qualified, the 
number of securities sold in the offering, the price of the securities, 
any fees associated with the offering, and the net proceeds to the 
issuer.
b. Termination or Suspension of Tier 2 Disclosure Obligations
    In light of the proposed ongoing reporting obligations for Tier 2 
offerings, we are proposing to permit issuers that conduct a Tier 2 
offering to terminate or suspend their ongoing reporting obligations on 
a basis similar to the provisions that allow issuers to suspend their 
ongoing reporting obligations under Section 13 and Section 15(d) of the 
Exchange Act.\442\ We acknowledge that, similar to the Exchange Act 
reporting context, there may be circumstances when an issuer would like 
to exit the reporting system. We received a comment letter that 
suggested we adopt a provision similar to Section 15(d) of the 
Securities Act that would permit an issuer to automatically

[[Page 3965]]

terminate its Regulation A reporting obligation as to any fiscal year, 
other than the year in which the offering was made, if at the beginning 
of such fiscal year, the securities of the class sold in reliance on 
Regulation A are held of record by fewer than 300 persons.\443\ We 
propose to permit an issuer in a Tier 2 offering that has filed all 
ongoing reports required by Regulation A for the shorter of (i) the 
period since the issuer became subject to such reporting obligation, or 
(ii) its most recent three fiscal years and the portion of the current 
year preceding the date of filing Form 1-Z to immediately suspend its 
ongoing reporting obligation under Regulation A at any time after 
completing reporting for the fiscal year in which the offering 
statement was qualified, if the securities of each class to which the 
offering statement relates are held of record by fewer than 300 persons 
and offers or sales made in reliance on a qualified offering statement 
are not ongoing.\444\ In such circumstances, an issuer's obligation to 
continue to file ongoing reports in a Tier 2 offering under Regulation 
A would be suspended immediately upon the filing of a notice to the 
Commission on Part II of proposed new Form 1-Z. A manually-signed copy 
of the Form 1-Z would have to be executed by the issuer and related 
signatories before or at the time of filing and retained by the issuer 
for a period of five years.\445\ Issuers would be required to produce 
the manually signed copy to the Commission, upon request.\446\
---------------------------------------------------------------------------

    \442\ See Exchange Act Section 15(d), 15 U.S.C. 78o(d); Exchange 
Act Rule 12h-3, 17 CFR 240.12h-3.
    \443\ ABA Letter.
    \444\ See proposed Rule 257(d)(2).
    \445\ See Instruction to proposed Form 1-Z.
    \446\ Id.
---------------------------------------------------------------------------

    We further propose that issuers' obligations to file ongoing 
reports in a Tier 2 offering under Regulation A would be automatically 
suspended upon registration of a class of securities under Section 12 
of the Exchange Act or registration of an offering of securities under 
the Securities Act, such that Exchange Act reporting obligations would 
always supersede ongoing reporting obligations under Regulation A. If 
an issuer terminates or suspends its reporting obligations under the 
Exchange Act and the issuer would be eligible to suspend its Regulation 
A reporting obligation by filing a Form 1-Z at that time, the ongoing 
reporting obligations would terminate automatically and no Form 1-Z 
filing would be required to terminate the issuer's Regulation A 
reporting obligation. If the issuer would not be eligible to file a 
Form 1-Z at that time, it would need to recommence its Regulation A 
reporting with the report covering any financial period not completely 
covered by a registration statement or Exchange Act report.\447\
---------------------------------------------------------------------------

    \447\ See proposed Rule 257(d)(1) and (e).
---------------------------------------------------------------------------

Request for Comment
    107. As currently proposed, should we modify the current 
requirement in Regulation A that issuers file a Form 2-A to report 
sales and the termination of sales made under Regulation A to instead 
require issuers conducting Tier 1 offerings to report such information 
only after the termination or completion of the offering on Part I of 
proposed new Form 1-Z and issuers in Tier 2 offerings to report such 
information on either Part I of Form 1-Z or proposed new Form 1-K? Why 
or why not?
    108. Is there any additional information about an issuer's recently 
completed or terminated Regulation A offering that should be required 
to be disclosed? Alternatively, should we not require any disclosure of 
summary information about an issuer's recently completed Regulation A 
offering? Why or why not?
    109. Should we permit issuers to suspend their reporting 
obligations in a Tier 2 offering under Regulation A, as proposed, when 
they take on Exchange Act reporting obligations? Should we otherwise 
alter the proposed provisions regarding the suspension or termination 
of an issuer's ongoing reporting obligations in Tier 2 offering? Should 
issuers in Tier 2 offerings be able to suspend or terminate ongoing 
reporting under Regulation A on some other basis? For example, should 
we permit issuers to terminate their ongoing reporting obligations 
immediately upon completion of the offering, provided, at that time, 
they have less than 300 holders of record? Why or why not? Should we 
require a Form 1-Z filing for issuers that would be eligible to 
immediately file that form upon the suspension or termination of their 
Exchange Act reporting obligations?
    110. Should we alter the number of record holders below which an 
issuer in a Tier 2 offering can suspend or terminate its ongoing 
reporting obligations from the proposed 300 record holders? Or should 
we alter the threshold below which certain types of issuers that are 
subject to a Tier 2 ongoing reporting obligation would be able to 
suspend or terminate reporting (e.g., 2,000 or 500 holders of record)? 
For example, similar to the provisions of Title VI of the JOBS Act, 
should we allow banks and bank holding companies to terminate their 
ongoing Regulation A reporting obligations by falling below a higher 
threshold of record holders (e.g., 1,200 holders of record)? \448\ Or 
should we increase or decrease the number of record holders below which 
all issuers in Tier 2 offerings, irrespective of issuer-type, could 
suspend or terminate their ongoing reporting obligations? Why or why 
not? Please explain.
---------------------------------------------------------------------------

    \448\ See Title VI of the JOBS Act, Public Law 112-106,--601 
(Capital Expansion).
---------------------------------------------------------------------------

F. Insignificant Deviations From a Term, Condition or Requirement

    Currently, Rule 260 provides that certain insignificant deviations 
from a term, condition or requirement of Regulation A will not result 
in the issuer's loss of the exemption from registration under Section 5 
of the Securities Act.\449\ Under Rule 260, the provisions of current 
Rule(s) 251(a) (issuer eligibility), 251(b) (aggregate offering price), 
251(d)(1) (offers) and 251(d)(3) (continuous or delayed offerings) of 
Regulation A are, however, deemed to be significant to the offering as 
a whole, and any deviations from these provisions would result in the 
issuer's loss of the exemption. We have not received any comment on 
Rule 260, nor do we propose to amend the rule. We do, however, solicit 
comment on whether the provision should be amended to, for example, 
alter the list of significant deviations.
---------------------------------------------------------------------------

    \449\ 17 CFR 230.260.
---------------------------------------------------------------------------

Request for Comment
    111. Should we amend Rule 260 to alter the list of deviations that 
would be deemed significant to the offering as a whole? Why or why not? 
If so, which provision(s) should be amended? Alternatively, are there 
other provisions within Rule 260 that should be amended? If so, please 
state which provisions and describe why they should be amended.

G. Bad Actor Disqualification

    Under Securities Act Section 3(b)(2)(G)(ii), the Commission has 
discretion to issue rules disqualifying certain ``felons and other `bad 
actors' '' from using the new exemption. Such rules, if adopted, must 
be ``substantially similar'' to those adopted to implement Section 926 
of the Dodd-Frank Act, which requires the Commission to adopt 
disqualification rules for securities offerings under Rule 506 of 
Regulation D. The Commission adopted the disqualification provisions 
required by Section 926 in Rule 506(d), and a

[[Page 3966]]

related disclosure requirement in Rule 506(e).\450\
---------------------------------------------------------------------------

    \450\ SEC Rel. No. 33-9414 (July 10, 2013) [78 FR 44729]. The 
Commission recently proposed rules substantially similar to those 
adopted pursuant Section 926 of the Dodd-Frank Act in the proposing 
release for securities-based crowdfunding transactions under Title 
III of the JOBS Act. See SEC Rel. No. 33-9470, at 284.
---------------------------------------------------------------------------

    All commenters on potential ``bad actor'' disqualification 
provisions in the context of Title IV of the JOBS Act suggest that the 
Commission apply the same standards for bad actor disqualification 
under Regulation A as under Rule 506.\451\ One commenter further 
suggested that the Commission adopt uniform disqualification rules 
across Regulation D, Section 4(a)(5), and the expanded Regulation A 
exemption.\452\
---------------------------------------------------------------------------

    \451\ ABA Letter; WR Hambrecht + Co. Letter; NASAA Letter 2; 
Kaplan Voekler Letter 2. See also Final Report of the 31st Annual 
SEC Government-Business Forum on Small Business Capital Formation, 
Recommendation 13B, at 25 (Nov. 15, 2012) (available at: https://www.sec.gov/info/smallbus/gbfor31.pdf).
    \452\ NASAA Letter 2.
---------------------------------------------------------------------------

    Regulation A currently provides for the disqualification of ``bad 
actors'' in Rule 262.\453\ We propose to amend Rule 262 to include bad 
actor disqualification provisions in substantially the same form as 
recently adopted under Rule 506(d), but without the categories of 
covered persons specific to fund issuers, which would not be eligible 
to use Regulation A under the proposal.\454\ Such ``bad actor'' 
disqualification requirements would disqualify securities offerings 
from reliance on Regulation A if the issuer or other relevant persons 
(such as underwriters, placement agents, and the directors, officers 
and significant shareholders of the issuer) have been convicted of, or 
are subject to court or administrative sanctions for, securities fraud 
or other violations of specified laws.
---------------------------------------------------------------------------

    \453\ 17 CFR 230.262.
    \454\ See proposed Rule 262.
---------------------------------------------------------------------------

    Under the proposed amendment, the disqualification provisions would 
apply to the following categories of persons (``covered persons''):
     The issuer and any predecessor of the issuer or affiliated 
issuer;
     any director, executive officer, or other officer 
participating in the offering, general partner, or managing member of 
the issuer;
     any beneficial owner of 20% or more of the issuer's 
outstanding voting equity securities, calculated on the basis of voting 
power;
     any promoter connected with the issuer in any capacity at 
the time of filing of the offering statement or any offers or sales 
after qualification;
     any underwriter or person that has been or will be paid 
(directly or indirectly) remuneration for solicitation of purchasers in 
connection with sales of securities in the offering;
     any general partner or managing member of any such 
solicitor; and
     any director, executive officer or other officer 
participating in the offering of any such underwriter or solicitor or 
of a general partner or managing member of any such underwriter or 
compensated solicitor.
    An offering would be disqualified from reliance on the Regulation A 
exemption if any covered person had been the subject of the following 
disqualifying events:
     Criminal convictions (felony or misdemeanor) entered 
within five years before the filing of the offering statement in the 
case of issuers, their predecessors and affiliated issuers, and ten 
years in the case of other covered persons:
     In connection with the purchase or sale of any security;
     involving the making of a false filing with the 
Commission; or
     arising out of the conduct of the business of an 
underwriter, broker, dealer, municipal securities dealer, investment 
adviser, or paid solicitor of purchasers of securities; \455\
---------------------------------------------------------------------------

    \455\ See proposed Rule 262(a)(1).
---------------------------------------------------------------------------

     Court injunctions and restraining orders, including any 
order, judgment, or decree of any court of competent jurisdiction, 
entered no more than five years before the filing of the offering 
statement, that, at the time of such filing, restrains or enjoins such 
person from engaging or continuing to engage in any conduct or 
practice:
     In connection with the purchase or sale of any security;
     involving the making of a false filing with the 
Commission; or
     arising out of the conduct of the business of an 
underwriter, broker, dealer, municipal securities dealer, investment 
adviser, or paid solicitor of purchasers of securities; \456\
---------------------------------------------------------------------------

    \456\ See proposed Rule 262(a)(2).
---------------------------------------------------------------------------

     Final orders issued by state securities, banking, credit 
union, and insurance regulators, federal banking regulators, the U.S. 
Commodity Futures Trading Commission, and the National Credit Union 
Administration that at the time of filing of the offering statement 
either:
     Bar the covered person from association with any entity 
regulated by the regulator issuing the order, or from engaging in the 
business of securities, insurance or banking, or from savings 
association or credit union activities; or
     are based on a violation of any law or regulation that 
prohibits fraudulent, manipulative, or deceptive conduct within the 
last ten years; \457\
---------------------------------------------------------------------------

    \457\ See proposed Rule 262(a)(3).
---------------------------------------------------------------------------

     Commission disciplinary orders entered pursuant to Section 
15(b) or 15(B)(c) of the Exchange Act or Section 203(e) or (f) of the 
Investment Advisers Act of 1940 (the ``Advisers Act'') that, at the 
time of filing of the offering statement:
     Suspend or revoke a person's registration as a broker, 
dealer, municipal securities dealer, or investment adviser;
     place limitations on the activities, functions, or 
operations of such person; or
     bar such person from being associated with any entity or 
from participating in the offering of any penny stock; \458\
---------------------------------------------------------------------------

    \458\ See proposed Rule 262(a)(4).
---------------------------------------------------------------------------

     Commission cease and desist orders entered no more than 
five years before the filing of the offering statement that, at the 
time of such filing, order the person to cease and desist from 
committing or causing a violation or future violation of any scienter-
based anti-fraud provision of the federal securities laws or Section 5 
of the Securities Act; \459\
---------------------------------------------------------------------------

    \459\ See proposed Rule 262(a)(5).
---------------------------------------------------------------------------

     Suspension or expulsion from membership in, or suspension 
or a bar from association with a member of, an SRO, i.e., a registered 
national securities exchange or a registered national or affiliated 
securities association for any act or omission to act constituting 
conduct inconsistent with just and equitable principles of trade; \460\
---------------------------------------------------------------------------

    \460\ See proposed Rule 262(a)(6).
---------------------------------------------------------------------------

     Stop orders applicable to a registration statement and 
orders suspending the Regulation A exemption for an offering statement 
that an issuer filed or in which the person was named as an underwriter 
no more than five years before the filing of the offering statement, 
and proceedings pending at the time of such filing as to whether such a 
stop or suspension order should be issued; \461\ and
---------------------------------------------------------------------------

    \461\ See proposed Rule 262(a)(7).
---------------------------------------------------------------------------

     U.S. Postal Service false representation orders including 
temporary or preliminary orders entered no more than five years before 
the filing of the offering statement.\462\
---------------------------------------------------------------------------

    \462\ See proposed Rule 262(a)(8).
---------------------------------------------------------------------------

    The proposed triggering events are substantially the same as the 
triggering events included in Rule 506(d).\463\ We believe that 
creating a uniform set of

[[Page 3967]]

bad actor triggering events should simplify diligence, particularly for 
issuers that may engage in different types of exempt offerings. It 
could also foster the creation of third-party databases or other data 
sources regarding bad actors that could aid issuers in conducting 
diligence. As noted above, however, the proposed rules in Regulation A 
would specify that an order must bar the covered person at the time of 
filing \464\ of the offering statement, as opposed to the requirement 
in Rule 506(d) that the order must bar the covered person at the time 
of the relevant sale. This clarification accords with the current 
provisions of Rule 262 and is appropriate in the context of Regulation 
A because there is no filing requirement before the time of first sale 
in Rule 506.\465\
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    \463\ 17 CFR 230.506(d).
    \464\ In order to simplify the application of the rules, we do 
not propose to require that an order bar the covered person at the 
time of non-public submission of the offering statement. As a 
practical matter, if a covered person is involved with a proposed 
Regulation A offering at the time of non-public submission or 
filing, the issuer would be ineligible to qualify the offering in 
reliance on Regulation A under either circumstance.
    \465\ Under Rule 503 of Regulation D, issuers must file a notice 
of sales on Form D no later than 15 calendar days after the first 
sale of securities. 17 CFR 230.503(a).
---------------------------------------------------------------------------

    We further propose a reasonable care exception under Regulation A 
on a basis consistent with Rule 506.\466\ Under proposed Rule 
262(b)(4), an issuer would not lose the benefit of the Regulation A 
exemption if it could show that it did not know, and in the exercise of 
reasonable care could not have known, of the existence of a 
disqualification.
---------------------------------------------------------------------------

    \466\ See proposed Rule 262(b)(4).
---------------------------------------------------------------------------

    Proposed Rule 262 is very similar in substance to existing Rule 
262, although the format is different. In its current form, Rule 262 
provides three different categories of offering participants and 
related persons, with different disqualification triggers for each 
category. The amendments we propose are based on a simplified framework 
of potentially disqualified persons and disqualifying events, which 
aligns with Rule 506(d). The covered persons are the same as under 
current Rule 262, except that the proposal includes references to 
managing members of limited liability companies and, like Rule 506(d), 
would cover compensated solicitors of investors in addition to 
underwriters; executive officers and other officers participating in 
the offering, rather than all officers, of the issuer and any 
underwriter or compensated solicitor; and beneficial owners of 20% or 
more of the issuer's outstanding voting equity securities, calculated 
on the basis of voting power, rather than beneficial owners of 10% of 
any class of the issuer's equity securities. The proposals would also 
add two new disqualification triggers: proposed Rule 262(a)(3), which 
covers final orders and bars of certain state and other federal 
regulators, and proposed Rule 262(a)(5), which covers Commission cease-
and-desist orders relating to violations of scienter-based anti-fraud 
provisions of the federal securities laws or Section 5 of the 
Securities Act. Finally, the proposals include a ``reasonable care'' 
exception modeled on the Rule 506(d) provision. We believe these 
changes to Rule 262 are appropriate in light of the Section 
3(b)(2)(G)(ii) mandate and the benefits of creating a more uniform set 
of standards for all exemptions that include bad actor 
disqualification.\467\
---------------------------------------------------------------------------

    \467\ If adopted, the amendments to Rule 262 would also 
effectively modify the bad actor disqualification provisions of Rule 
505 of Regulation D, which incorporate Rule 262 by reference. We are 
proposing technical amendments to Rule 505 to update the citations 
to Rule 262.
---------------------------------------------------------------------------

    Under the proposal, offerings that would have been disqualified 
from reliance on Regulation A under Rule 262 as currently in effect 
would continue to be disqualified. Triggering events that are not 
currently covered by Rule 262--namely, the events specified in proposed 
Rule 262(a)(3) and 262(a)(5)--and that pre-date effectiveness of any 
rule amendments would not cause disqualification, but would be required 
to be disclosed on a basis consistent with new Rule 506(e). 
Specifically, issuers would be required to indicate in Part I of Form 
1-A that disclosure of triggering events that would have triggered 
disqualification, but occurred before the effective date of the 
Regulation A amendments, will be provided in Part II of Form 1-A.\468\
---------------------------------------------------------------------------

    \468\ As discussed in Section II.C.3.a. above, Part I of Form 1-
A focuses, in part, on issuer eligibility, and forces issuers to 
make an eligibility determination at the outset of filling out Form 
1-A, while also facilitating quick eligibility determinations by 
Commission staff reviewing Regulation A offering materials.
---------------------------------------------------------------------------

    In addition to soliciting comment on the proposed amendments to 
Rule 262, we are also soliciting comment more broadly on the 
interpretation of the phrase ``voting equity securities,'' as it 
appears in ``any beneficial owner of 20% or more of the issuer's 
outstanding voting equity securities, calculated on the basis of voting 
power,'' a category of covered persons in Rule 506(d) and proposed Rule 
201(r)(2) of Regulation Crowdfunding, as well as in Rule 262, as 
proposed to be amended. When we adopted Rule 506(d), we did not define 
``voting equity securities,'' but rather indicated that our initial 
intention would be to consider securities as voting equity securities 
if ``securityholders have or share the ability, either currently or on 
a contingent basis, to control or significantly influence the 
management and policies of the issuer through the exercise of a voting 
right.'' \469\ In light of numerous questions and concerns raised about 
the implications of such an interpretation, however, we are 
reconsidering our initial views. In particular, we are concerned that 
our initial interpretation may be overbroad, and that a ``bright-line'' 
test may be more workable and would facilitate compliance. We are 
therefore soliciting comment about alternative interpretations of the 
phrase ``voting equity securities'' as it appears in current and 
proposed bad actor disqualification rules.
---------------------------------------------------------------------------

    \469\ SEC Rel. No. 33-9414 (July 10, 2013) [78 FR 44729], text 
accompanying fn. 62.
---------------------------------------------------------------------------

Request for Comment
    112. Should we amend Rule 262, as proposed, to align with Rule 
506(d)? Are there proposed amendments to the covered persons or 
disqualification triggering events of Rule 262 that we should not make? 
Why not? Are there other amendments consistent with the statutory 
mandate of Section 3(b)(2)(G)(ii) that we should consider?
    113. How should the phrase ``voting equity securities'' as it 
appears in ``any beneficial owner of 20% or more of the issuer's 
outstanding voting equity securities, calculated on the basis of voting 
power'' in Rule 506(d), proposed Rule 201(r)(2) of Regulation 
Crowdfunding, and Rule 262 as proposed to be amended, be interpreted? 
Should we interpret it consistently with the definition of ``voting 
securities'' in Rule 405, as equity securities ``the holders of which 
are presently entitled to vote for the election of directors''? Are 
there factors other than the current ability to vote for directors (or 
their equivalents) that should be taken into account?

H. Relationship With State Securities Law

    Commenters have suggested that the cost of state securities law 
compliance, which they identify as an obstacle to the use of existing 
Regulation A, would discourage market participants from using the new 
exemption. In addition, as discussed previously, Section 402 of the 
JOBS Act required the Comptroller General to conduct a study on the 
impact of state ``blue sky'' laws on

[[Page 3968]]

offerings conducted under Regulation A, and to report its findings to 
Congress. The resulting GAO report to Congress indicates that state 
securities laws were among several central factors that may have 
contributed to the lack of use of Regulation A.\470\
---------------------------------------------------------------------------

    \470\ See Section I.C. above.
---------------------------------------------------------------------------

    NASAA recently proposed a coordinated review process for Regulation 
A offerings, which, if implemented, could potentially reduce the state 
law disclosure and compliance obligations of Regulation A issuers.\471\ 
As proposed, the coordinated review program would permit issuers to 
file Regulation A offering materials with the states using an 
electronic filing depository system currently in development by NASAA. 
The administrator of the coordinated review program would select a lead 
disclosure examiner and, where applicable, a lead merit examiner, which 
would be responsible for drafting and circulating a comment letter to 
the participating jurisdictions, and for seeking resolution of those 
comments with the issuer and its counsel. The draft review protocol 
also contemplates that certain NASAA statements of policy would be 
modified or would not apply to offerings undergoing coordinated review. 
There are a number of open questions about the proposal: Whether NASAA 
will adopt a coordinated review program as proposed; if the proposal 
were to be adopted in the future, how many states would elect to 
participate; when such a program, if adopted, could be implemented; and 
if adopted as proposed, whether the protocol would address the concerns 
related to state securities law compliance identified by the GAO and 
commenters.\472\ NASAA has stated that its members broadly support the 
proposed program and would be able to implement it promptly.\473\
---------------------------------------------------------------------------

    \471\ See NASAA Release, dated October 30, 2013, Notice of 
Request for Public Comment: Proposed Coordinated Review Program for 
Section 3(b)(2) Offerings (the comment period for NASAA's proposal 
was scheduled to close on November 30, 2013), available at: https://www.nasaa.org/27427/notice-request-public-comment-proposed-coordinated-review-program-section-3b2-offerings/.
    \472\ See, e.g., GAO-12-839, at 14 (discussing the varying 
standards and degrees of stringency applied during the qualification 
and review process in merit review states); see also Paul Hastings 
Letter.
    \473\ Letter from Andrea Seidt, President, NASAA, December 12, 
2013 (``NASAA Letter 3''). If the proposed coordinated review 
program were not adopted by every state, we could consider adoption 
of a ``qualified purchaser'' definition that would provide 
preemption as to the non-participating states.
---------------------------------------------------------------------------

    In the absence of any such coordinated review, issuers would be 
required to analyze and comply with separate registration or 
qualification requirements, or to identify and comply with applicable 
exemptions, in each state in which they intend to offer or sell 
securities under revised Regulation A, as is currently the case under 
Regulation A. Depending on the nature of any such coordinated review 
process, state securities laws could impose additional requirements and 
limitations on offerings beyond those imposed by Regulation A, either 
currently or as proposed to be amended.\474\
---------------------------------------------------------------------------

    \474\ For example, under the proposed coordinated review 
protocol, Regulation A offerings would be subject to most aspects of 
current NASAA policies regarding lock-up of shares held by promoters 
and disclosure and procedural requirements for loans and other 
material transactions involving issuer affiliates.
---------------------------------------------------------------------------

    As a result, most commenters strongly supported some form of state 
securities law preemption.\475\ Section 18 of the Securities Act 
generally provides for exemption from state law registration and 
qualification requirements for certain categories of securities, 
defined as ``covered securities.'' \476\ Although Section 401(b) of the 
JOBS Act does not itself exempt offerings made under Section 3(b)(2) 
and the related rules from state law registration and qualification 
requirements, it did add Section 18(b)(4)(D) to the Securities Act. 
That provision states that Section 3(b)(2) securities are covered 
securities for purposes of Section 18 if they are ``offered or sold on 
a national securities exchange'' or ``offered or sold to a qualified 
purchaser, as defined by the Commission pursuant to [Section 18(b)(3)] 
with respect to that purchase or sale.'' Section 18(b)(3) provides that 
``the Commission may define the term `qualified purchaser' differently 
with respect to different categories of securities, consistent with the 
public interest and the protection of investors.''
---------------------------------------------------------------------------

    \475\ Karr Tuttle Letter; Letter from Robert J. Tresslar, Title 
Company Data Provider, Property Tax Lien Investor, June 28, 2012 
``Tresslar Letter''; McCarter & English Letter; ABA Letter; Letter 
from Paul Getty, Managing Director, Satwik Ventures LLC, Nov. 7, 
2012 (``Satwik Ventures Letter''); Campbell Letter; WR Hambrecht + 
Co. Letter; Kaplan Voekler Letter 2; Fallbrook Letter; Paul Hastings 
Letter. See also Final Report of the 29th Annual SEC Government-
Business Forum on Small Business Capital Formation, Recommendation 
7B, at 19 (Nov. 18, 2010) (available at: https://www.sec.gov/info/smallbus/gbfor29.pdf); Final Report of the 30th Annual SEC 
Government-Business Forum on Small Business Capital Formation, 
Recommendation 8, at 30 (Nov. 17, 2011) (available at: https://www.sec.gov/info/smallbus/gbfor30.pdf); Final Report of the 31st 
Annual SEC Government-Business Forum on Small Business Capital 
Formation, Recommendations 12 and 14, at 25 (Nov. 15, 2012) 
(available at: https://www.sec.gov/info/smallbus/gbfor31.pdf); ECTF 
Report (Recommendations 1.2, 1.3, and 1.4).
    \476\ See Section 18(c), 15 U.S.C. 77r(c). State securities 
regulators retain authority to impose certain filing and fee 
requirements and general antifraud enforcement authority with 
respect to covered securities. See Section 18(c), 15 U.S.C. 77r(c).
---------------------------------------------------------------------------

    Some commenters suggested that the Commission preempt state 
securities laws by permitting Section 3(b)(2) securities to be listed 
and traded on a national securities exchange,\477\ others suggested 
preemption by means of a ``qualified purchaser'' definition,\478\ while 
others still suggested some combination of both approaches.\479\
---------------------------------------------------------------------------

    \477\ See, e.g., Karr Tuttle Letter.
    \478\ See, e.g., Tresslar Letter; McCarter & English Letter; 
Campbell Letter; Kaplan Voekler Letter 2; see also Final Report of 
the 31st Annual SEC Government-Business Forum on Small Business 
Capital Formation, Recommendations 12 and 14, at 25 (Nov. 15, 2012); 
ECTF Report (Recommendation 1.3).
    \479\ See, e.g., ABA Letter; Satwik Ventures Letter; WR 
Hambrecht + Co. Letter.
---------------------------------------------------------------------------

    Commenters advocating listing and trading of Section 3(b)(2) 
securities on a national securities exchange have suggested we permit 
such listing without attendant registration of the securities under 
Section 12(b) of the Exchange Act \480\ or through short-form Exchange 
Act registration on Form 8-A.\481\ Commission action would not be 
required to effect the preemption of state securities laws for 
Regulation A securities that are listed or traded on an exchange. Under 
Section 18(b)(1) of the Securities Act, any securities that are listed 
or authorized for listing on a national securities exchange are exempt 
from state securities law registration and qualification 
requirements.\482\ Section 401(b) of the JOBS Act in effect restated 
this provision specifically for Regulation A securities, by adding 
Section 18(b)(4)(D)(i) to the Securities Act.\483\ We expect, however, 
that this approach to preemption will have limited impact, because many 
Regulation A issuers would not meet the standards for listing on a 
national securities exchange.\484\
---------------------------------------------------------------------------

    \480\ Karr Tuttle Letter (suggesting a lower tier of exchange-
listed security).
    \481\ WR Hambrecht + Co. Letter (suggesting upper tier exchange 
listing, but on a shorter form Exchange Act registration statement); 
see also Final Report of the 29th Annual SEC Government-Business 
Forum on Small Business Capital Formation, Recommendation 5, at 18 
(Nov. 18, 2010) (available at: https://www.sec.gov/info/smallbus/gbfor29.pdf).
    \482\ Section 18(b)(1), 15 U.S.C. 77r(b)(1).
    \483\ Section 18(b)(4)(D)(i) uses the language ``offered or sold 
on a national securities exchange,'' whereas Section 18(b)(1) uses 
the language, ``listed, or authorized for listing, on a national 
securities exchange.''
    \484\ See also ECTF Report. As discussed in Section II.E.3. 
above, we solicit comment on whether we should facilitate the 
listing of Regulation A securities on a national securities exchange 
by permitting issuers to file a short-form Exchange Act registration 
statement on Form 8-A concurrently with the qualification of a 
Regulation A offering statement.

---------------------------------------------------------------------------

[[Page 3969]]

    From those commenters advocating preemption through a qualified 
purchaser definition, suggested definitions included:
     Any purchaser in a Regulation A offering; \485\
---------------------------------------------------------------------------

    \485\ Campbell Letter.
---------------------------------------------------------------------------

     Any purchaser meeting a specified net worth standard, set 
at or lower than the current ``accredited investor'' definition in Rule 
501 of Regulation D; \486\
---------------------------------------------------------------------------

    \486\ Tresslar Letter; McCarter & English Letter; ABA Letter; 
Satwik Ventures Letter; WR Hambrecht + Co. Letter. See also Final 
Report of the 31st Annual SEC Government-Business Forum on Small 
Business Capital Formation, Recommendation 14, at 25 (Nov. 15, 2012) 
(available at: https://www.sec.gov/info/smallbus/gbfor31.pdf).
---------------------------------------------------------------------------

     Any purchaser meeting a net worth or income test based on 
thresholds below accredited investor thresholds, combined with an 
investment cap; \487\ or
---------------------------------------------------------------------------

    \487\ Kaplan Voekler Letter 2.
---------------------------------------------------------------------------

     Any purchaser who purchased through a registered broker-
dealer.\488\
---------------------------------------------------------------------------

    \488\ ABA Letter; WR Hambrecht + Co. Letter; Paul Hastings 
Letter (suggesting that, in addition to primary offerings, the 
qualified purchaser definition apply in connection with secondary 
trading in Regulation A securities, where the issuer is subject to 
an ongoing reporting obligation under Regulation A); see also ECTF 
Report (Recommendation 1.2).
---------------------------------------------------------------------------

    One commenter stated that it did not object to the Commission's 
defining ``qualified purchaser'' for Section 3(b)(2) securities, but 
objected to a definition based on transactions effected through a 
broker-dealer or on purchaser criteria commensurate with or less 
stringent than current ``accredited investor'' thresholds.\489\ In its 
view, Congress intended a qualified purchaser definition under Section 
18(b)(3) of the Securities Act to require investor qualifications 
greater than those provided in the accredited investor definition, and 
sales through broker-dealers do not provide adequate protections.\490\ 
This commenter suggested that ``qualified purchaser'' could be defined 
based on existing definitions of ``qualified purchaser'' in the 
Investment Company Act \491\ or ``qualified client'' in Rule 205 under 
the Investment Advisers Act.\492\
---------------------------------------------------------------------------

    \489\ NASAA Letter 2; see also NASAA Letter 3 (indicating 
NASAA's concerns with the Commission's use of either the ``qualified 
purchaser'' or ``accredited investor'' definition in the context of 
implementing rules for Section 3(b)(2) of the Securities Act).
    \490\ NASAA Letter 2; see also NASAA Letter 3. Section 18(b)(3) 
was enacted under the National Securities Markets Improvement Act of 
1996 (NSMIA), Public Law 104-290, 110 Stat. 3416 (Oct. 11, 1996).
    \491\ 15 U.S.C. 80a-2(a)(51). For natural persons to be 
``qualified purchasers'' under this definition, they must own at 
least $5 million in investment assets.
    \492\ 17 CFR 275.205-3. For natural persons to be ``qualified 
clients,'' they must have at least $1 million in assets under 
management with the investment adviser or have a net worth of more 
than $2 million, excluding the value of their primary residence.
---------------------------------------------------------------------------

    In light of the issues raised by commenters and in the GAO study, 
we are concerned that the costs associated with state securities law 
compliance may deter issuers from using Regulation A, even if the 
increased cap on offering size and other proposals intended to make 
Regulation A more workable are implemented. This could significantly 
limit the possible impact of an amended Regulation A as a tool for 
capital formation. We believe that the addition of Section 
18(b)(4)(D)(ii) of the Securities Act, which specifically refers to a 
``qualified purchaser'' definition that would apply to transactions 
under the new 3(b)(2) exemption, suggests that it is appropriate for us 
to consider including such a definition in our rulemaking to implement 
Title IV of the JOBS Act.
    We also believe that Regulation A, as we propose to amend it, would 
provide substantial protections to purchasers. Under the proposed 
amendments, a Regulation A offering statement would continue to provide 
substantive narrative and financial disclosures about the issuer, 
including an MD&A discussion. The proposed electronic filing 
requirement, including the structured data in Part I of the offering 
circular, would provide ready access to key information about the 
issuer and the offering, and would facilitate analysis of the offering 
in relation to comparable opportunities. We expect that Regulation A 
offering statements would continue to receive the same level of 
Commission staff review as registration statements. Additional investor 
protections would be afforded by Regulation A's limitations on eligible 
issuers and ``bad actor'' disqualification provisions, which we are 
proposing to expand.
    The requirements for Tier 2 offerings would provide further 
protection, because the financial statements contained in the offering 
circular would be required to be audited, the issuer would have an 
obligation to provide ongoing reporting to purchasers, and such 
purchasers would be limited in the percentage of income or net worth 
that could be invested in a single offering. Ongoing reporting would 
assure a continuing flow of information to investors and could support 
the development of secondary markets for Regulation A securities, 
offering the prospect of reduced investor risk through liquidity.
    The approach to investor protection for Tier 2 of Regulation A is 
in some ways similar to the approach taken under Title III of the JOBS 
Act and our recently proposed rules for securities-based crowdfunding 
transactions under Section 4(a)(6) of the Securities Act.\493\ In 
Section 4(a)(6), Congress outlined a new exemption for securities-based 
crowdfunding transactions intended to take advantage of the internet 
and social media to facilitate capital-raising by the general public, 
or crowd. In that provision, Congress directly preempted state 
securities laws relying, in part, on a variety of investor protections, 
including disclosure requirements, the use of regulated intermediaries 
and limitations on the amount of securities an investor could acquire 
through this type of offering required by the JOBS Act.\494\
---------------------------------------------------------------------------

    \493\ See Section 4(a)(6)(ii) of the Securities Act, 15 U.S.C. 
77d(a)(6)(ii), and SEC Rel. No. 33-9470.
    \494\ See, generally, the requirements for issuers and 
intermediaries and state securities law preemption set forth in 
Title III of the JOBS Act, Public Law 112-106, 126 Stat. 306, 
Sec. Sec.  301-305.
---------------------------------------------------------------------------

    Like the proposed provisions for securities-based crowdfunding, 
Regulation A--both as currently in effect and as proposed to be 
amended--is available to all types of investors, and therefore we 
believe it should include certain appropriate investor protections. We 
believe that the substantial investor protections embedded in the 
issuer eligibility conditions, limitations on investment, disclosure 
requirements, qualification process and ongoing reporting requirements 
of proposed Tier 2 of Regulation A, in combination, could address 
potential concerns that may arise as a result of the preemption of 
state securities law registration and qualification requirements.
    We therefore propose to define the term ``qualified purchaser'' for 
certain purposes under Regulation A. As proposed, ``qualified 
purchasers'' in a Regulation A offering would consist of:
    (i) All offerees; and
    (ii) All purchasers in a Tier 2 offering.\495\
---------------------------------------------------------------------------

    \495\ See Proposed Rule 256.

We believe that this approach would protect offerees and investors in 
Regulation A securities, while streamlining compliance and reducing 
---------------------------------------------------------------------------
transaction costs.

    We believe it would be appropriate to preempt blue sky requirements 
with respect to all offerees in a Regulation A offering, in order to 
make Regulation A a workable approach to capital raising. Issuers 
relying on Regulation A should be able to communicate with potential 
investors about their offerings using the

[[Page 3970]]

internet, social media, and other means of widespread communication, 
without concern that such communications might trigger registration 
requirements under state law. We believe this is consistent with 
Section 3(b)(2)(E) of the Securities Act and the ``testing the waters'' 
provisions of Rule 254 of existing Regulation A, which we are proposing 
to expand, and that it would result in reduced costs to issuers seeking 
capital while maintaining investor protections.\496\
---------------------------------------------------------------------------

    \496\ We understand that some state securities regulators do not 
require the registration of broadly advertised offerings such as 
internet offerings, if the advertisement indicates, directly or 
indirectly, that the offering is not available to residents of that 
state. See, e.g., Washington State Dep't of Financial Institutions, 
Securities Act Policy Statement--16, available at: https://dfi.wa.gov/sd/securitiespolicy.htm#ps-16; see also NASAA Reports ] 
7,040 (regarding NASAA resolution, dated January 7, 1996, which 
encourages states to take appropriate steps to exempt from 
securities registration offers of securities over the Internet).
---------------------------------------------------------------------------

    Alternatively, we could import existing ``qualified purchaser'' 
definitions from other regulatory regimes. These other regimes may not, 
however, account for the regulatory protections and limited offering 
size of Regulation A, or the likelihood that issuers that target 
investors meeting these other standards could choose to rely on other 
Securities Act exemptions, such as Regulation D, rather than Regulation 
A. We could also consider the involvement of a regulated intermediary 
or advisor in a transaction as, or as part of, the basis for such a 
definition. Such intermediaries may, however, increase costs to issuers 
and investors without commensurate investor protection benefits. 
Finally, we could consider a broad definition such that any purchaser 
in any Regulation A offering would be treated as a ``qualified 
purchaser.'' Our preliminary view is that the investment limitations, 
enhanced disclosure and ongoing reporting obligations associated with 
Tier 2 would meaningfully bolster the protections otherwise embedded in 
Regulation A, and justify a difference in treatment to offerings 
conducted pursuant to Tier 1.
    We believe the proposed ``qualified purchaser'' definition for Tier 
2 offerings would help to make Regulation A a more workable means of 
capital formation. We are soliciting comment, however, on whether we 
should adopt such a definition or an alternative definition and, if so, 
what it should require. In particular, we are mindful that, if NASAA 
and its members are able to implement a coordinated review program for 
Regulation A offerings, the costs to issuers of state law registration 
and qualification requirements and the time required for qualification 
may be substantially lower in the future. We solicit comment below on 
whether, rather than adopting a definition of ``qualified purchaser'' 
for Regulation A as proposed, we should wait to determine whether such 
a coordinated review program can be finalized, adopted and successfully 
implemented and, if so, whether such a program would sufficiently 
address current concerns about the costs of blue sky compliance.\497\ 
We solicit comment on the extent to which state securities law 
registration and qualification requirements may affect the use of 
Regulation A, as proposed to be amended. We will also consult with the 
states and consider any changes to the states' processes and 
requirements for reviewing offerings before we adopt final amendments.
---------------------------------------------------------------------------

    \497\ If the proposed coordinated review program were not 
adopted by every state, we could consider whether a ``qualified 
purchaser'' definition that would provide preemption as to the non-
participating states would be appropriate.
---------------------------------------------------------------------------

Request for Comment
    114. Should we preempt state securities law registration and 
qualification requirements for certain Regulation A offerings by 
adopting a definition of ``qualified purchaser,'' as proposed? Why or 
why not? Please explain. In responding to this question and the 
questions below, please address both the practical implications of 
preemption for capital formation and the impact on investor protection.
    115. Is there any potential alternative approach by which we might 
address the concern raised by commenters and the GAO that state 
securities regulation poses a significant impediment to the use of 
Regulation A? \498\ In particular, could NASAA's proposed coordinated 
review program be effectively implemented in the near term? If NASAA 
implements a coordinated review program, should we consider changes to 
the proposed ``qualified purchaser'' definition or other provisions of 
the proposed rules? Are there other methods to streamline state review, 
such as a process based on review or qualification in a single state?
---------------------------------------------------------------------------

    \498\ See related discussion and requests for comment in Section 
II.I. below.
---------------------------------------------------------------------------

    116. Does proposed Tier 2 of Regulation A include sufficient 
investor protections to justify the preemption of state securities law 
registration and qualification requirements for offerings sold to 
``qualified purchasers,'' defined as proposed or otherwise? If not, are 
there additional investor protections that would justify such 
preemption? What are they?
    117. As proposed, should we adopt a ``qualified purchaser'' 
definition for purposes of Regulation A to include all offerees and all 
purchasers in a Tier 2 offering? Is it appropriate, as proposed, to 
treat all offerees as qualified purchasers? Is it appropriate to treat 
all purchasers in a Tier 2 offering as qualified purchasers, or should 
we impose additional limitations (based on, for example, an income 
threshold, a net worth threshold and/or an investment assets 
threshold)? Should we base the definition of ``qualified purchasers'' 
on the Investment Company Act definition of that term, or on the 
definition of ``qualified client'' under the Investment Advisers Act? 
Alternatively, should we define all accredited investors as qualified 
purchasers, as has been previously proposed? \499\ Why or why not?
---------------------------------------------------------------------------

    \499\ See SEC Rel. No. 33-8041 (Dec. 19, 2001) [66 FR 66839].
---------------------------------------------------------------------------

    118. Are there other approaches we should consider to defining 
``qualified purchaser'' for Regulation A offerings? For example, should 
we define ``qualified purchaser'' as any offeree or purchaser in a 
Regulation A offering by an issuer that meets certain criteria--for 
example, specified financial criteria or operating or other criteria 
indicative of reduced risk? Or should we define it based on attributes 
of the offering that may reduce risk to investors (e.g., firm 
commitment underwritten offerings or offerings through a registered 
broker-dealer)? Alternatively, should we consider a ``qualified 
purchaser'' definition that reflects some attributes of the purchaser, 
issuer and offering?
    119. Should we consider defining ``qualified purchaser'' 
unconditionally, as all offerees and all purchasers in any Regulation A 
offering? Would such a definition better address potential burdens to 
capital formation under Regulation A? If so, how? Would such a 
definition provide sufficient investor protections to support the 
preemption of state securities law registration and qualification 
requirements? If not, what would support unconditional preemption of 
state securities laws? Please explain.
    120. In addition to providing blue sky preemption for Tier 2 
offerings, should we also consider providing preemption for some or all 
resales of Regulation A securities? Would the need to comply with blue 
sky laws prevent the development of a liquid secondary market for 
Regulation A securities?
    121. Would the preemption of state securities law registration and

[[Page 3971]]

qualification requirements provided by Section 18(b)(1) of the 
Securities Act for securities that are listed or authorized for listing 
on a national securities exchange be a viable option for many 
Regulation A issuers? Why or why not?

I. Regulation A in Comparison to Other Methods of Capital Formation

    As noted above, in developing the proposals, we have attempted to 
create a workable exemption that both promotes small company capital 
formation and provides for meaningful investor protections. In that 
context, we are mindful that issuers have a range of possible 
approaches to capital-raising, including Securities Act registration 
and other exemptions from registration, such as the statutory exemption 
under Section 4(a)(2) of the Securities Act, Rules 504, 505 and 506 
under Regulation D \500\ and Section 4(a)(6) of the Securities Act and 
the proposed rules for a crowdfunding exemption.\501\
---------------------------------------------------------------------------

    \500\ The Regulation D market is large, in recent years 
approaching the size of the registered market. See Vladimir Ivanov 
and Scott Bauguess, Capital Raising in the U.S.: An Analysis of 
Unregistered Offerings Using the Regulation D Exemption, 2009-2012 
(July 2013), available at: https://www.sec.gov/divisions/riskfin/whitepapers/dera-unregistered-offerings-reg-d.pdf.
    \501\ See SEC Rel. No. 33-9470.
---------------------------------------------------------------------------

Request for Comment
    122. How does Regulation A, as proposed to be amended, compare--in 
terms of the type of companies that may use the exemption, its 
requirements, and its potential effectiveness--to other methods of 
capital raising that issuers may choose for small offerings? How would 
it compare to the proposed crowdfunding exemption? Either by reference 
to today's proposals or more generally, are there ways in which 
Regulation A could be amended that would make it a more usable 
exemption?

J. Additional Considerations Related to Smaller Offerings

    As noted above, in recent years, Regulation A offerings have been 
rare. Commenters \502\ and the GAO identified a number of factors that 
have influenced the use of Regulation A in its current form, including 
the process of filing the offering statement with the Commission, state 
securities law compliance, the types of investors businesses seek to 
attract, and the cost-effectiveness of Regulation A relative to other 
exemptions.\503\ In developing the proposals, we have attempted to 
create a more efficient and effective method to raise capital that 
incorporates important investor protections. We also have been 
cognizant of how issuers seeking to raise relatively smaller amounts of 
capital could consider a range of possible approaches to capital-
raising.\504\
---------------------------------------------------------------------------

    \502\ See, e.g., Karr Tuttle Letter; Lacey Letter; Kaplan 
Voekler Letters 1 and 2; McCarter & English Letter; ABA Letter; 
Alpine Ventures Letter; Campbell Letter; WR Hambrecht + Co. Letter; 
and Oggilby Letter.
    \503\ See fn. 35 above.
    \504\ These methods include, for example, Rules 504, 505 and 506 
under Regulation D and Section 4(a)(6) of the Securities Act and the 
proposed rules for a crowdfunding exemption. See Section II.I. 
above.
---------------------------------------------------------------------------

    Under our proposal, offerings for up to $5 million that are 
conducted under Tier 1 would benefit from the proposed updates to 
Regulation A's filing and qualification processes, but the proposed 
amendments would not otherwise substantially alter the existing 
exemption for such offerings.\505\ We are mindful of the possibility 
that additional changes to Tier 1 could expand its use by, and thus 
potentially benefit, issuers conducting smaller offerings. An 
intermediate tier between proposed Tier 1 and Tier 2 could also 
potentially help increase the effectiveness of Regulation A for smaller 
offerings by, among other things, permitting additional modifications 
to requirements in light of the size of the offering. We are soliciting 
comment on additional considerations with respect to Tier 1 and an 
intermediate tier for offerings incrementally larger than Tier 1 
offerings and how they would affect investor protection and capital 
formation.
---------------------------------------------------------------------------

    \505\ See Kaplan Voekler Letter 1 (suggesting updating the 
filing and qualification processes of, but otherwise preserving a 
separate $5 million tier based on, existing Regulation A in the 
revised exemption); see also Beacon Investment Letter (suggesting 
existing Regulation A be preserved as a separate exemption from the 
implementing rules for Title IV of the JOBS Act).
---------------------------------------------------------------------------

Request for Comment
    123. As proposed, and as is currently the case for Regulation A, 
state law registration and qualification requirements would not be 
preempted for Tier 1 offerings. Issuers in offerings of up to $5 
million could also elect to proceed under Tier 2, which would provide 
for preemption by complying with the additional requirements for Tier 2 
(investment limitations, audited financial statements in the offering 
statement and ongoing reporting). Are there circumstances in which we 
should provide for preemption for Tier 1 offerings? If so, what are the 
circumstances? Should we consider including in Tier 1 certain elements 
of Tier 2, such as investment limitations, audited financial statements 
in the offering statement, or ongoing reporting, or some combination of 
these requirements in order to provide for preemption? Should we 
consider including requirements that draw on those for other approaches 
to capital-raising? If so, which requirements should we include and 
why? If we require ongoing reporting for issuers that have conducted 
Tier 1 offerings, should the substance or frequency of the requirements 
be different from the requirements proposed for Tier 2, such as 
requiring only an annual report consisting of annual financial 
statements and a cover sheet or only an annual report, or an annual 
report and current updates but no semiannual report?
    124. Should we consider adding an intermediate tier for offerings 
exceeding $5 million but significantly less than the $50 million (e.g., 
$10 million) limitation for Tier 2? Why or why not? If so, what would 
be an appropriate annual offering limitation for any such intermediate 
tier? What requirements of Tier 1 and Tier 2 (e.g., audited financial 
statements, investor limitations) should or should not apply to any 
such intermediate tier? Should those requirements be modified with 
respect to the intermediate tier? If so, how? Should we consider other 
requirements? How would such requirements compare to requirements for 
other avenues of capital-raising that an issuer might choose? Should 
offerings made using this intermediate tier be preempted from state law 
registration and qualification requirements? If so, under what 
circumstances should we provide for preemption?
    125. If an issuer undergoes a registration or qualification process 
that complies with the coordinated review protocol proposed and being 
developed by NASAA,\506\ assuming such a program is adopted and fully 
implemented, should an offering under Tier 1 or any potential 
intermediate tier also be subject to review, in whole or in part, by 
the Commission's staff? Why or why not? Should the Commission's rules 
specify the scope or other requirements of any such coordinated review? 
What standards would apply to the review and what would the review 
entail (e.g., would the state review for compliance with state law 
requirements, compliance with requirements of the federal securities 
laws and Commission rules and forms, or both)?
---------------------------------------------------------------------------

    \506\ See discussion in Section II.H. above.
---------------------------------------------------------------------------

    126. Should we provide for preemption in a Tier 1 offering or an 
offering conducted pursuant to the requirements for any potential 
intermediate tier if an issuer undergoes a registration or 
qualification process in

[[Page 3972]]

a single state? If we develop a process based on registration or 
qualification in a single state for Tier 1 offerings or for offerings 
conducted pursuant to the requirements for an intermediate tier, how 
should it be determined which state would review and qualify the 
offering? Should we specify how the issuer would determine the state 
for review (e.g., the state of the issuer's principal place of business 
or the state in which the issuer is incorporated)? If an offering were 
subject to a single state review, should the offering also be subject 
to review, in whole or in part, by the Commission's staff? Why or why 
not? Would the answer depend on whether the state had a disclosure or 
merit review program? Should the Commission's rules specify the scope 
or other requirements of any such state review? What role, if any, 
would other states have in any such state review? What standards would 
apply to the review and what would the review entail (e.g., would the 
state review for compliance with state law requirements, compliance 
with requirements of the federal securities laws and Commission rules 
and forms, or both)? How would allowing a single state review or 
qualification process affect the filing choices made by issuers and the 
regulatory choices made by states? Would such a process enhance or 
diminish the comparability and consistency of state regulatory 
frameworks? If so, how? What would be the impact of such a process on 
investor protection and capital formation?

K. Regulation A Offering Limitation

    As noted above, Section 401 of the JOBS Act requires the Commission 
to review the $50 million offering limit not later than two years after 
enactment of the JOBS Act and every two years thereafter and, if the 
Commission decides not to increase the amount, requires that it report 
its reasoning to Congress.\507\ The first such review must be completed 
by April 5, 2014. We solicit comment on whether the Commission should 
adopt an offering amount under Regulation A, as proposed to be amended, 
that is higher than the $50 million limitation for offerings in a 
twelve-month period provided in Section 3(b)(2) of the Securities Act.
---------------------------------------------------------------------------

    \507\ See discussion in Section I.D. above.
---------------------------------------------------------------------------

Request for Comment
    127. As proposed to be amended, and consistent with Section 
3(b)(2), should we limit offerings conducted in reliance on Regulation 
A in a twelve-month period to $50 million? Or should the Commission 
adopt an offering limit under Regulation A that is higher than $50 
million in a twelve-month period? \508\ Why or why not? If so, what 
would be an appropriate threshold for offerings in a twelve-month 
period conducted in reliance on Regulation A, as proposed to be 
amended?
---------------------------------------------------------------------------

    \508\ See Section 3(a)(5) of the Securities Act (requiring the 
review of the Section 3(b)(2) offering limit every two years after 
enactment of Title IV of the JOBS Act). 15 U.S.C. 77c(b)(5).
---------------------------------------------------------------------------

L. Technical and Conforming Amendments

    We propose to amend existing Rules 251-263 \509\ under Regulation 
A.\510\ The proposed rule amendments take into account changes to 
Regulation A associated with the addition of Section 3(b)(2) \511\ to 
the Securities Act,\512\ and the proposals detailed in this release.
---------------------------------------------------------------------------

    \509\ 17 CFR 230.251 through 230.263.
    \510\ 17 CFR 230.251 through 230.263.
    \511\ 15 U.S.C. 77c(b)(2).
    \512\ 15 U.S.C. 77a et seq.
---------------------------------------------------------------------------

    In connection with these actions, we propose to revise Form 1-
A,\513\ to rescind Form 2-A,\514\ and to create four new forms, Form 1-
K (annual updates), Form 1-SA (semiannual updates), Form 1-U (current 
reporting), and Form 1-Z (exit report).
---------------------------------------------------------------------------

    \513\ 17 CFR 239.90.
    \514\ 17 CFR 239.91.
---------------------------------------------------------------------------

    We also propose to revise Rule 4a-1 \515\ under the Trust Indenture 
Act \516\ to increase the dollar ceiling of the exemption from the 
requirement to issue securities pursuant to an indenture, and to amend 
Rule 15c2-11 \517\ of the Exchange Act \518\ to permit an issuer's 
ongoing reports filed under Regulation A to satisfy a broker-dealer's 
obligations to review and maintain certain information about an 
issuer's quoted securities. In addition, we are proposing a technical 
amendment to Exchange Act Rule 15c2-11 to amend subsection (d)(2)(i) of 
the rule to update the outdated reference to the ``Schedule H of the 
By-Laws of the National Association of Securities Dealers, Inc.'' which 
is now known as the ``Financial Industry Regulatory Authority, Inc.'' 
and to reflect the correct rule reference.
---------------------------------------------------------------------------

    \515\ 17 CFR 260.4a-1.
    \516\ 15 U.S.C. 77aaa et seq.
    \517\ 17 CFR 240.15c2-11.
    \518\ 15 U.S.C. 78a et seq.
---------------------------------------------------------------------------

    As a result of the proposed revisions to Regulation A, conforming 
and technical amendments would be made to Rule 157(a),\519\ in order to 
reflect amendments to Section 3(b) of the Securities Act, and Rule 
505(b)(2)(iii),\520\ in order to reflect the proposed changes to Rule 
262 of Regulation A. Additionally, Item 101(a) \521\ of Regulation S-T 
\522\ would be revised to reflect the mandatory electronic filing of 
all issuer initial filing and ongoing reporting requirements under 
proposed Regulation A. The portion of Item 101(c)(6) \523\ of 
Regulation S-T dealing with paper filings related to a Regulation A 
offering, and Item 101(b)(8) \524\ of Regulation S-T dealing with the 
optional electronic filing of Form F-X by Canadian issuers, would 
therefore be rescinded.
---------------------------------------------------------------------------

    \519\ 17 CFR 230.157(a).
    \520\ 17 CFR 230.505(b)(2)(ii).
    \521\ 17 CFR 232.101(a).
    \522\ 17 CFR 232.10 et seq.
    \523\ 17 CFR 232.101(c)(6).
    \524\ 17 CFR 232.101(b)(8).
---------------------------------------------------------------------------

III. General Request for Comment

    We solicit comment, both specific and general, on each component of 
the proposals. We request and encourage any interested person to submit 
comments regarding:
     the proposals that are the subject of this release;
     additional or different revisions to Regulation A; and
     other matters that may have an effect on the proposals 
contained in this release.
    Comment is solicited from the point of view of both issuers and 
investors, as well as of capital formation facilitators, such as 
broker-dealers, and other regulatory bodies, such as state securities 
regulators. Any interested person wishing to submit written comments on 
any aspect of the proposal is requested to do so. With regard to any 
comments, we note that such comments are of particular assistance to us 
if accompanied by supporting data and analysis of the issues addressed 
in those comments. We urge commenters to be as specific as possible.

IV. Economic Analysis

    As discussed above, Title IV of the JOBS Act requires the 
Commission to adopt rules under Section 3(b)(2) of the Securities Act 
exempting from Securities Act registration the offer and sale of 
securities that, in the aggregate, shall not exceed $50 million in a 
twelve-month period. Congress enacted Section 3(b)(2) against a 
background of public commentary suggesting that Regulation A, an 
existing exemption for offerings of up to $5 million in a twelve-month 
period adopted under Section 3(b)(1) of the Securities Act, should be 
expanded and updated to make it more useful to small companies.
    We are mindful of the costs imposed by, and the benefits to be 
obtained from, our rules. Securities Act Section 2(b) and Exchange Act 
Section 3(f) require

[[Page 3973]]

us, when engaging in rulemaking that requires us to consider or 
determine whether an action is necessary or appropriate in the public 
interest, to consider, in addition to the protection of investors, 
whether the action will promote efficiency, competition and capital 
formation. Exchange Act Section 23(a)(2) requires us, when adopting 
rules under the Exchange Act, to consider the impact that any new rule 
would have on competition and not to adopt any rule that would impose a 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Exchange Act.
    The discussion below addresses the economic effects of the proposed 
rules, including the likely costs and benefits of the proposed rules, 
as well as the likely effect of the proposed rules on efficiency, 
competition and capital formation. The proposed rules include 
provisions mandated by the statute as well as provisions that rely on 
the Commission's discretionary authority. As a result, while many of 
the costs and benefits of the proposed rules stem from the statutory 
mandate of Title IV, certain costs and benefits are affected by the 
discretion we propose to exercise in connection with implementing this 
mandate. For purposes of this economic analysis, we address the costs 
and benefits resulting from the mandatory statutory provisions and our 
exercise of discretion together, because the two types of benefits and 
costs are not separable. We also analyze the potential costs and 
benefits of significant alternatives to what is proposed.
    We request comment on all aspects of our economic analysis, 
including the potential costs and benefits of the proposed rules.

A. Economic Baseline \525\

    The baseline for our economic analysis of proposed amendments to 
Regulation A, including the baseline for our consideration of the 
effects of the proposed rules on efficiency, competition and capital 
formation, is a description of market conditions today, in which 
companies seeking to raise capital through securities offerings must 
register the offer and sale of securities under the Securities Act 
unless they can rely on an exemption from registration under the 
federal securities laws. The baseline also includes a description of 
investors in offerings of similar amounts and a discussion of liquidity 
considerations that impact issuers' choice of capital markets.
---------------------------------------------------------------------------

    \525\ Several rules mandated by the JOBS Act have been proposed 
by the Commission and one has been adopted recently. These rules may 
affect the economic baseline for proposed Regulation A, but because 
of data limitations the analysis below cannot account for potential 
changes that may result from other Commission actions. For example, 
pursuant to Title II the Commission recently amended Rule 506 of 
Regulation D to permit issuers relying on the exemption in Rule 
506(c) to use general solicitation or general advertising, subject 
to certain conditions. See SEC Rel. No. 33-9415. This recent change 
could increase the use of Regulation D, but the sample of Regulation 
D offerings analyzed below does not include offerings utilizing this 
amendment.
---------------------------------------------------------------------------

1. Current Methods of Raising up to $50 Million of Capital
    While there are a number of factors that companies consider when 
determining how to raise capital, a key consideration is whether to 
issue securities through a registered public offering or through an 
offering that is exempt from Securities Act registration and ongoing 
Exchange Act financial reporting requirements. The choice of offering 
method may also depend on the size of the issuer and the amount of new 
capital sought. Registered offerings entail initial and ongoing fixed 
costs that can weigh more heavily on smaller companies, providing 
incentive to remain private and to pursue capital outside of public 
markets. As we describe throughout this economic analysis, the proposed 
amendments to Regulation A are intended to provide small issuers access 
to sources for capital unavailable through other offering exemptions 
without imposing the full registration and ongoing reporting 
requirements of a registered public offering. This section describes 
the various currently available offering methods and prevalence of 
their use.
a. Exempt Offerings
    Currently, small companies can raise capital by relying on an 
exemption from registration under the Securities Act, such as Section 
3(a)(11),\526\ Section 4(a)(2),\527\ Regulation D \528\ and Regulation 
A.\529\ Each of these exemptions, however, includes restrictions that 
may limit its utility for small companies. For example, the exemption 
under Securities Act Section 3(a)(11) is limited to intrastate 
offerings, and Regulation D offerings may limit or prohibit 
participation by unaccredited investors. Additionally, offerings 
relying on Regulation A require submission of offering materials to, 
and qualification of the offering statement by, the Commission, and may 
require qualification or registration in multiple states.\530\ The 
table below summarizes the main features of each exemption.
---------------------------------------------------------------------------

    \526\ Under Securities Act Section 3(a)(11), except as expressly 
provided, the provisions of the Securities Act (including the 
registration requirement under Securities Act Section 5) do not 
apply to a security that is ``part of an issue offered and sold only 
to persons resident within a single State or Territory, where the 
issuer of such security is a person resident and doing business 
within, or, if a corporation, incorporated by and doing business 
within, such State or Territory.'' 15 U.S.C 77c(a)(3)(a)(11).
    \527\ Securities Act Section 4(a)(2) provides that the 
provisions of the Securities Act shall not apply to ``transactions 
by an issuer not involving a public offering.'' 15 U.S.C. 
77d(4)(a)(2).
    \528\ Regulation D contains three rules providing exemptions 
from the registration requirements, allowing some companies to offer 
and sell their securities without having to register the securities 
with the SEC. 17 CFR 230.504, 505, 506.
    \529\ See release text Section I.B. above for a description of 
the current terms and conditions of Regulation A.
    \530\ See Rutheford B. Campbell, Regulation A: Small Business' 
Search for a Moderate Capital, 31 Del. J. Corp. L. 77, 106 (2005). 
See also GAO-12-839, ``Factors that May Affect Trends in Regulation 
A Offerings'', (July 3, 2012).

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                   Offering limit                          Issuer and investor          Filing             Resale         Blue Sky Law
        Type of offering                \531\           Solicitation           requirements          requirement        restrictions       preemption
--------------------------------------------------------------------------------------------------------------------------------------------------------
Section 3(a)(11)...............  None..............  No limitations....  All issuers and          None.............  Restricted in      No.
                                                                          investors must be                           some cases \532\.
                                                                          resident in state.
Section 4(a)(2)................  None..............  No general          All investors must meet  None.............  Restricted         No.
                                                      solicitation.       sophistication and                          securities.
                                                                          access to information
                                                                          test.

[[Page 3974]]

 
Regulation A...................  $5 million with     ``Testing the       U.S. or Canadian         File ``testing     No...............  No.
                                  $1.5 million        waters''            issuers, excluding       the waters''
                                  limit on            permitted before    investment companies,    materials, Form
                                  secondary sales.    filing; general     blank-check companies,   1-A, Form 2-A.
                                                      solicitation        and reporting
                                                      permitted after     companies.
                                                      qualification.
Rule 504 Regulation D..........  $1 million........  General             Excludes investment      File Form D \534\  Restricted in      No.
                                                      solicitation        companies, blank-check                      some cases \535\.
                                                      permitted in some   companies, and
                                                      cases \533\.        reporting companies.
Rule 505 Regulation D..........  $5 million........  No general          Unlimited accredited     File Form D \536\  Restricted         No.
                                                      solicitation.       investors and 35 non-                       securities.
                                                                          accredited investors.
Rule 506 Regulation D..........  None..............  General             Unlimited accredited     File Form D \539\  Restricted         Yes.
                                                      solicitation        investors. Limitations                      securities.
                                                      permitted in some   on unaccredited
                                                      cases \537\.        investors \538\.
--------------------------------------------------------------------------------------------------------------------------------------------------------
\531\ Aggregate offering limit on securities sold within a twelve-month period.
\532\ Resale restrictions are determined by state securities laws, which typically restrict in-state resales for a one-year period.
\533\ No general solicitation or advertising are permitted unless registered in a state requiring the use of a substantive disclosure document or sold
  under state exemption for sales to accredited investors with general solicitation.
\534\ Filing is not a condition of the exemption.
\535\ Restricted unless registered in a state requiring use of a substantive disclosure document or sold under state exemption for sale to accredited
  investors.
\536\ Filing is not a condition of the exemption.
\537\ No general solicitation or advertising is permitted under Rule 506(b). General solicitation and general advertising permitted under Rule 506(c),
  provided all purchasers are accredited investors and the issuer takes reasonable steps to verify accredited investor status.
\538\ Under Rule 506(b), offerings may involve an unlimited number of accredited investors and up to 35 non-accredited investors. Under Rule 506(c), all
  purchasers must be accredited investors.
\539\ Filing is not a condition of the exemption.

    While we do not have adequate data on offerings relying on an 
exemption under Section 3(a)(11) or Section 4(a)(2), certain data 
available related to Regulation D and Regulation A filings allow us to 
gauge how frequently issuers currently use these exemptions when 
raising capital.
(1) Regulation A Offerings
    Companies rarely rely on existing Regulation A when raising 
capital. The chart below, from the GAO study,\540\ reports the number 
of filed and qualified Regulation A offerings in fiscal years 1992 to 
2011.\541\ Specifically, the GAO notes that the number of filed 
Regulation A offerings decreased from 116 in 1997 to 19 in 2011. The 
number of qualified offerings dropped from 57 in 1998 to 1 in fiscal 
year 2011.
---------------------------------------------------------------------------

    \540\ See Factors That May Affect Trends in Regulation A 
Offerings, U.S. Government Accountability Office (Jul. 3, 2012), 
available at https://www.gao.gov/products/GAO-12-839 (``GAO 
Report'').
    \541\ A Regulation A offering is considered ``filed'' when the 
Commission receives a potential issuer's offering materials through 
Form 1-A. A Regulation A offering is considered qualified after the 
Commission has reviewed the offering materials and certified that 
all conditions have been met. Therefore, offerings that are filed 
and not qualified are either pending, withdrawn, or abandoned.
[GRAPHIC] [TIFF OMITTED] TP23JA14.000


[[Page 3975]]


    Based on information submitted in 1,001 Form 1-A filings between 
1993 and 2012, there were 914 unique Regulation A issuers during this 
period. Of these, 439 offerings by 393 unique issuers were qualified by 
SEC staff. Examination of these filings shows that 80% of the offerings 
were for equity. Although issuers may include up to $1.5 million in 
secondary sales under existing regulations, more than 95% of Regulation 
A offerings included only primary shares. Analysis of industry 
composition indicates that many of the issuers operate in the financial 
industry (49%). In the year of the offering, the median financial 
industry issuer had assets and annual revenue of $29.3 million and $2.9 
million respectively, while the median non-financial industry issuer 
had assets of $188,000 and annual revenue of $34,000.
    Section 402 of the JOBS Act required the GAO to study the impact of 
blue sky laws on Regulation A offerings. The GAO examined (1) trends in 
Regulation A filings, (2) differences in state registration of 
Regulation A filings, and (3) factors that may have affected the number 
of Regulation A filings. In its July 2012 report on Regulation A, the 
GAO cited four central factors affecting the use of Regulation A 
offerings: (1) Costs associated with compliance with state securities 
regulations, or ``blue sky laws''; (2) the availability of alternative 
offering methods exempt from registration, such as Regulation D 
offerings; (3) costs associated with the filing and qualification 
process with the SEC; and (4) the type of investors businesses sought 
to attract.
    As identified by the GAO, compliance with state securities laws may 
currently affect the use of existing Regulation A. While state 
securities law filing fees are likely not significant in any particular 
state (filing fees are, on average, approximately $1000 in every 
state), such fees can become non-trivial when the offering extends 
across multiple states.\542\ For example, state securities law filing 
fees averaged $35,000 in initial public offerings under $50 
million.\543\ Legal and compliance costs for issuers seeking to offer 
securities in multiple states may be significant for issuers due to 
myriad differences in securities laws and applicable procedures across 
states. Inconsistencies in state laws and exemptions, as well as in the 
process of registration or qualification of an offering under state 
law, can result in an expensive, drawn-out process for issuers that 
could adversely affect their efforts to raise capital in a timely and 
cost-effective manner.
---------------------------------------------------------------------------

    \542\ See Paul Hastings Letter, at 2 and Exhibit A (citing 
estimated costs of state securities law filings under Section 
3(b)(2) of $50,000 to $70,000); Cf. Regulation D Rule 506 Blue Sky 
Filing Chart available at https://americansaferetirements.com/agents/wp-content/uploads/2012/09/Blue-Sky-Filing-Chart-Reg-D-506-.pdf.
    \543\ This calculation is based on data provided by Capital IQ 
and is obtained from S-1 filings from 1996-2012 which reports six 
categories of IPO-related fees, shown in more detail in the ``IPO-
related fees'' table below.
---------------------------------------------------------------------------

    The GAO also identified costs associated with the filing and 
qualification process for Regulation A offerings as a potential reason 
for its current limited use. As described above, a business that relies 
on Regulation A must file an offering statement with the Commission 
that is subject to review by Commission staff and must be qualified 
before the offering can proceed. From 2002 through 2012, Regulation A 
filings took an average of 241 days to qualify.\544\ While some of this 
timeframe reflects delays associated with the paper filing method, most 
of the delay results from the concurrent review by state securities 
regulators and the fact that the review process may encompass several 
rounds of discussion between Commission staff and issuers. It may also 
take longer to qualify when issuers fail to provide all required 
information in their filings or to address all questions from previous 
correspondence with the Commission. Issuer size may also be related to 
the speed at which offerings are qualified. For example, larger 
companies (i.e., those with total assets greater than the median ($1.4 
million) for all qualified Regulation A offerings) navigate the 
qualifying process on average 97 days faster than smaller 
companies.\545\
---------------------------------------------------------------------------

    \544\ This estimate is based on the initial Form 1-A filing and 
the last Form 1-A filing through which the offering was qualified. 
The median number of calendar days for an offering to be qualified 
was approximately 189. The fastest offering qualified in 4 calendar 
days and the slowest offering took 693 calendar days.
    \545\ Id. It is also possible that because most of the larger 
Regulation A issuers are financial institutions, such as banks and 
trusts, which are regulated and disclose more information than other 
Regulation A issuers, they are able to prepare offering materials 
relatively quickly and easily, based on information they are 
required to provide to other regulators.
---------------------------------------------------------------------------

    Unlike other exemptions, existing Regulation A permits offerings to 
an unlimited number of unaccredited investors, provided that the total 
amount sold does not exceed $5 million in a twelve-month period. 
Further, securities sold under existing Regulation A have no 
restrictions on resale. As discussed below, Regulation A issuers 
currently have limited involvement in secondary markets.
(2) Regulation D Offerings
    Based on information available to us, it appears that the most 
common way to issue up to $50 million of securities is in reliance on a 
Regulation D offering exemption. Regulation D includes three rules 
providing exemptions from the registration requirements of the 
Securities Act. Specifically, as described in the table above, eligible 
issuers can rely on Rule 504 to raise up to $1 million within a twelve-
month period, Rule 505 to raise up to $5 million within a twelve-month 
period, and Rule 506 to raise an unlimited amount. As the table notes, 
the three rules have different requirements that affect their use. In 
total, based on analysis of issuer offering details reported on Form D, 
Regulation D accounts for approximately $900 billion in annual capital 
raising.\546\ During the 2009 to 2012 period, most issuers chose to 
raise capital by relying on Rule 506, even when their offering 
permitted reliance on Rule 504 or Rule 505.\547\
---------------------------------------------------------------------------

    \546\ These exclude issuances of pooled investment vehicles.
    \547\ This tendency could, in part, be attributed to two 
features of Rule 506: Blue sky law preemption and an unlimited 
offering amount. See also Factors That May Affect Trends in 
Regulation A Offerings, U.S. Government Accountability Office (Jul. 
3, 2012), available at https://www.gao.gov/products/GAO-12-839.
---------------------------------------------------------------------------

    During 2012, there were nearly 22,000 Regulation D offerings 
reported on Form D. Of these, approximately 12,000 would meet the 
conditions of Regulation A, as proposed to be amended, which excludes 
offerings by reporting companies, foreign issuers and investment 
companies, and offerings of interests in claims on natural resources. 
The following table reports the breakdown of Regulation D filings from 
2012 for all issuers that would be eligible to use Regulation A, as 
proposed to be amended.\548\
---------------------------------------------------------------------------

    \548\ These numbers are calculated using data from raw Form D's 
filed with the Commission. We have adjusted for amended filings by 
dropping old filings if an amended filing exists. This analysis 
excludes filings from issuers relying on Regulation D as a pooled 
investment fund.

[[Page 3976]]



                                  Regulation D Offerings During 2012 by Issuers Eligible To Rely on Regulation A \549\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                           Rule 504                Rule 505                                       Rule 506
           Offering size           ---------------------------------------------------------------------------------------------------------------------
                                             <$1M                    <$5M                    <$5M                  $5M-$50M                >$50M
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current Reg A Eligible............  Yes...................  Yes...................  Yes...................  No...................  No
Proposed Reg A Eligible...........  Yes...................  Yes...................  Yes...................  Yes..................  No
Number of filings.................  385...................  142...................  7,202.................  2,784................  330
Median offering amount ($           0.4...................  1.0...................  1.0...................  10.0.................  88.9
 millions).
Average offering amount ($          0.5...................  1.3...................  1.4...................  13.7.................  481
 millions).
Average amount raised (% of         62.2..................  67.9..................  72.1..................  72.7.................  76.4
 offering) \550\.
Portion with unaccredited           62.1..................  36.8..................  7.8...................  5.0..................  8.2
 investors (% of deals).
Average fees (% of funds raised)..  0.1...................  0.2...................  0.7...................  0.7..................  0.8
Median number of investors........  4.....................  4.....................  5.....................  8....................  12
--------------------------------------------------------------------------------------------------------------------------------------------------------
Excludes offerings by reporting companies, foreign issuers and investment companies, offerings of interests in natural resources, and issuers who failed
  to sell any securities.

    As shown in the table above, most Regulation D offerings that would 
be eligible for Regulation A under the proposed rules are relying on 
Rule 506 of Regulation D. A comparison of Rule 506 offerings over $50 
million to those below $50 million shows that larger offerings involve 
more investors and have generally raised a greater percentage of the 
amount of capital sought at the time of the Form D filing. This 
evidence indicates potentially higher success rates for larger 
offerings, although this cannot be confirmed because there is no 
requirement for issuers to file an amended Form D at the completion of 
an offering.
---------------------------------------------------------------------------

    \549\ Id.
    \550\ The total offering amount is not always equivalent to the 
total amount raised at the time of filing. Regulation D permits 
filing a Form D before completion of the fundraising round. Thus for 
most companies, the difference between the total offering amount and 
amount raised results from filing a Form D before securing all funds 
promised. In addition, some companies (usually pooled investment 
funds) use Form D for open-ended offerings.
---------------------------------------------------------------------------

    Most Regulation D issuers elect not to disclose their revenue range 
in their Form D filings. The following table shows the breakdown of the 
issuers potentially eligible to rely on Regulation A that did not 
disclose, and those that elected to disclose a revenue range for 
offerings made in 2012.

   Amount Raised Through Regulation D Offerings in 2012 by Issuers Eligible To Rely on Regulation A, by Issuer
                                               Revenue Range.\551\
----------------------------------------------------------------------------------------------------------------
                                                                     Frequency       Frequency      Avg. raised
                          Revenue range                             offering  <   offering  $5M-   ($ millions)
                                                                        $5M            $50M       offering <$50M
----------------------------------------------------------------------------------------------------------------
Not Applicable \552\............................................             141              92             4.7
Decline to Disclose.............................................           4,543            2091             4.3
No revenues.....................................................           1,353             264             1.4
$1-$1,000,000...................................................           1,168             118             1.0
$1,000,001-$5,000,000...........................................             315              64             2.1
$5,000,001-$25,000,000..........................................             132              93             3.8
$25,000,001-$100,000,000........................................              53              41             7.7
Over $100,000,000...............................................              24              21             6.9
----------------------------------------------------------------------------------------------------------------
Excludes offerings by reporting companies, foreign issuers and investment companies, offerings of interests in
  natural resources, and issuers who failed to sell any securities.

    If issuers that disclose a revenue range are representative of all 
Form D filers, then nearly half of the issuers that file Form D have no 
revenues. The portion of issuers without revenues is noteworthy because 
debt is not likely to be a feasible source of capital for companies 
without regular cash flows.
---------------------------------------------------------------------------

    \551\ Id.
    \552\ These could be Regulation D issuers (non-registered 
investment companies) that manage assets and report net asset value, 
for example, REITS, or spillover from the ``No revenues'' category.
---------------------------------------------------------------------------

b. Registered Offerings
    Companies seeking to raise capital without being subject to the 
restrictions under exempt offerings can register the offer and sale of 
securities under the Securities Act.
    The following figure shows the frequency of IPOs each year for 
companies issuing above or below $50 million.\553\ Consistent with many 
previous observations about the recent IPO market, the number of IPOs, 
particularly those under $50 million, has fallen dramatically since the 
late 1990s.\554\
---------------------------------------------------------------------------

    \553\ There were approximately 25 registered initial public 
offerings up to $50 million in 2012 according to data from Capital 
IQ.
    \554\ See, e.g., D. Weild and E. Kim, A wake-up call for 
America, 2009. In 2011, the Treasury Department hosted a conference 
on access to capital to better understand how to restore access to 
capital for emerging companies. The conference featured the findings 
of an IPO task force comprised of a number of experienced venture 
capitalists, investment bankers, and lawyers. Their findings provide 
a number of possible explanations for the decline in the number of 
IPOs, including that 92% of the surveyed CEOs listed the 
``Administrative Burden of Public Reporting'' as being one of the 
most significant challenges of an IPO.

---------------------------------------------------------------------------

[[Page 3977]]

[GRAPHIC] [TIFF OMITTED] TP23JA14.001

    One possible reason for the decreasing number of IPOs under $50 
million is that public offerings may be too costly to be a viable 
alternative for some small companies.\556\ In particular, commissions 
paid to underwriters average 7% for IPOs, 5% for seasoned public 
issuances, and 1% for bond issuances.\557\ Issuers conducting 
registered public offerings must also pay Commission registration fees 
and FINRA filing fees, legal and accounting fees and expenses, transfer 
agent and registrar fees, costs associated with periodic reporting 
requirements and other regulatory requirements and various other fees. 
Two surveys concluded that regulatory compliance costs of IPOs average 
$2.5 million initially, followed by an ongoing $1.5 million per 
year.\558\
---------------------------------------------------------------------------

    \555\ The data is provided by Capital IQ and this sample 
excludes offerings from blank check companies and non-Canadian 
foreign issuers.
    \556\ See also Gao, Xiaohui, Jay R. Ritter, and Zhongyan Zhu. 
Where have all the IPOs gone?, Working Paper, University of Florida, 
2012 (suggesting, among other things, that acquisitions have 
partially supplanted the traditional IPO as an exit path for smaller 
companies).
    \557\ See, e.g., H. Chen and J. Ritter (2000), The Seven Percent 
Solution, Journal of Finance 55, pp. 1105-1131; S. Corwin (2000), 
The Determinants of Underpricing for Seasoned Equity Offers, Journal 
of Finance 58 pp. 2249-2279; L. Fang (2005), Investment Bank 
Reputation and the Price and Quality of Underwriting Services, 
Journal of Finance 60, pp. 2729-2761.
    \558\ See IPO Task Force, Rebuilding the IPO On-Ramp, 9 (Oct. 
20, 2011), available at https://www.sec.gov/info/smallbus/acsec/rebuilding_the_ipo_on-ramp.pdf (``IPO Task Force'').
---------------------------------------------------------------------------

    Because of the fixed-cost nature of many of the fees associated 
with public offerings, size may be one of the most important 
determinates of whether an offering is made available to the public. As 
shown in the scatter plot below, there is a downward trend in IPO-
related fees (excluding underwriter and printing costs and reported as 
a percentage of offering proceeds) as offering size increases.\559\
---------------------------------------------------------------------------

    \559\ Fee information is compiled by Capital IQ and is obtained 
from S-1 filings from 1996-2012 which reports six categories of IPO-
related fees. The analysis includes four of the fees: legal, 
accounting, blue sky, and registration, which we collectively refer 
to as ``compliance fees''.

---------------------------------------------------------------------------

[[Page 3978]]

[GRAPHIC] [TIFF OMITTED] TP23JA14.002

    For offerings below $50 million, the fixed cost components of legal 
and accounting-related fees, as a percentage of offering size, are 
particularly burdensome. In the table below, which reports the six fee 
types reported in Form S-1, offerings less than $50 million incur 
compliance related fees that are on average nearly twice those incurred 
by larger offerings, measured as a percentage of proceeds.

          IPO-Related Fees as a Percentage of Offering Size for Offerings Completed From 1996 to 2012.
----------------------------------------------------------------------------------------------------------------
                                                                                  Offerings  $5-    Offering >
                                                                   All offerings    $50 million     $50 million
                                                                    (N=4868)  %    (N = 2017)  %   (N = 2851)  %
----------------------------------------------------------------------------------------------------------------
Total Fees......................................................            9.55           11.15            8.44
    Compliance Fees.............................................            1.39            1.91            1.03
        Registration Fees.......................................            0.03            0.04            0.02
        Blue Sky Fees...........................................            0.03            0.07            0.01
Accounting Fees.................................................            0.53            0.72            0.40
        Legal Fees..............................................            0.80            1.08            0.60
    Underwriter Fees............................................            6.45            6.87            6.17
    Printing Fees...............................................            0.32            0.47            0.22
----------------------------------------------------------------------------------------------------------------
Analysis excludes offerings from non-Canadian foreign issuers and blank-check companies.

    Additional statistical analysis \560\ of these fees using 
regression methodologies shows that fees have increased by 
approximately six basis points per year since 1996, and that these fees 
have increased disproportionately more for small offerings than for 
large offerings. For example, fees related to offerings over $50 
million increased by approximately 50 basis points from 2000 to 2010, 
while fees related to offerings below $50 million increased by 100 
basis points over the same period.
---------------------------------------------------------------------------

    \560\ We tested for statistical significance in the relationship 
between fees and issue size using regression analysis of fees 
disclosed in S-1 filings. The data is from Capital IQ, which 
tabulates S-1 and other filings. Due to the abnormal distribution of 
IPO-related fees, we use quantile regressions. Fees were calculated 
as described in the table above. The sample eliminates all 
observations by issuers who would be ineligible for the proposed 
Regulation A exemption. Finally, we determine that fees have 
increased more rapidly for smaller issuers by including an 
interaction term of issuance date with offering size.
---------------------------------------------------------------------------

    In addition to increased compliance costs, there are a number of 
other possible explanations for the decline in IPOs. For example, one 
benefit of a public listing is the increased liquidity that results 
from access to retail investors; however, catering to retail owners can 
involve investor relations challenges and liability-related costs.\561\ 
A second explanation for the decline of IPOs could result if current 
offerings are

[[Page 3979]]

concentrated in high-technology sectors that are sensitive to R&D-
related disclosure requirements, which could potentially cause issuers 
to rely more on private capital sources.\562\ Access to capital may 
also be especially time-sensitive for the types of companies most 
likely to make small offerings, rendering these companies unwilling to 
go through a potentially lengthy registration process. It is also 
possible that directors and officers of companies looking to raise less 
than $50 million may not want to subject themselves to the increased 
liability and takeover threats that come with dispersed ownership.\563\ 
Finally, the decline of public offerings could result from macro-
economic effects on investment opportunities in the economy and the 
cost of capital.\564\
---------------------------------------------------------------------------

    \561\ For instance, the 2011 IPO Task-Force survey results 
indicate that 88% of CEOs that had completed an IPO listed 
``Managing Public Communications Restrictions'' as one of the most 
significant challenges brought on by becoming a reporting company.
    \562\ Campbell, Tim S. (1979), Optimal investment financing 
decisions and the value of confidentiality, Journal of Financial and 
Quantitative Analysis: pp. 913-924.
    \563\ Burkart, Mike, Denis Gromb, and Fausto Panunzi (2000), 
Agency conflicts in public and negotiated transfers of corporate 
control, The Journal of Finance 55.2, pp. 647-677.
    \564\ Lowry, Michelle (2003), Why does IPO volume fluctuate so 
much?, Journal of Financial Economics 67.1, pp. 3-40.
---------------------------------------------------------------------------

    Companies that have completed an IPO often continue to raise 
capital through follow-on offerings. In 2012, public follow-on 
offerings accounted for $155 billion, $4 billion of which came from 
offerings less than $50 million,\565\ which is significantly more than 
the amount raised through IPOs over the same period, suggesting that 
follow-on offerings (also known as ``seasoned equity offerings'') 
comprise a prevalent source of capital for companies.\566\
---------------------------------------------------------------------------

    \565\ There were approximately 211 public follow-on offerings in 
2012 according to data from Thompson Reuters SDC.
    \566\ These estimates are based on our analysis of data on 
seasoned equity offerings from Thompson Financials SDC Platinum and 
excludes offerings from non-Canadian foreign issuers.
---------------------------------------------------------------------------

c. Private Debt Offerings
    Companies with regular cash flows often rely on debt as a source of 
capital; however, borrowing may not be a cost effective option for many 
early-stage companies as they may face large information asymmetries 
with investors, irregular cash-flow projections, insufficient assets to 
offer as collateral, and high external monitoring costs.\567\ For 
example, an internet start-up company without steady revenues might 
have trouble securing a loan or a line of credit from a bank because it 
would have difficulty signaling the quality of its business model and 
ability to repay. Conversely, an owner of a restaurant franchise could 
reasonably rely on regular cash flows and its own credit history to 
support a loan application. Additionally, some companies may find loan 
requirements imposed by financial institutions difficult to meet. For 
example, financial institutions generally require a borrower to provide 
collateral and/or a guarantee by owners,\568\ which some companies may 
not be able to or may be reluctant to provide.\569\
---------------------------------------------------------------------------

    \567\ Robb, Alicia M., and David T. Robinson, The capital 
structure decisions of new firms, No. w16272, National Bureau of 
Economic Research, 2010.
    \568\ Approximately 92% of all small business debt to financial 
institutions is secured, and owners of the firm guarantee about 52% 
of that debt. See Berger, Allen N., and Gregory F. Udell. 
Relationship lending and lines of credit in small firm finance. 
Journal of Business (1995): 351-381.
    \569\ Some of these companies might instead rely on trade 
credit, which can be an important source of capital for young firms. 
See, e.g. Petersen, Mitchell A., and Raghuram G. Rajan, Trade 
credit: theories and evidence, Review of Financial Studies 10.3 
(1997): 661-691; and Murfin, Justin, and Ken Njoroge, The Implicit 
Costs of Trade Credit Borrowing by Large Firms., working paper.
---------------------------------------------------------------------------

2. Liquidity Considerations
    As described above, various financing options are available to 
small companies looking to raise up to $50 million of capital. For many 
companies, access to liquid markets is an important consideration as 
they compare the merits of these options.
    There are important differences in liquidity for securities issued 
in a registered offering or under Regulation D or Regulation A. 
Securities in registered offerings that meet listing requirements 
benefit from the liquidity of listing on a national securities 
exchange. Conversely, securities sold under Regulation D are relatively 
illiquid due to restrictions that prohibit resale in the public market 
for up to a year. Although securities issued under Regulation A are 
freely tradable, they typically trade in over-the-counter markets (if 
at all), as these issuers may not meet listing standards of a national 
securities exchange or be willing or able to bear the costs of ongoing 
reporting.\570\ In fact, a much larger proportion of the qualified 
Regulation A offerings from 2001 to 2012 are quoted in the OTC market 
than listed on a national securities exchange; although most of these 
offerings are not currently quoted on OTC markets.\571\
---------------------------------------------------------------------------

    \570\ See, e.g., Sanger and Peterson, 1990; Harris, 
Panchapagesan, and Werner, 2008; Macey, O'Hara, and Pompilio, 2008.
    \571\ This conclusion is based on a review of three databases 
with coverage of OTC markets: CapitalIQ, iMetrix, and OTC quote.
---------------------------------------------------------------------------

    More generally, OTC-traded securities are significantly less liquid 
than those listed on a national securities exchange.\572\ Existing 
studies of bid-ask spreads, trading volume, and price volatility find 
statistically lower liquidity in OTC securities and a comparison group 
\573\ of similar securities listed on a national securities 
exchange.\574\
---------------------------------------------------------------------------

    \572\ See, e.g., Sanger and Peterson, 1990; Harris, 
Panchapagesan, and Werner, 2008; Macey, O'Hara, and Pompilio, 2008.
    \573\ Choosing a comparison set of companies with similar 
characteristics, such as market capitalization, helps isolate the 
effect of trading venue on liquidity.
    \574\ Ang, A., Shtauber, A., & Tetlock, P. Asset pricing in the 
Dark: The Cross Section of OTC Stocks (July 1, 2013). Netspar 
Discussion Paper No. 11/2010-093, available at SSRN: https://ssrn.com/abstract=1817542 or https://dx.doi.org/10.2139/ssrn.1817542. 
Review of Financial Studies, forthcoming. The study analyzes 486 OTC 
stocks and compares them with a benchmarked (size-based) sample of 
listed stocks.
---------------------------------------------------------------------------

    There is also evidence that illiquidity is especially expensive for 
companies that trade on OTC markets.\575\ A recent study finds OTC-
traded securities differ from listed securities in that they are 
primarily held by retail investors and have a larger illiquidity return 
premium.\576\ One explanation for the higher liquidity premium is the 
likelihood of increased asymmetric information,\577\ as the cost of 
illiquidity is largest for securities whose issuers choose not to 
disclose financial information and that are primarily held by retail 
investors.\578\ The desire of issuers to alleviate this illiquidity 
discount may explain why many OTC quoted companies that are not 
required to report financial information under the Exchange Act 
voluntarily provide limited financial information to investors.\579\
---------------------------------------------------------------------------

    \575\ Id.
    \576\ Id.
    \577\ Lev, Baruch. Toward a theory of equitable and efficient 
accounting policy. Accounting Review (1988): 1-22.
    \578\ Ang, A., Shtauber, A., & Tetlock, P. 2011. Asset pricing 
in the Dark: The Cross Section of Over-the-Counter Stocks. Review of 
Financial Studies, forthcoming. The study analyzes 486 OTC stocks 
and compares them a benchmark group of listed stocks.
    \579\ Analysis by staff in the Division of Economic and Risk 
Analysis found that in 2012, there were more than 700 companies 
quoted through the OTC Markets Group platform that provided limited 
financial information to qualify as OTC Pink Limited Information 
securities, which are quoted in a tier above firms that do not 
provide financial information.
---------------------------------------------------------------------------

3. Investors in Offerings of up to $50 Million
    The various methods of raising up to $50 million in capital may 
attract different types of investors. For example, as discussed above, 
Regulation A and public offerings have no limit on the number of 
unaccredited investors that can participate. In contrast,

[[Page 3980]]

offerings under Rule 506(b) of Regulation D are limited to a maximum of 
35 unaccredited investors.
    Data from Form D filings suggests that unaccredited investors are 
not significantly involved in Regulation D offerings of up to $50 
million. While unaccredited investors can and do participate in 
Regulation D offerings, offerings involving unaccredited investors are 
typically smaller than those that do not involve unaccredited 
investors. In 2012, we estimate that there were approximately 220,000 
investor participations in nearly 11,000 Regulation D offerings of 
below $50 million by issuers that would be eligible for exemption under 
Regulation A, as proposed to be amended.\580\ Of these offerings, 
approximately 9.4% involved at least one unaccredited investor. 
Offerings to exclusively accredited investors averaged 12 investors per 
offering and raised an average of $3.7 million per offering. In 
contrast, an average of 107 investors participated in offerings that 
involved at least one unaccredited investor and raised an average of 
$1.5 million.\581\
---------------------------------------------------------------------------

    \580\ These numbers are based on analysis by the Division of 
Economic and Risk Analysis of initial Form D filings submitted 
during calendar year 2012. The estimated total number of investor 
participations is likely greater than the actual number of 
Regulation D investors because investors could have participated in 
more than one offering.
    \581\ Because some investors participate in multiple offerings, 
these numbers likely overestimate the actual number of unique 
investors in these reported offerings.
---------------------------------------------------------------------------

    As of 2010, 8.7 million U.S. households, or 7.4% of all U.S. 
households, qualified as accredited investors based on the net worth 
standard in the definition of ``accredited investor,'' \582\ which is 
substantially larger than the total number of investors that reported 
as having participated in an unregistered offering, but considerably 
less than the total number of retail investors, which we estimate could 
be as high as 33 million.\583\ Thus the current pool of investors 
eligible to participate in Regulation A offerings and public offerings 
is substantially larger than the estimated total number of accredited 
investors or current levels of investor participation in the private 
offering market.
---------------------------------------------------------------------------

    \582\ See analysis presented in SEC Rel. No. 33-9415 (July 10, 
2013) [78 FR 44771].
    \583\ Id.
---------------------------------------------------------------------------

B. Analysis of Proposed Rules

1. General Considerations
    The impact of the proposed rules on the level and efficiency of 
capital formation will depend on the extent to which companies use the 
new offering method to raise capital that would not otherwise have been 
available to them. It will also depend on the extent to which companies 
elect to rely on Regulation A, as proposed to be amended, in place of 
existing offering methods. As discussed above, many companies finance 
their operations and investments with credit from banks and other 
financial entities.\584\ Other companies, particularly early-stage and 
high growth companies, seek capital through equity-based financing 
because they do not have sufficient collateral or the revenue streams 
necessary to support the fixed repayment schedule of debt 
financing.\585\ These companies often seek capital from institutional 
or accredited investors through offerings that are exempt from 
registration because the minimum fixed costs of going public through a 
registered offering can be disproportionately large for small 
issuers.\586\ But private offerings impose restrictions on resale, 
offering amounts, or participating investors in ways that can limit the 
ability to raise capital and may not be attractive to some small 
companies or investors.
---------------------------------------------------------------------------

    \584\ Berger, Allen N., and Gregory F. Udell, 1998, The 
economics of small business finance: The roles of private equity and 
debt markets in the financial growth cycle, Journal of Banking & 
Finance 22.6, pp. 613-673.
    \585\ Id.
    \586\ See Section I.A. above.
---------------------------------------------------------------------------

    The proposed amendments to Regulation A are intended to provide 
small issuers access to sources for capital unavailable through other 
offering exemptions without imposing the full registration and ongoing 
reporting requirements of a registered public offering. Hence, it is 
likely that companies seeking to raise capital through an offering 
conducted under Regulation A, as proposed to be amended, would have 
been able to access to capital through private offerings or registered 
public offerings. In this respect, the impact of the proposed 
Regulation A amendments on capital formation could be redistributive in 
nature, but with potentially significant positive effects on capital 
formation and allocative efficiency by providing the issuers less 
costly access to capital than alternative offering methods and by 
providing unaccredited (retail) investors with additional investment 
opportunities.
    The potential future use of an amended Regulation A depends largely 
on the perceived trade-off between the costs of qualification and 
ongoing disclosure requirements and the potential benefits to issuers 
from access to a broad investor base and secondary market 
liquidity.\587\ For example, companies considering a traditional IPO 
may alternatively consider issuing securities pursuant to Regulation A, 
as amended, if they believe that the benefits of reduced disclosure 
requirements offset the potential loss of secondary market liquidity 
that may result from an issuer's inability to have its securities 
quoted on platforms that are available only for Exchange Act-registered 
securities. Alternatively, companies considering seeking capital from 
institutional or accredited investors through a private offering might 
consider an offering under amended Regulation A if they believe that 
there is a more dispersed investor base, which could include retail 
investors, willing to provide capital at a lower cost.
---------------------------------------------------------------------------

    \587\ The Commission also recognizes that other important 
considerations could affect the use of Regulation A as proposed to 
be amended. In particular, as explained above, the GAO study of 
Regulation A offerings found that blue sky law compliance was a 
primary factor in the infrequent reliance on Regulation A. Because 
we are proposing to define qualified purchasers in a way that has 
the potential to include a large percentage of Regulation A 
investors, we believe that compliance costs associated with blue sky 
laws will be eliminated for most offerings, making them similar to 
Regulation D offerings and registered offerings in this respect.
---------------------------------------------------------------------------

    We preliminarily believe that an approach that generally preserves 
existing Regulation A while also introducing an option that allows 
issuers to raise greater amounts of capital without state review but 
with additional disclosure requirements is a prudent first step to 
adapting Regulation A for larger offerings. We believe this approach 
balances the trade-offs among compliance costs, investor protection, 
and benefits associated with liquidity and access to investors. We 
recognize, however, that this approach may limit the use of Regulation 
A for certain issuers, and we accordingly are requesting comment on 
additional considerations for smaller offerings. For example, the 
ongoing reporting obligations of a Tier 2 offering may be 
proportionately more burdensome for smaller issuers that are looking to 
raise substantially less than $50 million, and may not provide the same 
benefit to smaller issuers that are not pursuing secondary market 
liquidity. For these issuers, it may also not be reasonable to pursue a 
Tier 1 offering because the $5 million maximum issuance threshold may 
be insufficient in light of costs associated with the existing offering 
process. We recognize that observing market behavior under the proposed 
approach would provide information that would allow us to assess the 
need for modifications to the proposed

[[Page 3981]]

approach, which also could be made when the Commission considers the 
efficacy of the $50 million threshold, as mandated by Congress every 
two years.
    The disclosure requirements that we are proposing account for the 
trade-offs identified above and are guided by current and past market 
experiences. For example, prior to 1999, securities traded over-the-
counter (OTC) and quoted on the OTC Bulletin Board (OTCBB) interdealer 
quotation system were not required to be Exchange Act reporting 
companies. In January 1999, the SEC approved an OTCBB eligibility rule 
that required companies whose securities are quoted on OTCBB to file 
periodic financial reports under the Exchange Act or with their primary 
regulator if not the SEC.\588\ One study evaluating this change found 
improved liquidity at companies that were already providing periodic 
reports, or that chose to comply with Exchange Act reporting 
requirements to remain eligible for quotation on OTCBB.\589\ 
Approximately three-fourths of the companies that were not already 
reporting chose not to satisfy the new eligibility requirement by 
becoming an Exchange Act reporting company and instead entered less 
regulated and less liquid OTC markets, indicating that, for these 
companies, the expected costs associated with mandatory public 
reporting under the Exchange Act outweighed the expected liquidity 
benefits.\590\
---------------------------------------------------------------------------

    \588\ See Order Granting Approval of Proposed Rule Change and 
Amendment No. 1 from the National Association of Securities Dealers, 
Inc. Relating to Microcap Initiatives-Amendments to NASD Rules 6530 
and 6540, Exchange Act Release No. 34-40878 (Jan. 4, 1999), 64 FR 
1255 (Jan. 8, 1999).
    \589\ Bushee, Brian J., and Christian Leuz, (2005), Economic 
consequences of SEC disclosure regulation: Evidence from the OTC 
bulletin board, Journal of Accounting and Economics 39.2, pp. 233-
264.
    \590\ Id.
---------------------------------------------------------------------------

    The Tier 2 reporting requirements are substantially less than 
Exchange Act reporting requirements, but greater than what is currently 
required for an exemption from registration under the existing 
Regulation A rules and those under Regulation D. The following table 
shows a selection of commonly filed reports for Exchange Act registered 
companies and the analogous form, if any, that would be required for 
securities issued under Regulation A, as proposed to be amended, or 
Regulation D.

   Overview Comparison of Differences in Reporting Requirements for Offerings Exempt Under Regulation D, Regulation A, Regulation A as Proposed To Be
                                                            Amended and Registered Offerings
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                   Proposed  regulation    Proposed  regulation
    Common disclosure types            Regulation D        Current  regulation A         A tier 1                A tier 2            Registered \591\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Offering document or notice....  D \592\................  1-A...................  1-A...................  1-A...................  S-1
Auditors.......................  .......................  ......................  ......................  No requirement for a    PCAOB-registered
                                                                                                           PCAOB-registered        Auditor.
                                                                                                           Auditor.
Report of material events......  .......................  ......................  ......................  1-U...................  8-K
Interim report.................  .......................  ......................  ......................  1-SA..................  10-Q
Annual report..................  .......................  ......................  ......................  1-K...................  10-K
Termination of registration....  .......................  2-A...................  1-Z...................  1-Z...................  15
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Tier 2 reporting requirements are also greater than what is 
proposed to be required under Tier 1. We believe that it is appropriate 
to require some additional disclosure from issuers of larger offerings 
up to $50 million in order to better protect investors under the new 
Regulation A regime.
---------------------------------------------------------------------------

    \591\ This comparison does not cover offerings by foreign 
private issuers.
    \592\ Form D is a notice of sale under Regulation D, not a 
disclosure document, although certain disclosures are required. 
Regulation D does not require filing of a disclosure document with 
the Commission, and does not generally impose disclosure 
requirements except when sales are made to purchasers that are not 
accredited investors. See Rule 502(b), 17 CFR 230.502(b).
---------------------------------------------------------------------------

    We recognize that even if the proposed rules reduce compliance 
costs and require sufficient disclosure to enable investors, 
particularly retail investors, to make informed capital allocation 
decisions, some issuers may still prefer other offering exemptions. 
Preferences for other offering exemptions could be particularly strong 
given that general solicitation is now permissible in certain cases 
under Rule 506(c). In particular, it is possible that issuers relying 
on Rule 506(c) may now be in a better position to identify 
institutional and accredited investors, such that seeking capital from 
a broader retail investor base is not required or desired. In addition, 
eliminating the ban on general solicitation for certain Rule 506 
offerings may encourage new trading platforms for privately placed 
securities once their resale restrictions are lifted. While secondary 
markets for private offerings are unlikely to achieve the same level of 
liquidity of OTC or other listing venues, it is nonetheless possible 
that trading platforms could achieve levels of liquidity sufficient to 
allow certain types of securityholders (like founders and other 
affiliated owners) to exit once resale restrictions are lifted.
2. Scope of Exemption
a. Eligible Issuers
    Under the proposed rules, and consistent with current Regulation A 
eligibility requirements, eligible issuers include any companies 
organized and with their principal place of business inside the United 
States or Canada excluding investment companies, reporting companies, 
blank check companies, and issuers of claims on natural resources, and 
certain disqualified ``bad actors''. We also propose to exclude some 
issuers that are currently eligible to rely on Regulation A. 
Specifically, the Commission is proposing to exclude from eligibility 
issuers that are subject to a denial, suspension, or revocation order 
by the Commission pursuant to Section 12(j) of the Exchange Act within 
the five years immediately preceding the filing of the offering 
statement and issuers that have not filed required ongoing reports 
pursuant to Regulation A, as proposed to be amended, in the two-year 
period immediately preceding the filing of a new offering statement.
    The proposed changes to the Regulation A eligibility requirements 
would have benefits and costs. In particular, we believe that the 
proposed exclusion from eligibility of issuers that have not complied 
with ongoing reporting requirements in the two-year period immediately 
preceding the filing of a new offering statement would

[[Page 3982]]

incentivize issuers that intend to rely on Regulation A in the future 
to comply with ongoing reporting requirements, which would allow 
investors to make better informed investment decisions. This exclusion, 
however, should not impose additional burdens or costs on issuers that 
would not have already been incurred with the proposed ongoing 
reporting requirements of Regulation A.
    The Commission is also proposing to exclude from eligibility 
issuers that are subject to a denial, suspension, or revocation order 
by the Commission pursuant to Section 12(j) of the Exchange Act within 
the five years immediately preceding the filing of the offering 
statement. This exclusion may incentivize Exchange Act registrants to 
comply with their obligations, and would prevent companies with a 
history of reporting non-compliance from relying on Regulation A. We 
also recognize that this exclusion could prevent offerings by issuers 
that intend to comply with Regulation A requirements despite a history 
of Exchange Act non-compliance, which could limit capital formation in 
certain situations.
    The proposed rules continue to exclude non-Canadian foreign issuers 
from use of Regulation A, but, as discussed above, we are soliciting 
comment about the alternative of amending Regulation A to expand 
eligibility to additional foreign issuers. Allowing participation by 
non-Canadian foreign issuers could increase competition between foreign 
and domestic issuers for U.S.-based investor capital. This increased 
competition could raise the cost of capital for Regulation A issuers to 
the extent that there is not a commensurate increase in the supply of 
Regulation A capital. It is also possible, however, that expanding 
eligibility to use Regulation A to non-Canadian foreign issuers could 
attract additional investor capital to the market such that the change 
would not have a material impact on domestic issuers' cost of capital.
    The proposed rules also continue to exclude blank-check companies. 
We believe that this exclusion is appropriate given the potential 
difficulty for retail investors to evaluate the investment 
opportunities posed by these issuers, particularly because the issuers 
do not explicitly identify investment opportunities at the time of 
offering. The continued exclusion of blank check companies could 
prevent some legitimate early-stage companies that would otherwise be 
eligible issuers from relying on Regulation A.
    We are not proposing to amend the existing exclusion of companies 
subject to the ongoing reporting requirements of Section 13 or 15(d) of 
the Exchange Act (``reporting companies''). As an alternative, we could 
amend Regulation A to expand the category of eligible issuers to 
include reporting companies. Although reporting companies do 
occasionally rely on exemptions for private placements, we believe that 
many reporting companies generally would not benefit from eligibility 
to rely on Regulation A as proposed to be amended. In particular, 
reporting companies are subject to Exchange Act reporting requirements 
that are more extensive than those proposed for Regulation A, so would 
not benefit from the reduced disclosure requirements; although 
reporting companies could potentially benefit from the liability 
standards conferred by reliance on Regulation A, and such issuers that 
do not have the class of securities being offered already listed, or 
are not simultaneously listing, on a national securities exchange could 
potentially benefit from blue sky law preemption. Nonetheless, we 
believe that the benefits of amending Regulation A to permit reporting 
companies to rely on the exemption are minimal.\593\
---------------------------------------------------------------------------

    \593\ This exemption does not bar reporting companies from 
suspending or terminating their reporting obligations and then 
relying on Regulation A. This option could appeal even to large 
reporting companies if they are not looking to raise more than $50 
million of new capital. Many follow-on offerings, for example, are 
for less than $50 million, as discussed above. This could have both 
benefits (in the form of reduced transaction costs and compliance 
costs for issuers) and costs (in the form of reduced accountability 
and reduced information available to investors).
---------------------------------------------------------------------------

    The proposed rules also continue to exclude investment companies 
and BDCs. If, as an alternative, the Commission were to permit 
investment companies to use Regulation A, offerings from investment 
companies could increase investment opportunities for retail investors. 
Additionally, the Commission recognizes that permitting investment 
companies to rely on Regulation A could enhance capital formation 
indirectly. Specifically, if the use of proposed Regulation A decreased 
the cost of capital for investment companies and those savings were 
passed through to the company recipients of the investment companies' 
capital, expanding the eligibility for Regulation A to investment 
companies could potentially enhance capital formation.\594\
---------------------------------------------------------------------------

    \594\ Brewer, Elijah, et al. (1996), Performance and access to 
government guarantees: The case of small business investment 
companies, Economic Perspectives--Federal Reserve Bank of Chicago 
20, pp. 16-30.
---------------------------------------------------------------------------

b. Eligible Securities and Maximum Offering Size
    Consistent with the statute, the proposed rules increase the 
maximum offering size from $5 million to $50 million of ``equity 
securities, debt securities, and debt securities convertible or 
exchangeable to equity interests, including any guarantees of such 
securities.'' The proposed rules exclude asset-backed securities 
(``ABS'') from eligibility. As discussed above, the Commission does not 
believe that ABS issuers are the intended beneficiaries of the mandated 
expansion of Regulation A. ABS are designed to pool the risk of 
already-issued loans and other financial assets, and, in this respect, 
do not constitute new capital formation. We recognize, however, that 
allowing ABS offerings under Regulation A could, in certain cases, 
lower the cost of capital for underlying borrowers whose loans are 
eventually securitized by ABS issuers and therefore indirectly 
facilitate capital formation.\595\
---------------------------------------------------------------------------

    \595\ This indirect effect may result because, due to bank 
accounting standards and capital requirements, securitization allows 
banks sponsoring ABS issuers to move assets off balance sheet, 
freeing up capital for additional loans. The resulting increase in 
capital available for lending could lead to lower borrowing costs 
for all borrowers down the capital supply chain. See, e.g., 
Pennacchi, George G. (1995), Loan sales and the cost of bank 
capital, The Journal of Finance 43, no. 2, pp. 375-396.; Carlstrom, 
Charles T., and Katherine A. Samolyk (1995), Loan sales as a 
response to market-based capital constraints, Journal of Banking & 
Finance 19, no. 3, pp. 627-646.
---------------------------------------------------------------------------

    Although there are potential indirect benefits from allowing ABS 
offerings under Regulation A, we believe that, in practice, Regulation 
A would have little appeal to ABS issuers if available. Most ABS 
offerings are much larger than the maximum allowable offer size under 
the proposed rules. Average ABS offering sizes are generally well over 
$50 million.\596\ Because of their large size, unregistered ABS 
offerings--for which Regulation A might be an alternative offering 
method--currently target Qualified Institutional Buyers (QIBs) under 
Rule 144A. For these reasons, we do not believe excluding ABS from 
eligibility for Regulation A will have an adverse effect on capital 
formation.
---------------------------------------------------------------------------

    \596\ Our analysis indicates that from 2011-2013, 2.9% of ABS 
issuances were below $50 million. This calculation uses the AB Alert 
and CM Alert databases and includes only private label (non-GSE) ABS 
deals.
---------------------------------------------------------------------------

    As explained above, we are proposing to increase the maximum 
offering size of Regulation A offerings by introducing two tiers of 
offerings. Tier 1 offerings may be up to $5 million and Tier 2 
offerings may be up to $50 million. As compared to the current rules, 
the

[[Page 3983]]

increase in the offering limit for some Regulation A offerings should 
significantly lower issuance costs as a proportion of proceeds to the 
extent that issuers face certain fixed costs or costs that do not 
otherwise scale in proportion to offering size. This could make 
Regulation A, as proposed to be amended, more cost effective and 
attractive for issuers than existing Regulation A.\597\
---------------------------------------------------------------------------

    \597\ Section 401 of the JOBS Act also requires the Commission 
to review the $50 million offering limit not later than two years 
after enactment of the JOBS Act and every two years thereafter and, 
if the Commission decides not to increase the amount, requires that 
it report its reasoning to Congress. This requirement will benefit 
issuers and investors by establishing a regular schedule for the 
Commission to review whether the offering limit remains appropriate 
or should be increased.
---------------------------------------------------------------------------

    Increasing the maximum offering size could lead to improved 
liquidity of the securities sold in offerings under Regulation A as 
proposed to be amended, to the extent that larger issuances permit 
greater breadth of ownership.\598\ This would be of particular benefit 
to companies that have a greater interest in floating their securities 
in the public market for the purpose of creating liquidity than in 
raising capital. Greater investor participation, particularly retail 
investor participation, could increase investors' demand for liquidity, 
resulting in more frequent trading and further increases in liquidity. 
As a result of improved liquidity, current and potential investors in 
larger Regulation A offerings could more easily unwind their 
investments and at lower cost, thus making such investments more 
attractive.
---------------------------------------------------------------------------

    \598\ Grullon, Gustavo, George Kanatas, and James P. Weston, 
Advertising, breadth of ownership, and liquidity, Review of 
Financial Studies 17.2, pp. 439-461. The study shows that large 
issuances permit greater analyst coverage, which leads to higher 
breadth of ownership.
---------------------------------------------------------------------------

    The increase in maximum offering size could also increase the 
potential feasibility and value of intermediation services, such market 
making and analyst coverage, with respect to Regulation A securities. 
These services require sufficient investor demand for securities and 
information following the issuance because market makers and analysts 
are generally compensated on a per transaction or subscription basis. 
The presence of these intermediation services could also have a 
positive impact on investor participation and aftermarket liquidity of 
Regulation A offerings, providing further demand for such services. It 
is also possible, however, that even the large increase in maximum 
offering size included in the statute and proposed rules would not be 
sufficient to make such services economically feasible. \599\
---------------------------------------------------------------------------

    \599\ For instance, one prominent study finds that firm size is 
an important predictor of analyst coverage. See Barth, Mary E., Ron 
Kasznik, and Maureen F. McNichols., Analyst coverage and intangible 
assets. Journal of Accounting Research 39.1 (2001): 1-34.
---------------------------------------------------------------------------

    Lastly, the increased maximum offering size could make Regulation A 
more attractive to larger or more mature companies that are in less 
need of capital than business start-ups. For these issuers, secondary 
market liquidity may be the primary goal of an offering, and it is 
possible that their resulting market capitalization could be much 
greater than the maximum offering size.\600\ It is not clear whether 
existing OTC markets would be able to supply the liquidity necessary 
for large issuers.
---------------------------------------------------------------------------

    \600\ For instance, an issuer that floats 20% of its shares at 
$50 million would be valued at $250 million following the issuance. 
For this issuer, secondary market liquidity may facilitate 
subsequent offerings by founders, employees, affiliates, and other 
pre-issuance shareholders who are seeking a partial or full exit of 
their holdings.
---------------------------------------------------------------------------

c. Limitations on Secondary Sales
    We propose to permit sales by selling securityholders of up to $1.5 
million in Tier 1 offerings and to $15 million in Tier 2 offerings in 
any twelve-month period, which represents 30% of the total maximum 
offering size.\601\ This percentage is consistent with the current 
Regulation A rules, which permit secondary sales of up to $1.5 million, 
or 30% of the $5 million maximum offering size. The proposed rules 
would also eliminate current Rule 251(b), which prohibits resales by 
affiliated parties unless the issuer has had operating income in at 
least one of the last two years.\602\ As discussed above, selling 
securityholder access to Regulation A has historically been an 
important part of the exemptive scheme, and for some issuers, secondary 
market liquidity and the ability for significant company insiders and 
affiliates to exit all or a portion of their holdings in the issuer may 
be a more important consideration than the ability to raise new 
capital.\603\ Hence, we believe that removing the limitation on 
affiliate resales would have negligible costs and could enhance capital 
formation and allocative efficiency of capital; however, it is also 
possible that the limit on resales would not be a constraint on selling 
securityholders in most instances. The table below shows that if the 
proposed $15 million resale cap for Regulation A Tier 2 offerings had 
been applied to registered offerings conducted in 2012, only a small 
fraction of offerings below $50 million would have been affected.
---------------------------------------------------------------------------

    \601\ So, for example, an offering under $5 million but 
involving secondary sales in excess of $1.5 million would require 
exemption under section 3(b)(2) of the Exchange Act and would 
therefore be a Tier 2 offering.
    \602\ Tier 1 offerings may still be subject to state law 
limitations on secondary sales and sales from affiliates.
    \603\ For example, see Rydqvist, Kristian, and Kenneth 
H[ouml]gholm (1995), Going public in the 1980s: evidence from 
Sweden, European Financial Management 1.3, pp. 287-315.

Overview by Offering Size of the Percent of Registered Offerings Conducted in 2012 That Would Have Been Affected
                                    by a $15 Million Limit on Secondary Sales
----------------------------------------------------------------------------------------------------------------
                                                        Initial public offerings     Follow-on public offerings
                                                            \604\ (millions)              \605\ (millions)
                                                     -----------------------------------------------------------
                                                        <$5 %   $5-$50 %   >$50 %     <$5 %   $5-$50 %   >$50 %
----------------------------------------------------------------------------------------------------------------
Average percentage of proceeds to existing                 0.0       1.4      13.4       2.8       5.1      21.7
 shareholders sales.................................
Percentage offerings with proceeds to existing             n/a       0.8      26.5       n/a       0.0       6.2
 shareholders > $15 million.........................
----------------------------------------------------------------------------------------------------------------


[[Page 3984]]

    Permitting these secondary sales provides exit options for company 
founders, employees, and institutional investors, such as private 
equity or venture capital investors, which can have a positive effect 
on capital formation. For instance, because these investors consider 
available exit options before participating in a new venture, 
permitting secondary sales increases the incentives to make the 
original investment.\606\ Allowing these exits could also facilitate an 
optimal re-allocation of human capital. In particular, entrepreneurs 
and venture capitalists have valuable talents and allowing them to exit 
may free their attention for new projects and business ventures, and 
allow them to make investments not otherwise possible.\607\ In turn, 
their exits facilitate new investment opportunities for investors with 
different skills and risk preferences, and potentially a more 
appropriate investor base for an issuer.
---------------------------------------------------------------------------

    \604\ These estimates use data provided by Capital IQ and are 
calculated by comparing the total IPO proceeds to the proceeds from 
the IPO that went to incumbent shareholders as disclosed on Form S-
1.
    \605\ These estimates use SCD data provided by Thompson 
Analytics and, as above, these numbers are calculated by comparing 
total offering proceeds to the proceeds that went to incumbent 
shareholders.
    \606\ Cumming, Douglas J., and Jeffrey G. MacIntosh (2003), 
Venture-capital exits in Canada and the United States, The 
University of Toronto Law Journal 53.2, pp. 101-199.
    \607\ Zhang, Junfu (2011), The advantage of experienced start-up 
founders in venture capital acquisition: Evidence from serial 
entrepreneurs, Small Business Economics 36.2, pp. 187-208. Also see, 
Gompers, P., A. Kovner, J. Lerner, D. Scharfstein (2006), Skill vs. 
luck in entrepreneurship and venture capital: Evidence from serial 
entrepreneurs, No. w12592. National Bureau of Economic Research.
---------------------------------------------------------------------------

    As an alternative, we could increase the cap on secondary sales 
above the proposed $1.5 million for Tier 1 offerings and $15 million 
for Tier 2 offerings. Increasing the cap on secondary sales could 
provide additional exit options for incumbent shareholders, which could 
indirectly increase capital formation because exiting investors could 
more quickly redeploy their capital into new projects and business 
ventures.
    It is also possible that increasing the cap on secondary sales 
could lead to better monitoring of the underwriter or placement agent 
if used, as the selling securityholders have incentives to ensure that 
the underwriter values the securities and conducts the offering so as 
to maximize the value of their investment.\608\ Finally, increasing the 
cap on secondary share offerings could result in more dispersed 
ownership, resulting in better liquidity in the secondary resale 
market. As described above, an increase in the portion of securities 
sold to the public generally increases investor participation and the 
breadth of ownership. The exit of a large shareholder that accounts for 
an increase in public float has the benefit of changing the composition 
of shareholders to those that do not have access to non-public 
information about the issuer's operations and that predominantly trade 
based on liquidity needs or publicly available information. Studies 
show that this can result in lower spreads because it minimizes the 
inventory risk that dealers face.\609\
---------------------------------------------------------------------------

    \608\ Ljungqvist, Alexander, and William J. Wilhelm (2003), IPO 
pricing in the dot[hyphen]com bubble, The Journal of Finance 58.2, 
pp. 723-752.
    \609\ Bharath, S. and Amy Dittmar (2010), Why Do Firms Use 
Private Equity to Opt Out of Public Markets?, Review of Financial 
Studies 23(5), pp. 1771-1818.
---------------------------------------------------------------------------

    Increasing the permitted amount of secondary sales could also 
result in potential costs. In particular, it is often argued that the 
incentives of company management are better aligned with other 
shareholders when managers hold a significant equity interest in the 
company.\610\ Specifically, it can be important for insiders to retain 
some ownership stake to ensure that the incentives of directors and 
officers are aligned.\611\ Hence, it is possible that affiliate sales, 
if too large, could be detrimental to purchasing investors. However, 
there is no conclusive evidence that affiliate sales are associated 
with poor post-offering performance in the context of IPOs, \612\ and 
there is some evidence that affiliate sales are associated with 
positive post-IPO performance, as the selling affiliates have 
incentives to monitor and limit rent capture by underwriters.\613\
---------------------------------------------------------------------------

    \610\ See, e.g., Jensen, Michael C., and William H. Meckling 
(1978), Theory of the firm: Managerial behavior, agency costs and 
ownership structure, Journal of Financial Economics 3.4, pp. 305-
360.
    \611\ Core, John E., Robert W. Holthausen, and David F. Larcker 
(1999), Corporate governance, chief executive officer compensation, 
and firm performance, Journal of Financial Economics 51.3, pp. 371-
406.; Mehran, Hamid (1995), Executive compensation structure, 
ownership, and firm performance, Journal of Financial Economics 
38.2, pp. 163-184.
    \612\ Mikkelson, Wayne H., M. Megan Partch, and Kshitij Shah. 
Ownership and operating performance of companies that go public. 
Journal of Financial Economics 44.3 (1997): 281-307.
    \613\ Ljungqvist, Alexander, and William J. Wilhelm (2003), IPO 
pricing in the dot[hyphen]com bubble, The Journal of Finance 58.2, 
pp. 723-752.
---------------------------------------------------------------------------

    There may also be investor protection benefits in some cases from 
precluding affiliate sales by limiting transactions between informed 
investors (affiliates) and uninformed investors, such as retail 
investors. These potential benefits may be limited, as buyers are aware 
that they are less informed than affiliates and consequently, security 
prices should generally reflect these asymmetries at the time of the 
offering.\614\ Investors also may prefer to transact with affiliates in 
an offering because affiliates assume additional liability for 
misstatements in the offering documents. Thus affiliates may be 
sensitive to the risks of exploiting uninformed investors during an 
offering in which they are selling securities. For example, some 
empirical evidence suggests venture capitalists avoid reputational 
consequences of selling over-valued securities to uninformed investors 
during IPOs.\615\ Furthermore, we believe that state oversight of 
affiliate sales in Tier 1 offerings and the proposed investment 
limitation and financial statement and disclosure requirements for Tier 
2 offerings could provide additional investor protection.
---------------------------------------------------------------------------

    \614\ Easley, David, and Maureen O'Hara (2004), Information and 
the cost of capital, The Journal of Finance 59.4, 1553-1583.
    \615\ Lin, Timothy H., and Richard L. Smith (1998), Insider 
reputation and selling decisions: the unwinding of venture capital 
investments during equity IPOs, Journal of Corporate Finance 4.3, 
pp. 241-263.
---------------------------------------------------------------------------

    Using an operating income criterion for permitting secondary sales 
could promote investor confidence with respect to issuer viability by 
reducing the incidence of insiders offloading investments in companies 
that are not financially viable. However, the Commission believes that 
doing so may result in an under- or over-inclusion of companies that 
are viable investment opportunities because there is no single 
criterion that would provide an accurate measure of the financial 
health of all companies that could rely on Regulation A.\616\
---------------------------------------------------------------------------

    \616\ Indeed, one study suggests that standard accounting 
measures are often poor indicators of financial health in small 
companies. Davila, Antonio, and George Foster (2005), Management 
accounting systems adoption decisions: evidence and performance 
implications from early-stage/startup companies, The Accounting 
Review 80.4, pp. 1039-1068.
---------------------------------------------------------------------------

d. Investment Limitation
    Regulation A currently does not place any limitations on the amount 
of securities that may be purchased by an investor. As explained above, 
we are proposing that purchasers of Tier 2 offerings be limited to 
investing no more than 10% of the greater of the investor's annual 
income and net worth.\617\ By limiting investment size in Tier 2 
Regulation A offerings in that way, the

[[Page 3985]]

proposed rules could limit potential losses to investors; however, they 
could also limit potential gains.
---------------------------------------------------------------------------

    \617\ Annual income and net worth would be calculated for 
individual purchasers as provided in the accredited investor 
definition in Rule 501 of Regulation D. See 17 CFR 230.501. For 
example, individuals' net worth calculations would exclude the value 
of their primary residence.
---------------------------------------------------------------------------

    The proposed rules would permit issuers to rely on investors' 
representation that they are investing no more than 10% of their net 
worth and annual income. The ability to rely on investor 
representations should help to mitigate potential costs that issuers 
could incur in relation to this requirement. At the same time, we 
realize that investors might make inaccurate representations, whether 
intentionally or not, which could expose these investors to the risk of 
increased losses.
    It is also possible that preventing investors from investing more 
than 10% of the greater of their income and net worth in a Tier 2 
Regulation A offering could limit capital formation, particularly if 
potential purchasers of Tier 2 offerings are not able to meet minimum 
investment sizes that may be required by some issuers.\618\ While these 
issuers could require smaller minimum investment sizes, doing so may 
entail searching for, and involving more, investors that contribute to 
a smaller portion of the offering, which could increase transaction 
costs. If issuers maintain minimum investment sizes, the proposed rules 
could limit investor participation in Tier 2 offerings.
---------------------------------------------------------------------------

    \618\ For example, in 2012 approximately half of the Regulation 
D offerings that would have been eligible for reliance on Regulation 
A included a minimum investment amount; the median minimum 
investment amount was $20,000.
---------------------------------------------------------------------------

    Furthermore, in some settings, it may be beneficial for issuers to 
involve large investments from some types of investors in Regulation A 
offerings. For example, it could be beneficial to allow company 
officers to invest a substantial portion of their net worth in an 
offering as a mechanism to align the officers' incentives with those of 
the other securityholders. While we recognize that limiting investment 
size could result in less capital being raised by issuers in Regulation 
A offerings, we believe that preventing investors from exposing more 
than 10% of the greater of their income or net worth in a Tier 2 
offering could enhance investor protection by limiting potential 
losses.
    As an alternative, we could also require that purchasers of Tier 1 
offerings, like purchasers of Tier 2 offerings, be limited to investing 
no more than 10% of the greater of their annual income and net worth. 
We believe, however, that because Tier 1 offerings would continue to be 
subject to additional state oversight, any benefit associated with 
limiting the investment size in Tier 1 offerings could potentially be 
eclipsed by state-level protections. We also recognize that Tier 1 
offerings would be subject to fewer reporting obligations and other 
investor protections than Tier 2 offerings, which could make investor 
losses due to fraud more likely under Tier 1.
e. Integration
    We are proposing to allow companies to conduct other exempt 
offerings that would not be integrated with an offering made in 
reliance on Regulation A under the proposed amendments, as long as the 
company complies with the requirements of the exemption relied upon for 
the particular offering. We could have selected an alternative that 
would have aggregated the amounts offered in reliance on Regulation A 
with the amounts offered pursuant to other exempt offerings. Under such 
an alternative, the amounts raised in other exempt offerings would 
count toward the maximum offering amount under Regulation A. Compared 
to this alternative, the ability of issuers to conduct other exempt 
offerings that would not count toward the maximum offering amount under 
Regulation A would allow issuers to raise more capital.
f. Exclusion From Section 12(g)
    As amended by the JOBS Act, Section 12(g) of the Exchange Act 
requires, among other things, that an issuer with total assets 
exceeding $10 million and a class of securities held of record by 
either 2,000 persons, or 500 persons who are not accredited investors, 
register such class of securities with the Commission.\619\ As 
explained above, the JOBS Act includes a provision regarding the 
treatment under Section 12(g) of securities issued in securities-based 
crowdfunding transactions pursuant to Section 4(a)(6) of the Securities 
Act, but did not provide a similar provision in Section 3(b)(2). We are 
not proposing to exempt Regulation A securities from the requirements 
of Section 12(g).
---------------------------------------------------------------------------

    \619\ See Section 501 of the JOBS Act.
---------------------------------------------------------------------------

    As discussed above and in more detail below, the intent of the 
proposed rules is to provide sufficient financial disclosure to help 
investors make informed decisions while limiting the costs imposed on 
issuers for doing so. We believe that the limited required initial and 
ongoing disclosures, as proposed, accomplish this objective. If 
Regulation A issuers cross the shareholder of record threshold 
described above, however, they would no longer benefit from the limited 
Regulation A disclosure environment and would be subject to the more 
comprehensive periodic reporting requirements under the Exchange Act. 
This may not have significant economic consequences for issuers that 
are prepared to list on a national securities exchange and would 
otherwise be required to register with the Commission under Section 
12(b) and become subject to Exchange Act reporting requirements. For 
issuers that do not wish to list on a national securities exchange or 
do not meet listing requirements, the additional disclosure burden 
could provide incentive to take actions that would allow them to 
deregister and cease reporting.\620\ In this case, the benefits of the 
Regulation A environment would be lost to the issuer's securityholders.
---------------------------------------------------------------------------

    \620\ Leuz, Christian, Alexander Triantis, and Tracy Yue Wang 
(2008), Why do firms go dark? Causes and economic consequences of 
voluntary SEC deregistrations, Journal of Accounting and Economics 
45.2, pp. 181-208.
---------------------------------------------------------------------------

    Because of the manner in which shareholders of record are 
tabulated, the likelihood of a Regulation A issuer triggering the 12(g) 
threshold is low if not triggered at the time of offering. In 
particular, beneficial owners of Regulation A issuers who hold their 
shares at a broker are not counted as a record holder. Their shares, 
held in ``street name,'' are counted at the broker level, so that each 
brokerage at which there is a least one beneficial owner would 
constitute one shareholder of record. Because of this treatment, the 
number of shareholders of record is often significantly less than the 
number of beneficial owners.\621\
---------------------------------------------------------------------------

    \621\ Langevoort, Donald, and Robert Thompson, 
Publicness' in Contemporary Securities Regulation after 
the JOBS Act, Georgetown Law Journal, pp. 12-002.
---------------------------------------------------------------------------

g. Liability Under Section 12(a)(2)
    Consistent with current Regulation A, sellers of securities under 
Regulation A as proposed to be amended would be subject to liability to 
investors under Section 12(a)(2) for any offer or sale by means of an 
offering circular or an oral communication that includes a material 
misleading statement or material misstatement of fact. We believe that 
this would continue to benefit investors by encouraging issuers and 
selling securityholders to truthfully disclose all relevant facts 
associated with an offering, which in turn would allow potential 
investors to better assess the merits of the offering and make informed 
decisions. We do not expect this requirement to impose any significant 
costs beyond the liability already incurred by current Regulation A 
issuers.

[[Page 3986]]

    In the context of registered transactions, Section 11 liability 
applies not only to the issuer and underwriter but also, in certain 
circumstances, to other specified persons, including the accountants, 
attorneys and other experts involved in preparing the registration 
statement. In contrast, Section 12(a)(2) liability applies by its terms 
only to sellers, and does not extend to ``those who merely assist in 
another's solicitation efforts.'' \622\ Therefore, we anticipate that 
auditors and placement agents may not demand as much compensation for 
bearing the legal risks associated with participation in Regulation A 
offerings as they would for offerings subject to Section 11 liability. 
We recognize, however, that Section 12(a)(2) liability may result in 
lower levels of scrutiny by such intermediaries and may therefore 
expose investors to additional risks.
---------------------------------------------------------------------------

    \622\ Pinter v. Dahl 486 U.S. 622 (1988), at 651 fn. 21.
---------------------------------------------------------------------------

3. Offering Statement
    We are proposing a number of modifications to the offering 
statement required under Regulation A. Under current Regulation A, 
offering materials are submitted to the Commission in paper form. We 
are proposing to require electronic submission of offering materials so 
that these materials can more easily be made available to the public.
    As discussed in detail above, electronic submission has numerous 
benefits to issuers and investors. For example, electronic filing 
allows offering materials to be more easily accessed and analyzed by 
regulators, investors, and financial market researchers. We anticipate 
the effect of providing electronic access to offering materials to the 
public will promote liquidity and pricing efficiency for the issued 
securities. We also recognize that electronic filing on EDGAR may 
impose costs on issuers, as discussed below.
    We also are proposing a number of modifications to Form 1-A 
intended to streamline the type of information included in the offering 
circular. In general, we are proposing to maintain Form 1-A's three-
part structure and to make various revisions and updates to the form. 
For Part I, the substantive additions to Regulation A items are: issuer 
eligibility, bad actor disqualification and disclosure, and a summary 
of key issuer financial information and offering details. Since most of 
this information is already contained in other offering materials, the 
additional reporting burden in Part I of the Form 1-A should not entail 
significantly higher costs in terms of time or out-of-pocket expenses.
    Regulation A issuers currently are required to file their offering 
statements on paper. Paper documents are difficult to process both for 
the Commission and for investors, analysts, and other researchers. The 
proposed rules require issuer and offering details in Part I of Form 1-
A to be reported in XML format that once filed with the Commission will 
be machine readable. This format will allow for more efficient reviews 
and the systematic tracking of offering particulars by investors, 
regulators, and other market participants such as financial market data 
aggregators.
    The rule also proposes eliminating one of the three alternate 
models for providing narrative disclosure under Part II of the offering 
statement. Currently, issuers can choose between Model A (for issuers 
that are corporations only), Model B, and Part 1 of Form S-1 as 
described in the release. Elimination of Model A, wherein issuers 
provided disclosure in a question-and-answer format, is unlikely to 
affect most issuers, as historically, only about 20% of issuers have 
elected to use Model A. Eliminating Model A also addresses regulators' 
concerns about possible confusion that could result from the lack of 
uniformity of information presented in the question-and-answer in the 
format. Issuers continue to have the option of using Form S-1.
    The proposed changes to Model B include statutorily required 
disclosures and a section containing management discussion and analysis 
of the issuer's liquidity, capital resources, and business operations. 
As discussed in more detail below, these additional items may impose 
costs on the issuer, while providing important information to 
investors.
    Consistent with JOBS Act requirements with regard to ongoing 
reporting by Regulation A issuers, we are proposing to require offering 
materials to include audited financial statements, but only for issuers 
conducting a Tier 2 offering. The benefits of audited financial 
statements should provide investors with greater confidence in the 
accuracy and quality of the financial statements of issuers seeking to 
raise larger amounts of capital. We understand that audited financial 
statements could entail significant costs to issuers, and that the 
costs of an audit may discourage the use of Regulation A as proposed to 
be amended. Based on a compilation of data submitted by reporting 
companies, the average cost of an audit for offerings of less than $50 
million is approximately $114,000.\623\ Additionally, the proposed 
rules do not require that the auditor be PCAOB registered, which could 
reduce the cost of an audit for some issuers.
---------------------------------------------------------------------------

    \623\ See Audit Analytics, Auditor-Fees, available at https://www.auditanalytics.com/0002/audit-data-company.php. The auditor fee 
database contains fee data disclosed by SEC reporting companies in 
electronic filings since January 1, 2001.
---------------------------------------------------------------------------

    The proposed amendments also include a limitation on the age of 
financial statements at the time of qualification or filing (on these 
dates, financial statement data must not be older than nine months). 
This provision ensures that qualification is based on information that 
closely reflects a company's current financial condition. The 
additional costs from these changes are somewhat mitigated by decreases 
in disclosure requirements regarding the issuer's business and 
transactions with related persons. The higher level of disclosure 
would, however, enable investors to have better information for making 
their investment decisions.
    The proposed rules would also allow for continuous or delayed 
offerings of eligible securities by an eligible issuer under Regulation 
A, on a basis analogous to shelf registration under Rule 415 for 
registered offerings, although acquisition shelves would not be 
permitted under Regulation A. Unlike existing Regulation A, the 
proposed rules also restrict at-the-market shelf offerings. Issuers 
would need to update their offering circulars annually and after the 
second fiscal quarter, the same timetable as is proposed to apply for 
ongoing reporting requirements.
    The current Regulation A rules allow for continuous or delayed 
offerings under Rule 415, but Rule 415 only discusses registered 
offerings, which may have caused confusion in its application to 
Regulation A. The provisions in Regulation A as proposed explicitly 
allow for continuous or delayed offerings and would provide greater 
clarity. It would now be clear that eligible issuers would have greater 
flexibility to select the timing of their offerings based on 
macroeconomic conditions such as interest rates and market volatility, 
or other company specific factors that may contribute to a successful 
offering.\624\ Issuers would not have to wait for the Commission or a 
state regulator to complete what can sometimes be a lengthy review 
process. These factors should contribute to more timely financing 
decisions and higher capital market efficiency. For example,

[[Page 3987]]

existing research for Rule 415 offerings in the registered offering 
market shows that costs of intermediation in shelf offerings, and 
consequently the cost of raising equity through shelf registration, is 
lower than through traditional registration.\625\
---------------------------------------------------------------------------

    \624\ Bayless, Mark and Susan Chaplinsky, 1996, ``Is there a 
window of opportunity for seasoned equity issuance?'' Journal of 
Finance 51, 253-278.
    \625\ Bethel, Jennifer and Laurie Krigman, ``Managing the Cost 
of Issuing Common Equity: The Role of Registration Choice'', 
Quarterly Journal of Finance and Accounting, 47 (4) (2008), pp. 57-
85.
---------------------------------------------------------------------------

    Excluding at the market offerings will avoid situations where sales 
at fluctuating market prices result in a breach of the offering ceiling 
or the cap on secondary sales. Issuers could thus avoid losing their 
exemption under Regulation A due to unanticipated market factors. While 
eligible issuers have to file periodic updates and amendments as 
described above, they have the flexibility to file only a supplement to 
the offering circular if there were no fundamental changes. Hence, the 
cost to issuers of having the flexibility to make a continuous or 
delayed offering could be minimal.
4. Solicitation of Interest (``Testing the Waters'')
    Consistent with Title IV of the JOBS Act, the proposed rules permit 
issuers to ``test the waters'' by soliciting interest in the offering. 
Regulation A issuers would be allowed to use all forms of 
communications with all potential investors in these communications. 
Under current Regulation A, testing the waters is permitted only until 
the offering statement is filed with the Commission, and solicitation 
material is required to be filed prior to or concurrent with first use. 
Under the proposal, testing the waters would be permitted both before 
and after filing of the offering statement, and testing the water 
materials would be required to be filed with the Commission at the time 
of initial submission of the offering statement, and would be updated 
thereafter.
    In general, allowing issuers to gauge interest through testing the 
waters may reduce uncertainty regarding whether an offering could be 
completed successfully. If after testing the waters, the issuer is not 
confident that it will attract sufficient investment, the issuer can 
consider alternate methods of raising capital and thereby avoid the 
costs of an unsubscribed or under-subscribed offering. Allowing 
solicitation prior to filing enables issuers to determine market 
interest in their securities before incurring the costs of preparing 
and filing an offering statement.
    By expanding the permissible scope of testing the waters, the 
proposed rules could have several benefits. In particular, allowing 
issuers to advertise their intention to raise capital prior to 
qualification of the offering statement could decrease the time 
required to raise the desired amount of capital. This option may be 
useful for smaller companies, especially early-stage companies, which 
may find it too costly to solicit through intermediaries. Thus, at 
least for some companies, the proposed rules could lead to lower search 
costs and therefore lower issuance costs. The expansion of testing the 
waters could also increase the type and extent of information available 
to investors, which could lead to more efficient prices for the offered 
securities.
    In addition, to the extent that the proposed rules permit testing 
the waters for an expanded period of time, investors who previously 
found it difficult to find investment opportunities in private 
offerings may be able to find and potentially invest in a larger and 
more diverse pool of investment opportunities, allowing investors to 
more efficiently allocate their capital. The net effect would be to 
enhance both capital formation and allocative efficiency. Further, 
requiring issuers to attach the offering statement to their testing the 
waters materials (or providing information about where it can be 
accessed) would allow investors to be fully aware of the details of the 
offering material in a timely manner that would support sound 
investment decisions.
    We recognize that there would also be potential costs associated 
with expanding the use of testing the waters. In particular, to the 
extent that testing the waters increases under the proposed rules, the 
proposed rules could result in increased levels of inappropriate and 
potentially fraudulent activity, because solicitation of these 
offerings can be directed towards all investors, including non-
accredited and unsophisticated investors. To some extent, these costs 
are mitigated by the application of Section 12(a)(2) and the general 
antifraud provisions of the federal securities laws. By expanding the 
scope of permissible testing the waters, the proposed amendments could 
also lead to investor confusion about how to process the different 
disclosure materials they receive. For example, investors already aware 
of an impending offering through testing the waters materials may 
neglect to read the offering circular, which could be substantively 
different from the material distributed when testing the waters.
    The Commission could require submission of testing the waters 
materials before or concurrent with first use, allowing regulators to 
better assess how testing the waters is used to gauge investor interest 
prior to filing of the offering statement. Requiring initial submission 
of testing the waters materials could increase costs for issuers that 
decide not to proceed with the offering after testing the waters. 
Requiring submission before filing the offering circular could decrease 
issuers' willingness to test the waters and could potentially limit the 
overall reliance on Regulation A. Any additional solicitation materials 
that could result from requiring early submission would also lead to an 
increase in the amount of material available for investors about the 
offering, which could increase confusion and the costs incurred by 
investors evaluating their investment opportunities.
5. Ongoing Reporting Requirements
    Requiring limited ongoing disclosure could improve investor 
decision-making and ultimately benefit issuers by improving the price 
efficiency of securities issued through an amended Regulation A 
offering, to the extent that secondary markets for these securities 
develop. Ongoing financial disclosures and mandatory disclosures of key 
material events would allow existing and potential future investors to 
periodically update their expectations of the issuer's prospects and 
act accordingly. By standardizing the content, timing, and form of 
these disclosures, the proposed amendments would make it easier for 
investors to compare information across issuers than if disclosure 
decisions were otherwise left to voluntary, bilateral arrangements 
between issuers and investors, as would be the case without mandatory 
disclosures. Hence, the proposed amendments to require ongoing 
disclosure under Regulation A would eliminate many potential 
differences in disclosures between issuers that could otherwise impair 
the capital allocation decisions of investors,\626\ particularly to the 
extent that such securities trade in OTC markets.
---------------------------------------------------------------------------

    \626\ See, e.g., Luigi Zingales (2009), The Future of Securities 
Regulation, Journal of Accounting Review, Vol 47, pp. 391-425.
---------------------------------------------------------------------------

    More generally, the proposed ongoing disclosure requirements should 
result in fewer information asymmetries between issuers and their 
investors than currently exist for securities offered under the 
existing Regulation A or other exempt offering methods. The enhanced 
disclosure requirements should help improve the ability of investors 
with different risk preferences to identify investment opportunities 
best suited for

[[Page 3988]]

their risk tolerance. They will provide investors with a useful 
benchmark with which to evaluate the performance of other companies, 
both within and outside of the proposed Regulation A market. This 
enhanced information environment should improve the allocative 
efficiency of capital and facilitate the subsequent transfer of issued 
securities in secondary markets, allowing for more efficient pricing 
and liquidity.\627\
---------------------------------------------------------------------------

    \627\ See Graham, J., C. Harvey and S. Rajgopal (2005), The 
Economic Implications of Corporate Financial Reporting. Journal of 
Accounting and Economics 40, pp. 3-73; Durnev, A., R. Morck and B. 
Yeung (2003), Value Enhancing Capital Budgeting and Firm-Specific 
Stock Returns Variation, Journal of Finance 59, pp. 65-106.
---------------------------------------------------------------------------

    In addition to the direct costs of preparing the mandatory 
disclosures, issuers of securities in a Regulation A offering under the 
proposed rules would be subject to potential indirect disclosure costs 
by revealing to their competitors and other market participants 
information about their business not previously required to be 
disclosed.\628\ For these issuers, ongoing reporting requirements under 
Regulation A may render alternative offering methods more appealing, 
such as Rule 506(c) of Regulation D, which allows general solicitation 
but does not impose any ongoing disclosure requirements.
---------------------------------------------------------------------------

    \628\ Campbell, Tim S (1979), ``Optimal investment financing 
decisions and the value of confidentiality.'' Journal of Financial 
and Quantitative Analysis, pp. 913-924.
---------------------------------------------------------------------------

    Nonetheless, the indirect costs of increased disclosures are 
present for any issuer seeking improved liquidity through access to 
public capital markets and a broader investor base that includes 
unaccredited investors. Enhanced disclosure is likely to improve the 
liquidity of the securities of Regulation A issuers in the secondary 
market, particularly for securities that are traded in the OTC 
market.\629\ As discussed above, there is a positive feedback effect 
from increased liquidity, whereby increased trading engenders more 
accurate pricing by incorporating a greater number of investors' views. 
More accurate pricing, in turn, encourages greater investor 
participation and greater liquidity, and provides investors with more 
accurate information. Increased price efficiency can also facilitate a 
lower cost of capital by lessening the discount investors otherwise 
place on illiquid securities and securities for which there is 
increased risk of asymmetric information. Hence, there would be 
significant indirect effects of improving capital formation.
---------------------------------------------------------------------------

    \629\ Ang, A., Shtauber, A., & Tetlock, P. (2011). Asset Pricing 
in the Dark: The Cross Section of Over-the-Counter Stocks. Review of 
Financial Studies, forthcoming.
---------------------------------------------------------------------------

a. Periodic Reporting Requirements
    Currently, Regulation A issuers do not have ongoing reporting 
obligations. Under the proposed amendments, issuers that conducted Tier 
2 offerings would be required to provide annual audited financial 
statements on Form 1-K. The Commission is further proposing that 
issuers that conducted Tier 2 offerings provide a semi-annual update on 
Form 1-SA and current event reporting on Form 1-U. These proposed 
requirements are more extensive, in terms of breadth and frequency, 
than those for current Regulation A offerings and those for other 
exempt offerings.\630\ The proposed additional disclosures are intended 
to reduce the information asymmetries between companies that conduct 
Tier 2 offerings and their potential investors, both at the time of the 
offering, through the disclosure document, and on an ongoing basis, via 
ongoing reporting. While we considered whether we should require 
certain additional disclosures to be provided in structured data 
format, the proposed rules do not require these disclosures to be 
machine readable. Not requiring structured data should help to limit 
costs to issuers while still providing meaningful information to 
investors. While not requiring a structured data format could limit the 
ability for investors, academics, regulators and other market 
participants to analyze firms relying on Regulation A, as proposed to 
be amended, we do not believe it is advisable to impose such a 
requirement on issuers relying on the exemption.
---------------------------------------------------------------------------

    \630\ Small private companies, such as those that might consider 
a Regulation A offering, typically do not disclose information as 
frequently or as extensively as public companies, if at all. 
Moreover, unlike public companies, small private companies are not 
required to have their financial statements audited or to hire an 
independent third party to certify the information disclosed.
---------------------------------------------------------------------------

b. Current Event Reporting Requirements
    As discussed above, in addition to the proposed annual and semi-
annual reporting requirements, the proposed rules include several 
event-based disclosure requirements, similar to the event-based 
reporting of reporting companies on Form 8-K. These events, like the 
ongoing financial performance of a company, can be important 
determinants in an investor's capital allocation decision. The direct 
cost of reporting these events is often minimal, particularly to the 
extent that the disclosed information is simply the announcement of a 
new development, such as the sale of an unregistered security. Of the 
26 relevant current reporting items on Form 8-K, listed in the table 
below, eleven are proposed to be required to be reported, in whole or 
in part, by issuers that conducted Tier 2 offerings.

------------------------------------------------------------------------
                          Description of event
     8-K Item No.         triggering reporting    Proposed  Regulation A
                               obligation               requirement
------------------------------------------------------------------------
             Section 1--Registrant's Business and Operations
------------------------------------------------------------------------
Item 1.01.............  Entry into a Material     Sometimes.
                         Definitive Agreement.
Item 1.02.............  Termination of a          Sometimes.
                         Material Definitive
                         Agreement.
Item 1.03.............  Bankruptcy or             Yes.
                         Receivership.
Item 1.04.............  Mine Safety--Reporting    No.
                         of Shutdowns and
                         Patterns of Violations.
------------------------------------------------------------------------
                    Section 2--Financial Information
------------------------------------------------------------------------
Item 2.01.............  Completion of             Sometimes.
                         Acquisition or
                         Disposition of Assets.
Item 2.02.............  Results of Operations     No.
                         and Financial Condition.
Item 2.03.............  Creation of a Direct      No.
                         Financial Obligation or
                         an Obligation under an
                         Off-Balance Sheet
                         Arrangement of a
                         Registrant.
Item 2.04.............  Triggering Events That    No.
                         Accelerate or Increase
                         a Direct Financial
                         Obligation or an
                         Obligation under an Off-
                         Balance Shelf
                         Arrangement.
Item 2.05.............  Costs Associated with     No.
                         Exit or Disposal
                         Activities.

[[Page 3989]]

 
Item 2.06.............  Material Impairments....  No.
------------------------------------------------------------------------
                Section 3--Securities and Trading Markets
------------------------------------------------------------------------
Item 3.01.............  Notice of Delisting or    N/A.
                         Failure to Satisfy a
                         Continued Listing Rule
                         or Standard; Transfer
                         of Listing.
Item 3.02.............  Unregistered Sales of     Yes.
                         Equity Securities.
Item 3.03.............  Material Modification to  Yes.
                         Rights of Security
                         Holders.
------------------------------------------------------------------------
   Section 4--Matters Related to Accountants and Financial Statements
------------------------------------------------------------------------
Item 4.01.............  Changes in Registrant's   Yes.
                         Certifying Accountant.
Item 4.02.............  Non-Reliance on           Yes.
                         Previously Issued
                         Financial Statements or
                         a Related Audit Report
                         or Completed Interim
                         Review.
------------------------------------------------------------------------
             Section 5--Corporate Governance and Management
------------------------------------------------------------------------
Item 5.01.............  Changes in Control of     Yes.
                         Registrant.
Item 5.02.............  Departure of Directors    Sometimes.\631\
                         or Certain Officers;
                         Election of Directors;
                         Appointment of Certain
                         Officers; Compensatory
                         Arrangements of Certain
                         Officers.
Item 5.03.............  Amendments to Articles    No.
                         of Incorporation or
                         Bylaws; Change in
                         Fiscal Year.
Item 5.04.............  Temporary Suspension of   No.
                         Trading Under
                         Registrant's Employee
                         Benefit Plans.
Item 5.05.............  Amendments to the         No.
                         Registrant's Code of
                         Ethics, or Waiver of a
                         Provision of the Code
                         of Ethics.
Item 5.06.............  Change in Shell Company   No.
                         Status.
Item 5.07.............  Submission of Matters to  No.
                         a Vote of Security
                         Holders.
Item 5.08.............  Shareholder Director      No.
                         Nominations.
------------------------------------------------------------------------
                Section 6--Asset-Backed Securities (N/A)
                           Sections 7-9--Other
------------------------------------------------------------------------
Item 7.01.............  Regulation FD Disclosure  No.
Item 8.01.............  Other Events............  Optional.
Item 9.01.............  Financial Statements and  Sometimes.
                         Exhibits.
------------------------------------------------------------------------

    We have chosen to require the reporting of key current events based 
on our assessment of their potential usefulness to investors in these 
types of offerings and issuers and based on the suggestions of 
commenters. For instance, we are proposing to require the disclosure of 
certain events that directly affect the rights of securityholders 
(Items 3.02 and 3.03). Because sales of securities provide important 
information about an issuer's capital structure and could dilute 
existing shareholders, these events can have direct securities pricing 
implications. We are also proposing to require issuers to disclose 
changes in their certifying accountant or non-reliance on previously 
issued financial statements or a related audit report (Items 4.01 and 
4.02). We believe that these items are relevant information for 
investors who rely on the information made available to them through 
the issuer's periodic reporting, and it is important for investors to 
know if financial statements could be incorrect or compromised in some 
way.
---------------------------------------------------------------------------

    \631\ Form 1-U focuses on officers, as discussed in the release.
---------------------------------------------------------------------------

    We also propose requiring disclosure of certain meaningful 
corporate events. Bankruptcy (Item 1.03) can have direct effects on 
valuation as it changes a number of obligations of the issuer,\632\ the 
fiduciary duties of executive officers and directors,\633\ and can 
potentially call into question the claims of existing securities to 
issuer assets and cash flows.\634\ Similarly, reorganizations, such as 
takeovers (Item 5.01), debt restructuring and mergers (Items 1.01, 
1.02, and 2.01), change companies' obligations and organizational 
structure in ways that can have a material impact on security prices.
---------------------------------------------------------------------------

    \632\ For example, the automatic stay provision suspends 
contractual obligations.
    \633\ Firms nearing the ``zone of insolvency'' have a 
responsibility to maximize ``enterprise value'', which is generally 
not the same as firm value, as it can include the value of providing 
employment, among other things.
    \634\ Renegotiation plans are subject to approval from a 
majority of owners of the ``fulcrum'' security which can be 
difficult to determine.
---------------------------------------------------------------------------

    Finally, we propose requiring the disclosure of changes in issuer 
management, which can have direct implications on the issuer's future 
prospects and security prices.\635\ Therefore we believe disclosure of 
management changes would benefit investors.
---------------------------------------------------------------------------

    \635\ Murphy, Kevin J., and Jerold L. Zimmerman (1993), 
Financial performance surrounding CEO turnover. Journal of 
Accounting and Economics 16.1 pp. 273-315.
---------------------------------------------------------------------------

c. Termination or Suspension of Reporting Requirements
    The proposed rules allow for a termination or suspension of an 
issuer's ongoing reporting obligations if the number of record holders 
of the class of securities to which the Regulation A offering statement 
relates falls below 300 persons or suspension upon registration of a 
class of securities under Section 12 of the Exchange Act or 
registration of an offering of securities under the Securities Act.
    For Tier 2 issuers, which are subject to substantial ongoing 
reporting requirements, the option for suspending or terminating the 
Regulation A reporting obligations could be beneficial, especially for 
issuers that are not seeking secondary market liquidity, and smaller 
issuers for which the fixed costs of complying with the ongoing 
disclosure requirements would weigh more heavily.\636\ The option to 
suspend or terminate periodic reporting might be costly for investors 
because it would decrease the amount of information available about the 
issuer, making it

[[Page 3990]]

more difficult to monitor the issuer and accurately price its 
securities or to find a trading venue that would allow liquidation of 
the investment. Suspension or termination of reporting might 
particularly adversely affect minority investors if the lack of current 
financial or other material information, and/or the presence of large 
inside or affiliate shareholders could make it easier for controlling 
shareholders to expropriate capital from minority investors. In most 
cases we propose to require Tier 2 issuers to notify the Commission 
upon suspension or termination of reporting requirements through Form 
1-Z, which for Tier 2 issuers, will request information regarding the 
reason for the suspension or termination. To the extent that ongoing 
reporting is suspended due to registration of a class of securities 
under the Exchange Act, investors may benefit from enhanced reporting 
under the Exchange Act requirements.
---------------------------------------------------------------------------

    \636\ See Request for Comment 90 above (seeking comment on, 
among other things, whether we should exempt some issuers from 
ongoing reporting on the basis of whether such issuer has taken 
steps to foster a secondary market for their securities).
---------------------------------------------------------------------------

    Although Tier 1 issuers are not subject to periodic and current 
event reporting requirements, we propose to require issuers of Tier 1 
offerings to notify the Commission of their terminated reporting 
obligation using Form 1-Z upon completion of the offering. Under the 
proposed rules, Form 1-Z would take the place of Form 2-A, which is 
currently required upon completion of a Regulation A offering. For Tier 
1 issuers, Form 1-Z will require issuers to provide updated information 
regarding some features of the completed offering, such as the final 
proceeds raised net of fees.\637\ This information will allow the 
Commission to monitor whether issuers can reliably raise the projected 
amount of capital in Regulation A offerings. Form 1-Z would elicit 
limited summary information about the completed offering and the 
issuer, would not require any additional information from issuers that 
would not have been forecasted and provided in the offering materials 
of Tier 1 issuers and, therefore, should not impose substantial 
additional costs on the issuer.
---------------------------------------------------------------------------

    \637\ We do not propose to require notification of the 
completion of a Tier 2 offering as the information will be included 
in other ongoing reporting materials required from issuers of Tier 2 
offerings.
---------------------------------------------------------------------------

6. Bad Actor Disqualification
    We propose to amend Rule 262 to include bad actor disqualification 
provisions in substantially the same form recently adopted under Rule 
506(d), but without the categories of covered persons specific to fund 
issuers, which are not proposed to be eligible to use Regulation 
A.\638\ We believe that the proposed disqualification provisions are 
not likely to impose significant incremental costs on issuers and other 
covered persons because the proposed rules are substantially similar to 
the disqualification provisions under existing Regulation A and other 
exemptions.
---------------------------------------------------------------------------

    \638\ See proposed Rule 262.
---------------------------------------------------------------------------

    The proposed rules likely would induce issuers to implement 
measures to restrict bad actor participation in offerings made in 
reliance on Regulation A, which could help reduce the potential for 
fraud in these types of offerings. If disqualification standards lower 
the risk premium associated with the presence of bad actors in 
securities offerings, any resulting reduction in fraud could also 
reduce the cost of raising capital to issuers that rely on Regulation A 
as proposed to be amended. In addition, the requirement that issuers 
determine whether any covered persons are subject to disqualification 
might reduce the need for investors to do their own investigations and 
could therefore increase efficiency.
    The proposed disqualification provisions likely would also impose 
costs on issuers, other covered persons and investors. If issuers are 
disqualified from participating in offerings made in reliance on 
proposed Regulation A, they may experience increased costs in raising 
capital through alternative methods. These costs could hinder potential 
investment opportunities for such issuers, which could have negative 
effects on capital formation. In addition, issuers may incur personnel 
costs to avoid the participation of covered persons who are subject to 
disqualifying events. Issuers also might incur costs by restructuring 
share ownership to avoid beneficial ownership of more than 20% from 
individuals subject to disqualifying events. Finally, issuers might 
incur costs by devoting resources to seeking disqualification waivers.
    As discussed above, we are also proposing a reasonable care 
exception under Regulation A on a basis consistent with Rule 506.\639\ 
We anticipate that the reasonable care exception also would impose 
benefits and costs. For example, a reasonable care exception could 
encourage capital formation by enabling Regulation A offerings to go 
forward, where issuers might have been deterred from relying on 
Regulation A if they risked potential liability under Section 5 of the 
Securities Act for unknown disqualifying events. This exception could 
increase the potential for fraud by limiting issuers' incentive to 
determine whether bad actors are involved with their offerings. We also 
recognize that some issuers might incur costs associated with 
conducting and documenting their factual inquiry into possible 
disqualifications. The rule's flexibility about the nature and extent 
of the factual inquiry required could increase these costs because 
uncertainty could drive issuers to misunderstand requirements for 
compliance; however, the flexibility would allow an issuer to tailor 
its factual inquiry as appropriate to its particular circumstance, 
thereby potentially reducing costs associated with conducting the 
inquiry.
---------------------------------------------------------------------------

    \639\ See proposed Rule 262(b)(4).
---------------------------------------------------------------------------

    The proposed requirement that issuers disclose matters that would 
have triggered disqualification, had such matters occurred after the 
effective date of proposed Regulation A, also would impose costs and 
benefits. The proposed disclosure requirement would likely reduce 
issuer costs, relative to the cost of disqualification. This approach 
would not preclude the participation of past bad actors, whose 
disqualifying events occurred prior to the effective date of the 
proposed rules, which could expose investors to the risks that arise 
when bad actors are associated with an offering. Nevertheless, 
investors would benefit by having access to such information that could 
inform their investment decisions. Disclosure of triggering events may 
also make it more difficult for issuers to attract investors, and 
issuers may experience some or all of the impact of disqualification as 
a result. Some issuers may, accordingly, choose to exclude involvement 
from prior bad actors to avoid such disclosures.
    We believe the inclusion of Commission cease-and-desist orders in 
the list of disqualifying events would not impose a significant, 
incremental cost on issuers and other covered persons because many 
might already be subject to Commission cease-and-desist orders or may 
already be disqualified on the basis of orders issued by state 
regulators, federal banking regulators and the National Credit Union 
Administration.\640\ The inclusion of Commission cease-and-desist 
orders in the list of disqualifying events might change how settlement 
negotiations are conducted between respondents and the Commission, and 
the Commission could grant an appropriate waiver from disqualification.
---------------------------------------------------------------------------

    \640\ See SEC Rel. No. 33-9414 (July 10, 2013) [78 FR 44729] 
(``Bad Actor'' adopting release).
---------------------------------------------------------------------------

    Under the proposed rules, orders issued by the CFTC would trigger

[[Page 3991]]

disqualification to the same extent as orders of the regulators 
enumerated in Section 302(d)(2)(B)(i) of the JOBS Act (e.g., state 
securities, insurance and banking regulators, federal banking agencies 
and the National Credit Union Administration). We believe that 
including orders of the CFTC would result in the similar treatment, for 
disqualification purposes, of comparable sanctions. In this regard, we 
note that the conduct that would typically give rise to CFTC sanctions 
is similar to the type of conduct that would result in disqualification 
if it were the subject of sanctions by another financial services 
industry regulator. This provision should enable the disqualification 
rules to more effectively screen out bad actors.
7. Relationship With State Securities Law
    As explained above, Regulation A offerings are subject to 
registration or qualification under state ``blue sky laws,'' unless the 
offering is made to ``qualified purchasers'' (as the Commission may 
define that term) or is offered or sold on a national securities 
exchange. Compliance with blue sky law requirements can impose 
significant costs, predominantly as a result of having to coordinate 
independent reviews across multiple regulatory regimes when issuers are 
offering securities to investors in multiple states.\641\
---------------------------------------------------------------------------

    \641\ See discussion in Section IV.A.1.a. above regarding the 
determinates of trends in Regulation A issuances.
---------------------------------------------------------------------------

    The GAO study of Regulation A offerings found that blue sky law 
compliance was one of four central factors in the infrequent reliance 
on Regulation A.\642\ Commenters have also raised the importance of 
state securities law preemption to the utilization of Regulation 
A.\643\ As discussed above, we are concerned that the costs associated 
with state securities law compliance may deter issuers from using 
Regulation A, even if the increased cap on offering size and other 
proposals intended to make Regulation A more workable are implemented. 
This would limit the possible impact of an amended Regulation A as a 
tool for capital formation. We believe that Regulation A, as we propose 
to amend it for Tier 2 offerings, would provide substantial protections 
to purchasers. Under the proposed amendments, a Regulation A offering 
statement would continue to provide substantive narrative and financial 
disclosures about the issuer, including an MD&A discussion. We expect 
that Regulation A offering statements would continue to receive the 
same level of Commission staff review as registration statements. 
Additional investor protections would be afforded by Regulation A's 
limitations on eligible issuers and ``bad actor'' disqualification 
provisions, which we are proposing to expand. In addition, the 
requirements for Tier 2 offerings would provide further protection by 
requiring the audited financial statements in the offering circular, an 
obligation for issuers to provide ongoing reporting to purchasers, and 
a limitation on the percentage of annual income or net worth that an 
investor could invest in a single offering. Ongoing reporting would 
assure a continuing flow of information to investors and could support 
the development of secondary markets for Regulation A securities, 
offering the prospect of reduced investor risk through liquidity.
---------------------------------------------------------------------------

    \642\ See GAO-12-839, ``Factors that May Affect Trends in 
Regulation A Offerings'', (July 3, 2012).
    \643\ See Fallbrook Letter (``It cannot be understated as to how 
critical state securities law preemption is to ensuring the 
Regulation A+ Rules are user-friendly and attractive for utilization 
by growing companies.'').
---------------------------------------------------------------------------

    Based on these requirements, we are proposing to define the term 
``qualified purchasers'' for purposes of Regulation A to include all 
offerees in a Regulation A offering and all purchasers in a Tier 2 
Regulation A offering. Therefore, as proposed, Tier 1 offerings would 
be subject to state registration and qualification requirements to the 
same extent as offerings under current Regulation A, whereas such 
requirements would be preempted for Tier 2 offerings.
    Because state registration requirements were cited as a central 
factor in the infrequent reliance on Regulation A,\644\ we believe that 
by eliminating these costs of state law compliance for Tier 2 offerings 
issuers may be more likely to rely on amended Regulation A relative to 
the current rules under Regulation A, which do not preempt state 
securities laws.\645\ We believe that this definition could facilitate 
capital formation, as suggested in several comment letters.\646\ It is 
also possible that the preemption of state securities laws for Tier 2 
offerings could attract issuers away from offerings conducted under 
Rule 506, which also provides preemption of state laws, but restricts 
resales. Given that in 2012 the majority of Rule 506 offerings by 
eligible issuers were less than $50 million, some shift from Rule 506 
to Regulation A is possible; however, we are unable to quantify its 
magnitude. The infrequent and issuer-specific use of existing 
Regulation A makes it difficult to identify general findings about the 
effect of preemption on Regulation A, as proposed to be amended, and to 
quantify the potential effects of defining qualified purchasers to 
include all offerees in a Regulation A offering and all purchasers in 
Tier 2 offerings made under the proposed amendments.
---------------------------------------------------------------------------

    \644\ See GAO-12-839, ``Factors that May Affect Trends in 
Regulation A Offerings'', (July 3, 2012).
    \645\ See discussion in Section IV.A.1.a. above.
    \646\ See, e.g., Campbell Letter, Kaplan Voekler Letter, WR 
Hambrecht + Co. Letter, and Tresslar Letter.
---------------------------------------------------------------------------

    We recognize that the proposal could impose some costs. For 
example, because the types of issuers and investors that would 
participate in Regulation A offerings could vary by state, state-
specific securities requirements may potentially be tailored to the 
specific investors and issuers involved in these transactions. It is 
possible that state securities regulators could provide a meaningful 
level of investor protection for certain offerings because of greater 
familiarity with local issuers and investors.
    As a policy alternative, we could permit one or a subset of states 
to qualify certain Regulation A offerings either in place of, or in 
addition to, federal qualification. This alternative could allow state 
securities regulators to provide a comparable level of oversight, while 
still limiting the costs associated with requiring issuers to undergo 
multiple review processes. Depending on how this alternative is 
implemented, it may not result in comparable review. For example, if 
state review is conducted by a single state, issuers could seek review 
from the state with the least stringent standards and could therefore 
increase the level of fraud in Regulation A offerings. A potentially 
greater risk of fraud could negatively affect both investors and 
issuers, which may find it more expensive to raise capital using 
Regulation A, as proposed to be amended, if investors demand higher 
returns because of any perceived increase in the risk associated with 
this type of offering. The Commission also recognizes that there are a 
number of alternative definitions of qualified purchaser that we could 
propose. One alternative that we could have selected is to define as a 
``qualified purchaser'' any purchaser in any Regulation A offering. 
Compared to the definition in the proposed rulemaking, such a broad 
definition would allow Tier 1 Regulation A offerings to qualify for the 
state law preemption, which in turn would decrease the cost of such 
offerings and potentially enhance capital formation. However, the 
resulting loss of state review for Tier 1

[[Page 3992]]

offerings, combined with the absence of the additional investor 
protections included in Tier 2, could increase the likelihood of fraud 
in these offerings.
    Other alternatives can be broadly categorized as relying on 
attributes of the investor, the issuer, and/or the offering. We discuss 
these alternatives in greater detail below.
    We could have selected a policy alternative that defines as a 
``qualified purchaser'' any purchaser who meets a specified income or 
net worth standard that is set either lower or higher than the current 
``accredited investor'' definition in Rule 501 of Regulation D. 
Compared to the definition in the proposed rulemaking, such an 
alternative could limit the number of offerings that would qualify for 
state preemption because some investors that purchased securities in 
Tier 2 offerings would not satisfy these alternative definitions. 
However, such alternatives might allow the preemption of blue sky law 
for Tier 1 offerings, which are not subject to the same reporting and 
other obligations proposed for Tier 2. Limiting eligible investors 
could result in higher offering costs for potential Regulation A 
issuers but could also lower the likelihood of fraud in Regulation A 
offerings compared to the proposed rules.
    Another policy alternative that we could have adopted is to define 
a ``qualified purchaser'' as any purchaser who purchases securities in 
a Regulation A offering through a registered broker-dealer. Such an 
alternative could have limited the number of offerings that would 
qualify for state preemption because some investors might not use 
broker-dealers when participating in Tier 2 offerings. Such a 
limitation could result in higher offering costs for issuers. 
Additionally, such an alternative could have increased the cost to 
investors participating in Tier 2 offerings because they would have to 
pay broker-dealer fees. On the other hand, the presence of registered 
broker-dealers, who presumably perform due diligence on potential 
investments, could result in lower likelihood of fraud in this market 
compared to the proposed rules, and could support blue sky preemption 
for Tier 1 offerings as well as Tier 2 offerings.
    In addition, we could have defined qualified purchasers as 
investors in a Regulation A offering in which the issuer meets 
specified conditions. For example, the definition could require that 
the issuer meet some financial criteria, or that the issuer meet some 
governance requirements. The potential advantage of defining qualified 
purchaser according to attributes of the issuer is that indicators of 
fraud or risky investments are often characteristics of the issuer 
(e.g. shell companies, financially distressed companies, etc.). 
Therefore, a definition based on issuer attributes might effectively 
identify the investments most in need of additional regulatory 
oversight. However, it may be difficult to identify criteria that 
effectively distinguish between fraudulent or excessively risky 
investments and safer investments, given the wide variety of potential 
issuers. For example, a high degree of leverage would be indicative of 
financial distress in some companies, but could be optimal in others.
    Lastly, we could have used attributes of the offering, other than 
or in addition to the proposed requirements for Tier 2, to define 
qualified purchasers. For example, qualified purchasers could be 
defined in relation to offerings in which issuers and agents of the 
issuer assume increased liability for material misstatements and 
omissions, offerings over a certain size, or offerings with a firm 
commitment underwriting. While some of these factors are correlated 
with the riskiness of the offering, using a definition based on these 
factors could prompt issuers to sub-optimally modify features of the 
offering in order to avoid state regulation.
    We considered the policy alternative suggested by one commenter to 
preempt blue sky laws with respect to secondary sales of Regulation A 
securities in addition to preempting blue sky laws governing primary 
offerings.\647\ If blue sky laws pertaining to resales affect the 
ability to conduct or the cost of transactions involving Regulation A 
securities, preemption of sales in addition to offers could help 
facilitate liquid secondary markets, and could therefore enhance 
capital formation. We are currently unaware of any evidence suggesting 
that blue sky laws inhibit trading in OTC markets; therefore, we are 
not proposing to preempt blue sky laws with respect to secondary sales 
of Regulation A securities at this time.
---------------------------------------------------------------------------

    \647\ See Paul Hastings Letter.
---------------------------------------------------------------------------

8. Effect of Regulation A on OTC Markets and Dealer Intermediation
    For securities issued in Regulation A offerings that end up trading 
on the OTC market, the proposed new Tier 2 disclosure requirements 
would provide timely and relevant issuer information to broker-dealers 
that initiate quotations and make markets in these securities and to 
investors in these securities. This information would be much more 
detailed than what is currently required for non-reporting issuers 
under Rule 15c2-11 and reported on Form 211. Similarly, for issuers 
with existing securities trading on the OTC market, the disclosure 
proposed to be required under Tier 2 would supplement the issuer 
information otherwise used by broker-dealers when relying on the 
existing piggyback exception of Rule 15c2-11.\648\ For Tier 2 issuers, 
the proposed new periodic reporting requirements, including audited 
financials, would allow broker-dealers to obtain more current 
information about these issuers more frequently and at lower cost. 
Thus, broker-dealers quoting securities for such issuers under Rule 
15c2-11 would have a more robust basis for believing that the issuer 
information is accurate. The availability of more current information 
about Tier 2 issuers would likely improve the pricing efficiency and 
reduce the likelihood of fraud in the OTC market for their securities. 
We expect this effect to be much stronger for issuers that do not 
currently provide voluntary disclosure to the OTC market. The overall 
effect of the required disclosure would also depend on what fraction of 
Regulation A securities eventually trade on the OTC market and on how 
many current OTC participants decide to make offerings under Regulation 
A.
---------------------------------------------------------------------------

    \648\ Rule 15c2-11(a)(5) currently provides that issuer 
information must be made available upon request to any person 
expressing an interest in a transaction in that issuer's security 
with the broker-dealer. This requirement may have little practical 
effect because only the first broker-dealer to publish quotations 
must have the information, and an investor might find it difficult 
to identify that broker-dealer. In fact, that broker-dealer may no 
longer be publishing quotations.
---------------------------------------------------------------------------

    A particular set of OTC-listed companies--those that cease 
reporting and, if necessary, delist from national securities 
exchanges--might find the proposed rules attractive for raising 
capital. As mentioned above, the proposed Tier 2 disclosure 
requirements are less stringent than those applicable to reporting 
companies. Companies that delist from national exchanges might be able 
to use Regulation A offerings to raise capital as well as maintain 
liquid securities in the OTC market. The potential effect of the 
proposed rules on companies that delist from national securities 
exchanges is difficult to predict. Companies that would like to 
maintain liquidity for their securities trading in the OTC market and 
face a less burdensome disclosure regime than entailed by Exchange Act 
registration might find Regulation A useful. On the other hand, 
companies that delist from national securities exchanges because they 
want to minimize disclosure and

[[Page 3993]]

cease reporting might find the proposed disclosure requirements under 
Regulation A too burdensome, and might prefer other offering methods to 
raise capital (e.g., Regulation D).
    The potential future use of Regulation A could also depend on the 
willingness of financial intermediaries such as placement agents or 
underwriters to participate in offerings. For example, in registered 
offerings, underwriters are frequently used to identify potential 
investors and are primarily responsible for facilitating a successful 
distribution of the offered securities. Some commenters claim that 
underwriters are generally unwilling to participate in small offerings 
because the commissions are not sufficient to warrant their 
involvement.\649\ If the services of financial intermediaries continue 
to be limited for small offerings under Regulation A as proposed to be 
amended, it could be difficult for Regulation A issuers to place all 
offered securities. As noted in the GAO report,\650\ increasing the 
allowed maximum Regulation A offering amount may make placement agents 
more inclined to participate in offerings because they would be able to 
collect more compensation from larger offerings. Furthermore, 
underwriter costs for offerings under Regulation A as proposed to be 
amended may be lower than for registered public offerings because 
underwriters would not take on liability under Section 11 of the 
Securities Act (although they could be liable as sellers under Section 
12(a)(2)). Finally, if the requirements for qualification of Regulation 
A offerings are substantially lighter than the requirements for 
registered offerings, an underwriting market could develop to provide 
expedient Regulation A underwriting services.
---------------------------------------------------------------------------

    \649\ See, e.g., Karr Tuttle Letter.
    \650\ See GAO-12-839, ``Factors that May Affect Trends in 
Regulation A Offerings'', (July 3, 2012).
---------------------------------------------------------------------------

C. Request for Comment

    Throughout this release, we have discussed the anticipated costs 
and benefits of the proposed rules and their potential impact on 
efficiency, competition and capital formation. We request and encourage 
any interested person to submit comments regarding the proposed rules, 
our analysis of the potential effects of the rules and other matters 
that may have an effect on the proposed rules. We request comment from 
the point of view of issuers, investors and other market participants. 
With regard to any comments, we note that such comments are of 
particular assistance to us if accompanied by supporting data and 
analysis of the issues addressed in those comments. We also are 
interested in comments on the qualitative benefits and costs we have 
identified and any benefits and costs we may have overlooked. We urge 
commenters to be as specific as possible.
Request for Comment
    128. What types of companies (e.g., in terms of size, industry, 
age, etc.) would most likely rely on the amended Regulation A 
exemption? Would Exchange Act reporting companies, which are ineligible 
to rely on proposed Regulation A, consider raising additional capital 
through Regulation A by first terminating or suspending their reporting 
requirements?
    129. Are investors in private companies likely to use the amended 
Regulation A exemption to exit their investments? Would eliminating 
current Rule 251(b), which prohibits resales by affiliated parties 
unless the issuer has had operating income in at least one of the last 
two years, affect fraud in this market?
    130. How likely is the amended Regulation A exemption to attract 
companies that are considering a traditional IPO? What types of 
companies (e.g., in terms of size, industry, age, etc.) would prefer a 
Regulation A offering to a traditional IPO? How would the cost of a 
traditional IPO compare to the cost of a Regulation A offering? Could a 
Regulation A offering serve as a stepping stone for a future 
traditional IPO or a national securities exchange listing?
    131. How likely is the amended Regulation A exemption to attract 
companies that are considering offerings relying on Rule 506(b) or Rule 
506(c) of Regulation D? What would be the costs and benefits from 
relying on the amended Regulation A exemption versus Rule 506(b) or 
Rule 506(c) of Regulation D? Please provide estimates, where possible.
    132. What is the economic effect of the proposed investment 
limitation in Tier 2 Regulation A offerings? What types of issuers and 
investors are most likely to be affected by this restriction? Will this 
restriction enhance investor protection? What would be the economic 
effect of imposing a similar restriction on Tier 1 Regulation A 
offerings?
    133. Would the amended Regulation A exemption attract 
intermediaries (e.g., broker-dealers or underwriters) to the market for 
Regulation A offerings? How would the presence of intermediaries change 
the cost structure for Regulation A issuers? Would the amended 
Regulation A exemption make it economically feasible for intermediaries 
to serve as market makers and provide research and analyst coverage? 
Would the presence of intermediaries likely increase the chances that a 
wider variety of investors will participate in Regulation A offerings?
    134. Do the proposed disclosure requirements help ensure that 
investors have a reasonable understanding of the risks and costs of 
investing in Regulation A securities? If not, what additional 
requirements would further mitigate the associated risks? How would the 
costs and benefits of the requirements compare to the costs and 
benefits of the disclosure that currently exists for securities offered 
under the current Regulation A requirements? How would the costs and 
benefits compare to other exempt offering methods? Please provide 
estimates, where possible.
    135. How would the proposed preemption of state blue sky laws for 
offerings made to qualified purchasers, as we propose to define that 
term, affect the costs and benefits of Tier 1 and Tier 2 Regulation A 
offerings? Please provide estimates, where possible. Would the proposed 
blue sky law preemption affect fraud and investor protection and 
capital formation in this market?
    136. The Commission is interested in receiving comments, views, 
estimates and data on all aspects of the proposal and the following:
     Expected size of the Regulation A market (e.g., number of 
offerings, number of issuers, size of offerings, number of investors, 
etc., as well as information comparing these estimates to the current 
baseline);
     Overall economic impact of the proposed rules; and
     Any other aspect of the economic analysis.
    137. What would be the economic impact of the policy alternatives 
discussed in the proposed rules?

V. Paperwork Reduction Act

A. Background

    Certain provisions of the proposed rules contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'').\651\ We are submitting the proposal to 
the Office of Management and Budget (``OMB'') for review in accordance 
with the PRA.\652\ The titles for the collections of information are:
---------------------------------------------------------------------------

    \651\ 44 U.S.C. 3501 et seq.
    \652\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.

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[[Page 3994]]

    (1) ``Regulation A (Form 1-A and Form 2-A)'' (OMB Control Number 
3235-0286);
    (2) ``Form 1-K'' (a proposed new collection of information);
    (3) ``Form 1-SA'' (a proposed new collection of information);
    (4) ``Form 1-U'' (a proposed new collection of information);
    (5) ``Form 1-Z'' (a proposed new collection of information);
    (6) ``Form ID'' (OMB Control Number 3235-0328).
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a 
currently valid OMB control number. We are applying for OMB control 
numbers for the proposed new collections of information in accordance 
with 44 U.S.C. 3507(j) and 5 CFR 1320.13, and OMB has not yet assigned 
a control number to each new collection. Responses to these new 
collections of information would be mandatory for issuers raising 
capital under Regulation A.

B. Estimate of Issuers

    The number, type and size of the issuers that would participate in 
offerings of securities under Regulation A, as proposed to be amended, 
is uncertain, but data regarding current market practices may help 
identify the number and characteristics of potential issuers that may 
offer and sell securities in reliance on the proposed rules.\653\ We 
estimate that there are currently approximately 22 Regulation A filings 
by issuers per year.\654\ While it is not possible to predict the 
number of filings by issuers relating to offerings made in reliance on 
the proposed amendments to Regulation A, for purposes of this analysis, 
we estimate that the number would be 250 offerings per year. We base 
this estimate on (i) the current approximate number of issuers that, on 
average in recent years, filed a Form 1-A to qualify a Regulation A 
offering of securities under the existing rules, plus (ii) 95 percent 
of the estimated number of registered offering of securities of up to 
$50 million,\655\ plus (iii) an additional four offerings that either 
would not otherwise occur or would have been conducted in reliance on 
another exemption from Securities Act registration, such as Regulation 
D.\656\ We believe issuers that have either previously relied on 
Regulation A or have offered securities in amounts up to the revised 
offering ceiling of $50 million in a twelve-month period would be 
similar to the potential issuers that may participate in offerings of 
securities under Regulation A as proposed to be amended.
---------------------------------------------------------------------------

    \653\ See Section I.C. above for a discussion of the data 
regarding current market practices.
    \654\ From 2009 through 2012, there were 87 Form 1-As filed with 
the Commission, and 19 qualified offering statements during this 
same period. See also figures for current use of Regulation A in 
Section I.C. above.
    \655\ See figures and graphs for registered offerings cited in 
Section IV. above (citing approximately 236 registered initial 
public offerings or follow-on offerings of up to $50 million in 
calendar year 2012).
    \656\ See figures and graphs for registered and exempt offerings 
under Regulation D cited in Section IV.A.1.a(2). above (citing 
approximately 12,000 issuances of up to $50 million in reliance on 
Regulation D in calendar year 2012).
---------------------------------------------------------------------------

C. Estimate of Issuer Burdens

1. Regulation A (Form 1-A and Form 2-A)
    Currently, Regulation A requires issuers to file a Form 1-A: 
Offering Statement and a Form 2-A: Report of Sales and Uses of Proceeds 
with the Commission. Regulation A has 1.00 administrative burden hour 
associated with it, while current Form 1-A takes approximately 608.00 
hours to prepare and Form 2-A takes approximately 12.00 hours to 
prepare.\657\ We do not anticipate that the 1.00 administrative burden 
hour associated with Regulation A would change as a result of the 
proposal. As discussed more fully below, we believe the burden hours 
associated with Form 1-A would change, while Form 2-A and the 
associated burden hours would be eliminated as a result of today's 
proposal.\658\
---------------------------------------------------------------------------

    \657\ See Form 1-A at 1; Form 2-A at 1.
    \658\ See discussion in Section II.E.1. above.
---------------------------------------------------------------------------

    Under the proposed rules, an issuer conducting a transaction in 
reliance on Regulation A would be able to conduct either a Tier 1 
offering or a Tier 2 offering.\659\ In either case, a Regulation A 
issuer would continue to be required to file with the Commission 
specified disclosures on a Form 1-A: Offering Statement.\660\ An issuer 
also would file amendments to Form 1-A to reflect comments from 
Commission staff and to disclose material changes in the disclosure 
previously provided to the Commission or investors.\661\ In light of 
the proposed electronic filing requirements for Regulation A offering 
materials discussed above,\662\ issuers would no longer be required to 
file a manually signed copy of the Form 1-A with the Commission.\663\ 
Issuers would, however, be required to manually sign a copy of the 
offering statement before or at the time of non-public submission or 
filing that would have to be retained by the issuer for a period of 
five years and produced to the Commission, upon request.\664\ As 
issuers are currently required to manually sign the Form 1-A and file 
it with the Commission, we do not anticipate the proposed Form 1-A 
retention requirement would alter an issuer's compliance burden. As 
proposed, Form 1-A is similar to existing Form 1-A. In some instances, 
Form 1-A, as proposed, would contain fewer disclosure items than 
existing Form 1-A (e.g., Part I (Notification) of Form 1-A would not 
require disclosure of ``Affiliate Sales''; Part II (Offering Circular) 
of Form 1-A would require a description of the issuer's business for a 
period of three years, rather than five years). Part II of Form 1-A 
would no longer permit disclosure in reliance on the Model A disclosure 
format, but direct issuers to follow the provisions of Model B (renamed 
``Offering Circular'') or Part I of Form S-1.\665\ In other instances, 
Form 1-A would contain more disclosure items than existing Form 1-A 
(e.g., Part I of Form 1-A would require additional disclosure of 
certain summary information regarding the issuer and the offering; Part 
II of Form 1-A would require a more detailed management discussion and 
analysis of the issuer's liquidity and capital resources and results of 
operations). Form 1-A would require disclosure similar to that required 
in a Form S-1 registration statement for registered offerings under the 
Securities Act, but it would require fewer disclosure items (e.g., it 
would require less disclosure about the compensation of officers and 
directors, and less detailed management discussion and analysis of the 
issuer's liquidity and capital resources and results of operations) 
and, under certain circumstances, not require issuers to file audited 
financial statements.\666\
---------------------------------------------------------------------------

    \659\ See discussion in Section II.B.3. above.
    \660\ See 17 CFR 239.91 (Form 1-A) (OMB Control Number 3235-
0286) and proposed Rule 252.
    \661\ See proposed Rule 252(h).
    \662\ See discussion in Section II.C.1. above.
    \663\ See discussion in Section II.C.3.d. above.
    \664\ See Instruction 2. to Signatures in Form 1-A.
    \665\ See discussion at Section II.C.3.b. above.
    \666\ See discussion in Section II.C.3.b. above.
---------------------------------------------------------------------------

    We expect that issuers relying on proposed Regulation A for Tier 1 
offerings of up to $5 million in a twelve-month period would largely be 
at a similar stage of development to issuers relying on existing 
Regulation A and would therefore not experience an increased compliance 
burden with proposed Form 1-A. Given the increased annual offering 
threshold of $50 million, however, we expect that issuers conducting 
Tier 2 offerings pursuant to proposed Regulation A may be at a more 
advanced stage of

[[Page 3995]]

development than issuers offering securities at a lower threshold. In 
such cases, the complexity of the required disclosure and, in turn, the 
burden of compliance with the requirements of proposed Form 1-A may be 
greater for some issuers than for issuers relying on existing Form 1-
A.\667\ We estimate that the total burden to prepare and file proposed 
Form 1-A, including any amendments to the form, would increase on 
average across all issuers in comparison to existing Form 1-A to 
approximately 750.00 hours.\668\ We believe that the burden hour 
response of proposed Form 1-A would be greater than the current 
estimated 608.00 burden hours per response, but would not be as great 
as the current estimated 972.32 burden hours per response for Form S-1. 
We estimate that the issuer would internally carry 75 percent of the 
burden of preparation and that outside professionals \669\ retained by 
the issuer at an average cost of $400 per hour would carry 25 
percent.\670\
---------------------------------------------------------------------------

    \667\ As noted above, we estimate the burden per response for 
preparing existing Form 1-A to be 608.00 hours. See Form 1-A at 1.
    \668\ By comparison, we estimate the burden per response for 
preparing Form S-1 to be 972.32 hours. See Form S-1, at 1.
    \669\ For example, an issuer may address certain disclosure 
requirements internally, but retain an outside professional to 
assist in the preparation of the financial statements.
    \670\ The costs of retaining outside professionals may vary 
depending on the nature of the professional services. For purposes 
of this PRA analysis, however, we estimate that such costs would be 
an average of $400/hour, which is consistent with the rate we 
typically estimate for outside legal services used in connection 
with public company reporting.
---------------------------------------------------------------------------

    We estimate that compliance with the requirements of a Form 1-A 
provided in connection with transactions made in reliance on proposed 
Regulation A would require 187,500 burden hours (250 offering 
statements x 750.00 hours/offering statement) in aggregate each year, 
which corresponds to 140,625 aggregated hours carried by the issuer 
internally (250 offering statements x 750.00 hours/offering statement x 
0.75) and aggregated costs of $18,750,000 (250 offering statements x 
750.00 hours/offering statement x 0.25 x $400) for the services of 
outside professionals. These estimates include the time and cost of 
collecting the information, preparing and reviewing disclosure, filing 
documents and retaining records. In deriving our estimates, we 
recognize that the burdens likely would vary among individual issuers 
based on a number of factors, including the stage of development of the 
business, the amount of capital an issuer seeks to raise and the number 
of years since inception of the business. We believe that some issuers 
would experience costs in excess of the average and some issuers may 
experience less than the average costs.
2. Form 1-K: Annual Report
    Under the proposed rules, any issuer that conducts a Tier 2 
offering in reliance on proposed Regulation A would be required to file 
an annual report with the Commission on Form 1-K: Annual Report.\671\ A 
manually-signed copy of the Form 1-K would have to be executed by the 
issuer and related signatories before or at the time of electronic 
filing, retained by the issuer for a period of five years and, if 
requested, produced to Commission.\672\ We do not anticipate that the 
proposed requirement to retain a manually-signed copy of the Form 1-K 
would affect an issuer's compliance burden. We believe the compliance 
burden on disclosure provided in Form 1-K would be less than the 
compliance burden associated with reporting required under Exchange Act 
Section 13 or 15(d). We also believe the burden would be more analogous 
to the compliance burden attendant to proposed Form 1-A. Unlike the 
disclosure required in Form 1-A, however, offering-specific disclosure 
in Form 1-K would not be required. Additionally, under certain 
circumstances, an issuer would also be required to disclose information 
similar to the information previously required of issuers on Form 2-
A.\673\ Unlike the disclosure previously required on Form 2-A, however, 
an issuer would not be required to provide disclosure about the use of 
proceeds. We estimate that the burden to prepare and file a Form 1-K 
would be less than that required to prepare and file a Form 1-A. We 
estimate that compliance with proposed Form 1-K would result in a 
burden of 600.00 hours per response.\674\ We further estimate that 75 
percent of the burden of preparation would be carried by the issuer 
internally and that 25 percent would be carried by outside 
professionals \675\ retained by the issuer at an average cost of $400 
per hour.\676\ While we do not know the exact number of issuers that 
will seek to qualify offerings in excess of $5 million in a twelve-
month period in reliance on proposed Regulation A, we estimate 75 
percent of all issuers filing a Form 1-A (or 188 issuers, 250 issuers x 
.75) will enter the proposed ongoing reporting regime and therefore be 
required to file proposed Form 1-K.
---------------------------------------------------------------------------

    \671\ See proposed Rule 257(b)(1).
    \672\ See General Instruction C. to proposed Form 1-K and 
related discussion in Section II.E.1.a. above.
    \673\ See discussion in Section II.E.1.a. above.
    \674\ We estimate that the burden of preparing the information 
required by Form 1-K would be approximately 3/4 of the burden for 
the Form 1-A due to the lack of offering-specific disclosure and an 
issuer's ability to update previously-provided disclosure.
    \675\ See fn. 669 above.
    \676\ See fn. 670 above.
---------------------------------------------------------------------------

    We estimate that compliance with the requirements of Form 1-K for 
issuers with an ongoing reporting obligation under proposed Regulation 
A would require 112,800 burden hours (188 issuers x 600.00 hours/
issuer) in the aggregate each year, which corresponds to 84,600 hours 
carried by the issuer internally (188 issuers x 600.00 hours/issuer x 
0.75) and costs of $11,280,000 (188 issuers x 600.00 hours/issuer x 
0.25 x $400) for the services of outside professionals.
3. Form 1-SA: Semiannual Report
    Under the proposed rules, any issuer that conducts a Tier 2 
offering in reliance on proposed Regulation A would be required to file 
a semiannual report with the Commission on Form 1-SA: Semiannual 
Report.\677\ A manually-signed copy of the Form 1-SA would have to be 
executed by the issuer and related signatories before or at the time of 
electronic filing, retained by the issuer for a period of five years 
and, if requested, produced to Commission.\678\ We do not anticipate 
that the proposed requirement to retain a manually-signed copy of the 
Form 1-SA would affect an issuer's compliance burden. Issuers would be 
required to provide semiannual updates on proposed Form 1-SA, which, 
much like a Form 10-Q,\679\ would consist primarily of financial 
statements and MD&A. Unlike Form 10-Q, Form 1-SA would not require 
disclosure regarding quantitative and qualitative market risk or 
controls and procedures.\680\ We estimate, however, that on balance the 
reduction in burden attributable to eliminating these two items in Form 
1-SA would be offset by the increased burden associated with requiring 
financial statement disclosure covering six months, rather than three 
months. We therefore believe the per response compliance burden of Form 
1-SA would be similar to the compliance burden for issuers filing a 
Form 10-Q under the Exchange Act.\681\ Therefore,

[[Page 3996]]

for purposes of this PRA, we estimate that the burden to prepare and 
file a Form 1-SA would equal the burden to prepare and file Form 10-Q, 
which we have previously estimated as 187.43 hours per response.\682\ 
Unlike proposed Form 1-K, Form 1-SA does not require the provision of 
audited financial statements. We therefore believe, in comparison to 
Form 1-K, issuers filing a Form 1-SA will be able to handle more of the 
required disclosures internally. Accordingly, we estimate that 85 
percent of the burden of preparation would be carried by the issuer 
internally and that 15 percent would be carried by outside 
professionals retained by the issuer at an average cost of $400 per 
hour.\683\
---------------------------------------------------------------------------

    \677\ See proposed Rule 257(b)(3).
    \678\ See General Instruction C. to proposed Form 1-SA and 
related discussion in Section II.E.1.b. above.
    \679\ 17 CFR 249.308a.
    \680\ See discussion in Section II.E.1.b. above.
    \681\ Issuers would, however, have to file Form 1-SA, a 
semiannual report, less frequently than Form 10-Q, a quarterly 
report.
    \682\ See Form 10-Q, at 1.
    \683\ See fn. 670 above.
---------------------------------------------------------------------------

    We estimate that compliance with the requirements of Form 1-SA for 
issuers with an ongoing reporting obligation under proposed Regulation 
A would require 23,428.75 burden hours (188 issuers x 187.43 hours/
issuer) in the aggregate each year, which corresponds to 19,914.44 
hours carried by the issuer internally (188 issuers x 187.43 hours/
issuer x 0.85) and costs of $1,405,725 (188 issuers x 187.43 hours/
issuer x 0.15 x $400) for the services of outside professionals.
4. Form 1-U: Current Reporting
    Under the proposed rules, any issuer that conducts a Tier 2 
offering in reliance on proposed Regulation A would be required to 
promptly file current reports on proposed Form 1-U with the 
Commission.\684\ A manually-signed copy of the Form 1-U would have to 
be executed by the issuer and related signatories before or at the time 
of electronic filing, retained by the issuer for a period of five years 
and, if requested, produced to Commission.\685\ We do not anticipate 
that the proposed requirement to retain a manually-signed copy of the 
Form 1-U would affect an issuer's compliance burden. Issuers would be 
required to file such reports in the event they experience certain 
corporate events, much the same way as issuers subject to an ongoing 
reporting obligation under the Exchange Act file current reports on 
Form 8-K.\686\ The requirement to file a Form 1-U, however, would be 
triggered by significantly fewer corporate events than those that 
trigger a reporting requirement on a Form 8-K, and, as proposed, the 
form itself would be slightly less burdensome for issuers to fill 
out.\687\ Thus, the frequency of filing the required disclosure and the 
burden to prepare and file a Form 1-U would be considerably less than 
for Form 8-K. We estimate that the burden to prepare and file each 
current report would be 5.00 hours. While we do not know for certain 
how often an issuer would experience a corporate event that would 
trigger a current report filing on Form 1-U, we estimate that many 
issuers may not experience a corporate event that triggers reporting, 
while others may experience multiple events that trigger reporting. On 
average, we estimate that an issuer would be required to file one 
current report annually.\688\ Therefore, we estimate that an issuer's 
compliance with proposed Form 1-U would result in an annual aggregate 
burden of 5.00 hours (1.00 current report annually x 5.00 hours per 
current report) per issuer.
---------------------------------------------------------------------------

    \684\ See proposed Rule 257(b)(4).
    \685\ See General Instruction C. to proposed Form 1-U and 
related discussion in Section II.E.1.c. above.
    \686\ We estimate the burden per response for preparing a Form 
8-K to be 5.71 hours. See Form 8-K, at 1.
    \687\ See discussion at Section II.E.1.c. above.
    \688\ We have previously estimated that on average issuers file 
one current report on Form 8-K annually. Although we believe that 
the frequency of filing a Form 1-U would be considerably less than a 
Form 8-K, to be conservative, we are estimating that each issuer 
would be required to file one Form 1-U per year.
---------------------------------------------------------------------------

    As with Form 1-SA, we estimate that 85 percent of the burden of 
preparation would be carried by the issuer internally and that 15 
percent would be carried by outside professionals retained by the 
issuer at an average cost of $400 per hour.\689\ We estimate that 
compliance with the requirements of Form 1-U would require 940 burden 
hours (188 issuers x 1 current report annually x 5.00 hours per current 
report) in aggregate each year, which corresponds to 799 hours carried 
by the issuer internally (188 issuers x 5.00 hours/issuer/year x 0.85) 
and costs of $56,400 (188 issuers x 5.00 hours/issuer/year x 0.15 x 
$400) for the services of outside professionals.
---------------------------------------------------------------------------

    \689\ See fn. 670 above.
---------------------------------------------------------------------------

5. Form 1-Z: Exit Report
    Under the proposed rules, all Regulation A issuers would be 
required to file a notice under cover of Form 1-Z: Exit Report. Issuers 
conducting Tier 1 offerings would be required to file Part I of Form 1-
Z that would disclose information similar to the information previously 
required of issuers on Form 2-A.\690\ Issuers conducting Tier 2 
offerings would also be required to disclose the same information as 
issuers conducting Tier 1 offerings in Part I of Form 1-Z, unless 
previously reported by the issuer on Form 1-K. Issuers conducting Tier 
2 offerings would also be required to fill out Part II of Form 1-Z in 
order to notify investors and the Commission that it will no longer 
file and provide annual reports pursuant to the requirements of 
Regulation A.\691\ In Tier 2 offerings, an issuers' obligations to file 
ongoing reports could be terminated at any time after completion of 
reporting for the fiscal year in which the offering statement was 
qualified,\692\ if the securities of each class to which the offering 
statement relates are held of record by fewer than 300 persons and 
offers and sales made in reliance on a qualified offering statement are 
not ongoing. A manually-signed copy of the Form 1-Z would have to be 
executed by the issuer and related signatories before or at the time of 
electronic filing, retained by the issuer for a period of five years 
and, if requested, produced to Commission.\693\ We do not anticipate 
that the proposed requirement to retain a manually-signed copy of the 
Form 1-Z would affect an issuer's compliance burden. We estimate that 
50 percent of issuers with an ongoing reporting obligation under 
proposed Regulation A (or 94 issuers, 188 issuers with an ongoing 
reporting obligation x .50 of issuers filing a Form 1-Z) would file a 
Form 1-Z in the second fiscal year after qualification of the offering 
statement. Although we believe that the vast majority of issuers 
subject to ongoing reporting under Regulation A would qualify for 
termination in the second fiscal year after qualification, we believe 
that only half or 50 percent of such issuers would actually choose to 
terminate their reporting obligations. An issuer may have many reasons, 
such as a desire to facilitate continued quotations in the over-the-
counter (``OTC'') markets pursuant to proposed revisions to Exchange 
Act Rule 15c2-11,\694\ to continue reporting even though entitled to 
terminate reporting.
---------------------------------------------------------------------------

    \690\ See discussion in Section II.E.1.a. above.
    \691\ See proposed Rule 257(d).
    \692\ See proposed Rule 252(h)(2).
    \693\ See Instruction to proposed Form 1-Z and related 
discussion in Section II.E.4. above.
    \694\ See discussion in Section II.E.2. above.
---------------------------------------------------------------------------

    The Form 1-Z would be similar to the Form 15 that issuers file to 
provide notice of termination of the registration of a class of 
securities under Exchange Act Section 12(g) or to provide notice of the 
suspension of the duty to file reports required by Exchange Act 
Sections 13(a) or 15(d).\695\ Therefore, we estimate that compliance 
with the proposed Form 1-Z would result in a similar burden as 
compliance with Form 15, a burden of 1.50 hours per response. We 
estimate

[[Page 3997]]

that compliance with proposed Form 1-Z would result in a burden of 141 
hours (94 issuers filing Form 1-Z x 1.50 hours/issuer) in the aggregate 
during the second fiscal year after qualification of the offering 
statement for issuers terminating their reporting obligations.
---------------------------------------------------------------------------

    \695\ We currently estimate the burden per response for 
preparing a Form 15 to be 1.50 hours. See Form 15 at 1.
---------------------------------------------------------------------------

6. Form ID Filings
    Under the proposed rules, an issuer would be required to file 
specified disclosures with the Commission on EDGAR.\696\ We anticipate 
that many issuers relying on proposed Regulation A for the first time 
would not have previously filed an electronic submission with the 
Commission and so would need to file a Form ID. Form ID is the 
application form for access codes to permit filing on EDGAR. The 
proposed rules would not change the form itself, but we anticipate that 
the number of Form ID filings would increase due to an increase in 
issuers relying on proposed Regulation A. For purposes of this PRA 
discussion, we estimate that 75 percent of the issuers who would seek 
to offer and sell securities in reliance on proposed Regulation A would 
not have previously filed an electronic submission with the Commission 
and would, therefore, be required to file a Form ID. As noted above, we 
estimate that approximately 250 issuers per year would seek to offer 
and sell securities in reliance on proposed Regulation A, which would 
correspond to approximately 188 additional Form ID filings. As a 
result, we estimate the additional annual burden would be approximately 
28.20 hours (188 filings x 0.15 hours/filing).\697\
---------------------------------------------------------------------------

    \696\ See proposed Rules 252 and 257.
    \697\ We currently estimate the burden associated with Form ID 
is 0.15 hours per response. See Form ID at 1.
---------------------------------------------------------------------------

D. Collections of Information Are Mandatory

    The collections of information required under proposed Rules 251 
through 263 would be mandatory for all issuers seeking to rely on the 
Regulation A exemption. Responses on Form 1-A, Form 1-K, Form 1-SA, 
Form 1-U and Form 1-Z would not be confidential, although issuers may 
request confidential treatment for certain materials submitted in 
conjunction with the filings.\698\ It is anticipated that most of this 
material would be made public when the offering is qualified. A Form 1-
A that is submitted by an issuer with a confidential treatment request 
and later abandoned before being publicly filed with the Commission and 
responses on Form ID would, however, remain non-public, absent a 
request for such information under the Freedom of Information Act.\699\ 
The hours and costs associated with preparing and filing forms and 
retaining records constitute reporting and cost burdens imposed by the 
collection of information requirements.
---------------------------------------------------------------------------

    \698\ See Commission Rule 83, 17 CFR 200.83.
    \699\ 5 U.S.C. 552. The Commission's regulations that implement 
the Freedom of Information Act are at 17 CFR 200.80 et seq.
---------------------------------------------------------------------------

E. Request for Comment

    The Commission invites comment on all of the above estimates. 
Pursuant to 44 U.S.C. 3506(c)(2)(A), the Commission requests comment in 
order to: (1) Evaluate whether the proposed collections of information 
are necessary for the proper performance of our functions, including 
whether the information would have practical utility; (2) evaluate the 
accuracy of our estimate of the burden of the proposed collections of 
information; (3) determine whether there are ways to enhance the 
quality, utility and clarity of the information to be collected; and 
(4) evaluate whether there are ways to minimize the burden of the 
proposed collections of information on those who respond, including 
through the use of automated collection techniques or other forms of 
information technology.
    Persons submitting comments on the proposed collection of 
information requirements should direct their comments to the Office of 
Management and Budget, Attention: Desk Officer for the Securities and 
Exchange Commission, Office of Information and Regulatory Affairs, 
Washington, DC 20503, and should also send a copy of their comments to 
Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 
F Street NE., Washington, DC 20549-1090, with reference to File No. S7-
11-13. Requests for materials submitted to OMB by the Commission, with 
regard to these collections of information, should be in writing, with 
reference to File No. S7-11-13, and they should be submitted to the 
Securities and Exchange Commission, Office of FOIA Services, 100 F 
Street NE., Washington, DC 20549-2736. As OMB is required to make a 
decision concerning the collections of information between 30 and 60 
days after publication, a comment to OMB is best assured of having its 
full effect if OMB receives it within 30 days of publication.

VI. Initial Regulatory Flexibility Act Analysis

    This Initial Regulatory Flexibility Analysis has been prepared in 
accordance with 5 U.S.C. 603. It relates to the following:
     proposed amendments to Rules 251 through 263 of Regulation 
A, Form 1-A, Rule 4a-1 under the Trust Indenture Act, Rule 15c2-11 
under the Exchange Act, and Item 101 of Regulation S-T;
     proposed new Forms 1-K, 1-SA, 1-U, and 1-Z; and
     the proposed rescission of Form 2-A.

A. Reasons for the Proposed Action

    The proposed rule amendments, new forms, and rescission of Form 2-A 
are designed to implement the requirements of Section 3(b)(2) of the 
Securities Act and to make certain conforming changes based on our 
proposed amendments to Regulation A. Section 3(b)(2) directs the 
Commission to adopt rules adding a class of securities exempt from the 
registration requirements of the Securities Act for offerings of up to 
$50 million of securities within a twelve-month period, subject to 
various additional terms and conditions set forth in Section 3(b)(2) or 
as provided for by the Commission as part of the rulemaking process.

B. Objectives

    Our primary objective is to implement Section 401 of the JOBS Act, 
as mandated by Section 3(b)(2), by expanding and updating Regulation A 
in a manner that makes public offerings of up to $50 million less 
costly and more flexible while providing a framework for regulatory 
oversight to protect investors. In so doing, we have endeavored to 
craft a workable revision of Regulation A that would both promote small 
company capital formation and provide for meaningful investor 
protection. We believe that issuers, particularly small businesses, 
benefit from having a wide range of capital-raising strategies 
available to them, and that an expanded and updated Regulation A could 
serve as a valuable option that augments the exemptions more frequently 
relied upon, thereby facilitating capital formation for small 
businesses.

C. Legal Basis

    The amendments are being proposed under the authority set forth in 
Sections 3(b), 19 and 28 of the Securities Act of 1933, as amended, and 
Section 401 of the JOBS Act.\700\
---------------------------------------------------------------------------

    \700\ Public Law 112-106, -401, 126 Stat. 307 (April 5, 2012).
---------------------------------------------------------------------------

D. Small Entities Subject to the Proposed Rules

    For purposes of the Regulatory Flexibility Act, under our rules, an

[[Page 3998]]

issuer (other than an investment company) is a ``small business'' or 
``small organization'' if it has total assets of $5 million or less as 
of the end of its most recent fiscal year and is engaged or proposing 
to engage in an offering of securities which does not exceed $5 
million.\701\
---------------------------------------------------------------------------

    \701\ 17 CFR 230.157. We note that currently this rule refers to 
``the dollar limitation prescribed by Section 3(b) of the Securities 
Act.'' As noted earlier in this release, the JOBS Act amended 
Section 3(b) of the Securities Act. The former Section 3(b) is now 
Section 3(b)(1), and a new Section 3(b)(2) was added. To retain the 
meaning of 17 CFR 230.157, we are proposing a technical correction 
to replace the reference to ``Section 3(b)'' with a reference to 
``Section 3(b)(1).''
---------------------------------------------------------------------------

    While proposed Regulation A would be available for offerings of up 
to $50 million in securities in a twelve-month period, only offerings 
up to $5 million in securities in a twelve-month period would be 
offerings by small entities. It is difficult to predict the number of 
small businesses that would use proposed Regulation A due to the many 
variables created by our proposed amendments. Nevertheless, we believe 
that proposed Regulation A will increase the overall number of 
Regulation A offerings of $5 million or less due to the ability to non-
publicly submit draft offering statements for review by the 
Commission's staff, the expanded use of solicitation of interest 
materials, the ability to electronically file and transmit offering 
statements and offering circulars, the potential for preemption of 
state regulatory review if the issuer elects to conduct a Tier 2 
offering, and other significant changes summarized in Section II.A. 
above.
    Regulation A is currently limited to offerings with an aggregate 
offering price of $5 million or less.\702\ From 2009 through 2012, 87 
issuers filed offering statements and 19 offering statements were 
qualified by the Commission, or an average of approximately 5 qualified 
offering statements per year. Of the 19 offering statements that were 
qualified, 12 included financial statements indicating that the issuer 
had total assets of $5 million or less (as of the most recent balance 
sheet included in such issuer's offering statement at the time of 
qualification), or an average of approximately 3 qualified offering 
statements per year in which the issuer indicated it had total assets 
of $5 million or less. Based on these data, and for the reasons 
discussed above, we believe that at least 3 small businesses will 
conduct offerings under proposed Regulation A per year.
---------------------------------------------------------------------------

    \702\ As explained in Section II.B.3. above, the aggregate 
offering price under existing and proposed Regulation A includes 
prior sales generated from Regulation A offerings that occurred in 
the twelve months preceding the current offering.
---------------------------------------------------------------------------

E. Reporting, Recordkeeping, and Other Compliance Requirements

    As discussed above in Section II.C., the proposed regulation 
includes reporting, recordkeeping and other compliance requirements. In 
particular, the proposed regulation would impose certain reporting 
requirements on issuers offering and selling securities in a 
transaction relying on the exemptions provided by Section 3(b) and 
Regulation A. The proposed rules would require that issuers relying on 
the exemption file with the Commission certain information specified in 
Form 1-A about the issuer and the offering, including the issuer's 
contact information; use of proceeds from the offering; price or method 
for calculating the price of the securities being offered; business and 
business plan; property; financial condition and results of operations; 
directors, officers, significant employees and certain beneficial 
owners; material agreements and contracts; and past securities 
sales.\703\ Such issuers would also be required to provide information 
on the material factors that make an investment in the issuer 
speculative or risky; dilution; the plan of distribution for the 
offering; executive and director compensation; conflicts of interest 
and related party transactions; and financial statements. Similar to 
existing Regulation A, for Tier 1 offerings, Form 1-A would not require 
the financial statements to be audited unless the issuer has already 
had them audited for another purpose.\704\
---------------------------------------------------------------------------

    \703\ See discussion in Section II.C.3. above.
    \704\ The distinction between a Tier 1 offering and Tier 2 
offering are discussed in Section II.B.3. above.
---------------------------------------------------------------------------

    As discussed above in Section II.E., issuers conducting Tier 2 
offerings would also be required to file annual reports on proposed new 
Form 1-K, semiannual updates on proposed new Form 1-SA, current event 
reporting on proposed new Form 1-U, and to provide notice to the 
Commission of the termination of their ongoing reporting obligations on 
proposed new Form 1-Z. A Tier 1 offering would be limited to $5 million 
in a twelve-month period. Issuers in a Regulation A offering that would 
result in exceeding $5 million in a twelve-month period would be 
required to comply with the requirements for Tier 2 offerings, 
including being subject to ongoing reporting.
    An issuer subject to the Tier 2 periodic and current event 
reporting described above would be required to provide information 
annually on Form 1-K, including the issuer's business and business 
plan; conflicts of interest and related party transactions; executive 
and director compensation; financial condition and results of 
operations; and audited financial statements. The semiannual update on 
Form 1-SA would consist primarily of unaudited, interim financial 
statements for the issuer's first two fiscal quarters and information 
regarding the issuer's financial condition and results of operations. 
The current event reporting on Form 1-U would require issuers to 
disclose certain major developments, including changes of control; 
changes in the principal executive officer and principal financial 
officer; fundamental changes in the nature of business; material 
transactions or corporate events; unregistered sales of five percent or 
more of outstanding equity securities; changes in the issuer's 
certifying accountant; and non-reliance on previous financial 
statements.
    Unlike the other ongoing reporting requirements, Form 1-Z would 
only be required for issuers in both Tier 1 and Tier 2 offerings to 
report summary information about a completed or terminated Regulation A 
offering. Issuers conducting Tier 2 offerings would, however, be 
subject to the additional provision in Form 1-Z that relates to the 
voluntary termination of an issuer's continuous reporting obligations 
under Tier 2 and thus its use by small entities would be limited. Also, 
the information that is required in Form 1-Z is minimal.
    Although we estimated that approximately 188 issuers under proposed 
Regulation A would enter the proposed ongoing reporting regime every 
year, we believe that very few small businesses would do so. A small 
business under our rules would only be required to file ongoing reports 
under Regulation A if a Regulation A offering would result in exceeding 
the Tier 1 annual offering limitation of $5 million in a twelve-month 
period.

F. Duplicative, Overlapping or Conflicting Federal Rules

    We believe that there are no federal rules that conflict with or 
duplicate the proposed rules.

G. Significant Alternatives

    The Regulatory Flexibility Act directs us to consider significant 
alternatives that would accomplish the stated objective of our 
proposals, while minimizing any significant adverse impact on small 
entities. In connection with the proposed amendments and

[[Page 3999]]

rules, we considered the following alternatives: (1) The establishment 
of differing compliance or reporting requirements or timetables that 
take into account the resources available to small entities; (2) the 
clarification, consolidation or simplification of compliance and 
reporting requirements under the rule for small entities; (3) the use 
of performance rather than design standards; and (4) an exemption from 
coverage of the rules, or any parts of the rules, for small entities.
    We considered whether it is necessary or appropriate to establish 
different compliance or reporting requirements, timetables, or to 
clarify, consolidate, or simplify compliance and reporting requirements 
under the proposed rules for small entities. With respect to using 
performance rather than design standards, we used performance standards 
to the extent appropriate under the statute. For example, issuers have 
the flexibility to customize the presentation of certain disclosures in 
their offering statements.\705\ We also considered whether there should 
be an exemption from coverage of the rules, or any parts of the rule 
for small entities. As discussed above, we do propose different 
compliance reporting requirements for issuers of less than $5 million 
that conduct an offering under Tier 1. For example, we are not 
proposing to subject entities likely to be small entities to ongoing 
reporting requirements and the requirement to provide audited financial 
statements. We also considered providing additional reductions in the 
disclosures required by Form 1-A for issuers of less than $5 million, 
but we believe that different compliance requirements for Form 1-A 
users may lead to investor confusion or reduced investor confidence in 
Regulation A offerings, especially considering that the disclosure 
requirements are already less than what is required by Form S-1 for 
registered offerings. Further, we anticipate that the burden for 
filling out a Form 1-A should be less for companies at an earlier stage 
of development and with less extensive operations that are likely to be 
small entities.\706\ For these reasons, we believe that small entities 
should be covered by the proposed rules to the extent specified above. 
We believe that the proposed rules should have limited impact on small 
entities and we are not proposing to establish different compliance 
requirements for small entities other than what we have proposed. We 
do, however, seek comment on alternatives that may reduce any potential 
adverse impact on small entities but accomplish similar objectives.
---------------------------------------------------------------------------

    \705\ See Section II.C. above.
    \706\ See discussion in Section V.C.1. above.
---------------------------------------------------------------------------

H. Request for Comment

    We encourage comments with respect to any aspect of this initial 
regulatory flexibility analysis. In particular, we request comments 
regarding:
     The number of small entities that may be affected by the 
proposals;
     The existence or nature of the potential impact of the 
proposals on small entities discussed in the analysis; and
     How to quantify the impact of the proposed rules.
    We request members of the public to submit comments and ask them to 
describe the nature of any impact on small entities they identify and 
provide empirical data supporting the extent of the impact. Such 
comments will be considered in the preparation of the final regulatory 
flexibility analysis, if the proposals are adopted, and will be placed 
in the same public file as comments on the proposed amendments 
themselves.

VII. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996,\707\ a rule is ``major'' if it has resulted, or is likely 
to result in:
---------------------------------------------------------------------------

    \707\ Public Law 104-121, Title II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million or more;
     A major increase in costs or prices for consumers or 
individual industries; or
     Significant adverse effects on competition, investment or 
innovation.
    We request comment on whether our proposals would be a ``major 
rule'' for purposes of SBREFA. We solicit comment and empirical data 
on:
     The potential effect on the U.S. economy on an annual 
basis;
     Any potential increase in costs or prices for consumers or 
individual industries; and
     Any potential effect on competition, investment or 
innovation.
    We request those submitting comments to provide empirical data and 
other factual support for their views if possible.

VIII. Statutory Basis and Text of Proposed Amendments

    The amendments and forms contained in this document are being 
proposed under the authority set forth in Sections 3(b), 19 and 28 of 
the Securities Act of 1933, as amended, and Section 401 of the JOBS 
Act.\708\
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    \708\ Public Law 112-106, -401, 126 Stat. 307 (April 5, 2012).
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Text of Proposed Amendments

List of Subjects in 17 CFR Part 230, 232, 239, 240 and 260

    Reporting and recordkeeping requirements, Securities.

    In accordance with the foregoing, Title 17, Chapter II of the Code 
of Federal Regulations is proposed to be amended as follows:

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

0
1. The authority citation for part 230 is revised to read in part as 
follows:

    Authority: 15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h, 
77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o-
7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-
30, and 80a-37, and Pub. L. 112-106, Sec.  201(a), Sec.  401, 126 
Stat. 313 (2012), unless otherwise noted.
* * * * *
0
2. Sec.  230.157 paragraph (a) is revised to read as follows:


Sec.  230.157  Small entities under the Securities Act for purposes of 
the Regulatory Flexibility Act.

* * * * *
    (a) When used with reference to an issuer, other than an investment 
company, for purposes of the Securities Act of 1933, means an issuer 
whose total assets on the last day of its most recent fiscal year were 
$5 million or less and that is engaged or proposing to engage in small 
business financing. An issuer is considered to be engaged or proposing 
to engage in small business financing under this section if it is 
conducting or proposes to conduct an offering of securities which does 
not exceed the dollar limitation prescribed by section 3(b)(1) of the 
Securities Act.
* * * * *
    3. Revise the undesignated center heading and Sec. Sec.  230.251 
through 230.263 to read as follows:
* * * * *

Regulation A

Sec.
230.251 Scope of exemption.
230.252 Offering statement.
230.253 Offering circular.
230.254 Preliminary offering circular.
230.255 Solicitation of interest communications.
230.256 Definition of ``qualified purchaser.''
230.257 Periodic and current reporting; exit report.

[[Page 4000]]

230.258 Suspension of the exemption.
230.259 Withdrawal or abandonment of offering statements.
230.260 Insignificant deviations from a term, condition or 
requirement of Regulation A.
230.261 Definitions.
230.262 Disqualification provisions.
230.263 Consent to service of process.
* * * * *
0
4. Sec. Sec.  230.251 through 230.263 are revised to read as follows:


Sec.  230.251  Scope of exemption.

    (a) Tier 1 and Tier 2. A public offer or sale of eligible 
securities, as defined in Rule 261 (Sec.  230.261), that meets the 
following terms and conditions shall be exempt under section 3(b) from 
the registration requirements of the Securities Act of 1933 (the 
``Securities Act'') (15 U.S.C. 77a et seq.):
    (1) Offerings pursuant to Regulation A in which the sum of all cash 
and other consideration to be received for the securities being offered 
(``aggregate offering price'') plus the aggregate offering price for 
all securities sold pursuant to other Regulation A offering statements 
within the twelve months before the start of and during the current 
offering of securities does not exceed $5,000,000, including not more 
than $1,500,000 offered by all selling securityholders (``Tier 1 
offerings''); and
    (2) Offerings pursuant to Regulation A in which such sum does not 
exceed $50,000,000, including not more than $15,000,000 offered by all 
selling securityholders (``Tier 2 offerings'').

    Note: Where a mixture of cash and non-cash consideration is to 
be received, the aggregate offering price must be based on the price 
at which the securities are offered for cash. Any portion of the 
aggregate offering price attributable to cash received in a foreign 
currency must be translated into United States currency at a 
currency exchange rate in effect on or at a reasonable time before 
the date of the sale of the securities. If securities are not 
offered for cash, the aggregate offering price must be based on the 
value of the consideration as established by bona fide sales of that 
consideration made within a reasonable time, or, in the absence of 
sales, on the fair value as determined by an accepted standard. 
Valuations of non-cash consideration must be reasonable at the time 
made. If convertible securities or warrants are being offered, the 
underlying securities must also be qualified and the aggregate 
offering price must include the conversion, exercise, or exchange 
price of such securities.

    (b) Issuer. The issuer of the securities:
    (1) Is an entity organized under the laws of the United States or 
Canada, or any State, Province, Territory or possession thereof, or the 
District of Columbia, with its principal place of business in the 
United States or Canada;
    (2) Is not subject to section 13 or 15(d) of the Securities 
Exchange Act of 1934 (the ``Exchange Act'') (15 U.S.C. 78a et seq.) 
immediately before the offering;
    (3) Is not a development stage company that either has no specific 
business plan or purpose, or has indicated that its business plan is to 
merge with an unidentified company or companies;
    (4) Is not an investment company registered or required to be 
registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et 
seq.) or a business development company as defined in section 2(a)(48) 
of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(48));
    (5) Is not issuing fractional undivided interests in oil or gas 
rights, or a similar interest in other mineral rights;
    (6) Is not, and has not been, subject to any order of the 
Commission entered pursuant to Section 12(j) of the Exchange Act (15 
U.S.C. 78l(j)) within five years before the filing of the offering 
statement;
    (7) Has filed with the Commission all the reports it was required 
to file, if any, pursuant to Rule 257 (Sec.  230.257) during the two 
years before the filing of the offering statement (or for such shorter 
period that the issuer was required to file such reports); and
    (8) Is not disqualified under Rule 262 (Sec.  230.262).
    (c) Integration with other offerings. Offers and sales made in 
reliance on this Regulation A will not be integrated with:
    (1) Prior offers or sales of securities; or
    (2) Subsequent offers or sales of securities that are:
    (i) Registered under the Securities Act, except as provided in Rule 
255(e) (Sec.  230.255(e));
    (ii) Made pursuant to Rule 701 (Sec.  230.701);
    (iii) Made pursuant to an employee benefit plan;
    (iv) Made pursuant to Regulation S (Sec.  230.901-905);
    (v) Made more than six months after the completion of the 
Regulation A offering; or
    (vi) Made in reliance on Regulation Crowdfunding (Sec.  230.XX-XX).

    Note: If these safe harbors do not apply, whether subsequent 
offers and sales of securities will be integrated with the 
Regulation A offering will depend on the particular facts and 
circumstances. See Securities Act Release No. 4552 (November 6, 
1962) [27 FR 11316].

    (d) Offering conditions--(1) Offers.
    (i) Except as allowed by Rule 255 (Sec.  230.255), no offer of 
securities may be made unless a Form 1-A offering statement has been 
filed with the Commission.
    (ii) After the Form 1-A offering statement has been filed, but 
before it is qualified:
    (A) Oral offers may be made;
    (B) Written offers pursuant to Rule 254 (Sec.  230.254) may be 
made; and
    (C) Communications pursuant to Rule 255 (Sec.  230.255) may be 
made.
    (iii) After the Form 1-A offering statement has been qualified, any 
written offers must be accompanied with or preceded by the most recent 
offering circular filed with the Commission for such offering.
    (2) Sales.
    (i) No sale of securities may be made until:
    (A) The Form 1-A offering statement has been qualified;
    (B) A Preliminary Offering Circular is delivered at least 48 hours 
before the sale to any person that before qualification of the offering 
statement had indicated an interest in purchasing securities in the 
offering, including those persons that responded to an issuer's 
solicitation of interest materials; and
    (C) For Tier 2 offerings, no sale may be made to a purchaser if the 
aggregate purchase price paid by such purchaser for securities in the 
offering (including any conversion, exercise, or exchange price for 
securities that are convertible, exercisable or exchangeable for other 
securities) is more than ten percent (10%) of the greater of such 
purchaser's annual income and net worth, based on the representations 
of the purchaser (with annual income and net worth for natural person 
purchasers determined as provided in Rule 501 (Sec.  230.501), provided 
that the issuer does not know, at the time of sale, that any such 
representation is untrue.
    (ii) In a transaction that represents a sale by the issuer or an 
underwriter, or a sale where there is not an exclusion or exemption 
from the requirement to deliver a Final Offering Circular pursuant to 
paragraph 251(d)(2)(iii) of this rule, each underwriter or dealer 
selling in such transaction must deliver to each purchaser from it, not 
later than two business days following the completion of such sale, a 
copy of the Final Offering Circular or, in lieu of such Final Offering 
Circular, a notice to the effect that the sale was made pursuant to a 
qualified offering statement that includes the uniform resource locator 
(``URL'') where the Final Offering Circular, or the offering statement 
of which such Final Offering Circular is part, may be obtained on EDGAR 
and contact information sufficient to notify a purchaser where a

[[Page 4001]]

request for a Final Offering Circular can be sent and received in 
response. If the sale was by the issuer and was not effected by or 
through an underwriter or dealer, the issuer is responsible for sending 
the Final Offering Circular or notice.
    (iii) Sales by a dealer (including an underwriter no longer acting 
in that capacity for the security involved in such transaction) that 
take place within 90 calendar days after the qualification of the 
Regulation A offering statement may be made only if the dealer delivers 
a copy of the current offering circular to the purchaser before or with 
the confirmation of sale, provided that where an offering statement 
relates to offerings to be made from time to time pursuant to paragraph 
(d)(3) of this rule, such 90 calendar day period shall commence on the 
day of the first bona fide offering of securities under such offering 
statement; and
    (3) Continuous or delayed offerings. (i) Continuous or delayed 
offerings may be made under this Regulation A, so long as the offering 
statement pertains only to:
    (A) Securities that are to be offered or sold solely by or on 
behalf of a person or persons other than the issuer, a subsidiary of 
the issuer, or a person of which the issuer is a subsidiary;
    (B) Securities that are to be offered and sold pursuant to a 
dividend or interest reinvestment plan or an employee benefit plan of 
the issuer;
    (C) Securities that are to be issued upon the exercise of 
outstanding options, warrants, or rights;
    (D) Securities that are to be issued upon conversion of other 
outstanding securities;
    (E) Securities that are pledged as collateral; or
    (F) Securities the offering of which will be commenced within two 
calendar days after the qualification date, will be made on a 
continuous basis, may continue for a period in excess of 30 days from 
the date of initial qualification, and will be offered in an amount 
that, at the time the offering statement is qualified, is reasonably 
expected to be offered and sold within two years from the initial 
qualification date. These securities may be offered and sold only if 
not more than three years have elapsed since the initial qualification 
date of the offering statement under which they are being offered and 
sold; provided, however, that if a new offering statement has been 
filed pursuant to this paragraph (d)(3)(i)(F), securities covered by 
the prior offering statement may continue to be offered and sold until 
the earlier of the qualification date of the new offering statement or 
180 days after the third anniversary of the initial qualification date 
of the prior offering statement. Before the end of such three-year 
period, an issuer may file a new offering statement covering the 
securities. The new offering statement must include all the information 
that would be required at that time in an offering statement relating 
to all offerings that it covers. Before the qualification date of the 
new offering statement, the issuer may include as part of such new 
offering statement any unsold securities covered by the earlier 
offering statement by identifying on the cover page of the new offering 
circular or the latest amendment the amount of such unsold securities 
being included. The offering of securities on the earlier offering 
statement will be deemed terminated as of the date of qualification of 
the new offering statement. Securities may be sold pursuant this 
paragraph (d)(3)(i)(F) only if the issuer is current in its annual and 
semiannual filings pursuant to Rule 257(b) (Sec.  230.257(b)), at the 
time of such sale.
    (ii) At the market offerings, by or on behalf of the issuer or 
otherwise, are not permitted under this Regulation A. As used in this 
paragraph (d)(3)(ii), the term at the market offering means an offering 
of equity securities into an existing trading market for outstanding 
shares of the same class at other than a fixed price.


Sec.  230.252  Offering statement.

    (a) Documents to be included. The offering statement consists of 
the contents required by Form 1-A (Sec.  239.90 of this chapter) and 
any other material information necessary to make the required 
statements, in light of the circumstances under which they are made, 
not misleading.
    (b) Paper, printing, language and pagination. Except as otherwise 
specified in this rule, the requirements for offering statements are 
the same as those specified in Rule 403 (Sec.  230.403) for 
registration statements under the Act. No fee is payable to the 
Commission upon either the submission or filing of an offering 
statement on Form 1-A, or any amendment to an offering statement.
    (c) Confidential treatment. A request for confidential treatment 
may be made under Rule 406 (Sec.  230.406) for information required to 
be filed, and Rule 83 (Sec.  200.83) for information not required to be 
filed.
    (d) Signatures. The issuer, its principal executive officer, 
principal financial officer, principal accounting officer, and a 
majority of the members of its board of directors or other governing 
body, must sign the offering statement. If a signature is by a person 
on behalf of any other person, evidence of authority to sign must be 
filed, except where an executive officer signs for the issuer.
    (e) How to file. The offering statement must be filed with the 
Commission in electronic format by means of the Commission's Electronic 
Data Gathering, Analysis and Retrieval System (``EDGAR'') in accordance 
with the EDGAR rules set forth in Regulation S-T (17 CFR Part 232). The 
offering statement must be signed in the manner prescribed by Form 1-A.
    (f) Non-public submission. An issuer whose securities have not been 
previously sold pursuant to a qualified offering statement under this 
Regulation A or an effective registration statement under the 
Securities Act may submit under Rule 83 (Sec.  200.83) a draft offering 
statement to the Commission for non-public review by the staff of the 
Commission before public filing, provided that the offering statement 
shall not be qualified less than 21 calendar days after the public 
filing of (1) the initial non-public submission, (2) all non-public 
amendments with the Commission, and (3) all non-public correspondence 
submitted by or on behalf of the issuer to the Commission staff 
regarding such submissions (subject to any separately approved 
confidential treatment request under paragraph (c) of this rule). Draft 
offering statements must be submitted to the Commission in electronic 
format by means of EDGAR in accordance with the EDGAR rules set forth 
in Regulation S-T (17 CFR Part 232).
    (g) Qualification. An offering statement and any amendment thereto 
can be qualified only by order of the Commission.
    (h) Amendments. (1)(i) Amendments to an offering statement must be 
signed and filed in the same manner as the initial filing. The 
amendment must be filed with the Commission in the manner set forth in 
paragraph (e) of this rule. Amendments to an offering statement must be 
filed under cover of Form 1-A and must be numbered consecutively in the 
order in which filed.
    (ii) Every amendment that includes audited financial statements 
must include the consent of the certifying accountant to the use of 
such accountant's certificate in connection with the amended financial 
statements in the offering statement or offering circular and to being 
named as having audited such financial statements.
    (iii) Amendments solely relating to Part III of Form 1-A must 
comply with

[[Page 4002]]

the requirements of paragraph (h)(1)(i) of this rule, except that such 
amendments may be limited to the Part I of Form 1-A, an explanatory 
note, and all of the information required by Part III of Form 1-A.
    (2) Post-qualification amendments must be filed in the following 
circumstances for ongoing offerings:
    (i) At least every 12 months after the qualification date to 
include the financial statements that would be required by Form 1-A as 
of such date; or
    (ii) To reflect any facts or events arising after the qualification 
date of the offering statement (or the most recent post-qualification 
amendment thereof) which, individually or in the aggregate, represent a 
fundamental change in the information set forth in the offering 
statement.


Sec.  230.253  Offering circular.

    (a) Contents. An offering circular must include the information 
required by Form 1-A for offering circulars.
    (b) Notwithstanding paragraph (a) of this section, the offering 
circular may omit information with respect to the public offering 
price, underwriting syndicate (including any material relationships 
between the issuer or selling securityholders and the unnamed 
underwriters, brokers or dealers), underwriting discounts or 
commissions, discounts or commissions to dealers, amount of proceeds, 
conversion rates, call prices and other items dependent upon the 
offering price, delivery dates, and terms of the securities dependent 
upon the offering date; provided, that the following conditions are 
met:
    (1) The securities to be qualified are offered for cash.
    (2) The outside front cover page of the offering circular includes 
a bona fide estimate of the range of the maximum offering price and the 
maximum number of shares or other units of securities to be offered or 
a bona fide estimate of the principal amount of debt securities 
offered, subject to the following conditions:
    (i) The range must not exceed $2 for offerings where the upper end 
of the range is $10 or less and 20% if the upper end of the price range 
is over $10; and
    (ii) The upper end of the range must be used in determining the 
aggregate offering price under Rule 251(a) (Sec.  230.251(a)).
    (3) The offering statement does not relate to securities to be 
offered by competitive bidding.
    (4) The volume of securities (the number of equity securities or 
aggregate principal amount of debt securities) to be offered may not be 
omitted in reliance on this paragraph (b).

    Note: A decrease in the volume of securities offered or a change 
in the bona fide estimate of the offering price range from that 
indicated in the offering circular filed as part of a qualified 
offering statement may be disclosed in the offering circular filed 
with the Commission pursuant to Rule 253(g) (Sec.  230.253(g)), so 
long as the decrease in the volume of securities offered or change 
in the price range would not materially change the disclosure 
contained in the offering statement at qualification. 
Notwithstanding the foregoing, any decrease in the volume of 
securities offered and any deviation from the low or high end of the 
price range may be reflected in the offering circular supplement 
filed with the Commission pursuant to Rule 253(g)(1) (Sec.  
230.253(g)(1)) if, in the aggregate, the decrease in volume and/or 
change in price represent no more than a 20% change from the maximum 
aggregate offering price calculable using the information in the 
qualified offering statement. In no circumstances may this paragraph 
be used to offer securities where the maximum aggregate offering 
price would result in the offering exceeding the limit set forth in 
Rule 251(a) (Sec.  230.251(a)) for offerings under Regulation A or 
if the change would result in a Tier 1 offering becoming a Tier 2 
offering. An offering circular supplement may not be used to 
increase the volume of securities being offered. Additional 
securities may only be offered pursuant to a new offering statement 
or post-qualification amendment qualified by the Commission.

    (c) The information omitted from the offering circular in reliance 
upon paragraph (b) of this rule must be contained in an offering 
circular filed with the Commission pursuant to Rule 252(e) (Sec.  
230.252(e)) and paragraph (g) of this rule; except that if such 
offering circular is not so filed by the later of 15 business days 
after the qualification date of the offering statement or 15 business 
days after the qualification of a post-qualification amendment thereto 
that contains an offering circular, the information omitted in reliance 
upon paragraph (b) of this rule must be contained in a qualified post-
qualification amendment to the offering statement.
    (d) Presentation of information.
    (1) Information in the offering circular must be presented in a 
clear, concise and understandable manner and in a type size that is 
easily readable. Repetition of information should be avoided; cross-
referencing of information within the document is permitted.
    (2) Where an offering circular is distributed through an electronic 
medium, issuers may satisfy legibility requirements applicable to 
printed documents by presenting all required information in a format 
readily communicated to investors.
    (e) Date. An offering circular must be dated approximately as of 
the date it was filed with the Commission.
    (f) Cover page legend. The cover page of every offering circular 
must display the following statement highlighted by prominent type or 
in another manner:
    The United States Securities and Exchange Commission does not pass 
upon the merits of or give its approval to any securities offered or 
the terms of the offering, nor does it pass upon the accuracy or 
completeness of any offering circular or other solicitation materials. 
These securities are offered pursuant to an exemption from registration 
with the Commission; however, the Commission has not made an 
independent determination that the securities offered are exempt from 
registration.
    (g) Offering circular supplements.
    (1) An offering circular that discloses information previously 
omitted from the offering circular in reliance upon Rule 253(b) (Sec.  
230.253(b)) must be filed with the Commission no later than two 
business days following the earlier of the date of determination of the 
offering price or the date such offering circular is first used after 
qualification in connection with a public offering or sale.
    (2) An offering circular that reflects information other than that 
covered in paragraph (g)(1) of this rule that constitutes a substantive 
change from or addition to the information set forth in the last 
offering circular filed with the Commission must be filed with the 
Commission no later than five business days after the date it is first 
used after qualification in connection with a public offering or sales. 
If an offering circular filed pursuant to this paragraph (g)(2) 
consists of an offering circular supplement attached to an offering 
circular that (i) previously had been filed or (ii) was not required to 
be filed pursuant to paragraph (g) of this rule because it did not 
contain substantive changes from an offering circular that previously 
was filed, only the offering circular supplement need be filed under 
paragraph (g) of this rule, provided that the cover page of the 
offering circular supplement includes a cross reference to the date(s) 
of the related offering circular and any offering circular supplements 
thereto that together constitute the offering circular with respect to 
the securities currently being offered or sold.
    (3) An offering circular that discloses information, facts or 
events covered in both paragraphs (g)(1) and (2) must be filed with the 
Commission no later than

[[Page 4003]]

two business days following the earlier of the date of the 
determination of the offering price or the date it is first used after 
qualification in connection with a public offering or sales.
    (4) An offering circular required to be filed pursuant to paragraph 
(g) of this rule that is not filed within the time frames specified in 
paragraph (g) must be filed pursuant to this paragraph (4) as soon as 
practicable after the discovery of such failure to file.
    (5) Each offering circular must be filed with the Commission in 
electronic format by means of EDGAR in accordance with the EDGAR rules 
set forth in Regulation S-T (17 CFR Part 232).
    (6) Each offering circular filed under this rule must contain in 
the upper right corner of the cover page the paragraph and subparagraph 
of this rule under which the filing is made, and the file number of the 
offering statement to which the offering circular relates.


Sec.  230.254  Preliminary offering circulars.

    Before qualification of the required offering statement, but after 
its filing, a written offer of securities may be made if it meets the 
following requirements:
    (a) The outside front cover page of the material bears the caption 
Preliminary Offering Circular, the date of issuance, and the following 
legend, which must be highlighted by prominent type or in another 
manner:
    An offering statement pursuant to Regulation A relating to these 
securities has been filed with the Securities and Exchange Commission. 
Information contained in this Preliminary Offering Circular is subject 
to completion or amendment. These securities may not be sold nor may 
offers to buy be accepted before the offering statement filed with the 
Commission is qualified. This Preliminary Offering Circular shall not 
constitute an offer to sell or the solicitation of an offer to buy nor 
may there be any sales of these securities in any state in which such 
offer, solicitation or sale would be unlawful before registration or 
qualification under the laws of any such state. We may elect to satisfy 
our obligation to deliver a Final Offering Circular by sending you a 
notice within two business days after the completion of our sale to you 
that contains the URL where the Final Offering Circular or the offering 
statement in which such Final Offering Circular was filed may be 
obtained.
    (b) The Preliminary Offering Circular contains substantially the 
information required in an offering circular by Form 1-A (Sec.  239.90 
of this chapter), except that information that may be omitted under 
Rule 253(b) (Sec.  230.253(b)) may be omitted if the conditions set 
forth in Rule 253(b) are met.
    (c) The Preliminary Offering Circular is filed as a part of the 
offering statement.


Sec.  230.255  Solicitation of interest communications.

    (a) At any time before the qualification of an offering statement, 
including before the non-public submission or public filing of such 
offering statement, an issuer or any person authorized to act on behalf 
of an issuer may communicate orally or in writing to determine whether 
there is any interest in a contemplated securities offering. Such 
communications are deemed to be an offer of a security for sale for 
purposes of the antifraud provisions of the federal securities laws. No 
solicitation or acceptance of money or other consideration, nor of any 
commitment, binding or otherwise, from any person is permitted until 
qualification of the offering statement.
    (b) The communications must:
    (1) State that no money or other consideration is being solicited, 
and if sent in response, will not be accepted;
    (2) State that no offer to buy the securities can be accepted and 
no part of the purchase price can be received until the offering 
statement is qualified, and any such offer may be withdrawn or revoked, 
without obligation or commitment of any kind, at any time before notice 
of its acceptance given after the qualification date;
    (3) State that a person's indication of interest involves no 
obligation or commitment of any kind; and
    (4) After the public filing of the offering statement:
    (i) State from whom a copy of the most recent version of the 
Preliminary Offering Circular may be obtained, including a phone number 
and address of such person;
    (ii) Provide the URL where such Preliminary Offering Circular or to 
the offering statement in which such Preliminary Offering Circular was 
filed may be obtained; or
    (iii) Include a complete copy of the Preliminary Offering Circular.
    (c) Any written communication under this rule may include a means 
by which a person may indicate to the issuer that such person is 
interested in a potential offering. This issuer may require the name, 
address, telephone number, and/or email address in any response form 
included pursuant to this paragraph (c).
    (d) If solicitation of interest materials are used after the public 
filing of the offering statement and such solicitation of interest 
materials contain information that is inaccurate or inadequate in any 
material respect, revised solicitation of interest materials must be 
redistributed in a manner substantially similar to the manner in which 
such materials were originally distributed. Notwithstanding the 
foregoing in this paragraph (d), if the only information that is 
inaccurate or inadequate is contained in a Preliminary Offering 
Circular provided with the solicitation of interest materials pursuant 
to paragraphs (b)(4)(i) or (b)(4)(ii) of this rule, no such 
redistribution is required in the following circumstances:
    (1) in the case of paragraph (b)(4)(i) of this rule, the revised 
Preliminary Offering Circular will be provided to any persons making 
new inquiries and will be recirculated to any persons making any 
previous inquiries; or
    (2) in the case of paragraph (b)(4)(ii) of this rule, the URL 
continues to link directly to the most recent Preliminary Offering 
Circular or to the offering statement in which such revised Preliminary 
Offering Circular was filed.
    (e) Where an issuer decides to register an offering under the 
Securities Act after soliciting interest in a contemplated, but 
abandoned, Regulation A offering, the Regulation A exemption for offers 
would not be subject to integration with the registered offering, 
unless the issuer engaged in solicitations of interest pursuant to this 
rule to persons other than qualified institutional buyers and 
institutional accredited investors permitted by Section 5(d) of the 
Securities Act. In such circumstances, the issuer (and any underwriter, 
broker, dealer, or agent used by the issuer in connection with the 
proposed offering) must wait at least 30 calendar days between the last 
such solicitation of interest in the Regulation A offering and the 
filing of the registration statement with the Commission.


Sec.  230.256  Definition of ``qualified purchaser.''

    For purposes of Section 18(b)(3) of the Securities Act [15 U.S.C. 
77r(b)(3)], a ``qualified purchaser'' of a security offered or sold 
pursuant to Regulation A means any offeree of such security and, in a 
Tier 2 offering, any purchaser of such security.


Sec.  230.257  Periodic and current reporting; exit report.

    (a) Tier 1: Exit report. Each issuer that has filed an offering 
statement for a Tier 1 offering that has been qualified pursuant to 
this Regulation A must file an exit report on Form 1-Z (Sec.  239.94) 
not later than 30 calendar days after the termination or completion of 
the offering.

[[Page 4004]]

    (b) Tier 2: Periodic and current reporting. Each issuer that has 
filed an offering statement for a Tier 2 offering that has been 
qualified pursuant to this Regulation A must file with the Commission 
the following periodic and current reports in electronic format by 
means of EDGAR in accordance with the EDGAR rules set forth in 
Regulation S-T (17 CFR Part 232):
    (1) Annual reports. An annual report on Form 1-K (Sec.  239.91) for 
the fiscal year in which the offering statement became qualified and 
for any fiscal year thereafter, unless the issuer's obligation to file 
such annual report is suspended under paragraph (d) of this rule. 
Annual reports must be filed within the period specified in Form 1-K.
    (2) Special financial report. (i) A special financial report if the 
offering statement did not contain the following:
    (A) audited financial statements for the issuer's last full fiscal 
year (or for the life of the issuer if less than a full fiscal year) 
preceding the fiscal year in which the issuer's offering statement 
became qualified; or
    (B) financial statements covering the first half of the issuer's 
current fiscal year if the offering statement was qualified during the 
second half of that fiscal year.
    (ii) The special financial report described in paragraph 
(a)(2)(i)(A) of this rule must be filed under cover of Form 1-K within 
120 calendar days after the qualification date of the offering 
statement and must include audited financial statements for such last 
full fiscal year or other period, as the case may be. The special 
financial report described in paragraph (a)(2)(i)(B) of this rule must 
be filed under cover of Form 1-SA within 90 calendar days after the 
qualification date of the offering statement and must include the 
semiannual financial statements for the first half of the issuer's 
fiscal year, which may be unaudited.
    (iii) A special financial report must be signed in accordance with 
the requirements of the form on which it is filed.
    (3) Semiannual report. A semiannual report on Form 1-SA (Sec.  
239.92) within the period specified in Form 1-SA. Semiannual reports 
must cover the first half of each fiscal year of the issuer, commencing 
with the first half of the fiscal year following the most recent fiscal 
year for which full financial statements were included in the offering 
statement, or, if the offering statement included financial statements 
for the first half of the fiscal year following the most recent full 
fiscal year, for the first half of the following fiscal year.
    (4) Current reports. Current reports on Form 1-U (Sec.  239.93) 
with respect to the matters and within the period specified in that 
form, unless substantially the same information has been previously 
reported to the Commission by the issuer under cover of Form 1-K or 1-
SA.
    (5) Reporting by successor issuers. Where in connection with a 
succession by merger, consolidation, exchange of securities, 
acquisition of assets or otherwise, securities of any issuer that is 
not required to file reports pursuant to paragraph (b) of this rule are 
issued to the holders of any class of securities of another issuer that 
is required to file such reports, the duty to file reports pursuant to 
paragraph (b) of this rule shall be deemed to have been assumed by the 
issuer of the class of securities so issued. The successor issuer must, 
after the consummation of the succession, file reports in accordance 
with paragraph (b) of this rule, unless that issuer is exempt from 
filing such reports or the duty to file such reports is suspended under 
paragraph (d).
    (c) Amendments. All amendments to the reports described in 
paragraphs (a) and (b) of this rule must be filed under cover of the 
form amended, marked with the letter ``A'' to designate the document as 
an amendment, e.g., ``1-K/A,'' and in compliance with pertinent 
requirements applicable to such reports. Amendments filed pursuant to 
this paragraph (c) must set forth the complete text of each item as 
amended, but need not include any items that were not amended. 
Amendments must be numbered sequentially and be filed separately for 
each report amended. Amendments must be signed on behalf of the issuer 
by a duly authorized representative of the issuer. An amendment to any 
report required to include certifications as specified in the 
applicable form must include new certifications by the appropriate 
persons.
    (d) Termination or suspension of duty to file reports. (1) The duty 
to file reports under this rule shall be automatically suspended if and 
so long as the issuer is subject to the duty to file reports required 
by section 13 or 15(d) of the Exchange Act (15 U.S.C. 78m or 15 U.S.C. 
78o).
    (2) The duty to file reports under paragraph (b) of this rule with 
respect to a class of securities held of record (as defined in Rule 
12g5-1 (Sec.  240.12g5-1)) by less than 300 persons shall be suspended 
for such class of securities immediately upon filing with the 
Commission an exit report on Form 1-Z (Sec.  239.94) if the issuer of 
such class has filed all reports due pursuant to this rule before the 
date of such Form 1-Z filing for the shorter of (i) the period since 
the issuer became subject to such reporting obligation, or (ii) its 
most recent three fiscal years and the portion of the current year 
preceding the date of filing Form 1-Z. For the purposes of this 
subsection, the term ``class'' shall be construed to include all 
securities of an issuer that are of substantially similar character and 
the holders of which enjoy substantially similar rights and privileges. 
If the Form 1-Z is subsequently withdrawn or denied, the issuer must, 
within 60 days, file with the Commission all reports which would have 
been required if such exit report had not been filed. If the suspension 
resulted from the issuer's merger into, or consolidation with, another 
issuer or issuers, the notice must be filed by the successor issuer.
    (3) The ability to suspend reporting, as described in paragraph 
(d)(2) of this rule, is not available for any class of securities if 
(i) during that fiscal year an offering statement was qualified or (ii) 
at the time of filing of Form 1-Z, offers or sales of securities of 
that class are being made pursuant to Regulation A.
    (e) Termination of suspension of duty to file reports. If the duty 
to file reports is suspended pursuant to paragraph (d)(1) of this rule 
and such suspension ends because the issuer is no longer subject to the 
duty to file reports under the Exchange Act, the issuer's obligation to 
file reports under paragraph (b) of this rule shall:
    (1) automatically terminate if the issuer is eligible to suspend 
its duty to file reports under paragraph (d)(2)-(3); or
    (2) recommence with the report covering any financial period after 
that included in any registration statement or Exchange Act report.


Sec.  230.258  Suspension of the exemption.

    (a) The Commission may at any time enter an order temporarily 
suspending a Regulation A exemption if it has reason to believe that:
    (1) No exemption is available or any of the terms, conditions or 
requirements of Regulation A have not been complied with;
    (2) The offering statement, any sales or solicitation of interest 
material, or any report filed pursuant to Rule 257 (Sec.  230.257) 
contains any untrue statement of a material fact or omits to state a 
material fact necessary in order to make the statements made, in light 
of the circumstances under which they are made, not misleading;
    (3) The offering is being made or would be made in violation of 
section 17 of the Securities Act;

[[Page 4005]]

    (4) An event has occurred after the filing of the offering 
statement that would have rendered the exemption hereunder unavailable 
if it had occurred before such filing;
    (5) Any person specified in Rule 262(a) (Sec.  230.262(a)) has been 
indicted for any crime or offense of the character specified in Rule 
262(a)(1) (Sec.  230.262(a)(1)), or any proceeding has been initiated 
for the purpose of enjoining any such person from engaging in or 
continuing any conduct or practice of the character specified in Rule 
262(a)(2) (Sec.  230.262(a)(2)), or any proceeding has been initiated 
for the purposes of Rule 262(a)(3)-(8) (Sec.  230.262(a)(3)-(8)); or
    (6) The issuer or any promoter, officer, director or underwriter 
has failed to cooperate, or has obstructed or refused to permit the 
making of an investigation by the Commission in connection with any 
offering made or proposed to be made in reliance on Regulation A.
    (b) Upon the entry of an order under paragraph (a) of this rule, 
the Commission will promptly give notice to the issuer, any underwriter 
and any selling securityholder:
    (1) That such order has been entered, together with a brief 
statement of the reasons for the entry of the order; and
    (2) That the Commission, upon receipt of a written request within 
30 calendar days after the entry of the order, will within 20 calendar 
days after receiving the request, order a hearing at a place to be 
designated by the Commission.
    (c) If no hearing is requested and none is ordered by the 
Commission, an order entered under paragraph (a) of this rule shall 
become permanent on the 30th calendar day after its entry and shall 
remain in effect unless or until it is modified or vacated by the 
Commission. Where a hearing is requested or is ordered by the 
Commission, the Commission will, after notice of and opportunity for 
such hearing, either vacate the order or enter an order permanently 
suspending the exemption.
    (d) The Commission may, at any time after notice of and opportunity 
for hearing, enter an order permanently suspending the exemption for 
any reason upon which it could have entered a temporary suspension 
order under paragraph (a) of this rule. Any such order shall remain in 
effect until vacated by the Commission.
    (e) All notices required by this rule must be given by personal 
service, registered or certified mail to the addresses given by the 
issuer, any underwriter and any selling securityholder in the offering 
statement.


Sec.  230.259  Withdrawal or abandonment of offering statements.

    (a) If none of the securities that are the subject of an offering 
statement have been sold and such offering statement is not the subject 
of a proceeding under Rule 258 (Sec.  230.258), the offering statement 
may be withdrawn with the Commission's consent. The application for 
withdrawal must state the reason the offering statement is to be 
withdrawn, must be signed by an authorized representative of the issuer 
and must be filed with the Commission in electronic format by means of 
EDGAR in accordance with the EDGAR rules set forth in Regulation S-T 
(17 CFR Part 232). Any withdrawn document will remain in the 
Commission's files, as well as the related request for withdrawal.
    (b) When an offering statement has been on file with the Commission 
for nine months without amendment and has not become qualified, the 
Commission may, in its discretion, declare the offering statement 
abandoned. If the offering statement has been amended, the nine-month 
period shall be computed from the date of the latest amendment.


Sec.  230.260  Insignificant deviations from a term, condition or 
requirement of Regulation A.

    (a) A failure to comply with a term, condition or requirement of 
Regulation A will not result in the loss of the exemption from the 
requirements of section 5 of the Securities Act for any offer or sale 
to a particular individual or entity, if the person relying on the 
exemption establishes that:
    (1) The failure to comply did not pertain to a term, condition or 
requirement directly intended to protect that particular individual or 
entity;
    (2) The failure to comply was insignificant with respect to the 
offering as a whole, provided that any failure to comply with 
paragraphs (a), (b), (d)(1) and (3) of Rule 251 (Sec.  230.251) shall 
be deemed to be significant to the offering as a whole; and
    (3) A good faith and reasonable attempt was made to comply with all 
applicable terms, conditions and requirements of Regulation A.
    (b) A transaction made in reliance upon Regulation A must comply 
with all applicable terms, conditions and requirements of the 
regulation. Where an exemption is established only through reliance 
upon paragraph (a) of this rule, the failure to comply shall 
nonetheless be actionable by the Commission under section 20 of the 
Securities Act.
    (c) This provision provides no relief or protection from a 
proceeding under Rule 258 (Sec.  230.258).


Sec.  230.261  Definitions.

    As used in this Regulation A, all terms have the same meanings as 
in Rule 405 (Sec.  230.405), except that all references to registrant 
in those definitions shall refer to the issuer of the securities to be 
offered and sold under Regulation A. In addition, these terms have the 
following meanings:
    (a) Business day. Any day except Saturdays, Sundays or United 
States federal holidays.
    (b) Eligible securities. Equity securities, debt securities, and 
debt securities convertible or exchangeable to equity interests, 
including any guarantees of such securities, but not including asset-
backed securities as such term is defined in Item 1101(c) of Regulation 
AB.
    (c) Final offering circular. The more recent of (1) the current 
offering circular contained in a qualified offering statement and (2) 
the offering circular filed pursuant to Rule 253(g) (Sec.  230.253(g)), 
or if the issuer is relying on Rule 253(b), the Final Offering Circular 
is the offering circular filed pursuant to Rule 253(g)(1) or (3) (Sec.  
230.253(g)(1) or (3)).
    (d) Preliminary offering circular. The offering circular described 
in Rule 254 (Sec.  230.254).


Sec.  230.262  Disqualification provisions.

    (a) No exemption under this Regulation A shall be available for a 
sale of securities if the issuer; any predecessor of the issuer; any 
affiliated issuer; any director, executive officer, other officer 
participating in the offering, general partner or managing member of 
the issuer; any beneficial owner of 20% or more of the issuer's 
outstanding voting equity securities, calculated on the basis of voting 
power; any promoter connected with the issuer in any capacity at the 
time of filing, any offer after qualification, or such sale; any person 
that has been or will be paid (directly or indirectly) remuneration for 
solicitation of purchasers in connection with such sale of securities; 
any general partner or managing member of any such solicitor; or any 
director, executive officer or other officer participating in the 
offering of any such solicitor or general partner or managing member of 
such solicitor:
    (1) Has been convicted, within ten years before the filing of the 
offering statement (or five years, in the case of issuers, their 
predecessors and affiliated issuers), of any felony or misdemeanor:

[[Page 4006]]

    (i) In connection with the purchase or sale of any security;
    (ii) Involving the making of any false filing with the Commission; 
or
    (iii) Arising out of the conduct of the business of an underwriter, 
broker, dealer, municipal securities dealer, investment adviser or paid 
solicitor of purchasers of securities;
    (2) Is subject to any order, judgment or decree of any court of 
competent jurisdiction, entered within five years before the filing of 
the offering statement, that, at the time of such filing, restrains or 
enjoins such person from engaging or continuing to engage in any 
conduct or practice:
    (i) In connection with the purchase or sale of any security;
    (ii) Involving the making of any false filing with the Commission; 
or
    (iii) Arising out of the conduct of the business of an underwriter, 
broker, dealer, municipal securities dealer, investment adviser or paid 
solicitor of purchasers of securities;
    (3) Is subject to a final order of a state securities commission 
(or an agency or officer of a state performing like functions); a state 
authority that supervises or examines banks, savings associations, or 
credit unions; a state insurance commission (or an agency or officer of 
a state performing like functions); an appropriate federal banking 
agency; the U.S. Commodity Futures Trading Commission; or the National 
Credit Union Administration that:
    (i) At the time of the filing of the offering statement, bars the 
person from:
    (A) Association with an entity regulated by such commission, 
authority, agency, or officer;
    (B) Engaging in the business of securities, insurance or banking; 
or
    (C) Engaging in savings association or credit union activities; or
    (ii) Constitutes a final order based on a violation of any law or 
regulation that prohibits fraudulent, manipulative, or deceptive 
conduct entered within ten years before such sale;
    (4) Is subject to an order of the Commission entered pursuant to 
section 15(b) or 15B(c) of the Securities Exchange Act of 1934 (15 
U.S.C. 78 o (b) or 78 o -4(c)) or section 203(e) or (f) of the 
Investment Advisers Act of 1940 (15 U.S.C. 80b-3(e) or (f)) that, at 
the time of the filing of the offering statement:
    (i) Suspends or revokes such person's registration as a broker, 
dealer, municipal securities dealer or investment adviser;
    (ii) Places limitations on the activities, functions or operations 
of such person; or
    (iii) Bars such person from being associated with any entity or 
from participating in the offering of any penny stock;
    (5) Is subject to any order of the Commission entered within five 
years before the filing of the offering statement that, at the time of 
such filing, orders the person to cease and desist from committing or 
causing a violation or future violation of:
    (i) Any scienter-based anti-fraud provision of the federal 
securities laws, including without limitation section 17(a)(1) of the 
Securities Act of 1933 (15 U.S.C. 77q(a)(1)), section 10(b) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78j(b)) and 17 CFR 240.10b-
5, section 15(c)(1) of the Securities Exchange Act of 1934 (15 U.S.C. 
78 o (c)(1)) and section 206(1) of the Investment Advisers Act of 1940 
(15 U.S.C. 80b-6(1)), or any other rule or regulation thereunder; or
    (ii) Section 5 of the Securities Act of 1933 (15 U.S.C. 77e).
    (6) Is suspended or expelled from membership in, or suspended or 
barred from association with a member of, a registered national 
securities exchange or a registered national or affiliated securities 
association for any act or omission to act constituting conduct 
inconsistent with just and equitable principles of trade;
    (7) Has filed (as a registrant or issuer), or was or was named as 
an underwriter in, any registration statement or Regulation A offering 
statement filed with the Commission that, within five years before the 
filing of the offering statement, was the subject of a refusal order, 
stop order, or order suspending the Regulation A exemption, or is, at 
the time of such filing, the subject of an investigation or proceeding 
to determine whether a stop order or suspension order should be issued; 
or
    (8) Is subject to a United States Postal Service false 
representation order entered within five years before the filing of the 
offering statement, or is, at the time of such filing, subject to a 
temporary restraining order or preliminary injunction with respect to 
conduct alleged by the United States Postal Service to constitute a 
scheme or device for obtaining money or property through the mail by 
means of false representations.
    (b) Paragraph (a) of this rule shall not apply:
    (1) With respect to any order under Sec.  230.262(a)(3) or (a)(5) 
that occurred or was issued before [effective date of rule];
    (2) Upon a showing of good cause and without prejudice to any other 
action by the Commission, if the Commission determines that it is not 
necessary under the circumstances that an exemption be denied;
    (3) If, before the filing of the offering statement, the court or 
regulatory authority that entered the relevant order, judgment or 
decree advises in writing (whether contained in the relevant judgment, 
order or decree or separately to the Commission or its staff) that 
disqualification under paragraph (a) of this rule should not arise as a 
consequence of such order, judgment or decree; or
    (4) If the issuer establishes that it did not know and, in the 
exercise of reasonable care, could not have known that a 
disqualification existed under paragraph (a) of this rule.
    Instruction to paragraph (b)(4). An issuer will not be able to 
establish that it has exercised reasonable care unless it has made, in 
light of the circumstances, factual inquiry into whether any 
disqualifications exist. The nature and scope of the factual inquiry 
will vary based on the facts and circumstances concerning, among other 
things, the issuer and the other offering participants.
    (c) For purposes of paragraph (a) of this rule, events relating to 
any affiliated issuer that occurred before the affiliation arose will 
be not considered disqualifying if the affiliated entity is not:
    (1) In control of the issuer; or
    (2) Under common control with the issuer by a third party that was 
in control of the affiliated entity at the time of such events.
    (d) Disclosure of prior ``bad actor'' events. The issuer must 
include in the offering circular a description of any matters that 
would have triggered disqualification under paragraph (a) of this rule 
but occurred before [effective date]. The failure to provide such 
information shall not prevent an issuer from relying on Regulation A if 
the issuer establishes that it did not know and, in the exercise of 
reasonable care, could not have known of the existence of the 
undisclosed matter or matters.

    Note: An issuer will not be able to establish that it has 
exercised reasonable care unless it has made, in light of the 
circumstances, factual inquiry into whether any disqualifications 
exist. The nature and scope of the factual inquiry will vary based 
on the facts and circumstances concerning, among other things, the 
issuer and the other offering participants.

Sec.  230.263  Consent to service of process.

    (a) If the issuer is not organized under the laws of any of the 
states of or the United States of America, it shall at the time of 
filing the offering statement required by Rule 252 (Sec.  230.252),

[[Page 4007]]

furnish to the Commission a written irrevocable consent and power of 
attorney on Form F-X (Sec.  239.42 of this chapter).
    (b) Any change to the name or address of the agent for service of 
the issuer shall be communicated promptly to the Commission through 
amendment of the requisite form and referencing the file number of the 
relevant offering statement.
* * * * *
0
5. Sec.  230.505(b)(2)(iii)(A) and (B) are revised, in part, to read as 
follows:


Sec.  230.505  Exemption for limited offers and sales of securities not 
exceeding $5,000,000.

* * * * *
    (b) * * *
    (2) * * *
    (iii) * * *
    (A) The term ``filing of the offering statement'' as used in Sec.  
230.262 shall mean the first sale of securities under this section;
    (B) The term ``underwriter'' as used in Sec.  230.262(a) shall mean 
a person that has been or will be paid directly or indirectly 
remuneration for solicitation of purchasers in connection with sales of 
securities under this section; and
* * * * *

PART 232--REGULATION S-T--GENERAL RULES AND REGULATIONS FOR 
ELECTRONIC FILINGS

0
6. The authority citation for part 232 is revised to read in part as 
follows:

    Authority:  15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s(a), 77z-3, 
77sss(a), 78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll, 80a-6(c), 
80a-8, 80a-29, 80a-30, 80a-37, 7201 et seq.; 18 U.S.C. 1350; and 
Pub. L. 112-106, Sec.  401, 126 Stat. 313 (2012), unless otherwise 
noted.
* * * * *
0
7. Sec.  232.101 is amended by:
0
a. Revising paragraph (a)(1)(vii) and (c)(6);
0
b. Adding paragraph (a)(1)(xvii); and
0
c. Reserving paragraph (b)(8).
    The revisions, additions and reservations read as follows:


Sec.  232.101  Mandated electronic submissions and exceptions.

    (a) * * *
    (1) * * *
    (vii) Form F-X (Sec.  239.42 of this chapter) when filed in 
connection with a Form CB (Sec. Sec.  239.800 and 249.480 of this 
chapter) or a Form 1-A (Sec.  239.90);
* * * * *
    (xvii) Filings made pursuant to Regulation A (Sec. Sec.  230.251-
230.263 of this chapter).
* * * * *
    (b) * * *
    (8) [Reserved]
* * * * *
    (c) * * *
    (6) Filings on Form 144 (Sec.  239.144 of this chapter) where the 
issuer of the securities is not subject to the reporting requirements 
of section 13 or 15(d) of the Exchange Act (15 U.S.C. 78m or 78o(d), 
respectively).
* * * * *

PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

0
8. The authority citation for Part 239 is revised to read, in part, as 
follows:

    Authority:  15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-
3, 77sss, 78c, 78l, 78m, 78n, 78o(d), 78o-7 note, 78u-5, 78w(a), 
78ll, 78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24, 
80a-26, 80a-29, 80a-30, and 80a-37, and Pub. L. 112-106, Sec.  401, 
126 Stat. 313 (2012), unless otherwise noted.
* * * * *
0
9. Amend Form 1-A (referenced in Sec.  239.90) by revising it to read 
as follows:
BILLING CODE 8011-01-P

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* * * * *
0
10. Revise Sec.  239.91 to read as follows:


Sec.  239.91  Form 1-K

    This form shall be used for filing annual reports under Regulation 
A (Sec. Sec.  230.251-230.263 of this chapter).

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0
12. Revise Sec.  239.92 to read as follows:


Sec.  230.92  Form 1-SA

    This form shall be used for filing semiannual reports under 
Regulation A (Sec. Sec.  230.251-230.263 of this chapter).

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0
13. Revise Sec.  239.93 to read as follows:


Sec.  230.93  Form 1-U

    This form shall be used for filing current reports under Regulation 
A (Sec. Sec.  230.251-230.263 of this chapter).

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* * * * *
0
13. Revise Sec.  239.94 to read as follows:


Sec.  230.94  Form 1-Z

    This form shall be used to file an exit report under Regulation A 
(Sec. Sec.  230.251-230.263 of this chapter).

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* * * * *

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
14. The authority citation for Part 240 is amended by revising the 
sectional authority for Sec.  240.15c2-11 to read as follows:

    Authority:  15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 
80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et. seq., and 
8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; and 
Pub. L. 111-203, 939A, 124 Stat. 1376, (2010), unless otherwise 
noted.
* * * * *
    Section 240.15c2-11 also issued under 15 U.S.C. 78j(b), 78o(c), 
78q(a), 78w(a), and Pub. L. 112-106, Sec.  401, 126 Stat. 313 
(2012).
* * * * *
0
15. Sec.  240.15c2-11 is amended by revising paragraphs (a)(3) and 
(d)(2)(i) to read as follows:


Sec.  240.15c2-11  Initiation or resumption of quotations without 
specific information.

* * * * *
    (a) * * *
    (3) A copy of the issuer's most recent annual report filed pursuant 
to section 13 or 15(d) of the Act or pursuant to Regulation A 
((Sec. Sec.  230.251-230.263 of this chapter), or a copy of the annual 
statement referred to in section 12(g)(2)(G)(i) of the Act in the case 
of an issuer required to file reports pursuant to section 13 or 15(d) 
of the Act or an issuer of a security covered by section 12(g)(2)(B) or 
(G) of the Act, together with any semiannual, quarterly and current 
reports that have been filed under the provisions of the Act or 
Regulation A by the issuer after such annual report or annual 
statement; provided, however, that until such issuer has filed its 
first annual report pursuant to section 13 or 15(d) of the Act or 
pursuant to Regulation A, or annual statement referred to in section 
12(g)(2)(G)(i) of the Act, the broker or dealer has in its records a 
copy of the prospectus specified by section 10(a) of the Securities Act 
of 1933 included in a registration statement filed by the issuer under 
the Securities Act of 1933, other than a registration statement on Form 
F-6, or a copy of the offering circular specified by Regulation A 
included in an offering statement filed by the issuer under Regulation 
A, that became effective or was qualified within the prior 16 months, 
or a copy of any registration statement filed by the issuer under 
section 12 of the Act that became effective within the prior 16 months, 
together with any semiannual, quarterly and current reports filed 
thereafter under section 13 or 15(d) of the Act or Regulation A; and 
provided further, that the broker or dealer has a reasonable basis 
under the circumstances for believing that the issuer is current in 
filing annual, semiannual, quarterly, and current reports filed 
pursuant to section 13 or 15(d) of the Act or Regulation A, or, in the 
case of an insurance company exempted from section 12(g) of the Act by 
reason of section 12(g)(2)(G) thereof, the annual statement referred to 
in section 12(g)(2)(G)(i) of the Act; or
* * * * *
    (d) * * *
    (2) * * *
    (i) A broker-dealer shall be in compliance with the requirement to 
obtain current reports filed by the issuer if the broker-dealer obtains 
all current reports filed with the Commission by the issuer as of a 
date up to five business days in advance of the earlier of the date of 
submission of the quotation to the quotation medium and the date of 
submission of the paragraph (a) information pursuant to the applicable 
rule of the Financial Industry Regulatory Authority, Inc. or its 
successor organization; and
* * * * *

PART 260--GENERAL RULES AND REGULATIONS, TRUST INDENTURE ACT OF 
1939

0
16. The authority citation for Part 260 is revised to read, in part, as 
follows:

    Authority:  15 U.S.C. 77c, 77eee, 77ggg, 77nnn, 77sss, 78 ll 
(d), 80b-3, 80b-4, 80b-11 and Pub. L. 112-106, Sec.  401, 126 Stat. 
313 (2012), unless otherwise noted.
* * * * *
0
17. Sec.  260.4a-1 is revised to read as follows:


Sec.  260.4a-1  Exempted securities under section 304(a)(8).

    The provisions of the Trust Indenture Act of 1939 shall not apply 
to any security that has been or will be issued otherwise than under an 
indenture. The same issuer may not claim this exemption within a period 
of twelve consecutive months for more than $50,000,000 aggregate 
principal amount of any securities.

    Dated: December 18, 2013.
    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-30508 Filed 1-22-14; 8:45 am]
BILLING CODE 8011-01-C