Amendments for Small and Additional Issues Exemptions Under the Securities Act (Regulation A), 21805-21925 [2015-07305]

Download as PDF Vol. 80 Monday, No. 75 April 20, 2015 Part II Securities and Exchange Commission mstockstill on DSK4VPTVN1PROD with RULES2 17 CFR Parts 200, 230, 232, et al. Amendments for Small and Additional Issues Exemptions Under the Securities Act (Regulation A); Final Rule VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 PO 00000 Frm 00001 Fmt 4717 Sfmt 4717 E:\FR\FM\20APR2.SGM 20APR2 21806 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 200, 230, 232, 239, 240, 249, and 260 [Release Nos. 33–9741; 34–74578; 39–2501; File No. S7–11–13] RIN 3235–AL39 Amendments for Small and Additional Issues Exemptions Under the Securities Act (Regulation A) Securities and Exchange Commission. ACTION: Final rules. AGENCY: We are adopting amendments to Regulation A and other rules and forms to implement Section 401 of the Jumpstart Our Business Startups (JOBS) Act. Section 401 of the JOBS Act added Section 3(b)(2) to the Securities Act of 1933, which directs the Commission to adopt rules exempting from the registration requirements of the Securities Act offerings of up to $50 million of securities annually. The final rules include issuer eligibility requirements, content and filing requirements for offering statements, and ongoing reporting requirements for issuers in Regulation A offerings. DATES: The final rules and form amendments are effective on June 19, 2015. SUMMARY: mstockstill on DSK4VPTVN1PROD with RULES2 FOR FURTHER INFORMATION CONTACT: Zachary O. Fallon, Special Counsel; Office of Small Business Policy, Division of Corporation Finance, at (202) 551–3460; or Shehzad K. Niazi, Special Counsel; Office of Rulemaking, Division of Corporation Finance, at (202) 551–3430, U.S. Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–3628. SUPPLEMENTARY INFORMATION: We are amending Rules 251 through 263 1 of Regulation A under the Securities Act of 1933 (the ‘‘Securities Act’’).2 We are revising Form 1–A,3 rescinding Form 2–A,4 and adopting four new forms, Form 1–K (annual report), Form 1–SA (semiannual report), Form 1–U (current report), and Form 1–Z (exit report). Further, we are revising Rule 4a–1 5 under the Trust Indenture Act of 1939 (the ‘‘Trust Indenture Act’’) 6 to increase the dollar ceiling of the exemption from the requirement to issue securities 1 17 CFR 230.251 through 230.263. U.S.C. 77a et seq. 3 17 CFR 239.90. 4 17 CFR 239.91. 5 17 CFR 260.4a–1. 6 15 U.S.C. 77aaa et seq. 2 15 VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 pursuant to an indenture. We are also amending Rule 12g5–1 7 of the Securities Exchange Act of 1934 (the ‘‘Exchange Act’’) 8 to permit issuers to rely on a conditional exemption from mandatory registration of a class of securities under Section 12(g) of the Exchange Act, Rule 15c2–11 9 of the Exchange Act 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, and Rule 30–1 10 of the Commission’s organizational rules and provisions for delegated authority to permit the Division of Corporation Finance to issue notices of qualification and deny Form 1–Z filings. In addition, we are adopting a technical amendment to Exchange Act Rule 15c2–11 to update the outdated reference to ‘‘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. As a result of the revisions to Regulation A, we are adopting conforming and technical amendments to Securities Act Rules 157(a),11 505(b)(2)(iii),12 and Form 8–A. Additionally, we are revising Item 101(a) 13 of Regulation S–T 14 to reflect the mandatory electronic filing of all issuer initial filing and ongoing reporting requirements under Regulation A. We are also revising Item 101(c)(6) 15 of Regulation S–T to remove the reference to paper filings in a Regulation A offering, and removing and reserving Item 101(b)(8) 16 of Regulation S–T dealing with the optional electronic filing of Form F–X by Canadian issuers. Table of Contents I. Introduction II. Final Rules and 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) C. Offering Statement 7 17 CFR 240.12g5–1. U.S.C. 78a et seq. 9 17 CFR 240.15c2–11. 10 17 CFR 200.30–1. 11 17 CFR 230.157(a). 12 17 CFR 230.505(b)(2)(iii). 13 17 CFR 232.101(a). 14 17 CFR 232.10 et seq. 15 17 CFR 232.101(c)(6). 16 17 CFR 232.101(b)(8). 8 15 PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 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) 1. Proposed Rules 2. Comments on Proposed Rules 3. Final Rules 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 1. Proposed Rules 2. Comments on Proposed Rules 3. Final Rules H. Relationship With State Securities Law 1. Proposed Rules 2. Comments on Proposed Rules 3. Final Rules I. Additional Considerations Related to Smaller Offerings J. Transitional Guidance for Issuers Currently Conducting Regulation A Offerings K. Technical and Conforming Amendments III. Economic Analysis A. Broad Economic Considerations B. Baseline 1. Current Methods of Raising Up to $50 Million of Capital 2. Investors 3. Financial Intermediaries C. 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) D. Offering Statement 1. Electronic Filing and Delivery 2. Disclosure Format and Content 3. Audited Financial Statements 4. Other Accounting Requirements 5. Continuous and Delayed Offerings 6. Nonpublic Review of Draft Offering Statements E. Solicitation of Interest (‘‘Testing the Waters’’) F. Ongoing Reporting 1. Periodic and Current Event Reporting Requirements 2. Termination and Suspension of Reporting and Exit Reports 3. Exchange Act Registration G. Insignificant Deviations H. Bad Actor Disqualification I. Relationship With State Securities Law IV. Paperwork Reduction Act A. Background B. Estimated Number of Regulation A Offerings C. PRA Reporting and Cost Burden Estimates E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations 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 8–A: Short Form Registration Under the Exchange Act 7. Form ID Filings 8. Form F–X D. Collections of Information Are Mandatory V. Final Regulatory Flexibility Act Analysis A. Need for the Rules B. Significant Issues Raised by Public Comments C. Small Entities Subject to the Rules D. Reporting, Recordkeeping, and Other Compliance Requirements E. Agency Action To Minimize Effect on Small Entities VI. Statutory Basis and Text of Amendments I. Introduction mstockstill on DSK4VPTVN1PROD with RULES2 On December 18, 2013, we proposed rule and form amendments 17 to implement Section 401 of the Jumpstart Our Business Startups Act (the ‘‘JOBS Act’’).18 Section 401 of the JOBS Act amended Section 3(b) of the Securities Act by designating existing Section 3(b) as Section 3(b)(1), and creating new Sections 3(b)(2)–(5). 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 12-month period. Sections 3(b)(2)–(5) specify mandatory terms and conditions for such exempt offerings and also authorize the Commission to adopt other terms, conditions, or requirements as necessary in the public interest and for the protection of investors.19 In addition, Section 3(b)(5) directs the Commission to review the $50 million offering limit specified in Section 3(b)(2) not later than two years after the enactment of the JOBS Act and every two years thereafter, and authorizes the Commission to increase the annual offering limit if it determines that it would be appropriate to do so. Accordingly, we are revising Regulation A under the Securities Act to require issuers conducting offerings in reliance on Section 3(b)(2) to comply with terms and conditions established by the 17 See Rel. No. 33–9497 [79 FR 3925] (Dec. 18, 2013) (the ‘‘Proposing Release’’), available at: https://www.sec.gov/rules/proposed/2013/339497.pdf. 18 Public Law 112–106, 126 Stat. 306. 19 We are adopting a number of terms and conditions for Regulation A offerings pursuant to our discretionary authority under Sections 3(b)(2)– (5). Where we have done so, as discussed in detail in Section II. below, it is because we find such terms and conditions to be necessary in the public interest and for the protection of investors. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 Commission’s rules, and, where applicable, to make ongoing disclosure. II. Final Rules and Amendments to Regulation A A. Overview We are adopting final rules to implement the JOBS Act mandate by expanding Regulation A into two tiers: Tier 1, for securities offerings of up to $20 million; and Tier 2, for offerings of up to $50 million.20 The final rules 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. As proposed, and with the modifications described below, the final rules modernize the Regulation A filing process for all offerings, align practice in certain areas with prevailing practice for registered offerings, create additional flexibility for issuers in the offering process, and establish an ongoing reporting regime for Regulation A issuers. Under the final rules, Tier 2 issuers are required to include audited financial statements in their offering documents and to file annual, semiannual, and current reports with the Commission. With the exception of securities that will be listed on a national securities exchange upon qualification, purchasers in Tier 2 offerings must either be accredited investors, as that term is defined in Rule 501(a) of Regulation D, or be subject to certain limitations on their investment. The differences between Tier 1 and Tier 2 offerings are described more fully below. In developing the final rules, we considered the statutory language of JOBS Act Section 401, the JOBS Act legislative history, recent recommendations of the Commission’s Government-Business Forum on Small Business Capital Formation,21 the Advisory Committee on Small and Emerging Companies,22 the Equity Capital Formation Task Force,23 comment letters received on Title IV of 20 An issuer of $20 million or less of securities could elect to proceed under either Tier 1 or Tier 2. 21 Recommendations of the Commission’s Government-Business Forum on Small Business Capital Formation are available at: https:// www.sec.gov/info/smallbus/sbforum.shtml. 22 Recommendations of the Advisory Committee on Small and Emerging Companies are available at: https://www.sec.gov/info/smallbus/acsec.shtml. 23 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/. PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 21807 the JOBS Act before the Commission’s proposed rules were issued in December of 2013,24 and comment letters received to date on the Commission’s proposed rules to implement Section 401 of the JOBS Act.25 The key provisions of the final rules and amendments to Regulation A follow: Scope of the exemption—the final rules: • Establish two tiers of offerings: • Tier 1: Annual offering limit of $20 million, including no more than $6 million on behalf of selling securityholders that are affiliates of the issuer. • Tier 2: Annual offering limit of $50 million, including no more than $15 million on behalf of selling securityholders that are affiliates of the issuer. • Limit sales by selling securityholders in an issuer’s initial Regulation A offering and any subsequently qualified Regulation A offering within the first 12-month period following the date of qualification of the initial Regulation A offering to no more than 30% of the aggregate offering price. • Preserve the existing issuer eligibility requirements of Regulation A, and also exclude 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 and issuers that are required to, but that have not, filed with the Commission the ongoing reports required by the final rules during the two years immediately preceding the filing of an offering statement. • Limit the amount of securities that an investor who is not an accredited investor under Rule 501(a) of Regulation D can purchase in a Tier 2 offering to no more than: (a) 10% of the greater of annual income or net worth (for natural persons); or (b) 10% of the greater of annual revenue or net assets at fiscal year end (for non-natural persons). This limit will not apply to purchases of securities that will be listed on a national 24 To facilitate public input on JOBS Act rulemaking before the issuance of rule proposals, the Commission 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/jobsact comments.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-titleiv.shtml. 25 The comment letters received to date in response to the Proposing Release are available at: https://www.sec.gov/comments/s7-11-13/ s71113.shtml. E:\FR\FM\20APR2.SGM 20APR2 mstockstill on DSK4VPTVN1PROD with RULES2 21808 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations securities exchange upon qualification. • Exclude asset-backed securities, as defined in Regulation AB, from the list of eligible securities. • Update the safe harbor from integration and provide 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’’ with, or solicit interest in a potential offering from, 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. 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 unless the issuer is subject to, and current in, Tier 2 ongoing reporting obligations. Where the issuer is subject to, and current in, a Tier 2 ongoing reporting obligation, issuers and intermediaries will only be required to comply with the general delivery requirements for offers. • Modernize the qualification, communications, and offering processes in Regulation A to reflect analogous provisions of the Securities Act registration process: 26 • Permit issuers and intermediaries to satisfy their delivery requirements as to the final offering circular under an ‘‘access equals delivery’’ model when sales are made on the basis of offers conducted during the prequalification period and the final offering circular is filed and available on the Commission’s Electronic Data Gathering, Analysis and Retrieval system (EDGAR); • Require issuers and intermediaries, not later than two business days after completion of a sale, to provide purchasers with a copy of the final offering circular or a notice with the uniform resource locator (URL) where the final offering circular may be obtained on EDGAR and contact information sufficient to notify a purchaser where a request for a final offering circular • • • • • • • • • • 26 See, e.g., Securities Offering Reform, Rel. No. 33–8591 (July 19, 2005) [70 FR 44722]. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 PO 00000 can be sent and received in response; and • Permit issuers to file offering circular updates and supplements after qualification of the offering statement in lieu of postqualification amendments in certain circumstances, including to provide the types of information that may be excluded from a prospectus under Rule 430A. Permit continuous or delayed offerings, but require issuers in continuous or delayed Tier 2 offerings to be current in their annual and semiannual reporting obligations in order to do so. Permit issuers to qualify additional securities in reliance on Regulation A by filing a post-qualification amendment to a qualified offering statement. Offering statement: Require issuers to file offering statements with the Commission electronically on EDGAR. 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-andAnswer) disclosure format under Part II of Form 1–A. Update and clarify Model B (Narrative) disclosure format under Part II of Form 1–A (renamed, ‘‘Offering Circular’’), while continuing to permit Part I of Form S–1 narrative disclosure as an alternative. Permit real estate investment trusts (REITs) and similarly eligible companies to provide the narrative disclosure required by Part I of Form S–11 in Part II of Form 1–A. Require that offering statements be qualified by the Commission before sales may be made pursuant to Regulation A. Require Tier 1 and Tier 2 issuers to file balance sheets and related financial statements for the two previous fiscal year ends (or for such shorter time that they have been in existence). Require Tier 2 issuers to include financial statements in their offering circulars that are audited in accordance with either the auditing standards of the American Institute of Certified Public Accountants (AICPA) (referred to as U.S. Generally Accepted Auditing Standards or GAAS) or the standards of the Public Company Accounting Oversight Board (PCAOB). Frm 00004 Fmt 4701 Sfmt 4700 • Require Tier 1 and Tier 2 issuers to include financial statements in Form 1–A that are dated not more than nine months before the date of non-public submission, filing, or 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 Tier 1 issuers to provide information about sales in such offerings and to update certain issuer information by electronically filing a Form 1–Z exit report with the Commission not later than 30 calendar days after termination or completion of an offering. • Require Tier 2 issuers to file electronically with the Commission on EDGAR annual and semiannual reports, as well as current event reports. • Require Tier 2 issuers to file electronically a special financial report to cover financial periods between the most recent period included in a qualified offering statement and the issuer’s first required periodic report. • Permit the ongoing reports filed by an issuer conducting a Tier 2 offering to satisfy a broker-dealer’s obligations under Exchange Act Rule 15c2–11. • Provide that Tier 2 issuers’ reporting obligations under Regulation A would suspend when they are subject to the ongoing reporting requirements of Section 13 of the Exchange Act, and may also be suspended under Regulation A at any time by filing a Form 1–Z exit report after completing reporting for the fiscal year in which an 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, or fewer than 1,200 persons for banks or bank holding companies, and offers or sales made in reliance on a qualified Tier 2 Regulation A offering statement are not ongoing. In certain circumstances, Tier 2 Regulation A reporting obligations may terminate when issuers are no longer subject to the ongoing reporting requirements of Section 13 of the Exchange Act. • Require Tier 2 issuers 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 E:\FR\FM\20APR2.SGM 20APR2 mstockstill on DSK4VPTVN1PROD with RULES2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations 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. Exchange Act registration: • Conditionally exempt securities issued in a Tier 2 offering from the mandatory registration requirements of Section 12(g) of the Exchange Act, for so long as the issuer engages the services of a transfer agent that is registered with the Commission under Section 17A of the Exchange Act, remains subject to a Tier 2 reporting obligation, is current in its annual and semiannual reporting at fiscal year end, and had a public float of less than $75 million as of the last business day of its most recently completed semiannual period, or, in the absence of a public float, had annual revenues of less than $50 million as of its most recently completed fiscal year. • Permit Tier 2 issuers to use a Form 8– A short form registration statement concurrently with the qualification of a Regulation A offering statement that includes Part I of Form S–1 or Form S–11 narrative disclosure in Form 1– A in order to register a class of securities under Sections 12(g) or 12(b) of the Exchange Act. ‘‘Bad actor’’ disqualification provisions: • Substantially conform the ‘‘bad actor’’ disqualification provisions of Rule 262 to Rule 506(d) and add a disclosure requirement similar to Rule 506(e). Application of state securities laws: • Provide for the preemption of state securities law registration and qualification requirements for securities offered or sold to ‘‘qualified purchasers,’’ in light of the total package of investor protections included in the final rules. A qualified purchaser will be defined to be any person to whom securities are offered or sold in a Tier 2 offering. The Commission is required by Section 3(b)(5) of the Securities Act to review the Tier 2 offering limitation every two years. In addition to revisiting the Tier 2 offering limitation, the staff will also undertake to review the Tier 1 offering limitation at the same time. The staff also will undertake to study and submit a report to the Commission no later than 5 years following the adoption of the amendments to Regulation A, on the impact of both the Tier 1 and Tier 2 offerings on capital formation and investor protection. The report will VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 include, but not be limited to, a review of: (1) The amount of capital raised under the amendments; (2) the number of issuances and amount raised by both Tier 1 and Tier 2 offerings; (3) the number of placement agents and brokers facilitating the Regulation A offerings; (4) the number of Federal, State, or any other actions taken against issuers, placement agents, or brokers with respect to both Tier 1 and Tier 2 offerings; and (5) whether any additional investor protections are necessary for either Tier 1 or Tier 2. Based on the information contained in the report, the Commission may propose to either decrease or increase the offering limit for Tier 1, as appropriate. B. Scope of Exemption 1. Eligible Issuers a. Proposed Rules Section 401 of the JOBS Act does not include any express issuer eligibility requirements. The proposed rules would have maintained Regulation A’s existing issuer eligibility requirements and added two new categories of ineligible issuers.27 The two new categories would exclude 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 and issuers that are required to, but that have not, filed with the Commission the ongoing reports required by the final rules during the two years immediately preceding the filing of an offering statement. Additionally, we requested comment on other potential changes to the existing issuer eligibility requirements, including whether the exemption should be limited to ‘‘operating companies,’’ United States domestic issuers, or issuers that use a certain amount of the proceeds raised in a Regulation A offering in the United States. We also solicited comment on whether we should extend issuer eligibility to non-Canadian foreign issuers, business development companies as defined in Section 2(a)(48) of the Investment Company Act of 1940 27 Existing Regulation A limits issuer eligibility to issuers organized, and with a principal place of business, in the United States or Canada, while excluding Exchange Act reporting companies, investment companies, including business development companies, development stage companies that have no specific business plan or purpose or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies, issuers of fractional undivided interests in oil or gas rights or a similar interest in other mineral rights, and issuers disqualified because of Rule 262, 17 CFR 230.262 (2014). See 17 CFR 230.251(a) (2014). PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 21809 (BDCs),28 blank check companies,29 or Exchange Act reporting companies, or, alternatively, eliminate shell companies or REITs from the exemptive regime. b. Comments on the Proposed Rules Commenters expressed a wide range of views on the proposed issuer eligibility requirements. A number of commenters expressed general support for the proposed issuer eligibility requirements.30 Many commenters expressly supported the new proposed issuer eligibility criterion relating to the requirement to be current in Tier 2 ongoing reporting obligations.31 One commenter also expressly supported the proposed exclusion of issuers subject to an order of the Commission entered pursuant to Section 12(j) of the Exchange Act from the list of eligible issuers.32 Other commenters suggested additional limitations on issuer eligibility, including: a requirement that issuers be ‘‘operating companies,’’ 33 28 15 U.S.C. 80a–2(a)(48). check companies’’ are development stage companies that have no specific business plan or purpose or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies. See Securities Act Rule 419(a)(2)(i), 17 CFR 230.419(a)(2)(i); 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). 30 Letter from Catherine T. Dixon, Chair, Federal Regulation of Securities Committee, Business Law Section, American Bar Association, April 3, 2014 (‘‘ABA BLS Letter’’); Letter from Gabrielle Buckley, Chair, Section of International Law, American Bar Association, May 14, 2014 (‘‘ABA SIL Letter’’); Letter from Andrew F. Viles, Canaccord Letter Genuity Inc., March 27, 2014 (‘‘Canaccord Letter’’); Letter from Pw Carey, March 24, 2014 (‘‘Carey Letter’’); Letter from Kurt N. Schacht, CFA, Managing Director, Standards and Financial Market Integrity, and Linda L. Rittenhouse, Director, Capital Markets, CFA Institute, March 24, 2014 (‘‘CFA Institute Letter’’); Letter from Kim Wales, Executive Board Member, Crowdfund Intermediary Regulatory Advocates (CFIRA), May 14, 2014 (‘‘CFIRA Letter 1’’); Letter from Christopher Tyrrell, Chair, Crowdfunding Intermediary Regulatory Advocates, February 23, 2015 (‘‘CFIRA Letter 2’’); Robert R. Kaplan, Jr. and T. Rhys James, Kaplan Voekler Cunningham & Frank PLC, March 23, 2014 (‘‘KVCF Letter’’); Letter from William F. Galvin, Secretary, Commonwealth of Massachusetts, March 24, 2014 (‘‘Massachusetts Letter 2’’); Letter from Morrison & Foerster LLP, March 26, 2014 (‘‘MoFo Letter’’); Letter from Andrea Seidt, President, North American Securities Administrators Association (NASAA) and Ohio Securities Commissioner, March 24, 2014 (‘‘NASAA Letter 2’’); Letter from William M. Beatty, Securities Administrator, Washington Department of Financial Institutions, March 24, 2014 (‘‘WDFI Letter’’); Letter from William R. Hambrecht, Chairman, WR Hambrecht+ Co, March 4, 2014 (‘‘WR Hambrecht + Co Letter’’). 31 ABA BLS Letter; CFA Institute Letter; Massachusetts Letter 2; NASAA Letter 2; WDFI Letter. 32 CFA Institute Letter. 33 CFIRA Letter 1; WR Hambrecht + Co Letter (suggesting that limiting the availability of the 29 ‘‘Blank E:\FR\FM\20APR2.SGM Continued 20APR2 21810 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES2 excluding shell companies and issuers of penny stock,34 and excluding other types of investment vehicles, such as commodity pools and investment funds that invest in gold or virtual currencies.35 A few commenters recommended allowing blank check companies and special purpose acquisition companies (SPACs) to rely on Regulation A.36 One of these commenters recommended allowing blank check companies seeking to raise at least $10 million to use Regulation A in the same manner as any other eligible issuer, but suggested that, if a company is raising less than $10 million in a Tier 2 offering, the Commission should implement certain additional requirements.37 Another commenter recommended allowing issuers of fractional interests in oil and gas or other mineral rights to rely on Regulation A based on a ‘‘reasonable’’ eligibility test to be developed by the Commission.38 Several commenters opposed any change to the proposed issuer eligibility requirements that would exclude REITs from participating in Regulation A offerings.39 Other commenters advocated expanding the current categories of eligible issuers, and specifically supported the continued inclusion of Canadian exemption to, among other things, operating companies would provide investors with more confidence in the offerings conducted pursuant to Regulation A). But see KVCF Letter (suggesting that limiting availability of the exemption to operating companies would unnecessarily limit the utility of the exemption). 34 ABA BLS Letter; MoFo Letter. 35 Massachusetts Letter 2. 36 Gilman Law Letter; Letter from Mark Goldberg, Chairman, Investment Program Association, March 24, 2014 (‘‘IPA Letter’’); Letter from David N. Feldman, Partner, Richardson Patel LLP, January 15, 2014 (‘‘Richardson Patel Letter’’). 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. 37 Richardson Patel Letter (recommending that for offerings of less than $10 million under Tier 2, the rules should require that: (a) Monies raised be placed into escrow, minus underwriters compensation and 10% for offering expenses, until a reverse merger is completed; (b) a combination with an operating business be completed within three years; (c) full Form 10 information be disclosed regarding a pending reverse merger to investors who will have 15–20 days to reconfirm their investment or receive their money back; (d) there be no requirement that a certain percentage of investors reconfirm; and (e) accredited investors have no limit on the investment they make in the offering). 38 Letter from Mark Kosanke, President, Real Estate Investment Securities Association, March 24, 2014 (‘‘REISA Letter’’) (suggesting that the Commission base the eligibility test on the issuer having an ‘‘established track record’’ or some minimum amount of assets). 39 ABA BLS Letter; Letter from Gilman Law LLC, March 24, 2014 (‘‘Gilman Law Letter’’); MoFo Letter; Letter from Serenity Storage, January 5, 2014 (‘‘Serenity Storage Letter’’). VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 companies and shell companies as eligible issuers, as proposed.40 relying on Exchange Act Rule 12g3–2(b) to make offerings under Regulation A.49 (1) Non-Canadian Foreign Issuers (2) BDCs A number of commenters supported making BDCs eligible issuers under Regulation A.50 Most of these commenters noted that BDCs serve an important function in facilitating small or emerging business capital formation or in providing a bridge from the private to public markets.51 Several of these commenters recommended at least allowing small business investment company (SBIC) licensed BDCs to use the exemption given the review process such entities are required to undergo with the U.S. Small Business Administration.52 One of these commenters noted that if BDCs become eligible to use Regulation A, the Commission should consider requiring them to provide quarterly financial disclosure so as to enhance transparency and provide the market with critical investment information.53 Many commenters recommended making non-Canadian foreign companies eligible issuers under Regulation A.41 Several commenters suggested that the proposed approach to non-Canadian foreign companies is inconsistent with the treatment of foreign private issuers in registered offerings.42 Additionally, commenters noted a variety of benefits arising from allowing foreign companies to access the U.S. capital markets through Regulation A offerings, including job creation,43 increasing the amount of disclosure available for investors in foreign companies,44 encouraging domestic exchange listings,45 expanding investment opportunities for U.S. investors,46 and general economic benefits.47 One commenter recommended making all foreign private issuers eligible if they maintained a principal place of business in the United States.48 Two commenters also recommended permitting companies 40 Letter from Jonathan C. Guest, McCarter & English, LLP, February 19, 2014 (‘‘McCarter & English Letter’’) (also opposing any limitation on issuer eligibility on the basis of whether most of the offering proceeds were being used in connection with the issuer’s operations in the United States, noting that many Canadian issuers would be excluded as a result); OTC Markets Letter. 41 ABA SIL Letter; Letter from Scott Kupor, Managing Partner, Andreessen Horowitz, and Jeffrey M. Solomon, Chief Executive Officer, Cowen and Company, February 26, 2014 (‘‘Andreessen/ Cowen Letter’’); Letter from BDO USA, LLP, March 20, 2104 (‘‘BDO Letter’’); Canaccord Letter (suggesting expanding issuer eligibility to companies organized in jurisdictions with ‘‘robust securities regulation systems’’ such as the United Kingdom and other countries in the European Union, Australia, and Asian markets such as Singapore and Hong Kong); McCarter & English Letter; OTC Markets Letter; Richardson Patel Letter; Letter from Michael T. Lempres, Assistant General Counsel, SVB Financial Group, March 21, 2014 (‘‘SVB Financial Letter’’); Letter from Bill Soby, Managing Director, Silicon Valley Global Shares, March 24, 2014 (‘‘SVGS Letter’’). 42 Andreessen/Cowen Letter; BDO Letter; Richardson Patel Letter. In the context of registered offerings, foreign private issuers may provide scaled disclosure if it qualifies as a ‘‘smaller reporting company,’’ which is defined in Item 10(f)(1) of Regulation S–K, 17 CFR 229.10(f)(1), Securities Act Rule 405, 17 CFR 230.405, and Exchange Act Rule 12b–2, 17 CFR 240.12b–2, and rely on other disclosure accommodations. 43 ABA SIL Letter; SVGS Letter (noting that highpaying jobs would be created by expanding global tech companies). 44 SVB Financial Letter. 45 Andreessen/Cowen Letter; SVB Financial Letter. 46 Andreessen/Cowen Letter; OTC Markets Letter. 47 ABA SIL Letter; Andreessen/Cowen Letter; McCarter & English Letter; SVB Financial Letter. 48 ABA SIL Letter. PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 (3) Potential Limits on Issuer Size Several commenters opposed using the issuer’s size to limit eligibility.54 Two of these commenters thought that the $50 million offering limit for Tier 2 would already limit the utility of the 49 McCarter & English Letter; OTC Markets Letter. Rule 12g3–2(b) generally provides foreign private issuers with an automatic exemption from registration under Section 12(g) if the issuer (i) is not required to file reports under Exchange Act Sections 13(a) or 15(d); (ii) maintains a listing of the subject class of securities on one or two exchanges in non-U.S. jurisdictions that comprise more than 55% of its worldwide trading volume; and (iii) publishes in English on its Web site certain material items of information. See 17 CFR 240.12g3–2(b). 50 ABA BLS Letter; CFIRA Letter 1; Letter from Michael Sauvante, Executive Director, Commonwealth Fund LLC, March 21, 2014 (‘‘Commonwealth Fund Letter 1’’); Letter from Michael Sauvante, Executive Director, Commonwealth Fund LLC, March 22, 2014 (‘‘Commonwealth Fund Letter 2’’); KVCF Letter; Letter from Daniel Gorfine, Director, Financial Markets Policy, and Staci Warden, Executive Director, Center for Financial Markets, Milken Institute, March 19, 2014 (‘‘Milken Institute Letter’’); MoFo Letter; REISA Letter; SBIA Letter; WR Hambrecht + Co Letter. 51 ABA BLS Letter; CFIRA Letter 1; Commonwealth Fund Letter 1; Commonwealth Fund Letter 2; KVCF Letter; Milken Institute Letter; MoFo Letter; REISA Letter; SBIA Letter; WR Hambrecht + Co Letter. 52 Milken Institute Letter; SBIA Letter. A SBIClicensed BDC is a company that is licensed by the Small Business Administration (SBA) to operate as such under the Small Business Investment Act of 1958. 53 Milken Institute Letter. 54 Letter from E. Cartier Esham, Executive Vice President, Emerging Companies, Biotechnology Industry Organization (BIO), March 11, 2014 (‘‘BIO Letter’’); IPA Letter; Letter from Tom Quaadman, Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce, March 24, 2014 (‘‘U.S. Chamber of Commerce Letter’’). E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations exemption for issuers on the basis of issuer size—with smaller issuers likely benefitting most from the exemption— and recommended against size-based eligibility criteria that may be difficult to define.55 One commenter suggested that most issuers with a large public float would likely be subject to Exchange Act reporting requirements and therefore would be ineligible to use Regulation A.56 Another commenter noted that a size restriction based on public float would be particularly harmful to biotechnology companies, because they often have a public float that is disproportionately high in relation to their corporate structure, number of employees, or revenues.57 (4) Exchange Act Reporting Companies A number of commenters supported allowing Exchange Act reporting companies to conduct offerings under Regulation A.58 Several of these commenters recommended allowing Exchange Act reporting companies that are current in their reporting obligations to conduct Tier 2 offerings,59 with one commenter limiting its recommendation to companies with a non-affiliate float of less than $250 million.60 Three commenters further suggested that, if Exchange Act reporting companies are permitted to conduct offerings pursuant to Regulation A, Exchange Act reporting should satisfy any Regulation A reporting obligation.61 One such commenter further suggested that Exchange Act reporting companies should be required to be current in their Exchange Act reporting obligations in order to be eligible to rely on the exemption, in a manner that is consistent with Regulation A as it existed before 1992.62 c. Final Rules We are adopting the issuer eligibility criteria as proposed. Under the final rules, Regulation A will be limited to companies organized in and with their 55 BIO Letter; U.S. Chamber of Commerce Letter. Letter. 57 BIO Letter. 58 Andreessen/Cowen Letter; BIO Letter; OTC Markets Letter; Letter from U.S. Senator Pat Roberts, May 27, 2014 (‘‘Sen. Roberts Letter’’); Letter from Jack H. Brier, President and Founder, US Alliance Corporation, March 19, 2014 (‘‘US Alliance Corp. Letter’’). 59 Andreessen/Cowen Letter; BIO Letter; OTC Markets Letter. 60 BIO Letter. 61 Andreessen/Cowen Letter; CFIRA Letter 1; OTC Markets Letter. 62 CFIRA Letter 1. Before amendments to Regulation A were adopted in 1992, Exchange Act reporting companies were permitted to conduct offerings in reliance on Regulation A, provided they were current in their public reporting. See 17 CFR 230.252(f) (1992). mstockstill on DSK4VPTVN1PROD with RULES2 56 IPA VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 principal place of business in the United States or Canada. It will be unavailable to: • Companies subject to the ongoing reporting requirements of Section 13 or 15(d) of the Exchange Act; • companies registered or required to be registered under the Investment Company Act of 1940 and BDCs; • blank check companies; • issuers of fractional undivided interests in oil or gas rights, or similar interests in other mineral rights; • issuers that are required to, but that have not, filed with the Commission the ongoing reports required by the rules under Regulation A 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); • 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; 63 and • issuers subject to ‘‘bad actor’’ disqualification under Rule 262.64 We expect that the amendments we are adopting will significantly expand the utility of the Regulation A offering exemption. Our approach in the final rules is generally to maintain the issuer eligibility requirements of existing Regulation A with the limited addition of two new categories of ineligible issuers. We believe this approach will provide important continuity in the Regulation A regime as it expands in the way Congress mandated. For this reason, we do not believe it is necessary to adopt final rules to exclude issuers that are currently eligible to conduct Regulation A offerings. Additionally, we recognize that expanding the categories of eligible issuers, as suggested by a number of commenters, could provide certain benefits, including increased investment opportunities for investors and avenues for capital formation for certain issuers. We are concerned, however, about the implications of extending issuer eligibility before the Commission has the ability to assess the impact of the changes to Regulation A being adopted today. In light of these changes, we believe it prudent to defer expanding the categories of eligible issuers (for example, by including nonCanadian foreign issuers, BDCs, or Exchange Act reporting companies) until the Commission has had the opportunity to observe the use of the 63 See 64 See PO 00000 Rule 251(b). Rule 262. Frm 00007 Fmt 4701 Sfmt 4700 21811 amended Regulation A exemption and assess any new market practices as they develop. Additionally, we are not adopting further restrictions on eligibility at this time. In light of the disclosure requirements contained in the final rules, we do not believe that it is necessary to exclude additional types of issuers, such as shell companies, issuers of penny stock, or other types of investment vehicles, from relying on the exemption in Regulation A. At the same time, we are concerned about potentially increased risks to investors that could result from extending issuer eligibility to other types of entities, such as blank check companies, before the Commission has the opportunity to observe developing market practices. We therefore believe the prudent approach with respect to any potential expansion of issuer eligibility is to give the Regulation A market time to develop under rules that we are adopting today. We also do not believe it is necessary to limit availability of the exemption to issuers of a certain size, as we agree with commenters that suggested that the annual offering limit will serve to limit the utility of the exemption for larger issuers in need of greater amounts of capital. We further do not believe that it is appropriate to limit the availability of the exemption to ‘‘operating companies,’’ as that term would restrict availability of the exemption to fewer issuers than are currently eligible under Regulation A, such as by excluding shell companies. As proposed, the final rules include two new issuer eligibility requirements that add important investor protections to Regulation A. First, potential issuers must have filed all required ongoing reports under Regulation A 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) to remain eligible to conduct offerings pursuant to the rules. This requirement will benefit investors by providing them with more information, with respect to issuers that have previously made a Regulation A offering, to consider when making an investment decision, facilitate the development of an efficient secondary market in such securities, and enhance our ability to analyze and observe the Regulation A market. Second, issuers subject to orders by the Commission entered pursuant to Section 12(j) of the Exchange Act within a five-year period immediately preceding the filing of the offering statement will not be eligible to conduct an offering pursuant to Regulation A. This requirement will increase investor protection and E:\FR\FM\20APR2.SGM 20APR2 21812 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations compliment the exclusion of delinquent Regulation A filers discussed immediately above by excluding issuers with a demonstrated history of delinquent filings under the Exchange Act from the pool of eligible issuers under Regulation A. 401 of the JOBS Act was enacted to facilitate the issuance of asset-backed securities. 2. Eligible Securities We proposed to amend Regulation A to create two tiers of requirements: Tier 1, for offerings of up to $5 million of securities in a 12-month period; and Tier 2, for offerings of up to $50 million of securities in a 12-month period.70 As proposed, issuers could conduct offerings of up to $5 million under either Tier 1 or Tier 2. Consistent with the existing provisions of Regulation A, we also proposed to permit sales by selling securityholders of up to 30% of the maximum offering amount permitted under the applicable tier ($1.5 million in any 12-month period for Tier 1 and $15 million in any 12-month period for Tier 2). Sales by selling securityholders under either tier would be aggregated with sales by the issuer for purposes of calculating the maximum permissible amount of securities that may be sold during any 12-month period. In addition, we proposed 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. a. Proposed Rules 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.’’ 65 The proposed rules would have limited 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) and also would have excluded asset-backed securities, as defined in Regulation AB, from the list of eligible securities. b. Comments on the Proposed Rules Several commenters supported the exclusion of asset-backed securities from the list of eligible securities.66 One commenter recommended clarifying that warrants exercisable for equity or debt securities are eligible securities.67 c. Final Rules We are adopting final rules that limit the types of securities eligible for sale under Regulation A to the specifically enumerated list in Section 3(b)(3), which includes warrants and convertible equity securities, among other equity and debt securities.68 The final rules exclude asset-backed securities from the list of eligible securities. Asset-backed securities are subject to the provisions of Regulation AB and other rules specifically tailored to the offering process, disclosure, and reporting requirements for such securities. These rules were not in effect when Regulation A was last updated in 1992.69 We do not believe that Section 65 15 U.S.C. 77c(b)(3). BLS Letter; Carey Letter; Massachusetts Letter 2; NASAA Letter 2; WDFI Letter. 67 ABA BLS Letter. 68 See Rule 261(c); see also Rule 405 (defining ‘‘equity security’’ to include, among other things, warrants and certain convertible securities). We have also revised the proposed definition in Rule 261(c) to clarify that all securities, rather than just equity securities, that are convertible or exchangeable into equity interests are eligible, subject to the other terms of Regulation A. 69 Regulation AB, 17 CFR 229.1100 et seq., went into effect in 2005. See 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 mstockstill on DSK4VPTVN1PROD with RULES2 66 ABA VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 3. Offering Limitations and Secondary Sales a. Proposed Rules b. Comments on the Proposed Rules Commenters were generally supportive of the proposed offering limitations on primary and secondary offerings. Many commenters, however, suggested changes to the proposed offering limits for both tiers, as well as to the proposed limits on secondary sales. (1) Offering Limitation Several commenters recommended that the Commission increase the $50 million offering limitation for Tier 2.71 fixed or revolving, that by its terms converts into cash within a finite time period. 70 As proposed, 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. 71 Letter from Salomon Kamalodine, Director, Investment Banking, B. Riley & Co., March 24, 2014 (‘‘B. Riley Letter’’); Letter from William Klehm, Chairman and CEO, Fallbrook Technologies, March 22, 2014 (‘‘Fallbrook Technologies Letter’’) (recommended raising the limit to $75 million); OTC Markets Letter (recommended raising the limit to $80 million); Jason Coombs, Co-Founder and CEO, Public Startup Company, Inc., March 24, 2014 (‘‘Public Startup Co. Letter 1’’) (recommended PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 As an alternative, one commenter recommended applying the $50 million limit on a per offering basis rather than on a 12-month basis, and suggested that the Commission consider eliminating the offering limits for certain types of issuers, such as those that have yet to generate revenue.72 Additionally, two commenters recommended that the Commission do more to increase the utility of Tier 1 offerings by raising the Tier 1 offering limitation to $10 million or more in a 12-month period.73 Another commenter suggested that the Commission create a third tier in between Tier 1 and Tier 2 that would have a $15 million offering limitation.74 With respect to offering limit calculations, one commenter recommended that the aggregate offering price of the underlying security only be included in the $50 million offering limitation during the 12-month period in which such security is first convertible, exercisable, or exchangeable.75 This commenter suggested that its recommended approach would accommodate common small business offering structures that involve warrants exercisable at a premium over several years. (2) Secondary Sales Offering Limitation Several commenters specifically supported the proposed limitations on secondary sales.76 While some commenters indicated their support for resale limitations,77 they expressed a preference for either proscribing resales entirely 78 or requiring the approval of the resale offering by a majority of the issuer’s independent directors upon a finding that the offering is in the best interests of both the selling securityholders and the issuer.79 One commenter recommended prohibiting raising the limit to $75 million); Richardson Patel Letter (recommended raising the limit to $100 million). 72 Richardson Patel Letter. 73 Letter from Samuel S Guzik, Guzik and Associates, March 24, 2014 (‘‘Guzik Letter 1’’) (recommended raising the limit to ‘‘at least $10 million’’); Letter from Christopher Cole, Senior Vice President and Senior Regulatory Counsel, Independent Community Bankers of America, March 25, 2014 (‘‘ICBA Letter’’) (encouraged increasing the limit ‘‘from $5 million to $10 million’’). 74 Public Startup Co. Letter 1. 75 Andreessen/Cowen Letter; cf. Proposing Release, fn. 112. 76 Massachusetts Letter 2; NASAA Letter 2; Richardson Patel Letter; WDFI Letter. 77 Massachusetts Letter 2; NASAA Letter 2; WDFI Letter. 78 Massachusetts Letter 2; NASAA Letter 2. 79 NASAA Letter 2 (supporting the proposed limits coupled with a board approval requirement in lieu of prohibiting resales entirely); WDFI Letter (not expressing a preference for prohibiting resales entirely). E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations resales under Regulation A entirely.80 Another commenter recommended requiring selling securityholders to hold the issuer’s securities for 12 months before being eligible to sell pursuant to Regulation A, in order to distinguish between investors seeking to invest in a business and investors simply seeking to sell to the public for a gain.81 Many other commenters recommended raising the resale limits or eliminating them entirely.82 One such commenter recommended alternatively removing non-affiliate securityholders from the resale limitation since concerns over investor information asymmetries would be reduced when dealing with non-affiliate securityholders.83 This commenter also recommended that the Commission reevaluate the need for resale limits within a year of implementing the rules. Another commenter also recommended allowing for unlimited sales by nonaffiliate selling securityholders and further suggested that the rules not aggregate such sales with issuer sales.84 Two commenters suggested that limitations on resales are contrary to the Congressional intent behind the enactment of Title IV of the JOBS Act.85 (3) Rule 251(b) Many commenters specifically supported the proposed elimination of the requirement that issuers must have had net income from continuing operations in at least one of its last two fiscal years in order for affiliate resales to be permitted, generally noting that many companies have net losses for many years, including, for example, due to high research and development costs.86 c. Final Rules We are adopting the proposed amendments to Regulation A with modifications to the Tier 1 offering limitation and the secondary sales offering limitation. We discuss these amendments in detail below. We are also making a technical change to clarify 80 Carey Letter. from Andrew M. Hartnett, Missouri Commissioner of Securities, March 24, 2014 (‘‘MCS Letter’’). 82 ABA BLS Letter; B. Riley Letter; Canaccord Letter; CFIRA Letter 1; Milken Institute Letter; MoFo Letter; Richardson Patel Letter; WR Hambrecht + Co Letter. 83 Milken Institute Letter. 84 B. Riley Letter. 85 CFIRA Letter 1; WR Hambrecht + Co Letter (noting that the JOBS Act contemplated an increase in the offering threshold to $50 million, but did not limit the percentage that could be sold by selling securityholders). 86 ABA BLS Letter; B. Riley Letter; Canaccord Letter; CFIRA Letter 1; Milken Institute Letter; MoFo Letter; WR Hambrecht + Co Letter. mstockstill on DSK4VPTVN1PROD with RULES2 81 Letter VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 the description of how compliance with the offering limitations is calculated in Rule 251(a).87 Tier 1 As discussed more fully in the ‘‘Additional Considerations for Smaller Offerings’’ section below, we are making changes to the proposed rules in response to comments and to increase the utility of Tier 1 of the Regulation A exemption.88 Several commenters 89 and a report on the impact of state securities law requirements on offerings conducted under Regulation A by the U.S Government Accountability Office (GAO), as required by Section 402 of the JOBS Act,90 highlighted the $5 million offering limitation in existing Regulation A as one of the main factors limiting the utility of the exemption. In certain circumstances, fixed costs associated with conducting Regulation A offerings, such as legal and accounting fees, may serve as a disincentive to use the exemption for lower offering amounts. We are therefore increasing the offering limitation in the final rules for Tier 1 offerings in a 12-month period from the proposed $5 million limitation to $20 million.91 We believe that raising the offering limitation for Tier 1 offerings, in addition to other changes discussed in Section II.I. below, will increase the utility of the exemption for smaller issuers by providing them with additional options for capital formation and potentially increasing the proceeds received by the issuer. Consistent with the proportionate limitation on secondary sales in the proposed rules, we are also increasing the limitation on secondary sales in Tier 1 offerings in a 12-month period from the proposed $1.5 million limitation to $6 million. 87 The proposed rules used the phrase ‘‘aggregate offering price for all securities sold’’ when discussing the gross proceeds resulting from prior or anticipated sales of securities under Regulation A. We have clarified Rule 257(a)(1) to define as ‘‘aggregate sales’’ gross proceeds within the prior 12 month time frame contemplated by Regulation A. We have also made conforming changes elsewhere in the final rules and forms. 88 See Section II.I. below. 89 See, e.g., Guzik Letter 1; ICBA Letter; Public Startup Co. Letter 1. 90 Factors that May Affect Trends in Regulation A Offerings, GAO–12–839 (July 2012) (the ‘‘GAO Report’’) (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. 91 Rule 251(a)(1). We intend to revisit the Tier 1 offering limitation at the same time that we are required by Section 3(b)(5) of the Securities Act to review the Tier 2 offering limitation and will consider whether additional investor protections would be necessary if the Tier 1 offering limitation is increased. PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 21813 Tier 2 We are adopting the proposed $50 million Tier 2 offering limitation.92 Some commenters suggested that we raise the offering limitation to an amount above the statutory limitation set forth in Section 3(b)(2), but we do not believe an increase is warranted at this time. While Regulation A has existed as an exemption from registration for some time, today’s changes are significant. We believe that the final rules for Regulation A will provide for a meaningful addition to the existing capital formation options of smaller companies while maintaining important investor protections. We are concerned, however, about expanding the offering limitation of the exemption beyond the level directly contemplated in Section 3(b)(2) at the outset of the adoption of final rules. As noted above in Section II.B.1., the final rules do not limit issuer eligibility on the basis of issuer size, as we believe that the $50 million annual offering limitation will serve to limit the utility of the exemption for larger issuers in need of greater amounts of capital. Similarly, we believe that the more extensive disclosure requirements associated with Exchange Act reporting are more appropriate for larger and generally more complex issuers that raise money in the public capital markets.93 We are therefore concerned that an increase in the offering limitation at this time may increase risks to investors by encouraging larger issuers to conduct offerings pursuant to Regulation A in instances where disclosure pursuant to a registered offering under the Securities Act would be more appropriate. The Commission is required by Section 401 of the JOBS Act to review the Section 3(b)(2) offering limitation every two years, and we will consider the use of the final rules by market participants as part of that review. We will therefore revisit the offering limitation by April 2016, as required by the statute, with a view to considering whether to increase the $50 million offering limitation. We also are adopting the proposed $15 million limitation on secondary sales for Tier 2 as proposed, with a change in the application of the limitation for secondary sales under both Tier 1 and Tier 2 discussed in the following section. Application of the Limitation on Secondary Sales As noted in the Proposing Release, secondary sales are an important part of Regulation A. We believe that allowing 92 Rule 93 See E:\FR\FM\20APR2.SGM 251(a)(2). discussion in Section III.C.3. below. 20APR2 mstockstill on DSK4VPTVN1PROD with RULES2 21814 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations selling securityholders access to avenues for liquidity will encourage them to invest in companies, although we acknowledge that providing for secondary sales in any amount may give rise to certain concerns. As highlighted by at least one commenter at the preproposing stage, permitting some secondary sales pursuant to Regulation A could place investors at an informational disadvantage to selling securityholders who have potentially greater access to inside information about the issuer and does not necessarily provide capital to the issuer.94 Other commenters stated that such concerns are misplaced in the context of secondary sales by nonaffiliates, who generally do not have access to inside information.95 We do not believe that a wholesale prohibition on secondary sales, as suggested by some commenters, is appropriate or necessary for either Tier 1 or Tier 2 of Regulation A. However, in order to strike an appropriate balance between allowing selling securityholders continued access to avenues for liquidity in Regulation A and the concern that secondary offerings do not directly provide new capital to companies and could pose the potential risks to investors discussed above, the final rules continue to permit secondary sales but provide additional limitations on secondary sales in the first year. The final rules limit the amount of securities that selling securityholders can sell at the time of an issuer’s first Regulation A offering and within the following 12 months to no more than 30% of the aggregate offering price of a particular offering.96 While the final rules continue to provide selling securityholders with the flexibility to sell securities during this period, we believe that this approach to the final rules will help to ensure that secondary sales at the time of such offerings will be made in conjunction with capital raising events by the issuer. Further, we are providing different requirements for secondary sales by affiliates and by non-affiliates. The final rules limit secondary sales by affiliates that occur following the expiration of the first year after an issuer’s initial qualification of an offering statement to no more than $6 million, in the case of Tier 1 offerings, or no more than $15 million, in the case of Tier 2 offerings, over a 12-month period. Secondary sales by non-affiliates that are made pursuant 94 Letter from A. Heath Abshure, President, NASAA, April 10, 2013 (‘‘NASAA (pre-proposal) Letter’’). 95 See, e.g., Milken Institute Letter. 96 Rule 251(a)(3) (Additional limitation on secondary sales in first year). VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 to a qualified offering statement following the expiration of the first year after an issuer’s initial qualification of an offering statement will not be limited except by the maximum offering amount permitted by either Tier 1 or Tier 2.97 Although the secondary sales offering amount limitation will only apply to affiliates during this period, consistent with the proposal, non-affiliate secondary sales will be aggregated with sales by the issuer and sales by affiliates for purposes of calculating compliance with the maximum offering amount permissible under the respective tiers.98 We do not believe that the concerns expressed by one commenter about informational disadvantages that may exist with affiliate sales are present with respect to resales by non-affiliates.99 On the contrary, in comparison to requirements for non-affiliate resales of restricted securities after the expiration of Securities Act Rule 144 holding periods,100 we believe that Regulation A provides purchasers of such securities with the benefit of, among other things, narrative and financial disclosure that is reviewed and qualified by the Commission in transactions that are subject to Section 12(a)(2) liability and the antifraud provisions of Section 17 of the Securities Act.101 We also disagree with the commenters who suggested limitations on secondary sales are contrary to the legislative intent behind the enactment of Title IV of the JOBS Act. We note that Section 3(b)(2) expressly provides that the Commission may impose additional terms, conditions, or requirements as it deems necessary in the public interest and for the protection of investors.102 For the reasons discussed above, we believe that limiting secondary sales by affiliates is not only consistent with the language and purpose of the statute but also necessary in the public interest and for the protection of investors. Offering Limit Calculation Under the proposal, if the offering included securities that are convertible 97 Rule 251(a). sales of shares acquired in a Regulation A offering—which are freely tradable— are not subject to limitations on secondary sales, but must be resold under an exemption from Securities Act registration (e.g., Section 4(a)(1), 15 U.S.C. 77d(a)(1)). 99 NASAA (pre-proposal) Letter. 100 Under Rule 144, non-affiliates of an issuer are, among other things, permitted to resell restricted securities after the expiration of a one-year holding period without limitations or requirements as to: (i) The availability of current public information about the issuer or its securities, (ii) the volume of resales, (iii) the manner of sale, or (iv) disclosure. See 17 CFR 230.144. 101 15 U.S.C. 77l(a)(2), 77q. 102 See Section 3(b)(2)(G), 15 U.S.C. 77c(b)(2)(G). 98 Secondary PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 into, or exercisable or exchangeable for, other securities (rights to acquire), the offer and sale of the underlying securities also would generally be required to be qualified,103 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.104 Consistent with the views of at least one commenter,105 we are concerned that the proposed requirement could have a greater impact on smaller issuers than larger issuers because smaller issuers frequently issue rights to acquire other securities in capital raising events. The proposed method of calculating the offering limit would presume the exercise price of underlying securities that, by their terms, may occur at a date in the distant future or only upon the occurrence of key events. By including all securities underlying any rights to acquire other securities in the offering limit calculation, the proposed rules could effectively limit the proceeds of an offering available to an issuer by requiring such issuers to include in the aggregate offering price at the time of qualification the securities underlying rights to acquire that may or may not become exercisable or exchangeable in the future. We are adopting final rules that will require issuers to aggregate the price of all securities for which qualification is currently being sought, including the securities underlying any rights to acquire that are convertible, exercisable, or exchangeable within the first year after qualification or at the discretion of the issuer. As such, and consistent with the treatment of rights to acquire in the context of registered offerings, if an offering includes rights to acquire other securities at a time more than one year after qualification and the issuer does not otherwise seek to qualify such underlying securities, the aggregate offering price would not include the aggregate conversion, exercise, or exchange price of the underlying securities.106 For purposes 103 Qualification would not be required for securities transactions exempt from registration pursuant to Securities Act Section 3(a)(9), 15 U.S.C. 77c(a)(9). Section 3(a)(9) exempts from registration any security exchanged by the issuer with its existing security holders exclusively where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange. 104 See note to proposed Rule 251(a). 105 Andreessen/Cowen Letter. 106 See note to Rule 251(a). In these circumstances, the securities underlying the rights to acquire would need to be separately qualified under Regulation A or, depending on the circumstances, registered, exempt from registration, or otherwise offered in an appropriate manner at the time of issuance. E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations of calculating the price of underlying securities that use a pricing formula, as opposed to a known conversion price, the issuer will be required to use the maximum estimated price for which such securities may be converted, exercised, or exchanged.107 Rule 251(b) We are adopting as proposed final rules that eliminate the last sentence of Rule 251(b),108 which prohibited affiliate resales unless the issuer had net income from continuing operations in at least one of its last two fiscal years. We agree with the views expressed by commenters that the absence of net income, by itself, is not a sufficient indicator of an enhanced risk that existing shareholders will use informational advantages to transfer their holdings to the investing public that would necessitate the continued application of the prohibition in the final rules. Further, as noted in the Proposing Release, the Commission’s current disclosure review and qualification processes and enforcement programs are significantly more sophisticated and robust than they were when this provision was added to Regulation A in its original form.109 In addition, the final rules being adopted today include revised ‘‘bad actor’’ disqualification provisions and additional issuer eligibility requirements aimed at limiting access to the exemption for market participants with demonstrated track records of noncompliance or abuse.110 4. Investment Limitation mstockstill on DSK4VPTVN1PROD with RULES2 a. Proposed Rules Regulation A does not currently limit the amount of securities an investor can purchase in a qualified Regulation A offering. As we noted in the Proposing Release, however, we recognize that with the increased annual offering limitation provided in Section 3(b)(2) comes a risk of commensurately greater investor losses.111 To address that risk we proposed, among other things, 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 or their net worth. For this purpose, annual income and net worth would be calculated as provided in the accredited investor definition 107 Id. 108 17 CFR 230.251(b) (2014). Proposing Release, at Section II.B.3. 110 See discussions in Section II.G (Bad Actor Disqualification) below and Section II.B.1 (Eligible Issuers) above. 111 See Proposing Release, at Section II.B.4. 109 See VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 under Rule 501 of Regulation D.112 Under the proposal, issuers would be required to make investors aware of the investment limitations,113 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. b. Comments on Proposed Rules A number of commenters generally supported investment limitations for Tier 2 offerings.114 These commenters believed that an investment limitation would serve as an important investor protection. Several commenters recommended revisiting the necessity of the limitations after a one- to three- year trial period,115 and another commenter 116 recommended extending the investment limitation to Tier 1 offerings to make them more consistent with our proposed rules for securitiesbased crowdfunding transactions conducted pursuant to Section 4(a)(6) of the Securities Act.117 Some commenters’ support for the proposed investment limitations was conditioned on suggested changes to the proposed rules that would require issuers to do more to ensure compliance with the limitations and that would impose adverse consequences on issuers for the failure to do so.118 One commenter believed that the 10% limitation is ‘‘significantly higher’’ than is appropriate for ‘‘all but the wealthiest, least risk averse’’ investors.119 Two commenters suggested that the 10% limitation should be aggregated across all Regulation A offerings instead of being applied on a per offering basis,120 while one commenter specifically argued against such an aggregated limit.121 112 17 CFR 230.501. paragraph (a)(5) to Part II of proposed Form 1–A. 114 CFA Institute Letter; IPA Letter; Letter from Robert Kisel, Small Business Owner, March 18, 2014 (‘‘Kisel Letter’’) (erroneously referring to the 10% limit as a 5% limit); MCS Letter; REISA Letter; Richardson Patel Letter; WDFI Letter. 115 CFIRA Letter 1; Kisel Letter; Milken Institute Letter. 116 CFA Institute Letter. 117 See Crowdfunding, Rel. No. 33–9470 [78 FR 66427] (Nov. 5, 2013). 118 CFA Institute Letter; MCS Letter; WDFI Letter. 119 Letter from Barbara Roper, Director of Investor Protection, Consumer Federation of America, March 24, 2014 (‘‘CFA Letter’’). 120 CFA Letter (not recommending this specifically, but noting this as one reason why the investment limit was not an adequate substitute for state review of Tier 2 offerings); William A. Jacobson, Clinical Professor of Law, Cornell Law School, and Director, Cornell Securities Law Clinic, March 24, 2014 (‘‘Cornell Clinic Letter’’). 121 KVCF Letter. 113 See PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 21815 Numerous commenters recommended eliminating the investment limitation for Tier 2 offerings.122 Several of these commenters alternatively recommended at least doubling the limit if the provision is not eliminated entirely.123 Other commenters thought that the investment limitation is unnecessary in light of the other investor protections for Tier 2 offerings, such as the expanded disclosure requirements.124 Several commenters noted that the limit does not have a statutory basis and suggested that it may be contrary to Congressional intent,125 or contrary to the principles underlying federal securities law, which focus on fraud prevention and full disclosure.126 One commenter recommended eliminating the investment limitations only if the final rules do not preempt state law registration requirements for Tier 2 offerings, arguing that the limitations may conflict with state investor suitability standards,127 while another commenter indicated that investment limitations would be unnecessary with appropriate state oversight, but supported limits for retail investors in startup companies and high-risk offerings.128 Another commenter recommended creating various categories of investor sophistication with corresponding requirements and limitations for each.129 Many commenters, including those both for and against the investment limit, recommended providing exceptions to the limit for certain types of investors, such as accredited investors, or altering the application of 122 ABA BLS Letter; Andreessen/Cowen Letter; B. Riley Letter; CFIRA Letter 1; CFIRA Letter 2; Fallbrook Technologies Letter; Letter from Groundfloor Finance, Inc., Nov. 18, 2014 (‘‘Groundfloor Letter’’); Heritage Letter; ICBA Letter; IPA Letter; Letter from Ford C. Ladd, Esq., May 19, 2014 (‘‘Ladd Letter 2’’); Letter from John Rodenrys, Executive Director R&D, Leading Biosciences, Inc., March 24, 2014 (‘‘Leading Biosciences Letter’’); Milken Institute Letter; MoFo Letter; NASAA Letter 2; Letter from Michael L. Zuppone, Paul Hastings LLP, March 24, 2014 (‘‘Paul Hastings Letter’’); Letter from Jason Coombs, Co-Founder and CEO, Public Startup Company, Inc., April 2, 2014 (‘‘Public Startup Co. Letter 7’’); SVB Financial Letter. 123 Fallbrook Technologies Letter; Leading Biosciences Letter; ICBA Letter. 124 ABA BLS Letter; Andreessen/Cowen Letter; B. Riley Letter; MoFo Letter; Paul Hastings Letter; SVB Financial Letter. 125 ABA BLS Letter; Andreessen/Cowen Letter; CFIRA Letter 1; Heritage Letter; MoFo Letter; WR Hambrecht + Co Letter. 126 ABA BLS Letter; B. Riley Letter; Heritage Letter; Milken Institute Letter. 127 Groundfloor Letter. 128 NASAA Letter 2. 129 Cornell Clinic Letter (recommending the tiered investment limits in our proposed rules for securities-based crowdfunding as an example). E:\FR\FM\20APR2.SGM 20APR2 21816 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES2 the limit to such types of investors.130 These commenters believed that the investor protections afforded by the investment limit would not be necessary for all types of investors or in all types of Regulation A offerings. Some commenters recommended eliminating the investment limit for accredited investors.131 One such commenter recommended eliminating the investment limit generally and, if not, at least for institutional investors and offerings of securities listed on securities exchanges.132 Several commenters recommended eliminating the investment limit for non-natural persons or institutional investors.133 Other commenters recommended eliminating the investment limits for other types of investors or offerings.134 Two commenters noted that it would be difficult to apply the investment limits to non-natural persons (such as small businesses and IRAs) if the rules use an income or net worth test.135 One of these commenters recommended that, if the test applies to such investors, it should be based on assets or revenue.136 Many commenters explicitly supported allowing issuers to rely on an investor’s representation of compliance 130 ABA BLS Letter; Andreessen/Cowen Letter; Canaccord Letter; Cornell Clinic Letter; Fallbrook Technologies Letter; Heritage Letter; Ladd Letter 2; Leading Biosciences Letter; McCarter & English Letter; MCS Letter; Milken Institute Letter; MoFo Letter; Paul Hastings Letter; Richardson Patel Letter; SVB Financial Letter; WR Hambrecht + Co Letter. 131 ABA BLS Letter; Andreessen/Cowen Letter; Canaccord Letter; Fallbrook Technologies Letter; Heritage Letter; Ladd Letter 2; Leading Biosciences Letter; McCarter & English Letter; MCS Letter; MoFo Letter; Paul Hastings Letter; Richardson Patel Letter; SVB Financial Letter; cf. Cornell Clinic Letter (recommending an unspecified higher limit for accredited investors); Milken Institute Letter; WR Hambrecht + Co Letter (supporting eliminating the investment limit generally). 132 Milken Institute Letter. 133 ABA BLS Letter; Canaccord Letter; Milken Institute Letter; MoFo Letter; WR Hambrecht + Co Letter. Several of these commenters believed that, as proposed, the investment limitations would not apply to non-natural persons and asked the Commission to confirm or clarify this point. 134 Cornell Clinic Letter (creating a separate, higher limit for institutional investors and other types of non-retail investors included in the ‘‘accredited investor’’ definition); Heritage Letter (eliminating the investment limit for ‘‘any current or former investor, employee or officer of the issuer’’); Ladd Letter 2 (eliminating the investment limit for any non-accredited affiliates, founders, employees, agents, independent contractors and owners); Milken Institute Letter (eliminating the investment limit for investors that purchase Tier 2 securities on an exchange); Paul Hastings Letter (eliminating the investment limit for offerings conducted by registered broker-dealers); Richardson Patel Letter (eliminating the investment limit for any non-individual investor with at least $100,000 in assets or $100,000 in revenue in the previous fiscal year). 135 McCarter & English Letter; Richardson Patel Letter. 136 Richardson Patel Letter. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 with the 10% investment limit.137 Most of these commenters stated that any more rigorous verification process would cause the compliance costs to be too high. One commenter recommended eliminating any obligation for the issuer to monitor the 10% investment limit and allowing the issuer to rely on a representation by the investor that he or she will notify the issuer upon exceeding the 10% limit.138 Another commenter recommended permitting an issuer to rely on representations from its underwriters or broker-dealers as to the 10% investment limit, rather than having to seek this directly from investors.139 This commenter believed that the issuers in most Tier 2 offerings would have little direct contact with the investors and that the intermediaries would be better positioned to assess compliance (possibly already having information about the investor’s finances). Several commenters disagreed with allowing investors to represent compliance with the investment limitation and recommended a standard that would require an issuer to do more to ensure compliance.140 Two commenters recommended adopting a standard requiring issuers to take reasonable steps to verify that the purchasers are in compliance with the 10% investment limit.141 Two commenters recommended requiring an issuer to have a ‘‘reasonable belief’’ or ‘‘reasonable basis’’ that it can rely on an investor’s representation of compliance with the 10% investment limit.142 One such commenter also suggested allowing accredited investors to exceed the 10% investment limit, but requiring that the issuer take reasonable steps to verify accredited investor status.143 One commenter recommended requiring a ‘‘duty of inquiry’’ so that the issuer would have to follow-up on any ‘‘red flags.’’ 144 Additionally, this commenter recommended that the Commission create an independent and secure means of verifying investor income or to require a mandatory questionnaire for individual investors to complete before 137 Fallbrook Technologies Letter; Heritage Letter; IPA Letter; KVCF Letter; Leading Biosciences Letter; REISA Letter. 138 REISA Letter. 139 KVCF Letter. 140 Letter from Paul Sigelman, President & CEO, Accredited Assurance, March 24, 2014 (‘‘Accredited Assurance Letter’’); CFA Letter; CFA Institute Letter; Cornell Clinic Letter; MCS Letter; WDFI Letter. 141 Accredited Assurance Letter; WDFI Letter. 142 CFA Institute Letter; MCS Letter. 143 MCS Letter. 144 Cornell Clinic Letter. PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 buying a security issued under Regulation A. c. Final Rules We are adopting an investment limitation for Tier 2 offerings in the final rules, with minor modifications from the proposed rules. We believe that the investment limitation serves as an important investor protection and may help to mitigate the risk that with the increased annual offering limitation provided in Section 3(b)(2) comes a risk of commensurately greater investor losses. We do not believe that the limitation is needed for accredited investors because investors that qualify as accredited under our rules satisfy certain criteria that suggest they are capable of protecting themselves in transactions that are exempt from registration under the Securities Act.145 We also do not believe that the limitation is necessary for investments in securities that will be listed on a national securities exchange upon qualification because of the issuer listing requirements and the potential liquidity that exchanges provide to investors that seek to reduce their holdings. These both are important investor protections that help to mitigate concerns about the magnitude of loss that could potentially result from an investor purchasing a large amount of securities in a single offering. Under the final rules, the investment limitations for purchasers in Tier 2 offerings will not apply to purchasers who qualify as accredited investors under Rule 501 of Regulation D.146 Further, investment limitations in a Tier 2 offering will not apply to the sale of securities that will be listed on a national securities exchange upon qualification since such issuers will be required to meet the listing standards of 145 See Rule 501(a) of Regulation D, 17 CFR 230.501(a); see also SEC v. Ralston Purina Co., 346 U.S. 119 (1953). 146 See Rule 252(c)(2). Under Rule 501, natural persons are accredited investors if: (i) Their income exceeds $200,000 in each of the two most recent years (or $300,000 in joint income with a person’s spouse), and they reasonably expect to reach the same income level in the current year; (ii) they serve as executives or directors of the issuer; or (iii) their net worth exceeds $1,000,000 (individual or jointly with a spouse), excluding the value of their primary residence. Certain enumerated entities that satisfy an asset-based test also qualify as accredited investors, while others, including regulated entities such as banks and registered investment companies, are not subject to the asset test. See 17 CFR 230.501. The accredited investor definition is intended to encompass those individuals and entities ‘‘whose financial sophistication and ability to sustain the risk of loss of investment or ability to fend for themselves render the protections of the Securities Act’s registration process unnecessary.’’ See, e.g., Rel. No. 33–6683 (Jan. 16, 1987) [52 FR 3015] (Regulation D Revisions; Exemption for Certain Employee Benefit Plans). E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations a national securities exchange 147 and become subject to ongoing Exchange Act reporting, resulting in additional investor protections. In response to questions raised by commenters, we are clarifying that nonaccredited, non-natural persons are subject to the investment limitation and should calculate the limitation based on no more than 10% of the greater of the purchaser’s revenue or net assets (as of the purchaser’s most recent fiscal year end).148 Non-accredited, natural persons must calculate the investment limitations on the basis of 10% of the greater of the purchaser’s annual income or net worth (determined as provided in Rule 501 of Regulation D).149 If the investor is purchasing securities that are convertible into, or exercisable or exchangeable for, other securities, if such securities are exercisable within a year or otherwise are being qualified, the investment limitation will include the aggregate conversion, exercise, or exchange price of such securities, in addition to the purchase price.150 We believe this is an appropriate calculation because it is consistent with the offering limit calculation for the respective tiers 151 and because it applies investment limitations to reasonably foreseeable investment decisions (i.e., those involving securities exercisable within a year or otherwise qualified by the issuer) while reducing the risk that issuers may seek to sell large amounts of securities that are convertible, exercisable or exchangeable into other securities in the near term at a low cost in an effort to avoid the 10% limitation. As proposed, we are adopting final rules that require issuers to notify investors of the investment limitations.152 Issuers may rely on a representation of compliance with the investment limitation from the investor, unless the issuer knew at the time of sale that any such representation was untrue.153 As we noted in the Proposing mstockstill on DSK4VPTVN1PROD with RULES2 147 National securities exchanges impose certain requirements on issuers, in addition to those generally required by the Commission, in order for an issuer’s securities to be approved for listing. See discussion of listing requirements for, and additional investor protections associated with, national securities exchanges in Section II.E.3.c. below; see also fns. 721, 722 below. 148 Rule 251(d)(2)(i)(C)(1). 149 Rule 251(d)(2)(i)(C)(2). See Securities Act Rule 501(a)(5) [17 CFR 230.501(a)(5)] (net worth). Consistent with this rule, the calculation of a natural person’s net worth for purposes of the investment limit excludes the value of the primary residence of such person. 150 See note to Rule 251(d)(2)(i). 151 See discussion in Section II.B.3.c. above. 152 See paragraph (a)(5) to Part II of Form 1–A. 153 Rule 251(d)(2)(i)(D). Similarly, issuers may also rely on representations of investor compliance VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 Release, we are cognizant of the privacy issues and practical difficulties associated with verifying individual income and net worth and, therefore, are not requiring investors to disclose personal information to issuers in order to verify compliance.154 Some commenters suggested requiring an issuer to have a reasonable belief that it can rely on an investor’s representation of compliance with the investment limitations or to take reasonable steps to verify compliance, while other commenters suggested we establish consequences for issuers (and intermediaries, when applicable) if an investor failed to comply with the limitations.155 At the same time, many commenters supported the proposed approach, noting the low compliance costs and the certainty it would provide issuers and their intermediaries.156 We believe that the rules, as adopted, will limit potential losses for non-accredited investors with respect to individual offerings, while providing certainty to, and lower compliance costs for, issuers and intermediaries. We do not believe that additional requirements for issuers and their intermediaries, such as requiring issuers to take reasonable steps to verify an investors’ compliance with the investment limitations, are necessary to protect investors in light of the total package of investor protections included in the final rules for Tier 2 offerings.157 We believe that additional requirements, like the ones suggested by some commenters, may have an unintended consequence of dissuading issuers from selling to non-accredited investors in Tier 2 offerings by increasing compliance uncertainties and obligations. We are therefore not adopting any additional compliance requirements with respect to investment limitations in the final rules. While many commenters urged the Commission to eliminate or provide less restrictive investment limitations in the final rules,158 we believe that these requirements, as proposed and adopted, usefully augment other requirements with the investment limitations from participating broker-dealers, unless the issuer knew at the time of sale that any such representation was untrue. 154 See Proposing Release, at Section II.B.4. 155 See fn. 140–144 above. 156 See fn. 137 above. 157 For example, the final rules include limitations on issuer eligibility, bad actor disqualification provisions, a requirement that offering statements must be qualified by the Commission, narrative and financial disclosure requirements, which for Tier 2 offerings must include audited financial statements on an initial and annual basis, as well as annual, semiannual, and current event reporting. 158 See fn. 122 above. PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 21817 for, and investor protections applicable to, Tier 2 offerings. As we noted in the Proposing Release, Title IV of the JOBS Act mandates certain investor protections 159 and suggests that the Commission consider others as part of its Section 3(b)(2) rulemaking.160 Congress recognized in Section 3(b)(2) that investor protections beyond those expressly provided in 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. . . .’’ Limiting the amount of securities that a non-accredited investor can purchase in a particular Tier 2 offering (other than a Tier 2 offering of securities listed on a national securities exchange) should help to mitigate concerns that such investors may not be able to absorb the potential loss of the investment and is consistent with the authority granted to the Commission in Section 3(b)(2).161 We further believe that setting the investment limitation at 10% of the greater of such investor’s net worth/net assets and annual income/ revenue, as opposed to some other percentage (e.g., 5% or 20%), is generally consistent with similar maximum investment limitations placed on investors in Title III of the JOBS Act and will help to set a loss limitation standard in such offerings.162 Despite the suggestions of some commenters,163 we do not believe that further distinctions as to the applicability of investment limitations are appropriate among investors that do not qualify as accredited investors. On the contrary, we believe that the regulatory distinctions among accredited and non-accredited investors and the familiarity many market participants have with such terms will help to ease compliance with, and 159 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). 160 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). 161 As proposed and adopted, 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 will not be considered an investor that is subject to the investment limitations. 162 Section 301 of the JOBS Act; see also Securities Act Section 4(a)(6), 15 U.S.C. 77d(a)(6). 163 See fn. 134 above. E:\FR\FM\20APR2.SGM 20APR2 21818 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations determinations about the applicability of, the investment limitations and will avoid unnecessary complexity associated with other, additional distinctions. 5. Integration a. Proposed Rules We proposed amending Rule 251(c) of Regulation A, which governs the integration of Regulation A offerings with other offerings, to provide that offerings under Regulation A would not to be integrated with any of the following: 164 • Prior offers or sales of securities; or • certain specified subsequent offers and sales of securities.165 The proposed safe harbor was substantially the same as the existing integration safe harbor in Rule 251(c), with the addition of a separate provision for securities-based crowdfunding transactions conducted pursuant to Section 4(a)(6) of the Securities Act.166 We further proposed 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) 167 and institutional accredited investors permitted by Section 5(d) 168 of the Securities Act.169 As proposed, an issuer (and any underwriter, broker, dealer, or agent that is acting on behalf of the issuer in connection with the proposed offering) soliciting interest in a Regulation A offering to persons other than QIBs and institutional accredited investors would need to wait at least 30 calendar days between the last such solicitation of interest in the Regulation mstockstill on DSK4VPTVN1PROD with RULES2 164 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. 165 See proposed Rule 251(c), which included in the safe harbor subsequent offers or sales that are registered under the Securities Act, or made pursuant to Securities Act Rule 701, an employee benefit plan, Regulation S, proposed Regulation Crowdfunding (see Rel. No. 33–9470), or more than six months after completion of the Regulation A offering. 166 Section 4(a)(6) was added to the Securities Act by Section 302 of the JOBS Act. 167 QIBs are large institutions meeting specific requirements outlined in Rule 144A, or entities the seller (or a person acting on its behalf) reasonably believes to be QIBs. See Rule 144A, 17 CFR 230.144A. 168 15 U.S.C. 77e(d); see also fn. 537 below. 169 Proposed Rule 255(e). VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 A offering and the filing of the registration statement with the Commission.170 The Proposing Release also provided guidance on the applicability of the integration doctrine for offerings conducted outside the scope of the safe harbor.171 b. Comments on the Proposed Rules One commenter specifically supported the proposed changes to the integration provisions of Regulation A.172 Another commenter objected to the proposed changes to the integration provisions and related guidance.173 This commenter cautioned that it would be very difficult to police compliance with these provisions and suggested that they would be used to evade regulatory requirements. c. Final Rules We are adopting, as proposed, an integration safe harbor, with one clarifying change. Under the final rules, offerings pursuant to Regulation A will not be integrated with: • 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 255(c); • made pursuant to Rule 701 under the Securities Act; • made pursuant to an employee benefit plan; • made pursuant to Regulation S; • made pursuant to Section 4(a)(6) of the Securities Act; or • made more than six months after completion of the Regulation A offering.174 We believe that the integration safe harbor has historically provided and, as amended, will continue to provide, issuers, particularly smaller issuers whose capital needs often change, with valuable certainty as to the contours of a given offering and their eligibility for an exemption from Securities Act registration. The addition of subsequent offers or sales made pursuant to Section 4(a)(6), which is the only substantive change to the existing safe harbor being adopted today, should not significantly alter the application of the doctrine in practice. Given the unique capital formation method available to issuers and investors through Section 4(a)(6) of the Securities Act and the small dollar amounts involved, we believe that the addition to the safe harbor list of subsequent crowdfunding offers and 170 Id. 171 See Proposing Release, Section II.B.5. BLS Letter. 173 CFA Letter. 174 Rule 251(c). 172 ABA PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 sales conducted pursuant to such section is appropriate and will not unduly increase risks to investors.175 As with any exemption from registration, the burden of proof of compliance with a claimed exemption rests with the party claiming it.176 In our view, the benefits of providing issuers with certainty as to the scope of the integration doctrine, particularly for Regulation A, outweighs the concern expressed by one commenter that compliance with the doctrine may be difficult to enforce.177 In light of the broad permissible target audience of Regulation A solicitations, the potential for expanded use of solicitation materials in Regulation A discussed more fully in Section II.D. below, and the addition of similar provisions for registered offerings under Section 5(d), we believe the integration provisions in the final rule are necessary to ensure that amended Regulation A functions as a viable capital raising option for issuers. We are also clarifying in the final rules the scope of the proposed safe harbor from integration in instances where an issuer abandons a contemplated Regulation A offering before qualification, but after soliciting interest in such offering to persons other than QIBs and institutional accredited investors. The proposed language could be read to imply that issuers must wait at least 30 calendar days to avoid integration with a subsequent registered offering or else be subject to integration. The final rules clarify that waiting less than 30 calendar days before a subsequent registered offering would not necessarily result in integration and would instead depend on the particular facts and circumstances.178 We are also reaffirming the integration guidance provided in the Proposing Release, which is consistent with guidance provided by the Commission in a 2007 rule proposal on Regulation D.179 As noted in the Proposing Release, 175 See 15 U.S.C.77d(a)(6); see also Rel. No. 33– 9470. 176 See Ralston Purina Co., 346 U.S. 119. 177 CFA Letter. 178 See Note to Rule 251(c) and Rule 255(e); see also Section II.D. below for a discussion on solicitation materials. 179 See Revision of Limited Offering Exemptions in Regulation D, Release No. 33–8828 (Aug. 3, 2007) (expressing the view that the determination as to whether the filing of the registration statement should be considered to be a general solicitation or general advertising that would affect the availability of an exemption under Securities Act Section 4(a)(2) for such a concurrent unregistered offering should be based on a consideration of whether the investors in the private placement were solicited by the registration statement or through some other means that would otherwise not foreclose the availability of the Section 4(a)(2) exemption). E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations 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. For example, an issuer conducting a concurrent exempt offering for which general solicitation is not permitted will 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.180 Alternatively, an issuer conducting a concurrent exempt offering for which general solicitation is permitted, for example, under Rule 506(c), could not include in any such general solicitation an advertisement of the terms of a Regulation A offering, unless that advertisement also included the necessary legends for, and otherwise complied with, Regulation A.181 6. Treatment Under Section 12(g) a. Proposed Rules 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.182 We did not propose to exempt Regulation A securities from mandatory registration under Section 12(g), but we solicited comment on whether Regulation A securities should be granted such an exemption, either conditionally or otherwise. mstockstill on DSK4VPTVN1PROD with RULES2 b. Comments on Proposed Rules Commenters generally expressed support for some form of exemption from the registration requirements under Section 12(g). Numerous commenters recommended exempting Regulation A securities from Section 12(g).183 Several of these commenters 180 For a concurrent offering under Rule 506(b), an issuer will 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 Rel. No. 33–8828 (Aug. 3, 2007) [72 FR 45116]. 181 See discussion in Section II.D. below. 182 15 U.S.C. 78l(g). 183 B. Riley Letter; CFIRA Letter 1; CFIRA Letter 2; Fallbrook Technologies Letter; Letter from Jonathan Frutkin, Principal, The Frutkin Law Firm, PLC, March 24, 2014 (‘‘Frutkin Law Letter’’); Guzik Letter 1; Letter from Samuel S Guzik, October 25, 2014 (‘‘Guzik Letter 2’’); Heritage Letter; IPA Letter; Ladd Letter 2; Milken Institute Letter; MoFo Letter; SBIA Letter (recommending that the trigger be VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 expressed concern that the Section 12(g) record holder count would decrease the utility of the Regulation A exemption by incentivizing issuers to sell to accredited investors over non-accredited investors, likely resulting in issuers electing to rely on a potentially less costly exemption, such as Rule 506 of Regulation D.184 These commenters also expressed concern that Section 12(g) would decrease the utility of the exemption because secondary trading in otherwise unrestricted Regulation A securities might result in issuers inadvertently crossing the Section 12(g) registration threshold.185 Other commenters questioned the extent to which Regulation A securities would be held in street name through brokers, which the proposal mentions as a factor that could potentially limit the impact of not proposing an exemption from Section 12(g).186 Some commenters suggested that the reporting regime under Tier 2 would be a sufficient means by which issuers could provide investors with current information and that therefore Exchange Act reporting would be unnecessary.187 Two commenters believed that the legislative history of the JOBS Act supported an exemption from Section 12(g).188 Several commenters recommended changing, delaying, or conditioning the application of Section 12(g)’s registration requirements, especially the corresponding Section 13 reporting obligations that come with registration.189 One of these commenters recommended delaying the application of Exchange Act reporting requirements for Tier 2 issuers until the issuer’s nonaffiliate market capitalization reached $250 million, so long as the issuer filed reports under Regulation A.190 This commenter believed that non-affiliate market capitalization was a superior proxy for market interest than the thresholds under Section 12(g) and noted that the Commission uses the measure in establishing primary S–3 eligibility. Another commenter recommended exempting initial Tier 2 issuers from all or part of Exchange Act reporting obligations until the earliest of the occurrence of several events.191 Yet another commenter suggested exempting Tier 2 issuers from Exchange Act reporting until they reach a certain unspecified level of revenue or market capitalization.192 Two commenters recommended deeming Tier 2 issuers’ ongoing reports under Regulation A to satisfy the issuer’s Exchange Act reporting obligations for a phase-in period.193 One commenter recommended at least allowing for 2,000 holders of record (whether accredited or not) without being subject to Exchange Act registration requirements,194 while two other commenters suggested eliminating the cap of 500 nonaccredited investors.195 One commenter conditioned its support for a conditional exemption from Section 12(g) on the Commission requiring Tier 2 issuers to remain current in their ongoing Regulation A reporting requirements.196 c. Final Rules We are adopting today final rules that exempt securities issued in a Tier 2 offering from the provisions of Section 12(g) for so long as the issuer remains subject to, and is current in (as of its fiscal year end),197 its Regulation A 190 Paul Hastings Letter. & English Letter (suggesting the earliest of: (1) The last day of any fiscal year of the issuer during which it had annual gross revenues of $250 million; (2) the last day of any fiscal year following the fifth anniversary of the date of the first sale of equity securities under Regulation A; and (3) the date on which the issuer has an aggregate worldwide market value of voting and non-voting equity held by its non-affiliates of at least $75 million computed as of the last business day of the issuer’s most recently completed second quarter). 192 Milken Institute Letter. 193 ABA BLS Letter (a 24 month phase-in period that could expire earlier if the company triggered Exchange Act reporting in some other manner); MoFo Letter. 194 Heritage Letter. 195 KVCF Letter; SBIA Letter. 196 MoFo Letter. 197 The determination as to ‘‘current’’ reporting status is determined at the time of fiscal year end in reference to the filing of all periodic reports, including special financial reports, required to be filed during such fiscal year. For these purposes, a newly qualified issuer that at fiscal year end has not yet been obligated to file a periodic report, including, if applicable, a special financial report, would be considered ‘‘current’’ for these purposes. 191 McCarter ‘‘raised or remedied,’’ but not explicitly calling for elimination); US Alliance Corp. Letter; U.S. Chamber of Commerce Letter; WR Hambrecht + Co Letter. 184 CFIRA Letter 1; Fallbrook Technologies Letter; Frutkin Law Letter; Heritage Letter; IPA Letter; Milken Institute Letter; MoFo Letter; SBIA Letter; U.S. Chamber of Commerce Letter. 185 Id. 186 Guzik Letter 1 (noting the statements of other commenters); Heritage Letter; Ladd Letter 2 (citing discussions with various brokers); MoFo Letter; SBIA Letter; WR Hambrecht + Co Letter; see also OTC Markets Letter (highlighting difficulties associated with issuer securities becoming eligible for Depository Trust Company (DTC) services, which services typically limit the number of an issuer’s record holders thereby minimizing the impact of the Section 12(g) mandatory registration provisions; further suggesting that companies issuing Regulation A securities be required to use registered transfer agents). 187 B. Riley Letter; Fallbrook Technologies Letter; Milken Institute Letter; MoFo Letter. 188 Ladd Letter 2; WR Hambrecht + Co Letter. 189 Heritage Letter; KVCF Letter; McCarter & English Letter; Milken Institute Letter; MoFo Letter; Paul Hastings Letter; SBIA Letter. PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 21819 E:\FR\FM\20APR2.SGM 20APR2 21820 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations periodic reporting obligations.198 Additionally, in order for the conditional exemption to apply, issuers are required to engage the services of a transfer agent registered with the Commission pursuant to Section 17A of the Exchange Act. The final rules also provide that the exemption from Section 12(g) is only available to companies that meet requirements similar to those in the ‘‘smaller reporting company’’ definition under Securities Act and Exchange Act rules.199 As such, the conditional exemption in the final rules is limited to issuers that have a public float of less than $75 million, determined as of the last business day of its most recently completed semiannual period,200 or, in the absence of a public float, annual revenues of less than $50 million, as of the most recently completed fiscal year.201 An issuer that exceeds either of the thresholds, in addition to exceeding the threshold in Section 12(g) of the Exchange Act, would be granted a two-year transition period before it would be required to register its class of securities pursuant to Section 12(g), provided it timely files all ongoing reports due pursuant to Rule 257 during such period.202 Section 12(g) 198 Rule 12g5–1(a)(7). reporting company’’ is defined in Securities Act Rule 405, 17 CFR 230.405, Exchange Act Rule 12b–2, 17 CFR 240.12b–2, and Item 10(f)(1) of Regulation S–K, 17 CFR 229.10(f)(1). The provision of the smaller reporting company definition relating to initial registration statements under the Securities Act is not applicable to exempt offering pursuant to Regulation A. See Item 10(f)(1)(a)(ii) of Regulation S–K, 17 CFR 229.10(f)(a)(ii). The final rules do not therefore incorporate this concept for purposes of Rule 12g5– 1(a)(7). See Rule 12g5–1(a)(7). 200 Consistent with the smaller reporting company definition, an issuer will calculate ‘‘public float’’ by multiplying the aggregate worldwide number of shares of its common equity securities held by non-affiliates by the price at which such securities were last sold (or the average bid and asked prices of such securities) in the principal market for such securities. Rule 12g5–1(a)(7). See also, e.g., Item 10(f)(1)(i) of Regulation S–K. 201 Rule 12g5–1(a)(7). The Commission adopted the smaller reporting company regime in 2007. See SEC Rel. No. 33–8876 (Dec. 19, 2007) [73 FR 934]. Some commentators, such as the Commission’s Advisory Committee on Small and Emerging Companies, have suggested that the Commission revisit the smaller reporting company regime, including the definitional thresholds. 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, available at: https:// www.sec.gov/info/smallbus/acsec/acsecrecommendation-032113-smaller-public-co-ltr.pdf. Although the Commission has not yet responded to this recommendation, in considering any potential changes to the smaller reporting company regime, we would expect to consider whether corresponding changes to the thresholds included in Rule 12g5–1(a)(7) should also be made, taking into account how the Regulation A regime is working. 202 Id. mstockstill on DSK4VPTVN1PROD with RULES2 199 ‘‘Smaller VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 registration will only be required if, on the last day of the fiscal year in which the company exceeded the public float or annual revenue threshold, the company has total assets of more than $10 million and the class of equity securities is held by more than 2,000 persons or 500 persons who are not accredited investors.203 In such circumstances, an issuer that exceeds the thresholds in Section 12(g) and Rule 12g5–1(a)(7) would be required to begin reporting under the Exchange Act the fiscal year immediately following the end of the two-year transition period.204 An issuer entering Exchange Act reporting will be considered an ‘‘emerging growth company’’ to the extent the issuer otherwise qualifies for such status.205 In determining to provide a conditional exemption from the provisions of Section 12(g), we have considered a number of factors. First, we believe the conditional exemption we are adopting today is consistent with the intent behind the original enactment of Section 12(g) to the extent it ensures that relevant information about issuers will be made routinely available to investors and the marketplace.206 Second, we believe the additional requirement that Regulation A issuers use a registered transfer agent will provide an important investor protection in this context. The use of a transfer agent registered under the Exchange Act, which, in the absence of a conditional exemption from the provisions of Section 12(g), would be required of issuers when they register under the Exchange Act, will provide added comfort that securityholder records and secondary trades will be handled accurately. Third, we believe that phasing out the exemption once companies grow and expand their shareholder base is consistent with the intent behind Title IV of the JOBS Act, which was enacted to facilitate smaller company capital formation.207 Finally, 203 15 U.S.C. 78l(g). See Section II.E.4.b(2). below for a discussion on suspension or termination of the duty to file ongoing reports pursuant to Rule 257. 205 See fn. 726 below and accompanying text. 206 Section 12(g) was originally enacted by Congress as a way to ensure that investors in overthe-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. 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. 207 See, e.g., H.R. Rep. No. 112–206 (2011), at 4 (‘‘Small companies are critical to economic growth in the United States. Amending Regulation A to make it viable for small companies to access capital 204 Id. PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 we are concerned that, as commenters suggested, the lack of an exemption from mandatory registration under the Exchange Act may undermine the utility of amended Regulation A either by discouraging use of the exemption altogether or by dissuading issuers from making sales to non-accredited investors in Regulation A offerings in an effort to avoid the application of Section 12(g). While we believe, as we noted in the Proposing Release, that the Section 12(g) record holder threshold continues to provide an important baseline above which issuers should generally be subject to the disclosure obligations of the Exchange Act, we are persuaded that this need not be the case where an issuer is a smaller company that is subject to, and current in, its periodic reporting obligations under Tier 2 of Regulation A and engages the services of a transfer agent that is registered with the Commission under the Exchange Act. Regulation A, as amended in the final rules, requires issuers that conduct Tier 2 offerings to provide periodic disclosure to their investors and updates for certain important corporate events.208 While such reports provide less information than is required of an Exchange Act reporting company, we believe a conditional exemption from registration under Section 12(g) is warranted for smaller Tier 2 issuers since such companies are required to provide investors with ongoing information about themselves and the securities offered, and the ongoing reporting regime we are adopting today is more appropriately tailored for such companies. Additionally, in order to address situations where an issuer that conducts a Tier 2 offering could remain subject to its ongoing reporting requirements indefinitely and thereby avoid having to comply with Exchange Act reporting requirements regardless of the size of its shareholder base, we note that the exemption from Section 12(g) is conditional and that an issuer that does not meet its conditions, including the limitation on public float and annual revenues, will be required to register under the Exchange Act. 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.209 The provision permits electronic filing of will permit greater investment in these companies, resulting in economic growth and jobs.’’). 208 See Rule 257. 209 15 U.S.C. 77c(b)(2)(G)(i). E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations offering statements, and provides a nonexhaustive 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 investor funds, and other appropriate matters. 1. Electronic Filing; Delivery Requirements a. Proposed Rules Consistent with the language of Section 3(b)(2)(G)(i), we proposed to require Regulation A offering statements to be filed with the Commission electronically on EDGAR.210 We further proposed to amend Form 1–A, but to continue to have the form consist of three parts: • Part I: An eXtensible Markup Language (XML) based fillable form; • Part II: A text file attachment containing the body of the disclosure document and financial statements; and • Part III: Text file attachments, containing the signatures, exhibits index, and the exhibits to the offering statement.211 We further proposed 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.212 Additionally, we proposed an access equals delivery model for Regulation A final offering circulars.213 Under the proposed rules, issuers would be required to include a notice in any preliminary offering circular used that would inform potential investors that the issuer may satisfy its delivery obligations for the final offering circular electronically.214 As with registered offerings, we also proposed aftermarket delivery obligations for dealers that would be satisfied if the final offering circular is filed and available on EDGAR and the appropriate notice was given by the dealer.215 210 See 211 See proposed Rule 252(e). Proposing Release, at Section II.C.1. 212 Id. Consistent with prior Commission releases on the use of electronic media for delivery purposes, we proposed that ‘‘electronic-only’’ offerings of Regulation A securities would not be prohibited, but an issuer and its participating intermediaries would have to obtain the consent of investors to the electronic delivery of: • 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.216 We further proposed to maintain the existing requirements in Regulation A, which require dealers to deliver a copy of the current offering circular to purchasers for sales that take place within 90 calendar days after qualification.217 We proposed to update and amend Rule 251(d)(2)(i) 218 to require issuers and participating brokerdealers to deliver only a preliminary offering circular to prospective purchasers 219 at least 48 hours in advance of sale when a preliminary offering circular is used during the prequalification period to offer such securities to potential investors. We also proposed to continue to require a final offering circular to accompany or precede any written communication that constitutes an offer in the postqualification period.220 In addition to the revised delivery requirements discussed above, we proposed to add a provision analogous to Rule 173,221 which would require issuers, underwriters, and dealers, not later than two business days after completion of a sale, to provide purchasers with a copy of the final offering circular or a notice stating that the sale occurred pursuant to a qualified offering statement.222 As proposed, the notice must include the Web site address 223 where the final offering circular, or the offering statement of which such final offering circular is 213 Id. 214 See proposed Rule 254(a). proposed, a dealer would generally be required to deliver a copy of the current offering circular to purchasers for all sales that occur within 90 calendar days after qualification, although this requirement would be satisfied when the final offering circular is filed and available on EDGAR and the dealer has otherwise complied with the obligation to deliver a notice of sales to the purchaser not later than two business days after completion of such sale. See proposed Rules 251(d)(2)(ii)–(iii). mstockstill on DSK4VPTVN1PROD with RULES2 215 As VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 216 See Proposing Release, at Section II.C.1. proposed Rule 251(d)(2)(iii). 218 17 CFR 230.251(d)(2)(i) (2014). 219 See proposed Rule 251(d)(2)(i). 220 See proposed Rule 251(d)(1)(iii). 221 17 CFR 230.173. 222 See proposed Rule 251(d)(2)(ii). 223 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. 217 See PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 21821 part, may be obtained on EDGAR and contact information sufficient to notify a purchaser how it may request and receive a final offering circular from the issuer.224 We further proposed 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 has been sold and such offering statement is not the subject of a Commission order temporarily suspending a Regulation A exemption. 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. These withdrawal and abandonment procedures are similar to the ones that apply to registration statements under the Securities Act.225 b. Comments on the Proposed Rules No commenters opposed the proposed requirement that issuers be required to file offering statements and related material electronically with the Commission on EDGAR, while two commenters expressly supported such a requirement.226 One commenter recommended only requiring preliminary or final offering circular delivery 48 hours in advance of sale for initial public offerings and not for offerings by issuers that are already subject to Tier 2 ongoing reporting requirements.227 This commenter also recommended eliminating dealer offering circular delivery requirements for Tier 2 issuers that are subject to ongoing reporting. A few commenters opposed an access equals delivery model of final offering circular delivery.228 These commenters raised concerns about the perceived challenge of finding these materials on EDGAR and not requiring delivery 48 hours in advance of sale in all circumstances. One commenter recommended, in addition to requiring electronic filing on EDGAR, requiring issuers to maintain a corporate Web site where the public may access copies of all nonconfidential filings in a timely manner so that investors not familiar with EDGAR may access the most complete information provided to the 224 See proposed Rule 251(d)(2)(ii). Securities Act Rule 477, 17 CFR 230.477, and Rule 479, 17 CFR 230.479. 226 See MCS Letter; OTC Markets Letter. 227 Paul Hastings Letter. 228 Massachusetts Letter 2; NASAA Letter 2; WDFI Letter. 225 See E:\FR\FM\20APR2.SGM 20APR2 21822 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations Commission.229 In addition to suggested changes to the filing process itself, several commenters encouraged the Commission to find ways to reduce the staff’s review time for offering statements.230 c. Final Rules (1) Filing Requirements We are adopting provisions for electronic filing and delivery requirements in the final rules for Regulation A substantially as proposed.231 We agree with commenters that support requiring electronic filing of offering and related materials and believe that this requirement will ultimately benefit issuers and investors by streamlining the offering process. As adopted, issuers must file their Regulation A offering statements with the Commission electronically on EDGAR.232 Further, as proposed, we are amending Form 1–A to consist of the following three parts: • Part I: An eXtensible Markup Language (XML) based fillable form, which captures key information about the issuer and its offering using an easy to complete online form, similar to Form D, with drop-down menus, indicator boxes or buttons, and text boxes, and assists issuers in determining their ability to rely on the exemption. The XML-based fillable form will provide a convenient means of assembling and transmitting information to EDGAR, without requiring the issuer to purchase or maintain additional software or technology; 233 • Part II: A text file attachment containing the body of the disclosure document and financial statements, 229 Ladd Letter 2. Law Letter; Heritage Letter (suggesting that the review time needs to be reduced by twothirds); Letter from Gregory S. Fryer, Esq., Partner, Verrill Dana LLP, February 28, 2014 (‘‘Verrill Dana Letter 1’’) (recommending providing guidance to issuers, staff training, and more discretion to the staff to make materiality determinations and to work informally with issuers); Letter from Ted J. Coombs, Chief Technology Officer, Workers On Call, March 24, 2014 (‘‘WOC Letter’’). 231 In conjunction with the adoption of final rules for electronic filing and delivery, we are making clarifying revisions to the proposed rules that renumber some of the proposed provisions in the final rules. See, e.g., Rule 251(e), (f) (originally proposed Rules 252(c), (e), respectively). 232 See Rule 101(a)(vii), (xvii) of Regulation S–T, 17 CFR 232.101(a)(xvii); see also Rule 251(f). As proposed, and in conjunction with this change, Item 101(c)(6) of Regulation S–T (17 CFR 232.101(c)(6)) is revised so that it no longer prohibits electronic submission of filings related to Regulation A offerings. 233 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. mstockstill on DSK4VPTVN1PROD with RULES2 230 Frutkin VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 formatted in HyperText Markup Language (HTML) or American Standard Code for Information Interchange (ASCII) to be compatible with the EDGAR filing system; 234 and • Part III: Text file attachments, containing the signatures, exhibits index, and the exhibits to the offering statement, formatted in HTML or ASCII to be compatible with the EDGAR filing system.235 As proposed and adopted, all other documents required to be submitted or filed with the Commission in conjunction with a Regulation A offering, such as ongoing reports, must generally be submitted or filed electronically on EDGAR.236 As materials will be available on EDGAR, we do not see a need to separately require issuers to maintain a corporate Web site where the public may access all non-confidential filings. Issuers may, however, elect to provide the filings on their Web site or to their EDGAR filing page. Consistent with current Regulation A, there are no filing fees associated with the Regulation A filing and qualification process. We believe the approach to electronic filing adopted today will be both practical and useful for issuers of Regulation A securities, investors in such securities, and other market participants. Issuers will be able to maintain better control over their filing process, reduce the printing costs associated with filings, obtain immediate confirmation of acceptance of an offering statement, and ultimately save time in the qualification process. Investors will gain real-time access to the information contained in Regulation A filings.237 We anticipate that 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, electronic filing on EDGAR will allow for more efficient storing, processing, and disseminating of Regulation A filings than paper filings, which should improve the efficiency of the staff review and qualification processes. Electronic filing also will facilitate the capture of important financial and other information about Regulation A issuers and offerings that will enable the 234 Part II (Offering Circular) of Form 1–A. See discussion in Section II.C.3.b. below. 235 Part III (Exhibits) of Form 1–A. See discussion in Section II.C.3.c. below. 236 For a discussion on the ongoing reporting requirements, see Section II.E. below. 237 Investors would not, however, have immediate access to non-public submissions of draft offering statements. See discussion in Section II.C.2. below. PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 Commission and market participants to analyze any market that develops in Regulation A securities, including, for example, information about 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 Regulation A offerings.238 We appreciate that requiring EDGAR filing will impose some new costs on issuers, as addressed more fully in the Economic Analysis section of the release.239 We do not, however, believe that the incremental cost associated with the EDGAR filing requirements justifies maintaining a paper-only filing requirement. On the contrary, we believe that the potential additional cost to issuers associated with the EDGAR filing requirement should be minimal and electronic filing on EDGAR would eliminate any processing delays and costs otherwise associated with the current paper filing system, such as printing or mailing costs. (2) Delivery Requirements We are adopting, as proposed, an access equals delivery model for Regulation A final offering circulars when sales are made on the basis of offers conducted during the prequalification period and the final offering circular is filed and available on EDGAR. The expanded use of the Internet and continuing technological developments suggest that we should update the final offering circular delivery method for Regulation A in a manner that is consistent with similar updates to delivery requirements for registered offerings.240 Contrary to the views of some commenters,241 we do not believe that access to EDGAR generally has proven to be a challenge for investors in registered offerings since the adoption of the Securities Offering Reform Release in 2005. We also do not believe that it will be a challenge for investors under Regulation A or raise investor protection concerns, particularly in light of our final delivery requirements (including, where applicable, the inclusion of hyperlinks to offering materials on EDGAR that must be provided to investors by issuers and intermediaries).242 Therefore, where sales of Regulation A securities occur 238 The specific disclosure requirements included in the XML-based fillable form are discussed more fully in Section II.C.3.a. below. 239 See Section III. below. 240 See Securities Offering Reform, Rel. No. 33– 8591. 241 See fn. 228 above. 242 See Rule 251(d)(2), Rule 254(a), and Rule 255(b) and (d). E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations after qualification on the basis of offers made using a preliminary offering circular, issuers and intermediaries can presume that investors have access to the Internet and may satisfy their delivery requirements for the final offering circular by filing it on EDGAR.243 Issuers are, however, required to include a notice in any preliminary offering circular that will inform potential investors that the issuer may satisfy its delivery obligations for the final offering circular electronically.244 Further, as proposed, ‘‘electroniconly’’ offerings of Regulation A securities will be permitted under the final rules, provided that issuers and intermediaries comply with relevant Commission guidance.245 Specifically, in such offerings, an issuer and its participating intermediaries must obtain the consent of investors to, or otherwise be able to evidence the receipt of, the electronic delivery of: • The preliminary offering circular and information other than the final offering circular, in instances where the issuer sells 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 made during the post-qualification period using a final offering circular. As we noted in the Proposing Release, in light of the proposed requirements for electronic delivery and in order to be consistent with requirements for registered offerings, we believe it appropriate to permit dealers, during the aftermarket delivery period, to be deemed to satisfy their final offering circular delivery requirements if such document is filed and available on EDGAR.246 We are amending Rule 251(d)(2)(ii) of existing Regulation A to make clear that dealers, like issuers and intermediaries, can also rely on the provisions for access equals delivery.247 243 Cf. Rel. No. 33–8591, at 244. Rule 254(a). 245 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 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), Rel. No. 34– 42728 (Apr. 28, 2000) [65 FR 25843] (Use of Electronic Media), and Rel. No. 33–7233 (Oct. 6, 1995) [60 FR 53458] (Use of Electronic Media for Delivery Purposes). 246 See Proposing Release, at Section II.C.1. 247 See Rule 251(d)(2)(ii). Notwithstanding the final delivery requirements, broker-dealers remain subject to the anti-fraud provisions of Section 15 of the Exchange Act. mstockstill on DSK4VPTVN1PROD with RULES2 244 See VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 Additionally, the amendment clarifies that a dealer can rely on access equals delivery for a final offering circular provided it complies with the requirements of Rule 251(d)(2)(ii). This clarifying amendment is necessary to avoid any confusion that the final rules could be read to impose a double delivery requirement on dealers during the aftermarket delivery period. Separately, we are modifying the terms of Rule 251(d)(2)(ii) to make it more consistent with the dealer delivery requirements for registered offerings under Securities Act Rule 174.248 As proposed, the rules would have required dealers in all circumstances to deliver a copy of the current offering circular to purchasers for sales that take place within 90 calendar days after qualification.249 Consistent with the suggestion of one commenter,250 we are revising the proposed rules to more closely align the Regulation A delivery requirements with those required in Securities Act Rules 174(b) and (d).251 We, therefore, are adopting the proposed 90 calendar day dealer delivery requirement, but eliminating the dealer delivery requirement when the issuer is subject immediately prior to filing the offering statement to Tier 2 ongoing reporting 252 and reducing the length of the delivery requirement to 25 calendar days after the later of the qualification date of the offering statement or the first bona fide offering of securities if the securities will be listed on a national securities exchange.253 As adopted, the final rules reduce dealer aftermarket delivery requirements, which should aid dealers in compliance with the final rules. The final rules also update and amend Rule 251(d)(2)(i) to align with changes in the prospectus delivery requirements for registered offerings that have occurred since these requirements were last updated in Regulation A.254 We believe the delivery of the preliminary offering circular to potential investors before they make an investment decision on the basis of information 248 While we have made clarifying revisions to proposed Rule 251(d)(2)(iii) and renumbered it as Rule 251(d)(2)(ii), the final rule is consistent with Rule 174, as there is no need for an analog to Rule 174(g), which covers the dealer delivery obligations in registered offerings by blank check companies under Rule 174(g). Blank check companies are ineligible issuers under Regulation A. See Rule 251(b). 249 See proposed Rule 251(d)(2)(iii). 250 Paul Hastings Letter. 251 See 17 CFR 230.174(b), (d). 252 Rule 251(d)(2)(ii)(D); see also Securities Act Rule 174(b). 253 Rule 251(d)(2)(ii)(C); see also Securities Act Rule 174(d). 254 See Proposing Release, at Section II.C.1. PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 21823 provided during the prequalification period remains an important investor protection that the final rules should preserve, 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, as discussed further in Section II.D. below.255 We also recognize that updating and amending Regulation A’s offering circular delivery requirements will likely benefit market participants by minimizing discrepancies between the requirements of broker-dealers in Regulation A and registered offerings. We therefore are amending, as proposed, Rule 251(d)(2)(i) to require issuers and participating broker-dealers to deliver only a preliminary offering circular to prospective purchasers 256 at least 48 hours in advance of sale only when a preliminary offering circular is used during the prequalification period to offer such securities to potential investors.257 To make the final rules more consistent with the requirements of Exchange Act Rule 15c2–8(b) for issuers who already provide continuous, ongoing information to investors and the market, the final rules do not require an issuer or its intermediaries to deliver a preliminary offering circular at least 48 hours in advance of sale where the issuer is already subject to a Tier 2 reporting obligation. In such instances, however, the issuer and its intermediaries will otherwise remain subject to the general delivery requirements of the rules, including compliance with the requirements for making offers pursuant to Rule 251(d)(1) and for including a preliminary offering circular in any solicitation materials used after filing the offering statement with the Commission pursuant to Rule 255. As proposed and adopted, the delivery requirements under the final rules apply to both issuers and 255 See Securities Offering Reform, 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). 256 Prospective purchasers 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 Rule 251(d)(2)(i). 257 In accordance with time of sale provisions discussed in Securities Offering Reform, see Rel. No. 33–8591, at p. 173 et seq., the final rules provide that the 48-hour delivery obligation must be made 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. E:\FR\FM\20APR2.SGM 20APR2 21824 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations participating broker-dealers.258 We believe these delivery requirements are an important investor protection that should apply to issuers in advance of sale, in addition to their intermediaries, and is consistent with current Regulation A.259 We are also adopting, as proposed, the requirement that a final offering circular must accompany or precede any written communications that constitute offers in the postqualification period.260 In addition to the revised delivery requirements discussed above, we are adopting, as proposed, final rules analogous to Securities Act Rule 173.261 Rule 251(d)(2)(ii) requires issuers and participating broker-dealers, not later than two business days after completion of the sale, to 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.262 The notice must include the URL 263 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. (3) Withdrawal of an Offering Statement The final rules will, as proposed, permit 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 mstockstill on DSK4VPTVN1PROD with RULES2 258 Issuers may rely on reasonable assurances of delivery from participating broker-dealers to satisfy their delivery obligations. 259 See also 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. 260 See Rule 251(d)(1)(iii). For written confirmations and notices of allocation in the postqualification period, issuers and intermediaries may rely on the EDGAR filing of the final offering circular to satisfy any delivery requirements that may apply under Rule 251(d)(1)(iii). This approach is consistent with Rule 172(a) in the context of registered offerings. For a discussion of Rule 172(a), see Securities Offering Reform, Rel. No. 33–8591, at 251. 261 17 CFR 230.173. 262 See Rule 251(d)(2)(ii). 263 As proposed, the final rules make clear that, 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. See Rule 251(d)(2)(ii)(E). VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 suspending a Regulation A exemption.264 The final rules also permit, as proposed, the Commission 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.265 These withdrawal and abandonment procedures are similar to the ones that apply to issuers in registered offerings. 2. Non-Public Submission of Draft Offering Statements a. Proposed Rules We proposed to allow the non-public submission of draft offering statements by issuers of Regulation A securities. As we noted in the Proposing Release, such submissions would not be subject to the statutorily-mandated confidentiality of draft initial public offering (IPO) registration statements confidentially submitted by ‘‘emerging growth companies’’ 266 under Title I of the JOBS Act.267 Instead, where an issuer seeks to non-publicly submit a draft offering statement, the proposal indicated it could do so in compliance with the Commission’s Rule 83.268 We also sought comment on whether we should instead adopt a new rule relating to confidential treatment of draft offering statements in Regulation A. Under the proposed rules, 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 by emerging growth companies, all non-public submissions of draft offering statements would be 264 See Rule 259(a). As discussed in Section II.C.5. below in the context of qualification, we are amending the delegated authority of the director of the Division of Corporation Finance to permit the Division to consent to the withdrawal of an offering statement or to declare an offering statement abandoned, as opposed to requiring the Commission to issue an order. Rule 30–1(b)(3), 17 CFR 200.30–1(b)(3). 265 See Rule 259(b). 266 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). 267 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. 268 See proposed Rule 252(f); see also Proposing Release, at fn. 212. PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 submitted via EDGAR. The initial nonpublic submission, all non-public amendments thereto, and correspondence with Commission staff regarding such submissions would be required to be publicly filed and available on EDGAR as exhibits to the offering statement not less than 21 calendar days before qualification of the offering statement.269 Unlike emerging growth companies in registered offerings, 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. b. Comments on Proposed Rules Commenters were generally supportive of the proposed non-public submission process for Regulation A offerings.270 One commenter recommended keeping all filings confidential other than the final qualified version and possibly any interim version actually used in conjunction with solicitation materials.271 Another commenter recommended requiring the inclusion of a legend on non-public offering statements so that the confidentiality of such submissions would be automatic, without the need for a separate confidentiality request,272 while another commenter recommended treating the proposed non-public submissions the same way that draft registration statements are treated under Title I of the JOBS Act.273 c. Final Rules We are adopting rules that will, as proposed, provide for the submission of non-public draft offering statements under Regulation A.274 In a change from the proposal, however, the final rules do not require an issuer seeking non-public staff review of its draft offering statement to submit such draft pursuant to the Commission’s Rule 83. Instead, all such draft offering statements under Rule 252(a) shall receive non-public review. The final rules only permit 269 See proposed Rule 252(f). Letter; McCarter & English Letter; Paul Hastings Letter; Richardson Patel Letter. 271 Verrill Dana Letter 1. 272 McCarter & English Letter. The Proposing Release indicated that issuers seeking to nonpublicly submit offering statements should submit such statements under cover of the Commission’s Rule 83, 17 CFR 200.83, which deals with confidential treatment requests. 273 Milken Institute Letter (recommending that the Commission seek Congressional authority, if necessary, to protect these submissions from requests under the FOIA. 274 See Rule 252(d). 270 BIO E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations 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 to submit to the Commission a draft offering statement for non-public review. Consistent with the treatment of draft registration statements in registered offerings by emerging growth companies, a nonpublicly submitted offering statement must be substantially complete upon submission in order for staff of the Division of Corporation Finance to begin its review. All non-public submissions of draft offering statements must be submitted via EDGAR, and the initial non-public submission, all nonpublic amendments thereto, and correspondence submitted by or on behalf of the issuer to the Commission staff regarding such submissions must be publicly filed and available on EDGAR as exhibits to the offering statement not less than 21 calendar days before qualification of the offering statement. We do not believe, as was suggested by at least one commenter,275 that requiring issuers to file only the qualified version of the offering statement and any earlier versions used in conjunction with solicitation materials would provide investors with sufficient disclosure to make informed investment decisions. Further, in light of the preemption of state securities laws registration requirements for Tier 2 offerings in the final rules,276 the 21 calendar day filing requirement will insure that state securities regulators are able to require first-time issuers that non-publicly submit draft offering statements to file such material with them for a minimum of 21 calendar days before any potential sales to investors in their respective states.277 Unlike emerging growth companies, the timing requirement for filing by issuers seeking qualification under Regulation A does not depend on whether or not the issuer conducts a road show or tests the waters in a contemplated offering before qualification.278 275 Verrill Dana Letter 1. discussion in Section II.H. below. 277 Notwithstanding the final rules that provide for the preemption of state securities laws’ registration and qualification requirements of Tier 2 offerings, state securities regulators retain, among other things, their authority to require the filing with them of any documents filed with the Commission. See, e.g., Section 18(c)(2) of the Securities Act. The timing of filing requirements at the state level, however, may reduce the time period in which an offering statement and related materials are on file with the state before Commission qualification. 278 See Section II.D. below for a discussion on the timing and requirements for the use of solicitation mstockstill on DSK4VPTVN1PROD with RULES2 276 See VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 Unlike Title I of the JOBS Act, Title IV does not provide for confidential submissions of offering statements under Regulation A.279 Consequently, the requirements of the FOIA are controlling on the scope of the Commission’s ability to adopt confidentiality rules for non-publicly submitted offering statements. We are therefore not adopting any specific additional rule or requirement for nonpublic submissions that would deem such submissions ‘‘confidential.’’ However, where an issuer seeks confidential treatment for non-publicly submitted offering materials, or any portion thereof, for which it believes an exemption from the FOIA exists, it should continue to do so in compliance with the Commission’s Rule 83.280 While non-publicly submitted offering statements must be submitted electronically on EDGAR, the Commission and its staff will not make such offering statements publicly available on EDGAR as a matter of course.281 The treatment of non-public submissions in this regard is consistent with the Commission staff’s approach to the public availability of draft registration statements submitted by foreign private issuers for registered offerings.282 As there is no statutory basis for withholding non-public submissions from production, absent an exemption from the FOIA,283 issuers that rely on our provisions for nonpublic submission should be aware that the Commission may, under certain circumstances, be compelled to provide such materials to a requesting party (or to otherwise make them publicly available) before the date on which an issuer would otherwise have been required to publicly file on EDGAR. 3. Form and Content Section 3(b)(2)(G)(i) of the Securities Act identifies certain disclosure requirements that the Commission may require for offerings relying on the materials under Rule 255. Regulation A’s testing the waters provisions encompass a variety of activities, including, but not limited to, activities that could constitute a traditional road show. 279 See fn. 267 above. 280 See 17 CFR 200.83. Where an issuer seeks confidential treatment of any information included in a publicly filed offering statement or related materials, it should do so in compliance with Securities Act Rule 406. See 17 CFR 230.406. See Rule 251(e) (confidential treatment). 281 This is in contrast to publicly filed draft and final offering statements that will be made automatically available on EDGAR at the time of filing. 282 See Non-Public Submissions from Foreign Private Issuers, available at: https://www.sec.gov/ divisions/corpfin/internatl/ nonpublicsubmissions.htm. 283 See 5 U.S.C. 552. PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 21825 Regulation A exemption. The requirements largely coincide with the existing offering statement disclosure requirements of Form 1–A, such as financial statements,284 a description of the issuer’s business operations,285 financial condition,286 and use of investor funds.287 The proposed rules, comments received on the proposed rules, and the final rules being adopted today for each of Part I, II, and III of Form 1–A are discussed in detail below. a. Part I (Notification) (1) Proposed Rules 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.288 As proposed, 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 would be filed online with the Commission.289 The information would be publicly available on EDGAR, as an online data cover sheet, but not otherwise required to be distributed to investors.290 (2) Comments on Proposed Rules We received several comments with recommendations specific to certain items on Part I of Form 1–A. With respect to Item 1 of Part I, one commenter recommended defining the term ‘‘publicly traded,’’ eliminating the ‘‘Financial Statements’’ section of Item 1 of Part I or conforming it to the existing disclosures required by Item 301 of Regulation S–K, or conforming the line item descriptions in Item 1 to those in Regulation S–X.291 Other commenters recommended clarifying that an auditor and related fees need not 284 See Form 1–A, Part II, Part F/S (2014). Section 3(b)(2)(G)(i) also contemplates that the Commission may require issuers to submit audited financial statements. Currently, the financial statements required under Regulation A need to be audited only if the issuer has them otherwise available. 285 Id., Part II, e.g., Model B, Item 6 (Description of Business). 286 Id., e.g., Part F/S. 287 Id., e.g., Item 5 (Use of Proceeds to Issuer). 288 Rel. No. 33–6275 [46 FR 2637], at 2638. 289 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. 290 The Commission would make the information available on EDGAR 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. 291 Letter from Ernst & Young LLP, March 24, 2014 (‘‘E&Y Letter’’). E:\FR\FM\20APR2.SGM 20APR2 21826 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES2 be listed in Part I if audited financial statements are not included.292 With respect to Item 5 of Part I, another commenter supported the proposal’s inclusion of checkboxes specifying the jurisdictions in which the securities are intended to be offered,293 while a different commenter recommended expanding the list of jurisdictions so that issuers could indicate the Canadian provinces in which they intended to conduct their offerings.294 With respect to Item 6 of Part I, one commenter recommended defining the term ‘‘affiliated issuer.’’ 295 This commenter recommended defining the term to refer to entities controlled by the issuer, noting that otherwise it may require disclosure by parent and sister entities, which is information unrelated to the capitalization of the issuer. Other commenters recommended including additional disclosure in Part I. Two of these commenters recommended requiring issuers to include their Web site address and the jurisdiction of their principal place of business.296 These commenters also objected to removing the disclosure and contact information for persons that are covered by the bad actor rules.297 (3) Final Rules With the exception of technical clarifications, we are adopting provisions for Part I as proposed. The notification in Part I of Form 1–A will require disclosure in response to the following items: • Item 1. (Issuer Information) will require information about the issuer’s identity, industry, number of employees, financial statements and capital structure, as well as contact information.298 • Item 2. (Issuer Eligibility) will require the issuer to certify that it meets various issuer eligibility criteria. 292 Letter from Cynthia M. Fornelli, Executive Director, Center for Audit Quality, March 24, 2014 (‘‘CAQ Letter’’); Letter from Deloitte & Touche LLP, March 24, 2014 (‘‘Deloitte Letter’’); E&Y Letter; Letter from PricewaterhouseCoopers LLP, March 24, 2014 (‘‘PwC Letter’’). 293 NASAA Letter 2. 294 Letter from Mike Liles, Jr., Attorney, Karr Tuttle Campbell, January 17, 2014 (‘‘Karr Tuttle Letter’’). 295 Paul Hastings Letter. 296 NASAA Letter 2; WDFI Letter. These commenters requested that this information be included in XBRL format, rather than XML. We note that XBRL is a form of XML, and generally requires labeling information with data ‘‘tags’’ rather than providing the information through fillable forms. 297 NASAA Letter 2; WDFI Letter. 298 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 already required to be included on the cover page of Form 1–A. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 • Item 3. (Application of Rule 262 (‘‘bad actor’’ disqualification and disclosure)) will require the issuer to certify that no disqualifying events have occurred and to indicate whether related disclosure will be 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).299 • Item 4. (Summary Information Regarding the Offering and other Current or Proposed Offerings) will include indicator boxes or buttons and text boxes eliciting information about the offering (including whether the issuer is 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 sales of any concurrent offerings pursuant to Regulation A, anticipated fees in connection with the offering, and the names of audit and legal service providers, underwriters, and certain others providing services in connection with the offering). • Item 5. (Jurisdictions in Which Securities are to be Offered) will include information about the jurisdiction(s) in which the securities will be offered. • Item 6. (Unregistered Securities Issued or Sold Within One Year) will require disclosure about unregistered issuances or sales of securities within the last year, but will not include a requirement to provide the names and identities of the persons to whom unregistered securities were issued. We are adopting, as proposed, further changes to Part I of Form 1–A. We are eliminating 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 are requiring only narrative disclosure in Part II of Form 1– A when the issuer has determined that a relevant party has a disclosable, but not disqualifying, ‘‘bad actor’’ event.300 We also are eliminating Item 3 of current Part I relating to affiliate sales, because we are eliminating the current restrictions on affiliate resales under Rule 251(b).301 Information about the amount of expected secondary sales and the existence of affiliate sales in the offering, however, will continue to be disclosed in Item 4. Item 6 (Other 299 See discussion of Rule 262(a)(3) and (a)(5) in Section II.G. below. 300 See discussion in Section II.G. below. 301 The primary purpose of Item 3 (Affiliate Sales) in Part I of Form 1–A (2014) is to ensure compliance with certain restrictions on affiliate resales under Rule 251(b). See discussion in Section II.B.3. above. PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 Present or Proposed Offerings) and Item 9 (Use of a Solicitation of Interest Document) of current Part I will be incorporated into Item 4 (Summary Information Regarding the Offering and Other Current or Proposed Offerings). We also are eliminating 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). Some of the technical changes from the proposed rules are non-substantive procedural revisions to the form that are needed to conform the form with the technical requirements of EDGAR, while the others will, as suggested by commenters, provide clarifications to the terms and requirements of Part I. We do not, however, believe that the additional disclosure items suggested by some commenters,302 such as the issuer’s Web site address and the jurisdiction of the issuer’s principal place of business, are necessary additional disclosures in Part I of Form 1–A. As proposed and adopted, Item 1 (Issuer Information) of Part I requires issuers to disclose the location of their principal executive offices, while Item 1 (Cover Page of Offering Circular) of Part II requires issuers to provide investors with their Web site address, if the issuer has a Web site. In light of these required disclosures, we do not believe that the additional suggested disclosure items for Part I are necessary or would provide investors with any additional relevant information about the issuer. Additionally, notwithstanding the view of some commenters,303 we do not believe that the disclosure requirements for the application of Rule 262 (Disqualification Provisions) in Item 3 to Part I of Form 1–A need to include descriptions and addresses of persons that trigger disqualification for several reasons. An issuer that has a disqualified person involved in its offering will not be eligible to conduct a Regulation A offering, issuers will have to certify their compliance with Rule 262, and, with the exception of the addresses of covered persons, much of the requested disclosure, as it applies to persons that would have been disqualified but whose conduct occurred before effectiveness of the final rules or have received a waiver from disqualification,304 will be required in Part II of the offering statement.305 302 NASAA Letter 2; WDFI Letter. 303 Id. 304 Rule 262(b)(1)–(2). paragraph (a)(2) to Part II of Form 1–A. Additionally, underwriters, those receiving sales commissions and finders’ fees, promoters, counsel, 305 See E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES2 Therefore, as proposed and adopted, the final rules for Part I of Form 1–A no longer require the disclosure of such information. Consistent with a comment received,306 we are making technical amendments to the financial statement requirements of Item 1 (Issuer Information) of Part I to clarify and require the use of certain industryspecific terminology and, wherever possible, to use terminology that is consistent with Regulation S–X and GAAP. These changes are designed to minimize potential confusion on the part of issuers in the banking and insurance industries that could result from the use of more general financial accounting terminology. We disagree, however, with the suggestion that we eliminate the financial statement section.307 As we noted in the Proposing Release, the disclosure of this type of information will provide the Commission (and market participants) with more information about the Regulation A market as it develops to use as it considers potential changes to the regulation in the future. We also believe that the disclosure of this information will provide relevant and useful information about issuers and their offerings to investors and market participants that will help to facilitate informed investment decisions. We do not anticipate that the disclosure of financial information in response to Item 1 to Part I of Form 1–A will materially alter the compliance obligations of issuers given that the requirements draw from disclosure already required in the financial statements included in the offering circular. Additionally, we are revising Item 1 to require issuers to provide up to two email addresses to which the Commission’s staff may send comment letters relating to an offering statement, rather than making this optional as proposed. The email addresses, however, will no longer be disseminated with the filings. We believe this change will result in faster reviews of offering statements by the Commission’s staff.308 Finally, consistent with the concerns underlying a comment we received, we recognize that the use of the term ‘‘publicly traded’’ in the outstanding executive officers, directors, and significant securityholders, among others, must be identified in the offering statement in most instances. See, e.g., Item 4 of Part I and Items 1, 10, and 11 of the Offering Circular, Part II of Form 1–A. 306 E&Y Letter. 307 Id. 308 In the review of registered offerings the Commission’s staff will call filers to obtain email addresses so as to issue comment letters electronically. Depending on the responsiveness of the filer, this can be a time consuming process. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 securities table of Item 1 may be confusing in the context of a Regulation A offering.309 Accordingly, we have revised Item 1 to only request the name of the trading center or quotation medium, if any, for outstanding securities. Consistent with the views of several commenters,310 we are clarifying that in the fee table included in Item 4 of Part I (Summary Information Regarding the Offering and Other Current or Proposed Offerings), auditor fees only need to be disclosed when the issuer is providing audited financial statements because, for example, an auditor might not be used for a Tier 1 offering.311 This and similar items in the fee table could be left blank if not applicable and responses could be clarified in the text box following the table. As suggested by one commenter,312 we are expanding the list of jurisdictions in Item 5 (Jurisdiction in Which Securities are to be Offered) so that issuers can indicate the Canadian provinces in which they intend to conduct their offerings.313 Finally, in response to one comment,314 we are clarifying, in this release, that the scope of the term ‘‘affiliated issuer’’ in proposed Item 6 of Part I is only meant to include affiliates of the issuer that are issuing securities in the same offering for which qualification is currently being sought under Regulation A. We believe this clarification is necessary in the final rules in order to avoid potential confusion among issuers as to the scope of the definition, in light of the broader definition of ‘‘affiliate’’ as it appears in Securities Act Rule 405.315 b. Part II (Offering Circular) (1) Narrative Disclosure (a) Proposed Rules for Narrative Disclosure 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–1.316 We proposed to eliminate the 309 See E&Y Letter. fn. 292 above. 311 Disclosure is only required in the fee table to the extent applicable fees were incurred by the issuer in connection with the offering. 312 Karr Tuttle Letter. 313 Item 5 of Part I of proposed Form 1–A did not include Canadian provinces, despite Canadian issuers being eligible issuers. Item 5, as adopted, corrects the form for Canadian issuers or for offerings that contemplate offers or sales in Canada. 314 Paul Hastings Letter. 315 Rule 405 defines ‘‘affiliate’’ to include, among other things, persons controlling the issuer or under common control with the issuer. 17 CFR 230.405. 316 Non-corporate issuers are not permitted to use Model A. 21827 Model A question-and-answer format 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.317 We further proposed to create new requirements for 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.318 As proposed, 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 12 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.319 Consistent with the treatment of issuers in registered offerings, we further proposed to permit issuers to incorporate by reference into Part II of Form 1–A certain items previously submitted or filed on EDGAR, regardless of whether they were provided pursuant to Regulation A disclosure requirements. As proposed, incorporation by reference would be limited to documents publicly submitted or filed under Regulation A and issuers would have to be subject to the ongoing reporting obligations for Tier 2 offerings.320 Issuers would be required to describe the information incorporated by reference, and include a separate hyperlink to the relevant document on EDGAR, which need not remain active after the filing of the related offering statement. (b) Comments on Proposed Rules Several commenters recommended against the proposed elimination of the Model A disclosure format, and instead recommended that the Commission retain an updated version of the 310 See PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 317 See Proposing Release, at Section II.C.3. Proposing Release, at Section II.C.3(b)(1). 319 See Item 9(c) of Offering Circular, Part II of proposed Form 1–A. 320 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 (other than Item 11(e)) 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 format of proposed Part II of Form 1–A and Part I of Form S–1 do not align. 318 See E:\FR\FM\20APR2.SGM 20APR2 21828 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES2 format.321 Two of these commenters recommended including a Model A disclosure format that reflects the most recent version of NASAA’s Form U– 7.322 One commenter recommended retaining existing Form 1–A with minor changes until such time as the Commission and NASAA could develop an improved form.323 Six commenters, however, suggested that the Commission eliminate Model A and the proposed Offering Circular disclosure formats and instead recommended requiring disclosure by reference to Regulation S–K (with reduced disclosure requirements in some instances).324 These commenters believed that such a change would increase efficiency and comparability. One of these commenters was concerned that differences between Items 303 and 402 of Regulation S–K and the comparable disclosure requirements of the Offering Circular format might cause confusion.325 Two commenters recommended requiring REITs to incorporate certain of the items contained in Industry Guide 5 and Form S–11.326 Several commenters had specific recommendations on disclosure requirements. Four commenters recommended that the Commission find a way to require more concise risk factor disclosure.327 One of these commenters recommended possibly imposing a limit on the number of risk factors or guidance to avoid repetition and emphasizing that disclosure should not be repeated throughout the offering circular.328 Two commenters recommended expanding the dilution disclosure requirement in the Offering Circular format’s Item 4.329 As proposed, Item 4 only requires disclosure of any material disparity between the public offering price and the effective cash cost to insiders over the past year. These commenters recommended removing the one year restriction. One commenter recommended focusing the disclosure requirements in the offering statement on valuation assessments and a discussion of management’s 321 BIO Letter; Karr Tuttle Letter; NASAA Letter 2; Verrill Dana Letter 1; WDFI Letter. 322 Karr Tuttle Letter; Verrill Dana Letter 1. 323 NASAA Letter 2. 324 Canaccord Letter; CFIRA Letter 1; E&Y Letter; Ladd Letter 2 (recommending the change only to the extent that the Commission believed it would increase the speed of staff reviews); McCarter & English Letter; WR Hambrecht + Co Letter. 325 E&Y Letter. 326 ABA BLS Letter; MoFo Letter. 327 CFIRA Letter 1; MoFo Letter; SVB Financial Letter; WR Hambrecht + Co Letter. 328 WR Hambrecht + Co Letter. 329 NASAA Letter 2; WDFI Letter. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 expectations about the company’s future performance, including projections.330 Another commenter recommended requiring disclosure of the names of ‘‘those holding more than 20% of shares’’ and a description of the ownership and capital structure, including descriptions of how the exercise of rights by principal shareowners could negatively affect the purchasers of shares being offered.331 Two commenters recommended reducing and clarifying the disclosure obligations for executive compensation and management’s discussion and analysis for smaller offerings.332 One commenter recommended requiring disclosure regarding the existence of a code of ethics and corporate governance principles in a manner that would encourage issuers to adopt internal controls.333 (c) Final Rules for Narrative Disclosure With the exception of clarifying changes, certain additional scaled disclosure items applicable to Tier 1 offerings, and additional guidance to issuers designed to streamline disclosure, we are adopting final rules for narrative disclosure in Form 1–A substantially as proposed. As adopted, Offering Circular disclosure in Part II of Form 1–A will cover: 334 • 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); • Table of Contents (Item 2); • The most significant factors that make the offering speculative or substantially risky (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); 330 WR Hambrecht + Co Letter (indicating that, absent this requirement, such information would be shared orally by management or research analysts with only the biggest investors). 331 CFA Institute Letter. 332 Letter from Rutheford B. Campbell, Jr., SpearsGilbert Professor of Law, University of Kentucky, March 5, 2014 (‘‘Campbell Letter’’); MoFo Letter (recommending that the Commission reduce and clarify the disclosure obligations for executive compensation and management’s discussion and analysis by eliminating the need to repeat information already required to be included in the financial statements, reducing the number of years of business experience disclosure required to be included and clarifying the instructions of the executive compensation section). 333 Ladd Letter 2 (referring to PCAOB AU 325 and 9325). 334 Financial statements disclosure requirements for Part F/S of Form 1–A are discussed in Section II.C.3.b(2)(c). below. PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 • Plan of distribution for the offering 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 interim periods, if required; 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 (or since inception, whichever is shorter), the plan of operations for the 12 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); • Group-level executive compensation disclosure for the most recent fiscal year for the three highest paid executive officers or directors with Tier 2 requiring individual disclosure of the three highest paid executive officers or directors (Item 11: Compensation of Directors and Executive 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); and • Any events that would have triggered disqualification of the offering under Rule 262 if the issuer could not E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES2 rely on the provisions in Rule 262(b)(1).335 The final rules eliminate Model A as a disclosure format for Regulation A offerings, as proposed. While some commenters suggested that the Commission should preserve Model A as an additional disclosure format for Part II of Form 1–A or update existing Model A with NASAA’s more recent Form U–7, we are not persuaded that a question-and-answer format should be retained in the final rules. As we noted in the Proposing Release, the Model A disclosure format has historically been used less frequently, and resulted in less-uniform disclosure and a longer time to qualification than the Model B disclosure format.336 We do not believe that the use of Form U–7, which is largely similar to Model A and is also in a question-and-answer format, will alter this result. While the question-andanswer disclosure format does provide issuers with additional flexibility, we believe that the Offering Circular disclosure format (formerly called Model B) and Part I of Forms S–1 or S– 11 provide issuers with sufficient flexibility in choosing their disclosure format without any of the potential delays or uniform disclosure issues associated with Model A, either currently or even if it is updated with Form U–7. We are further concerned that a question-and-answer format may not best serve the interests of investors in Regulation A offerings by providing them with less-uniform disclosure in a potentially unfamiliar format. Additionally, we are concerned that a question-and-answer format may incorrectly lead issuers to believe that, despite the guidance contained in the form itself, less complete disclosure is required under this format, thereby causing unnecessary delays in the qualification process. Lastly, and particularly with respect to Tier 2 offerings, we do not believe that a question-and-answer format is appropriate for issuers and investors in larger-sized offerings that generally benefit from disclosure that is comparable between offerings in format and information disclosed. For similar reasons, we do not believe that this format is appropriate in offerings of any size by issuers that seek to foster potential trading in the secondary markets.337 335 See discussion of the final disqualification provisions in Section II.G. below. The final rules require issuers to provide this ‘‘bad actor’’ disclosure even if it elects to follow the Part I of Form S–1 disclosure format. 336 See Proposing Release, at Section II.C.3. 337 See Section II.E. below for a discussion of the final rules for ongoing reporting. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 As proposed, the final rules will require issuers to provide disclosure in Part II of Form 1–A that follows the Offering Circular or Part I of Form S–1 disclosure format. Additionally, we agree with commenters that certain additional disclosure requirements may be appropriate for offerings by REITs and similar issuers. The final rules, therefore, also permit issuers to follow, in addition to the Offering Circular and Part I of Form S–1 formats, the form disclosure requirements of Part I of Form S–11.338 An issuer may, however, only use Part I of Form S–11 if the securities are eligible to be registered on that form. As proposed and adopted with respect to disclosure under Part I of Form S–1, issuers following Part I of Form S–11 may follow smaller reporting company narrative disclosure requirements if they meet the definition of that term in Securities Act Rule 405.339 Contrary to the suggestions of some commenters, we are not adopting rules that would limit the number of risk factors disclosed. While we appreciate the concern that certain issuers and their advisors may take an overly cautious approach to the application of our disclosure requirements resulting in numerous risk disclosures, the decision as to the appropriate mix of information that should be disclosed to investors must be based on the particular facts and circumstances of each company. We do not believe that a limit on risk factor disclosure is an appropriate substitute for the judgments of issuers and their advisors. A form-based limitation on the number of risk factors, beyond the guidance in Item 3 of Part II, could lead to incomplete disclosure that may place investors at a higher risk of potential loss and issuers at a higher risk for potential litigation if it results in appropriate risk factors being excluded. Further, we believe that certain other commenter concerns and suggestions as to specific narrative disclosures are already appropriately addressed by the final rules. For example, one commenter suggested that we require disclosure of the names of those holding more than 20% beneficial ownership of the issuer and a description of the issuer’s ownership and capital structure, including descriptions of the exercise of 338 As proposed, issuers must choose one format to follow for the offering circular and may not combine items from different formats. See General Instruction II to proposed and final Form 1–A. In order to avoid confusion and to facilitate the review of offering circulars by investors and the Commission’s staff, the final rules will also require issuers to indicate on the offering circular cover page which format they are following. See Part II(a)(1) of Form 1–A. 339 17 CFR 230.405. PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 21829 rights of principal shareholders.340 The final rules substantially address these topics. Item 12 of the Offering Circular, as proposed and adopted, requires disclosure relating to more than 10% beneficial ownership and Item 14, which is adopted as proposed, requires disclosure of the terms of all classes of outstanding capital stock. As adopted, the Offering Circular includes disclosure based on disclosure guidelines set forth in the Securities Act Industry Guides as well as guidance applicable to limited partnerships and limited liability companies.341 As suggested by commenters,342 in order to create more flexibility in disclosure matters for smaller issuers, we are adding a materiality threshold for disclosure as it relates to time and dollar expenditures on research and development.343 Additionally, the final rules require issuers to provide financial statements, which in the case of Tier 2 offerings must be audited,344 as well as a section on management’s discussion and analysis (MD&A) of the issuer’s liquidity, capital resources, and results of operations.345 We are amending the MD&A disclosure requirements in Item 9 to align more closely with the language in Regulation S–K that applies to domestic registrants 346 and smaller reporting companies.347 Consistency with Regulation S–K in this regard may assist companies with compliance with the rules for registered offerings to the extent Tier 2 issuers eventually become Exchange Act reporting companies, while also making sure that Regulation A issuers do not have a greater disclosure obligation than registered 340 CFA Institute Letter. Item 7(c)–(d) of Offering Circular, Part II of Form 1–A ; see also Rel. No. 33–6900 (June 17, 1991) [56 FR 28979] (setting forth the Commission’s view on the disclosure requirements for limited partnerships). 342 CFIRA Letter 1; MoFo Letter; WR Hambrecht + Co Letter. 343 Item 7(a)(1)(iii) of Offering Circular, Part II of Form 1–A. 344 See discussion in Section II.C.3.b(2)(c). below. 345 See Item 9 of Offering Circular, Part II of Form 1–A. 346 Item 9(b)(1) of Offering Circular, Part II of proposed Form 1–A is amended to track more closely the language and requirements of domestic issuers, as opposed to foreign private issuers. As proposed, the language more closely followed the requirements contained in Form 20–F for foreign private issuers. 347 We are eliminating proposed Item 9(b)(2)–(3) of Offering Circular, Part II of Form 1–A. As proposed, these disclosures would have increased the disclosure obligations of Regulation A issuers in comparison to those required of smaller reporting companies under Item 305 of Regulation S–K. 17 CFR 229.305. 341 See E:\FR\FM\20APR2.SGM 20APR2 21830 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations domestic issuers.348 Further, consistent with the proposed rules, issuers that have not generated revenue from operations during each of the three fiscal years immediately before the filing of the offering statement (or since inception, whichever is shorter) will be required to describe their plan of operations for the 12 months following qualification of the offering statement.349 For companies that have been in existence for less than three years, the final rules clarify that this disclosure requirement applies to them since inception.350 The changes to the Offering Circular format adopted today will result in Offering Circular disclosure, particularly for Tier 2 offerings, more akin to what is required of smaller reporting companies in a prospectus for a registered offering. For example, the final rules require issuers in both Tier 1 and Tier 2 offerings to disclose beneficial ownership of their voting securities, as opposed to record ownership of voting and non-voting securities.351 With respect to transactions with related persons, promoters, and certain control persons in Tier 2 offerings, issuers will no longer be required to disclose transactions in excess of $50,000 in the prior two years (or similar transactions currently contemplated), but rather must 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.352 We originally proposed to apply this threshold to Tier 1 offerings also, but believe that the 1% of average total assets threshold could result in a lower disclosure threshold for smaller issuers than was otherwise required of such issuers under the existing rules. The final rules therefore preserve the related party transaction disclosure requirements of Regulation A, as they existed before the adoption of final rules today, for Tier 1 offerings so that issuers in such offerings are only required to disclose such transactions in excess of $50,000 in the prior two years (or similar transactions currently contemplated).353 In addition to preserving the related party transaction disclosure threshold for Tier 1 offerings, we are adopting a change applicable to Tier 1 that will provide an additional scaled disclosure option for issuers in the Offering Circular. This change is consistent with the general views of a number of commenters that urged the Commission to consider additional potential scaling for smaller issuers generally and Tier 1 offerings in particular.354 The final rules alter the format of, but not the ultimate aggregate amount of information required to be disclosed in, the proposed executive compensation disclosure requirements for Tier 1 offerings. Instead of providing executive compensation data on an individual basis for the three highest paid officers or directors and on a group basis for all directors, as was proposed for both Tier 1 and Tier 2, issuers in Tier 1 offerings will instead be required to disclose only group-level compensation data as it applies to the three highest paid executives or directors and all directors as a collective group, including the number of persons comprising such group, covering the period of the issuer’s last completed fiscal year.355 In this regard, the final rules for Tier 1 offerings will continue to require the disclosure of important compensation data to investors, but on an aggregate, rather than individual, basis. The grouplevel disclosure format for the highest paid executives and all directors should help smaller issuers avoid some of the harm that could follow compensation disclosure of individual executives or directors to the market and competitors, especially when disclosure of such information would not necessarily be required in the context of a private placement or other exempt offering.356 Further, the additional requirement to disclose the total number of persons comprising any group for which group353 Id. mstockstill on DSK4VPTVN1PROD with RULES2 348 See also discussion of the final rules for simplifying Exchange Act registration of Tier 2 issuers in Section II.E.3.c. below. 349 Item 9(c) of Offering Circular, Part II of Form 1–A. 350 Id. 351 Item 12 of Offering Circular, Part II of Form 1–A. 352 Item 13 of Offering Circular, Part II of Form 1–A. As adopted, Tier 2 issuers that have more than $5 million in average total assets at year end for the last two completed fiscal years would be required to disclose related party transactions at a higher threshold (i.e., 1% or more) than was previously required under Regulation A, which required the disclosure of transactions in excess of $50,000 in the prior two years. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 354 See, e.g., Campbell Letter; MoFo Letter. Item 11 of Offering Circular, Part II of Form 1–A. The number of persons comprising the director-level group data is also required of issuers providing compensation data under Tier 2. 356 For example, there are no rule-based disclosure requirements for private placements pursuant to Rule 506 of Regulation D, 17 CFR 230.500 et seq., when the issuer only sells to accredited investors. Contrary to the requirements of Regulation D, we believe mandated compensation (and other) disclosure is appropriate in the context of a public offering under Regulation A. Additionally, however, we believe that the final disclosure rules for such information are appropriately tailored to provide information to investors. 355 See PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 level data is required to be disclosed will preserve the ability of investors in Tier 1 offerings to determine the average compensation paid to all persons within the group.357 Consistent with the suggestions of some commenters,358 we believe that this change to the final rules will assist smaller issuers with more appropriately tailored executive compensation disclosure requirements and will provide investors with useful information. We do not, however, believe that further scaling of smaller issuers’ MD&A is necessary under the final rules. As we noted in the Proposing Release, while the final rules provide issuers with more detailed instructions on MD&A disclosure, similar disclosure is already called for under existing requirements.359 The final MD&A requirements clarify existing requirements and will likely save issuers time by providing more express guidance regarding the type of information and analysis that should be included. We believe the clearer requirements will lead to improved MD&A disclosure, which will provide investors with better visibility into management’s perspective on the issuer’s financial condition and operations. The final provisions for MD&A disclosure in the Offering Circular, however, are not as extensive as those required under Item 303 of Regulation S–K.360 As proposed, the final Offering Circular format includes detailed guidance and requirements similar to Item 303 with respect to liquidity, capital resources, and results of operations, including the most significant trend information,361 but does not separately call for disclosure of off-balance sheet arrangements or a table of contractual obligations.362 Similar to 357 This requirement is a change to the disclosure requirements of group-level data in both Tiers. Although this information would have been ascertainable under Tier 2 by comparing the grouplevel disclosure of director compensation to the number of directors disclosed pursuant to Item 10 of the Offering Circular, we believe the change will facilitate investors’ calculations of average director compensation without significantly increasing the burden on Tier 2 issuers. 358 Campbell Letter; MoFo Letter. 359 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. 360 17 CFR 229.303. 361 17 CFR 303(a)(1)–(3). Cf. Form 20–F, at Item 5. 362 An issuer may, however, be required to disclose such information during the course of the E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES2 smaller reporting companies in registered offerings, Regulation A issuers are required to disclose information about the issuer’s results of operations for the two most recently completed fiscal years and interim periods, when applicable.363 Except as noted above, the updates to the Offering Circular disclosure requirements will not result in an overall increase in an issuer’s disclosure obligations. For example, as mentioned above, certain issuers will have a higher threshold for reporting related party transactions than would have previously been required under Regulation A. Additionally, Tier 1 issuers (which will likely be smaller companies) will, in comparison to the proposed rules, benefit from further scaling of related party transactions and compensation-related disclosures. Further, as proposed, all issuers will 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.364 While we disagree with commenters that suggested we should expand disclosure provisions related to dilution,365 the final rules, which reduce the disclosure time period from three years to one year, are consistent with their view that the disclosure of this information should not depend on when such shares were acquired. We do not believe that information regarding dilution covering more than the prior year is necessary for the smaller issuers likely to conduct Regulation A offerings, nor do we believe that a reduction in the required disclosure from three years to one year, as proposed and adopted, will negatively affect investor protection. Additionally, the final provisions for MD&A disclosure clarify existing requirements and should benefit issuers by providing more express guidance regarding the type of information and analysis that should be included, qualification process, if material to an understanding of the issuer’s financial condition. 363 When management’s discussion and analysis of the financial condition and results of operations is provided for interim period financial statements, any material change in financial condition from the end of the preceding fiscal year to the date of the most recent interim balance sheet should be discussed. Also, any material changes in results of operations with respect to the most recent fiscal year-to-date period for which an income statement is provided and the corresponding year-to-date period of the preceding fiscal year shall be discussed. See Instruction 3 to Item 9(a) of the Offering Circular, Part II of Form 1–A. 364 See Item 4 (Dilution) of the Offering Circular, Part II of Form 1–A. 365 See NASAA Letter 2, at fn. 50; WDFI Letter, at 9. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 including instructions about disclosure of operating results. We believe that these clarifications should also lead to improved MD&A disclosure, which will provide investors with better visibility into management’s perspective on the issuer’s financial condition and results of operations. Investors, particularly in Tier 2 offerings, will also benefit from disclosure that is more consistent across issuers in both registered offerings and Regulation A offerings. We are making one change to the disclosure requirements of Item 6 (Use of Proceeds) in the final rules. As proposed, issuers were required to disclose if any material amount of other funds are to be used in conjunction with the proceeds raised in the offering. If so, an issuer would be required to state the amounts and sources of such other funds. The final rules include these proposed provisions, but add a requirement that the issuer further provide disclosure about whether such other funds are firm or contingent. While we did not receive any comment specifically addressing this issue, where applicable, this type of information would generally be required to be disclosed as part of the staff review and comment process before qualification. We believe an express requirement in the final rules will ultimately save issuers time in the qualification process and therefore are including language addressing this issue in the final rules.366 For clarity, we are moving the requirements to furnish certain supplemental information found in Item 7 (Business Description) of Part II to Form 1–A to General Instruction IV (Supplemental Information) to Form 1– A, where similar requirements are found. We believe that providing these instructions in one place will help issuers understand and comply with the process for furnishing supplemental information to the Commission. The process for furnishing supplemental information to the Commission pursuant to Form 1–A is similar to the treatment of such information in registered offerings.367 Additionally, since we believe it is important for the Commission to be aware of the existence—rather than the nonexistence—of such reports, the final rules no longer require an issuer to 366 See Instruction 5 to Item 6 (Use of Proceeds) of Part II of Form 1–A. 367 In this regard, we have also clarified in General Instruction IV that supplemental information provided to the Commission may be returned in certain circumstances and will be handled by the Commission in a similar manner to supplemental information provided in connection with registered offerings. PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 21831 inform the Commission if no such report has been prepared. Item 7 is further revised to clarify that issuers must only disclose distinctive or special characteristics of the issuer’s operation or industry that are reasonably likely to have a material impact on its future financial performance.368 The final rules also clarify in Item 5 (Plan of Distribution and Selling Securityholders) the calculation of selling securityholder ownership prior to an offering, which we believe will facilitate compliance with, and calculations pursuant to, this requirement. Additionally, in order to avoid potential confusion as to the scope of Items 11 and 13 to Part II of Form 1–A, the final rules make clear that issuers are required to provide disclosure for ‘‘executive officers’’ rather than ‘‘officers.’’ 369 Contrary to the suggestion of one commenter,370 we do not believe that requiring disclosure regarding the existence of a code of ethics and corporate governance principles should be a required disclosure item for the types of issuers likely to conduct Regulation A offerings. While nothing in Part II of Form 1–A would prevent an issuer from providing more disclosure than is otherwise required in the form itself, we do not believe it would be appropriate to mandate this type of disclosure for all issuers because we anticipate that issuers of Regulation A securities will generally be smaller companies with less complex organizational structures.371 We further believe that the disclosure requirements of Part II of Form 1–A will provide investors with the information they need to adequately evaluate an issuer’s business and securities. As proposed, the final rules permit issuers to incorporate by reference into Part II of Form 1–A certain items previously submitted or filed on EDGAR. In a change from the proposed rules, issuers will be permitted to incorporate by reference any documents publicly submitted or filed on EDGAR, as opposed to being limited to documents submitted or filed pursuant to Regulation A. We believe that this 368 The language in proposed Item 7 to Part II of Form 1–A indicated that issuers had to disclose characteristics that ‘‘may’’ have a material impact on its future financial performance. We believe this clarifying change in the final rules will help facilitate compliance by smaller issuers. 369 The language in proposed Items 11 and 13 to Part II of Form 1–A indicated that issuers had to disclose information regarding directors and officers. We believe the clarifying language will help smaller issuers comply with the final rules. 370 Ladd Letter 2 (referring to PCAOB AU 325 and 9325). 371 See fn. 93 above and Section III.C.3. below. E:\FR\FM\20APR2.SGM 20APR2 21832 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES2 change will continue to facilitate the provision of required information to investors, while taking a consistent approach to information previously provided to the Commission and publicly available on EDGAR. Issuers following the Offering Circular disclosure model will be permitted to incorporate by reference into Items 2 through 14; issuers following the narrative disclosure in Part I of Form S– 1 will be permitted to incorporate by reference into Items 3 through 11 (other than Item 11(e)) of Part I of Form S–1; issuers following the narrative disclosure in Part I of Form S–11 will be permitted to incorporate by reference into Items 3 through 26, Item 28, and Item 30 of Part I of Form S–11.372 The final rules require issuers to describe the information incorporated by reference, and include a separate hyperlink to the relevant document on EDGAR, which need not remain active after the filing of the related offering statement. Additionally, Form 1–A encourages issuers to cross-reference items within the form, where applicable.373 Further, in order to avoid incorporation by reference to stale information without requiring the latest version of the document to be filed, Form 1–A indicates that, if any substantive modification has occurred in the text of any document incorporated by reference since such document was filed, the issuer must file with the reference a statement containing the text and date of such modification.374 372 See General Instruction III to Form 1–A. Since, as proposed, the financial statements required by Part F/S would apply to those following the Form S–1 format, rather than Item 11(e), we have removed the reference to that item in General Instruction III for clarity. Although, as proposed, Items 11(f) and (g) are also not required for those following the Form S–1 format, we continue to specifically allow for cross-referencing and incorporation by reference in those items for those voluntarily choosing to provide such disclosure. As with Model B, the item numbers in the Offering Circular format of Part II of Form 1–A and Part I of Form S–1 do not align. 373 Id. Issuers may, for example, add a crossreference to disclosure found in the financial statements. However, they may not incorporate by reference or add a cross-reference within the financial statements to disclosures found elsewhere. See General Instruction III to Form 1–A, which does not allow for incorporation by reference in Part F/ S. 374 Cf. Securities Act Rule 411(c) and Exchange Act Rule 12b–32 (providing a similar requirement when incorporating exhibits by reference in filings under the Securities Act and Exchange Act). VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 (2) Financial Statements (a) Proposed Rules for Financial Statements Part F/S of Form 1–A currently requires issuers 375 in Regulation A offerings to provide the following financial statements prepared in accordance with U.S. GAAP: 376 • 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 or to be acquired businesses; and • pro forma information relating to significant business combinations. The required financial statements may be unaudited unless the issuer has already obtained an audit for another purpose.377 We proposed to generally maintain the existing financial statement requirements of current Part F/S of Form 1–A for Tier 1 offerings, while requiring Tier 2 issuers to file audited financial statements.378 We proposed 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. As proposed, financial statements for U.S.domiciled issuers would be required to be prepared in accordance with U.S. GAAP. Additionally, however, we proposed to permit Canadian issuers to prepare financial statements in accordance with either U.S. GAAP or International Financial Reporting 375 The requirements also apply to the issuer’s predecessors or any business to which the issuer is a successor. 376 See Form 1–A, Part F/S (2014). 377 The issuer would be considered to have audited financial statements if the qualifications and reports of the auditor meet the requirements of Article 2 of Regulation S–X (17 CFR 210.1 et seq.) and the audit was conducted in accordance with U.S. GAAS or the standards of the PCAOB. The auditor is not required to be registered with the PCAOB. 378 See paragraph (c) of Part F/S of proposed Form 1–A. PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 Standards (IFRS) as issued by the International Accounting Standards Board (IASB).379 As proposed, issuers conducting Tier 1 offerings would be required to follow the requirements for the form and content of their financial statements set out in Part F/S, rather than the requirements in Regulation S–X. In certain less common circumstances, however, such as for an acquired business or subsidiary guarantors, Part F/S would direct issuers conducting Tier 1 offerings to comply with certain portions of Regulation S–X, which provides guidance on the financial statements required for entities other than the issuer.380 For all Tier 2 offerings, the proposed rules would require issuers 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.381 As proposed, issuers conducting Tier 2 offerings would be required to have their financial statements audited. As with Tier 1 offerings, the auditor of financial statements would need to 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.382 Unlike Tier 1 379 If the proposed 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. 380 We proposed 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 proposed 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). As proposed, 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. 381 Tier 2 issuers would, however, follow paragraph (a)(3) of Part F/S of proposed Form 1– A with respect to the age of the financial statements and the periods to be presented. In Tier 2 offerings, the form and contents of financial statements for other entities follow the requirements of Article 8 of Regulation S–X. 382 See Part F/S of proposed Form 1–A (referencing Article 2 of Regulation S–X, 17 CFR 210.2–01 et seq.). E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES2 issuers, issuers conducting Tier 2 offerings would be required to provide financial statements that are audited in accordance with the standards issued by the PCAOB. Additionally, we proposed to update the Form 1–A financial statement requirements to be consistent with the proposed timetable for ongoing reporting.383 Under existing Regulation A, 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 approved by the Commission upon a showing of good cause.384 In practice, issuers often receive a six-month accommodation. 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.385 We proposed 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.386 We also proposed 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.387 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.388 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.389 If interim financial statements are required, they would be required to 383 The rules for ongoing reporting are discussed in Section II.E. below. 384 See Form 1–A, Part F/S (2014). 385 Id. 386 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/cffinancialreporting manual.pdf#topic6. 387 Form 1–A currently 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. 388 See paragraph (a)(3)(i) to Part F/S of proposed Form 1–A. 389 Id. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 21833 cover a period of at least six months.390 In the Proposing Release, we noted that requiring issuers to file 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.391 We proposed 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.392 While not proposed, we additionally solicited comment on whether Tier 2 issuers should be required to submit financial statements in interactive data format using the eXtensible Business Reporting Language (XBRL). While commenters generally approved of the proposed rules not requiring audits for Tier 1 issuers,396 many recommended making changes to the proposed auditing requirements for the financial statements included in an offering.397 One commenter recommended not requiring audited financial statements until after the first year of operations as a ‘‘public startup company’’ or not at all for companies that are pre-revenue or that have paidin capital, assets and revenues below a specified threshold.398 Many commenters recommended allowing Tier 1 issuers to designate financial statements as ‘‘audited’’ if the auditor was only independent in accordance with the rules of the AICPA and not in accordance with the Commission’s auditor independence rules.399 These commenters noted that the proposed requirements for financial statements only to qualify as ‘‘audited’’ if the auditor complies with the independence standards of Article 2 of Regulation S– X, as opposed to the independence standards of the AICPA, may increase (b) Comments on Proposed Rules costs to smaller issuers due to the increased likelihood that an issuer We received numerous detailed would need to have their financial suggestions from commenters on our statements audited a second time by an proposed financial statement auditor who was independent under requirements for Part F/S of Form 1–A. Rule 2–01 of Regulation S–X. One Commenters were generally supportive commenter requested clarification of of the proposed rules, but also raised whether a Tier 1 issuer could concerns as to the effect some of the proposed requirements for audits in Tier voluntarily provide an audit opinion on its financial statements that was 2 offerings could have on issuers and obtained for other purposes if the recommended clarifying revisions that auditor complied with U.S. GAAS, would help to make the financial including AICPA independence statements more consistent in some standards, but not with the respects with those required in Commission’s independence rules.400 registered offerings, while also Several commenters recommended eliminating potentially confusing or requiring Tier 1 issuers that provide inconsistent terminology. unaudited financial statements to label Commenters generally supported the them as unaudited.401 proposed increase to two years of Many commenters recommended balance sheets.393 One commenter noted allowing financial statements in Tier 2 that the Commission’s proposal to offerings to be audited in accordance require two years of balance sheets was appropriate, particularly in light of the 396 See, e.g., CFA Institute Letter; ABA BLS Letter; existing requirement to provide Campbell Letter. 397 ABA BLS Letter; BDO Letter; Canaccord statements of income, cash flows and Letter; CAQ Letter; CFA Letter; CFIRA Letter 2; stockholders’ equity for two years.394 Deloitte Letter; E&Y Letter; Letter from KPMG LLP, Another commenter, however, argued March 24, 2014 (‘‘KPMG Letter’’); Letter from against two years of balance sheets for McGladrey LLP (‘‘McGladrey Letter’’); MoFo Letter; WOC Letter; WR Hambrecht + Co Letter. Tier 1 issuers instead of the one year 398 Letter from Jason Coombs, Co-Founder and required under existing Regulation A.395 390 See paragraph (a)(3)(iv) to Part F/S of proposed Form 1–A. 391 See discussion in Section II.E.1. below. 392 See paragraph (a)(3)(i) to Part F/S of proposed Form 1–A. 393 See, e.g., CFA Institute Letter; ABA BLS Letter. 394 ABA BLS Letter (noting that in light of the existing requirements, the proposed change did not seem unduly burdensome). 395 Campbell Letter. PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 CEO, Public Startup Company, Inc., March 25, 2014 (‘‘Public Startup Co. Letter 3’’) (suggesting three tiers, where at least the first two would not require audited financial statements); Public Startup Co. Letter 6. 399 BDO Letter; CAQ Letter; Deloitte Letter; E&Y Letter; KPMG Letter; McGladrey Letter. 400 CAQ Letter. 401 CAQ Letter (recommending that such issuers disclose that the financial statements have not been subject to an audit or review by an independent accountant); E&Y Letter; KPMG Letter. E:\FR\FM\20APR2.SGM 20APR2 21834 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES2 with either PCAOB standards or U.S. GAAS.402 One commenter limited its recommendation to smaller Tier 2 issuers and conditioned this recommendation on the Commission not altering the requirement that auditors be independent under Rule 2– 01 of Regulation S–X.403 This commenter also recommended conditioning the ability to follow U.S. GAAS under Tier 2 on the issuer’s showing of undue cost and impracticability in the offering statement and also limiting this relief to the issuer’s initial Tier 2 offering. One commenter noted that because Regulation A issuers are not ‘‘issuers’’ (as defined in Section 2(a)(7) of the Sarbanes-Oxley Act of 2002),404 when the audit is performed in accordance with PCAOB standards, AICPA rules would require the audit to be compliant with both AICPA and PCAOB standards and the auditor’s report would have to reference both AICPA and PCAOB standards. This commenter also noted, however, that given recent changes to the auditor’s report under AICPA standards, it may not be possible for the auditor to be in compliance with both AICPA and PCAOB standards from a reporting perspective.405 Additionally, two commenters expressed concern about potential confusion that could result from requiring PCAOB standards in Tier 2 offerings, but not requiring PCAOB registration.406 One of these commenters recommended avoiding any potential confusion by allowing for audits under U.S. GAAS in Tier 2 offerings.407 Another commenter stated that the issue could be resolved by requiring either the use of PCAOB-registered auditors for Tier 2 offerings or appropriate disclosure of the auditor’s PCAOB registration status, noting that the disclosure option would result in lower costs to the issuer and fewer instances in which an issuer would need to have its financial statements audited a second time under PCAOB standards.408 One commenter asked the Commission to clarify issues relating to transition reporting for Tier 1 issuers that have previously conducted an offering pursuant to the exemption under Section 4(a)(6) and were required to file reviewed annual financial 402 ABA BLS Letter; BDO Letter; Canaccord Letter; Deloitte Letter; E&Y Letter; KPMG Letter; McGladrey Letter; MoFo Letter; WR Hambrecht + Co Letter. 403 ABA BLS Letter. 404 15 U.S.C. 7201(a) et seq. 405 KPMG Letter. 406 BDO Letter; Deloitte Letter. 407 Deloitte Letter. 408 BDO Letter. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 statements.409 Another commenter asked the Commission to clarify the application of the audit requirements applicable to Tier 1 issuers that have audited financial statements prepared for other purposes, in light of potentially contradictory references in proposed Form 1–A to the ‘‘standards of the PCAOB’’ and the PCAOB auditing standards.410 One commenter recommended not requiring audited financials under either Tier 1 or Tier 2 for ‘‘small companies with limited revenues and assets.’’ 411 Another commenter raised concerns about allowing Tier 1 issuers to include financial statements audited using U.S. GAAS and not requiring that all audits be conducted by PCAOB-registered auditors.412 Many commenters recommend making other changes to the financial statement requirements not directly related to audit requirements.413 A number of commenters suggested allowing companies to use alternatives under U.S. GAAP for non-public business entities when preparing their financial statements, since Regulation A issuers would otherwise be considered ‘‘public business entities’’ under FASB standards.414 These commenters were concerned about the need for issuers to have their financial statements prepared and audited a second time under U.S. GAAP applicable to public business entities, as discussed in greater detail below. One commenter did not address this issue with respect to Tier 1, but recommended allowing the smallest Tier 2 issuers to follow alternatives under U.S. GAAP applicable to nonpublic business entities.415 One commenter recommended allowing companies to include financial statements prepared in accordance with alternatives under U.S. GAAP for nonpublic business entities in offerings up to a specified minimum, suggesting $10 million or $20 million.416 Another commenter recommended explicitly stating that Regulation A issuers are subject to ‘‘public business entity’’ 409 E&Y Letter. Letter. 411 WOC Letter. 412 CFA Letter. 413 ABA BLS Letter; BDO Letter; Letter from Frederick D. Lipman, Blank Rome LLP, March 17, 2014 (‘‘Blank Rome Letter’’); Canaccord Letter; CAQ Letter; CFIRA Letter 1; Deloitte Letter; E&Y Letter; KPMG Letter; Karr Tuttle Letter; McGladrey Letter; MoFo Letter; PwC Letter; WR Hambrecht + Co Letter. 414 ABA BLS Letter; Canaccord Letter; CAQ Letter; CFIRA Letter 1; Deloitte Letter; E&Y Letter; KPMG Letter; McGladrey Letter; MoFo Letter; WR Hambrecht + Co Letter. 415 ABA BLS Letter. 416 McGladrey Letter. 410 CAQ PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 requirements if the final rules do not provide for the use of, or a non-costly transition from, financial statements based on alternatives under U.S. GAAP for non-public business entities.417 One commenter limited its recommendation with respect to the applicability of alternatives under U.S. GAAP for nonpublic business entities to Tier 1 issuers and to entities whose financial statements are required to be included in offering statements relying on Tier 1.418 Another commenter noted that significant acquired businesses will qualify as ‘‘public business entities’’ because their financial statements are filed with the Commission.419 As a result, financial statements of those businesses would also need to be revised, and an issuer would potentially need to have their financial statements prepared and audited a second time under U.S. GAAP applicable to public business entities. Several commenters recommended allowing issuers under Regulation A to defer adopting new or revised accounting standards effective for public companies if non-public business entities have a delayed effective date (similar to accommodations for emerging growth companies under Section 102(b) of the JOBS Act).420 Two commenters recommended either clarifying how the disclosure requirements for pro forma financial information in Part F/S for Tier 1 issuers differ from Rule 8–05 of Regulation S– X or requiring such Tier 1 issuers to follow Rule 8–05.421 One commenter recommended allowing companies formed within nine months of the filing date of the offering statement to provide only a discussion of their financial condition and operations since inception, rather than financial statements as of a date within nine months of the date of filing.422 This commenter further recommended aligning the financial statement updating requirements with the timing of periodic reports (e.g., allowing for 120 days before year end financial statements are required in the offering statement, rather than 90 days).423 This commenter also recommended that the Commission consider additional scaling for Regulation A offerings in the requirements concerning the financial statements of: Acquired or to-be417 KPMG Letter. Letter. 419 Deloitte Letter. 420 CAQ Letter; Deloitte Letter; E&Y Letter; KPMG Letter. 421 CAQ Letter; PwC Letter. 422 E&Y Letter. 423 Id. 418 E&Y E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations acquired businesses; guarantors of issuers of guaranteed securities; and, affiliates that collateralize an issuance.424 Another commenter recommended that Tier 2 issuers not be subject to Rule 8–04(b)(3) of Regulation S–X when the to-be-acquired business has significant loss operations.425 This commenter recommended at least not applying Rule 8–04(b)(3) in situations where companies intend to eliminate the losses by dropping certain products or service lines of business that produced the loss. Another commenter recommended clarifying whether financial statements should also be dated within nine months of the qualification date of the offering statement.426 One commenter made a number of specific recommendations that we clarify language in particular paragraphs of the proposed requirements for financial statements in Part F/S of Form 1–A.427 A different commenter indicated that proposed Form 1–A seemed to require issuers to disclose ‘‘selected financial information’’ and objected to any such requirement as being more onerous than the requirements otherwise applicable to smaller reporting companies.428 Several commenters specifically supported allowing Canadian issuers to prepare their financial statements in accordance with IFRS as issued by the IASB, as proposed.429 More generally, many commenters recommended allowing foreign issuers to use IFRS as issued by the IASB to prepare their financial statements.430 One commenter recommended allowing U.S. companies to use IFRS when conducting offerings in Canada.431 This comment was made within the context of providing U.S. companies the ability to list on a Canadian exchange without being subject to resale restrictions imposed by Regulation S. Three commenters specifically opposed adding an XBRL requirement.432 424 Id. 425 Blank Rome Letter. Letter (referring to paragraphs (a)(3)(i) and (b)(2) of Part F/S of proposed Form 1–A). 427 E&Y Letter, Appendix B. 428 CAQ Letter. See Section II.C.3.a. above. 429 ABA BLS Letter; Canaccord Letter; MoFo Letter; NASAA Letter 2; PwC Letter. 430 ABA BLS Letter (although supporting excluding non-Canadian foreign companies); Andreessen/Cowen Letter; Canaccord Letter (stating generally that the Commission should clarify that companies may use IFRS); CAQ Letter; Deloitte Letter; PwC Letter. 431 Karr Tuttle Letter. 432 BIO Letter; MoFo Letter; U.S. Chamber of Commerce Letter. mstockstill on DSK4VPTVN1PROD with RULES2 426 E&Y VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 (c) Final Rules for Financial Statements As discussed more fully below, we are adopting requirements for financial statements in Part F/S of Form 1–A with changes from the proposed rules that are designed to simplify and lower the cost of compliance for issuers, while maintaining important investor protections. As proposed, the final rules require Tier 1 and Tier 2 issuers to file balance sheets and other required financial statements as of the two most recently completed fiscal year ends (or for such shorter time that they have been in existence). With the exception of the requirement to file two years of balance sheets, the final rules largely maintain the existing financial statement requirements of current Part F/S for Tier 1 offerings, while requiring Tier 2 issuers to file audited financial statements in Part F/S. Financial statements for U.S.domiciled issuers will be required to be prepared in accordance with U.S. GAAP, as is currently the case. Canadian issuers, however, may 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).433 Additionally, consistent with the suggestions of commenters and in order to be consistent with the treatment of emerging growth companies under Section 102(b)(1) of the JOBS Act, the final rules permit issuers, where applicable, to delay the implementation of new accounting standards to the extent such standards provide for delayed implementation by non-public business entities.434 In this regard, with respect to the delayed implementation of new or revised financial accounting standards, if the issuer chooses to take advantage of the extended transition period to the same extent that a ‘‘nonissuer’’ company is permitted to, the issuer: • Must disclose such choice at the time the issuer files the offering statement; and • May not take advantage of the extended transition period with respect to some standards and not others, but must apply the same choice to all standards.435 433 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 Form 1–A. 434 CAQ Letter; Deloitte Letter; E&Y Letter; KPMG Letter. See also Section 7(a)(2)(B) of the Securities Act, 15 U.S.C. 77g(a)(2)(B), and Section 13(a) of the Exchange Act, 15 U.S.C. 78m(a). 435 See paragraph (a)(3) of Part F/S of Form 1–A. PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 21835 However, issuers electing not to use this accommodation must forgo this accommodation for all financial accounting standards and may not elect to rely on this accommodation in any future filings.436 As proposed, the final rules require issuers conducting Tier 1 offerings to 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.437 However, consistent with a comment received,438 in certain less common circumstances, such as for an acquired business or subsidiary guarantors, Part F/S directs issuers conducting Tier 1 offerings to certain portions of Regulation S–X that provide guidance on when financial statements for entities other than the issuer are required.439 In Tier 1 offerings the form and content of the financial statements for those other entities also follow the requirements set out in Part F/S. We believe this guidance will assist issuers with compliance with the general requirements for financial statement disclosure in these less common circumstances and is an appropriate change in the final rules. In an effort to reduce confusion, as suggested by commenters,440 the final rules also direct issuers to Rule 8–05 of Regulation S–X for pro forma information disclosure requirements. Additionally, the final rules require compliance with Rule 8–06 of Regulation S–X for real estate operations acquired because real estate companies and REITs are eligible issuers. The final rules require Tier 2 issuers to follow the financial statement requirements of Article 8 of Regulation S–X, as if the issuer were a smaller reporting company, unless otherwise 436 Id. 437 See paragraph (b) of Part F/S of Form 1–A. Letter. 439 We are updating 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 are also providing 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), financial statements provided in connection with oil and gas producing activities (Rule 4–10 of Regulation S–X), pro forma financial information (Rule 8–05 of Regulation S–X) and income statements for real estate operations acquired or to be acquired (Rule 8–06 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 those financial statements for other purposes. 440 CAQ Letter; PwC Letter. 438 E&Y E:\FR\FM\20APR2.SGM 20APR2 21836 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations noted in Part F/S.441 This requirement also includes any financial information required for Tier 1 offerings, as discussed above, such as acquired businesses required by Rule 8–04 and 8–05 of Regulation S–X.442 As adopted, financial statements in a Tier 1 offering are not required to be audited. Consistent with the suggestions of commenters,443 and in order to avoid potential confusion as to the presentation of financial statements, issuers in Tier 1 offerings that do not provide audited financial statements must label their financial statements as unaudited. However, the final rules clarify 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. GAAS or the standards of the PCAOB, and the auditor followed the independence standards of either Rule 2–01 of Regulation S–X or the independence standards of the AICPA, then those audited financial statements must be filed.444 We believe the requirement to file already available audited financial statements will benefit investors. The auditor need not be registered with the PCAOB. While audited financial statements are not generally required to be filed for Tier 1 offerings, allowing auditors to follow the independence standards of the AICPA or Rule 2–01 of Regulation S–X is consistent with the suggestions of most commenters and will provide smaller issuers that seek to submit ‘‘audited’’ financial statements in Tier 1 offerings with greater flexibility in satisfying the financial statement requirements.445 We agree that, when available, financial statements that satisfy the financial statement requirements and that have been audited by an auditor that meets the independence standards of the AICPA should be deemed ‘‘audited’’ for purposes of Tier 1 offerings. Issuers conducting Tier 2 offerings are, by contrast, required to have their financial statements audited. The auditor of financial statements being filed as part of a Tier 2 offering must be 441 See paragraph (c) of Part F/S of Form 1–A. 2 issuers would, however, follow paragraphs (c)(1) of Part F/S of Form 1–A with respect to the age of the financial statements and the periods to be presented. In Tier 2 offerings, the form and content of financial statements for other entities follow the requirement of Article 8 of Regulation S–X. 443 CAQ Letter; E&Y Letter; KPMG Letter. 444 See CAQ Letter (requesting clarification on this issue). 445 While not a requirement, issuers in Tier 1 offerings may have independent business reasons why they seek to provide, or investors that may otherwise demand, audited financial statements. mstockstill on DSK4VPTVN1PROD with RULES2 442 Tier VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 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.446 In a change from the proposed rules, and consistent with the suggestions of commenters,447 the final rules require issuers conducting Tier 2 offerings to provide financial statements that are audited in accordance with either U.S. GAAS or the standards issued by the PCAOB. As noted above, one commenter indicated that, because Regulation A issuers are not ‘‘issuers,’’ as defined by Section 2(a)(7) of the Sarbanes-Oxley Act of 2002, AICPA rules would require the audit to be compliant with U.S. GAAS even if the auditor has conducted the audit in accordance with PCAOB standards. Staff of the Commission consulted with the AICPA on this issue and has been advised that an audit performed by its members of an issuer conducting an offering pursuant to Regulation A would be required to comply with U.S. GAAS in accordance with the AICPA’s Code of Professional Conduct.448 As a result, an auditor for a Regulation A issuer who is conducting its audit in accordance with PCAOB standards would also be required to comply with U.S. GAAS, and the auditor would need to comply with the reporting requirements of both the AICPA standards and the PCAOB standards. As further noted by this commenter,449 there may be some question as to whether an auditor can currently comply with both sets of standards when issuing its auditor’s report. Commission staff also consulted with the AICPA on this issue and has been informed that the AICPA will consider taking action to address this potential conflict so that an auditor’s report would be able to comply with both sets of auditing standards. Thus, requiring issuers in Tier 2 offerings to have their financial statements audited in accordance with PCAOB standards would have the effect of requiring issuers to comply with two sets of auditing standards and potentially result in audits for Tier 2 issuers being subject to additional incremental costs than would be required for registered offerings (which are only subject to PCAOB auditing 446 See paragraph (c)(1)(iii) of Part F/S of Form 1–A. 447 ABA BLS Letter; BDO Letter; Canaccord Letter; Deloitte Letter; E&Y Letter; KPMG Letter; McGladrey Letter; MoFo Letter; WR Hambrecht + Co Letter. 448 The AICPA Code of Professional Conduct is available at: https://pub.aicpa.org/codeofconduct/ ethicsresources/et-cod.pdf. 449 See KPMG Letter. PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 standards). To avoid such a result, the final rules permit Tier 2 issuers the option of following U.S. GAAS or the standards of the PCAOB.450 We believe that providing issuers with this option could help reduce the cost of required audits in Tier 2 offerings while maintaining appropriate safeguards for investors. We believe audits conducted in accordance with U.S. GAAS provide sufficient protection for investors in Regulation A offerings, especially in light of the requirement that auditors for Tier 2 offerings must be independent under Rule 2–01 of Regulation S–X. Moreover, we believe that the flexibility adopted in the final rules is more appropriately tailored for the different types of issuers likely to conduct Tier 2 offerings because it will not only eliminate the potential that existed under the proposed rules that some issuers would need to have their financial statements audited a second time under PCAOB standards, but also continue to permit issuers, such as those that may seek concurrent registration of a class of securities under the Exchange Act, to comply with the PCAOB standards if they so choose.451 An issuer that includes financial statements audited in accordance with U.S. GAAS and PCAOB standards will likely incur additional incremental costs compared with an issuer that includes financial statements audited only in accordance with U.S. GAAS. However, we assume that an issuer would only elect to comply with both sets of auditing standards because it has concluded that the benefit of doing so (for example, to facilitate Exchange Act registration) justify these additional incremental costs. Commission staff understands that many firms that conduct audits using PCAOB standards have developed their methodology in a manner that would comply with both sets of standards, which could help contain the costs related to complying with both U.S. GAAS and PCAOB auditing standards. An issuer conducting a Regulation A offering that seeks to concurrently register its securities under the Exchange Act would be required to file audited financial statements that are prepared in accordance with the standards of the PCAOB by an auditor that is PCAOB-registered.452 The final rules therefore provide Regulation A 450 As discussed above, however, compliance with PCAOB standards could also require compliance with U.S. GAAS. 451 See, e.g., Section II.E.3.c (Exchange Act Registration of Regulation A Securities) below. 452 See Section 12 of the Exchange Act, Section 102 of the Sarbanes Oxley Act of 2002 and Article 2 of Regulation S–X. E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES2 issuers with the option to provide financial statements in Part F/S of Form 1–A that comply with correlating requirements under the Exchange Act.453 The Form 1–A financial statement requirements are being further updated to be consistent with the timetable for ongoing reporting.454 The final rules 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 requirement for semiannual interim reporting.455 As proposed, the final rules add a new limitation on the age of financial statements at qualification, under which an offering statement cannot be qualified if the date of the most recent balance sheet included under Part F/S is more than nine months before the date of qualification.456 For filings made more than three months but no more than nine months after the end of the issuer’s most recently completed fiscal year end, issuers are required to include a balance sheet as of the two most recently completed fiscal year ends.457 For filings made more than nine months after the end of the issuer’s most recently completed fiscal year end, the balance sheet is required to be dated as of the two most recently completed fiscal year ends and an interim balance sheet must be included as of a date no earlier than six months after the end of the most recently completed fiscal year.458 If interim financial statements are required, they are required to cover a period of at least six months.459 Requiring issuers to file interim financial statements no older than nine months and covering a minimum of six months has the beneficial effect of eliminating what would otherwise be a requirement for certain issuers to provide quarterly interim financial statements during the qualification 453 If the final rules did not permit issuers to prepare audited financial statements in accordance with the standards of the PCAOB, Regulation A issuers that rely on the amendments to Form 8–A adopted today in order to register a class of securities pursuant to Section 12 of the Exchange Act would have to have their financial statements audited a second time under PCAOB standards by a PCAOB registered auditor. 454 Our final rules for ongoing reporting are discussed in Section II.E.1. below. 455 See paragraph(s) (b)(3)–(4) of Part F/S of Form 1–A for Tier 1 issuers, which also apply to Tier 2 issuers by virtue of paragraph (c)(1) of Part F/S of Form 1–A. 456 Id. 457 See paragraph (b)(3)(A) of Part F/S of Form 1–A. 458 See paragraph (b)(3)(B) of Part F/S of Form 1–A. 459 See paragraph (b)(4) of Part F/S of Form 1–A. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 process and is consistent with the timing of the ongoing reporting requirements adopted today.460 We are generally maintaining the 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 are changing the interval from 90 calendar days to three months, which we believe will simplify compliance by allowing issuers to follow full months. In order to further simplify compliance with the final rules, we also revised Part F/S of Form 1–A to streamline the application of, and simplify the language in, the rules without substantively changing the required content. Although we solicited comment 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 XBRL, we are not adopting any such requirement in the final rules.461 Commenters that addressed this issue opposed requiring the use of XBRL in Regulation A filings.462 We agree and do not believe that requiring the use of XBRL in Regulation A filings would be an appropriately tailored requirement for smaller issuers at this time.463 On December 23, 2013, after we proposed rules for Regulation A, the Financial Accounting Standards Board (FASB) and Private Company Council (PCC) issued a guide for evaluating financial accounting and reporting for non-public business entities.464 The PCC was created in 2012 by the FASB and the Financial Accounting Foundation (FAF) to improve the standard-setting process, and provide for accounting and reporting alternatives, for non-public business entities under U.S. GAAP.465 As the 460 See, e.g., discussion in Section II.E.1. below. 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 Rel. No. 33–9002 (Jan. 30, 2009) [74 FR 6776]. 462 BIO Letter; MoFo Letter; US Chamber of Commerce Letter. 463 We recognize, however, that future technological developments may lessen the burden to smaller issuers associated currently with XBRL, at which time we may revisit this initial determination. 464 The Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies (the ‘‘PCC Guide’’), available at: https://www.fasb. org/cs/ContentServer?c=Document_C&pagename= FASB%2FDocument_C%2FDocumentPage&cid= 1176163703583. 465 For a brief history behind the creation of the PCC, see: https://www.fasb.org/cs/ContentServer?c= Page&pagename=FASB%2FPage%2FSectionPage& cid=1351027243391. 461 Data PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 21837 standards for non-public business entities are new, there are currently very few distinctions between U.S. GAAP for public and non-public business entities. Over time, however, more distinctions between non-public business entity and public company accounting standards could develop. Issuers that offer securities pursuant to Regulation A will be considered ‘‘public business entities’’ as defined by the FASB and, therefore, ineligible to rely on any alternative accounting or reporting standards for non-public business entities.466 Even though issuers of securities in a Regulation A offering fit within the definition of ‘‘public business entity,’’ the Commission retains the authority to determine whether or not such issuers would be permitted to rely on the developing nonpublic business entity standards.467 The distinction between public and non-public business entity standards was not directly contemplated in the Proposing Release, as the FASB/PCC Guide was issued after the Regulation A proposal was approved by the Commission.468 Commenters, however, generally expressed concern about the costs associated with requiring nonpublic business entities (e.g., nonExchange Act reporting companies) to follow public company U.S. GAAP accounting standards, particularly on a going forward basis.469 Commenters also expressed concern about the potential that an issuer would need to have its financial statements prepared and audited a second time, which would likely increase the costs associated with any previously obtained financial statements by a non-public business entity that would not comply with the financial statement requirements of an exemption that requires such issuer to follow the standards applicable to public business entities.470 The final rules do not allow Regulation A issuers to use the alternatives available to non-public business entities under U.S. GAAP in the preparation of their financial statements. One of the significant factors considered by the FASB in developing its definition of ‘‘public business entity’’ was the number of primary users of the financial statements and their access to 466 See numbered paragraph 12 of the PCC Guide, p. 3. 467 Id. 468 The Commission approved the proposed rules on December 18, 2013, while the PCC Guide was issued on December 23, 2013. 469 ABA BLS Letter; Canaccord Letter; CAQ Letter; CFIRA Letter 1; Deloitte Letter; E&Y Letter; KPMG Letter; McGladrey Letter; MoFo Letter; WR Hambrecht + Co Letter. 470 Id. E:\FR\FM\20APR2.SGM 20APR2 21838 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations management.471 As the FASB noted, ‘‘users of private company financial statements have continuous access to management and the ability to obtain financial information throughout the year.’’ 472 As the number of investors increases and the ability to influence management decreases, it is important that all investors receive or have timely access to comprehensive financial information. As a result, the Commission believes that investor protection is enhanced by Regulation A issuers providing financial statements prepared in the same manner as other entities meeting the FASB’s definition of ‘‘public business entity.’’ mstockstill on DSK4VPTVN1PROD with RULES2 c. Part III (Exhibits) We proposed to maintain the existing exhibit requirements in Part III of Form 1–A. Additionally, we proposed to continue to permit issuers to incorporate by reference certain information in documents filed under Regulation A that is already available on EDGAR, but also require issuers to describe the information incorporated by reference and include a hyperlink to such exhibit on EDGAR.473 As proposed, issuers also would have to be subject to the ongoing reporting obligations for Tier 2 offerings in order to avail themselves of this accommodation. We did not receive any comments on the proposed exhibit requirements for Part III of Form 1–A, and are adopting the proposed exhibit requirements substantially as proposed. As adopted, issuers will be required 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; plan of acquisition, reorganization, arrangement, liquidation, or succession; escrow agreements; consents; opinion regarding legality; ‘‘testing the waters’’ materials; appointment of agent for service of process; and any additional exhibits the issuer may wish to file.474 In a change from the proposed requirements, however, the final rules no longer require issuers to file schedules (or similar attachments) to material contracts in all instances. As adopted, issuers are permitted to exclude schedules (or similar 471 PCC Guide, p. 6. 472 Id. 473 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. 474 See Part III (Exhibits) of Form 1–A. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 attachments) to material contracts if not material to an investment decision or if the material information contained in such schedules is otherwise disclosed in the agreement or the offering statement. Any material contract filed in response to Item 17, however, must contain a list briefly identifying the contents of all omitted schedules, together with an agreement to furnish supplementally a copy of any omitted schedule to the Commission upon request. We are adopting final rules that permit issuers to incorporate by reference certain information that is already available on EDGAR. In a change from the proposed rules, incorporation by reference will not be limited to documents previously filed pursuant to Regulation A and will not be limited to issuers subject to Tier 2 ongoing reporting obligations. We believe that this change will continue to facilitate the provision of required information to investors, while taking a consistent approach to information previously provided to the Commission and publicly available on EDGAR. Issuers that seek to incorporate by reference are further required to describe the information incorporated by reference and include a hyperlink to such exhibit on EDGAR.475 As proposed, such issuers must be subject to the ongoing reporting obligations for Tier 2 offerings. Additionally, as proposed, to the extent postqualification amendments to offering statements must include audited financial statements, the final rules require the consent of the certifying accountant to the use of such accountant’s report in connection with amended financial statements to be included as an exhibit.476 The final rule, however, clarifies that the requirement to file the consent of the certifying accountant only applies where the financial statements required to be filed are amended.477 d. Signature Requirements Similar to the requirement for issuers in registered offerings, we proposed to require issuers to manually sign a copy of the offering statement before or at the time of filing and retain it for a period of five years.478 Issuers would be required to produce the manually 475 See General Instruction III to Form 1–A. The hyperlink must be active at the time of filing, but need not remain active after filing. 476 This is consistent with current practice under Regulation A, but will be made an express requirement under the final rules. See Rule 252(f)(1)(ii). 477 See id. 478 See Instructions 2 and 3 to Signatures in proposed Form 1–A; cf. Rule 402(e), 17 CFR 230.402(e). PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 signed copy to the Commission, upon request.479 Additionally, we proposed to eliminate the requirement that, where an issuer filing a Form 1–A is a Canadian issuer, its authorized representative in the United States is required to sign the offering statement.480 Also, we proposed to maintain the requirement that Canadian issuers file a Form F–X 481 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.482 We did not receive any comments on this aspect of the proposal, and are adopting these provisions, as proposed, in the final rules.483 4. Continuous or Delayed Offerings and Offering Circular Supplements a. Proposed Rules Rule 251(d)(3) currently allows for continuous or delayed offerings under Regulation A if permitted by Rule 415.484 By reference to the undertakings of Item 512(a) of Regulation S–K,485 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 posteffective amendment.486 On the other hand, currently 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 to be qualified in a process similar to the Commission staff review, comment and qualification process for initial offering statements.487 The requalification 479 Id. 480 See 17 CFR 230.252(f) (2014) and Instruction 1 to Signatures of Form 1–A (2014). 481 17 CFR 239.42. 482 See Rel. No. 33–6902 (June 21, 1991) [56 FR 30036] (adopting the multijurisdictional disclosure system). 483 See Instructions to Signatures, Form 1–A. 484 17 CFR 230.415. Certain shelf offerings, however, are only permissible in offerings on Form S–3, which Regulation A issuers are ineligible to use. See, e.g., Rule 415(a)(1)(x). 485 17 CFR 230.415(a)(3). 486 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). 487 See 17 CFR 230.253(e) (2014); 17 CFR 230.252(h)(1) (2014). E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES2 process can be costly and time consuming for smaller issuers conducting continuous offerings of securities pursuant to Regulation A. We proposed to clarify in the rules for Regulation A the scope of permissible continuous or delayed offerings and the related concept of offering circular supplements. 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.488 Prior to the adoption of final rules today, Rule 251(d)(3) of Regulation A allowed for continuous or delayed offerings under Regulation A if permitted by Rule 415.489 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.490 Since Rule 415 only addresses registered offerings, however, the precise scope of continuous or delayed offerings under Regulation A has been unclear. The proposed rules would clarify the scope of permissible continuous or delayed offerings under Regulation A and the related concept of offering circular supplements, and otherwise continue to allow for certain traditional shelf offerings to promote flexibility, efficiency, and to reduce unnecessary offerings costs.491 Further, as proposed, an issuer’s ability to sell securities in a continuous or delayed offering would be conditioned on being current with the Tier 2 ongoing reporting requirements at the time of sale.492 To provide clarity regarding the application of Rule 415 concepts to Regulation A offerings, we proposed to add a provision to Regulation A similar to Rule 415, but with limitations that we believed would be appropriate for Regulation A. The provision would establish time limits similar to those in Rule 415 and make conforming changes as necessary.493 In the Proposing Release we proposed excluding types of shelf offerings that cannot be conducted under existing 488 See 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). 489 17 CFR 230.415. 490 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 Rel. No. 33–4936 [33 FR 18617] (Dec. 9, 1968) (adopting Guide 4 and other Commission guides). 491 See Proposing Release, at Section II.C.4. 492 Proposed Rule 251(d)(3)(i)(F). 493 Proposed Rule 251(d)(3). VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 Regulation A, such as offerings requiring registration on Form F–6, offerings requiring primary eligibility to use Forms S–3 or F–3,494 offerings conducted by issuers ineligible to use Regulation A,495 as well as certain offerings that we do not currently believe would be appropriate to include in the Regulation A framework. Further, we proposed prohibiting all ‘‘at the market’’ offerings under Regulation A.496 Additionally, as proposed, changes in the information contained in the offering statement would no longer necessarily trigger an obligation to amend.497 Offering circulars for continuous Regulation A offerings would, however, continue to be required to be updated annually through the filing of a post-qualification amendment. These annual postqualification amendments would include updated financial statements and post-qualification amendments would also be required when updating the offering circular 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.498 In addition to these post-qualification amendments to the offering statement that must be qualified, we also proposed to allow issuers to use offering circular supplements in certain situations.499 Further, we proposed to permit issuers in continuous offerings to qualify additional securities in reliance on Regulation A by a post-qualification amendment.500 We also proposed 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.501 Further, these proposed provisions would require offering circulars that contain substantive changes in information previously provided in the last offering circular (other than information omitted in reliance on proposed Rule 253(b)) to be 494 See also fn. 484 above. 415(a)(1)(xi) discusses investment companies and BDCs. 496 See proposed Rule 251(d)(3)(ii). 497 See proposed Rule 252(h)(2). 498 Id. 499 See proposed Rule 253(g). 500 See proposed Rule 251(d)(3)(i)(F) and note to proposed Rule 253(b). 501 See proposed Rule 253(g). 495 Rule PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 21839 filed within five business days after the date such offering circular is first used after qualification.502 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.503 b. Comments on Proposed Rules Commenters were generally supportive of the proposed modernization of Regulation A’s offering process, in general, and the provisions for continuous or delayed offerings, in particular.504 Two commenters, however, recommended allowing for at the market offerings under Regulation A.505 Additionally, one commenter recommended allowing for at the market offerings in non-penny stocks on established trading markets.506 Another commenter recommended allowing for at the market offerings in securities that qualify for the actively-traded securities exceptions in Rules 101 and 102 of Regulation M.507 This commenter suggested that the offering amount could be determined by using the calculation set forth in Securities Act Rule 457(c) 508 as of a specified date within five business days of qualification of the offering statement. c. Final Rules We believe the proposed rules sufficiently update existing rules, while providing issuers with adequate flexibility with respect to, and additional guidance on, the permissible scope of continuous or delayed Regulation A offerings and offering 502 See proposed Rule 253(g)(2). proposed Rule 253(g)(4). 504 See, e.g., ABA BLS Letter; KVCF Letter; OTC Markets Letter; Paul Hastings Letter. 505 OTC Markets Letter; Paul Hastings Letter. 506 OTC Markets Letter. This commenter also recommended that securities offered under Regulation A that are not penny stocks and that trade on an established public market should be treated as having a ‘‘ready market’’ and thus be considered eligible for margin purposes, which the commenter believed would increase the value of securities and their liquidity. 507 Paul Hastings Letter. Regulation M was adopted by the Commission in 1996 and is intended to prevent potentially manipulative practices by underwriters, issuers, selling securityholders, and other participants in a securities offering. See Rel. No. 38067 (December 20, 1996) [62 FR 520]. 508 Rule 457(c) specifies that Securities Act registration fees for securities offered on the basis of fluctuating market prices shall be calculated as follows: Either the average of the high and low prices reported in the consolidated reporting system (for last sale reported over-the-counter securities) or the average of the bid and asked price (for other over-the-counter securities) as of a specified date within 5 business days prior to the date of filing the offering statement. 503 See E:\FR\FM\20APR2.SGM 20APR2 21840 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations circular supplements. We are adopting these rules as proposed. The final rules add Rule 251(d)(3) to Regulation A, without changes from the proposed rule. This provision is similar to Rule 415, but its scope is limited to permissible Regulation A offerings.509 In this regard, the final rules for Regulation A will continue to allow for certain traditional shelf offerings to promote flexibility, efficiency, and to reduce unnecessary offerings costs.510 The final rules will condition the ability of an issuer to sell securities in a continuous offering on being current in its annual and semiannual report filing, if required under Rule 257(b), at the time of sale.511 As we indicated in the Proposing Release, 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 promote parity of information in the secondary markets. As proposed, the final rules provide for the following types of continuous or delayed offerings: • Securities offered or sold by or on behalf of a person other than the issuer or its subsidiary or a person of which the issuer is a 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 that are part of an offering which commences within two calendar days after the qualification date, will be offered on a continuous basis, may continue to be offered 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.512 Notwithstanding the suggestions of commenters regarding at the market offerings, we continue to believe that such offerings are not appropriate for Regulation A offerings, particularly at the outset of the adoption of today’s amendments to the existing rules. 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 determination as to whether the exemption would be an appropriate method for such offerings should occur in the future. 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. Under the final rules, as proposed, changes in the information contained in the offering statement will no longer necessarily trigger an obligation to amend.513 Offering circulars for continuous or delayed Regulation A offerings will 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.514 In addition to postqualification amendments to the offering statement that must be qualified, the final rules also will allow issuers to use offering circular supplements in certain situations.515 Further, issuers in continuous offerings will be permitted to qualify additional securities in reliance on Regulation A by a post-qualification amendment.516 The final rules will, as proposed, permit offering circular supplements to be used for final pricing information, where the offering statement is qualified on the basis of a bona fide price range estimate.517 Additionally, the final rules permit offering circulars to omit information with respect to the underwriting syndicate analogous to the provisions for registered offerings under Rule 430A.518 However, the final rules do not allow an issuer to omit the volume of securities (the number of equity securities or aggregate principal 513 Rule 252(f)(2). 514 Id. 515 Rule 253(g). 251(d)(3)(i)(F) and note to Rule 253(b). 517 Rule 253(b)(2). The bona fide price range estimate may 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. 518 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). 516 Rule mstockstill on DSK4VPTVN1PROD with RULES2 509 Rule 251(d)(3). 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.’’). 511 This condition only applies to continuous offerings under Rule 251(d)(3)(i)(F). 512 Id. 510 See VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 amount of debt securities) to be offered.519 The final rules also permit, as proposed, offering circular supplements to reflect 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, 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.520 Notwithstanding this provision, 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 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.521 Under no circumstances, however, would an issuer be able to amend its offering statement or rely on the provisions for offering circular supplements 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 Rule 251(a) or if the increase in aggregate offering price would result in a Tier 1 offering becoming a Tier 2 offering.522 We are also adopting as proposed provisions similar to Rule 424 that require issuers omitting certain pricing and price-related information from an offering statement at the time of qualification, in reliance on 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.523 These provisions require offering circulars that contain substantive changes (other than information omitted in reliance on 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.524 Offering circular supplements that are not filed within the required time frames provided by the rules are required to be 519 Rule 520 See 253(b)(4). note to Rule 253(b). 521 Id. 522 Id. 523 Rule 524 Rule E:\FR\FM\20APR2.SGM 253(g)(1). 253(g)(2). 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations filed as soon as practicable after the discovery of the failure to file.525 5. Qualification Under existing 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.526 In such instances, the issuer includes a delaying notation on the cover of the Form 1–A stating that the offering statement shall only be qualified by order of the Commission.527 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.528 An offering statement that does not include a delaying notation will be qualified without Commission action on the 20th calendar day after filing.529 We proposed 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. A few commenters generally supported the proposed elimination of qualification without Commission action.530 No commenters opposed this aspect of the proposal. We are adopting, substantially as proposed, final rules that require Commission action before a Regulation A offering statement may be qualified. The final rules modify the proposed rules by permitting the offering statements to be declared qualified by a ‘‘notice of qualification’’ issued by the Division of Corporation Finance, pursuant to delegated authority, rather than requiring the Commission itself to issue an order.531 The notice of qualification is analogous to a notice of effectiveness in registered offerings.532 We are therefore amending the Commission’s organization rules, as they relate to the delegated authority of the Director of the Division of Corporation Finance, to permit the Division to issue qualification orders pursuant to Regulation A.533 The final rules also eliminate the risk that an 525 Rule 526 17 253(g)(4). CFR 230.252(g)(2) (2014). 527 Id. mstockstill on DSK4VPTVN1PROD with RULES2 528 17 CFR 230.252(g)(3) (2014). CFR 230.252(g)(1) (2014). 530 CFA Letter; CFA Institute Letter; MCS Letter. 531 See Rule 252(e). 532 See 17 CFR 200.30–1(a)(5) (The Director of the Division of Corporation Finance has the delegated authority to declare registration statements to be effective within shorter periods of time than 20 days after filing, consistent with Section 8(a) of the Securities Act (15 U.S.C. 77h). 533 Rule 30–1(b)(2)–(4). 529 17 VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 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 the electronic filing processes we are adopting,534 the scaled disclosure requirements for Tier 1 and Tier 2 offerings,535 and the preemption of state securities law registration and qualification requirements for Tier 2 offerings,536 we believe it is appropriate to ensure that the Commission staff has the opportunity to review and comment on an offering statement before it becomes qualified. D. Solicitation of Interest (Testing the Waters) 1. Proposed Rules Under Securities Act Section 3(b)(2)(E), issuers may test the waters for interest in an offering—without restriction as to the types of investors solicited—before filing an offering statement on such terms and conditions as the Commission prescribes. We proposed 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 of solicitation materials and disclaimers.537 As we noted in the Proposing Release, the investor protections with respect to solicitation materials in existing Regulation A would remain in place as these materials remain subject to the antifraud and other civil liability provisions of the federal securities laws.538 As proposed, 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. We further proposed to require issuers to publicly file their offering statements not later 534 See discussion in Section II.C.1. above. discussion in Section II.C.3.b. above. 536 See discussion in Section II.H.3. below. 537 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.’’ 538 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 Rel. No. 33–6924, at fn. 48. 535 See PO 00000 Frm 00037 Fmt 4701 Sfmt 4700 21841 than 21 calendar days before qualification so that 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 the preliminary offering circular. The proposed rules would amend the requirements for submission or filing of solicitation materials, 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. As proposed, Rule 255(b) would require all soliciting materials to bear certain legends or disclaimers.539 Further, we did not propose to limit testing the waters to QIBs and institutional accredited investors (as is currently the case with testing the waters by emerging growth companies under Securities Act Section 5(d)). 2. Comments on Proposed Rules Most commenters generally supported the proposed amendments to the testing the waters provisions.540 Several commenters, however, recommended requiring the filing of testing the waters materials prior to first use.541 These commenters suggested that the antifraud and other civil liability provisions of the federal securities laws are not an adequate substitute for the investor protections afforded by an advance filing requirement for solicitation materials. They further suggested that their concerns about the proposed testing the waters provisions are compounded by an access equals delivery model of final offering circular delivery. One commenter recommended allowing states to have immediate access to all testing the waters materials filed with the Commission.542 Another commenter recommended making the filing of testing the waters materials a condition to the exemption,543 while a third commenter specifically opposed that recommendation.544 539 Proposed Rule 255(b). As proposed, Rule 255(b) would largely follow similar provisions in the context of registered offerings. See Rule 134(d), 17 CFR 230.134(d) (requiring a disclaimer for solicitations of interest in registered offerings). 540 BIO Letter; Letter from Daniel McElroy, DuMoulin Black LLP, April 1, 2014 (‘‘DuMoulin Letter’’); Ladd Letter 2; Paul Hastings Letter; Richardson Patel Letter. 541 Massachusetts Letter 2; NASAA Letter 2; WDFI Letter. 542 Ladd Letter 2. 543 MCS Letter. 544 BIO Letter. E:\FR\FM\20APR2.SGM 20APR2 21842 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations Two commenters recommended ensuring that any testing the waters materials that are filed with the Commission be kept confidential, at least until the offering statement is qualified.545 One commenter recommended removing any requirement to file testing the waters materials publicly,546 while another commenter recommended not requiring testing the waters materials to be filed for Tier 2 offerings.547 One commenter supported the use of legends on testing the waters materials or, in lieu of legends, restricting testing the waters to certain types of investors, such as QIBs and accredited investors.548 Several commenters suggested that the Commission provide market participants with communication safe harbors from Section 12(a)(2) liability for regular business communications by a Regulation A issuer.549 3. Final Rules We are adopting testing the waters provisions in the final rules as proposed. Under the final rules, issuers will be permitted to test the waters with all potential investors and use solicitation materials both before and after the offering statement is filed, subject to issuer compliance with the rules on filing and disclaimers.550 The final rules require, as proposed, that testing the waters materials used by an issuer or its intermediaries after the issuer publicly files an offering statement be accompanied by a current preliminary offering circular or contain a notice informing potential investors where and how the most current preliminary offering circular can be obtained.551 This requirement may be satisfied by providing the URL where the preliminary offering circular or the offering statement may be obtained. Solicitation materials will remain subject to the antifraud and other civil liability provisions of the federal securities laws.552 Further, the final rules require issuers and intermediaries that use testing the waters materials after publicly filing the offering 545 Heritage Letter; Ladd Letter 2. Letter. 547 MoFo Letter. 548 CFA Institute Letter. 549 ABA BLS Letter; Canaccord Letter; CFIRA Letter 1; CFIRA Letter 2; MoFo Letter; Public Startup Co. Letter 6; WR Hambrecht + Co Letter. See also discussion of Section 12(a)(2) liability in Proposing Release, Section II.B.7. 550 Rule 255. For a discussion of the use of solicitation materials as it relates to (i) the doctrine of integration, see Section II.B.5.c. above and Rule 255(e), and (ii) the application of state securities laws, see Section II.H.3. below. 551 Rule 255(b)(4). 552 See fn. 538 above. statement to update and redistribute such material in a substantially similar manner as such materials were originally distributed to the extent that either the material itself or the preliminary offering circular attached thereafter becomes inadequate or inaccurate in any material respect.553 As discussed in Section II.C.2. above, first-time issuers that are eligible for, and elect to, non-publicly submit draft offering statements are required to publicly file their offering statements not later than 21 calendar days before qualification so that any solicitation of interest made in the 21 calendar days before the earliest date of potential sales of securities by such issuers will be conducted while potential investors have access to the most recent version of the preliminary offering circular. Additionally, in light of the preemption of state securities laws registration requirements in the final rules for Tier 2 offerings, the 21 calendar day requirement will enable state securities regulators to require such issuers to file such materials with them for a minimum of 21 calendar days before any potential sales to investors in their respective states.554 As proposed, the final rules require that issuers submit or file solicitation materials as an exhibit when the offering statement is either submitted for non-public review or filed (and update for substantive changes in such material after the initial non-public submission or filing). However, issuers are no longer required to submit solicitation materials at or before the time of first use.555 The treatment of solicitation materials in Regulation A offerings is generally consistent with the Commission staff’s treatment of solicitation materials used by emerging growth companies under Securities Act Section 5(d), with two exceptions that we believe will provide investors in Regulation A offerings with additional protections: • Solicitation materials used in Regulation A offerings are required to be included with the offering statement; 556 and mstockstill on DSK4VPTVN1PROD with RULES2 546 BIO VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 553 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 may be obtained and that URL continues to link to the most recent version of the preliminary offering circular. See Rule 255(d). 554 See fn. 277 above. 555 Rule 255. 556 See Item 17 (Exhibits), Part III of Form 1–A. PO 00000 Frm 00038 Fmt 4701 Sfmt 4700 • solicitation materials used by Regulation A issuers that file an offering statement with the Commission will be publicly available as a matter of course. Contrary to the views of commenters that suggested we keep solicitation materials confidential, or not require such materials to be filed (either publicly or at all), we believe the submission and filing requirements for solicitation materials are important elements of the final rules for the use of solicitation materials.557 We believe that issuers should be accountable for the content of solicitation materials and that such information must be consistent with the information contained in the offering circular. We believe that making these materials publicly available as an exhibit to the offering statement, and thereby subjecting them to staff review and comment and scrutiny by the public, will help ensure that issuers use solicitation materials with appropriate caution. However, for the reasons discussed in Section II.F. below, we do not believe that the filing of such materials should be a condition to relying on the Regulation A exemption. We are adopting as proposed the required legends for solicitation materials. The legends provide that sales made pursuant to Regulation A are contingent upon the qualification of the offering statement.558 Additionally, to provide greater flexibility when using solicitation materials, the final rules eliminate, as proposed, the requirement in existing Regulation A for testing the waters materials to identify the issuer’s chief executive officer, business, and products. Solicitation materials used before qualification will, therefore, be required to bear a legend or disclaimer indicating that: (1) No money or other consideration is being solicited, and if sent, will not be accepted; (2) no sales will be made or commitments to purchase accepted until the offering statement is qualified; and (3) a prospective purchaser’s indication of interest is non-binding.559 While the expansion of use of solicitation materials after filing may result in investors receiving more sales literature in marketed offerings, in such circumstances, potential investors will also be afforded more time with the preliminary offering circular before making an investment decision because, as noted above, testing the waters materials used by an issuer or its intermediaries after the issuer publicly 557 BIO Letter; Heritage Letter; Ladd Letter 2; MoFo Letter. 558 See Rule 255(a). 559 See Rule 255(b). E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES2 files an offering statement must be accompanied by a current preliminary offering circular or contain a notice informing potential investors where and how the most current preliminary offering circular can be obtained.560 We believe the approach to solicitation materials that we are adopting today is consistent with existing Regulation A that allows issuers to test the waters and will make the use of solicitation materials more beneficial for issuers and investors. For issuers, the final rules will generally reduce compliance burdens and entirely eliminate the filing requirement for issuers that, after testing the waters, decide not to proceed with an offering. With respect to investors, we note that the final rules contain significant safeguards that should help mitigate the concerns expressed by some commenters that not requiring testing the waters materials to be submitted or filed with the Commission before first use will result in a reduction in investor protections.561 These include the requirements to make the most recent preliminary offering circular available with solicitation materials after filing, to redistribute solicitation materials after filing to the extent that either the material itself or the preliminary offering circular attached thereafter becomes inadequate or inaccurate in any material respect, to deliver the preliminary offering circular at least 48 hours in advance of sale if the issuer is not subject to a Tier 2 reporting obligation, to deliver the final offering circular (or a notice of the final offering circular) no later than two business days after sale in all instances, and the minimum 21 calendar day filing requirement for issuers that nonpublicly submit draft offering statements as well as the continued application of the antifraud provisions of the federal securities laws. Additionally, state securities regulators have the ability under the final rules to require issuers to file with them any materials required to be filed with the Commission.562 From an investor protection standpoint, we also note that sales under Regulation A may occur 560 Cf. The Regulation of Securities Offerings, 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). 561 See fn. 541 above. 562 See also fn. 277 above and discussion in Section II.H. below. Where states elect to require issuers to file such information with them, their respective securities regulators will, for example, have access to solicitation materials relied upon by first-time issuers that non-publicly submit draft offering statements for a minimum of 21 calendar days before the first date of any potential sales. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 only in connection with a qualified offering statement that is filed with the Commission and that is subject to review by the staff. Lastly, to address the concerns of commenters regarding an issuers’ ability to conduct routine communications with customers and suppliers at or near the time of a contemplated Regulation A offering,563 we are confirming, consistent with Rule 169’s existing exemption from Sections 2(a)(10) and 5(c) of the Securities Act for regularly released factual business communications,564 that we do not believe such communications constitute solicitation of interest materials under Regulation A. Ultimately, whether or not a communication is limited to factual business information depends on the facts and circumstances, but issuers may generally look to the provisions of Rule 169 for guidance in making this determination in the Regulation A context. More generally, we note that factual business information means information about the issuer, its business, financial condition, products, services, or advertisement of such products or services.565 Factual business information generally does not include such things as predictions, projections, forecasts, or opinions with respect to valuation of a security.566 The approach we are taking today with respect to factual business information is consistent with the Commission’s stated position on such communications for registered offerings and clarifies its application to Regulation A solicitation of interest materials. E. Ongoing Reporting Section 3(b)(2) of the Securities Act 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 may provide for the suspension and termination of such a requirement with respect to that issuer.’’ As we noted in the Proposing Release, we are mindful that a one-size-fits-all 563 See fn. 549 above CFR 230.169. 565 See Rel. No. 33–5180 (Aug. 20, 1971) (Guidelines for Release of Information by Issuers Whose Securities are in Registration). 566 Id. 564 17 PO 00000 Frm 00039 Fmt 4701 Sfmt 4700 21843 ongoing reporting regime may not be suitable for all types of entities and investors.567 In the final rules for Regulation A, we have endeavored to achieve an appropriate balance between the 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. 1. Continuing Disclosure Obligations a. Proposed Rules for Continuing Disclosure Obligations 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 the offering.568 We proposed to rescind Form 2–A, but to continue to require Regulation A issuers to file with the Commission electronically on EDGAR after the termination or completion of the offering the information generally disclosed in Form 2–A.569 As proposed, issuers conducting Tier 1 offerings would be required to provide this information on Part I of proposed Form 1–Z not later than 30 calendar days after termination or completion of the offering,570 while issuers conducting Tier 2 offerings have the flexibility to provide this information on either Part I of Form 1–Z at the time of filing an exit report or proposed Form 1–K as part of their annual report, whichever is filed first.571 As proposed, Tier 2 issuers would be subject to a Regulation A ongoing reporting regime that would require, in addition to annual reports and summary information about a recently completed offering, semiannual reports on proposed Form 1–SA, current event reports on proposed Form 1–U, and, when eligible and electing to do so, notice to the Commission of the suspension of ongoing reporting 567 See Proposing Release, at Section II.E. 17 CFR 230.257 (2014); see also 17 CFR 239.91 (Form 2–A). 569 We did not propose to continue to require issuers to disclose the use of proceeds currently disclosed in Form 2–A, as issuers would already have to disclose this information in Part II of proposed Form 1–A and changes in the use of proceeds after qualification not previously disclosed may require issuers to file a postqualification amendment or offering circular supplement to update such disclosure. See discussion of continuous or delayed offerings and offering circular supplements in Section II.C.4. above. 570 Proposed Form 1–Z (exit report) is discussed in Section II.E.4. below. 571 Proposed Rule 257(a), (b)(1). 568 See E:\FR\FM\20APR2.SGM 20APR2 21844 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations obligations on Part II of proposed Form 1–Z. All of these reports would be filed electronically on EDGAR. b. Comments on the Proposed Rules We received both general comments and specific comments on the proposed forms. These comments are discussed in turn below. General Comments mstockstill on DSK4VPTVN1PROD with RULES2 Commenters generally approved of the continuing disclosure obligations for Tier 2 offerings.572 One commenter noted favorably that professional fees, other costs, and the time burden associated with the proposed rules would likely be substantially lower for Regulation A issuers than for issuers subject to Exchange Act reporting.573 Another commenter remarked that the proposed ongoing reporting regime strikes an appropriate balance between the benefits of disclosure and costs to issuers.574 Other commenters expressed general support, but also recommended changes to the semiannual reporting requirement or the content of Form 1–U.575 One commenter supported the general policy that it should not be easier or harder to exit the Regulation A reporting system than it would be to exit the Exchange Act reporting system.576 Several commenters recommended including an ongoing disclosure requirement for Tier 1 issuers, including disclosure at a level lower than what was proposed for Tier 2,577 ongoing disclosure with yearly audited financials,578 or some unspecified continuous disclosure obligation.579 Another commenter recommended extending continuing disclosure obligations into Tier 1, but further suggested that the Commission replace any requirement to provide audited financial statements with an affidavit from management attesting to the accuracy of the financial statements.580 A few commenters generally recommended reducing the 572 ABA BLS Letter; Campbell Letter; Canaccord Letter; CFA Letter; McCarter & English Letter; NASAA Letter 2; Letter from Jason Coombs, CoFounder and CEO, Public Startup Company, Inc., March 26, 2014 (‘‘Public Startup Co. Letter 5’’); US Alliance Corp. Letter; WDFI Letter. 573 US Alliance Corp. Letter. 574 McCarter & English Letter. 575 ABA BLS Letter; Canaccord Letter; NASAA Letter 2; WDFI Letter. 576 ABA BLS Letter (raising the issue particularly with respect to ‘‘very small issuers’’ under Tier 2). 577 Guzik Letter 1 (suggesting that Tier 1 ongoing disclosure requirements could parallel Tier 2’s requirements but without the requirement for semiannual reports). 578 Ladd Letter 2. 579 SVB Financial Letter. 580 Public Startup Co. Letter 5. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 disclosure burden on Tier 2 issuers.581 One of these commenters recommended making continuing disclosure requirements contingent upon factors other than offering size, such as whether the issuer has taken steps to foster a market in its securities.582 This commenter also recommended allowing issuers to either avoid ongoing reporting or to file only financial statements and a management letter regarding operations and results if, shortly after commencing the offering upon qualification, issuers have less than 300 record holders. Another commenter recommended allowing Canadian companies to rely on Rule 12g3–2(b) to avoid having to file ongoing reports under Regulation A.583 As an alternative, this commenter recommended allowing Canadian companies to furnish reports under cover of Form 6–K rather than using the Regulation A reports. One commenter recommended that, to the extent that the final rules allow foreign private issuers to use Regulation A, such issuers should be permitted to follow the ongoing reporting rules applicable to them in the Exchange Act context in lieu of Regulation A ongoing reporting requirements,584 while another commenter specifically opposed this suggestion.585 Another commenter recommended requiring officers, directors, and controlling shareholders of companies that offer securities under Regulation A to make ongoing disclosure of transactions in company securities, similar to reporting on Forms 3, 4, and 5 and Schedules 13D, 13G, and 13F in the registered context.586 Comments on Form 1–K One commenter recommended revising proposed Form 1–K to expressly not require the disclosure of an issuer’s plan of operations, as described in Item 9(c) of Part II of Form 1–A.587 This commenter further recommended clarifying whether a Tier 2 issuer is required to comply with Rules 3–10, 3–16, and 8–04 of Regulation S–X in Form 1–K, in light of the reference to segmented data in Item 7(b) to Part F/S of proposed Form 1– 581 Heritage Letter; IPA Letter (providing estimated costs of compliance for offering statement and periodic reports). 582 Heritage Letter. 583 DuMoulin Letter. 584 McCarter & English Letter (noting Exchange Act Form 20–F, 40–F, Form 6–K, and ongoing home country reports). 585 Andreessen/Cowen Letter. 586 OTC Markets Letter. 587 E&Y Letter (noting the Commission’s intent to follow this approach, as mentioned in the Proposing Release at fn. 397). PO 00000 Frm 00040 Fmt 4701 Sfmt 4700 A.588 This same commenter recommended that the Commission clarify whether a Tier 2 issuer is required to comply with Rule 8–04 of Regulation S–X in proposed Form 1–K, particularly with respect to probable acquisitions.589 Comments on Form 1–SA Several commenters recommended requiring or permitting quarterly reporting rather than semiannual reporting on proposed Form 1–SA.590 One of these commenters stated that quarterly reporting is standard in the United States and is not overly burdensome.591 Two other commenters stated that quarterly reporting was necessary for investor protection and to reduce the risk of insider trading.592 Other commenters noted that quarterly reporting might be preferred by market participants but supported a semiannual requirement.593 One commenter agreed with our proposal not to require Tier 2 issuers to have their Form 1–SA financial statements reviewed by an independent accountant, particularly with respect to smaller issuers.594 Another commenter recommended either requiring the financial statements in Form 1–SA to be reviewed by an independent accountant or requiring issuers to disclose on Form 1–SA that the financial statements were not subject to review.595 Yet another commenter recommended that there be no requirement to provide Rule 3–16 of Regulation S–X financial statements or summarized financial information in semiannual reports (to align with requirements for existing registrants that are not required to include this in Form 10–Q).596 This commenter also recommended clarifying if the financial statements in Form 1–SA can be presented using a condensed format consistent with Rule 8–03(a) of Regulation S–X and if additional disclosure requirements of Rule 8–03(b) are applicable.597 This same commenter recommended removing Item 3(d) of Form 1–SA, because neither this statement nor a statement of changes in stockholders’ equity is an existing requirement on Form 10–Q.598 588 Id. 589 Id. 590 E&Y Letter; Massachusetts Letter 2; NASAA Letter 2; OTC Markets Letter; WDFI Letter. 591 OTC Markets Letter. 592 Massachusetts Letter 2; WDFI Letter. 593 B. Riley Letter; Milken Institute Letter. 594 ABA BLS Letter. As proposed, such reviews would not be required for any Form 1–SA filing. 595 KPMG Letter. 596 E&Y Letter. 597 Id. 598 Id. E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations Comments on Form 1–U Commenters made a number of suggestions regarding the current report requirements. Some commenters recommended eliminating the requirement to file Form 1–U for the smallest issuers, based on a measure such as asset size or market capitalization.599 Other commenters recommended extending the proposed filing requirement from four business days after the triggering event to fifteen business days after such event.600 Several commenters recommended changing or clarifying the ‘‘fundamental change’’ standard in Item 1 of proposed Form 1–U.601 One of these commenters expressed concerns about whether this item will be consistently interpreted and whether the use of the term ‘‘fundamental change,’’ in light of the use of the same term in Item 512 of Regulation S–K, would cause additional confusion.602 This commenter further recommended that, for contracts involving business acquisitions, the measurement of significance in this item should be limited to the investment test and the numerical threshold should be increased to at least 50% to be more consistent with the stated disclosure objective. Three commenters recommended moving to a materiality standard so as to be consistent with the standards in the anti-fraud provisions of federal securities laws, suggesting that this would help avoid confusion.603 One commenter recommended allowing (but not requiring) Tier 1 issuers to report material information on Form 1–U, including the financial statements of significant acquired businesses.604 Other commenters suggested changes to the substance of what would need to be reported on Form 1–U. One commenter generally recommended cross-referencing existing disclosure requirements when a proposed disclosure standard is meant to be the same.605 For example, this commenter suggested that Form 1–U include a cross-reference to Form 8–K when disclosure requirements are meant to be the same. One commenter recommended permitting companies to disclose: (1) A change in accountants in the next periodic filing instead of reporting it on Form 1–U if the change does not involve a disagreement or reportable event (as defined in Item 304 of Regulation S–K); and (2) sales of equity securities in the next periodic filing if the price was not below that of previous primary offerings.606 Two of these commenters recommended eliminating the requirement to report unregistered sales of securities on Form 1–U, or to raise the reporting threshold to only cover offerings that represent at least 10% of the issuer’s pre-transaction outstanding shares.607 c. Final Rules for Continuing Disclosure Obligations We are adopting rules for continuing disclosure obligations under Regulation A generally as proposed, with certain technical modifications and clarifications. The final rules eliminate Form 2–A and in its place require the disclosure of similar information pursuant to Part I of Form 1–Z for Tier 1 issuers and, depending on when the issuer’s offering is terminated or completed, in either Form 1–K or Part I of Form 1–Z for Tier 2 issuers. As proposed, the respective disclosure requirements in Part I of Forms 1–K and 1–Z will include the date the offering was qualified and commenced, the amount of securities qualified, the amount of securities sold in the offering, the price of the securities, the portions of the offering that were sold on behalf of the issuer and any selling securityholders, any fees associated with the offering, and the net proceeds to the issuer.608 We believe that summary information and data about an issuer and its Regulation A offering is most valuable when obtained after the offering is completed or terminated.609 Therefore, as proposed, issuers will only be required to disclose such information after the termination or completion of the offering. As noted in the Proposing Release, we are concerned that uniform ongoing reporting requirements for all issuers of Regulation A securities could 606 E&Y mstockstill on DSK4VPTVN1PROD with RULES2 599 ABA BLS Letter; Milken Institute Letter. 600 ABA BLS Letter; E&Y Letter; Milken Institute Letter. 601 E&Y Letter; Massachusetts Letter 2; NASAA Letter 2; WDFI Letter. 602 E&Y Letter. For description of Item 512, see fn. 486 above. 603 Massachusetts Letter 2; NASAA Letter 2; WDFI Letter. 604 E&Y Letter. Two commenters made a similar recommendation without specifying which form should be used for that purpose. See ABA BLS Letter; Canaccord Letter. 605 PwC Letter. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 Letter. BLS Letter; MoFo Letter. 608 See Part I of Form 1–K and Part I of Form 1– Z. For clarification purposes, we have changed the references in Part I in these forms from ‘‘number of securities’’ to ‘‘amount of securities.’’ These changes should avoid confusion when reporting debt offerings where a quantifiable number of securities is not being offered. In such cases, issuers will be able to report the aggregate sales of securities in the offering. 609 Additionally, in continuous offerings, issuers are required to file post-qualification amendments with the Commission every twelve months to the extent that sales are ongoing at that time. See Rule 252(f)(2)(i). 607 ABA PO 00000 Frm 00041 Fmt 4701 Sfmt 4700 21845 disproportionately affect issuers in smaller offerings. For that reason, the final rules do not require any ongoing reporting for issuers conducting Tier 1 offerings, other than the disclosure of the summary information discussed above.610 Issuers in smaller offerings will, however, have the option to conduct a Tier 2 offering and subject themselves to ongoing reporting and other Tier 2 requirements.611 The final rules for ongoing reporting for Tier 2 issuers are being adopted as proposed, except where noted below, and will require issuers to file annual reports on Form 1–K,612 file semiannual reports on Form 1–SA,613 file current event reports on Form 1–U,614 and provide notice to the Commission of the suspension of their ongoing reporting obligations on Part II of Form 1–Z.615 All reports for Tier 1 and Tier 2 offerings are required to be filed electronically on EDGAR.616 As discussed above, commenters suggested that the Commission consider various potential changes to the proposed ongoing reporting requirements for Tier 2 issuers, including: Extending ongoing reporting to Tier 1 offerings with some modifications; increasing the ongoing reporting requirements for Tier 2 issuers to include analogs to Exchange Act Forms 3, 4, and 5 and beneficial ownership reporting on Schedules 13D, 13G and 13F; basing the ongoing reporting requirements on characteristics of the issuer, such as whether the issuer has taken steps to foster a secondary market; or providing different requirements for Canadian companies or foreign private issuers. Another commenter suggested that we allow issuers to either avoid ongoing reporting or to file only financial statements and a management letter regarding operations and results if, shortly after commencing the offering upon qualification, issuers have less than 300 record holders.617 We do not, however, believe that the changes suggested by commenters 610 See Rule 257(a). issuer offering up to $20 million in a Tier 2 offering would, in addition to providing ongoing reports to the Commission on an annual and semiannual basis, with interim current event updates, be required to file audited financial statements in the offering statement, just as issuers in larger Tier 2 offerings are required to do. See Section II.C.3.b(2)(c). above. 612 Rule 257(b)(1). 613 Rule 257(b)(3). 614 Rule 257(b)(4). 615 Rule 257(d)(2). 616 Subject, in certain cases, to the hardship exemptions set forth in Rules 201 and 202 of Regulation S–T. 17 CFR 232.201–202. 617 Heritage Letter. 611 An E:\FR\FM\20APR2.SGM 20APR2 21846 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES2 described above are advisable at this time. Instead, we believe the approach to ongoing reporting adopted in the final rules is preferable and will support a regular flow of information about issuers conducting Tier 2 offerings, which will benefit investors in these larger offerings and also help foster the development of a secondary market in such securities, while balancing the compliance burden that would be imposed on smaller issuers. We do not believe that requiring ongoing reporting for Tier 1 issuers, other than the requirement to file a Form 1–Z upon completion or termination of the offering, is necessary for Tier 1 offerings. We believe issuers in Tier 1 offerings will be small companies whose businesses revolve around products, services, and a customer base that will likely be more local in nature than issuers in Tier 2 offerings.618 Further, we believe Tier 1 offerings will be conducted by issuers that are unlikely to seek the creation of a secondary trading market in their securities.619 In light of this, we do not believe that it is necessary to require ongoing reporting for Tier 1 issuers. Consistent with our experience under existing Regulation A, we do not believe that a lack of ongoing reporting for issuers in Tier 1 offerings will adversely affect investors that base purchasing decisions on the narrative and financial statement disclosure requirements included in the offering statement and, with respect to continuous offerings lasting for more than one year, updated annually by post-qualification amendment thereafter. Further, notwithstanding the suggestions of some commenters,620 we believe that adopting different ongoing reporting requirements for Canadian issuers 621 would not be consistent with our goal to adopt a uniform reporting standard for Tier 2 issuers that provides investors with certainty as to the amount of information they can expect to receive from an issuer in a Tier 2 offering on an ongoing basis. We believe that the final rules will provide investors and potential investors with the information they need to make investment decisions and facilitate capital formation for smaller companies. 618 See fn. 830 in Section II.H.3. below. discussion of the nature of offerings in Section II.H.3. below. 620 DuMoulin Letter; see also McCarter & English Letter. 621 Commenters also suggested that their proposed ongoing reporting for Canadian issuers apply to foreign private issuers. As noted above in Section II.B.1.c., however, non-Canadian foreign issuers are not eligible under Regulation A. 619 See VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 We are therefore adopting the following ongoing reporting requirements for Tier 2 offerings: (1) Annual Reports on Form 1–K As proposed and adopted, Form 1–K will consist of two parts: Part I (Notification) and Part II (Information to be included in the report). The contents of and requirements for Part I and Part II are, with the exception of technical amendments to the forms, amendments that are necessary to reflect corresponding changes to the required audit standards of financial statements filed under Part F/S of Form 1–A, and additional guidance designed to streamline disclosure, adopted without changes from the proposed rules. (a) Part I (Notification) As adopted, Part I of Form 1–K will be an online XML-based fillable form that will 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, the issuer will be required to provide certain updated summary information about itself and such offering in Part I, including the date the offering was qualified and commenced, the amount of securities qualified, the amount of securities sold in the offering, the price of the securities, the portions of the offering that were sold on behalf of the issuer and any selling securityholders, any fees associated with the offering, and the net proceeds to the issuer. As proposed and adopted, issuers will only be required to fill out the XMLbased portion of Part I of Form 1–K that relates to the summary information about a terminated or completed offering once per offering. An issuer that elects to terminate its ongoing reporting obligation under Tier 2 of 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, will be required to file the summary offering information in Part I of Form 1–K by filing a Form 1–Z (exit report) that includes such information.622 The summary information disclosed will facilitate analysis of Regulation A offerings by the Commission, other regulators, third-party data providers, 622 General PO 00000 Instruction (3) to Form 1–Z. Frm 00042 Fmt 4701 Sfmt 4700 and market participants and thereby enable the Commission and others to evaluate the use and effectiveness of Regulation A as a capital formation tool.623 The fillable form will enable issuers to provide the required information in a convenient medium and capture relevant data about the recently terminated or completed Regulation A offering. The required disclosure will be publicly available on EDGAR. Consistent with Part I of Form 1–A, the issuer will not be required to obtain specialty software to file Part I of Form 1–K on EDGAR. (b) Part II (Information To Be Included in the Report) As with Part II of Form 1–A, the final rules require that the issuer submit Part II of Form 1–K electronically as a text file attachment containing the body of the disclosure document and financial statements, formatted to be compatible with the EDGAR filing system. Part II will require issuers to disclose information about themselves and their business based on the financial statement and narrative disclosure requirements of Form 1–A.624 As adopted, Item 2 to Part II of Form 1–K (Management’s Discussion and Analysis of Financial Condition and Results of Operation) requires issuers, by cross-reference to the requirements of Form 1–A, to provide information for the two most recently completed fiscal years. As suggested by one commenter,625 we are clarifying that the Form 1–K cross-reference to the requirements of Item 9 to Part II of Form 1–A does not require issuers to include the additional MD&A disclosure required in Item 9(c) for issuers that have not received revenue from operations during each of the three fiscal years immediately before the filing of the offering statement (or since inception, whichever is shorter).626 Additionally, we are revising the financial statement requirements in Item 7 to Part II of Form 1–K. As proposed, Form 1–K directed issuers to the financial statement requirements of Part F/S of Form 1–A. We are revising this portion of the form so as to include the financial statement requirements directly in Item 7 to Part II of Form 1– K. We believe this change to Item 7 will make it easier for issuers to comply by clarifying, as one commenter recommended,627 the specific portions of Regulation S–X relating to financial 623 See also discussion in Section II.E.4. below. II of Form 1–K. 625 E&Y Letter. 626 See Item 2 to Part II of Form 1–K. 627 E&Y Letter. 624 Part E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations statements for entities other than the issuer that are required in Form 1–K. Additionally, since Tier 2 issuers are now permitted to file financial statements that are audited in accordance with either U.S. GAAS or the standards of the PCAOB, a corresponding change has been made to the financial statement requirements of Item 7 of Form 1–K.628 As proposed, the auditor of financial statements would need to 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. Further, in comparison to the proposed rules, Item 7(a) no longer requires issuers to provide a list of the financial statements included in Form 1–K at the beginning of the financial statement section. We eliminated this requirement in the final rules because we do not believe that there is a need for a separate list of the financial statements at the beginning of this section, when the financial statements themselves will be labeled. Form 1–K will permit issuers to incorporate by reference certain information previously filed on EDGAR, but will require issuers to include a hyperlink to such material on EDGAR.629 In a change from the proposed rules, the final rules do not limit the availability of incorporation by reference to information previously filed pursuant to Regulation A. We believe that this change will facilitate the provision of required information to investors, while taking a consistent approach to information previously provided to the Commission and publicly available on EDGAR. Additionally, to avoid unnecessary repetition of disclosure items, Form 1– K encourages issuers to cross-reference items within the form, where applicable.630 Further, in order to avoid incorporation by reference to stale information without requiring the latest version of the document to be filed, Form 1–K indicates that, if any substantive modification has occurred in the text of any document incorporated by reference since such document was filed, the issuer must file with the reference a statement mstockstill on DSK4VPTVN1PROD with RULES2 628 See discussion in Section II.C.3.b(2)(c). above. 629 General Instruction D. to Form 1–K. The hyperlink to EDGAR need only be active at the time of filing of the Form 1–K. Cf. Securities Act Rule 411(c) and Exchange Act Rule 12b–32. 630 Id. Issuers may, for example, add a crossreference to disclosure in the financial statements. We have clarified, however, that like with Form 1– A, they may not add a cross-reference within the financial statements themselves to disclosures elsewhere. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 containing the text and date of such modification.631 Form 1–K will cover: • 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 executive officers or directors; • MD&A of the issuer’s liquidity, capital resources, and results of operations covering the two most recently completed fiscal years; and • Two years of audited financial statements.632 We anticipate that issuers will generally be able to use the offering materials as a basis to prepare their ongoing disclosure. As adopted in the final rules, Form 1– K includes requirements for 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.633 Form 1–K must be filed within 120 calendar days after the issuer’s fiscal year end.634 A manually signed copy of the Form 1–K must 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.635 Issuers will be required to produce the manually signed copy to the Commission, upon request.636 Any amendments to the form must comply with the requirements of the applicable items and be filed under cover of Form 1–K/A.637 (2) Semiannual Reports on Form 1–SA We are adopting final rules for semiannual interim reporting for Regulation A issuers generally as proposed, with technical amendments 631 Id. 632 Part II of Form 1–K. Item 7 (Financial Statements), Part II of Form 1–K. 634 See General Instruction A.(2), Form 1–K. 635 See General Instruction C., Form 1–K. 636 Id. 637 See Rule 257(c) (also requiring the signature on behalf of an authorized representative of the issuer and the inclusion of any specified certifications). 633 See PO 00000 Frm 00043 Fmt 4701 Sfmt 4700 21847 and additional guidance designed to streamline the disclosure requirements for Tier 2 issuers and harmonize them with the requirements of issuers subject to an ongoing reporting obligation under the Exchange Act.638 As proposed, we continue to believe that a semiannual, rather than a quarterly, reporting requirement strikes an appropriate balance between the need to provide information to the market and the cost of compliance for smaller issuers, especially given the further flexibility provided to issuers in Form 1–U to provide quarterly information if they elect to do so.639 Issuers will be required to provide semiannual reports on Form 1–SA that, much like reports on Form 10–Q, consist primarily of financial statements and MD&A.640 Unlike Form 10–Q, however, Form 1–SA does not require disclosure about quantitative and qualitative market risk, controls and procedures, updates to risk factors, or defaults on senior securities.641 We do not believe such disclosure is necessary for ongoing reports under Regulation A, as we believe such disclosure is not applicable to, or appropriately tailored for, the types of issuers likely to conduct Regulation A offerings. Consistent with the technical, specialized suggestions of several commenters,642 we are including provisions in Form 1–SA that will help issuers comply with the form requirements, eliminate potential confusion over such requirements, and streamline and harmonize disclosure to make the requirements for Tier 2 issuers no more onerous than, and consistent with, the ongoing disclosures required of smaller reporting companies under the Exchange Act. Specifically, the final rules: • Add clarifying language to Item 1 (Management Discussion and Analysis of Financial Condition and Results of Operations) of Form 1–SA to indicate that compliance with this disclosure requirement only applies to the interim financial statements required by Item 3 to Form 1–SA and that, similar to our clarification of Form 1–K’s requirements, issuers are not required to 638 Rule 257(b)(3); Form 1–SA. with the suggestions of commenters, we are clarifying that issuers seeking to voluntarily report information to the market on a more frequent basis may do so under the final rules for current reporting on Form 1–U. See discussion in Section II.E.1.c(3). below; see also discussion in Section II.E.2.c. below regarding the provision of ongoing reports as it applies to Securities Act Rule 144. 640 See Part I (Financial Information) of Form 10– Q, 17 CFR 249.308a. 641 See Item 3 and Item 4 of Part I of Form 10– Q. 642 See, e.g., E&Y Letter; KPMG letter. 639 Consistent E:\FR\FM\20APR2.SGM 20APR2 21848 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES2 include the additional MD&A disclosure required by Item 9(c) of Form 1–A; 643 • Update the financial statement disclosure requirements of Form 1–SA to more clearly delineate the requirements for compliance with Item 3 of Form 1–SA; • Provide that the financial statements that must be included pursuant to Item 3 may be condensed, in addition to being unaudited, and that the financial statements are not required to be reviewed; • Amend the final form to note that additional guidance on the presentation of financial statements and footnotes and other disclosures can be found in Rule 8–03 of Regulation S–X; 644 • Revise the requirements of Item 3(e) of Form 1–SA to match the disclosure language contained in Rule 3–10 of Regulation S–X for smaller reporting companies; • Delete the requirement in Item 3(d) of proposed Form 1–SA to present interim statements of changes in financial position for the period between the end of the preceding fiscal year and the end of the interim period covered by this report, and for the corresponding period of the preceding fiscal year, as this is not required of issuers under Rule 8–03 of Regulation S–X; and • Make the ongoing reporting requirements under Item 3 of Form 1– SA more consistent with what is required of issuers subject to an ongoing reporting obligation under the Exchange Act, consistent with the suggestion of one commenter,645 by eliminating the line item requirements of Item 3(f) and (g), as Rule 3–16 and Rule 4–10 of Regulation S–X generally do not require the disclosure of such information other than in registration statements and annual reports. As adopted, Form 1–SA will require disclosure of updates otherwise reportable on Form 1–U. The final rules permit issuers to incorporate by reference in Form 1–SA certain information previously filed on EDGAR, but must include a hyperlink to such material on EDGAR.646 In a change from the proposed rules, the final rules do not limit the availability of incorporation by reference to information previously filed pursuant to 643 See Section II.F.1.c.(1)(b) above for a discussion of this clarification in Form 1–K. 644 Tier 2 issuers are required under Part F/S of Form 1–A to provide financial statements that comply with Article 8 of Regulation S–X. 645 E&Y Letter. 646 General Instruction D. to Form 1–SA. The hyperlink to EDGAR need only be active at the time of filing of the Form 1–SA. Cf. Securities Act Rule 411(c) and Exchange Act Rule 12b–32. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 Regulation A. We believe that this change will continue to facilitate the provision of required information to investors, while taking a consistent approach to information previously provided to the Commission and publicly available on EDGAR. Additionally, in a change from the proposed form that seeks to avoid unnecessary repetition of disclosure items, Form 1–SA encourages issuers to cross-reference items within the form, where applicable.647 Further, in order to avoid incorporation by reference to stale information without requiring the latest version of the document to be filed, Form 1–SA indicates that, if any substantive modification has occurred in the text of any document incorporated by reference since such document was filed, the issuer must file with the reference a statement containing the text and date of such modification.648 Form 1–SA must be filed within 90 calendar days after the end of the first six months of the issuer’s fiscal year.649 The first such obligation to file will commence immediately 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 six months of the fiscal year following the most recent full fiscal year, for the first six months of the following fiscal year.650 As proposed, a manually signed copy of the Form 1–SA must be executed by the issuer and related signatories before or at the time of filing, retained by the issuer for a period of five years, and produced by the issuer to the Commission, upon request.651 The final rules require, as proposed, any amendments to the form to comply with the requirements of the 647 Id. Issuers may, for example, add a crossreference to disclosure in the financial statements. We have clarified, however, that like with Form 1– A, they may not add a cross-reference within the financial statements themselves to disclosures elsewhere. 648 Id. 649 See General Instruction A.(2), Form 1–SA. 650 For example, where an offering statement is filed in October 2015 and includes full financial statements for the fiscal years ended December 31, 2014 and December 31, 2013 and interim financial statements for the six months ended June 30, 2015 and June 30, 2014 and is qualified in December 2015, the Form 1–SA will not be required until within 90 days following the first six months of the following fiscal year (i.e., within 90 days following June 30, 2016). If, however, the offering statement is filed in March 2015 and qualified in June of 2015 than the first Form 1–SA would cover the six months ended June 30, 2015 and June 30, 2014 and would not be required to be filed until within 90 days following June 30, 2015. 651 See General Instruction C. to Form 1–SA. PO 00000 Frm 00044 Fmt 4701 Sfmt 4700 applicable items and be filed under cover of Form 1–SA/A.652 (3) Current Reports on Form 1–U In addition to the annual report on Form 1–K and semiannual report on Form 1–SA, the final rules require issuers to submit current reports on Form 1–U. The final rules are being adopted largely as proposed with one change and some technical amendments and additional guidance designed to ease compliance with the final rules and eliminate potential confusion as to the scope and applicability of the disclosure requirements. The final rules require issuers to submit a report on Form 1– U when it experiences one (or more) of the following events: • Fundamental changes; 653 • 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 10% or more of outstanding equity securities. Additionally, as proposed, Item 9 of final Form 1–U contains provisions for disclosing other events not directly required of issuers in the form. As noted above in the context of suggestions by commenters to require or permit quarterly reporting by issuers,654 issuers that elect to provide relevant information to the market on, for example, a quarterly basis may do so pursuant to Item 9 (Other Events) of Form 1–U.655 Notwithstanding the view of some commenters,656 we believe that Form 1– U should be required of all Tier 2 652 See Rule 257(c). discussed below, disclosure pursuant to this requirement is limited to the entry into or termination of material definitive agreements resulting in fundamental changes in the nature of an issuer’s business. More generally, a fundamental change in the nature of an issuer’s business includes 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. 654 See fn. 639 and 604 above. 655 An issuer seeking to, for example, report information that satisfies, and on a frequency that accords with, the requirements of Exchange Act Rule 15c2–11(a)(5) and (g) or Securities Act Rule 144A(d)(4) may do so pursuant to Item 9 of Form 1–U. 656 ABA BLS Letter; Milken Institute Letter. 653 As E:\FR\FM\20APR2.SGM 20APR2 mstockstill on DSK4VPTVN1PROD with RULES2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations issuers, including smaller issuers. We believe that, on balance, the benefit of requiring a uniform base level of disclosure to investors of current event reporting for all issuers in Tier 2 offerings outweighs any potential additional compliance cost to smaller issuers. Additionally, given the inclusion of only the most significant events in the list of disclosable current events on Form 1–U, we do not anticipate that issuers, particularly smaller issuers, will on average be required to file many reports in this regard. In a change from the proposed rules, and consistent with the suggestions of commenters,657 the final rules increase the threshold below which an issuer need not report unregistered sales of equity securities pursuant to Item 8 of Form 1–U from 5% to 10% of the number of shares outstanding of the class of equity securities sold. We believe that this increase in the threshold below which an issuer would not be required to report such sales remains consistent with our general approach to the final rules for Form 1– U—namely, that Form 1–U should reflect the most significant or substantial events that an issuer may experience in the interim period between the filing of the required periodic reports. We are not amending Item 1 of Form 1–U to alter the use of the term ‘‘fundamental change,’’ as suggested by some commenters.658 We are, however, revising Instruction 2 to Item 1 to make clear that the transactions described therein are deemed to be ‘‘fundamental changes’’ solely for purposes of Item 1 of Form 1–U and should not be read to influence the definition of that term in other contexts.659 Item 1 of Form 1–U is meant to require issuers to disclose material definitive agreements, including agreements to acquire other entities, which result or would reasonably be expected to result in fundamental changes to the nature of the issuer’s business or plan of operations. As Instruction 2 to Item 1 indicates, certain transactions are deemed to involve fundamental changes, and disclosure of these transactions, as prescribed by Item 1 is required. Consistent with the suggestion of one commenter,660 we are narrowing from the proposed rules the applicability of Instruction 2(a) so that an acquisition transaction will only 657 ABA Letter; MoFo Letter. E&Y Letter; see also ABA BLS Letter; Canaccord Letter. 659 Item 1(d) to Form 1–U. 660 E&Y Letter. 658 See VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 result in a fundamental change for these purposes if the purchase price, as defined by U.S. GAAP and IFRS, exceeds 50% of the total consolidated assets of the issuer as of the end of the most recently completed fiscal year.661 We believe that this is consistent with our general goal of only requiring disclosure of significant and substantial matters that may affect an issuer’s business or plan of operations. We believe that this requirement is appropriately tailored for the types of issuers likely to conduct Tier 2 offerings by providing them with important flexibility as to the determination of a ‘‘fundamental change,’’ while providing clear guidance that certain transactions will always trigger disclosure under Item 1. On a related point, we continue to believe, despite the suggestions of some commenters,662 that a fundamental change standard for some of the disclosure requirements in Form 1–U is a more appropriately tailored standard for Tier 2 issuers than a broader materiality standard. A fundamental (as opposed to a material) change to the nature of an issuer’s business includes major and substantial changes to the issuer’s business or plan of operations or changes reasonably expected to result in such changes.663 The final rules reflect our belief that, on balance, Tier 2 issuers should only be required make disclosures in Form 1–U that reflect major and substantial changes to business plans or operations, as opposed to material events that are otherwise reportable in their periodic reports. Moreover, we do not believe that a fundamental change standard will cause confusion or raise concerns as to the applicability of other standards applicable in the anti-fraud provisions of the federal securities laws. Additionally, we note that Item 6 of Form 1–K and Item 2 of Form 1–SA permit issuers to disclose any information required to be disclosed under Form 1–U, but not so reported. For example, if an event occurs that would, under normal circumstances, require an issuer to file a Form 1–U within four business days, but such issuer is due to file either its annual or semiannual report within that period, then the issuer may instead report such information in its periodic report. 661 Instruction(s) 2(b)–(c) to Item 1 of Form 1–U are adopted, as proposed. 662 E&Y Letter; Massachusetts Letter 2; NASAA Letter 2; WDFI Letter. 663 See Instruction 2(a) to Item 1 for the circumstances when an acquisition transaction would be deemed to trigger a fundamental change for purposes of Form 1–U. PO 00000 Frm 00045 Fmt 4701 Sfmt 4700 21849 Finally, contrary to the suggestions of some commenters,664 we continue to believe that the requirement to report unregistered sales of securities in Item 8 of Form 1–U will provide investors with valuable current information as to significant capital raising events by the issuer and should be disclosed in a timely manner to the market. We therefore retain this disclosure requirement in the final rules.665 As adopted, Form 1–U must be filed within four business days after the occurrence of any of the triggering events, and, where applicable, will permit issuers to incorporate by reference certain information previously filed on EDGAR.666 Notwithstanding the suggestions of some commenters,667 we believe that requiring issuers to file the form within four business days, as opposed to fifteen business days, is appropriate in an ongoing reporting regime that otherwise only requires issuers to provide annual and semiannual reports. Further, we are concerned that extending the filing deadline for Form 1–U reports would make the reporting of disclosable events no longer ‘‘current.’’ We are therefore adopting the timing requirements, as proposed. Additionally, in a change from the proposed rules, the final rules do not limit the availability of incorporation by reference to information previously filed pursuant to Regulation A. We believe that this change will continue to facilitate the provision of required information to investors, while taking a consistent approach to information previously provided to the Commission and publicly available on EDGAR. Additionally, consistent with the changes made to Form 1–K and Form 1– SA and suggestions of at least one commenter,668 Form 1–U encourages issuers to cross-reference items within the form, where applicable.669 Further, in order to avoid incorporation by reference to stale information without requiring the latest version of the 664 ABA BLS Letter; MoFo Letter. 8 to Form 1–U. We have also clarified in Item 8(b) that only periodic reports that contain disclosure regarding unregistered sales of equity securities will reset the five percent reporting threshold for unregistered sales of securities, rather than any periodic report. 666 General Instruction D. to Form 1–U. The hyperlink to EDGAR need only be active at the time of filing of the Form 1–U. Cf. Securities Act Rule 411(c) and Exchange Act Rule 12b–32. 667 ABA BLS Letter; E&Y Letter; Milken Institute Letter. 668 PwC Letter. 669 General Instruction D. to Form 1–U. We have clarified, however, that like with Form 1–A, they may not add a cross-reference within any financial statements that may be included to disclosures elsewhere. 665 Item E:\FR\FM\20APR2.SGM 20APR2 21850 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations document to be filed, Form 1–U indicates that, if any substantive modification has occurred in the text of any document incorporated by reference since such document was filed, the issuer must file with the reference a statement containing the text and date of such modification.670 A manually signed copy of the Form 1–U must 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.671 Issuers are required to produce the manually signed copy to the Commission, upon request.672 Any amendments to the Form 1–U must comply with the requirements of the applicable items, and be filed under cover of Form 1–U/A.673 (4) Special Financial Reports on Form 1–K and Form 1–SA We did not receive any comment on the proposed provisions for special financial reports and are adopting them as proposed with one minor clarifying change. This report serves 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. Where applicable, issuers conducting Tier 2 offerings must provide special financial reports analogous to those required under Exchange Act Rule 15d– 2.674 The special financial report requires audited financial statements for the issuer’s most recent fiscal year (or for the life of the issuer if less than a full fiscal year) to be filed not later than 120 calendar days after qualification of the offering statement if the offering statement does not include such financial statements.675 The special financial report requires 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 does not include such financial statements and the offering statement was qualified in the second half of the issuer’s current fiscal year.676 The special financial report must be filed under cover of Form 1–K if it 670 Id. 671 See General Instruction C to proposed Form 1– mstockstill on DSK4VPTVN1PROD with RULES2 U. 672 Id. 673 Rule 257(c). CFR 240.15d–2. 675 Rule 257(b)(2)(ii). As adopted, we are revising Rule 257(b)(2)(ii) to reference the fiscal year or other period specified in Rule 257(b)(2)(i)(A), in order to avoid potential confusion about which most recent fiscal year is covered. 676 Id. 674 17 VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 includes audited year end financial statements and under cover of Form 1– SA if it includes semiannual financial statements for the first six months of the issuer’s fiscal year.677 The financial statement and auditing requirements must follow the requirements of those forms, and the issuer must indicate on the front page of the applicable form that only financial statements are included.678 (5) Reporting by Successor Issuers We did not receive any comment on reporting by successor issuers, and we are adopting the proposed rules without change. 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 are issued to the holders of any class of securities of an issuer that is subject to ongoing reporting under Tier 2, the issuer succeeding to that class of securities must continue to file the reports required for Tier 2 offerings on the same basis as would have been required of the original Tier 2 issuer.679 The successor issuer may suspend or terminate its reporting obligations on the same basis as the original issuer under Rule 257(d).680 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.681 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.682 The rule prohibits broker-dealers from publishing quotations (or submitting quotations for publication) in a 677 Id. 678 See General Instruction A.(3) to Form 1–K and General Instruction A.(3) to Form 1–SA. 679 See Rule 257(b)(5). 680 See Section II.E.4. below for a discussion of the suspension or termination of disclosure obligations. 681 17 CFR 240.15c2–11. 682 See Rel. No. 34–39670 (Feb. 17, 1998) (Publication or Submission of Quotations Without Specified Information) (describing 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). PO 00000 Frm 00046 Fmt 4701 Sfmt 4700 ‘‘quotation medium’’ for covered overthe-counter securities without first reviewing basic information about the issuer, subject to certain exceptions.683 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.684 A broker-dealer can 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 and includes, 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.685 a. Proposed Rules As proposed, the 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 semiannual basis, with additional provisions for current reporting, would satisfy a brokerdealer’s obligations under Rule 15c2–11 to review and maintain records of basic information about an issuer and its securities. In this regard, we proposed 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.686 683 17 CFR 240.15c2–11(a); See also Rel. No. 34– 29094 (April 17, 1991) [56 FR 19148]. 684 See 17 CFR 240.15c2–11 (Preliminary Note). 685 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 private issuers that claim the registration exemption or information specified in Rule 15c2–11(a)(5) for non-reporting issuers. 686 In addition, we proposed a technical amendment to Rule 15c2–11 to amend subsection (d)(2)(i) of the rule to update the outdated reference to ‘‘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. E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations We also solicited comment on other potential effects that Tier 2 ongoing reporting under Regulation A could have under other provisions of the federal securities laws, such as whether timely ongoing Regulation A reporting under Tier 2 should constitute ‘‘adequate current public information’’ for purposes of paragraph (c) of Rule 144.687 Under this provision, issuers are required to make available adequate current public information about themselves, which, for issuers not subject to Exchange Act reporting, must include certain information described in Exchange Act Rule 15c2–11(a)(5).688 We also solicited comment on whether ongoing Regulation A reporting for Tier 2 offerings should satisfy the information requirements of paragraph (d)(4) of Rule 144A.689 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.’’ 690 b. Comments on Proposed Rules All commenters that addressed Rule 15c2–11 supported amending the rule in the manner proposed.691 Some commenters recommended further amending Rule 15c2–11(g) to provide that an issuer that is current in its Tier 2 obligations would be deemed to have ‘‘reasonably current’’ financial information, even if its most current balance sheet is as of a date up to nine months old and it has not provided other updated information.692 Most commenters also recommended amending Rule 144(c) to allow for ongoing reporting under Tier 2 to constitute ‘‘adequate current public information.’’ 693 Other commenters recommended amending Rule 144A(d)(4) to allow for ongoing 687 17 CFR 230.144(c). CFR 230.144(c)(2); see also 17 CFR 230.15c2–11(a), (g). 689 17 CFR 230.144A(d)(4). 690 Id. 691 ABA BLS Letter; Canaccord Letter; CFIRA Letter 1; KVCF Letter; Milken Institute Letter; MoFo Letter; Paul Hastings Letter; Public Startup Co. Letter 1; REISA Letter; WR Hambrecht + Co Letter. 692 ABA BLS Letter; Canaccord Letter; Milken Institute Letter; MoFo Letter. 693 ABA BLS Letter; Canaccord Letter; CFIRA Letter 1; McCarter & English Letter; Paul Hastings Letter; KVCF Letter; Milken Institute Letter; Richardson Patel Letter; REISA Letter; WR Hambrecht + Co Letter. mstockstill on DSK4VPTVN1PROD with RULES2 688 17 VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 reporting under Tier 2 to satisfy the ‘‘reasonably current information’’ requirements of that rule.694 Although the proposal did not solicit comment on Rule 144(i), one commenter recommended amending this rule to allow former shell companies to rely on Rule 144 if they have been current in their ongoing reporting under Regulation A for a certain period of time and without having to file a Form 10.695 One commenter also supported allowing use of the Rule 144 safe harbor for former shell companies that were not previously registered under the Exchange Act and that are now selling securities under Regulation A.696 Another commenter requested that the Commission limit the prohibitions on reliance on Rule 144 only to Exchange Act registered issuers.697 c. Final Rules We are adopting final rules for Regulation A that, as proposed, amend Exchange Act Rule 15c2–11(a) so that an issuer’s ongoing reports filed under Tier 2 will satisfy the specified information about an issuer and its security that a broker-dealer must review before publishing a quotation for a security (or submitting a quotation for publication) in a quotation medium. In addition, we are adopting, as proposed, a technical amendment to Rule 15c2–11 to amend subsection (d)(2)(i) of the rule to update the outdated reference to ‘‘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. We are not following the suggestions of some commenters that we adopt provisions in the final rules so that Tier 2 ongoing reports will satisfy the current information requirements of Rule 144 and Rule 144A for the entirety of an issuer’s fiscal year. While commenters were generally supportive, we do not believe that the frequency of the required Tier 2 ongoing reporting merits a broad determination that such reports will constitute ‘‘adequate public information’’ or ‘‘reasonably current information’’ on a year-round basis. On the contrary, quarterly reporting is an integral part of the resale safe harbors provided for in Rule 144 and Rule 144A that contemplate the provision of 694 ABA BLS Letter; Canaccord Letter; Milken Institute Letter; MoFo Letter. 695 McCarter & English Letter. 696 Public Startup Co. Letter 1. 697 Letter from Jason Coombs, Co-Founder and CEO, Public Startup Company, Inc., March 24, 2014 (‘‘Public Startup Co. Letter 2’’). PO 00000 Frm 00047 Fmt 4701 Sfmt 4700 21851 ongoing and continuous information.698 While the semiannual reporting required under the final rules for Tier 2 offerings will result in issuers only having ‘‘reasonably current information’’ and ‘‘adequate current public information’’ for the portions of the year during which the financial statements of such issuers continue to satisfy the respective rules,699 we note that issuers may voluntarily submit on Form 1–U quarterly financial statements or other information necessary to satisfy the respective rule requirements.700 In such instances, and provided that the financial statements otherwise meet the financial statement requirements of Form 1–SA, such voluntarily provided quarterly information could satisfy the ‘‘reasonably current information’’ and ‘‘adequate current public information’’ requirements of Rule 144 and Rule 144A. An issuer that is therefore current in its semiannual reporting required under the rules and voluntarily provides quarterly financial statements on Form 1–U will have provided reasonably current and adequate current public information for the entirety of such year under Rule 144 and Rule 144A. 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.701 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.702 An issuer registering a class of securities under Section 12 of the Exchange Act must file either a Form 698 See, e.g., Rel. No. 33–6099 (Aug. 2, 1979) (Question 20). See also Section 13(a) of the Exchange Act, which contemplates, but does not prescribe, reasonably current information in the context of annual and quarterly reporting. 15 U.S.C. 78m(a). 699 See Securities Act Rule 144(c)(2); Securities Act Rule 144A(d)(4)(ii); Exchange Act Rule 15c2– 11(a) and Rule 15c2–11(g). 700 See Item 9 of Form 1–U; see also Section II.E.1.c(3). and fn. 655 above. 701 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. 702 See also Section II.B.6. above for a discussion of the conditional exemption from Section 12(g) adopted in the final rules today. E:\FR\FM\20APR2.SGM 20APR2 21852 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations 10 703 or Form 8–A 704 with the Commission. Form 10 is the general form 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 to avoid having the issuer restate the contents of its Securities Act registration statement in its Exchange Act registration statement.705 a. Proposed Rules As proposed, issuers conducting offerings under Regulation A that seek to list their securities on a national securities exchange or otherwise register a class of securities under the Exchange Act would be required to file a registration statement on Form 10. We solicited comment, however, on whether we should provide a simplified means for Regulation A issuers to register a class of securities under the Exchange Act, for example, by 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. We also invited 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. mstockstill on DSK4VPTVN1PROD with RULES2 b. Comments on Proposed Rules Many commenters recommended that Regulation A issuers be allowed to use Form 8–A to register a class of securities under the Exchange Act in Tier 2 offerings.706 Some of these commenters 703 17 CFR 249.210. Foreign private issuers must file a Form 20–F, 17 CFR 249.220f, or, where available, a Form 8–A. 704 17 CFR 249.208a. 705 See 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.’’). 706 ABA BLS Letter; Canaccord Letter; CFIRA Letter 1; CFIRA Letter 2; Fallbrook Technologies Letter; Frutkin Law Letter; McCarter & English VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 limited their recommendation to when the issuer follows the requirements of Part I of Form S–1 in its offering circular.707 Separately, three commenters recommended allowing issuers to use a ‘‘super’’ Form 8–A that would require issuers to include any disclosure that is required in a Form 10, but is not included in the chosen offering circular format under Form 1– A.708 Several commenters suggested allowing issuers to use a Form 10 that would go effective immediately as an alternative to filing a Form 8–A.709 This process could be used to register securities under the Exchange Act when a simultaneous exchange listing was not contemplated. Other commenters recommended limiting the use of Form 8–A to situations contemporaneous with qualification of an offering statement,710 within 12 months of qualification,711 or after a brief time period after an offering statement is qualified.712 Separately, two commenters recommended that Regulation A issuers that become Exchange Act reporting companies be considered ‘‘emerging growth companies.’’ 713 One commenter recommended allowing issuers to use Form 8–A but to continue using Regulation A reports until its nonaffiliate market capitalization reached $250 million.714 Two commenters encouraged the Commission to foster the development of venture exchanges on which Regulation A securities could be traded,715 while another commenter largely opposed the creation of venture exchanges.716 c. Final Rules In the final rules, and consistent with the views of many commenters,717 we are simplifying Exchange Act registration in connection with Regulation A offerings conducted pursuant to Tier 2 so that issuers wishing to register a class of Regulation A securities under the Exchange Act may do so by filing a Form 8–A in conjunction with the qualification of a Form 1–A. Only issuers that follow Part I of Form S–1 or the Form S–11 disclosure model in the offering circular will be permitted to use Form 8–A.718 An issuer registering a class of securities under the Exchange Act concurrently with the qualification of a Regulation A offering statement will become an Exchange Act reporting company upon effectiveness of the Form 8–A and, if applicable, its obligation to file ongoing reports under Regulation A will be suspended for the duration of the resulting reporting obligation under Section 13 of the Exchange Act.719 While some commenters suggested that we permit issuers to rely on the Form 8–A to register a class of securities for up to 12 months following the qualification of an offering statement, we believe limiting short form registration to situations in which an offering statement is being concurrently qualified will help ensure that the disclosures incorporated by reference into the Form 8–A, including financial statements contained in the offering statement are current.720 The final rules would not, however, prevent an issuer from registering a class of securities under the Exchange Act on Form 8–A concurrent with the re-qualification of a previously qualified offering statement. We recognize that Exchange Act reporting requires more comprehensive ongoing reporting than the Regulation A disclosure regime, which is why facilitating issuers’ entrance into the Exchange Act reporting system on Form 8–A concurrent with the qualification of a Regulation A offering statement will benefit investors. At a minimum, issuers pursuing this route to exchange listing must meet listing standards of, and be certified by, the exchange before the Form 8–A will be declared effective. In order to be approved for listing on an exchange, issuers generally must meet certain size, financial, minimum securities distribution (or liquidity), and corporate governance criteria.721 718 See Form 8–A, General Instructions A(c). discussed more fully in in Section II.E.4. below, a Tier 2 issuer may terminate its Regulation A ongoing disclosure obligation when it is no longer subject to the ongoing reporting requirements of Section 13 of the Exchange Act. See also Rule 257(e). 720 In order to ensure that registration on Form 8– A is limited to a concurrently qualified Regulation A offering statement, the amendments to Form 8– A expressly limit the use of the form to instances where the filing of the Form 8–A and, where applicable, the receipt by the Commission of certification from the national securities exchange listed on the form occur within five calendar days after the qualification of the Regulation A offering statement. 721 See, e.g., Initial Listing Guide for the NASDQAQ Stock Market, available at: https:// listingcenter.nasdaq.com/assets/initialguide.pdf; 719 As Letter; Milken Institute Letter; MoFo Letter; OTC Markets Letter; Paul Hastings Letter; Richardson Patel Letter; WR Hambrecht + Co Letter. 707 ABA BLS Letter; CFIRA Letter 1; WR Hambrecht + Co Letter. 708 Canaccord Letter; Milken Institute Letter; MoFo Letter. 709 ABA BLS Letter; Canaccord Letter; MoFo Letter. 710 Milken Institute Letter. 711 Frutkin Law Letter; Richardson Patel Letter. 712 McCarter & English Letter. 713 ABA BLS Letter; MoFo Letter. 714 Paul Hastings Letter. 715 Heritage Letter; SBIA Letter. 716 OTC Markets Letter. 717 See fn. 706 above. PO 00000 Frm 00048 Fmt 4701 Sfmt 4700 E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES2 Additionally, in order to maintain listing on an exchange, issuers must maintain certain qualitative and quantitative continued listing standards.722 Therefore, in addition to the provision of ongoing Exchange Act reports, investors will benefit from the issuer’s satisfaction of the exchange’s initial and ongoing listing standards, and may benefit from greater liquidity for their shares as a result. As suggested by commenters, we believe that our accommodation should be limited to instances where an issuer provides disclosure in Part II of Form 1– A that follows Part I of Form S–1 or Form S–11, instead of the Offering Circular format. While all formats require extensive disclosure that, with the exception of item numbering, is similar in many respects, we believe that an issuer entering Exchange Act reporting should provide disclosure in a manner that is generally consistent with the requirements of issuers entering the Exchange Act reporting regime through registered offerings.723 In this regard, we note that issuers qualifying an offering statement that follows Part I of Form S– 1 or Form S–11 will, however, be required to follow the financial statement requirements of Part F/S of Form 1–A. For purposes of concurrent Exchange Act registration, the financial statements included in Form 1–A must be audited in accordance with the standards of the PCAOB by a PCAOBregistered auditor that is independent pursuant to Article 2 of Regulation S– X.724 After effectiveness of the Form 8– A, they will be subject to Exchange Act reporting and compliance with the financial statement requirements of Exchange Act reporting companies. Consistent with the suggestion of commenters,725 we agree that issuers entering Exchange Act reporting under a qualified Regulation A offering statement and Form 8–A will be considered ‘‘emerging growth companies’’ to the extent the issuers otherwise qualify for such status. Issuers should base status determinations on the definition of an emerging growth U.S. Listing Standards for the New York Stock Exchange (NYSE), available at: https:// www.nyse.com/publicdocs/nyse/listing/ NYSE%20_Initial_Listing_Standards_Summary.pdf. 722 See, e.g., Continued Listing Guide for the NASDQAQ Stock Market, available at: https:// listingcenter.nasdaq.com/assets/ continuedguide.pdf; Continued Listing Standards for the New York Stock Exchange (NYSE), available at: https://www.nyse.com/get-started/reference. 723 See Section II.C.3.b(2)(c). above for a description of the financial statement requirements. 724 See General Instruction A.(a) to Form 8–A. 725 ABA BLS Letter; MoFo Letter. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 company as it appears in the Securities Act and the Exchange Act.726 As noted above, the Proposing Release sought comment on whether we should consider encouraging the development of venture exchanges or other trading venues to facilitate the secondary market trading of Regulation A securities. We are considering venture exchanges as a way to provide liquidity for smaller issuers, and are contemplating their use for Regulation A securities as part of that consideration. 4. Exit Report on Form 1–Z a. Proposed Rules (1) Summary Information on Terminated or Completed Offerings As discussed in Section II.E.1. above, we proposed 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 Form 1–K,727 we proposed to convert the Form 2–A information into an online XML-based fillable form with indicator boxes or buttons and text boxes to be filed electronically with the Commission as Part I of proposed 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.728 As proposed, the summary offering information disclosed on Form 1–Z would be publicly available on EDGAR (but not otherwise required to be distributed to investors) and 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. 726 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). See also Section 3(a)(80) of the Exchange Act (which repeats the same definition). 15 U.S.C. 78c(a)(80). 727 See also discussion in Section II.C.1. (Electronic Filing; Delivery Requirements) and Section II.C.3.a. (Part I (Notification)) above. 728 See Section II.E.1. above for a discussion of the requirements for proposed Form 1–K. PO 00000 Frm 00049 Fmt 4701 Sfmt 4700 21853 (2) Termination or Suspension of Tier 2 Disclosure Obligations We further proposed to permit a Tier 2 issuer that has filed all ongoing reports required by Regulation A for the shorter of (1) the period since the issuer became subject to such reporting obligation or (2) 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.729 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 with the Commission on Part II of proposed 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.730 Issuers would be required to produce the manually signed copy to the Commission, upon request.731 We further proposed 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 effectiveness of a registration statement 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 is 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 is not eligible to file a Form 1–Z at that time, it would need to recommence its Regulation A reporting with a report covering any financial period not completely covered by an effective registration statement or filed Exchange Act report.732 729 See 730 See proposed Rule 257(d)(2). Instruction to proposed Form 1–Z. 731 Id. 732 See E:\FR\FM\20APR2.SGM proposed Rule 257(d)(1) and (e). 20APR2 21854 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations b. Final Rules (1) Summary Information on Terminated or Completed Offerings The single commenter on this issue approved of the proposed requirement to file summary information after the termination or completion of a Regulation A offering under both tiers.733 We are adopting this requirement without changes. (2) Termination or Suspension of Tier 2 Disclosure Obligations We are adopting, with a change from the proposal, final rules that will 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.734 As proposed, the final rules permit a Tier 2 issuer that has filed all reports required by Regulation A for the shorter of: (1) The period since the issuer became subject to such reporting obligation, or (2) 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 Tier 2 offering statement are not ongoing.735 In a change from the proposal, in order to be consistent with Title VI of the JOBS Act, the final rules permit banks or bank holding companies 736 to immediately suspend their 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 1,200 persons, instead of 300 mstockstill on DSK4VPTVN1PROD with RULES2 733 CFA Institute Letter. 734 See Exchange Act Section 15(d), 15 U.S.C. 78o(d); Exchange Act Rule 12h-3, 17 CFR 240.12h– 3. 735 Rule 257(d)(2). 736 The Commission recently proposed changes to its rules regarding Exchange Act registration to implement Title V and Title VI of the JOBS Act. See Rel. No. 33–9693 (Dec. 18, 2014) [79 FR 78343]. These proposed changes would, among other things, apply the registration thresholds applicable to banks and bank holding companies, as set forth in Section 12(g) of the Exchange Act, to savings and loan holding companies. Should we adopt this provision in the final rules for Section 12(g), we would anticipate making a corresponding change to the termination provisions of Rule 257(d). VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 persons, and offers or sales made in reliance on a qualified Tier 2 offering statement are not ongoing.737 As proposed, an issuer’s obligation to continue to file ongoing reports in a Tier 2 offering under Regulation A will be suspended immediately upon the filing of a notice to the Commission on Part II of proposed Form 1–Z.738 As proposed, a manually signed copy of the Form 1–Z must 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.739 Issuers must produce the manually signed copy to the Commission, upon request.740 We otherwise adopt the proposed rules for the termination or suspension of a Tier 2 ongoing reporting obligation as proposed and without changes. F. Insignificant Deviations From a Term, Condition or Requirement We did not propose any changes to the existing insignificant deviation provisions of Rule 260. 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.741 The provisions of Regulation A regarding issuer eligibility, offering limits, offers, and continuous or delayed offerings of Regulation A are deemed to be significant to the offering as a whole, and any deviations from these provisions result in the issuer’s loss of the exemption. One commenter generally supported the concept of allowing for insignificant deviations from the rules without the loss of the exemption.742 This commenter recommended that the Commission give notice of violations and allow companies to have an opportunity to cure any such violation. The commenter also recommended imposing lesser sanctions, such as fines, if less significant violations could not be cured. Another commenter 737 Rule 257(d)(2). The final rules, as they apply to the number of record holders of other types of issuers, are adopted without changes from the proposal. Although Rule 257(d)(2) relies on the definition of ‘‘held of record’’ in Rule 12g5–1, issuers seeking to terminate or suspend their Tier 2 ongoing disclosure obligations are specifically excluded from relying on the amendment to such definition, which exclude securities issued in Tier 2 offerings. See Rule 12g5–1(a)(7) and Section II.B.6 above. 738 Id. In this regard, we have clarified that the Commission may only deny a Form 1–Z filing if the issuer is ineligible to use the form. See Rule 257(d). 739 See Instruction to Form 1–Z. 740 Id. 741 17 CFR 230.260. 742 Heritage Letter. PO 00000 Frm 00050 Fmt 4701 Sfmt 4700 recommended including deviations from the prohibitions on the timing of sales and the amounts sold to investors on the list of matters deemed significant in proposed Rule 260, noting that, in its view, it would be difficult for issuers to show a good faith and reasonable attempt was made to comply with the requirements of Rule 251(d)(2).743 This commenter noted that issuers, investors and state regulators need clear boundaries to know what actions will disqualify an offering from exemption and thus, with respect to the proposed provisions for Tier 2 offerings, would result in a loss of state preemption. The final rules maintain the existing provisions for insignificant deviations, as proposed. Under the final rules, a failure to comply with a term, condition or requirement of Regulation A will not result in the loss of the exemption 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 the offering limitations, issuer eligibility criteria, or requirements for offers or continuous or delayed offerings will 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.744 We believe that provisions for insignificant deviations serve an important function by allowing for certain errors that can occur in the offering process, while clearly delineating those provisions from which an issuer may not deviate. We believe the current provisions provide assurances to investors that issuers will not be able to deviate from certain fundamental requirements in the rules and avoid undue hardship that could befall issuers for inadvertent errors, such as loss of the exemption and, with respect to Tier 2 offerings, the loss of preemption of state securities law registration and qualification requirements. We are not expanding the list of provisions from which an issuer may not deviate. We note that whether a deviation from the requirements would be significant to the offering as a whole would depend on the facts and 743 MCS 744 Rule E:\FR\FM\20APR2.SGM Letter. 260. 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations circumstances related to the offering and the deviation. We also note that in certain situations, such as in the event of pre-qualification sales, it may be difficult for issuers to establish a good faith attempt at compliance. In such circumstances, an issuer would not be able to rely on the provision. G. Bad Actor Disqualification mstockstill on DSK4VPTVN1PROD with RULES2 1. Proposed Rules 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 amended Regulation A. 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) together with a related disclosure requirement in Rule 506(e) on July 10, 2013.745 We proposed amendments to Regulation A’s bad actor disqualification provisions that would make those provisions substantially similar to those adopted under Rule 506 of Regulation D. We also sought comment on the proposed disqualification rules and the categories of persons and types of events covered by the proposed rules. Additionally, we sought 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 the proposed disqualification provisions for Regulation A as well as our proposed rules for securities-based crowdfunding transactions. 2. Comments on Proposed Rules In general, commenters did not oppose the proposed amendments to Regulation A’s bad actor disqualification rules. Some commenters expressly supported the proposed rules.746 Some commenters, however, recommended changes to particular provisions of the proposal. One commenter recommended revising the look-back periods for disqualifying 745 Rel. No. 33–9414 (July 10, 2013) [78 FR 44729]. The Commission proposed rules substantially similar to those adopted pursuant to Section 926 of the Dodd-Frank Act in the Proposing Release for securities-based crowdfunding transactions under Title III of the JOBS Act. See Rel. No. 33–9470, at 284. 746 See, e.g., KVCF Letter; MCS Letter; VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 21855 events to run from the time of sale, not from the time of filing of the offering statement as proposed.747 Another commenter recommended adding final orders of Canadian provincial regulators to the list of disqualifying events.748 This commenter noted that some Canadian provinces have information publicly posted on their Web sites that would facilitate the bad actor diligence process. One commenter recommended that the Commission develop an online bad actor database.749 Another commenter supported bad actor provisions as extensive as those under Rule 506(d).750 Finally, one commenter recommended defining voting equity securities for purposes of the bad actor disqualifications provisions using the definition in Rule 12b-2 of the Exchange Act.751 Regulation A that is consistent with the term as it appears in Rule 501(g) of Regulation D. As adopted, a ‘‘final order’’ shall mean a written directive or declaratory statement issued by a federal or state agency described in Rule 262(a)(3) under applicable statutory authority that provides for notice and an opportunity for hearing, which constitutes a final disposition or action by that federal or state agency.756 We believe that creating a uniform set of bad actor triggering events should simplify due diligence, particularly for issuers that may engage in different types of exempt offerings. For this reason, consistent with the disqualification provisions of Rule 506(d), the final rules do not include final orders of Canadian provincial regulators in the list of disqualifying events. 3. Final Rules The final disqualification rules in We are adopting bad actor Regulation A also specify that an order disqualification provisions for must bar the covered person at the time Regulation A, substantially as proposed of filing of the offering statement, as with the exception of one change to opposed to the requirement in Rule further align the final rules for 506(d) that the order must bar the Regulation A with similar provisions in covered person at the time of the relevant sale.757 This clarification Rule 506(d). The covered persons and accords with the current provisions of triggering events in the final rules for Rule 262 and is appropriate for Regulation A are substantially the same Regulation A because there is no filing as the covered persons and triggering requirement before the time of first sale events included in Rule 506(d).752 The in Rule 506.758 We are further adopting covered persons include managing members of limited liability companies; a reasonable care exception to the disqualification provisions on a basis compensated solicitors of investors; consistent with Rule 506(d).759 Under underwriters; executive officers and the final rules, an issuer will not lose other officers participating in the the benefit of the Regulation A offering; and beneficial owners of 20% exemption if it is able to show that it did or more of the issuer’s outstanding not know, and in the exercise of voting equity securities, calculated on reasonable care could not have known, the basis of voting power.753 Consistent with the bad actor disqualification rules of the existence of a disqualification.760 As proposed, and consistent with the under Rule 506(d), the final rules also provisions of existing Regulation A, the include two new disqualification final rules permit issuers that are triggers not previously present in disqualified from relying on the Regulation A: (1) Final orders and bars exemption to request a waiver of of certain state and other federal regulators,754 and (2) Commission cease- disqualification from the Commission.761 and-desist orders relating to violations In the Proposing Release, we solicited of scienter-based anti-fraud provisions comment on the interpretation of the of the federal securities laws or Section phrase ‘‘voting equity securities,’’ as it 5 of the Securities Act.755 In order to appears in ‘‘any beneficial owner of clarify the scope of the term ‘‘final 20% or more of the issuer’s outstanding order’’ as it appears in Rule 262, we are voting equity securities, calculated on including a definition of that term in the basis of voting power,’’ a category of covered persons in Rule 506(d) and 747 KVCF Letter. 748 Karr Tuttle Letter. proposed Rule 262 as well as our 749 Ladd Letter 2. Letter. 751 ABA BLS Letter (suggesting ‘‘voting securities’’ be deemed securities the holders of which are presently entitled to vote for the election of directors (or the equivalent)). 752 17 CFR 230.506(d). 753 Rule 262(a). 754 Rule 262(a)(3). 755 Rule 262(a)(5). 750 MCS PO 00000 Frm 00051 Fmt 4701 Sfmt 4700 756 Rule 261(d). 506(d), 17 CFR 230.506(d). 758 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). 759 See Rule 262(b)(4). 760 Id. 761 Rule 262(b)(2). 757 Rule E:\FR\FM\20APR2.SGM 20APR2 21856 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations proposed rules for securities-based crowdfunding transactions. Consistent with the views of at least one commenter,762 we have reconsidered our initial views on the interpretation of ‘‘voting equity securities.’’ We believe that it is appropriate to refine our initial interpretation,763 as it applies to our bad actor disqualification rules,764 and create a ‘‘bright-line’’ standard that is consistent with the definition of the term ‘‘voting securities’’ in Rule 405 of the Securities Act.765 In this regard, we believe that such a term should include only those voting equity securities which, by their terms, currently entitle the holder to vote for the election of directors. In other words, we believe the term should be read to denote securities having a right to vote that are presently exercisable. Additionally, while the ability to control or significantly influence the management or policies of the issuer may be derived in part from the power to vote for the election of directors, in order to dispel any uncertainty as to the scope of our interpretation, we believe the term ‘‘voting equity securities’’ should be interpreted based on the present right to vote for the election of directors, irrespective of the existence of control or significant influence. Under the final rules, offerings that would have been disqualified from reliance on Regulation A under Rule 262 as in effect before today’s amendments will continue to be disqualified. Triggering events that were not previously included in the bad actor rules for Regulation A and that pre-date effectiveness of the final rules will not cause disqualification, but instead must be disclosed on a basis consistent with Rule 506(e). Specifically, issuers will be required to indicate in Part I of Form 1– A that none of the persons described in Rule 262 are disqualified and, where 762 ABA BLS Letter. 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.’’ See SEC Rel. No. 33–9414 (July 10, 2013) [78 FR 44729], text accompanying fn. 62. In light of concerns that our initial interpretation may be overbroad and that a ‘‘bright line’’ test may be more workable and would facilitate compliance, as we indicated in the Proposing Release, we are reconsidering our initial views. See Proposing Release, at Section II.G. 764 In addition to Regulation A, this interpretive position would apply to Rule 505 and Rule 506 of Regulation D. 765 In Securities Act Rule 405, the term voting securities means securities the holders of which are presently entitled to vote for the election of directors. 17 CFR 230.405. mstockstill on DSK4VPTVN1PROD with RULES2 763 When VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 applicable, 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.766 We believe that the final rules are appropriate in light of the Section 3(b)(2)(G)(ii) mandate, the benefits of creating a more uniform set of standards for all exemptions that include bad actor disqualification, and the required disclosure in the offering circular of persons subject to events that would have triggered disqualification, but occurred before the effective date of the final rules. H. Relationship With State Securities Law 1. Proposed Rules Although Section 401(b) of the JOBS Act does not exempt offerings made under Section 3(b)(2) and the related rules from state law registration and qualification requirements, it added Section 18(b)(4)(D) to the Securities Act.767 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.’’ Commenters in the pre-proposal stage suggested that the cost of state securities law compliance, which they identified as an obstacle to the use of Regulation A, would discourage market participants from using the new exemption. In addition, the GAO, as required by Section 402 of the JOBS Act, conducted a study on the impact of state securities laws registration and qualification requirements on offerings conducted under Regulation A and found that state securities laws were among several central factors that may 766 As discussed in Section II.C.3.a. above, Part I of Form 1–A focuses, in part, on issuer eligibility, and requires issuers to make an eligibility determination at the outset of filling out Form 1–A. 767 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.’’ 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). PO 00000 Frm 00052 Fmt 4701 Sfmt 4700 have contributed to the lack of use of Regulation A.768 In light of the issues raised by commenters and in the GAO Report, as well the substantial investor protections included in the proposed rules to amend Regulation A and implement Title IV of the JOBS Act, we proposed to define the term ‘‘qualified purchaser’’ in a Regulation A offering to consist of: (1) All offerees in a Regulation A offering and (2) all purchasers in a Tier 2 offering.769 We indicated in the Proposing Release that we believed this approach would protect offerees and purchasers in Regulation A securities, while streamlining compliance and reducing transaction costs. We proposed to preempt state securities laws registration and qualification requirements with respect to all offerees in a Regulation A offering, in order to allow issuers relying on Regulation A to communicate with potential investors about their offerings using the internet, social media, and other means of widespread communication, without concern that such communications might trigger registration requirements under state law.770 We further proposed to preempt state securities laws registration and qualification requirements with respect to all purchasers in a Tier 2 offering to help make Regulation A a more workable means of capital formation. We also noted our belief that the substantial investor protections embedded in the proposed rules, including issuer eligibility conditions, limitations on investment, disclosure requirements, qualification process, and ongoing reporting requirements of Tier 2, in combination, could address potential concerns that may arise as a result of preemption. Under the proposed rules, state securities regulators would retain their authority to: • Require the filing of any document filed with the Commission and the payment of filing fees; • investigate and bring enforcement actions against fraudulent securities transactions and unlawful conduct by broker-dealers in such offerings; and 768 See fn. 90 above. Rule 256. 770 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). 769 Proposed E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations • enforce the filing and fee requirements by suspending the offer or sale of securities within a given state for the failure to file or pay the appropriate fee.771 As noted in the Proposing Release, it was our preliminary view that the additional requirements for Tier 2 offerings would meaningfully bolster the protections otherwise embedded in Regulation A and therefore a different treatment than Tier 1 offerings is appropriate. 2. Comments on Proposed Rules mstockstill on DSK4VPTVN1PROD with RULES2 The preemption of state securities law registration and qualification requirements contemplated in the proposed ‘‘qualified purchaser’’ definition received an extensive amount of public commentary. Commenters were sharply divided on the need for state securities law preemption in Regulation A. Many commenters objected to the preemption of state securities law registration and qualification requirements.772 The views of these commenters were based on the following arguments: 771 Section 18(c) (Preservation of Authority) of the Securities Act, 15 U.S.C. 77r(c). 772 Letter from A. Heath Abshure, Arkansas Securities Commissioner, February 20, 2014 (‘‘ASD Letter’’); CFA Letter; CFA Institute Letter; Letter from Rep. Stephen F. Lynch, et al, U.S. House of Representatives, June 3, 2014 (‘‘Congressional Letter 2’’); Letter from Sen. Barbara Boxer, et al, U.S. Senate, Aug. 1, 2014 (‘‘Congressional Letter 4’’); Cornell Clinic Letter; Groundfloor Letter (suggesting that the Commission should at least evaluate NASAA’s coordinated review program for 12 months); Karr Tuttle Letter (acknowledging that state preemption may still be necessary for states not participating in NASAA’s new coordinated review program); Letter from William F. Galvin, Secretary, Commonwealth of Massachusetts, December 18, 2013 (‘‘Massachusetts Letter 1’’); Massachusetts Letter 2; MCS Letter; Letter from Andrea Seidt, President, et al., North American Securities Administrators Association (NASAA), February 19, 2014 (‘‘NASAA Letter 1’’); NASAA Letter 2; Letter from William Beatty, President, North American Securities Administrators Association (NASAA), February 11, 2015 (‘‘NASAA Letter 3’’); Letter from Jack E. Herstein, Assistant Director, Nebraska Department of Banking and Finance, February 10, 2014 (‘‘NDBF Letter’’); Letter from Chad Johnson, Bureau Chief, Investor Protection Bureau, New York State Attorney General’s Office, New York, May 7, 2014 (‘‘NYIPB Letter’’); Letter from Irving L. Faught, Administrator, Oklahoma Department of Securities, March 24, 2014 (‘‘ODS Letter’’); Letter from Damaris ´ Mendoza-Roman, Assistant Commissioner, Office of the Commissioner of Financial Institutions, Puerto Rico, March 5, 2014 (‘‘PRCFI Letter’’); Letter from Hon. Jesse White, Illinois Secretary of State, et al., March 4, 2014 (‘‘Secretaries of State Letter’’); Letter from Lindsay M. Scherber, May 8, 2014 (‘‘Scherber Letter’’); Letter from Janet M. Tavakoli, President, Tavakoli Structured Finance, Inc., February 24, 2014 (‘‘Tavakoli Letter’’); Letter from John Morgan, Securities Commissioner, Texas State Securities Board, March 21, 2014 (‘‘TSSB Letter’’); WDFI Letter. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 • A ‘‘qualified purchaser’’ means a purchaser with specialized skill, experience or knowledge.773 • The qualifications of the purchaser are key, not the nature of the issuer or the offering. Thus, the proposed definition of ‘‘qualified purchaser’’ is contrary to the plain meaning of this term.774 • The legislative history of the National Securities Markets Improvement Act of 1996 (NSMIA) 775 suggests that definitions of ‘‘qualified purchaser’’ must include an investor sophistication test.776 The Commission made similar statements on the ‘‘qualified purchaser’’ definition in a 2001 Proposing Release.777 • Congress considered preemption in the context of a provision to preempt offerings conducted through a brokerdealer in an early draft of Title IV of the JOBS Act, but then purposefully excluded such broad preemption from the final statute.778 • The Commission’s cost-benefit analysis of preemption was inadequate because it largely ignored investor protections, the benefits of state regulation, perceived resource constraints at the Commission, and preemption’s impact on investor confidence in the markets.779 • Although the GAO Report conducted under Section 402 of the JOBS Act cited compliance with state securities law review and qualification requirements as a factor in the lack of use of Regulation A, it also noted lengthy Commission reviews of Form 1–A filings.780 • States play a unique role in regulating securities offerings due to their localized knowledge and 773 See, e.g., ASD Letter; CFA Letter; Congressional Letter 4; Cornell Clinic Letter; Massachusetts Letter 1; NASAA Letter 2; ODS Letter; PRCFI Letter; WDFI Letter. 774 See, e.g., CFA Letter; Massachusetts Letter 1; NASAA Letter 2; PRCFI Letter; Tavakoli Letter; WDFI Letter. 775 Pub. L. 104–290, 110 Stat. 3416 (Oct. 11, 1996). 776 See, e.g., ASD Letter; Karr Tuttle Letter; Congressional Letter 4; Massachusetts Letter 1; Massachusetts Letter 2; NASAA Letter 1; NASAA Letter 2; NDBF Letter; NYIPB Letter; ODS Letter; PRCFI Letter; Secretaries of State Letter; Tavakoli Letter; WDFI Letter. 777 Rel. No. 33–8041 (Dec. 27, 2001) (the ‘‘2001 Proposing Release’’). 778 See, e.g., ASD Letter; CFA Letter; Congressional Letter 2; Congressional Letter 4; Groundfloor Letter; Massachusetts Letter 1; Massachusetts Letter 2; NASAA Letter 2; NDBF Letter; NYIPB Letter; Secretaries of State Letter; Tavakoli Letter; WDFI Letter. 779 See, e.g., CFA Letter; Groundfloor Letter; Massachusetts Letter 2; NASAA Letter 2; Scherber Letter; WDFI Letter. 780 See, e.g., CFA Letter; Massachusetts Letter 2; NASAA Letter 2; WDFI Letter. PO 00000 Frm 00053 Fmt 4701 Sfmt 4700 21857 resources, which aid in detecting fraud and facilitating issuer compliance.781 • The investor protections included in the proposal do not act as an adequate substitute for state review and comment on offering statements.782 • The states have adopted and implemented a new coordinated review program, designed to address many of the perceived inefficiencies associated with state registration.783 Many other commenters expressed their support for preemption, as proposed.784 These commenters made the following arguments: 781 See, e.g., NASAA Letter 1; ODS Letter; PRCFI Letter; WDFI Letter. 782 See, e.g., CFA Letter; CFA Institute Letter; MCS Letter; NASAA Letter 2; Scherber Letter; TSSB Letter; WDFI Letter. 783 See, e.g., ASD Letter; CFA Institute Letter; Cornell Clinic Letter; Groundfloor Letter; Karr Tuttle Letter; Massachusetts Letter 1; Massachusetts Letter 2; NASAA Letter 1; NASAA Letter 2; NASAA Letter 3; NYIPB Letter; PRCFI Letter; Secretaries of State Letter; Tavakoli Letter; TSSB Letter; WDFI Letter. 784 ABA BLS Letter; Letter from Kendall Almerico, Crowdfunding Expert, Attorney and CEO, Fund Hub and ClickStartMe, February 11, 2014 (‘‘Almerico Letter’’); Andreessen/Cowen Letter; B. Riley Letter; BIO Letter; Campbell Letter; Canaccord Letter; CFIRA Letter 1; CFIRA Letter 2; Letter from Rep. David Schweikert, et al, U.S. House of Representatives, Sept. 25, 2014 (‘‘Congressional Letter 3’’); DuMoulin Letter (noting that Canadian issuers conducting simultaneous offerings in Canada would otherwise be subject to three levels of review); Letter from Stanley Keller, Edwards Wildman Palmer LLP, April 3, 2014 (‘‘Edwards Wildman Letter’’) (recommending defining ‘‘qualified purchasers’’ as ‘‘accredited investors’’ if the proposed preemption is not adopted); Letter from Daniel Eng, CEO, March 20, 2014 (‘‘Eng Letter’’); Fallbrook Technologies Letter; Gilman Law Letter; McCarter & English Letter; Guzik Letter 1 (see also Guzik Letter 2 (suggesting that if the proposed preemption is not adopted to consider adopting an accredited investor style definition for ‘‘qualified purchaser,’’ but with a lower income or net worth test)); Letter from Todd Hart, Aug. 20, 2014 (‘‘Hart Letter’’); Heritage Letter; Letter from Charles Huynh, February 24, 2014 (‘‘Huynh Letter’’); IPA Letter; Kisel Letter; Letter from Akbert P. Kretz, Ph.D., Founder/Manager, Mentor, March 11, 2014 (‘‘Kretz Letter’’); KVCF Letter; Ladd Letters; Leading Biosciences Letter; Letter from Bruce E. Methven, Securities Law Attorney, March 23, 2014 (‘‘Methven Letter’’); Milken Institute Letter; MoFo Letter; Letter from Donald R. Hancock, CEO, Moloney Securities Co., Inc., February 20, 2014 (‘‘Moloney Letter’’); Letter from Jason Akel, President, New Food Ventures LLC, March 12, 2014 (‘‘New Food Letter’’); OTC Markets Letter; Letter from Jesse J. Palomino, February 25, 2014 (‘‘Palomino Letter’’); Paul Hastings Letter; Public Startup Co. Letters; REISA Letter; Richardson Patel Letter; SBIA Letter; Letter from Bradley L. Staples, MBA, University of Utah, February 21, 2014 (‘‘Staples Letter’’); Letter from Chris Sugai, February 21, 2014 (‘‘Sugai Letter’’); SVB Financial Letter; SVGS Letter; Letter from Ryan Hawxhurst, Founder and CEO of Unorthodocs Printing LLC, February 21, 2014 (‘‘Unorthodocs Letter’’); U.S. Chamber of Commerce Letter; Letter from Gregory S. Fryer, Esq., Partner, Verrill Dana LLP, July 15, 2014 (‘‘Verrill Dana Letter 2’’); Letter from John Warren, Esq., February 24, 2014 (‘‘Warren Letter’’); WR Hambrecht + Co Letter. E:\FR\FM\20APR2.SGM 20APR2 21858 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES2 • The proposed rules provide substantial investor protections to investors.785 • State securities law review of offering statements is a significant impediment to the use of Regulation A.786 • The Commission has the authority to preempt state qualification and review requirements.787 • States continue to have the authority to, among other things, bring anti-fraud enforcement actions and to review the publicly filed disclosure documents before sales occur.788 • NASAA’s coordinated review program as implemented will remain inefficient due to internal conflict, the application of merit review standards and the program’s inability to bind participants in the event of disagreements among the states.789 Many commenters that expressed general support for preemption, as proposed, also recommended applying it on an expanded basis.790 Some commenters recommended preempting state regulation of secondary trading in Regulation A securities,791 and some 785 See, e.g., ABA BLS Letter; Almerico Letter; B. Riley Letter; Campbell Letter; Canaccord Letter; CFIRA Letter 1; Congressional Letter 3; Edwards Wildman Letter; Fallbrook Technologies Letter; Gilman Law Letter; Guzik Letter 1; Guzik Letter 2; KVCF Letter; Leading Biosciences Letter; Milken Institute Letter; MoFo Letter; OTC Markets Letter; Paul Hastings Letter; Richardson Patel Letter; Verrill Dana Letter 2; WR Hambrecht + Co Letter. 786 See, e.g., ABA BLS Letter; Almerico Letter; BIO Letter; Campbell Letter; Canaccord Letter; Congressional Letter 3; DuMoulin Letter; Edwards Wildman Letter; Fallbrook Technologies Letter; Gilman Law Letter; Guzik Letter 1; Guzik Letter 2; Kisel Letter; Kretz Letter; KVCF Letter; Ladd Letters; Leading Biosciences Letter; McCarter & English Letter; Milken Institute Letter; Moloney Letter; OTC Markets Letter; Paul Hastings Letter; REISA Letter; Richardson Patel Letter; SBIA Letter; Staples Letter; SVB Financial Letter; U.S. Chamber of Commerce Letter; Verrill Dana Letter 2. 787 See, e.g., ABA BLS Letter; BIO Letter; Campbell Letter; Edwards Wildman Letter; Guzik Letter 1; Heritage Letter; IPA Letter; KVCF Letter; Public Startup Co. Letters; Richardson Patel Letter; U.S. Chamber of Commerce Letter; Verrill Dana Letter 2. 788 See, e.g., Congressional Letter 3; Heritage Letter; KVCF Letter; Methven Letter; REISA Letter. 789 See, e.g., ABA BLS Letter; BIO Letter; Canaccord Letter; Congressional Letter 3; Edwards Wildman Letter; Guzik Letter 2; KVCF Letter; Ladd Letters; Milken Institute Letter; Paul Hastings Letter; REISA Letter; Richardson Patel Letter; SVB Financial Letter; Verrill Dana Letter 2. 790 ABA BLS Letter; Campbell Letter; Congressional Letter 3; Guzik Letter 1; Hart Letter; Heritage Letter; IPA Letter; KVCF Letter; Ladd Letter 2; Milken Institute Letter; OTC Markets Letter; Paul Hastings Letter; Public Startup Co. Letter 1; SVB Financial Letter. 791 ABA BLS Letter; IPA Letter (recommending preempting for resales of all securities of a Tier 2 issuer that is current in Regulation A reporting); KVCF Letter; OTC Markets Letter (recommending preemption for at least Regulation A securities that are not penny stocks); Paul Hastings Letter; SVB Financial Letter. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 recommended preempting state regulation of Tier 1 offerings.792 Alternatively, several commenters recommended possibly eliminating the Commission’s review of Regulation A offerings to varying extents.793 Two commenters recommended eliminating the Commission’s review of Tier 1 offerings.794 One of these commenters recommended only doing this for offerings that are ‘‘local’’ in nature.795 One commenter recommended having a single state review, in lieu of a review and qualification by the Commission, if the Commission’s staff is unwilling to review Regulation A offerings ‘‘promptly with content-appropriate standards.’’ 796 One commenter recommended completely eliminating the Commission’s review if NASAA’s coordinated review program promotes a ‘‘robust’’ Regulation A market.797 3. Final Rules For the reasons discussed below, we are adopting the ‘‘qualified purchaser’’ definition in Regulation A, substantially as proposed. In the final rules, a ‘‘qualified purchaser’’ for purposes of Section 18(b)(4)(D)(ii) of the Securities Act includes any person to whom securities are offered or sold in a Tier 2 offering. Because of the requirements for all Tier 2 offerings, all purchasers in Tier 2 offerings persons must be either accredited investors or persons who limit their investment amount to no more than 10% of the greater of annual income or net worth (for natural persons), or 10% of the greater of annual revenue or net assets at fiscal year end (for non-natural persons). To address commenter concerns and avoid potential confusion as to the application of the preemption provisions in Tier 1 offerings, the final definition of ‘‘qualified purchaser’’ does not include offerees in Tier 1 offerings. While the final rules permit Regulation A issuers to test the waters and make 792 Andreessen/Cowen Letter; Campbell Letter; Congressional Letter 3; Guzik Letter 1 (recommending preemption with audited financial statements and a substantially lighter disclosure regime compared to Tier 2); Heritage Letter; Ladd Letter 2 (recommending preemption if company adopts internal controls and meets continuing disclosure requirements, including yearly audited financials); Milken Institute Letter (recommending preemption if audited financial statements are included in the ‘‘initial filing’’); Public Startup Co. Letter 1; SVB Financial Letter (recommending preemption with additional, unspecified disclosure obligations). See Section II.I. below for additional recommended changes to Tier 1. 793 Groundfloor Letter; Ladd Letter 2; Public Startup Co. Letter 5; Verrill Dana Letter 2. 794 Ladd Letter 2; Public Startup Co. Letter 5. 795 Public Startup Co. Letter 5. 796 Verrill Dana Letter 2. 797 Groundfloor Letter. PO 00000 Frm 00054 Fmt 4701 Sfmt 4700 offers in the pre-qualification period at the federal level, in light of the concerns raised by state regulators about the proposed rule’s expanded use of solicitation materials 798 and what we anticipate to be the generally more local nature of Tier 1 offerings,799 we believe it is appropriate, in this context, for the states to retain oversight over how these offerings are conducted. Although we acknowledge that this could potentially inhibit the use of solicitation materials in certain Tier 1 offerings, for these smaller, more localized offerings, we think the states should be permitted to regulate the use of solicitation materials. Given the sharply divided views of commenters on the ‘‘qualified purchaser’’ definition included in the Proposing Release, we want to clarify the scope of the Commission’s authority under the Securities Act to define such a term and the effect the final qualified purchaser definition will have on the continued ability of the states to regulate offers and sales within their jurisdiction. We continue to believe that the substantial investor protections embedded in the final rules for Tier 2 offerings, including the requisite qualifications of the issuer, offering, and eventual purchasers, as well as the particular characteristics associated with this category of securities, support the limited preemption of state securities laws registration and qualification requirements adopted in the final rules. a. NSMIA and the JOBS Act As noted above, some commenters questioned the ability of the Commission to adopt a ‘‘qualified purchaser’’ definition that includes any person to whom securities are offered or sold in a Tier 2 offering.800 These commenters suggested that a qualified purchaser definition under Section 18(b)(3) of the Securities Act must be based on attributes of the purchaser, not the nature of the issuer or offering. These commenters stated that broad preemption was contemplated in the legislative history of Title IV of the JOBS Act and expressly rejected by Congress. 798 Massachusetts Letter 2; NASAA Letter 2; WDFI Letter. These commenters suggested that the Commission require the filing of solicitation materials before the time of first use, as, in their view, the antifraud and other civil liability provisions of the federal securities laws are not an adequate substitute for the investor protections afforded by an advance filing requirement for solicitation materials, while also noting that problems with the use of solicitation materials are compounded by the provisions for access equals delivery of final offering circulars. 799 See Section II.H.3.d. below; see also fn. 830 below. 800 See fn. 772 above. E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations Title I of the NSMIA, referred to as the ‘‘Capital Markets Efficiency Act of 1996’’ (the ‘‘Efficiency Act’’),801 was, as its name suggests, enacted to promote efficiency and capital formation in the financial markets.802 The Efficiency Act realigned the respective responsibilities of federal and state securities regulators in the context of the dual system of securities offering registration that existed before enactment of the statute.803 The Efficiency Act achieved this regulatory realignment by amending Section 18 of the Securities Act to provide for exemption from state law registration and qualification requirements for certain categories of securities, defined as ‘‘covered securities.’’ Section 18(b)(3) provides that ‘‘[a] security is a covered security with respect to the offer or sale of the security to qualified purchasers, as defined by the Commission by rule.’’ Congress stated in Section 18(b)(3) 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.’’ The JOBS Act 804 amended Section 18 by adding to its list of ‘‘covered securities’’ transactions involving securities that are exempt from registration pursuant to a rule or regulation adopted pursuant to Section 3(b)(2) and that are ‘‘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.’’ 805 By its terms, Section 18(b)(3) provides the Commission with the express authority to adopt rules that define a ‘‘qualified purchaser.’’ The provision does not prescribe specific criteria that the Commission must consider in determining, or the manner in which it must determine, a purchaser to be ‘‘qualified.’’ Furthermore, Section 801 NSMIA, section 101 (Short Title). Rep. No. 622, 104th Cong. 2d Sess. at 1 (1996) (House Report). 803 As enacted, NSMIA included five separate titles, each of which served a different purpose in the overarching statutory goal of improving national securities markets. See preamble and Section 1 to NSMIA. 804 The stated purpose of the JOBS Act is to ‘‘increase American job creation and economic growth by improving access to the public capital markets. . . .’’ See JOBS Act (Preamble). 805 JOBS Act section 401(b) (adding Section 18(b)(4)(D)(ii) to the Securities Act). Section 401(b) also included in the list of ‘‘covered securities’’ transactions involving Section 3(b)(2) securities that are offered or sold on a national securities exchange, see Section 18(b)(4)(D)(i). See also Title III of the JOBS Act, which added to the list of ‘‘covered securities’’ in Section 18(b)(4)(C) transactions involving securities issued pursuant to Section 4(a)(6). mstockstill on DSK4VPTVN1PROD with RULES2 802 H.R. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 18(b)(3) states that the definition of qualified purchaser may be different for different categories of securities. This means that, rather than considering the characteristics of the purchaser in isolation, the Commission may adopt a qualified purchaser definition that is also tailored to reflect the characteristics of the particular type of issuer or transaction. Further, Section 18(b)(3) does not proscribe any particular terms or characteristics that the Commission must include in any rules defining qualified purchaser with respect to a given category of securities. What it does instead is require that any rules so adopted be consistent with the public interest and the protection of investors. Unlike Section 18(b)(3), which provides for preemption with respect to offers or sales to qualified purchasers in any context, Section 18(b)(4)(D)(ii) provides for preemption specifically with respect to transactions exempt from registration pursuant to Section 3(b)(2). As such, the preemption afforded under Section 18(b)(4)(D)(ii) necessarily encompasses the mandatory requirements for conducting an exempt offering pursuant to Section 3(b)(2). These include, among other things, that the civil liability provisions of Section 12(a)(2) must apply and that an issuer must file audited financial statements with the Commission annually.806 Other potential requirements left to the discretion of the Commission include provisions for ongoing reporting, bad actor disqualification, and requirements for electronic filing of offering materials.807 We believe that the terms of Section 18(b)(3) and Section 18(b)(4)(D)(ii)— read in conjunction—provide the Commission with discretionary authority to adopt a ‘‘qualified purchaser’’ definition that reflects the particular characteristics of transactions exempt from registration pursuant to Section 3(b)(2). Thus, in determining who should be considered a qualified purchaser for purposes of the amendments to Regulation A, we have considered not only the mandatory features of Section 3(b)(2), but also many of the discretionary features contained in our final rules, such as the requirement that purchasers in Tier 2 offerings be limited to accredited investors or persons otherwise subject to specified investment limitations. We recognize that a number of commenters disagreed with this approach.808 Some stated that a ‘‘qualified purchaser’’ definition 806 15 U.S.C. 77c(b)(2)(D), (F). 15 U.S.C. 77c(b)(2)(G); 15 U.S.C. 77c(b)(4). 808 See fn. 772 above. 807 See PO 00000 Frm 00055 Fmt 4701 Sfmt 4700 21859 adopted by the Commission must at a minimum be based on attributes of the purchaser, such as a person’s wealth, income, or sophistication,809 and noted that the Commission had highlighted such factors in a 2001 Proposing Release to define a ‘‘qualified purchaser’’ pursuant to Section 18(b)(3).810 The 2001 Proposing Release, however, contemplated that state securities review and qualification requirements would be preempted in all categories of transactions to the extent that sales were made to ‘‘accredited investors.’’ By contrast, our rules to implement Title IV of the JOBS Act provide for preemption in the more limited circumstances in which the requirements of Section 3(b)(2) and the rules adopted thereunder are satisfied. In the 2001 Proposing Release, we noted that certain aspects of NSMIA’s legislative history suggest that a qualified purchaser definition should include investors that are sophisticated and capable of protecting themselves. In addition, we asked questions about the proposed approach to the definition and whether other potential factors mentioned in the legislative history, such as the national character of an offering, could or should bear on potential qualified purchaser definitions adopted pursuant to Section 18(b)(3).811 We do not believe that the 2001 Proposing Release is inconsistent with the qualified purchaser definition for Regulation A that we are adopting today. The 2001 Proposing Release was not a Commission statement on the scope of all permissible definitions for a qualified purchaser adopted pursuant to Section 18(b)(3). Rather, it expressed a preliminary interpretive view of certain aspects of the legislative history of NSMIA in the context of a proposed rulemaking that would have equated ‘‘qualified purchaser’’ with the definition of an ‘‘accredited investor’’ for sales by any category of issuer in any type of transaction.812 While it may have been appropriate to focus on attributes of the purchaser when crafting a ‘‘qualified purchaser’’ definition that would have applied in a broad set of possible transactions, as in the 2001 809 See, e.g., NASAA Letter 2. Proposing Release. In this release, the Commission proposed to define a ‘‘qualified purchaser’’ to be an ‘‘accredited investor,’’ as that term is defined under Rule 501(a) of Regulation D. 811 See 2001 Proposing Release, Section II.B. (for example, asking questions about the national character of offerings and the potential for eliminating redundancies and inefficiencies in the application of disparate state standards); see also House Report, at 31. 812 See 2001 Proposing Release, Section I.C., II.B. The Commission did not adopt final rules based on the 2001 Proposing Release. 810 2001 E:\FR\FM\20APR2.SGM 20APR2 21860 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations Proposing Release, the definition being adopted today serves a different purpose because it applies only in Regulation A offerings. Indeed, Section 18(b)(3) contemplates that the term ‘‘qualified purchaser’’ can be defined ‘‘differently with respect to different categories of securities.’’ The enactment of the JOBS Act in 2012, and in particular its addition of Section 18(b)(4)(D)(ii) to the Securities Act has caused us to consider the definition of qualified purchaser specifically within the context of transactions under the new Section 3(b)(2) exemption. This is a new and different context in which to consider the definition of qualified purchaser than existed at the time of the 2001 Proposing Release. In this new context, we believe that the definition of qualified purchaser that we are adopting is appropriately tailored to these transactions because, as explained above, the requirements applicable to Tier 2 offerings include numerous provisions designed to protect investors, including, among other things, a requirement that all purchasers in these offerings be either accredited investors or persons who are subject to investment limitations. We do not agree with the commenters who assert that broad state securities law preemption was expressly rejected by Congress in Title IV of the JOBS Act. The legislative record indicates that the only form of state securities law preemption directly contemplated, but not adopted, in the drafting of Title IV of the JOBS Act was for offers and sales through a broker or dealer.813 b. Section 18 of the Securities Act and the Effect of Preemption on State Securities Laws mstockstill on DSK4VPTVN1PROD with RULES2 As discussed above, some commenters expressed concern about the effect preemption would have on the ability of state securities regulators to remain actively involved in Regulation A offerings.814 We believe it is important to clarify the effect preemption will have on the ability of state securities regulators to continue to play a vital role in the supervision of Regulation A securities. 813 See, e.g., Congressional Record Volume 157, Number 166 (Wednesday, Nov. 2, 2011), p. 7231 (Statement of Rep. Peters: ‘‘Finally, the gentleman [Rep. Schweikert (AZ)] has also worked with Democrats on the remaining issue of contention, and that was the preemption of State law. [Rep. Schweikert’s] substitute amendment to H.R. 1070 removes the exemption from State level review that was previously provided to an issuer using a broker-dealer to distribute and [sic] issue.’’) Cf. H.R. Rep. No. 112–206, at 2 (2011). 814 See, e.g., NASAA Letter 2, at 10. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 Under Section 18(a) of the Securities Act, no law, rule or regulation of any state requiring the registration or qualification of securities applies to a covered security or to a security that will be a covered security upon completion of the transaction.815 Further, with respect to a covered security, no state law, rule or regulation shall prohibit, limit, or impose, among other things, any conditions upon the use of any offering document 816 that is prepared by or on behalf of the issuer, or, based on the merits of such offering or issuer, upon the offer or sale of any covered security.817 While covered security status under Section 18 prohibits the states from requiring the registration or qualification of such securities, Section 18(c) preserves the power of the states in several important areas.818 Under Section 18(c), the states retain: • The jurisdiction to investigate and bring enforcement actions with respect to fraudulent securities transactions and unlawful conduct by broker-dealers; 819 • the ability to require issuers to file with the states any document filed with the Commission, solely for notice purposes and the assessment of fees, together with a consent to service of process and any required fee; 820 and • the power to enforce the filing and fee requirements by suspending the offer or sale of securities within a given state for the failure to file or pay the appropriate fee.821 As the name of the statute that added Section 18 to the Securities Act suggests, the preemption of state securities laws is about improving the ‘‘efficiency’’ of our capital markets by eliminating unnecessary, duplicative regulation of securities offerings at both the federal and state level.822 It is not about eliminating investor protections or otherwise limiting the continued 815 15 U.S.C. 77r(a)(1). Section 18(d), the term ‘‘offering document’’ has the same meaning given the term ‘‘prospectus’’ in first portion of section 2(a)(10) and includes a communication that is not deemed to offer a security pursuant to a rule of the Commission. For these purposes, the term ‘‘prospectus’’ means any prospectus, notice, circular, advertisement, letter, or communication, written or by radio or television, which offers any security for sale or confirms the sale of any security. 817 15 U.S.C. 77r(a)(2)–(3). 818 15 U.S.C. 77r(c). 819 15 U.S.C. 77r(c)(1). 820 15 U.S.C. 77r(c)(2). For example, even though state securities law registration requirements are preempted in offerings pursuant to Rule 506 of Regulation D, 17 CFR 230.506, many states continue to require the filing of Form D notices and amendments, and most of them charge a filing fee. See, e.g., https://www.efdnasaa.org; cf. 15 U.S.C. 77r(b)(4)(E). 821 15 U.S.C. 77r(c)(3). 822 House Report, at 1. 816 Under PO 00000 Frm 00056 Fmt 4701 Sfmt 4700 involvement of the states in such offerings.823 c. State Coordinated Review Program for Section 3(b)(2) Securities Since the proposed rules to implement Title IV of the JOBS Act were issued in December 2013, NASAA has implemented a multi-state coordinated review program for Regulation A offerings, the goal of which is to reduce the state law disclosure and compliance obligations of Regulation A issuers.824 Under the coordinated review program, issuers are required to file Regulation A offering materials with the states via electronic mail. The administrator of the coordinated review program must then select a lead disclosure examiner and, where applicable, a lead merit examiner, which are responsible for drafting and circulating comment letters to the participating jurisdictions, and for seeking resolution of those comments with the issuer and its counsel. As enacted, the program contemplates a twenty-one business day turnaround from the time of filing of an offering statement until the issuer receives comments from the states.825 The coordinated review program’s review protocol also modifies (or disapplies altogether) certain of NASAA statements of policy for offerings undergoing coordinated review. Where, however, an issuer elects to offer or sell Regulation A securities in at least one merit state, the coordinated review program may require the issuer to apply NASAA’s statements of policy to the offering as a whole (i.e., not solely for purposes of offers or sales within such merit review state(s)). At the proposing stage, we indicated that a number of open questions remained about the then-proposed multi-state review program. In the intervening time, many questions have been answered, largely relating to the final adoption and implementation of 823 Id., at 16 (Noting the reason behind the legislation that eventually became NSMIA was a clear need for modernization and that ‘‘there continues to be a substantial degree of duplication between Federal and State securities regulation, and that this duplication tends to raise the cost of capital to American issuers of securities without providing commensurate protection to investors or our markets.’’). 824 A description of NASAA’s coordinated review program can be found at: https://www.nasaa.org/ industry-resources/corporation-finance/coordinated -review/regulation-a-offerings/. The Proposing Release also discusses this program, as it was contemplated and proposed at that time. See Proposing Release, at Section II.H. 825 An illustrated timeline for NASAA’s multistate coordinated review program is available at: https://www.nasaa.org/wp-content/uploads/2015/ 03/Coordinated-Review-Chart.pdf. E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations the program by a vast majority of the states.826 Other crucial questions, however, remain, such as whether the program will be able to address the concerns related to state securities law compliance identified by the GAO Report and commenters,827 and whether the program can continue, as contemplated, in the face of numerous filings by issuers that seek to participate in the streamlined process. As of the date of this release, we are aware of three issuers that have elected to seek qualification at the state level pursuant to the protocols of the multi-state coordinated review program.828 While the program, as contemplated in its enactment, could potentially reduce the state law disclosure and compliance obligations of issuers,829 the limited experience of issuers with the program prevents us from being able to fully evaluate it at this time. We note that Tier 1 issuers may well benefit from the coordinated review program as it continues to develop. We remain concerned, however, that, even under the coordinated review program, state securities law registration and qualification requirements would be unnecessarily duplicative for, and impose unnecessary costs on, securities issued in Tier 2 offerings. In light of the recent efforts of state securities regulators to address concerns about the costs associated with state qualification of Regulation A offering statements, however, the ongoing implementation and development of the coordinated review program, particularly as it may operate within Tier 1 offerings, may provide additional data that will aid any future evaluation of whether such a program could effectively operate within the context of larger, more national Tier 2 offerings as an alternative to preemption. mstockstill on DSK4VPTVN1PROD with RULES2 d. Application of State Securities Law in Tier 1 and Tier 2 Offerings As we noted in the Proposing Release, in light of the issues raised by commenters and in the GAO report, we remain concerned that costs associated 826 At this time, it is our understanding that 49 of NASAA’s 53 constituent members have agreed to participate in the coordinated review program. 827 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, e.g., ABA BLS Letter, at 14. 828 See, e.g., Groundfloor Letter (the first issuer to rely on NASAA’s coordinate review program, with the exception of having to seek qualification outside of the coordinated review program in the state of Georgia). 829 Id. (suggesting that in its experience the benefits of NASAA’s coordinated review program outweighed the approximately $50,000 cost of the average Regulation A offering); see also NASAA Letter 3. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 with state securities law compliance, even under a coordinated review program, may deter issuers from using amended Regulation A, which could significantly limit the impact of the exemption as a tool for capital formation. In considering our approach to preemption in the final rules, particularly as we evaluate what is consistent with the public interest and the protection of investors, we have taken into account the amended Regulation A regime, including the distinctions between the two tiers and in particular the additional protections provided in Tier 2 beyond the requirements of Tier 1. In addition to certain basic requirements that are applicable to both tiers, Tier 2 issuers will be subject to significant additional requirements, some arising directly from Section 3(b)(2) and others that we have imposed through our discretionary authority under that section. For example, the financial statements that Tier 2 issuers include in their offering circulars are required to be audited, and Tier 2 issuers must file audited financial statements with the Commission annually. Tier 2 issuers also must provide ongoing reports on an annual and semiannual basis with additional requirements for interim current event updates, assuring a continuous flow of information to investors and the market. In addition, purchasers in Tier 2 offerings must be either accredited investors or subject to limitations in the amount they may invest in a single offering. Finally, as with Tier 1 offerings, Tier 2 offering statements will be filed electronically, reviewed and qualified by Commission staff, and the offerings are subject to both limitations on eligible issuers and ‘‘bad actor’’ disqualification provisions. In consideration of these requirements, as well as our view, as discussed in greater detail below, that Tier 2 offerings are more likely to be national rather than local in nature, we believe that preemption of state securities law registration and qualification requirements is appropriate for purchasers in these offerings. We believe that the final rules for Regulation A create two different categories of securities for purposes of Section 18(b)(3). The requirements for Tier 1 issuers create a category of securities that is more local in character, while Tier 2 offerings involve a category of securities that is more national in character. In this regard, to the extent an issuer seeks to raise money through a public offering pursuant to Regulation A, the distinctions between the requirements for Tier 1 and Tier 2 will PO 00000 Frm 00057 Fmt 4701 Sfmt 4700 21861 provide issuers with a meaningful choice at the outset between initial and ongoing offering costs and requirements. Tier 1 issuers are not required to include audited financial statements in their offering statements, nor are they required—as contemplated by Section 3(b)(2)—to file audited financial statements with the Commission annually. They are further not subject to any ongoing reporting, beyond the requirements contained in Part I of Form 1–Z. While the final rules raise the offering limitation in Tier 1 to $20 million in a 12-month period, which we believe should increase the general utility of the tier, such offerings by virtue of the lower dollar amounts that can be raised in comparison to Tier 2 offerings, as well as the form filing requirements and the lack of ongoing reporting, will likely be conducted by a different set of issuers than those that conduct offerings pursuant to Tier 2. Specifically, we think that issuers conducting Tier 1 offerings are likely to be smaller companies whose businesses revolve around products, services, and a customer base that will more likely be located within a single state, region, or a small number of geographically dispersed states.830 We believe that these issuers will typically not seek or, on the basis of their business models, be able to: (i) Raise capital on a national scale; or (ii) create a secondary trading market in their Regulation A securities. By contrast, we believe that the higher offering limitation for Tier 2 offerings, the higher costs associated with complying with the audited financial statement and ongoing reporting requirements, as well as the requirement to sell to ‘‘accredited investors’’ or otherwise limit the amount of securities sold to non-accredited investors, will necessitate that such offerings be offered and sold on a larger and more national scale. Additionally, an issuer electing to conduct a Tier 2 offering would likely do so, or be required by its investors to do so, in order to provide ongoing reports in a manner that will facilitate, or otherwise result in, secondary trading on a national level. While issuers conducting Regulation A offerings for less than $20 million are free to choose between the requirements of either tier, we believe that the initial and ongoing costs and limitations associated with 830 For example, issuers of securities in the seven offering statements qualified by the Commission pursuant to Regulation A in 2014 indicated, on average, that they were seeking qualification in approximately five states per offering. The financial statements provided by these issuers further indicated, on average, that issuers had approximately $1.2 million in assets. No issuer indicated assets greater than $3.6 million, while two issuers indicated assets of less than $20,000. E:\FR\FM\20APR2.SGM 20APR2 21862 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES2 complying with Tier 2 will provide for the natural separation of offerings into the respective tiers with issuers in more local offerings electing to comply with the less onerous requirements of Tier 1. As noted above, some of the basic requirements of the offering statement are applicable to both tiers, and issuers of securities pursuant to either tier will remain subject to the same review and comment process by the staff of the Division of Corporation Finance before qualification. On this basis, some commenters argued that the same reasons supporting the preemption of state securities law registration requirements for Tier 2 offerings suggests that the Commission should also extend preemption to Tier 1 offerings.831 The distinctions between the tiers in the final rules for purposes of the preemption of state securities law registration requirements are based only in part on the form distinctions and process requirements for issuers at the time of qualification at the federal level. The preemption of state securities law registration requirements in the final rules for Tier 2 offerings is additionally related to the inefficiencies of qualification at the state and federal level, the differing characteristics of Tier 1 and Tier 2 offerings, and the statutory purposes behind the enactment of the Efficiency Act that are served by deeming Tier 2 offerings to involve a covered class of securities. While, as some commenters suggest, the review and qualification of Tier 1 offerings at the state level will involve inefficiencies to which Tier 2 issuers will not be subject, we believe that continued state involvement in Tier 1 offerings is consistent with the policy underlying the enactment of NSMIA that suggests that states should ‘‘generally retain their authority to regulate small, regional, or intrastate securities offerings.’’ 832 As noted above, we believe that the implementation of NASAA’s multi-state coordinated review program has the potential to ameliorate some of these inefficiencies. We will observe issuers’ experience 831 Andreessen/Cowen Letter; Campbell Letter; Guzik Letter 1; Heritage Letter; Ladd Letter 2; Milken Institute Letter; Public Startup Co. Letter 1; SVB Letter. 832 House Report, at 16. See also WDFI Letter, at 3 (‘‘Given the relatively small size of these offerings and the low probability of attracting the attention of national broker-dealers to distribute them, these offerings are likely to be local in nature.’’). The Commission is exploring the possibility of establishing a program whereby a representative of NASAA, or of a state securities regulator, would be assigned to work at the Commission in the Division of Corporation Finance to assist the staff as it implements the final rules. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 under the coordinated review program and amended Regulation A, and whether changes to the rule could be beneficial. We also believe that the requirements for Tier 2 offerings will advance ‘‘the development of national securities markets and eliminate the costs and burdens of duplicative and unnecessary regulation.’’ 833 The absence of preemption in Tier 2 offerings would unnecessarily subject issuers in such offerings to a substantial degree of duplication between federal and state securities regulation in the qualification of offering statements, which would raise the cost of capital to issuers without providing commensurate additional protection to investors or our markets.834 As noted above, under Section 18(c), the states retain authority to (1) investigate and bring enforcement actions with respect to fraudulent transactions, (2) require the filing of any documents filed with the Commission ‘‘solely for notice purposes and the assessment of any fee,’’ and (3) enforce filing and fee requirements by suspending offerings within a given state. We see no reason why state securities regulators could not continue to rely on the multi-state coordinated review program as a mechanism to allow Tier 2 issuers to make notice filings of their offering statements with the states consistent with Section 18(c). In this regard, notice filings of offering statements of Tier 2 issuers would be available to the states for a period of time prior to the qualification of the offering.835 For example, the final rules 833 House Report, at 16. While further preemption of state securities law regulation of the secondary trading of Regulation A securities issued in a Tier 2 offerings could, as some commenters suggest, further advance the development of a national securities market by easing the compliance obligations of investors that trade in the secondary markets, we believe that the approach to preemption of state securities laws adopted today is more appropriate at the outset and will afford the Commission time to subsequently review the development of, and consider potential changes to, the final rules for primary and secondary Regulation A markets. 834 See id.; see also, e.g., ABA BLS Letter, at 13 (noting the challenges posed to smaller companies that arise when having to respond to both federal and state reviews and coordinating overlapping or potentially inconsistent comments and approvals); Groundfloor Letter (noting the existence of, and additional costs associated with, duplicative qualification requirements at the state and federal level, as well as potential complications between investment limitations at the federal level and state suitability standards). 835 See, e.g., comment letters cited in fn. 788 above; see also Letter from A. Heath Abshure, President, NASAA, September 27, 2013 (comments on SEC. Rel. No. 33–9416 (Proposed Amendments to Regulation D, Form D and Rule 156 under the Securities Act)) (indicating that although ‘‘states are preempted from requiring registration of securities that are sold in compliance with Rule 506 . . . state PO 00000 Frm 00058 Fmt 4701 Sfmt 4700 for Regulation A require an issuer that non-publicly submits its offering statement for review to the Commission to publicly file its offering statement and related documents with the Commission not less than 21 calendar days before qualification. At that time, the states would be permitted to require issuers to also make notice filings of such materials with them and to assess any filing fees under Section 18(c)(2). I. Additional Considerations Related to Smaller Offerings As we noted in the Proposing Release, a number of factors have influenced the use of Regulation A in the form it has taken since its last substantive update in 1992, 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.836 In developing the final rules we are adopting, we have attempted to create a more efficient and effective method to raise capital under Regulation A that incorporates important investor protections. We are also cognizant of how issuers seeking to raise relatively smaller amounts of capital could consider a range of possible approaches to capital raising.837 Under our proposal, offerings for up to $5 million conducted under Tier 1 would benefit from the proposed updates to Regulation A’s filing and qualification processes, but the proposed amendments did not otherwise substantially alter the existing exemption for such offerings.838 We were mindful of the possibility that additional changes to Tier 1 could expand its use by, and thus potentially benefit, issuers conducting smaller offerings. We therefore solicited regulators routinely review Form D filings to ensure that the offerings actually qualify for an exemption . . . and to look for ‘‘red flags’’ that may indicate a fraudulent offering. The absence of a Form D filing complicates our efforts to protect the investing public.’’). The concerns of the states, as they relate to Form D filings, would be addressed in the final rules for Regulation A that require the filing with the Commission of substantive offering materials, thereby triggering any notice filing requirements with the states, before sales can be made. 836 See, e.g., Proposing Release, at Section I.C.; see also GAO Report. 837 These methods include, for example, Rules 504, 505 and 506 under Regulation D and Section 4(a)(6) of the Securities Act and any rules adopted thereunder. See also Proposing Release, at Section II.I. 838 Some commenters at the pre-proposal stage suggested that the Commission should largely preserve the requirements of the then-existing Regulation A in the final rules. See Proposing Release, at fn. 505. E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES2 comment on additional considerations with respect to Tier 1 and a potential intermediate tier for offerings incrementally larger than Tier 1 offerings and how such offerings would affect investor protection and capital formation. Many commenters recommended making changes to proposed Tier 1 to make it a more viable option for small business capital formation.839 Some of these commenters recommended preempting state regulation of Tier 1 offerings, as mentioned above.840 Two commenters recommended raising the offering limit of Tier 1 to $10 million or more.841 Several commenters recommended including an ongoing disclosure requirement for Tier 1 issuers, including disclosure at a level lower than what is required for Tier 2,842 ongoing disclosure with yearly audited financials,843 or some unspecified continuous disclosure obligation.844 One commenter recommended lowering the Tier 1 disclosure obligations from the current proposed requirements, particularly for offerings of $2 million or less.845 One commenter recommended expanding the offering limit for Tier 1 to $15 million and creating a new tier below Tier 1 with fewer disclosure requirements.846 Many commenters recommended changes to proposed Tier 1, but did not address preemption.847 839 Andreessen/Cowen Letter; BDO Letter; Letter from Kevin Bernard, Sept. 3, 2014 (‘‘Bernard Letter’’); Campbell Letter; CAQ Letter; Deloitte Letter; E&Y Letter; Guzik Letter 1; Heritage Letter; ICBA Letter; KPMG Letter; Ladd Letter 2; McGladrey Letter; Milken Institute Letter; Public Startup Co. Letter 1; SVB Financial Letter; Verrill Dana Letter 1; WR Hambrecht + Co Letter. 840 Andreessen/Cowen Letter; Bernard Letter; Campbell Letter; Guzik Letter 1; Heritage Letter; Ladd Letter 2; Milken Institute Letter; Public Startup Co. Letter 1; SVB Financial Letter. 841 Guzik Letter 1; ICBA Letter. 842 Guzik Letter 1 (suggesting that Tier 1 ongoing disclosure requirements could parallel Tier 2’s requirements, but without the requirement for semiannual reports). 843 Ladd Letter 2. 844 SVB Financial Letter. 845 Campbell Letter. 846 Public Startup Co. Letter 1. As mentioned in the relevant sections above, this commenter recommended three tiers based on offering size. The first tier could potentially only require state review and would be ‘‘local’’ in nature. This tier would include some form of ongoing reporting with the states, but not audited financials. Instead directors and officers would have to certify under penalty of perjury that the financial statements were accurate. The second tier would only require audited financial statements if they were otherwise available, would preempt state review and would require periodic reporting. This tier might allow for more flexibility with respect to auditor independence. The third tier would require more reporting than currently proposed for Tier 2 and would appear to require PCAOB-registered auditors. 847 BDO Letter; CAQ Letter; Deloitte Letter; E&Y Letter; ICBA Letter; KPMG Letter; McGladrey Letter. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 Several of these commenters made recommendations with respect to the financial statement and auditing requirements in Form 1–A.848 The final rules for Regulation A take into account some of the suggestions by commenters on ways to improve the requirements for smaller offerings, particularly in Tier 1. The comments we received did not reflect any consensus on the particular provisions in Tier 1 that were most in need of amendment. As noted above, we do not agree that preemption of state securities laws registration and qualification requirements is appropriate for Tier 1 offerings.849 Further, while some commenters suggested that preemption of state securities laws may improve the attractiveness of Tier 1 offerings, they did so on the condition that other aspects of the tier should change accordingly, such as by requiring Tier 1 issuers to provide audited financial statements in the offering statement and possibly on an ongoing basis. For the reasons discussed in Section II.C.3.b(2)(c) above, however, we have not adopted such changes in Tier 1. Alternatively, some commenters suggested that the Commission adopt a third tier either expressly or through the flexible applicability of the proposed tier requirements. While a third tier may provide issuers with some additional flexibility for capital formation under Regulation A, this additional flexibility would also have potential costs. For example, a third tier may unnecessarily complicate compliance with Regulation A for smaller issuers, and could potentially confuse investors as to the type of Regulation A offering an issuer was undertaking and the type of information such investor could expect to receive as a result, thereby lessening the viability of the exemption as a whole. For this reason, we are not adopting a third or intermediate tier in Regulation A. We are adopting certain changes in the final rules that are intended to make Tier 1 more useful for small business capital formation. As discussed above, in line with the suggestions of commenters, we have raised the offering limitation in Tier 1 to $20 million in a 12-month period, including no more than $6 million on behalf of selling securityholders that are affiliates of the issuer.850 With respect to the offering circular narrative disclosure requirements,851 we have adopted 848 BDO Letter; CAQ Letter; Deloitte Letter; E&Y Letter; KPMG Letter; McGladrey Letter. 849 See Section II.H.3. above. 850 See Section II.B.3.c. above. 851 See Section II.C.3.b(1). above. PO 00000 Frm 00059 Fmt 4701 Sfmt 4700 21863 certain additional scaled disclosure requirements for Tier 1 that are intended to lessen the compliance obligations for issuers. For example, Tier 1 issuers will be required to disclose related party transactions at the thresholds in current Regulation A, as opposed to the lower thresholds in the proposed rules, and simplified executive compensation data. We are further providing issuers under both Tiers with the accommodation provided to emerging growth companies in Securities Act Section 7(a) to delay the implementation of new accounting standards to the extent such standards provide for delayed implementation by non-public business entities. Lastly, we have provided Tier 1 issuers with additional flexibility with respect to auditor independence standards. As originally proposed, an issuer electing to provide audited financial statements in a Tier 1 offering—even though audited financial statements would not generally be required—would have had to engage the services of an auditor that followed the independence standards outlined in Article 2 of Regulation S–X. Commenters suggested that we should permit auditors of the financial statements of Tier 1 issuers to alternatively follow the independence standards of the AICPA or Article 2 of Regulation S–X.852 In the view of these comments, allowing auditors of Tier 1 issuer financial statements the option to follow the independence standards of the AICPA would permit more issuers to include financial statements that would be deemed audited under the requirements for Tier 1 in the first instance, thereby avoiding any fees associated with an issuer having their existing financial statements audited a second time under PCAOB standards. As noted above,853 we agree with commenters that this accommodation may benefit smaller issuers in Tier 1 offerings who wish to file audited final statements for purposes of the offering statement and thus are adopting this suggestion. In the light of the changes discussed above, we believe that the final rules we are adopting will provide Tier 1 issuers with a meaningful choice within Regulation A between the costs and benefits associated with compliance with the requirements for Tier 1 and Tier 2 and therefore do not believe that an intermediate or other tier is necessary at this time. 852 BDO Letter; CAQ Letter; Deloitte Letter; E&Y Letter; KPMG Letter; McGladrey Letter. 853 See Section II.C.3.b(2)(c). above. E:\FR\FM\20APR2.SGM 20APR2 mstockstill on DSK4VPTVN1PROD with RULES2 21864 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations J. Transitional Guidance for Issuers Currently Conducting Regulation A Offerings While Regulation A has been used infrequently in recent years, there are issuers that are currently conducting, or that have filed offering statements, under the preexisting Regulation A rules. By way of transitional guidance, we are clarifying that issuers currently conducting sales of securities pursuant to a qualified Regulation A offering statement may continue to do so. Such offerings will be considered Tier 1 offerings after the effectiveness of the final rules. Qualified offering statements under the preexisting rules for Regulation A are, however, incompatible with the final requirements for Tier 2 offerings and, as discussed below, issuers that wish to transition to a Tier 2 offering will need to file a post-qualification amendment that satisfies the requirements for Tier 2. Upon effectiveness of the final rules, issuers currently conducting Regulation A offerings under the preexisting rules must begin to comply with the final rules for Tier 1 offerings, including, for example, the requirement of electronic filing and the rules for post-qualification amendments, at the time of their next filing under Regulation A. Additionally, after effectiveness of the final rules, to the extent that issuers provided offering statements that were qualified using the Model A disclosure format of Part II of the Form 1–A, any subsequently required filing or amendment to such offering statement must be filed using a disclosure format that is permissible under the final rules for Tier 1 offerings. Model A will no longer be appropriate or permitted for post-qualification amendments of qualified offerings that pre-date effectiveness of the final rules. Lastly, an issuer that is offering securities pursuant to a qualified offering statement under the preexisting rules will, upon effectiveness of the final rules, no longer be required to file a Form 2–A, but instead be required to file a Form 1–Z with the Commission electronically upon completion or termination of the offering. Issuers that are currently in the review process for the qualification of a Regulation A offering statement may continue to follow the preexisting rules for Regulation A until the effective date of the final rules. On or after the effective date, such an issuer will be required to comply with the final rules, including the requirements for electronic filing and, where applicable, transitioning to a disclosure format that is approved for Regulation A offerings. The issuer may also elect to proceed at VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 that time with its offering under the final requirements for either Tier 1 or Tier 2 offerings, provided it follows the requirements for the respective tiers. Issuers in ongoing offerings that were qualified before effectiveness of the final rules that wish to transition to a Tier 2 offering may do so by filing a postqualification amendment that satisfies all of the requirements for Tier 2. Such issuers will transition to the requirements for Tier 2 upon qualification of the post-qualification amendment. For purposes of calculating the maximum offering amount permissible under Rule 251(a), an issuer must reduce the maximum offering amount sought to be qualified under the final rules for the respective tiers by the amount which such issuer has sold during the previous 12-month period pursuant to the preexisting rules for Regulation A. K. Technical and Conforming Amendments The final rules for Regulation A amend existing Rules 251–263.854 The amendments take into account changes to Regulation A associated with the addition of Section 3(b)(2) to the Securities Act, and the items detailed in this release. As a result of the revisions to Regulation A, we are adopting conforming and technical amendments to Securities Act Rules 157(a),855 505(b)(2)(iii),856 and Form 8–A. Additionally, we are revising Item 101(a) 857 of Regulation S–T 858 to reflect the mandatory electronic filing of all issuer initial filing and ongoing reporting requirements under Regulation A. We are also revising Item 101(c)(6) 859 of Regulation S–T to remove the reference to paper filings in a Regulation A offering, and removing and reserving Item 101(b)(8) 860 of Regulation S–T dealing with the optional electronic filing of Form F–X by Canadian issuers. III. Economic Analysis In this section, we analyze the expected economic effects of the final rules relative to the current baseline, which is the market situation in existence today, including current methods of raising up to $50 million in capital available to potential issuers. Our analysis considers the anticipated costs and benefits for market 854 17 CFR 230.251 through 230.263. CFR 230.157(a). 856 17 CFR 230.505(b)(2)(iii). 857 17 CFR 232.101(a). 858 17 CFR 232.10 et seq. 859 17 CFR 232.101(c)(6). 860 17 CFR 232.101(b)(8). 855 17 PO 00000 Frm 00060 Fmt 4701 Sfmt 4700 participants affected by the final rules as well as the impact of the final rules on efficiency, competition, and capital formation relative to the baseline. This includes the likely economic effects of the specific provisions of the final rules related to the scope of the exemption, the format and contents of the offering statement, solicitation of interest, ongoing reporting, insignificant deviations, bad actor disqualification, and relationship with state securities law. The final rules to implement Section 401 of the JOBS Act and amend Regulation A seek to promote capital formation, efficiency and competition for small companies, and provide for meaningful investor protection. We are mindful of the costs imposed by, and the benefits to be obtained from, our rules. Securities Act Section 2(b) 861 and Exchange Act Section 3(f) 862 require 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) 863 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 final rules include provisions mandated by the statute as well as provisions that rely on our discretionary authority. As a result, while many of the costs and benefits of the final rules stem from the statutory mandate of Title IV of the JOBS Act, certain benefits and costs are affected by the discretion we exercise in connection with implementing this mandate. For purposes of this economic analysis, we address the benefits and costs resulting from the mandatory statutory provisions and our exercise of discretion together because the two types of benefits and costs are not readily separable. We also analyze the benefits and costs of significant alternatives to the final rules that were suggested by commenters and that we considered. Many of the benefits and costs discussed below are difficult to quantify when analyzing the likely effects of the final rules on efficiency, competition, and capital formation. For example, the extent to which the amendments to Regulation A will 861 15 U.S.C. 77b(b). U.S.C. 78c(f). 863 15 U.S.C. 78w(a)(2). 862 15 E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations promote future reliance by issuers on this offering method, and the extent to which future use of Regulation A will affect the use of other offering methods, is difficult to precisely estimate. Similarly, there is some uncertainty as to the effect of some of the provisions in the final rules on investor protection. Therefore, much of the discussion is qualitative in nature but, where possible, we attempted to quantify the potential costs and benefits of the final rules. mstockstill on DSK4VPTVN1PROD with RULES2 A. Broad Economic Considerations One of the primary objectives of Section 401 was to expand the capital raising options available to smaller and emerging companies and thereby to promote capital formation within the larger economy.864 With this objective in mind, and as background to our analysis of the likely costs and benefits of the final rule provisions, we consider the broader impact of amended Regulation A on capital formation. As discussed below, this will depend on whether issuers that currently raise capital elect to rely on amended Regulation A in place of other offering methods and whether issuers that have been unable to raise capital, or raise enough capital, avail themselves of amended Regulation A because it is preferable over other capital rising methods otherwise available to them. To the extent that amended Regulation A provides a method of raising capital for issuers that currently have no method of doing so, it could enhance the overall level of capital formation in the economy in addition to any redistributive effect that could arise from issuers changing their capital raising methods. The impact of the final rules on an issuer’s ability to raise capital will also depend on whether new investor capital is attracted to the Regulation A market, and on whether investors reallocate existing capital among various types of offerings. Investor demand for securities 864 Congress enacted Section 3(b)(2) against a background of public commentary suggesting that Regulation A, an exemption for small offerings originally adopted by the Commission in 1936 under the authority of Section 3(b) of the Securities Act, should be expanded and updated to make it more useful to small issuers. H.R. 1070 (Small Company Capital Formation Act of 2011) was introduced in April 2011. In its September 2011 report, the Committee on Financial Services noted: ‘‘H.R. 1070, the Small Company Capital Formation Act, raises the offering threshold for companies exempted from registration with the U.S. Securities and Exchange Commission (SEC) under Regulation A from $5 million—the threshold set in the early 1990s—to $50 million. Raising the offering threshold helps small companies gain access to capital markets without the costs and delays associated with the full-scale securities registration process . . .’’ See H.R. Rep. No. 112–206 (2011). VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 offered under amended Regulation A will depend on the expected risk, return and liquidity of the offered securities, and in particular, how these characteristics compare to what investors can obtain from securities in other exempt offerings and in registered offerings. Investor demand also will depend on whether Regulation A disclosure requirements are sufficient to enable investors to evaluate the aforementioned characteristics of Regulation A offerings. To assess the likely impact of the final rules on capital formation, we consider the features of amended Regulation A that potentially could increase the use of Regulation A by new issuers and by issuers that already rely on private and registered offerings. The amendments to Regulation A we are adopting remove certain burdens identified by commenters and others in existing Regulation A. Offerings relying on existing Regulation A must be qualified by the states and the Commission, which also requires a review and qualification process for issuers to access capital.865 Amended Regulation A removes the requirement of state qualification for Tier 2 offerings, thereby eliminating the cost and other burdens of the duplicative review under existing Regulation A. Issuance costs may also be reduced, as a percentage of proceeds, by increasing the maximum offering size from $5 million annually under existing Regulation A, to $20 million for Tier 1 offerings and to $50 million for Tier 2 offerings relying on amended Regulation A. We believe that the potential use of amended Regulation A for Tier 2 offerings depends largely on how issuers perceive, the trade-off between the costs of qualification and ongoing disclosure requirements and the benefits to issuers from access to a broad investor base, expansion of the offering size, the preemption of state securities law registration requirements and the potential for enhanced secondary market liquidity. With respect to Tier 1 offerings, the potential use of amended Regulation A 865 See GAO Report. According to the GAO Report, the limited use of Regulation A appears to have been influenced by multiple factors, including ‘‘the type of investors businesses sought to attract, the process of filing the offering with SEC, state securities laws, and the cost-effectiveness of Regulation A relative to other SEC exemptions. For example, identifying and addressing individual state’s securities registration requirements can be both costly and time-consuming for small businesses, according to research, an organization that advocates for small businesses, and securities attorneys that GAO interviewed. Additionally, another SEC exemption [Regulation D] is viewed by securities attorneys that GAO met with as more cost-effective for small businesses . . .’’ PO 00000 Frm 00061 Fmt 4701 Sfmt 4700 21865 depends largely on how issuers perceive the trade-off between state review and qualification requirements, limited disclosure requirements (with potentially greater information asymmetry between issuers and investors) and the $20 million maximum offering size. We also recognize that the level of investor protection resulting from the final rules is an important consideration that could affect the ultimate use and success of amended Regulation A. For example, if preempting state review of Tier 2 offerings, or not requiring audited financials or ongoing disclosures in Tier 1 offerings, leads to undisclosed risks or misconduct in the offering process, then investors may be unwilling to participate in those types of Regulation A offerings. On the other hand, Commission staff review of the offerings and investment limitations for Tier 2 offerings may mitigate some of these concerns for certain investors. Many of the potential issuers of securities under amended Regulation A may be small companies, particularly early-stage and high-growth companies, seeking capital through equity-based financing because they do not have sufficient collateral or the cash flows necessary to support the fixed repayment schedule of debt financing.866 Currently, these companies often seek capital from institutional or accredited investors through offerings that are exempt from registration under the Securities Act or through registered public offerings. In the future, whether issuers opt to rely instead on Regulation A will depend on the perceived utility of the amended Regulation A exemption compared to: (i) Other available exemptions from registration, and (ii) registered public offerings. Below we discuss each of these considerations in turn. Some issuers may prefer to offer securities under amended Regulation A relative to using other offering methods exempt from registration because of potentially limiting features associated with the other exemptions. In particular, securities sold pursuant to the exemptions from registration under Regulation D,867 which account for a significant amount of exempt offerings,868 are generally subject to 866 See 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 and Finance 22(6), pp. 613–673. 867 17 CFR 230.500 through 230.508. 868 See V. Ivanov, and S. Bauguess, 2013, Capital Raising in the U.S.: An Analysis of Unregistered Offerings Using the Regulation D Exemption, 2009– E:\FR\FM\20APR2.SGM Continued 20APR2 21866 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES2 restrictions on resale or limits on participation by non-accredited investors in ways that can limit the ability to raise capital. In contrast to Rule 506 of Regulation D, companies relying on amended Regulation A can sell securities to an unlimited number of non-accredited investors,869 and the securities will not be restricted securities for purposes of the federal securities laws, which will allow for a more diffuse investor base and potential liquidity benefits. The use of amended Regulation A may also depend on whether companies considering seeking capital through an exempt offering believe that the benefits from access to a broader investor base under amended Regulation A offset the costs of qualification and, with respect to Tier 2 offerings, ongoing disclosure requirements. Other offering exemptions could remain attractive relative to amended Regulation A. For example, general solicitation is now permissible under Rule 506(c) of Regulation D. Issuers relying on Rule 506(c) to solicit offerings may now more easily reach institutional and accredited investors, making it less necessary for them to seek capital from a broader non-accredited investor base, especially if trading platforms aimed at accredited investors in privately placed securities continue to develop.870 Finally, the conditional exemption from registration of a class of securities under Section 12(g) available to some Tier 2 issuers may encourage them to pursue a Regulation A offering as a means to avoid the associated costs and requirements of Exchange Act registration and reporting.871 This effect may be limited by the imposition of the conditions on the Section 12(g) exemption, in particular, the condition limiting the availability of the exemption to smaller companies that do not exceed certain thresholds for public float or, in the absence of float, revenues. Larger issuers of Regulation A securities or issuers using Regulation A to raise capital as part of a growth strategy, or seeking to increase liquidity through a broader investor base, may still be subject to a Section 12(g) registration requirement in the future. The trade-offs between amended Regulation A and a registered offering are somewhat different. In a registered offering, issuers can offer the securities directly to all potential investors, without a limitation on the aggregate offering amount and with no resale restrictions. Moreover, securities issued through registered offerings often trade on national securities exchanges and can offer a degree of liquidity to investors that is generally not available for securities issued in private offerings. However, the issuance costs associated with small registered public offerings are generally a significant percentage of proceeds and issuers in registered offerings must bear the costs arising from ongoing disclosure requirements under the Exchange Act. These costs are perceived to be one of the determinants of the relatively low incidence of initial public offerings (‘‘IPOs’’) over the past decade and may be a motivating factor for potential issuers to prefer offering securities under amended Regulation A.872 Relative to registered public offerings, offerings under amended Regulation A will provide smaller issuers with access to sources of capital without necessarily imposing the full ongoing reporting requirements of the Exchange Act. The use of amended Regulation A may depend on the extent to which companies considering a traditional IPO believe that amended Regulation A is a viable alternative. These potential issuers will need to assess whether the cost savings from reduced reporting requirements under amended Regulation A offset the potential reduction in secondary market liquidity compared to registered offerings that meet the listing requirements of national securities exchanges. In particular, securities listed on a national securities exchange are likely to benefit from increased liquidity as a result of greater access to potential investors and a lower level of information asymmetry due to more extensive reporting requirements. 2012, available at: https://www.sec.gov/divisions/ riskfin/whitepapers/dera-unregistered-offerings-regd.pdf. 869 Non-accredited investors in Tier 2 offerings will be subject to an investment limitation. 870 For example, ‘‘NASDAQ Private Market’s affiliated marketplace is an electronic network of Member Broker-Dealers who provide accredited institutions and individual clients with access to the market. Companies use a private portal to enable approved parties to access certain information and transact in its securities.’’ See NASDAQ Private Market overview, available at: https://www.nasdaqprivatemarket.com/market/ overview. 871 See Section II.B.6.c. 872 See IPO Task Force, Rebuilding the IPO OnRamp (Oct. 20, 2011), available at: https:// www.sec.gov/info/smallbus/acsec/rebuilding_the_ ipo_on-ramp.pdf (‘‘IPO Task Force’’). There are other possible explanations for the decline in IPOs, for example, macro-economic effects on investment opportunities in the economy and the cost of capital. See Lowry, M., 2003, Why does IPO volume fluctuate so much? Journal of Financial Economics 67(1), pp. 3–40. Another possible explanation is an increase in the benefits of being acquired by a larger entity relative to the benefits of operating as an independent firm. See Gao, X., J. Ritter, and Z. Zhu, 2013, Where have all the IPOs gone? Journal of Financial and Quantitative Analysis 48(6), pp. 1663–1692. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 PO 00000 Frm 00062 Fmt 4701 Sfmt 4700 At present, only some securities issued under existing Regulation A trade overthe-counter, with the majority not known to trade in any secondary market. The liquidity trade-off faced by issuers considering amended Regulation A relative to other exempt or registered offering methods may ultimately center on whether the ongoing reporting requirements of Tier 2 offerings can generate sufficient information for secondary markets to provide the intended liquidity benefits. Academic studies have found a close relationship between disclosure requirements and liquidity.873 The disclosure requirements in the final rules seek to balance the burden of disclosure requirements on issuers and the demand of investors for information by offering issuers a capital raising option with lower compliance costs while still mandating relevant information about the issuer and the securities for the market. Overall, amended Regulation A could increase the aggregate amount of capital raised in the economy if used by private issuers that have until now been limited in their ability to raise capital through other types of exempt offerings or by smaller private issuers that seek a public market for their securities but that are not sufficiently large to bear the fixed costs of being an Exchange Act reporting company. The impact of amended Regulation A on capital formation could also be redistributive in nature by encouraging issuers to shift from one method of capital raising to another. This potential outcome may have significant net positive effects on capital formation and allocative efficiency by providing issuers with access to capital at a lower cost than alternative capital raising methods and by providing 873 For example, one study found improved liquidity at companies that chose to comply with Exchange Act reporting requirements in order to remain eligible for quotation on OTCBB. See Bushee, B., and C. Leuz, 2005, Economic consequences of SEC disclosure regulation: Evidence from the OTC bulletin board, Journal of Accounting and Economics 39(2), pp. 233–264. Another study found significant decreases in liquidity for issuers that deregistered their securities, with the subsequent loss of liquidity attributed to decreased disclosure separate from the effect of delisting from a major exchange. This study also shows that some companies choose to deregister under Section 12(b) and trade on less liquid OTC markets instead of trading on national securities exchanges, indicating that, for such companies, the expected costs of reporting under the Exchange Act outweigh the expected liquidity benefits. See Leuz, C., A. Triantis, and T. Wang, 2008, Why do firms go dark? Causes and economic consequences of voluntary SEC deregistrations, Journal of Accounting and Economics 45(2–3), pp. 181–208. E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations investors with additional investment opportunities. The net effect of the final rules on capital formation will depend on whether issuers that rely on amended Regulation A do so in addition to or instead of other methods of raising capital. The effect will also depend on whether investors find Regulation A disclosure requirements and investor protections to be sufficient to evaluate the expected return and risk of such offerings and to choose between offerings reliant on Regulation A, other exempt offerings and registered offerings. Due to a lack of data, we are not able to estimate the effects of the final rules on the potential rate of substitution between alternative methods of raising capital and amended Regulation A and the overall expansion, if any, in capital raising by potential issuers eligible for amended Regulation A. B. Baseline As we described in the Proposing Release, the baseline for our economic analysis of amended Regulation A is market conditions as they exist today, in which issuers 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.874 The baseline discussion below also includes a description of investors in offerings of similar amounts and a discussion of the role of intermediaries that may be affected by the final rules. 1. Current Methods of Raising up to $50 Million of Capital Issuers seeking to raise up to $50 million over a twelve-month period are expected to be affected directly by amended Regulation A. As we described in the Proposing Release, while there are a number of factors that companies consider when determining how to raise capital, one of the primary considerations 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 reporting requirements. The choice of offering method may depend on the size of the issuer, the type of investors the issuer seeks to attract and the amount of new capital sought. Registered offerings entail considerable initial and ongoing costs that can weigh more heavily on smaller issuers, providing incentives to remain private and to raise capital outside of public markets.875 To the extent that these issuance costs constrain small firms’ access to capital, they may result in underinvestment in some value-generating projects and thus potentially less efficient allocation of capital to investment projects. This section describes the various currently available offering methods and the prevalence of their use. a. Exempt Offerings Currently, small issuers can raise capital by relying on an exemption from registration under the Securities Act, such as Section 3(a)(11),876 Section 4(a)(2),877 Regulation D,878 and Regulation A. Each of these exemptions, however, has requirements that may limit its utility for issuers. 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 non-accredited investors. Additionally, offerings relying on existing Regulation A require preparation of offering materials and qualification of an offering statement by the Commission and may require qualification or registration in multiple states.879 The table below summarizes the main features of each exemption. Offering limit 880 Solicitation Issuer and investor requirements Filing requirement Resale restrictions Section 3(a)(11) ....... None ...................... No limitations ......... None ...................... Regulation A 883 ....... $5 million with $1.5 million limit on secondary sales. No general solicitation. Testing the waters permitted before filing. Restricted in some cases. 881 Restricted securities. No .......................... Rule 504 Regulation D. $1 million ............... All issuers and investors must be resident in state. Transactions by an issuer not involving any public offering. 882 U.S. or Canadian issuers, excluding investment companies, blank-check companies, reporting companies, and issuers of fractional undivided interests in oil or gas rights, or similar interests in other mineral rights. Excludes investment companies, blankcheck companies, and Exchange Act reporting companies. None ...................... Section 4(a)(2) ......... mstockstill on DSK4VPTVN1PROD with RULES2 Type of offering General solicitation permitted in some cases. 884 874 Other rules mandated by the JOBS Act have been proposed but not adopted by the Commission. The baseline does not account for potential changes that may result from future adoption of proposed rules. 875 See IPO Task Force. 876 Under Securities Act Section 3(a)(11), except as expressly provided, the provisions of the Securities Act (including Section 5 registration requirement) 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). 877 Securities Act Section 4(a)(2) provides that the provisions of Section 5 shall not apply to VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 ‘‘transactions by an issuer not involving a public offering.’’ 15 U.S.C. 77d(4)(a)(2). 878 Regulation D contains rules providing exemptions and safe harbors from the Securities Act’s registration requirements, allowing some companies to offer and sell their securities without having to register the offering with the Commission. 17 CFR 230.504, 505, 506. 879 See Campbell, R., 2005, Regulation A: Small business’ search for a moderate capital, Delaware Journal of Corporate Law 31(1), pp. 77–123. See also GAO Report. 880 Aggregate offering limit on securities sold within a twelve-month period. 881 Resale restrictions are determined by state securities laws, which typically restrict in-state resales for a one-year period. 882 Section 4(a)(2) of the Securities Act provides a statutory exemption for ‘‘transactions by an issuer PO 00000 Frm 00063 Fmt 4701 Sfmt 4700 21867 None ...................... File testing the waters materials, Form 1–A, Form 2–A. File Form D 885 ...... Restricted in some cases. 886 Blue sky law preemption No. No. No. No. not involving any public offering.’’ See SEC v. Ralston Purina Co., 346 U.S. 119 (1953) (holding that an offering to those who are shown to be able to fend for themselves is a transaction ‘‘not involving any public offering.’’) 883 This description is based on Regulation A before the adoption of the final rules today. 884 No general solicitation or advertising is permitted unless the offering is registered in a state requiring the use of a substantive disclosure document or sold under a state exemption for sales to accredited investors with general solicitation. 885 Filing is not a condition of the exemption. 886 Restricted unless the offering is registered in a state requiring the use of a substantive disclosure document or sold under a state exemption for sale to accredited investors. E:\FR\FM\20APR2.SGM 20APR2 21868 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations Type of offering Offering limit 887 Solicitation Issuer and investor requirements Filing requirement Rule 505 Regulation D. Rule 506 Regulation D. $5 million ............... No general solicitation. General solicitation permitted in some cases. 889 Unlimited accredited investors and up to 35 non-accredited investors. Unlimited accredited investors. Limitations on non-accredited investors. 890 File Form D 888 ...... use these exemptions when raising capital. In calendar years 2012 to 2014, 26 Regulation A offerings, excluding amendments, were qualified by the Commission.893 Section 402 of the JOBS Act required the GAO to study the impact of state securities 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 factors affecting the use of Regulation A offerings: (1) Costs associated with compliance with state mstockstill on DSK4VPTVN1PROD with RULES2 While we do not have data on offerings relying on an exemption under Section 3(a)(11) or Section 4(a)(2), available data related to Regulation D and Regulation A filings allow us to gauge how frequently issuers currently 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 Commission’s filing and qualification process; and (4) the type of investors businesses sought to attract. As identified by the GAO, compliance with state securities laws is one of the factors that impacts the use of existing Regulation A. The GAO did not provide an estimate of the compliance costs. For issuers seeking to offer securities in multiple states, differences in securities laws and applicable procedures across states may result in significant legal 887 Aggregate offering limit on securities sold within a twelve-month period. 888 Filing is not a condition of the exemption. 889 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. 890 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. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 i. Regulation A Offerings As we described in the Proposing Release, issuers rarely rely on existing 891 Filing is not a condition of the exemption. the purposes of this chart, 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 staff has reviewed the offering materials and determined that all conditions have been met. Therefore, offerings that are filed and not qualified are either pending, withdrawn, or abandoned. 893 In cases in which an issuer made multiple Form 1–A filings over this time period, only the first qualified offering by that issuer was included 892 For PO 00000 Frm 00064 Fmt 4701 Sfmt 4700 File Form ...... Restricted securities. Restricted securities. Blue sky law preemption No. Yes. Regulation A to raise capital. The chart below, from the GAO Report shows the number of filed and qualified Regulation A offerings in fiscal years 1992 to 2011.892 costs 894 and a time consuming process for issuers, which could adversely affect their efforts to raise capital in a timely and cost-effective manner. NASAA has recently initiated a Coordinated Review Program for Regulation A offerings.895 Only a limited number of issuers have undergone state review through this process to date, so we are unable to conclude whether it may result in lower costs or a shorter amount of review time than was the case prior to its inception. The GAO also identified costs associated with the Commission’s filing and qualification process for Regulation A offerings as another factor contributing to its limited current use. in the number of qualified Regulation A offerings. The estimate also excludes amendments filed on Form 1–A/A, including post-qualification amendments to earlier Form 1–A filings, as well as abandoned and withdrawn filings. 894 See discussion in Section III.I below. 895 A description of NASAA’s coordinated review program can be found at: https://www.nasaa.org/ industry-resources/corporation-finance/ coordinated-review/regulation-a-offerings/. See discussion in Section III.I below. E:\FR\FM\20APR2.SGM 20APR2 ER20AP15.000</GPH> None ...................... D 891 Resale restrictions Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations While existing Regulation A permits offerings to an unlimited number of non-accredited investors, the total offering amount must not exceed $5 million in a twelve-month period, limiting the opportunity to scale the fixed component of these costs as a percentage of proceeds. As described above, a business that relies on Regulation A must file an offering statement with the Commission that must be qualified by Commission staff before the offering can proceed. From 2002 through 2011, Regulation A filings took an average of 228 days to qualify.896 Average time to qualification exceeded 300 days in 2012–2014.897 Factors that affect the time to qualification include the paper filing method, quality of the initial filing, time taken by the Commission staff, and time taken by the issuer to provide required information or address questions from previous correspondence with the Commission staff. Our analysis of the Regulation A filings qualified between 2002 and 2014 shows that approximately half of the issuers operated in the financial industry and the majority of offerings involved equity securities. Offerings with affiliate sales were rare, likely due not only to the requirement of the existing Regulation A that the issuer have net income from continuing operations in the prior two years but also due to the perceptions that adverse selection concerns may limit investor demand in securities offerings with affiliate sales.898 ii. Regulation D Offerings Based on the information available to us, it appears that the most common way to issue up to $50 million of securities is pursuant to an offering under a Regulation D exemption. 21869 Eligible issuers can rely on Rule 504 to raise up to $1 million within a twelvemonth period, on Rule 505 to raise up to $5 million within a twelve-month period, and on Rule 506 to raise an unlimited amount of capital. In total, based on the analysis of offering amounts reported on Form D in calendar year 2014, Regulation D offerings accounted for over one trillion dollars. Most issuers choose to raise capital by relying on Rule 506, even when their offering size would have potentially permitted reliance on Rule 504 or Rule 505.899 For example, in 2014, we identified 11,228 Regulation D offerings that would have been potentially eligible to be conducted under amended Regulation A. Of those, 10,671 offerings relied on Rule 506, 376 on Rule 504, and 181 on Rule 505. We summarize their characteristics in the table below. REGULATION D OFFERINGS IN 2014 BY ISSUERS THAT WOULD BE ELIGIBLE TO RELY ON AMENDED REGULATION A 900 Rule 504 Rule 505 ≤$1M ≤$5M Offering size Current Reg A Eligible ..................................................................................... Amended Reg A Eligible ................................................................................. Number of filings .............................................................................................. Average offering amount ($ million) ................................................................ Offerings with non-accredited investors .......................................................... Median number of investors ............................................................................ As shown in the table above, approximately 95% of Regulation D offerings that would be eligible for amended Regulation A relied on Rule 506. A comparison of Rule 506 offerings over $20 million to those below $20 million shows that larger offerings generally had a higher number of 896 See GAO Report. estimate is generated by staff from the Commission’s Division of Economic and Risk Analysis using Form 1–A filings and is determined as the difference between the filing date for the initial Form 1–A filing and the final disposition date for the final Form 1–A or 1–A/A filing through which the offering was qualified. 898 See Bettis, J., J. Coles, and M. Lemmon, 2000, Corporate policies restricting trading by insiders, Journal of Financial Economics 57, pp. 191–220 (discussing adverse selection issues and corporate policies restricting trading by insiders. See also mstockstill on DSK4VPTVN1PROD with RULES2 897 This VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 Yes Yes 376 0.4 58% 3 Rule 506 ≤$20M Yes Yes 181 1.4 31% 7 Up to $5M Yes 10,071 3.2 6% 6 $20–50M No Yes 600 31.6 2% 9 investors and were less likely to have non-accredited investors. Additional data on Regulation D offerings that would have been eligible for amended Regulation A exemption is provided in the graph below, which displays the offering size distribution of Rule 506 offerings and other Regulation D offerings that would have been potentially eligible for the amended Regulation A exemption in calendar year 2014. Approximately 95% of Regulation D offerings that would have been potentially eligible for amended Regulation A had offering amounts below $20 million. Michaely, R., and W. Shaw, 1994, The pricing of initial public offerings: Tests of adverse-selection and signaling theories, Review of Financial Studies 7(2), pp. 279–319 (analyzing the role of adverse selection and the possibility of informed trading in IPOs). 899 This tendency could, in part, be attributed to two features of Rule 506: State securities law preemption and unlimited offering amount. See also GAO Report. 900 Based on an analysis performed by staff in the Division of Economic and Risk Analysis of Form D filings submitted for calendar year 2014. The numbers exclude offerings by reporting companies, non-Canadian foreign issuers and pooled investment funds, as well as offerings of interests in claims on natural resources, which are not eligible for amended Regulation A. We do not have a scalable way of excluding blank check companies, which are also not eligible for amended Regulation A, from this sample, which leads to a higher estimate of the number of issuers that would be eligible to rely on amended Regulation A. 901 Based on an analysis performed by staff in the Division of Economic and Risk Analysis of Form D filings submitted for calendar year 2014. PO 00000 Frm 00065 Fmt 4701 Sfmt 4700 E:\FR\FM\20APR2.SGM 20APR2 21870 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations Distribution of offering size of Rule 506 offerings and other Regulation D offerings in 2014 by issuers that would be eligible to rely on amended Regulation A 901 0 5 10 15 20 25 30 Offering size 901 VerDate Sep<11>2014 Rule 40 45 50 5061 Based on an analysis performed by staff in the Division of Economic and Risk Analysis ofF orm D filings submitted for calendar year 2014. 20:46 Apr 17, 2015 Jkt 235001 PO 00000 Frm 00066 Fmt 4701 Sfmt 4725 E:\FR\FM\20APR2.SGM 20APR2 ER20AP15.001</GPH> mstockstill on DSK4VPTVN1PROD with RULES2 Regulation D 35 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations Approximately seventy percent of Regulation D issuers that would be eligible for amended Regulation A declined to disclose their revenue range in their Form D filings for 2014. Of the remaining 30%, 13% reported ‘‘no revenues.’’ The portion of issuers with no revenues is noteworthy because it may be more difficult for issuers without regular cash flows to obtain debt financing (without collateral or a guarantee). b. Registered Offerings Issuers may seek to raise capital by registering the offer and sale of securities under the Securities Act. In calendar year 2014, using data from Thomson Reuters, we identified 75 IPOs and 246 seasoned equity offerings (SEOs) of up to $50 million by issuers that would have been potentially eligible for amended Regulation A.902 There has been a general decline in the number of IPOs, particularly those undertaken by small firms, since the late 1990s.903 One possible reason behind the relatively low number of IPOs under $50 million is that public offerings may be too costly to be a viable capital raising option for smaller issuers.904 Fees paid to underwriters average 7% for IPOs, 5% for SEOs, and 1% for bond issuances.905 Issuers conducting registered public offerings also incur Commission registration fees and FINRA filing fees, legal and accounting fees and expenses, transfer agent and registrar fees, costs associated with 21871 periodic reporting requirements and other regulatory requirements and various other fees.906 Two surveys cited in the IPO Task Force report concluded that regulatory compliance costs of IPOs average $2.5 million initially, followed by an average ongoing cost of $1.5 million per year.907 Because of the fixed-cost nature of some of the compliance-related fees associated with public offerings, compliance-related fees as a percentage of offering proceeds tend to decline as offering size increases, as illustrated in the table below. Offerings below $50 million, and especially offerings below $20 million, incur significantly higher registration, legal and accountingrelated fees, as a percentage of proceeds. CERTAIN NON-UNDERWRITER IPO-RELATED FEES AS A PERCENTAGE OF OFFERING PROCEEDS FROM 1992–2014 908 Offering ≤$20M % SEC Registration Fees ................................................................................................................ Blue Sky Fees ............................................................................................................................. Accounting Fees .......................................................................................................................... Legal Fees ................................................................................................................................... 0.11 0.35 1.38 2.32 Offering $20–$50M % 0.04 0.05 0.84 1.18 Offering >$50M % 0.03 0.02 0.56 0.81 mstockstill on DSK4VPTVN1PROD with RULES2 In addition to compliance costs, there are other possible explanations for the trends in IPOs. A decline in public offerings also could result from macroeconomic effects on investment opportunities and the cost of capital 909 or an increase in the economies of scope from being acquired by a larger entity relative to the benefits of operating as an independent firm.910 Several other trade-offs may affect an issuer’s willingness to pursue an IPO. According to the IPO Task Force survey, 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.911 Additionally, issuers in certain industries, such as high-technology sectors, may be sensitive to the costs of disclosure of proprietary information and may find private capital sources more attractive.912 Access to capital may be especially time-sensitive for the types of issuers most likely to conduct small offerings, such as startups and small businesses, rendering these issuers unwilling to go through a potentially lengthy registration process. Directors and officers of small issuers also may not want to subject themselves to the increased liability and takeover threats that come with dispersed ownership.913 The cost and disclosure requirements of IPOs have been affected by the recent adoption of scaled reporting requirements for emerging growth companies (EGCs) under Title I of the 902 The sample excludes offerings from nonCanadian foreign issuers, blank check companies, and investment companies, which would not be eligible to rely on amended Regulation A. Offerings with gross proceeds below $1,000 are excluded to minimize measurement error. Issuers of interests in claims on natural resources, which also would not be eligible for amended Regulation A, were not separately eliminated due to data constraints. 903 See IPO Task Force. However, a recent study notes that the decline in IPOs has been partly reversed in 2012–2014. See Dambra, M., L. Field, and M. Gustafson, 2014, The JOBS Act and IPO volume: Evidence that disclosure costs affect the IPO decision, Journal of Financial Economics (forthcoming), available at: https://papers.ssrn.com/ sol3/papers.cfm?abstract_id=2459591. 904 Other potential reasons, such as macroeconomic conditions, are discussed below. 905 See Chen, H., and J. Ritter, 2000, The seven percent solution, Journal of Finance 55(3), pp. 1105–1131; Abrahamson, M., T. Jenkinson, and H. Jones, 2011, Why don’t U.S. issuers demand European fees for IPOs? Journal of Finance 66(6), pp. 2055–2082; Corwin, S., 2000, The determinants of underpricing for seasoned equity offers, Journal of Finance 58(5), pp. 2249–2279; Huang, R., and D. Zhang, 2011, Managing underwriters and the marketing of Seasoned Equity Offerings, Journal of Financial and Quantitative Analysis 46(1), pp. 141– 170; Fang, L., 2005, Investment bank reputation and the price and quality of underwriting services, Journal of Finance 60(6), pp. 2729–2761. 906 According to the survey cited in the IPO Task Force report, 92% of the surveyed CEOs listed the ‘‘Administrative Burden of Public Reporting’’ as being one of the most significant challenges of an IPO. See IPO Task Force. 907 See IPO Task Force. However, some studies conclude that the decline in U.S. small-firm IPOs predated the adoption of the Sarbanes-Oxley Act. See Gao, X., J. Ritter, and Z. Zhu, 2013, Where have all the IPOs gone? Journal of Financial and Quantitative Analysis 48(6), pp. 1663–1692. See also Doidge, C., A. Karolyi, and R. Stulz, 2013, The U.S. left behind? Financial globalization and the rise of IPOs outside the U.S., Journal of Financial Economics 110(3), pp. 546–573. 908 Fee information is compiled from Thomson Reuters SDC data on IPOs for 1992–2014. The sample excludes offerings from non-Canadian foreign issuers, blank-check companies, and investment companies. Averages are computed based on observations with non-missing data (where a particular type of fees is separately reported). Offerings with gross proceeds below $1,000 are excluded to minimize measurement error. The analysis includes legal, accounting, blue sky, and registration fees, to which we collectively refer as ‘‘compliance fees’’. Blue Sky Fees denotes fees and expenses related to compliance with state securities regulations. We note that Blue Sky fees associated with small registered offerings may overor under-estimate similar expenses for Regulation A offerings of the same size. 909 See Lowry, M., 2003, Why does IPO volume fluctuate so much? Journal of Financial Economics 67(1), pp. 3–40. 910 See Gao, X., J. Ritter, and Z. Zhu, 2013, Where have all the IPOs gone? Journal of Financial and Quantitative Analysis 48(6), pp. 1663–1692. 911 See IPO Task Force. 912 See Verrecchia, R., 2001, Essays on disclosure, Journal of Accounting and Economics 32, pp. 97– 180. 913 See Burkart, M., D. Gromb, and F. Panunzi, 2000, Agency conflicts in public and negotiated transfers of corporate control, Journal of Finance 55(2), pp. 647–677. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 PO 00000 Frm 00067 Fmt 4701 Sfmt 4700 E:\FR\FM\20APR2.SGM 20APR2 21872 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations JOBS Act, which can ease the compliance obligations of certain issuers in registered offerings. There is some evidence that Title I has contributed to an increase in IPO volume in 2012–2014, particularly in industries with high proprietary disclosure costs, such as biotechnology and pharmaceuticals.914 Some recent studies, however, suggest that the overall cost of going public for EGCs has not decreased whereas the indirect cost (e.g., IPO underpricing) has increased.915 mstockstill on DSK4VPTVN1PROD with RULES2 c. Private Debt Financing Equity, including principal owner equity, accounts for a significant proportion of the total capital of a typical small business. Other sources of capital for small businesses include loans from commercial banks, finance companies and other financial institutions, and trade credit.916 Borrowing is relatively costly for many early-stage issuers as they may have low revenues, irregular cash-flow projections, insufficient assets to offer as collateral and high external monitoring costs.917 For example, a small growth company, such as a technology or life sciences startup, without steady revenues or substantial tangible assets is likely to have trouble obtaining a loan or a line of credit from a bank because 914 See Dambra, M., L. Field, and M. Gustafson, 2014, The JOBS Act and IPO volume: Evidence that disclosure costs affect the IPO decision, Journal of Financial Economics (forthcoming), available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_ id=2459591. 915 See Chaplinsky, S., K. Hanley, and S. K. Moon, 2014, The JOBS Act and the costs of going public, Working paper, available at: https:// papers.ssrn.com/sol3/papers.cfm?abstract_ id=2492241; Barth, M., W. Landsman, and D. Taylor, 2014, The JOBS Act and information uncertainty in IPO firms, Working paper, available at: https://papers.ssrn.com/sol3/ papers.cfm?abstract_id=2465927; Westfall, T.J., and T.C. Omer, 2014, The impact of emerging growth company status on initial public offering valuation and the associated auditor risk and effort, Working paper, available at: https://papers.ssrn.com/sol3/ papers.cfm?abstract_id=2512605. 916 See Berger, A., and G. Udell, 2006, Small business credit availability and relationship lending: The importance of bank organisational structure, Economic Journal 112(477), pp. 32–53. In this study, equity accounted for approximately half of the total capital, including approximately 31% (45% for the smallest firms—that is, those, with less than $1 million in revenues or less than twenty employees) attributed to the principal owner. The remainder came from debt financing, with about one quarter accounted for by loans from commercial banks, finance companies and other financial institutions, and another 16% comprised of trade credit. The study was conducted based on the 1993 edition of the Federal Reserve Board’s Survey of Small Business Finances, which collects information on small businesses in the United States. 917 See Robb, A., and D. Robinson, 2014, The capital structure decisions of new firms, Review of Financial Studies 27(1), pp. 153–179. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 it would have difficulty proving its ability to repay. Financial institutions generally require such small business borrowers to provide collateral or a guarantee by owners,918 which some issuers may be unable or reluctant to provide. 2. Investors There are currently no limitations on who can invest in existing Regulation A offerings. In considering the baseline for the amendments to Regulation A, we also examine the investors in other existing methods of raising up to $50 million in capital because the final rules we are adopting may impact an issuer’s choice of offering method and the potential investor base of the offering. For example, as discussed above, while there are no limitations on the number of non-accredited investors that can invest in offerings made pursuant to Rule 504 of Regulation D and in registered public offerings, offerings made pursuant to Rule 505 and Rule 506(b) of Regulation D are limited to a maximum of 35 non-accredited investors. Issuers making offerings pursuant to Rule 506(c) of Regulation D must take reasonable steps to verify that investors are accredited investors. While non-accredited investors can participate in Regulation D offerings, subject to limitations described above, data from Form D filings suggests that non-accredited investors are not significantly involved in Regulation D offerings of up to $50 million. Offerings involving non-accredited investors are typically smaller than those that do not involve non-accredited investors. In 2014, we estimate that approximately 152,641 investors participated in Regulation D offerings of less than $50 million by issuers that would be eligible for amended Regulation A.919 Such offerings had an average of 13.6 investors per offering. Approximately 8% of such offerings involved one or more non-accredited investors. The total number of households estimated to qualify as accredited investors is substantially larger than the total number of investors reported to have participated in an unregistered offering. As of 2013, we estimated that over 9 million U.S. households qualified as accredited investors based on the net worth standard alone, approximately 8 million U.S. households qualified as accredited investors based on the income standard alone, and approximately 12.4 million U.S. households qualified based on either the income standard or the net worth standard.920 3. Financial Intermediaries Regulation A amendments may also affect financial intermediaries that may become involved in the placement and quotation of Regulation A securities. Currently, there is limited involvement of intermediaries in a Regulation A offering. However, financial intermediaries are used in certain of the other types of offerings, including registered offerings and certain exempt offerings. To the extent that the amendments to Regulation A that we are adopting today impact the number and the overall amount of capital raised in other types of offerings, financial intermediaries may be affected. 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. While intermediaries are used less frequently in Regulation D offerings, they play a role in some offerings. We estimate that fewer than 10% of Regulation D offerings that would have been potentially eligible under amended Regulation A involved an intermediary (the estimate is based on information about sales compensation or sales compensation recipients reported in connection with the offering).921 C. Scope of Exemption 918 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, A., and G. Udell, 1995, Relationship lending and lines of credit in small firm finance, Journal of Business 68(3), pp. 351–381. Some studies of small business lending also document the creation of local captive markets with higher borrowing costs for small, opaque firms as a result of strategic use of soft information by local lenders. See Agarwal, Sumit, and Robert Hauswald, 2010, Distance and private information in lending, Review of Financial Studies 13(7), pp. 2757–2788. 919 Based on an analysis by staff from the Commission’s Division of Economic and Risk Analysis of initial Form D filings submitted during calendar year 2014. The estimated number of investors likely exceeds the actual number of Regulation D investors because investors could have participated in more than one offering. PO 00000 Frm 00068 Fmt 4701 Sfmt 4700 1. Eligible Issuers Consistent with the restrictions in existing Regulation A, the final rules exclude non-Canadian foreign issuers, investment companies (including BDCs), Exchange Act reporting companies, blank check companies, and issuers of fractional undivided interests in oil or gas rights, or similar interests 920 These estimates are based on an analysis by staff from the Commission’s Division of Economic and Risk Analysis, using the Federal Reserve Board’s 2013 Survey of Consumer Finances. 921 Based on an analysis performed by staff in the Division of Economic and Risk Analysis of Form D filings for calendar year 2014. E:\FR\FM\20APR2.SGM 20APR2 mstockstill on DSK4VPTVN1PROD with RULES2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations in other mineral rights, from relying on the exemption. The final rules also exclude two additional categories of issuers: (i) issuers that are or have been 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 (ii) issuers that are required to, but that have not, filed with the Commission the ongoing reports required by the final rules during the two years immediately preceding the filing of an offering statement. Excluding issuers that have not complied with Regulation A’s ongoing reporting requirements in the two-year period immediately preceding the filing of a new offering statement will incentivize issuers that intend to rely on amended Regulation A exemption in the future to comply with its ongoing reporting requirements. Similarly, excluding issuers that were 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 will incentivize registrants to comply with their obligations under the Exchange Act, including their ongoing reporting obligations, and will prevent issuers with a history of non-compliance from relying on Regulation A after they terminate or suspend their Exchange Act reporting obligations. At the same time, neither of these exclusions should result in additional compliance costs for issuers because they do not impose any reporting or other requirements on issuers beyond those already mandated by existing regulations. We recognize that excluding these additional categories of issuers would have an effect on capital formation as it could prevent Regulation A offerings by issuers who otherwise might have utilized the Regulation A exemption rather than other methods of capital raising. However, to the extent that the information contained in required past reports provides investors in follow-on offerings of Regulation A securities with a more complete picture of the issuer’s business and financial condition and is relevant for current investment decisions, the exclusion of issuers that are not compliant with Regulation A’s reporting requirements and issuers subject to an order by the Commission pursuant to Section 12(j) should therefore enhance investor protection and the informational efficiency of prices of Regulation A securities by allowing investors to make better informed investment decisions. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 Moreover, we believe that these additional issuer eligibility requirements will complement each other in facilitating compliance with our rules. To the extent that more issuers use the amended Regulation A exemption, the final rules may promote competition among eligible issuers in the market for investor capital and in the market for goods and services. The final rules may also promote competition in the product market between small issuers and larger issuers. As suggested by some commenters, we could have expanded the categories of eligible Regulation A issuers to include non-Canadian foreign issuers,922 blank check companies,923 BDCs,924 and issuers of fractional undivided interests in oil or gas rights, or similar interests in other mineral rights.925 These alternatives could potentially enhance capital formation and competition.926 However, it may be potentially difficult and costly for investors, especially less sophisticated investors, to determine the valuation and risk of securities of non-Canadian foreign issuers, blank check companies and issuers of fractional undivided interests in oil or gas rights, or similar interests in other mineral rights, so extending eligibility to such issuers may also decrease investor protection. To the extent that such information asymmetries are not fully mitigated by initial and ongoing Regulation A disclosure requirements, which are generally less extensive than the disclosure requirements for registered offerings, the prices of Regulation A securities of these issuers could be less informationally efficient. Along the same lines, we believe the specialized nature of capital formation and investment strategies at BDCs warrants disclosures that are more specialized than what is required by existing or 922 See ABA SIL Letter; Andreessen/Cowen Letter; BDO Letter; McCarter & English Letter; OTC Markets Letter; Richardson Patel Letter; SVB Letter; SVGS Letter. 923 See Gilman Law Letter; IPA Letter; Richardson Patel Letter. 924 See ABA BLS Letter; CFIRA Letter 1; Commonwealth Fund Letters 1 and 2; KVCF Letter; Milken Institute Letter; MoFo Letter; REISA Letter; SBIA Letter; WR Hambrecht + Co Letter. Most of these commenters noted that BDCs serve an important function in facilitating small or emerging business capital formation or in providing a bridge from private to public markets. 925 See REISA Letter. 926 If eligibility under amended Regulation A had been extended to investment companies and BDCs, and such companies obtained a lower cost of capital and passed savings through to the companies in which they invest, the latter could also realize indirect capital formation benefits. PO 00000 Frm 00069 Fmt 4701 Sfmt 4700 21873 amended Regulation A for a proper understanding of an investment in the securities of these types of issuers. We also could have expanded the categories of eligible Regulation A issuers to include issuers that are subject to the ongoing reporting requirements of Section 13 or 15(d) of the Exchange Act (‘‘reporting companies’’), as suggested by some commenters.927 Although reporting companies sometimes conduct offerings exempt from registration, we are unable to estimate the number of reporting companies that would use the amended Regulation A exemption if it were made available to them. We recognize that some reporting companies may have benefited from this alternative due to, for example, the lower costs of preparation of a Regulation A offering statement than a registration statement.928 Additionally, some reporting companies whose securities are not listed on a national securities exchange could potentially benefit from savings of time and dollar expenditures that may result from the state securities law preemption in Tier 2 offerings. However, because Exchange Act disclosure requirements for reporting companies are more extensive than those under amended Regulation A, reporting companies would not be able to derive the benefit of reduced ongoing reporting costs under amended Regulation A. Other commenters suggested imposing more restrictive issuer eligibility criteria, by excluding issuers that are not ‘‘operating companies’’ 929 or excluding shell companies and issuers of penny stock.930 While these additional exclusions may create some investor protection benefits, such additional exclusions would be likely to limit capital formation and competition among small issuers, which are more likely to fall into the penny stock 927 Three commenters recommended allowing Exchange Act reporting companies that are current in their reporting obligations to conduct Tier 2 offerings. See Andreessen/Cowen Letter; BIO Letter; OTC Markets Letter. One of these three commenters limited its recommendation to companies with a non-affiliate float of less than $250 million. See BIO Letter. The other two commenters further commented that Exchange Act reporting should satisfy Regulation A reporting obligations if the Commission adopted their recommendation. See Andreessen/Cowen Letter and OTC Markets Letter. 928 According to one commenter, Form S–1 registration may be too costly for micro-cap companies, and the eligibility requirements of Form S–3 limit primary capital raising for issuers with a small public float. See Andreessen/Cowen Letter. But see earlier discussion of indirect costs of issuance for issuers using scaled disclosures in Section III.B.1.b. 929 See CFIRA Letter 1 and WR Hambrecht + Co Letter. 930 See ABA BLS Letter and MoFo Letter. E:\FR\FM\20APR2.SGM 20APR2 21874 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations category, or some early-stage companies, which may not meet the definition of an ‘‘operating company.’’ Overall, due to the implications of extending issuer eligibility before the Commission has the ability to assess the impact of the changes to Regulation A being adopted today, we believe that it is prudent to defer consideration of potential changes to the categories of eligible issuers until we have the opportunity to observe the use of the amended Regulation A exemption and assess any new market practices as they develop. 2. Eligible Securities Consistent with the statute, the final rules apply to offerings of equity securities, debt securities, and securities convertible or exchangeable to equity interests, for example, warrants, including any guarantees of such securities.931 Similar to the proposal, the final rules exclude offerings of asset-backed securities (‘‘ABS’’) from eligibility for Regulation A. As discussed above, we believe that ABS issuers are not the intended beneficiaries of the mandated expansion of Regulation A. ABS are subject to the provisions of Regulation AB and other rules specifically tailored to the offering process, disclosure and reporting requirements for such securities, and we do not believe that Regulation A’s requirements are suitable for offerings of such securities. ABS are designed to pool the risk of alreadyissued loans and other financial assets and, in this respect, do not constitute new capital formation. We recognize that, in certain cases, permitting ABS offerings to be conducted under Regulation A could lower the cost of capital for underlying borrowers whose loans are eventually securitized by ABS issuers and therefore indirectly facilitate capital formation.932 In practice, however, the vast majority of ABS offerings are much larger than the maximum allowable offering size under amended Regulation A.933 As a result, 931 See discussion in Section II.B.2 above. indirect effect may result because, due to bank accounting standards and capital requirements, securitization allows originators to move assets off the 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 Pennacchi, G., 1995, Loan sales and the cost of bank capital, Journal of Finance 43(2), pp. 375–396; Carlstrom, C., and K. Samolyk, 1995, Loan sales as a response to market-based capital constraints, Journal of Banking and Finance 19(3), pp. 627–646. 933 Our analysis indicates that from 2011–2013, approximately 2.9% of ABS issuances were below $50 million. This estimate uses the AB Alert and CM Alert databases and includes only private label ABS deals. mstockstill on DSK4VPTVN1PROD with RULES2 932 This VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 we believe that excluding ABS offerings from eligibility for Regulation A likely will not have a significant adverse effect on capital formation. 3. Offering Limitations and Secondary Sales a. Offering Limitations As explained above, the final rules introduce two tiers of offerings compared with the baseline of one tier in existing Regulation A. The tiered approach in the final rules allows us to scale regulatory requirements based on offering size, to give issuers more flexibility in raising capital under Regulation A, and to provide appropriately tailored protections for investors in each tier. Issuers seeking to raise a larger amount of capital are, among other things, required to provide more extensive initial and ongoing disclosures, but are also able to take advantage of the larger maximum offering size in Tier 2 (up to $50 million in a twelve-month period). In light of this larger maximum offering size, the final rules impose additional disclosure requirements and other provisions to provide protection to investors in Tier 2 offerings. Issuers seeking a smaller amount of capital retain the advantage of more scaled disclosures required in Tier 1 offerings but must comply with a lower offering size limit. We recognize that the cost associated with greater disclosure requirements for offerings made under Tier 2 in amounts up to $20 million may place Tier 2 issuers at a relative competitive disadvantage as compared to issuers seeking to raise an amount below $20 million in a Tier 1 offering. Such potential competitive effects are likely to be mitigated by the ability of issuers to evaluate the trade-off between the costs associated with more extensive disclosure requirements for Tier 2 offerings and the benefit of a potentially higher securities valuation stemming from a reduction in information asymmetry between issuers and investors due to the more extensive disclosure requirements for Tier 2 offerings. In a change from the proposal, and in line with the suggestions of some commenters, the final rules raise the Tier 1 maximum offering size from $5 million to $20 million in a twelvemonth period in order to provide smaller issuers with additional flexibility to meet their financing needs.934 We expect the higher Tier 1 maximum offering size will facilitate 934 Some commenters recommended raising the Tier 1 offering limitation to $10 million or more. See Guzik Letter 1 and ICBA Letter. PO 00000 Frm 00070 Fmt 4701 Sfmt 4700 capital formation under Regulation A for those issuers seeking to raise between $5 and $20 million in a twelvemonth period. We expect the resulting capital formation benefits to be greater for smaller issuers for which the incremental costs of the Tier 2 disclosure regime—relative to the costs of complying with state registration— exceed the benefits of more extensive disclosure. Compared to the baseline, the increase in the maximum offering size to $20 million for Tier 1 offerings and the creation of Tier 2 with the maximum offering size of $50 million will provide issuers with increased flexibility with regard to their offering size and should lower the burden of fixed costs associated with conducting Regulation A offerings as a percentage of proceeds.935 This could make amended Regulation A more cost effective and attractive to issuers than existing Regulation A, resulting in potential favorable effects on capital formation and competition. The increase in the maximum offering size could also make Regulation A attractive to a broader range of issuers, including larger issuers. This could provide investors with a broader range of investment opportunities in the Regulation A market and potentially result in a more efficient allocation of investor capital. The increased maximum offering size could also contribute to improved liquidity for Regulation A securities, to the extent that larger issues may encourage greater breadth of equity ownership, assuming sufficient secondary market demand develops.936 Improved liquidity would enable investors in Regulation A offerings to unwind their investments more easily and at a lower cost, thus making such investments more attractive to potential investors. On the other hand, if investor demand for securities offered under amended Regulation A is low, this could negatively affect security prices and liquidity. 935 To the extent that issuers in Tier 2 offerings face additional costs due to revised disclosure requirements under amended Regulation A, issuance costs as a percentage of proceeds may remain unchanged or may increase. 936 We recognize the possibility that, despite the absence of resale restrictions, even large Regulation A offerings with heavy investor participation may fail to attain sufficient liquidity due to a lack of secondary trading and a lack of breadth of institutional ownership, and thus may be associated with a higher cost of capital due to the illiquidity premium. In such a scenario, some issuers and investors may still benefit from having access to a type of offering that provides greater liquidity than Regulation D securities offerings although less liquidity than registered offerings of securities listed on major national exchanges. E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES2 If investor demand for Regulation A securities and information about issuers is sufficient, the increase in maximum offering size could also contribute to the development of intermediation services, such as market making, and to the coverage of Regulation A securities by analysts.937 It is possible that an underwriting market may develop to provide Regulation A offering services, especially in larger Tier 2 offerings. The presence of these services could have a positive impact on investor participation and aftermarket liquidity of Regulation A securities, further increasing demand for such services. It is also possible, however, that investor demand for Regulation A securities will not expand sufficiently to make such services economically feasible. Finally, the increase in the maximum offering size could result in increased competition among Regulation A issuers for investor capital. If the number of issuers seeking to raise larger amounts of capital pursuant to Regulation A increases more than the size of the accredited and non-accredited investor base, investors considering Regulation A securities will have more choice of investment opportunities in the Regulation A market, resulting in greater competition among issuers for prospective investors. Increased competition, in turn, could result in more efficient allocation of capital by investors. The intensity of competition among issuers for investor capital may not change, however, if issuers are able to attract additional numbers of accredited and non-accredited investors as the Regulation A market develops. Alternatively, as suggested by some commenters, we could have increased the Tier 2 maximum offering size above $50 million, for example, to $75 or $100 million.938 This alternative could result in benefits that are similar to the benefits of the increase in the maximum offering size contained in the final rules but of a potentially larger magnitude. However, there is reason to believe that the magnitude of the increase in such benefits may be limited. In particular, although Rule 506 does not limit maximum offering size, few Regulation D offerings by issuers that would be eligible for amended Regulation A 937 Academic studies show that firm size is an important predictor of analyst coverage, so if larger issuers are attracted to the Regulation A market, they may be more likely to be covered by analysts than smaller issuers, all else equal. See Barth, M., R. Kasznik, and M. McNichols, 2001, Analyst coverage and intangible assets, Journal of Accounting Research 39(1), pp. 1–34. 938 See B. Riley Letter; Fallbrook Technologies Letter; OTC Markets Letter; Public Startup Co. Letter 1; Richardson Patel Letter. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 exceeded $50 million.939 To the extent that the current use of other types of exempt offerings is indicative of future Regulation A offerings, the alternative of raising the Tier 2 offering size above $50 million may not lead to a significant increase in the number of issuers. However, we recognize that historical use of Regulation D may not fully represent future potential use of Regulation A, particularly to the extent that the amended rules facilitate offerings by issuers that do not currently rely on other private offering exemptions and that are seeking a broader investor base and enhanced liquidity for their issued securities. In particular, amended Regulation A may attract issuers seeking a public ownership status, and for whom a likely alternative is a registered offering. An increase in the Tier 2 offering size above $50 million could result in some issuers shifting from conducting a registered offering to conducting a Tier 2 offering. As discussed earlier, amended Regulation A may facilitate offerings that would not otherwise be conducted given the cost of registered offerings. However, it is also possible that an increase in the Tier 2 offering size above $50 million will not result in a significant number of issuers shifting from conducting a registered offering to conducting a Tier 2 offering given that the relative cost savings from a Tier 2 offering compared to a registered offering may be lower for offerings in the $50 million to $75 million range than for those below $50 million.940 939 Based on an analysis of Form D filings for 2014 by staff from Commission’s Division of Economic and Risk Analysis, less than 3% of Regulation D offerings by issuers that would be eligible for amended Regulation A had offering size greater than $50 million. We also considered the overall distribution of registered offerings (initial public offerings and seasoned equity offerings). The overall number of Regulation D offerings significantly exceeded the number of registered equity offerings, thus the combined distribution of registered and Regulation D offerings closely resembles the distribution of Regulation D offerings. In 2014, most (92.2%) of the offerings conducted in the form of registered equity offerings or Regulation D offerings had offer sizes up to $50 million. In 2014, offerings in the $50–$75 million range accounted for 1.0% of Regulation D offerings and approximately 10% of registered equity offerings. Data on registered offerings was obtained from Thomson Reuters, as described in Section III.B.1.b. 940 The fixed costs of registered offerings represent a significantly higher portion of offering proceeds as offering sizes decrease. For instance, compliance related costs (registration, legal and accounting expenses and fees) increase from an average of an average of 1.7% for IPOs and 0.5% for SEOs in the $50–$75 million range to an average of 2.9% for IPOs and 1.6% for SEOs in the below $50 million range. Fee information is compiled from Thomson Reuters SDC data for 1992–2014, excluding offerings from non-Canadian foreign issuers, blank-check companies, and investment PO 00000 Frm 00071 Fmt 4701 Sfmt 4700 21875 An increased maximum offering size for Tier 1 offerings could increase the overall amount of securities being offered to the general public that are subject to less extensive initial disclosure requirements and not subject to ongoing disclosure requirements, which may reduce the ability of investors to make informed investment decisions. However, some issuers that conduct offerings that are eligible for Tier 1 may instead choose a Tier 2 offering, for example, to take advantage of the benefits of more extensive disclosure, such as potentially greater secondary market liquidity, and the benefits of a single level of regulatory review. An increased maximum offering size for Tier 2 Regulation A offerings could increase the overall amount of securities being offered to the general public that are subject to initial and ongoing disclosure requirements that are less extensive than the requirements for registered offerings being offered to the general public, which may result in less informed decisions by investors, thus potentially impacting investor protection. This may be partly mitigated by the investment limitations imposed on non-accredited investors in Tier 2 offerings. Further, larger issuers are more likely to conduct registered offerings, associated with the more extensive disclosure requirements of the Exchange Act.941 We believe that the companies. Average compliance fees and expenses for this calculation are based on observations with non-missing data (where all four types of fees— legal, accounting, blue sky, and registration fees, to which we collectively refer as compliance fees—are separately reported). Offerings with gross proceeds below $1,000 are excluded to minimize measurement error. 941 Early in the firm’s life cycle, it may be optimal for a firm to remain private, but as it grows larger, it may become optimal to conduct a registered IPO. See Chemmanur, Thomas J., and Paolo Fulghieri, 1999, A theory of the going-public decision, Review of Financial Studies 12(2), pp. 249–279. Privately held firms tend to be significantly smaller than firms with publicly traded securities. See Asker, John, Joan Farre-Mensa, and Alexander Ljungqvist, 2014, Corporate investment and stock market listing: A puzzle? Review of Financial Studies 28(2), pp. 342–390. Asker, John, Joan Farre-Mensa, and Alexander Ljungqvist, 2011, What do private firms look like? Data appendix, available at: https://ssrn.com/abstract_id=1659926. Other studies support the notion that larger firms are more likely to conduct a registered IPO. See Pagano, Marco, Fabio Panetta, and Luigi Zingales, 1998, Why do computers go public? An empirical analysis, Journal of Finance 53, 27–64 (showing that size predicts going public using Italian data). See also Chemmanur, Thomas J., Shan He, and Debarshi K. Nandy, 2010, The going-public decision and the product market, Review of Financial Studies 23(5), pp. 1855–1908 (showing that size predicts a higher likelihood of conducting a registered IPO using US data). In turn, smaller firms that have undertaken an IPO in the past are more likely to go private later on. See Mehran, Hamid, and Stavros Peristiani, E:\FR\FM\20APR2.SGM Continued 20APR2 21876 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations annual offering limitation for Tier 2 will serve to limit the utility of the Regulation A exemption for larger issuers and thus will make it more likely that they will continue to raise money through registered offerings and provide the corresponding disclosure. mstockstill on DSK4VPTVN1PROD with RULES2 b. Secondary Sales The final rules continue to permit secondary sales as part of a Regulation A offering, subject to the following conditions. The amount of securities that selling securityholders can sell at the time of an issuer’s initial offering and within the following 12-month period may not exceed 30% of the aggregate offering price (offering size) of a particular offering. Following the expiration of the first 12-month period after an issuer’s initial qualification of an offering statement, the amount of securities that affiliate securityholders can sell in a Regulation A offering in any 12-month period will be limited to $6 million in Tier 1 offerings and $15 million in Tier 2 offerings.942 After the initial 12-month period, sales by nonaffiliate securityholders made pursuant to the offering statement will not be subject to a limit on secondary sales but will be aggregated with sales by the issuer and affiliates for the purposes of compliance with the maximum offering limitation for the respective tier. The final rules also eliminate the provision in the current Rule 251(b), which prohibits resales by affiliates unless the issuer has had net income from continuing operations in at least one of the last two years.943 Several commenters recommended eliminating limits on sales by existing securityholders,944 including one commenter that recommended eliminating restrictions on sales by nonaffiliate securityholders since concerns over information asymmetries between potential investors and non-affiliate securityholders would be reduced.945 Other commenters recommended either proscribing resales entirely 946 or requiring the approval of the resale 2010, Financial visibility and the decision to go private, Review of Financial Studies, 23(2), pp. 519–547. 942 The dollar limits are broadly consistent with existing Regulation A, which limits sales by existing securityholders to $1.5 million, or 30% of the $5 million maximum offering size, in a 12month period. 943 Tier 1 offerings may still be subject to state law limitations on secondary sales and sales by affiliates. 944 See ABA BLS Letter; B. Riley Letter; Canaccord Letter; CFIRA Letter 1; CFIRA Letter 2; Milken Institute Letter; MoFo Letter; WR Hambrecht + Co Letter. 945 See Milken Institute Letter. 946 See Massachusetts Letter 2; NASAA Letter 2; Carey Letter. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 offering by a majority of the issuer’s independent directors upon a finding that the offering is in the best interests of both the selling securityholders and the issuer.947 Another commenter recommended requiring a twelve-month holding period for selling shareholders in order to distinguish between investors seeking to invest in a business and investors simply seeking to sell to the public for a gain or limiting securityholders not qualifying for the twelve-month holding period to selling a fraction of their shares, such as 50%.948 Whether and to what extent securityholders should be permitted to sell in a Regulation A offering involves a trade-off between enhancing liquidity for selling securityholders and limiting the potential harm to investors that could arise from such sales. The final rules attempt to balance these considerations. The trade-off between these countervailing considerations will depend in large part on whether the selling securityholder is an affiliate of the issuer. There are two concerns about sales by affiliates. One is that there is an information asymmetry between an affiliate and outside investors. In particular, an affiliate selling securityholder is likely to have an informational advantage that it may potentially utilize to the detriment of outside investors.949 The other concern is the alignment of incentives. With respect to affiliates, 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.950 Thus, it can be important that insiders retain an ownership stake in the company to ensure that their incentives are aligned.951 A divestiture 947 See NASAA Letter 2 (supporting the proposed limits coupled with a board approval requirement in lieu of prohibiting resales entirely) and WDFI Letter (not expressing a preference for prohibiting resales entirely). 948 See MCS Letter. 949 See Easley, D., and M. O’Hara, 2004, Information and the cost of capital, Journal of Finance 59(4), pp. 1553–1583. We note that these potential effects may be limited to the extent that purchasers are aware that they may be transacting with better informed affiliates in the course of offerings with affiliate securityholder sale disclosures, in which case these informational asymmetries could be partially or fully reflected in lower security prices and lower proceeds at the time of the offering. 950 See Jensen, M., and W. Meckling, 1976, Theory of the firm: Managerial behavior, agency costs and ownership structure, Journal of Financial Economics 3(4), pp. 305–360. 951 See Core, J., R. Holthausen, and D. Larcker, 1999, Corporate governance, chief executive officer compensation, and firm performance, Journal of Financial Economics 51(3), pp. 371–406; Mehran, H., 1995, Executive compensation structure, PO 00000 Frm 00072 Fmt 4701 Sfmt 4700 of the ownership stake of an affiliate owner may therefore exacerbate agency conflicts, thus suggesting that large affiliate sales can be detrimental to current and future investors. We recognize, however, that there are benefits to be realized from permitting affiliate securityholders, such as company founders and employees, to sell in a Regulation A offering. Because entrepreneurs and other affiliates consider available exit options before participating in a new venture, permitting secondary sales increases their incentives to make the original investment, which may promote innovation and business formation.952 Allowing exit could also facilitate efficient reallocation of capital and talents of entrepreneurs to new ventures.953 Additionally, exit of a large affiliate shareholder could potentially result in a broader base of investors. As noted above, the final rules relax the existing limitations on secondary sales by affiliates by eliminating the net income test for affiliate resales in existing Rule 251(b). We are concerned that this criterion may not be the best measure of financial health and investment opportunities for some issuers eligible for amended Regulation A and thus may inappropriately disadvantage those issuers, and their affiliates, with respect to secondary sales.954 In particular, this change should benefit growth and R&Dintensive issuers that may experience longer periods of negative revenues. Several commenters supported the elimination of the net income test for affiliate resales, generally noting that some issuers may have net losses for several years, including due to high R&D costs.955 We recognize that eliminating this criterion could lead to reduced investor protection due to ownership, and firm performance, Journal of Financial Economics 38(2), pp. 163–184. 952 See Cumming, D., and J. MacIntosh, 2003, Venture-capital exits in Canada and the United States, University of Toronto Law Journal 53(2), pp. 101–199. 953 See Zhang, J., 2011, The advantage of experienced start-up founders in venture capital acquisition: Evidence from serial entrepreneurs, Small Business Economics 36(2), pp. 187–208. See also Gompers, P., A. Kovner, J. Lerner, and D. Scharfstein, 2006, Skill vs. luck in entrepreneurship and venture capital: Evidence from serial entrepreneurs, Working paper No. w12592, National Bureau of Economic Research. 954 See Davila, A., and G. Foster, 2005, Management accounting systems adoption decisions: Evidence and performance implications from early-stage/startup companies, Accounting Review 80(4), pp. 1039–1068 (suggesting that standard accounting measures are often poor indicators of financial health in small companies). 955 See ABA BLS Letter; B. Riley Letter; Canaccord Letter; CFIRA Letter 1; Milken Institute Letter; MoFo Letter; WR Hambrecht + Co Letter. E:\FR\FM\20APR2.SGM 20APR2 mstockstill on DSK4VPTVN1PROD with RULES2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations insiders in Regulation A offerings being able to sell securities in issuers that have not reported net income. However, we note that the disclosures required for Regulation A offerings, as well as the overall limits on secondary sales during the initial 12-month period and subsequent limits on secondary sales by affiliates, should partly mitigate this cost. The trade-off between enhanced liquidity and investor protection is different with respect to sales by nonaffiliates, because these securityholders are less likely to have access to inside information, and their sales do not raise the incentive alignment concerns discussed above in the context of affiliate securityholders. The option to exit through a Regulation A offering provides additional liquidity to existing non-affiliate securityholders. During the initial 12-month period, the final rules enable selling securityholders to access liquidity through a Regulation A offering while ensuring that secondary sales at the time of such offerings are made in conjunction with new capital raising by the issuer. After the expiration of the initial 12-month period, the ability of non-affiliate securityholders to sell securities pursuant to a qualified Regulation A offering statement without limitation (except the maximum Regulation A offering size) should make Regulation A securities more attractive to prospective investors, which may encourage initial investment and increase capital formation. Non-affiliate securityholders who hold restricted securities purchased in reliance on another exemption will be able to sell them freely after a one-year holding period. Purchasers of the securities from such non-affiliate securityholders would not have the benefit of the more robust disclosure provisions of a Regulation A offering, where the seller will be subject to Section 12(a)(2) liability. Thus, allowing secondary sales in a Regulation A offering will provide an additional measure of protection for purchasers as compared to transactions in the secondary market.956 Consequently, we believe that removing restrictions on non-affiliate securityholder sales in Regulation A offerings will not have an adverse effect on investor protection. Although secondary sales increase the liquidity for existing securityholders, since secondary sales will be aggregated with issuer sales for purposes of compliance with the maximum offering 956 See Securities Act Section 3(b)(2)(D) (expressly providing for Section 12(a)(2) liability for any person offering or selling Section 3(b)(2) securities). VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 amount permissible under the respective tiers, secondary sales may reduce the maximum amount of issuer sales in a Regulation A offering. The 30% limit on secondary sales imposed during the initial 12-month period partly mitigates this potential effect. 4. Investment Limitation Regulation A currently does not place limits on the amount of securities that may be purchased by an investor. The proposed rules included a 10% investment limit for all investors in Tier 2 offerings. Several commenters recommended providing exceptions to the limit, or altering the limit, for certain types of investors, such as accredited investors,957 and for securities that will be listed on an exchange upon qualification.958 We recognize that there are potential investor protection benefits as well as costs from imposing investment limits in Regulation A offerings. To help balance those benefits and costs, the final rules seek to focus these limits on those investors who may be less likely to be able to fend for themselves and sustain losses. Accordingly, nonaccredited investors in Tier 2 offerings will be limited to purchases of no more than 10% of the greater of annual income or net worth (for natural persons) or the greater of annual revenue or net assets (for non-natural persons), as proposed.959 In a change from the proposal, the final rules do not apply the investment limit to investors in Tier 2 offerings that are accredited investors as defined in Rule 501 of Regulation D. We believe that accredited investors, due to their level of income or net worth, are more likely to be able to withstand losses from an undiversified exposure to an individual offering. We also recognize that there are costs associated with investment limits. In particular, the investment limitation could limit potential gains for nonaccredited investors in Tier 2 offerings. The investment limitation could require some issuers to solicit a greater number of investors or to solicit additional accredited investors, which could impose additional costs on those issuers or limit capital formation if they are 957 See ABA BLS Letter; Andreessen/Cowen Letter; Canaccord Letter; Cornell Clinic Letter; Fallbrook Technologies Letter; Heritage Letter; Ladd Letter 2; Leading Biosciences Letter; McCarter & English Letter; MCS Letter; Milken Institute Letter; MoFo Letter; Paul Hastings Letter; Richardson Patel Letter; SVB Letter; WR Hambrecht + Co Letter. 958 See Milken Institute Letter. 959 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. PO 00000 Frm 00073 Fmt 4701 Sfmt 4700 21877 unable to attract additional investors.960 Despite these costs, we believe that this limitation, as tailored in the final rules, is an appropriate means of protecting investors while promoting efficiency, competition and capital formation. The investment limitation could also lead to a more dispersed non-accredited investor base or a higher proportion of accredited investors in the investor base to the extent that the 10% threshold impacts investor participation. This could facilitate increased liquidity as there would be more investors with which to trade. More diffuse ownership could also exacerbate the shareholder collective action problem and weaken external monitoring by non-affiliated shareholders to the extent that coordination costs with other shareholders increase. We do not believe, however, that either of these outcomes is a likely consequence of the 10% investment limit. In a change from the proposal, the final rules exclude sales of securities that will be listed on a national securities exchange upon qualification from Tier 2 investment limitations. This provision may provide additional investment opportunities for some investors and may enhance capital formation for some issuers. We do not anticipate that this provision will reduce investor protection since such issuers will be required to meet the listing standards of a national securities exchange and become subject to ongoing Exchange Act reporting, resulting in a high level of investor protection. As an alternative to the final rules, we considered imposing more restrictive investment limitations, as suggested by various comments, including extending investment limitations to Tier 1 offerings,961 imposing a limit lower than 10% on ‘‘all but the wealthiest, least risk averse’’ investors,962 or imposing a 10% investment limitation across investments in all Regulation A offerings rather than applying the limitation on a per offering basis.963 Applying the investment limitation in Tier 1 offerings could marginally enhance investor protection, especially since these offerings will be subject to less extensive disclosure and transactional requirements. However, given that Tier 1 offerings will remain 960 An issuer would, however, be able to conduct a Tier 1 offering, which does not impose investment limitations. 961 See CFA Institute Letter. 962 See CFA Letter. 963 See CFA Letter (not recommending this specifically, but noting this as one reason why the investment limit was not an adequate substitute for state review of Tier 2 offerings) and Cornell Clinic Letter. E:\FR\FM\20APR2.SGM 20APR2 mstockstill on DSK4VPTVN1PROD with RULES2 21878 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations subject to state registration requirements, it is unclear whether investment limits would significantly enhance investor protection in these offerings.964 Moreover, adding the investment limitation in Tier 1 offerings could have an adverse effect on capital formation for the smallest Regulation A issuers, which may face greater hurdles than larger issuers in attracting a broad investor base. The alternative of imposing a cap that is lower than 10% on ‘‘all but the wealthiest, least risk averse’’ investors may confer additional investor protection benefits on investors that are unable to withstand significant investment losses. However, this alternative could also limit some investors from pursuing attractive investment opportunities and limit capital formation for some issuers. Further, since risk preferences vary considerably among investors, objectively identifying ‘‘risk averse’’ investors in a way that is broadly applicable is a challenge. In contrast, the 10% investment limitation in the final rules that applies to all investors in a Tier 2 offering, except accredited investors, defined pursuant to Rule 501 of Regulation D, provides a standard that market participants can easily implement. The alternative of imposing the 10% investment limitation that is aggregated across investments in all Regulation A offerings rather than applying the limitation on a per offering basis may strengthen investor protection. Because the risk profiles of different securities offerings by the same issuer are likely to be correlated, and some issuers may participate in multiple Regulation A offerings over time, such an alternative definition of the limitation may prevent a non-accredited investor from using a significant share (potentially, significantly in excess of 10%) of their net worth or income to establish a highly undiversified exposure to a single issuer. However, this alternative could also limit some investors from pursuing attractive investment opportunities and limit capital formation for issuers. Moreover, different offerings by the same issuer under Regulation A may have different risk profiles, depending on security type and class, thus for some investors, depending on their preferences, investing a larger aggregate amount in multiple offerings by the same issuer may be optimal. Overall, while such additional restrictions may strengthen investor protection, their incremental contribution to investor protection may be small in light of other provisions of amended Regulation A. At the same time, such additional restrictions may prevent some investors from taking advantage of potentially beneficial investment opportunities and may limit the attractiveness of Regulation A to prospective issuers, reducing capital formation and competition benefits. The final rules permit issuers to rely on an investor’s representation that the investment represents no more than 10% of the greater of the investor’s net worth and annual income, unless the issuer has knowledge that such representation is untrue. The ability to rely on investor representations should help mitigate potential costs that issuers could incur to comply with the investment limitation provisions. At the same time, we realize that investors might make inaccurate representations, whether intentionally or not, which could expose these investors to increased losses. As an alternative to investor representations, we could have imposed additional requirements on the issuer to verify that investors in Tier 2 offerings are compliant with the 10% investment limit, as suggested by some commenters.965 Such additional provisions could strengthen investor protections. At the same time, they would likely result in a disproportionate increase in the cost of compliance, especially for smaller issuers in Tier 2 offerings, and might deter some investors from participating in such offerings due to the potential burdens of the verification process and privacy concerns. 964 One commenter noted that the investment limitation is unnecessary with appropriate state oversight. See NASAA Letter 2. 965 See Accredited Assurance Letter; CFA Letter; CFA Institute Letter; Cornell Clinic Letter; MCS Letter; WDFI Letter. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 5. Integration The final rules provide issuers with a safe harbor from integration that, with the exception of the addition of security-based crowdfunding transactions conducted pursuant to Section 4(a)(6) of the Securities Act, preserves the provisions of existing Regulation A. We believe that the final rules provide issuers with valuable certainty as to the contours of offerings conducted before, or close in time with, Regulation A offerings. This certainty may be particularly beneficial for smaller issuers whose capital needs, and thus preferred capital raising methods, may change frequently. PO 00000 Frm 00074 Fmt 4701 Sfmt 4700 As an alternative, we could have eliminated the integration safe harbor. We believe that the elimination of the safe harbor, however, would inject uncertainty into offerings conducted before, or close in time with, Regulation A offerings and would, in turn, decrease the utility of the exemption. Uncertainty as to the contours of offerings, as they relate to Regulation A, could possibly cause issuers to prefer other offering methods to Regulation A, which may have an effect on investor protection. For example, if issuers rely more on Regulation D, this alternative could result in investors receiving less information about an issuer before making an investment, thereby reducing investor protection. Instead, if issuers rely more on registered offerings, this alternative could potentially provide investors with the more extensive disclosure required of, and liability protections associated with, such offerings, although it would cause smaller issuers to incur the higher initial and ongoing costs associated with such offerings. 6. Treatment Under Section 12(g) Existing rules currently do not exempt Regulation A securities from the requirements of Section 12(g), but the Proposing Release requested comment on whether we should adopt such an exemption. A number of commenters recommended exempting Regulation A securities from Section 12(g) of the Exchange Act,966 and several commenters recommended changing or delaying the application of Section 12(g).967 In a change from the proposed rules, the final rules exempt securities issued in a Tier 2 offering from the provisions of Section 12(g) for so long as the issuer remains subject to, and is current in, its periodic Regulation A reporting obligations as of its fiscal year end,968 engages the services of a transfer agent registered with the Commission pursuant to Section 17A of the Exchange Act, and had a public float of less than $75 million as of the last business day of its most recently completed semiannual period, or, in the absence of a public float, had annual revenues of less than $50 million as of 966 See B. Riley Letter; CFIRA Letter 1; CFIRA Letter 2; Fallbrook Technologies Letter; Frutkin Law Letter; Guzik Letter 1 and Letter 3; Heritage Letter; IPA Letter; Ladd Letter 2; Milken Institute Letter; MoFo Letter; SBIA Letter (recommending that the trigger be ‘‘raised or remedied,’’ but not explicitly calling for elimination); U.S. Chamber of Commerce Letter; WR Hambrecht + Co Letter. 967 See Heritage Letter; KVCF; McCarter & English Letter; Milken Institute Letter; MoFo Letter; Paul Hastings Letter; SBIA Letter. 968 See Rule 12g5–1(a)(7). E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations its most recently completed fiscal year.969 The final rules are intended to provide sufficient disclosure to help investors make informed decisions while limiting the costs imposed on issuers. We believe that the initial and ongoing disclosures required for Tier 2 offerings in the final rules accomplish this objective and that the final rules also provide an appropriate balance between providing investor protection and promoting capital formation. The size of Tier 2 offerings, combined with the investment limitation and the ability to offer Tier 2 securities to the general public, may result in the number of an issuer’s shareholders of record exceeding Section 12(g) thresholds. A conditional Section 12(g) exemption for small issuers of Tier 2 securities in such instances is expected to reduce the compliance cost for small issuers and facilitate capital formation and the creation of a broad investor base in offerings made pursuant to Regulation A by small Tier 2 issuers. This will benefit those small Regulation A issuers that are not seeking to list on a national securities exchange 970 and that may find the costs of Exchange Act reporting to be too high given their size. Regulation A offerings may be particularly attractive to small private companies whose shareholder bases are approaching the Section 12(g) registration threshold. The conditional Section 12(g) exemption may enable small private issuers of Tier 2 securities under amended Regulation A to expand their shareholder base over time, as a result of secondary market trading, to the extent that such a market develops, or through subsequent security issuances, without incurring the costs associated with reporting company status.971 While the additional requirement to use a registered transfer agent will impose costs on issuers,972 it should mstockstill on DSK4VPTVN1PROD with RULES2 969 Id. 970 Issuers seeking to list on a national securities exchange will be required to register with the Commission under Section 12(b). 971 See IPO Task Force. Based on two surveys, regulatory compliance costs of IPOs average $2.5 million initially, followed by an ongoing cost of $1.5 million per year. 972 We lack the information to provide a precise quantitative estimate of transfer agent costs for Tier 2 issuers. However, we have some sources of information about transfer agent costs in analogous contexts. According to the Securities Transfer Association (STA), the registered transfer agent industry is highly competitive and many of its members can develop business models that will suit the needs of small issuers and at the same time provide adequate protection to investors. The STA further noted that it did not anticipate most small issuers to require some of the services, such as the processing of VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 provide investor protection benefits by helping to ensure that securityholder records and secondary trades will be handled accurately. As it is a conditional exemption from Section 12(g), however, issuers that are not concerned with registration under the Exchange Act, perhaps because they do not believe that Exchange Act registration will be required as a result of a Regulation A offering, would not be required to retain the services of a registered transfer agent in order to conduct a Tier 2 offering. The final rules also include an issuer size limit in the eligibility requirements for the Section 12(g) exemption for Tier 2 offerings, consistent with providing a conditional exemption tailored to facilitate small company capital formation. The issuer size limit may make Regulation A less attractive for larger issuers and issuers anticipating growth or capital appreciation that expect to reach Section 12(g) thresholds after conducting a Tier 2 offering or subsequent secondary market trading. The two-year transition period before reporting must begin may partly mitigate some of these costs to issuers. Due to the uncertainty about the future composition of the issuer and investor base in Tier 2 offerings, we cannot determine the proportion of Tier 2 issuers whose number of shareholders of record will exceed Section 12(g) thresholds or the proportion of those issuers that will not qualify for an exemption due to their size.973 dividends, that raise the cost of recordkeeping services. See STA letter on JOBS Act regulatory initiatives, available at: https://www.sec.gov/ comments/jobs-title-i/general/general-207.pdf. STA estimated that monthly transfer agent fees would be $75-$300 for security-based crowdfunding issuers, which translates into annual fees of $900-$3600. See STA letter on proposed crowdfunding rules, available at: https://www.sec.gov/comments/s7-0913/s70913-96.pdf. In 2014, average transfer agent and registrar fees amounted to approximately $9,000 in registered IPOs with offering sizes below $50 million, based on Thomson Reuters SDC data, excluding offerings from non-Canadian foreign issuers, blank-check companies, and investment companies. Offerings with proceeds below $1,000 are excluded to minimize measurement error. While estimates for security-based crowdfunding issuers are likely to underestimate the cost for a typical Tier 2 issuer, estimates for IPOs are likely to overestimate the cost of transfer agent services for a typical Tier 2 issuer. Costs of transfer agent services for a typical Tier 2 issuer may be in the range between the two sets of estimates. 973 Based on the analysis by the staff of Division of Economic and Risk Analysis of 2013 data on registrants under Section 12(g), excluding issuers with a class of securities registered under Section 12(b), approximately three-quarters of Section 12(g) registrants would have been below the issuer size limit (defined similarly to smaller reporting company (SRC) criteria). These figures may not be representative of the proportion of issuers that would be below the issuer size limit among future Regulation A issuers that would potentially exceed PO 00000 Frm 00075 Fmt 4701 Sfmt 4700 21879 Some issuers may be able to limit the number of shareholders of record by adopting a minimum investment size requirement. This may potentially limit the breadth of investor base and the availability of investment opportunities to some investors. We are not able to determine the extent to which the issuer size limit may affect overall capital formation and whether large or growth issuers will proceed with a Tier 2 offering or pursue a registered offering, a Regulation D offering or another method of financing. In addition, the issuer size limit may place at a competitive disadvantage those potential issuers that exceed the size limit but for which the costs of registration remain high, relative to potential issuers that are close to the size limit but that qualify for the Section 12(g) conditional exemption. We recognize that there are costs associated with the conditional exemption adopted today. Under this exemption, some issuers in Tier 2 offerings with a large number of shareholders could avoid—potentially indefinitely—the comprehensive disclosure requirements of the Exchange Act, which may decrease the informational efficiency of prices and potentially result in less informed investment decisions by a larger number of investors than in the absence of a conditional Section 12(g) exemption. The issuer size limit partly mitigates this concern. For the same reasons, however, the inclusion of a conditional exemption from Section 12(g) may entice small issuers that would have otherwise generally preferred to raise capital in private offerings to enter the public markets through a Tier 2 offering pursuant to Regulation A.974 In this regard, the conditional exemption could increase the availability of information about companies that would otherwise remain relatively obscure in the private markets. On balance, we believe that provisions such as the initial and periodic disclosure requirements and the investment limit in Tier 2 offerings appropriately balance investor protections and issuer compliance costs while facilitating the creation of a broad investor base in Tier 2 offerings for small issuers. We have considered the alternative of providing a conditional exemption from Section 12(g) registration that does not Section 12(g) thresholds for the number of shareholders of record. 974 For example, issuers may be more willing to raise capital publicly and become subject to some ongoing reporting requirements if such requirements are less costly to the issuer than the costs generally associated with the ongoing reporting requirements of the Exchange Act. E:\FR\FM\20APR2.SGM 20APR2 21880 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations incorporate an issuer size limitation. Such an alternative would enable a broader class of potential Tier 2 issuers to remain exempt from Exchange Act registration. Larger Regulation A issuers could generate a more vibrant OTC trading market, providing enhanced liquidity to those issuers that may not otherwise be of sufficient size to make listing on a national market exchange cost-effective. Providing an exemption from Section 12(g) could provide incentive for these larger issuers to broaden their investor base while still providing the ongoing disclosure of the Tier 2 reporting regime. This could result in potentially beneficial effects on capital formation, competition, and informational efficiency of prices. However, such an alternative would potentially create a class of securities permanently exempt from Exchange Act registration regardless of issuer size and thus subject to less extensive disclosure requirements than public reporting companies, which may affect investor protection. D. Offering Statement mstockstill on DSK4VPTVN1PROD with RULES2 1. Electronic Filing and Delivery The final rules preserve the current three-part structure of Form 1–A but make various revisions and updates to the form to streamline the information included in the form. 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-ofpocket expenses.975 Under existing Regulation A, offering materials are submitted to the Commission in paper form. The final rules require electronic submission of offering materials. Electronic submission is expected to offer benefits to issuers and investors. Paper documents are difficult to process both for the Commission and for investors. Electronic filing is therefore expected to reduce processing delays and costs associated with the current paper filing system, improve the overall efficiency of the filing process for issuers, benefit investors by providing them with faster access to the offering statement, and allow offering materials to be more 975 For the purposes of the Paperwork Reduction Act (‘‘PRA’’), we estimate that compliance with the requirements of amended Form 1–A will result in a burden of approximately 750 hours per response (compared to the current burden associated with Form 1–A of 608 hours per response). We estimate that compliance with the requirements of amended Form 1–A will result in an aggregate annual burden of 140,625 hours of in-house personnel time and an aggregate annual cost of $18,750,000 for the services of outside professionals. See Section IV below. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 easily accessed and analyzed by regulators and analysts. We anticipate that electronic access to offering materials may promote the informational efficiency of prices of Regulation A securities.976 Evidence, obtained from the adoption of EDGAR for 10–K filings by reporting companies, suggests that the use of EDGAR has favorably affected small investors.977 Moreover, the adoption of XML format for Part I of Form 1–A, which captures key information about the issuer and the offering, should allow more efficient access to information and more systematic tracking of offering details by investors, analysts, other market participants and regulators. The XML format for Part I will provide a convenient and efficient means of gathering information from issuers and transmitting it to EDGAR.978 At the same time, we recognize that an electronic filing requirement may impose compliance costs on issuers, particularly, issuers that have not previously used the EDGAR system, which include filing Form ID (the application form for access codes to permit EDGAR filing) 979 and converting filings into EDGAR format. Some of these compliance burdens will be mitigated by the savings of printing and mailing costs. Some commenters have expressed investor protection concerns in relation to the access equals delivery model (discussed in Section II.C.1) arising from the perceived challenge of finding these materials on EDGAR and not requiring delivery 48 hours in advance of sale in all circumstances.980 As discussed above, we do not believe that access to 976 In the case of reporting companies, one study found that EDGAR e-filing was associated with an increase in the speed with which information was incorporated into share prices (thus, increased informational efficiency of prices) and presented evidence of a larger market reaction to 10–K and 10–Q filings in the EDGAR period relative to the pre-EDGAR period. See Griffin, P., 2003, Got information? Investor response to Form 10–K and Form 10–Q EDGAR filings, Review of Accounting Studies 8(4), pp. 433–460. 977 One study has examined the effect of the switch to EDGAR filing for annual reports on Form 10–K on small versus large investors. See Asthana, S., S. Balsam, and S. Sankaraguruswam, 2004, Differential response of small versus large investors to 10–K filings on EDGAR, Accounting Review 79(3), pp. 571–589. 978 See Part I (Notification) of Form 1–A. As discussed more fully in Section II.C.3.a., the cover page and Part I of current Form 1–A would be converted into, and form the basis of, the XMLbased fillable form. 979 For purposes of the PRA, Form ID is estimated to result in 0.15 burden hours per form, for an additional aggregate annual burden due to the rule amendments of 28.20 hours of in-house personnel time. See Section IV. 980 See Massachusetts Letter 2; NASAA Letter 2; WDFI Letter. PO 00000 Frm 00076 Fmt 4701 Sfmt 4700 EDGAR generally has proven to be a challenge for investors in registered offerings since the adoption of Securities Offering Reform in 2005, nor do we believe that it will be a challenge for investors under Regulation A or raise investor protection concerns, particularly in light of our final delivery requirements (including, where applicable, the inclusion of hyperlinks to offering materials on EDGAR that must be provided to investors by issuers and intermediaries). Additionally, given that the final offering circular delivery obligations generally affect investors only after they have made their investment decisions and that, taking into account advancements in technology and expanded use of the Internet, investors will have access to the final offering circular upon its filing, we believe that using a means other than physical delivery to satisfy the final offering circular delivery obligation will not have an adverse effect on investor protection. Overall, we believe that there will be benefits to issuers of streamlining delivery requirements for the final offering circular, consistent with similar updates to delivery requirements for registered offerings.981 2. Disclosure Format and Content Under the existing Regulation A, issuers can choose among three models for providing narrative disclosure in Part II of the offering statement: Model A, Model B, and Part I of Form S–1. Similar to the proposal, the final rules eliminate Model A but preserve Model B, with certain changes to the contents, and Part I of Form S–1.982 We believe that eliminating Model A, which uses a question-and-answer format, may benefit investors by avoiding possible confusion that could result from the lack of uniformity of information presented in the questionand-answer format. Several commenters disagreed with the elimination of the Model A format, recommending that an updated version of the Model A disclosure format be retained.983 The Model A format may be easier to understand for non-accredited investors, who may lack the sophistication to analyze information presented in alternative disclosure formats. Compared to other formats, the Model A format might also result in lower costs of initial preparation of the offering statement, including, in some instances, 981 See Securities Offering Reform, Rel. No. 33– 8591. 982 See Section II.C.3.b for a more detailed description. 983 See BIO Letter; Karr Tuttle Letter; NASAA Letter 2; Verrill Dana Letter 1; WDFI Letter. E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations lessen the need to retain outside securities counsel.984 While a questionand-answer format may lower the cost of initial preparation, it often requires more substantive revisions after filing and before qualification, in order for the disclosure to sufficiently address the form requirements. We believe that most of the benefits associated with the lower cost of initial preparation are negated subsequently during the qualification process. Consequently, we are not persuaded that there are sufficient benefits to retaining the Model A format. The changes to Model B include updated disclosure requirements, including a new section containing management discussion and analysis of the issuer’s liquidity, capital resources and business operations. While these updates may impose costs on the issuer, they are expected to increase investor protection and informational efficiency of prices by providing important information to investors. The updated disclosure requirements are, however, generally designed to assist issuers with more guidance as to the required disclosures that, while they may increase the cost to issuers associated with the initial preparation of the offering circular, should lower the overall cost of, and time to, qualification, when the process is considered in its entirety. Overall, we believe that the availability of two alternative disclosure formats—a revised Model B format and Part I of Form S–1—provides sufficient flexibility to issuers in choosing their disclosure format while preserving the benefits of disclosure of relevant information to prospective investors. Some commenters suggested eliminating all three disclosure formats and instead creating a new disclosure format similar to Part I of Form S–1 that would reference Regulation S–K requirements (with reduced disclosure requirements in some instances).985 Another commenter recommended reducing the disclosure requirements for offerings of $2 million or less,986 while another suggested increasing disclosure requirements as an issuer grows in size and complexity.987 We recognize that scaling the disclosure requirements for mstockstill on DSK4VPTVN1PROD with RULES2 984 See Karr Tuttle Letter and WDFI Letter. The Karr Tuttle Letter also refers to the experience of issuers in Rule 504 offerings, indicating that NASAA’s Form U–7, upon which Model A is based, has proved convenient for issuers in Rule 504 offerings qualified by states without the use of securities counsel. 985 See Canaccord Letter; CFIRA Letter 1; E&Y Letter; Ladd Letter 2; McCarter & English Letter; WR Hambrecht + Co Letter. 986 See Campbell Letter. 987 See SVB Letter. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 Form 1–A, as suggested by commenters, could ease compliance costs for Regulation A issuers. However, additional scaling of disclosure requirements within tiers may reduce the comparability of disclosures within the same tier and result in pricing inefficiencies. 3. Audited Financial Statements The final rules require issuers conducting Tier 2 offerings to include audited financial statements in their offering materials. Audited financial statements should provide investors in Tier 2 offerings with greater confidence in the accuracy and quality of the financial statements of issuers seeking to raise larger amounts of capital. This, in turn, could benefit issuers by lowering the cost of capital or increasing the amount of capital supplied by investors. We recognize that audited financial statements could also entail significant costs to issuers, and that the costs of an audit could discourage the use of Tier 2 offerings. Based on data from registered IPOs below $50 million in 2014 by issuers that would have been potentially eligible for amended Regulation A, average total accounting fees amounted to 1.65% of gross offering proceeds, where reported separately.988 The final rules require issuers in Tier 2 offerings to include audited financial statements in their offering circulars that are audited in accordance with either the auditing standards of the American Institute of Certified Public Accountants (AICPA) (referred to as U.S. Generally Accepted Auditing Standards or GAAS) or the standards of the Public Company Accounting Oversight Board (PCAOB), as suggested by some commenters.989 We expect this provision in the final rules to provide issuers with flexibility that may help contain issuer compliance costs, compared to requiring financial statements that are audited in 988 This estimate is based on Thomson Reuters SDC data on IPOs with issue dates in 2014, excluding offerings from non-Canadian foreign issuers, blank check companies, and investment companies. Offerings with proceeds below $1,000 are excluded to minimize measurement error. Issuers of interests in claims on natural resources, which also would not be eligible for amended Regulation A, were not separately eliminated due to data constraints. Accounting fees include the cost of preparing accounting statements, in addition to the cost of an audit. We also note that costs incurred by issuers in registered IPOs may not be representative of costs incurred by issuers in Tier 2 offerings. We lack the information to provide a quantitative estimate of audit costs that would be incurred by Regulation A issuers in Tier 2 offerings. 989 See ABA BLS Letter; BDO Letter; Canaccord Letter; Deloitte Letter; E&Y Letter; KPMG Letter; McGladrey Letter; MoFo Letter; WR Hambrecht + Co Letter. PO 00000 Frm 00077 Fmt 4701 Sfmt 4700 21881 accordance with the standards of the PCAOB. As noted above,990 because AICPA rules would require an audit of a Regulation A issuer conducted in accordance with PCAOB standards to also comply with U.S. GAAS, an issuer who includes financial statements audited in accordance with PCAOB standards will likely incur additional incremental costs compared with an issuer who includes financial statements audited only in accordance with U.S. GAAS. However, we assume that an issuer would only elect to comply with both sets of auditing standards because it has concluded that the benefits of doing so (for example, to facilitate Exchange Act registration) justify these additional incremental costs. As an alternative, we could have not required the audited financial statements until after the first year of operation as a ‘‘public startup company’’ or indefinitely for issuers that are pre-revenue or that have paidin capital, assets and revenues below a modest threshold, as suggested by commenters.991 While this alternative may decrease issuer compliance costs, it may also lower the accuracy of information provided to investors in Tier 2 offerings, resulting in reduced investor protection. The large offering limit in Tier 2 offerings may make some of the fixed costs of an audit relatively less burdensome. In addition, we note that smaller issuers may opt to forgo the cost of an audit and elect a Tier 1 offering or a Regulation D offering, which does not require audited financial statements. On the other hand, other commenters advised the Commission to require audited financial statements for Tier 1 offerings.992 While we acknowledge that requiring audited statements is likely to result in stronger investor protections due to reduced likelihood of fraudulent financial statements being presented, this alternative would likely place a relatively greater burden on smaller issuers due to the fixed-cost nature of some of the audit costs. Also, given the relatively low maximum offering size for Tier 1, this could result in Tier 1 offerings becoming not cost-effective. 4. Other Accounting Requirements The final rules permit Canadian issuers to prepare financial statements in accordance with either U.S. GAAP or International Financial Reporting 990 See Section II.C.3. Public Startup Co. Letter 3 (also suggesting three tiers, where at least the first two would not require this) and Public Startup Co. Letter 11. 992 See Guzik Letter 1 and Milken Institute Letter. 991 See E:\FR\FM\20APR2.SGM 20APR2 21882 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations Standards (IFRS) as issued by the International Accounting Standards Board (IASB). This is expected to benefit Canadian issuers that currently use IFRS as issued by the IASB by helping such issuers contain compliance costs associated with Regulation A offerings, compared to requiring Canadian issuers to prepare financial statements in accordance with U.S. GAAP. Several commenters specifically supported allowing Canadian issuers to prepare their financial statements in accordance with IFRS as issued by the IASB.993 mstockstill on DSK4VPTVN1PROD with RULES2 5. Continuous and Delayed Offerings The final rules explicitly allow for continuous or delayed offerings.994 As a result, it is now clear that eligible issuers have greater flexibility to select the timing of their offerings. Such flexibility is expected to benefit issuers by allowing them to adjust their capital raising based on macro-economic factors or company conditions.995 These factors should facilitate financing decisions and capital market efficiency. For example, existing research on 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, are lower than through traditional registration.996 The final rules condition the ability to sell securities in a continuous or delayed Tier 2 offering on being current with ongoing reporting requirements at the time of sale. This should not impose incremental costs on eligible issuers as they already file periodic updates and amendments. The final rules restrict all ‘‘at the market’’ secondary offerings. Existing Regulation A prohibited primary ‘‘at the market’’ offerings, but did not necessarily restrict such offerings by selling securityholders. Some commenters suggested allowing such offerings, including primary offerings by the issuer.997 We recognize that not 993 See ABA BLS Letter; Canaccord Letter; NASAA Letter 2; MoFo Letter; PwC Letter. 994 Existing Regulation A allows for continuous or delayed offerings to the extent permitted by Rule 415. Since Rule 415 only discusses ‘‘registered offerings,’’ the reference to it may have caused confusion as to the scope of its application in Regulation A offerings. 995 See Bayless, M., and S. Chaplinsky, 1996, Is there a window of opportunity for seasoned equity issuance? Journal of Finance 51(1), pp. 253–278. 996 See Bethel, J., and L. Krigman, 2008, Managing the cost of issuing common equity: The role of registration choice, Quarterly Journal of Finance and Accounting 47(4), pp. 57–85. We recognize that the evidence based on registered offerings may not be indicative of the effects on Regulation A offerings. 997 See OTC Markets Letter and Paul Hastings Letter. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 allowing secondary ‘‘at the market’’ offerings may limit flexibility for those issuers that are uncertain about the offering price that will attract sufficient investor demand. However, the benefit of the new restriction as it applies to secondary sales is that it helps ensure that issuers do not lose their Regulation A exemption due to unanticipated market factors by inadvertently offering securities in an amount that exceeds the offering limitation. Future offerings made in reliance on the final rules may provide more information to determine whether a robust market capable of supporting ‘‘at the market’’ offerings develops and whether the Regulation A exemption could be an appropriate method for such offerings in the future. 6. Nonpublic Review of Draft Offering Statements Under the final rules, 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 will be permitted to submit to the Commission a draft offering statement for non-public review, so long as all such documents are publicly filed not later than 21 calendar days before qualification. The option of non-public submission of a draft offering statement is expected to reduce the barriers to entry for issuers using Regulation A. In this regard, a potential issuer could reduce the amount of time between disclosing possibly sensitive information to its competitors in its offering statement and the related sale of its securities. Furthermore, companies that are tentative about conducting an offering could start the qualification process and then abandon the offering any time before the initial public filing without receiving the related stigma in the market. To the extent that this accommodation lowers the barriers to entry, it may encourage capital formation and competition. Moreover, we do not believe that the option of draft offering statement submission will significantly affect investor protection. Disclosure requirements are unchanged for issuers that elect the option of nonpublic submission of draft offering statement. The initial non-public statement, all non-public statement amendments, and all correspondence with Commission staff regarding such submissions must be publicly filed and available on EDGAR as exhibits to the offering statement not less than 21 calendar days before qualification of the offering statement. PO 00000 Frm 00078 Fmt 4701 Sfmt 4700 E. Solicitation of Interest (‘‘Testing the Waters’’) Under existing 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. The final rules permit issuers to test the waters and use solicitation materials both before and after the offering statement is filed, subject to issuer compliance with the rules on filing information and disclaimers.998 Under the final rules, testing the waters materials will be required to be included as an exhibit to the offering statement at the time of initial submission or filing with the Commission, and updated thereafter. In general, allowing issuers to gauge interest through expanded testing the waters will reduce uncertainty about whether an offering could be completed successfully. 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. If after testing the waters, the issuer is not confident that it will attract sufficient investor interest, the issuer can consider alternate methods of raising capital and thereby avoid the costs of an unsubscribed or under-subscribed offering. Allowing testing the waters at any time prior to qualification of the offering statement, rather than only prior to filing of the offering statement with the Commission, may increase the likelihood that the issuer will raise the desired amount of capital. This option may be useful for smaller issuers, especially early-stage issuers, first-time issuers, issuers in lines of business characterized by a considerable degree of uncertainty, and other issuers with a high degree of information asymmetry. This provision may attract certain issuers—those that may be uncertain about the prospects of raising investor capital—to consider using amended Regulation A when they might not otherwise, thus potentially promoting competition for investor capital as well as capital formation in the Regulation A market. Expanding the permissible use of testing the waters communications could also increase the type and extent of information available to investors, which could lead to more efficient prices for the offered securities. The final rules permit testing the waters for an expanded period of time compared to the baseline. As a result, it may be easier 998 As noted in Section II.H.3. above, some state securities laws may impose limitations on the use of testing the waters by Tier 1 issuers. E:\FR\FM\20APR2.SGM 20APR2 mstockstill on DSK4VPTVN1PROD with RULES2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations for investors to become aware of a larger and more diverse set of investment opportunities in private offerings, which may allow these investors to more efficiently allocate their capital. The net effect could be to enhance both capital formation and allocative efficiency. Further, requiring issuers using testing the waters solicitations after the offering statement is publicly filed to provide the offering statement with the testing the waters materials (or provide information about where it can be accessed), and to update it and redistribute updates in the event of material changes, will allow investors to make informed investment decisions. We recognize that there may also be potential costs associated with expanding the use of testing the waters communications. If the contents of the offering circular differ substantively from the material distributed through testing the waters communications, and if investors rely on testing the waters materials, this may lead investors to make less informed investment decisions. Some commenters were concerned that the expanded use of permissible testing the waters may facilitate misleading statements to investors and may lead to a heightened risk of fraud.999 We believe, however, that this potential investor protection concern is mitigated by the application of Section 12(a)(2) liability to Regulation A offerings and the general anti-fraud provisions of the federal securities laws. We considered the alternative, suggested by some commenters,1000 of requiring submission and review of testing the waters materials before or concurrent with first use, rather than at the time the offering statement is submitted for non-public review or filed, which could aid regulators in detecting fraudulent solicitation of interest communications, potentially resulting in investor protection benefits. However, requiring initial submission and review of testing the waters materials prior to their use could dissuade issuers, particularly smaller or less experienced issuers, from engaging in testing the waters communications, thereby undermining many of the benefits of permitting such communications discussed above. We also considered the views of other commenters who suggested we relax some of the proposed requirements for the use of testing the waters. For example, we could have treated the solicitation materials as non-public 999 See Massachusetts Letter 2; NASAA Letter 2; WDFI Letter. 1000 See Massachusetts Letter 2; NASAA Letter 2; WDFI Letter. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 when filed with the Commission, at least until the offering statement is qualified,1001 or removed the requirement for public filing of solicitation materials for all Regulation A offerings or for Tier 2 offerings.1002 Issuers that have elected to use testing the waters communications have already incurred the cost of preparing the materials, so the incremental direct cost of the requirement to file the materials with the Commission will be low. We recognize that permitting issuers to file the solicitation materials non-publicly with the Commission could reduce the indirect costs of some issuers by limiting the ability of the issuer’s competitors to discover information about the issuer. However, we note that this information may become available to competitors in any event through the solicitation process and removing the requirement to publicly file the materials may result in adverse effects on the protection of investors to the extent that it may facilitate fraudulent statements by issuers to all or a selected group of investors that may fail to compare the statements in the solicitation materials against the offering circular. On balance, we believe that the final rule’s requirements governing the use of testing the waters communications appropriately balance the goals of providing flexibility to issuers and protection to investors. F. Ongoing Reporting Currently, Regulation A issuers do not have ongoing reporting obligations. The final rules prescribe an ongoing reporting regime for issuers that conduct Tier 2 offerings that requires, in addition to annual reports on Form 1– K, semiannual reports on Form 1–SA, current event reporting on Form 1–U, and notice to the Commission of the suspension of ongoing reporting obligations on Form 1–Z. These reporting requirements will have benefits and costs. These reporting requirements should strengthen investor protection and decrease the extent of information asymmetries between issuers and investors in the Regulation A market, relative to existing Regulation A. Requiring ongoing disclosures for Tier 2 offerings will provide investors with periodically updated information, allowing them to identify investment opportunities best suited for their level of risk tolerance and re-evaluate the issuer’s prospects through time, resulting in better informed investment decisions and improved allocative 1001 See 1002 See PO 00000 Heritage Letter and Ladd Letter 2. BIO Letter and MoFo Letter. Frm 00079 Fmt 4701 Sfmt 4700 21883 efficiency of capital. By standardizing the content, timing, and format of these disclosures, the amendments to Regulation A will make it easier for investors to compare information across issuers, both within and outside of the new Regulation A market. The additional reporting requirements for Tier 2 offerings increase the availability of public information that can be used for valuing securities. A reduction in information risk due to improvements in disclosure can lower the issuer’s cost of capital.1003 Because there are no resale restrictions, some securities issued in amended Regulation A offerings are likely to be quoted on the OTC market, and required ongoing disclosure requirements will provide investors with updated information about their underlying value, and as a result, lower the inherent asymmetric information risks associated with trading in this market.1004 The enhanced information environment should facilitate more informationally efficient pricing and better liquidity for amended Regulation A securities.1005 Tier 2 ongoing disclosure requirements should also provide timely and relevant issuer information at a lower cost to broker-dealers that initiate quotations and make markets in these securities. Increased secondary market liquidity can make securities more attractive to prospective investors, which can promote capital formation. Hence, there may be significant benefits for capital formation from the ongoing reporting requirements in the final rules. Although reporting obligations for Tier 2 issuers are less extensive than for reporting companies, we recognize that they will still result in a significant direct cost of compliance. One commenter estimated the qualification and reporting costs of a Tier 2 issuer to be approximately $400,000 in the first year and $200,000 annually thereafter (per issuer).1006 For the purposes of the PRA, we estimate that compliance with 1003 See Diamond, D., and R. Verrecchia, 1991, Disclosure, liquidity, and the cost of capital, Journal of Finance 46(4), pp. 1325–1359; Easley, D., and M. O’Hara, 2004, Information and the cost of capital, Journal of Finance 59(4), 1553–1583; Easley, D., S. Hvidkjaer, and M. O’Hara, 2002, Is information risk a determinant of asset returns? Journal of Finance 57(5), pp. 2185–2221. 1004 See Ang, A., A. Shtauber, and P. Tetlock, 2013, Asset pricing in the dark: The cross section of OTC stocks, Review of Financial Studies 26(12), pp. 2985–3028. 1005 See Graham, J., C. Harvey, and S. Rajgopal, 2005, The economic implications of corporate financial reporting, Journal of Accounting and Economics 40(1–3), pp. 3–73; Durnev, A., R. Morck, and B. Yeung, 2003, Value enhancing capital budgeting and firm-specific stock return variation, Journal of Finance 59(1), pp. 65–106. 1006 See IPA Letter. E:\FR\FM\20APR2.SGM 20APR2 21884 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations the requirements of Forms 1–K, 1–SA, and 1–U for issuers with an ongoing reporting obligation under Regulation A will result in an aggregate annual burden of 115,351 hours of in-house personnel time and an aggregate annual cost of $13,450,272 for the services of outside professionals.1007 In addition to the direct costs of preparing the mandatory disclosures, issuers of securities in Tier 2 offerings will be subject to indirect disclosure costs of revealing to their competitors and other market participants information about their business not previously required to be disclosed.1008 These disclosures can inform the issuer’s competitors about the issuer’s strategic decisions regarding investment, financing, management and other aspects of business. For issuers seeking to reduce such costs of disclosure, Rule 506(c) of Regulation D could be more appealing. Based on the scope of disclosures required, an issuer’s combination of direct and indirect costs of disclosure is likely to be lowest for a Regulation D Rule 506 offering, followed by a Tier 1 offering, a Tier 2 offering and, finally, a registered public offering. We evaluate below the different provisions of the ongoing reporting requirements and the alternatives we have considered. mstockstill on DSK4VPTVN1PROD with RULES2 1. Periodic and Current Event Reporting Requirements Currently, Regulation A issuers do not have ongoing reporting obligations. Tier 2 issuers in a Regulation A offering will have periodic and current event reporting obligations under the final rules. As noted above, these ongoing reporting requirements will result in both direct and indirect costs to Tier 2 issuers. Commenters made various suggestions for expanding the ongoing disclosure requirements for Tier 2 issuers. For example, several commenters suggested we require quarterly reporting instead of semiannual reporting.1009 Another commenter suggested we require officers, directors and controlling shareholders of issuers that offer securities under Regulation A to make ongoing disclosure of transactions in company securities, similar to reporting on Forms 3, 4 and 5 and Schedules 13D, 13G and 13F in the registered securities 1007 See Section IV below. Verrecchia, R., 2001, Essays on disclosure, Journal of Accounting and Economics 32, pp. 97–180. 1009 See Massachusetts Letter 2; NASAA Letter 2; OTC Markets Letter; WDFI Letter. 1008 See VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 context.1010 While additional requirements that would bring the Tier 2 disclosure obligations closer to the reporting company disclosure obligations are likely to have informational efficiency and investor protection benefits, they are also likely to make Regulation A more costly and less attractive to prospective issuers and may not promote capital formation as much as the final rules. Other commenters recommended reducing the continuing disclosure burden on Tier 2 issuers 1011 or making continuing disclosure requirements contingent upon factors other than offering tier, such as whether the issuer has taken steps to foster a market in its securities.1012 These alternatives would likely reduce compliance costs for Tier 2 issuers; however, they also may cause investors to have less information upon which to make investment decisions, resulting in weaker investor protections and less informationally efficient prices. Other commenters recommended requiring ongoing disclosures for issuers in Tier 1 offerings, including disclosures at a level lower than is required for Tier 2,1013 ongoing disclosure with yearly audited financials,1014 or some unspecified continuous disclosure obligation.1015 Such alternatives, particularly if accompanied by the requirement of audited financial statements, would increase the availability and quality of financial information provided to investors in Tier 1 offerings and strengthen investor protection by enabling investors to make better informed decisions. However, due to the fixed component of disclosure costs, and the likely smaller size of Tier 1 offerings relative to Tier 2 offerings, such requirements may limit capital formation and place Tier 1 issuers at a competitive disadvantage relative to Tier 2 issuers. We note that small issuers that value informational efficiency gains from ongoing disclosures above the cost of such disclosures have the option of conducting a Tier 2 offering. 2. Termination and Suspension of Reporting and Exit Reports The final rules permit issuers in Tier 2 offerings that have filed all periodic and current reports required by Regulation A for a specified period to 1010 See OTC Markets Letter. Heritage Letter and IPA Letter. 1012 See Heritage Letter. 1013 See Guzik Letter 1 (suggesting that Tier 1 ongoing disclosure requirements could parallel Tier 2’s requirements, but without the requirement for semiannual reports). 1014 See Ladd Letter 2. 1015 See SVB Letter. 1011 See PO 00000 Frm 00080 Fmt 4701 Sfmt 4700 suspend their 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 Tier 2 offering statement are not ongoing. For banks or bank holding companies, the termination threshold is fewer than 1,200 persons, consistent with Title VI of the JOBS Act. The option to cease reporting could be beneficial, especially for issuers that do not seek secondary market liquidity and for smaller issuers that find the costs of compliance with the ongoing disclosure requirements to be a relatively greater burden. At the same time, the option might be costly for investors because it will decrease the amount of information available about the issuer, making it more difficult to monitor the issuer and accurately price its securities or to find a trading venue that will allow liquidation of the investment. The public availability of information in bank regulatory filings is expected to mitigate some of these effects for bank issuers undertaking Regulation A offerings. Termination of reporting also might make it easier for inside shareholders to use an informational advantage to the detriment of minority outside investors. The final rules require Tier 1 issuers to notify the Commission upon completion of their offerings by filing Form 1–Z (exit report). Issuers in Tier 2 offerings will be required to provide this information on Form 1–Z at the time of filing the exit report, if they have not previously provided this information on Form 1–K as part of their annual report. Form 1–Z contains limited summary information about the issuer and the completed offering and, therefore, should not impose substantial additional compliance costs on the issuer.1016 The enhanced availability of Form 1–Z information is likely to benefit investors and facilitate evaluation of Regulation A market activity. For example, this information should allow the Commission and others to assess whether issuers have been able to raise the projected amount of capital in Regulation A offerings. We recognize, however, that, since information about the completed offering has value to an issuer’s 1016 For the purposes of the PRA, we estimate that filing the Form 1–Z exit report will result in an aggregate annual burden of 235.5 hours of in-house personnel time. See Section IV below. E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations competitors, its disclosure may also impose an indirect cost on issuers. mstockstill on DSK4VPTVN1PROD with RULES2 3. Exchange Act Registration Generally, an issuer of Regulation A securities would not be subject to Exchange Act reporting obligations unless it separately registers a class of securities under Section 12 of the Exchange Act or conducts a registered public offering. This results in significantly lower costs of periodic reporting for Regulation A issuers relative to reporting companies.1017 The final rules permit issuers seeking to register a class of Regulation A securities under the Exchange Act to do so by filing a Form 8–A in conjunction with the qualification of a Form 1–A that follows Part I of Form S–1 or the Form S–11 disclosure model in the offering circular. In some circumstances this option may provide more flexibility, for instance, with respect to testing the waters, to issuers seeking to register a class of securities. The obligation to file ongoing reports in a Tier 2 offering is 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. Given that Exchange Act reporting obligations are more extensive than those of Regulation A, the entry of such issuers into the Exchange Act reporting system upon qualification of a Regulation A offering statement is expected to have a beneficial effect on investor protection and informational efficiency of prices. While registration pursuant to the Exchange Act is likely to impose additional costs on issuers, only issuers that opt into such registration are affected. As a result, we anticipate that only those issuers for whom the perceived benefits of registration justify the accompanying costs will elect to use this provision. G. Insignificant Deviations Under the final rules, offerings with ‘‘certain insignificant deviations from a term, condition or requirement’’ of Regulation A remain exempt from registration. This is the same as the rules in existing Regulation A. As a result, the only change from the baseline is that these rules will likely apply to a greater number of offerings due to the expanded availability of amended Regulation A. Further, as in existing Regulation A, the final rules explicitly classify as significant those deviations that are related to issuer eligibility, 1017 Ongoing compliance costs were estimated to be $1.5 million per year, following an IPO, according to two surveys cited in the IPO Task Force report. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 aggregate offering price, offers and continuous or delayed offerings. This provision benefits investors by providing certainty about the provisions from which the issuer may not deviate without losing the exemption. At the same time, it enables issuers to continue to rely on the exemption and obtain its capital formation benefits even if they have an ‘‘insignificant deviation’’ from the final rules. This provision may be especially beneficial for issuers with limited experience with Regulation A offerings as their limited experience may make them more susceptible to an inadvertent error. In this way, the provision may encourage more issuers to engage in Regulation A transactions and thereby facilitate capital formation. H. Bad Actor Disqualification The final rules amend Rule 262 to include bad actor disqualification provisions in substantially the same form as adopted under Rule 506(d).1018 The final rules specify that the covered person’s status is tested at the time of filing of the offering statement. Consistent with the disqualification provisions of Rule 506(d), the final rules add two new disqualification triggers to those in existing Regulation A: 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 and the final orders and bars of certain state and other federal regulators. While these provisions may impose an incremental cost on issuers and other covered persons relative to the cost imposed by the disqualification provisions of existing Regulation A, they should strengthen investor protection from potential fraud. If one of these new triggering events occurred prior to the effective date of the final rules, the event will not cause disqualification, but instead must be disclosed on a basis consistent with Rule 506(e). This approach will not preclude the participation of bad actors whose disqualifying events occurred prior to the effective date of the final rules, which could expose investors to the risks that arise when bad actors are associated with an offering. These risks to investors may be partly mitigated since investors will have access to relevant 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 1018 See PO 00000 17 CFR 230.506(d). Frm 00081 Fmt 4701 Sfmt 4700 21885 involvement by prior bad actors to avoid such disclosures. We expect that the bad actor disqualification provisions in the final rules will lead most issuers to restrict bad actor participation in Regulation A offerings, which could help reduce the potential for fraud in these types of offerings and thus strengthen investor protection compared with an alternative of not including bad actor disqualification provisions. If disqualification standards lower the risk premium associated with the risk of fraud due to the presence of bad actors in securities offerings, they could also reduce the cost of capital for issuers that rely on amended Regulation A. 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 disqualification provisions also impose costs on issuers and covered persons. Issuers that are disqualified from using amended Regulation A may experience an increased cost of capital or a reduced availability of capital, which could have negative effects on capital formation. In addition, issuers may incur costs related to seeking disqualification waivers from the Commission and replacing personnel or avoiding the participation of covered persons who are subject to disqualifying events. Issuers also might incur costs to restructure their share ownership to avoid beneficial ownership of 20% or more of the issuer’s outstanding voting equity securities, calculated on the basis of voting power, by individuals subject to disqualifying events. As discussed above, the final rules also provide a reasonable care exception on a basis consistent with Rule 506(d).1019 We anticipate that the reasonable care exception would result in benefits and costs, compared with an alternative of not providing a reasonable care exception. For example, a reasonable care exception could facilitate capital formation by encouraging issuers to proceed with Regulation A offerings in situations in which issuers otherwise 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 also could increase the potential for fraud, compared with an alternative of not providing a reasonable care exception, by limiting issuers’ incentives to determine whether bad 1019 See E:\FR\FM\20APR2.SGM Proposed Rule 262(b)(4). 20APR2 21886 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations 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 with respect to the nature and extent of the factual inquiry required could allow an issuer to tailor its factual inquiry as appropriate to its particular circumstances, thereby potentially limiting costs. One commenter recommended revising the look-back periods for disqualifying events to run from the time of sale rather than the time of filing of the offering statement.1020 These changes would relax the bad actor disqualification standard, by allowing bad actors to participate in Regulation A offerings during the qualification process. We believe that timing application of the bad actor disqualification rules to the time of filing of the offering statement, as opposed to the time of qualification, is therefore more appropriate under the final rules. I. Relationship With State Securities Law The final rules preempt state registration and qualification requirements for Tier 2 offerings but preserve these requirements for Tier 1 offerings, consistent with state registration of Regulation A offerings of up to $5 million under existing Regulation A. The GAO Report found that compliance with state securities review and qualification requirements was one of the factors that appeared to have influenced the infrequent use of Regulation A by small businesses.1021 Various commenters supporting 1020 See KVCF Letter. GAO Report. The GAO Report also cites other factors that may have discouraged issuer use of the Regulation A exemption, including a comparatively low $5 million offering limitation, a slow and costly filing process associated with Commission qualification, and the availability of other exemptions under the federal securities laws. A recent study performs a comparison of Rule 506 offerings with Rule 505 and Rule 504 offerings that ‘‘suggests that the Blue Sky law preemption feature unique to Rule 506 offerings has greater value to issuers than the unique features of Rule 504 or Rule 505 offerings.’’ See Ivanov, V., and S. Bauguess, 2013, Capital raising in the U.S.: An analysis of unregistered offerings using the Regulation D exemption, 2009–2012, available at: https://www.sec.gov/divisions/riskfin/whitepapers/ dera-unregistered-offerings-reg-d.pdf. See also Leading Biosciences Letter referencing recommendations supporting preemption from the SEC Government-Business Forum on Small Business Capital Formation in 2011 and 2012. Similar recommendations were made in the final report of the SEC Forum on Small Business Capital Formation in 2013, available at: https:// www.sec.gov/info/smallbus/gbfor32.pdf. mstockstill on DSK4VPTVN1PROD with RULES2 1021 See VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 preemption of state securities laws in the final rules noted that state review of offering statements is a significant impediment to the use of Regulation A and that the process of qualification in multiple states will remain inefficient despite NASAA’s implementation of a coordinated review program.1022 More broadly, commenters as well as the GAO Report indicated that the existing regime of federal and state qualification has been a significant disincentive to the use of Regulation A for capital raising. With respect to time and compliance costs associated with state qualification, we believe preemption will likely reduce issuers’ costs, although we lack comprehensive, independent data to estimate the precise amount. Only a few commenters provided specific monetary estimates of cost components. One commenter indicated that a revenue-generating business seeking to conduct a debt or equity offering under existing Regulation A can produce a conforming offering statement for state and federal review for approximately $50,000.1023 According to another commenter, an issuer seeking state registration in 50 states would incur $80,000 to $100,000 in legal fees.1024 As one commenter noted, ‘‘[t]he challenges posed by the necessity of responding to both federal and state reviews and coordinating overlapping but potentially inconsistent comments and approvals have helped to make the existing Regulation A scheme unworkable for most smaller 1022 See ABA BLS Letter; Andreessen/Cowen Letter; Almerico Letter; B. Riley Letter; BIO Letter; Campbell Letter; Canaccord Letter; CFIRA Letter 1; CFIRA Letter 2; Congressional Letter 3; DuMoulin Letter; Eng Letter; Fallbrook Technologies Letter; Gilman Law Letter; Guzik Letter 1; Hart Letter; Heritage Letter; Huynh Letter; IPA Letter; Edwards Wildman Letter; Kisel Letter; Kretz Letter; KVCF Letter; Ladd Letter 2; Leading Biosciences Letter; McCarter & English Letter; Methven Letter; Milken Institute Letter; MoFo Letter; Moloney Letter; New Food Letter; OTC Markets Letter; Paul Hastings Letter; Palomino Letter; Public Startup Co. (several letters); REISA Letter; Richardson Patel Letter; SBIA Letter; Staples Letter; Sugai Letter; SVB Letter; SVGS Letter; Unorthodocs Letter; U.S. Chamber of Commerce Letter; Verrill Dana Letter 2; Warren Letter; WR Hambrecht + Co Letter. 1023 See Groundfloor Letter. This commenter does not separately estimate the component of the cost due to state registration. 1024 See Letter from Paul Hastings, LLP, November 26, 2013. Another commenter referenced one issuer’s offering in the State of Washington in the amount of $750,000, with legal and accounting expenses estimated at $10,000 and the offering statement prepared without outside securities counsel and reviewed by the state within less than three months. See WDFI Letter. We do not believe that this cost estimate would be representative of costs for issuers registering in multiple states rather than a single state or for issuers involving outside securities counsel. PO 00000 Frm 00082 Fmt 4701 Sfmt 4700 companies.’’ 1025 Preemption of state securities review and qualification requirements for Tier 2 offerings will eliminate the burdens of responding to multiple reviews and thus provide for a more streamlined review process than exists under existing Regulation A. We expect that this, in turn, will make Tier 2 a more attractive capital raising option for issuers than existing Regulation A. Accordingly, we believe that by eliminating the requirement for state qualification, the final rules’ preemption for Tier 2 offerings will result in greater use of amended Regulation A and thereby facilitate capital formation. We recognize that commenters were divided on the issue of preemption, and those who objected to preemption of state securities review and qualification requirements cited benefits of state review.1026 These include additional investor protection benefits arising from the localized knowledge and resources of state regulators that may aid in detecting fraud and facilitating issuer compliance.1027 Some of these commenters also noted that the launch of NASAA’s coordinated review program could streamline state review of offerings among participating states. We acknowledge that the preemption of state qualification for Tier 2 offerings may have an impact on investor protection by eliminating one level of government review. In addition, meritbased review of offerings undertaken by some states may, in some cases, provide a level of investor protections different from the disclosure-based review 1025 See ABA BLS Letter. ASD Letter; Cornell Clinic Letter; CFA Letter; CFA Institute Letter; Groundfloor Letter (arguing that the Commission should at least evaluate NASAA’s coordinated review program for 12 months); Karr Tuttle Letter (acknowledging that state preemption may still be necessary for states not participating in NASAA’s new coordinated review program); MCS Letter; Congressional Letter 2; Congressional Letter 4; NASAA Letter 1; NASAA Letter 2; NASAA Letter 3; NDBF Letter; NYIPB Letter; ODS Letter; PRCFI Letter; Scherber Letter; Secretaries of State Letter; Massachusetts Letter 1; Massachusetts Letter 2; Tavakoli Letter; TSSB Letter; WDFI Letter. One commenter stated its view that the Commission’s proposal to preempt state regulatory review contained little consideration of the adverse costs that come with preemption, particularly the potential harm to investors, including harm investors might incur in the absence of state review in the area of small and thinly traded company offerings. See NASAA Letter 2. 1027 According to the 2014 NASAA enforcement report for 2013, securities violations related to unregistered securities sold by unlicensed individuals, including fraudulent offerings marketed through the Internet, remain an important enforcement concern. The report does not detail the number and category of violations by type of exemption from registration. See NASAA Enforcement Report, available at: https:// www.nasaa.org/wp-content/uploads/2011/08/2014Enforcement-Report-on-2013-Data_110414.pdf. 1026 See E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES2 undertaken by the Commission. State regulators may also have a better knowledge of local issuers, which could help in detecting fraud, especially in offerings by small, localized issuers. If investors require higher returns because of a perceived increase in the risk of fraud as a result of preemption, issuers may face a higher cost of capital. We are unable to predict how the amendments to Regulation A will affect the incidence of fraud that may arise in Regulation A offerings. Several factors could mitigate these potential impacts. First, under Section 18(c), the states retain the ability to require the filing with them of any documents filed with the Commission and to investigate and bring enforcement actions with respect to fraudulent transactions. Second, we believe that amended Regulation A provides substantial protections to purchasers in Tier 2 offerings. Under the final rules, a Regulation A offering statement will continue to provide substantive narrative and financial disclosures about the issuer. Further, the final rules require offering statements to be qualified by the Commission before an issuer can conduct sales. Additional investor protections would be afforded by Regulation A’s limitations on eligible issuers and bad actor disqualification provisions. The final rules for Tier 2 offerings provide further protection by requiring audited financial statements in the offering circular, ongoing reporting, and an investment limitation for purchasers who do not qualify as accredited investors. The anticipated costs and benefits of state preemption will depend on key offering characteristics and issuer disclosure requirements. In particular, smaller offerings with a narrow investor base, such as those expected to be conducted under Tier 1, are more likely to be concentrated in fewer states and to benefit from geographic-specific information of state regulators as part of the review process.1028 In contrast, 1028 We believe that issuers conducting Tier 1 offerings are more likely to be smaller companies whose businesses revolve around products, services, and a customer base that will more likely be located within a single state or region or a small number of geographically dispersed states. For example, based on our analysis, issuers of securities in the seven offering statements qualified by the Commission pursuant to Regulation A in 2014 indicated, on average, that they were seeking qualification in approximately five states per offering. The financial statements provided by these issuers further indicated, on average, that issuers had approximately $1.2 million in assets. No issuer indicated assets greater than $3.6 million, while two issuers indicated assets of less than $20,000. We recognize, however, that the characteristics of Tier 1 issuers in Tier 1 offerings relying on VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 larger offerings that seek a broader investor base, such as those expected to be conducted under Tier 2, are more likely to span multiple states. For Tier 2 offerings, the additional disclosure, audited financial statements, and transactional requirements relative to Tier 1 offerings are expected to provide an additional layer of investor protection, thus reducing the need for, and the expected benefits of, state review. State preemption for Tier 2 offerings should lower the compliance burdens imposed on issuers, and partly offset the costs of the increased disclosure and transactional requirements. In general, we expect that issuers in Tier 1 offerings will face significantly lower offering costs as a result of not being subjected to the requirements of audited financial statements and ongoing reporting in the final rules. For these offerings, the local knowledge of state regulators is anticipated to add value to the review process to the extent that the issuer and the investor base are more likely to be localized. Thus, state qualification is more likely to have incremental investor protection benefits in Tier 1 offerings relative to Tier 2 offerings. Moreover, to the extent that Tier 1 offerings are more likely to be concentrated in fewer states, the cost of complying with state review procedures is likely to be diminished for these types of offerings. Some commenters also pointed to the increased burden on Commission resources as a cost of state preemption.1029 Compared with the baseline of the existing Regulation A, we anticipate a possible increase in the burden on Commission resources as a result of the increase in the Regulation A maximum offering size and other provisions intended to make Regulation A more attractive to prospective issuers. However, we believe this increase would also occur under the alternative of no state preemption for Tier 2 offerings. While state review of Tier 2 offerings could potentially confer incremental investor protection benefits to the extent a thorough Commission staff review is constrained by the increased burden on agency resources, overall we do not believe this effect will be substantial. As an alternative to preemption for Tier 2 offerings, we considered the option of state qualification by one state amended Regulation A in the future may differ from the characteristics of issuers that rely on existing Regulation A (for example, due to the higher maximum offering size for Tier 1 offerings in the final rules, compared with the maximum offering size in existing Regulation A). 1029 See WDFI Letter and NASAA Letter 2. PO 00000 Frm 00083 Fmt 4701 Sfmt 4700 21887 or a subset of states or the option of state review under NASAA’s coordinated review program.1030 According to one commenter, the coordinated review program creates value by defining concrete service standards regarding the timeliness of various steps of the qualification process and by introducing more legal certainty.1031 According to another commenter, the coordinated review program will eliminate costs of identifying and addressing individual state requirements and will provide an expedient registration process.1032 We recognize that the coordinated review process ultimately may reduce processing time and streamline certain state requirements for issuers registering in multiple states when compared to independent review conducted by individual states. To date, however, we are aware of only a few issuers that have utilized the coordinated review process, so currently there is limited evidence available to us to evaluate the effectiveness and timeliness of coordinated review, especially in the event that more potential Regulation A issuers seek state qualification under this process. While it is possible that the coordinated review process may reduce costs for issuers as compared to individual state review and qualification, it would add cost and complexity for issuers seeking an exemption under amended Regulation A when compared to Commission review and qualification alone. To the extent that disclosure or merit review (if applicable to one of the participating jurisdictions in which the issuer is seeking to offer securities) standards of participating jurisdictions impose more extensive requirements on the issuer than Commission rules, some issuers may incur additional compliance expense or require additional time to address comments. In light of the recent efforts of state securities regulators to address concerns about the cost of state review and qualification of Regulation A offerings, however, the ongoing implementation and development of the coordinated review program, particularly as it may operate within Tier 1 offerings, may, in the future, provide additional data that will aid our future evaluation of whether such a program could effectively operate within the context of larger, more national Tier 2 offerings. 1030 A description of NASAA’s coordinated review program can be found at: https:// www.nasaa.org/industry-resources/corporationfinance/coordinated-review/regulation-a-offerings/. 1031 See Groundfloor Letter. 1032 See WDFI Letter. E:\FR\FM\20APR2.SGM 20APR2 21888 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations We believe the final rules strike appropriate balance between mitigating cost and time demands on issuers and providing investor protections. IV. Paperwork Reduction Act A. Background Certain provisions of the final rules contain ‘‘collection of information’’ requirements within the meaning of the Paperwork Reduction Act of 1995 (PRA).1033 We published a notice requesting comment on the collection of information requirements in the Proposing Release, and we submitted these requirements to the Office of Management and Budget (OMB) for review in accordance with the PRA and its implementing regulations.1034 While several commenters provided qualitative comments on the possible costs of the proposed rules and amendments, we did not receive comments on our PRA analysis and thus are adopting our estimates substantially as proposed, except as otherwise noted herein. The titles for the collections of information are: (1) ‘‘Regulation A (Form 1–A and Form 2–A)’’ (OMB Control Number 3235–0286); (2) ‘‘Form 1–K’’ (OMB Control Number 3235–0720); (3) ‘‘Form 1–SA’’ (OMB Control Number 3235–0721); (4) ‘‘Form 1–U’’ (OMB Control Number 3235–0722); (5) ‘‘Form 1–Z’’ (OMB Control Number 3235–0723); (6) ‘‘Form 8–A’’ (OMB Control Number 3235–0056); (7) ‘‘Form ID’’ (OMB Control Number 3235–0328); and (8) ‘‘Form F–X’’ (OMB Control Number 3235–0379).1035 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 applied for OMB control numbers for the new collections of information in accordance with 44 U.S.C. 3507(j) and 5 CFR 1320.13, and OMB assigned a control number to each new collection, as specified above. Responses to these new collections of information would be mandatory for issuers raising capital under Regulation A. mstockstill on DSK4VPTVN1PROD with RULES2 1033 44 U.S.C. 3501 et seq. U.S.C. 3507(d) and 5 CFR 1320.11. 1035 Although the final rules do not amend Form F–X, the total burden hours associated with that form may increase minimally as a result of the increased number of issuers relying on Regulation A. The Commission submitted the revised burden estimate for Form F–X to OMB for review in accordance with the PRA, although the potential minimal increase in burden hours was not noted in the Proposing Release. 1034 44 VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 The hours and costs associated with preparing disclosure, filing forms, and retaining records constitute reporting and cost burdens imposed by the collections of information. In deriving estimates of these hours and costs, we recognize that the burdens likely will 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 will experience costs in excess of the average and some issuers may experience less than the average costs. B. Estimated Number of Regulation A Offerings Data regarding current market practices may help identify the potential number of offerings that will be conducted in reliance on the final rules.1036 We estimate that there are currently approximately 26 Regulation A offering statements filed by issuers per year.1037 While it is not possible to predict with certainty the number of offering statements that will be filed by issuers relating to offerings made in reliance on amended Regulation A, for purposes of this PRA analysis, we estimate that the number will be 250 offerings statements per year. We base this estimate on (i) the current approximate number of annual Form 1– A filings under the existing rules, plus (ii) 65 percent of the estimated number of registered offering of securities that would have been eligible to be conducted under Regulation A,1038 plus (iii) an additional 16 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.1039 For purposes of this PRA analysis, we assume that each offering statement for a unique Regulation A offering that is filed represents a unique issuer, such that approximately 250 issuers are estimated to conduct 1036 See Section III. above for a discussion of the data regarding current market practices. 1037 From 2009 through 2014, there were 158 Form 1–As filed with the Commission. 1038 See figures and graphs for registered offerings cited in Section III.B.b. above (citing approximately 320 registered initial public offerings or follow-on offerings in calendar year 2014 that would have been potentially eligible to be conducted under amended Regulation A). 1039 See figures and graphs for registered and exempt offerings under Regulation D cited in Section III.B.1.a.ii. above (citing 11,228 issuances under Regulation D in calendar year 2014 that would have been potentially eligible to be conducted under amended Regulation A). PO 00000 Frm 00084 Fmt 4701 Sfmt 4700 Regulation A offerings each year under the final rules. C. PRA Reporting and Cost Burden Estimates 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 one administrative burden hour associated with it, while current Form 1–A is estimated to take approximately 608 hours to prepare and Form 2–A is estimated to take approximately 12 hours to prepare.1040 We do not anticipate that the one administrative burden hour associated with Regulation A will change as a result of the final rules. As discussed more fully below, we believe the burden hours associated with Form 1–A will change, while Form 2–A and the associated burden hours are eliminated as a result of today’s proposal.1041 Under the final rules, an issuer conducting a transaction in reliance on Regulation A will be able to conduct either a Tier 1 offering or a Tier 2 offering.1042 In either case, a Regulation A issuer will continue to be required to file with the Commission specified disclosures on a Form 1–A: Offering Statement.1043 An issuer will also be required to file amendments to Form 1– A to address comments from Commission staff and to disclose material changes in the disclosure previously provided to the Commission or investors.1044 In light of the electronic filing requirements for Regulation A offering materials discussed above,1045 issuers are no longer required to file a manually signed copy of Form 1–A with the Commission.1046 Issuers are, however, required to manually sign a copy of the offering statement before or at the time of non-public submission or filing that must be retained by the issuer for a period of five years and produced to the Commission, upon request.1047 As issuers are currently required to manually sign the Form 1–A and file it with the Commission, we do not anticipate that the Form 1–A retention requirement adopted in the final rules will alter an issuer’s compliance 1040 See Form 1–A at 1; Form 2–A at 1. discussion in Section II.E. above. 1042 See discussion in Section II.B.3. above. 1043 See Rule 252. 1044 See Rule 252(f). 1045 See discussion in Section II.C.1. above. 1046 See discussion in Section II.C.3.d. above. 1047 See Instruction 2 to Signatures in Form 1–A. 1041 See E:\FR\FM\20APR2.SGM 20APR2 mstockstill on DSK4VPTVN1PROD with RULES2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations burden. As adopted, Form 1–A is similar to existing Form 1–A. In some instances, Form 1–A, contains fewer disclosure items than existing Form 1– A (e.g., Part I (Notification) of Form 1– A does not require disclosure of ‘‘Affiliate Sales’’; Part II (Offering Circular) of Form 1–A requires a description of the issuer’s business for a period of three years, rather than five years). Part II of Form 1–A no longer permits disclosure in reliance on the Model A disclosure format, but directs issuers to follow the provisions of Model B (renamed ‘‘Offering Circular’’), Part I of Form S–1, or, where applicable, Part I of Form S–11.1048 In other instances, Form 1–A contains more disclosure items than existing Form 1– A (e.g., Part I of Form 1–A requires additional disclosure of certain summary information regarding the issuer and the offering; Part II of Form 1–A requires more detailed management discussion and analysis of the issuer’s liquidity and capital resources and results of operations). Form 1–A requires disclosure similar to that required in a Form S–1 registration statement for registered offerings under the Securities Act, but with fewer disclosure items (e.g., it requires 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, Form 1–A does not require issuers to file audited financial statements.1049 We expect that issuers relying on Regulation A for Tier 1 offerings of up to $20 million in a 12-month period will largely be at a similar stage of development to issuers relying on existing Regulation A and will therefore not experience an increased compliance burden with Form 1–A. Given the increased annual offering amount limit of $50 million for Tier 2 offerings, however, we expect that issuers conducting such offerings pursuant to Regulation A may be at a more advanced stage of development than issuers offering securities under Tier 1. In such cases, the complexity of the required disclosure and, in turn, the burden of compliance with the requirements of Form 1–A may be greater for some issuers than for issuers relying on existing Form 1–A. We believe that the burden hours associated with amended Form 1–A will be greater than the current estimated 608 burden hours per response but will not be as great as the current estimated 972.32 1048 See 1049 See discussion at Section II.C.3.b. above. discussion in Section II.C.3.b(2). above. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 burden hours per response for Form S– 1. We therefore estimate that the total burden to prepare and file Form 1–A, as adopted today, including any amendments to the form, will increase on average across all issuers in comparison to existing Form 1–A to approximately 750 hours.1050 We estimate that the issuer will internally carry 75 percent of the burden of preparation and that outside professionals retained by the issuer at an average cost of $400 per hour will carry 25 percent.1051 We estimate that compliance with the requirements of a Form 1–A will require 187,500 burden hours (250 offering statements × 750 hours/offering statement) in aggregate each year, which corresponds to 140,625 aggregated hours carried by the issuer internally (250 offering statements × 750 hours/offering statement × 0.75) and aggregated costs of $18,750,000 (250 offering statements × 750 hours/offering statement × 0.25 × $400) for the services of outside professionals. As stated above, we estimate that the proposed amendments to Regulation A will not change the one administrative burden hour associated with the review of Regulation A and will require 250 burden hours (250 offering statements × one hour/offering statement) in aggregate each year, which corresponds to 187 aggregated hours carried by the issuer internally (250 offering statements × 0.75) and aggregated costs of $25,000 (250 offering statements × one hour/offering statement × 0.25 × $400) for services of outside professionals. When combined with the estimates for Form 1–A, the administrative burden hour results in an estimated total compliance burden of 751 hours per offering statement and an estimated annual compliance burden of 187,750 hours (250 offering statements × 751 hours/offering statement) and aggregated costs of $18,775,000 (250 offering statements × 751 hours/offering statement × 0.25 × $400). 2. Form 1–K: Annual Report Under the final rules, any issuer that conducts a Tier 2 offering pursuant to Regulation A is required to file an annual report with the Commission on Form 1–K: Annual Report.1052 A 1050 By comparison, we estimate the burden per response for preparing Form S–1 to be 972.32 hours. See Form S–1, at 1. 1051 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 will 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. 1052 See Rule 257(b)(1). PO 00000 Frm 00085 Fmt 4701 Sfmt 4700 21889 manually signed copy of Form 1–K must 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 the Commission.1053 We do not anticipate that the requirement to retain a manually signed copy of Form 1–K will affect an issuer’s compliance burden. We believe the compliance burden associated with disclosure provided in Form 1–K will be less than the compliance burden associated with reporting required under Exchange Act Sections 13 or 15(d). We also believe the burden is more analogous to the compliance burden attendant to Form 1–A. Unlike the disclosure required in Form 1–A, however, offering-specific disclosure in Form 1–K is not required. Additionally, under certain circumstances, an issuer will be required to disclose information similar to the information previously required of issuers on Form 2–A.1054 Unlike the disclosure previously required on Form 2–A, however, an issuer is not required to provide disclosure about the use of proceeds. We estimate that the burden to prepare and file a Form 1–K will be less than that required to prepare and file a Form 1–A. We estimate that compliance with Form 1–K will result in a burden of 600 hours per response.1055 We further estimate that 75 percent of the burden of preparation will be carried by the issuer internally and that 25 percent will be carried by outside professionals retained by the issuer at an average cost of $400 per hour. While we do not know the exact number of issuers that will conduct Tier 2 offerings in reliance on amended Regulation A, we estimate 75 percent of all issuers filing a Form 1–A (or 188 issuers, 250 issuers × .75) will conduct Tier 2 offerings, enter the Regulation A ongoing reporting regime and therefore be required to file Form 1–K.1056 We estimate that compliance with the requirements of Form 1–K for issuers with an ongoing reporting obligation under Regulation A will require 112,800 burden hours (188 issuers × 600 hours/ issuer) in the aggregate each year, which corresponds to 84,600 hours carried by the issuer internally (188 issuers × 600 1053 See General Instruction C to Form 1–K and related discussion in Section II.E.1.c. above. 1054 Id. 1055 We estimate that the burden of preparing the information required by Form 1–K will be approximately 3⁄4 of the burden for filing Form 1– A due to the lack of offering-specific disclosure and an issuer’s ability to update previously provided disclosure. 1056 This estimate includes any special financial reports required to be filed on Form 1–K. E:\FR\FM\20APR2.SGM 20APR2 21890 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations hours/issuer × 0.75) and costs of $11,280,000 (188 issuers × 600 hours/ issuer × 0.25 × $400) for the services of outside professionals. 3. Form 1–SA: Semiannual Report mstockstill on DSK4VPTVN1PROD with RULES2 Under the final rules, any issuer that conducts a Tier 2 offering in reliance on Regulation A will be required to file a semiannual report with the Commission on Form 1–SA: Semiannual Report.1057 A manually signed copy of the Form 1– SA must 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 the Commission.1058 We do not anticipate that the requirement to retain a manually signed copy of the Form 1–SA will affect an issuer’s compliance burden. Issuers must provide semiannual updates on Form 1–SA, which, like a Form 10–Q,1059 consists primarily of financial statements and MD&A. Unlike Form 10–Q, Form 1–SA does not require disclosure regarding quantitative and qualitative market risk or controls and procedures.1060 We estimate, however, that on balance the reduction in burden attributable to eliminating these two items in Form 1– SA will 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 will be similar to the compliance burden for issuers filing a Form 10–Q under the Exchange Act.1061 Therefore, for purposes of this PRA analysis, we estimate that the burden to prepare and file a Form 1–SA will equal the burden to prepare and file Form 10–Q, which we have previously estimated as 187.43 hours per response.1062 Unlike 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 prepare more of the required disclosures internally. Accordingly, we estimate that 85 percent of the burden of preparation will be carried by the issuer internally and that 15 percent will be carried by outside professionals retained 1057 See Rule 257(b)(3). General Instruction C to Form 1–SA and related discussion in Section II.E.1.c(2). above. 1059 17 CFR 249.308a. 1060 See discussion in Section II.E.1.c(2). above. 1061 Issuers will, however, have to file Form 1– SA, a semiannual report, less frequently than Form 10–Q, a quarterly report. 1062 See Form 10–Q, at 1. 1058 See VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 by the issuer at an average cost of $400 per hour. We estimate that compliance with the requirements of Form 1–SA for issuers with an ongoing reporting obligation under Regulation A will require 35,237 burden hours (188 issuers × 187 hours/ issuer/filing × 1 filing/year) in the aggregate each year, which corresponds to 29,952 hours carried by the issuer internally (188 issuers × 187 hours/ issuer/filing × 1 filing/year × 0.85) and costs of $2,113,872 (188 issuers × 187 hours/issuer/filing × 1 filing/year × 0.15 × $400) for the services of outside professionals.1063 an issuer will be required to file one current report annually.1068 Therefore, we estimate that an issuer’s compliance with Form 1–U will result in an annual aggregate burden of 5 hours (1 current report annually × 5 hours per current report) per issuer. As with Form 1–SA, we estimate that 85 percent of the burden of preparation will be carried by the issuer internally and that 15 percent will be carried by outside professionals retained by the issuer at an average cost of $400 per hour. We estimate that compliance with the requirements of Form 1–U will require 940 burden hours (188 issuers × 1 current report annually × 5 hours per current report) in aggregate each year, which corresponds to 799 hours carried by the issuer internally (188 issuers × 5 hours/issuer/year × 0.85) and costs of $56,400 (188 issuers × 5 hours/issuer/ year × 0.15 × $400) for the services of outside professionals. 4. Form 1–U: Current Reporting Under the final rules, any issuer that conducts a Tier 2 offering in reliance on Regulation A is required to promptly file current reports on Form 1–U with the Commission.1064 A manually signed copy of the Form 1–U must 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.1065 We do not anticipate that the requirement to retain a manually signed copy of the Form 1–U will affect an issuer’s compliance burden. Issuers are 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.1066 The requirement to file a Form 1– U, however, will be triggered by significantly fewer corporate events than those that trigger a reporting requirement on a Form 8–K, and the form itself will be slightly less burdensome for issuers to fill out.1067 Thus, the frequency of filing the required disclosure and the burden to prepare and file a Form 1–U will be considerably less than for Form 8–K. We estimate that the burden to prepare and file each current report will be 5 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 5. Form 1–Z: Exit Report Under the final rules, all Regulation A issuers are required to file a notice under cover of Form 1–Z: Exit Report. Issuers conducting Tier 1 offerings will be required to file Part I of Form 1–Z that discloses information similar to the information previously required of issuers on Form 2–A.1069 Issuers conducting Tier 2 offerings will 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 will also be required to complete 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.1070 In Tier 2 offerings, an issuer’s 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, 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.1071 A manually signed copy of the Form 1–Z must be executed by the issuer and related signatories before or at the time of electronic filing, retained 1063 This estimate includes any special financial reports required to be filed on Form 1–SA. 1064 See Rule 257(b)(4). 1065 See General Instruction C to Form 1–U and related discussion in Section II.E.1.c(3). above. 1066 We estimate the burden per response for preparing a Form 8–K to be 5.71 hours. See Form 8–K, at 1. 1067 See discussion at Section II.E.1.c(3). above. 1068 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 will be considerably less than a Form 8–K, we are estimating that each issuer will be required to file one Form 1–U per year. 1069 See discussion in Section II.E.4.b. above. 1070 See Rule 257(d). 1071 See Rule 252(f)(2). PO 00000 Frm 00086 Fmt 4701 Sfmt 4700 E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES2 by the issuer for a period of five years and, if requested, produced to Commission.1072 We do not anticipate that the requirement to retain a manually signed copy of the Form 1–Z will affect an issuer’s compliance burden. We estimate that all of the issuers conducting Tier 1 offerings (63 issuers, 250 total estimated issuers × 0.25) and 50 percent of issuers conducting Tier 2 offerings (94 issuers, 188 issuers with an ongoing reporting obligation × 0.50) will file a Form 1–Z in the second fiscal year after qualification of the offering statement (157 total issuers, 63 + 94). Although we believe that the vast majority of issuers subject to ongoing reporting under Regulation A will qualify for termination in the second fiscal year after qualification, we believe that only half or 50 percent of such issuers will actually choose to terminate their reporting obligations. An issuer may have many reasons for continuing its reporting obligations, such as a desire to facilitate continued quotations in the over-the-counter (OTC) markets pursuant to revisions to Exchange Act Rule 15c2–11.1073 The Form 1–Z is 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).1074 Therefore, we estimate that compliance with the Form 1–Z will result in a similar burden as compliance with Form 15 that is, a burden of 1.50 hours per response. We estimate that 100% of the burden will be carried by the issuer internally. We estimate that compliance with Form 1–Z will result in a burden of 235.5 hours (157 issuers filing Form 1–Z × 1.50 hours/issuer) in the aggregate. 6. Form 8–A: Short Form Registration Under the Exchange Act Under the final rules, Regulation A issuers in Tier 2 offerings that elect to list securities offered pursuant to a qualified offering statement on a national securities exchange or that seek to register the class of securities offered pursuant to a qualified offering statement under the Exchange Act may do so by filing a Form 8–A (short form) registration statement with the Commission.1075 In such circumstances, 1072 See Instruction to Form 1–Z and related discussion in Section II.E.4.b. above. 1073 See discussion in Section II.E.2. above. 1074 We currently estimate the burden per response for preparing a Form 15 to be 1.50 hours. See Form 15 at 1. 1075 See discussion in Section II.E.3. above. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 an issuer will be required to comply with the form requirements of Form 8– A, which will generally allow issuers to incorporate by reference in the form information provided in the related Form 1–A. While we do not know the exact number of issuers conducting Tier 2 offerings that will seek to register a class of securities under the Exchange Act at or near the time of qualification of an offering statement, for purpose of this PRA analysis, we estimate 2 percent of all issuers filing a Form 1–A (or 5 issuers, 250 issuers × .02) will elect to register a class of securities under the Exchange Act and file a Form 8–A. The final rules do not alter the burden hour per response of Form 8–A, but rather amend the existing Form 8–A to permit issuers in Tier 2 offerings to rely on the form. Therefore, we estimate that compliance with the Form 8–A will not change as a result of the final rules, a burden of 3 hours per response.1076 We estimate that compliance with Form 8– A by issuers conducting a Tier 2 offering will result in a burden of 15 hours (5 issuers filing Form 8–A × 3 hours/ issuer) in aggregate each year. We estimate that 100% of the burden will be carried by the issuer internally. 7. Form ID Filings Under the final rules, an issuer will be required to file specified disclosures with the Commission on EDGAR.1077 We anticipate that many issuers relying on Regulation A for the first time will not have previously filed an electronic submission with the Commission and so will need to file a Form ID. Form ID is the application form for access codes to permit filing on EDGAR. The final rules will not change the form itself, but we anticipate that the number of Form ID filings will increase due to an increase in issuers relying on Regulation A. For purposes of this PRA analysis, we estimate that 75 percent of the issuers who seek to offer and sell securities in reliance on amended Regulation A will not have previously filed an electronic submission with the Commission and will, therefore, be required to file a Form ID. As noted above, we estimate that approximately 250 issuers per year will seek to offer and sell securities in reliance on Regulation A, which corresponds to approximately 188 additional Form ID filings. We estimate that 100% of the burden will be carried by the issuer internally. As a result, we estimate the additional annual burden 1076 17 CFR 249.208a. Rules 252 and 257. 1077 See PO 00000 Frm 00087 Fmt 4701 Sfmt 4700 21891 will be approximately 28.20 hours (188 filings × 0.15 hours/filing).1078 8. Form F–X Under the final rules, Canadian issuers are required to file a Form F–X, which furnishes to the Commission a written irrevocable consent and power of attorney at the time of filing the offering statement required by Rule 252. It is used to appoint an agent for service of process by Canadian issuers eligible to use Regulation A, issuers registering securities on Forms F–8 or F–10 under the Securities Act or filing periodic reports on Form 40–F under the Exchange Act, as well as in certain other circumstances. The final rules will not change Form F–X itself, but will amend the rules to allow for the form to be filed electronically for offerings under Regulation A. Canadian companies are the only type of issuer that will be required to use this form under the final rules and we estimate that 100% of the burden will be carried by the issuer internally. We estimate that approximately 2 percent of issuers utilizing amended Regulation A will be Canadian companies (or 5 responses, 250 issuers × 0.02) resulting in an annual burden of approximately 10 hours (2 hours per response × 5 responses).1079 D. Collections of Information Are Mandatory The collections of information required under Rules 251 through 263 will 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 will not be kept confidential, although an issuer may request confidential treatment for non-publicly submitted offering materials, or any portion thereof, for which it believes an exemption from the FOIA exists.1080 It is anticipated that most material not subject to a confidential treatment request will be made public when the offering is qualified. A Form 1–A that is non-publicly submitted by an issuer and later abandoned before being publicly filed with the Commission and responses on Form ID will, however, remain non-public, absent a request for 1078 We currently estimate the burden associated with Form ID is 0.15 hours per response. See Form ID at 1. 1079 In this regard, we note that no Canadian issuers filed a Form 1–A in 2013. 1080 See Commission Rule 83, 17 CFR 200.83, and Securities Act Rule 406, 17 CFR 230.406. E:\FR\FM\20APR2.SGM 20APR2 21892 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations such information under the Freedom of Information Act.1081 facilitating capital formation for small businesses. V. Final Regulatory Flexibility Act Analysis B. Significant Issues Raised by Public Comments This Final Regulatory Flexibility Analysis has been prepared in accordance with the Regulatory Flexibility Act, 5 U.S.C. 603. It relates to the following: • Amendments to Rule 157(a), Rules 251 through 263 of Regulation A, Rule 505 of Regulation D, Form 1–A, Form 8– A, Rule 30–1 of the Commission’s organizational rules, Rule 4a–1 under the Trust Indenture Act, Rule 12g5–1 and Rule 15c2–11 under the Exchange Act, and Item 101 of Regulation S–T; • new Forms 1–K, 1–SA, 1–U, and 1– Z; and • the rescission of Form 2–A. An Initial Regulatory Flexibility Analysis (IRFA) was prepared in accordance with the Regulatory Flexibility Act and included in the Proposing Release. In the Proposing Release, we requested comment on every aspect of the IRFA, including the number of small entities that would be affected by the proposed amendments, 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 did not receive any comments specifically addressing the IRFA. We did, however, receive comments from members of the public on matters that could potentially impact small entities. These comments are discussed at length by topic in the corresponding subsections of Section II. above. While the proposed rules contemplated that small entities would be able to elect to proceed under the requirements of either Tier 1 or Tier 2, as discussed more fully below, an entity considered a small business under our rules would only be required to file ongoing reports under Regulation A if it elected to conduct a Tier 2 offering.1082 The following discussion therefore focuses on the suggestions of commenters, as they relate to the proposed and final requirements for Tier 1 offerings, which is the tier most likely to be relied upon by small entities.1083 Many commenters recommended making changes to proposed rules that, in their view, would make Regulation A a more viable capital raising option for smaller issuers.1084 Some commenters recommended improving the utility of Regulation A for smaller issuers by preempting state regulation of Tier 1 offerings.1085 Others, however, opposed preemption for all Regulation A offerings.1086 Some commenters recommended that we adopt a third tier, either expressly or through fleixble applicability of the proposed tier mstockstill on DSK4VPTVN1PROD with RULES2 A. Need for the Rules The 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 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 12-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. Our primary objective is to implement Section 401 of the JOBS Act 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 crafted a revision of Regulation A that both promotes small company capital formation and provides 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 from registration more frequently relied upon, thereby 1081 5 U.S.C. 552. The Commission’s regulations that implement the Freedom of Information Act are at 17 CFR 200.80 et seq. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 1082 The distinction between a Tier 1 offering and Tier 2 offering is discussed in Section II. above. 1083 For a more comprehensive discussion of commenter suggestions as to the proposed rules for both Tier 1 and Tier 2 that could potentially impact small entities, see Section II. above. 1084 Andreessen/Cowen Letter; BDO Letter; Bernard Letter; Campbell Letter; CAQ Letter; Public Startup Co. Letter 1; Deloitte Letter; E&Y Letter; Guzik Letter 1; Heritage Letter; ICBA Letter; KPMG Letter; McGladrey Letter; Milken Institute Letter; Ladd Letter 2; SVB Financial Letter; Verrill Dana Letter 1; WR Hambrecht + Co Letter. 1085 Andreessen/Cowen Letter; Bernard Letter; Campbell Letter; Public Startup Co. Letter 1; Guzik Letter 1; Heritage Letter; Milken Institute Letter; Ladd Letter 2; SVB Financial Letter. 1086 See fn. 772 above. PO 00000 Frm 00088 Fmt 4701 Sfmt 4700 requirements.1087 Some commenters suggested that raising the offering limit of Tier 1 from $5 million to $10 million or more would make Tier 1 more useful,1088 while others recommended including various forms of ongoing disclosure at a level lower than what was proposed to be required for Tier 2.1089 One commenter suggested reducing the Tier 1 narrative disclosure obligations, particularly for offerings of $2 million or less, so that such requirements would be more appropriately tailored for smaller issuers.1090 Several commenters made recommendations with respect to the financial statement and auditing requirements in Form 1–A, as they relate to the requirements for Tier 1.1091 The final rules for Regulation A take into account some of the suggestions by commenters on ways to make Tier 1 more useful for small entities. For example, the final rules raise the offering limit of Tier 1 to $20 million. Also, with respect to the offering circular narrative disclosure requirements,1092 we have adopted certain additional scaled disclosure requirements for Tier 1 that are intended to lessen the compliance obligations for smaller issuers. We are further providing issuers under both tiers with the accommodation provided to emerging growth companies in Securities Act Section 7(a) to use the extended transition periods applicable to private companies for complying with new or revised accounting standards under U.S. GAAP. Additionally, we have provided Tier 1 issuers with additional flexibility with respect to auditor independence standards. As noted in Section II.H.3. above, however, we do not agree with the position of some commenters that preemption of state securities laws registration and qualification requirements is necessary or appropriate for Tier 1 offerings.1093 We note that some commenters who suggested that preemption of state securities laws may improve the attractiveness of Tier 1 offerings did so on the condition that other aspects of the tier should change accordingly, namely requiring Tier 1 1087 See, e.g., Public Startup Co. Letter 1. Letter 1; ICBA Letter. 1089 Guzik Letter 1 (suggesting that Tier 1 ongoing disclosure requirements could parallel Tier 2’s requirements, but without the requirement for semiannual reports); Ladd Letter 2; Public Startup Co. Letters 1 and 5; SVB Financial Letter. 1090 Campbell Letter. 1091 BDO Letter; CAQ Letter; Deloitte Letter; E&Y Letter; KPMG Letter; McGladrey Letter. 1092 See Section II.C.3.b(1). above. 1093 See Section II.H.3. above. 1088 Guzik E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations issuers to provide audited financial statements in the offering statement and possibly on an ongoing basis. For the reasons discussed in Section II.D.3.b(2)(c). above, we have not adopted such changes in Tier 1. Additionally, as noted in Section II.I. above, we do not believe that the creation of a third tier, as suggested by some commenters, would meaningfully alter a smaller entity’s options for capital formation under Regulation A. While a third tier may provide issuers with some additional flexibility for capital formation under Regulation A, this additional flexibility would have potential costs. For example, a third tier may unnecessarily complicate compliance with Regulation A for smaller entities, and could potentially confuse investors as to the type of Regulation A offering an issuer was undertaking and the type of information such investor could expect to receive as a result, thereby lessening the viability of the exemption as a whole. For this reason, we are not adopting a third or intermediate tier in Regulation A. In the light of the changes discussed above, we believe that the final rules we are adopting today provide smaller issuers with an appropriately tailored regulatory regime that takes into account the needs of small entities to have a viable capital formation option in Regulation A, while maintaining appropriate investor protections. mstockstill on DSK4VPTVN1PROD with RULES2 C. Small Entities Subject to the Rules For purposes of the Regulatory Flexibility Act, under our rules, an 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.1094 While Regulation A is available for offerings of up to $50 million in securities in a 12-month period, only offerings up to $5 million in securities in a 12-month period will constitute offerings by small entities under the definition set forth above. It is difficult to predict the number of small entities that will use Regulation A due to the many variables included in the amendments. Nevertheless, we believe 1094 Securities Act Rule 157 [17 CFR 230.157]. We note that currently this rule refers to ‘‘the dollar limitation prescribed by Section 3(b) of the Securities Act.’’ 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 Rule 157, we are adopting a technical correction to replace the reference to ‘‘Section 3(b)’’ with a reference to ‘‘Section 3(b)(1).’’ VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 that the final rules for 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. above. Regulation A is currently limited to offerings with an aggregate offering price and aggregate sales of $5 million or less.1095 From 2009 through 2014, 158 issuers filed offering statements and 36 offering statements were qualified by the Commission, or an average of approximately six qualified offering statements per year. Of the 36 offering statements that were qualified, 28 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 five 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 five small businesses will conduct offerings under Regulation A per year. D. Reporting, Recordkeeping, and Other Compliance Requirements As discussed above in Section II., the final rules include reporting, recordkeeping and other compliance requirements. In particular, the final rules impose certain reporting requirements on issuers offering and selling securities in a transaction relying on the exemption provided by Section 3(b) and Regulation A. The final rules 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 1095 As explained in Section II.B.3. above, aggregate sales under Regulation A include prior sales generated from Regulation A offerings that occurred in the 12 months preceding the current offering. PO 00000 Frm 00089 Fmt 4701 Sfmt 4700 21893 sales.1096 Such issuers are also 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 does not require the financial statements to be audited unless the issuer has already had them audited for another purpose. As discussed above in Section II.E.1.c., issuers conducting Tier 2 offerings are also required to file annual reports on new Form 1–K, semiannual updates on new Form 1–SA, current event reporting on new Form 1–U, and to provide notice to the Commission of the termination of their ongoing reporting obligations on new Form 1–Z. An issuer subject to the Tier 2 periodic and current event reporting described above is 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 consists 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 requires 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. Form 1–Z is 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 also will 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; however, we expect its use by small entities will be limited. Although we estimated in the Proposing Release that approximately 188 issuers would enter the proposed Tier 2 ongoing reporting regime every year, we believe that very few small 1096 See E:\FR\FM\20APR2.SGM discussion in Section II.C.3.b. above. 20APR2 21894 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES2 businesses will do so. A small business under our rules will only be required to file ongoing reports under Regulation A if it elects to conduct a Tier 2 offering. E. Agency Action To Minimize Effect on Small Entities 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 final amendments and 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 final rules for small entities. We have made several changes from the proposal that may reduce compliance burdens on small entities. For example, in response to public comment, the final rules provide for the further scaling of disclosure items pertaining to executive compensation and related party transactions for entities offering securities pursuant to Tier 1, which are likely to be smaller 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.1097 We also considered whether there should be an exemption from coverage of the rules, or any parts of the rules, for small entities. As discussed above, we are adopting different compliance reporting requirements for issuers that qualify $20 million or less in securities annually under Tier 1. Those issuers, which are more likely to be small entities, are not subject to ongoing reporting requirements and the requirement to provide audited financial statements, although such entities retain the flexibility to comply with more rigorous initial and ongoing 1097 See Section II.C.3.b. above. VerDate Sep<11>2014 20:46 Apr 17, 2015 compliance obligations if they so choose. While audited financial statements are not a Tier 1 requirement, in comparison to the proposed rules, the final rules provide certain additional flexibility as to the independence standards required to be followed by auditors of financial statements for issuers of less than $20 million that conduct Tier 1 offerings—to the extent an issuer elects to provide audited financial statements—by allowing such auditors to comply with the independence standards of either the AICPA or Article 2 of Regulation S–X. We believe that further distinctions in compliance requirements for Form 1–A users beyond the different sets of requirements for Tier 1 and Tier 2 issuers 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 preparing 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.1098 For these reasons, we believe that small entities should be covered by the final rules to the extent specified above. VI. Statutory Basis and Text of Amendments The amendments and forms contained in this document are being adopted under the authority set forth in Sections 3(b), 19 and 28 of the Securities Act of 1933, as amended, Sections 12, 15, 23(a) and 36 of the Securities Exchange Act of 1934, as amended, and Section 304 of the Trust Indenture Act of 1939, as amended. 1. The authority citation for part 200 is revised to read in part as follows: ■ Authority: 15 U.S.C. 77c, 77o, 77s, 77z– 3, 77sss, 78d, 78d–1, 78d–2, 78o–4, 78w, 78ll(d), 78mm, 80a–37, 80b–11, 7202, and 7211 et seq., unless otherwise noted. * * * * * 2. Section 200.30–1 is amended by: a. Revise paragraphs (b)(2) and (3); and ■ b. Add paragraph (b)(4). The revisions and addition read as follows: ■ ■ § 200.30–1 Delegation of authority to Director of Division of Corporation Finance. * * * * * (b) * * * (2) To determine the date and time of qualification for offering statements and amendments to offering statements pursuant to Rule 252(e) (§ 230.252(e) of this chapter); (3) To consent to the withdrawal of an offering statement or to declare an offering statement abandoned pursuant to Rule 259 (§ 230.259 of this chapter); and (4) To deny a Form 1–Z filing pursuant to Rule 257 (§ 230.257 of this chapter). * * * * * PART 230—GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933 3. The authority citation for part 230 is revised to read in part as follows: ■ List of Subjects 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. 17 CFR Part 200 ■ * Administrative practice and procedure, Authority delegations (Government agencies), Organization and functions (Government agencies). 17 CFR Parts 230, 232, 239, 240, 249, and 260 Reporting and recordkeeping requirements, Securities. In accordance with the foregoing, title 17, chapter II of the Code of Federal Regulations is amended as follows: 1098 See Jkt 235001 PART 200—ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND REQUESTS PO 00000 discussion in Section IV.A.1. above. Frm 00090 Fmt 4701 Sfmt 4700 * * * * 4. In § 230.157, paragraph (a) is revised to read as follows: § 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, mean 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 E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations proposes to conduct an offering of securities which does not exceed the dollar limitation prescribed by section 3(b)(1) of the Securities Act. * * * * * ■ 5. Sections 230.251 through 230.263 are revised to read as follows: Sec. 230.251 Scope of exemption. 230.252 Offering statement. 230.253 Offering circular. 230.254 Preliminary offering circular. 230.255 Solicitations of interest and other communications. 230.256 Definition of ‘‘qualified purchaser’’. 230.257 Periodic and current reporting; exit report. 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. mstockstill on DSK4VPTVN1PROD with RULES2 § 230.251 Scope of exemption. (a) Tier 1 and Tier 2. A public offer or sale of eligible securities, as defined in Rule 261 (§ 230.261), pursuant to Regulation A 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) Tier 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 gross proceeds for all securities sold pursuant to other offering statements within the 12 months before the start of and during the current offering of securities (‘‘aggregate sales’’) does not exceed $20,000,000, including not more than $6,000,000 offered by all selling securityholders that are affiliates of the issuer (‘‘Tier 1 offerings’’). (2) Tier 2. Offerings pursuant to Regulation A in which the sum of the aggregate offering price and aggregate sales does not exceed $50,000,000, including not more than $15,000,000 offered by all selling securityholders that are affiliates of the issuer (‘‘Tier 2 offerings’’). (3) Additional limitation on secondary sales in first year. The portion of the aggregate offering price attributable to the securities of selling securityholders shall not exceed 30% of the aggregate offering price of a particular offering in: (i) The issuer’s first offering pursuant to Regulation A; or (ii) Any subsequent Regulation A offering that is qualified within one year VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 of the qualification date of the issuer’s first offering. Note to paragraph (a). 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 or aggregate sales 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 or aggregate sales 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 and such securities are convertible, exercisable, or exchangeable within one year of the offering statement’s qualification or at the discretion of the issuer, the underlying securities must also be qualified and the aggregate offering price must include the actual or maximum estimated 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 or acquire 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 reports required to be filed, if any, pursuant to Rule 257 (§ 230.257) during the two years before the filing of the offering statement (or for such shorter PO 00000 Frm 00091 Fmt 4701 Sfmt 4700 21895 period that the issuer was required to file such reports); and (8) Is not disqualified under Rule 262 (§ 230.262). (c) Integration with other offerings. Offers or 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) (§ 230.255(e)); (ii) Exempt from registration under Rule 701 (§ 230.701); (iii) Made pursuant to an employee benefit plan; (iv) Exempt from registration under Regulation S (§§ 230.901 through 203.905); (v) Made more than six months after the completion of the Regulation A offering; or (vi) Exempt from registration under Section 4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6)). Note to paragraph (c). 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. (d) Offering conditions—(1) Offers. (i) Except as allowed by Rule 255 (§ 230.255), no offer of securities may be made unless an offering statement has been filed with the Commission. (ii) After the offering statement has been filed, but before it is qualified: (A) Oral offers may be made; (B) Written offers pursuant to Rule 254 (§ 230.254) may be made; and (C) Solicitations of interest and other communications pursuant to Rule 255 (§ 230.255) may be made. (iii) Offers may be made after the offering statement has been qualified, but 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: (A) Until the offering statement has been qualified; (B) By issuers that are not currently required to file reports pursuant to Rule 257(b) (§ 230.257(b)), until 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) In a Tier 2 offering of securities that are not listed on a registered E:\FR\FM\20APR2.SGM 20APR2 21896 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations national securities exchange upon qualification, unless the purchaser is either an accredited investor (as defined in Rule 501 (§ 230.501)) or the aggregate purchase price to be paid by the purchaser for the securities (including the actual or maximum estimated conversion, exercise, or exchange price for any underlying securities that have been qualified) is no more than ten percent (10%) of the greater of such purchaser’s: (1) Annual income or net worth if a natural person (with annual income and net worth for such natural person purchasers determined as provided in Rule 501 (§ 230.501)); or (2) Revenue or net assets for such purchaser’s most recently completed fiscal year end if a non-natural person. mstockstill on DSK4VPTVN1PROD with RULES2 Note to paragraph (d)(2)(i)(C). When securities underlying warrants or convertible securities are being qualified pursuant to Tier 2 of Regulation A one year or more after the qualification of an offering for which investment limitations previously applied, purchasers of the underlying securities for which investment limitations would apply at that later date may determine compliance with the ten percent (10%) investment limitation using the conversion, exercise, or exchange price to acquire the underlying securities at that later time without aggregating such price with the price of the overlying warrants or convertible securities. (D) The issuer may rely on a representation of the purchaser when determining compliance with the ten percent (10%) investment limitation in this paragraph (d)(2)(i)(C), 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 by a dealer within 90 calendar days after qualification of the offering statement, 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, subject to the following provisions: (A) If the sale was by the issuer and was not effected by or through an underwriter or dealer, the issuer is responsible for delivering the Final Offering Circular as if the issuer were an underwriter; (B) For continuous or delayed offerings pursuant to paragraph (d)(3) of this section, the 90 calendar day period for dealers shall commence on the day of the first bona fide offering of securities under such offering statement; (C) If the security is listed on a registered national securities exchange, no offering circular need be delivered by VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 a dealer more than 25 calendar days after the later of the qualification date of the offering statement or the first date on which the security was bona fide offered to the public; (D) No offering circular need be delivered by a dealer if the issuer is subject, immediately prior to the time of the filing of the offering statement, to the reporting requirements of Rule 257(b) (§ 230.257(b)); and (E) The Final Offering Circular delivery requirements set forth in paragraph (d)(2)(ii) of this section may be satisfied by delivering a notice to the effect that the sale was made pursuant to a qualified offering statement that includes the uniform resource locator (‘‘URL’’), which, in the case of an electronic-only offering, must be an active hyperlink, where the Final Offering Circular, or the offering statement of which such Final Offering Circular is part, may be obtained on the Commission’s Electronic Data Gathering, Analysis and Retrieval System (‘‘EDGAR’’) and contact information sufficient to notify a purchaser where a request for a Final Offering Circular can be sent and received in response. (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 calendar 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 PO 00000 Frm 00092 Fmt 4701 Sfmt 4700 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 calendar days after the third anniversary of the initial qualification date of the prior offering statement. Before the end of such threeyear 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 to this paragraph (d)(3)(i)(F) only if the issuer is current in its annual and semiannual filings pursuant to Rule 257(b) (§ 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. (e) Confidential treatment. A request for confidential treatment may be made under Rule 406 (§ 230.406) for information required to be filed, and Rule 83 (§ 200.83) for information not required to be filed. (f) Electronic filing. Documents filed or otherwise provided to the Commission pursuant to this Regulation A must be submitted in electronic format by means of EDGAR in accordance with the EDGAR rules set forth in Regulation S–T (17 CFR part 232). § 230.252 Offering statement. (a) Documents to be included. The offering statement consists of the contents required by Form 1–A (§ 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. E:\FR\FM\20APR2.SGM 20APR2 mstockstill on DSK4VPTVN1PROD with RULES2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations (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 (§ 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) 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 in the manner prescribed by Form 1–A. 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. (d) 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 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 with the Commission of: (1) The initial non-public submission; (2) All non-public amendments; 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 Rule 251(e) (§ 230.251(e)). (e) Qualification. An offering statement and any amendment thereto can be qualified only at such date and time as the Commission may determine. (f) Amendments. (1)(i) Amendments to an offering statement must be signed and filed with the Commission in the same manner as the initial filing. 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 amended audited financial statements must include the consent of the certifying accountant to the use of such accountant’s certification 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 the requirements of paragraph (f)(1)(i) of this section, except that such VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 amendments may be limited to 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. § 230.253 Offering circular. (a) Contents. An offering circular must include the information required by Form 1–A for offering circulars. (b) Information that may be omitted. Notwithstanding paragraph (a) of this section, a qualified 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 or 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) (§ 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 PO 00000 Frm 00093 Fmt 4701 Sfmt 4700 21897 be offered may not be omitted in reliance on this paragraph (b). Note to paragraph (b). 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) (§ 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) or (3) (§ 230.253(g)(1) or (3)) 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) (§ 230.251(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) Filing of omitted information. The information omitted from the offering circular in reliance upon paragraph (b) of this section must be contained in an offering circular filed with the Commission pursuant to paragraph (g) of this section; 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 section 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; crossreferencing 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:\FR\FM\20APR2.SGM 20APR2 mstockstill on DSK4VPTVN1PROD with RULES2 21898 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations (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) (§ 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 section 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 sale. If an offering circular filed pursuant to this paragraph (g)(2) consists of an offering circular supplement attached to an offering circular that previously had been filed or was not required to be filed pursuant to paragraph (g) of this section 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 section, provided that the cover page of the offering circular supplement identifies 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) of this section must be filed with the Commission no later than two business days following the earlier of the date of VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 the determination of the offering price or the date it is first used after qualification in connection with a public offering or sale. (4) An offering circular required to be filed pursuant to paragraph (g) of this section that is not filed within the time frames specified in paragraphs (g)(1) through (3) of this section, as applicable, must be filed pursuant to this paragraph (g)(4) as soon as practicable after the discovery of such failure to file. (5) Each offering circular filed under this section must contain in the upper right corner of the cover page the paragraphs of paragraphs (g)(1) through (4) of this section under which the filing is made, and the file number of the offering statement to which the offering circular relates. § 230.254 Preliminary offering circular. After the filing of an offering statement, but before its qualification, written offers of securities may be made if they meet the following requirements: (a) Outside front cover page. 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) Other contents. The Preliminary Offering Circular contains substantially the information required to be in an offering circular by Form 1–A (§ 239.90 of this chapter), except that certain information may be omitted under Rule 253(b) (§ 230.253(b)) subject to the conditions set forth in such rule. PO 00000 Frm 00094 Fmt 4701 Sfmt 4700 (c) Filing. The Preliminary Offering Circular is filed as a part of the offering statement. § 230.255 Solicitations of interest and other communications. (a) Solicitation of interest. At any time before the qualification of an offering statement, including before the nonpublic 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) Conditions. 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 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) Indications of interest. 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) Revised solicitations of interest. If solicitation of interest materials are used after the public filing of the offering statement and such solicitation of interest materials contain information E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations that is inaccurate or inadequate in any material respect, revised solicitation of interest materials must be redistributed in a substantially similar manner as 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 (ii) of this section, no such redistribution is required in the following circumstances: (1) in the case of paragraph (b)(4)(i) of this section, 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 section, 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) Abandoned offerings. Where an issuer decides to register an offering under the Securities Act after soliciting interest in a contemplated, but subsequently abandoned, Regulation A offering, the abandoned Regulation A offering would not be subject to integration with the registered offering if the issuer engaged in solicitations of interest pursuant to this rule only to qualified institutional buyers and institutional accredited investors permitted by Section 5(d) of the Securities Act. If the issuer engaged in solicitations of interest to persons other than qualified institutional buyers and institutional accredited investors, an abandoned Regulation A offering would not be subject to integration if the issuer (and any underwriter, broker, dealer, or agent used by the issuer in connection with the proposed offering) waits 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. mstockstill on DSK4VPTVN1PROD with RULES2 § 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’’ means any person to whom securities are offered or sold pursuant to a Tier 2 offering of this Regulation A. § 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 VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 pursuant to this Regulation A must file an exit report on Form 1–Z (§ 239.94 of this chapter) not later than 30 calendar days after the termination or completion of the offering. (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: (1) Annual reports. An annual report on Form 1–K (§ 239.91 of this chapter) 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 section. Annual reports must be filed within the period specified in Form 1– K. (2) Special financial report. (i) A special financial report on Form 1–K or Form 1–SA if the offering statement did not contain the following: (A) Audited financial statements for the issuer’s most recent 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) unaudited financial statements covering the first six months of the issuer’s current fiscal year if the offering statement was qualified during the last six months of that fiscal year. (ii) The special financial report described in paragraph (b)(2)(i)(A) of this section 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 fiscal year or other period specified in that paragraph, as the case may be. The special financial report described in paragraph (b)(2)(i)(B) of this section 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 six months 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 (§ 239.92 of this chapter) within the period specified in Form 1–SA. Semiannual reports must cover the first six months of each fiscal year of the issuer, commencing with the first six months of the fiscal year immediately following the most recent fiscal year for which full financial statements were included in the offering PO 00000 Frm 00095 Fmt 4701 Sfmt 4700 21899 statement, or, if the offering statement included financial statements for the first six months of the fiscal year following the most recent full fiscal year, for the first six months of the following fiscal year. (4) Current reports. Current reports on Form 1–U (§ 239.93 of this chapter) 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 Form 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 section 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 section 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 section, unless that issuer is exempt from filing such reports or the duty to file such reports is terminated or suspended under paragraph (d) of this section. (c) Amendments. All amendments to the reports described in paragraphs (a) and (b) of this section 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) 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 section with respect to a class of securities held of E:\FR\FM\20APR2.SGM 20APR2 mstockstill on DSK4VPTVN1PROD with RULES2 21900 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations record (as defined in Rule 12g5–1 (§ 240.12g5–1 of this chapter)) by less than 300 persons, or less than 1,200 persons for a bank (as defined in Section 3(a)(6) of the Exchange Act (15 U.S.C. 78c(a)(6)), or a bank holding company (as defined in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. 1841)), shall be suspended for such class of securities immediately upon filing with the Commission an exit report on Form 1–Z (§ 239.94 of this chapter) 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. (3) For the purposes of paragraph (d)(2) of this section, 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 if it is denied because the issuer was ineligible to use the form, the issuer must, within 60 calendar 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. (4) The ability to suspend reporting, as described in paragraph (d)(2) of this section, is not available for any class of securities if: (i) During that fiscal year a Tier 2 offering statement was qualified; (ii) The issuer has not filed an annual report under this rule or the Exchange Act for the fiscal year in which a Tier 2 offering statement was qualified; or (iii) Offers or sales of securities of that class are being made pursuant to a Tier 2 Regulation A offering. (e) Termination of duty to file reports. If the duty to file reports is suspended pursuant to paragraph (d)(1) of this section and such suspension ends because the issuer terminates or suspends its duty to file reports under the Exchange Act, the issuer’s obligation to file reports under paragraph (b) of this section shall: (1) Automatically terminate if the issuer is eligible to suspend its duty to file reports under paragraphs (d)(2) and (3) of this section; or (2) Recommence with the report covering the most recent financial period after that included in any VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 effective registration statement or filed Exchange Act report. § 230.258 Suspension of the exemption. (a) Suspension. 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 (§ 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; (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) (§ 230.262(a)) has been indicted for any crime or offense of the character specified in Rule 262(a)(1) (§ 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) (§ 230.262(a)(2)), or any proceeding has been initiated for the purposes of Rule 262(a)(3)–(8) (§ 230.262(a)(3) through (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) Notice and hearing. Upon the entry of an order under paragraph (a) of this section, 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) Suspension order. If no hearing is requested and none is ordered by the Commission, an order entered under PO 00000 Frm 00096 Fmt 4701 Sfmt 4700 paragraph (a) of this section 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) Permanent suspension. 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 section. Any such order shall remain in effect until vacated by the Commission. (e) Notice procedures. 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. § 230.259 Withdrawal or abandonment of offering statements. (a) Withdrawal. If none of the securities that are the subject of an offering statement has been sold and such offering statement is not the subject of a proceeding under Rule 258 (§ 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 and must be signed by an authorized representative of the issuer. Any withdrawn document will remain in the Commission’s files, as well as the related request for withdrawal. (b) Abandonment. 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 ninemonth period shall be computed from the date of the latest amendment. § 230.260 Insignificant deviations from a term, condition or requirement of Regulation A. (a) Failure to comply. 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 E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations 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 Rule 251(a), (b), and (d)(1) and (3) (§ 230.251(a), (b), and (d)(1) and (3)) 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) Action by Commission. 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 section, the failure to comply shall nonetheless be actionable by the Commission under section 20 of the Securities Act. (c) Suspension. This provision provides no relief or protection from a proceeding under Rule 258 (§ 230.258). mstockstill on DSK4VPTVN1PROD with RULES2 § 230.261 Definitions. As used in this Regulation A, all terms have the same meanings as in Rule 405 (§ 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) Affiliated issuer. An affiliate (as defined in Rule 501 (§ 230.501)) of the issuer that is issuing securities in the same offering. (b) Business day. Any day except Saturdays, Sundays or United States federal holidays. (c) Eligible securities. Equity securities, debt securities, and securities convertible or exchangeable to equity interests, including any guarantees of such securities, but not including assetbacked securities as such term is defined in Item 1101(c) of Regulation AB. (d) Final order. A written directive or declaratory statement issued by a federal or state agency described in Rule 262(a)(3) (§ 230.262(a)(3)) under applicable statutory authority that provides for notice and an opportunity for hearing, which constitutes a final disposition or action by that federal or state agency. (e) Final offering circular. The more recent of: the current offering circular contained in a qualified offering statement; and any offering circular filed pursuant to Rule 253(g) (§ 230.253(g)). If, however, the issuer is relying on Rule 253(b) ((§ 230.253(b)), the Final Offering Circular is the most VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 recent of the offering circular filed pursuant to Rule 253(g)(1) or (3) (§ 230.253(g)(1) or (3)) and any subsequent offering circular filed pursuant to Rule 253(g) (§ 230.253(g)). (f) Offering statement. An offering statement prepared pursuant to Regulation A. (g) Preliminary offering circular. The offering circular described in Rule 254 (§ 230.254). § 230.262 Disqualification provisions. (a) Disqualification events. 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: (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; PO 00000 Frm 00097 Fmt 4701 Sfmt 4700 21901 (3) Is subject to a final order (as defined in Rule 261 (§ 230.261)) 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 filing of the offering statement; (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. 78o(b) or 78o–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. 78o(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 E:\FR\FM\20APR2.SGM 20APR2 mstockstill on DSK4VPTVN1PROD with RULES2 21902 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations (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 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) Transition, waivers, reasonable care exception. Paragraph (a) of this section shall not apply: (1) With respect to any order under § 230.262(a)(3) or (5) that occurred or was issued before June 19, 2015; (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 section 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 section. Note 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 VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 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. PART 232—REGULATION S–T— GENERAL RULES AND REGULATIONS FOR ELECTRONIC FILINGS (c) Affiliated issuers. For purposes of paragraph (a) of this section, 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 paragraphs (a)(3) and (5) of this section but occurred before June 19, 2015. 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. ■ § 230.263 Consent to service of process. (a) If the issuer is not organized under the laws of any of the states or territories of the United States of America, it shall furnish to the Commission a written irrevocable consent and power of attorney on Form F–X (§ 239.42 of this chapter) at the time of filing the offering statement required by Rule 252 (§ 230.252). (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. ■ 6. Section 230.505(b)(2)(iii)(A) and (B) are revised to read as follows: § 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 § 230.262 shall mean the first sale of securities under this section; (B) The term underwriter as used in § 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 * * * * * PO 00000 Frm 00098 Fmt 4701 Sfmt 4700 7. 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.; and 18 U.S.C. 1350, unless otherwise noted. * * * * * 8. Section 232.101 is amended by: a. Revising paragraph (a)(1)(vii), (xv), and (xvi), and (c)(6); ■ b. Adding paragraph (a)(1)(xvii); and ■ c. Removing and reserving paragraph (b)(8). The revisions and addition read as follows: ■ ■ § 232.101 Mandated electronic submissions and exceptions. (a) * * * (1) * * * (vii) Form F–X (§ 239.42 of this chapter) when filed in connection with a Form CB (§§ 239.800 and 249.480 of this chapter) or a Form 1–A (§ 239.90 of this chapter); * * * * * (xv) Form ABS–EE (§ 249.1401 of this chapter); (xvi) Form ABS–15G (as defined in § 249.1400 of this chapter); and (xvii) Filings made pursuant to Regulation A (§§ 230.251–230.263 of this chapter). * * * * * (c) * * * (6) Filings on Form 144 (§ 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 9. 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, unless otherwise noted. * * * * * 10. Amend Form 1–A (referenced in § 239.90) by revising it to read as follows: ■ E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 1–A REGULATION A OFFERING STATEMENT UNDER THE SECURITIES ACT OF 1933 GENERAL INSTRUCTIONS I. Eligibility Requirements for Use of Form 1–A. This Form is to be used for securities offerings made pursuant to Regulation A (17 CFR 230.251 et seq.). Careful attention should be directed to the terms, conditions and requirements of Regulation A, especially Rule 251, because the exemption is not available to all issuers or for every type of securities transaction. Further, the aggregate offering price and aggregate sales of securities in any 12-month period is strictly limited to $20 million for Tier 1 offerings and $50 million for Tier 2 offerings, including no more than $6 million offered by all selling securityholders that are affiliates of the issuer for Tier 1 offerings and $15 million by all selling securityholders that are affiliates of the issuer for Tier 2 offerings. Please refer to Rule 251 of Regulation A for more details. mstockstill on DSK4VPTVN1PROD with RULES2 II. Preparation, Submission and Filing of the Offering Statement. An offering statement must be prepared by all persons seeking exemption under the provisions of Regulation A. Parts I, II and III must be addressed by all issuers. Part II, which relates to the content of the required offering circular, provides alternative formats, of which the issuer must choose one. General information regarding the preparation, format, content, and submission or filing of the offering statement is contained in Rule 252. Information regarding non-public submission of the offering statement is contained in Rule 252(d). Requirements relating to the offering circular are contained in Rules 253 and 254. The offering statement must be submitted or filed with the Securities and Exchange 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) for such submission or filing. III. Incorporation by Reference and Cross-Referencing. An issuer may incorporate by reference to other documents previously submitted or filed on EDGAR. Cross- VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 referencing within the offering statement is also encouraged to avoid repetition of information. For example, you may respond to an item of this Form by providing a cross-reference to the location of the information in the financial statements, instead of repeating such information. Incorporation by reference and crossreferencing are subject to the following additional conditions: (a) The use of incorporation by reference and cross-referencing in Part II of this Form is limited to the following items: (1) Items 2–14 of Part II if following the Offering Circular format; (2) Items 3–11 (other than Item 11(e)) of Form S–1 if following the Part I of Form S–1 format; or (3) Items 3–26, 28, and 30 of Form S– 11 if following the Part I of Form S–11 format. (b) Descriptions of where the information incorporated by reference or cross-referenced can be found must be specific and must clearly identify the relevant document and portion thereof where such information can be found. For exhibits incorporated by reference, this description must be noted in the exhibits index for each relevant exhibit. All descriptions of where information incorporated by reference can be found must be accompanied by a hyperlink to the incorporated document on EDGAR, which hyperlink need not remain active after the filing of the offering statement. Inactive hyperlinks must be updated in any amendment to the offering statement otherwise required. (c) Reference may not be made to any document if the portion of such document containing the pertinent information includes an incorporation by reference to another document. Incorporation by reference to documents not available on EDGAR is not permitted. Incorporating information into the financial statements from elsewhere is not permitted. Information shall not be incorporated by reference or cross-referenced in any case where such incorporation would render the statement or report incomplete, unclear, or confusing. (d) If any substantive modification has occurred in the text of any document incorporated by reference since such document was filed, the issuer must file with the reference a statement containing the text and date of such modification. IV. Supplemental Information. The information specified below must be furnished to the Commission as supplemental information, if applicable. Supplemental information shall not be PO 00000 Frm 00099 Fmt 4701 Sfmt 4700 21903 required to be filed with or deemed part of the offering statement, unless otherwise required. The information shall be returned to the issuer upon request made in writing at the time of submission, provided that the return of such information is consistent with the protection of investors and the provisions of the Freedom of Information Act [5 U.S.C. 552] and the information was not filed in electronic format. (a) A statement as to whether or not the amount of compensation to be allowed or paid to the underwriter has been cleared with the Financial Industry Regulatory Authority (FINRA). (b) Any engineering, management, market, or similar report referenced in the offering circular or provided for external use by the issuer or by a principal underwriter in connection with the proposed offering. There must also be furnished at the same time a statement as to the actual or proposed use and distribution of such report or memorandum. Such statement must identify each class of persons who have received or will receive the report or memorandum, and state the number of copies distributed to each such class along with a statement as to the actual or proposed use and distribution of such report or memorandum. (c) Such other information as requested by the staff in support of statements, representations and other assertions contained in the offering statement or any correspondence to the staff. Correspondence appropriately responding to any staff comments made on the offering statement must also be furnished electronically. When applicable, such correspondence must clearly indicate where changes responsive to the staff’s comments may be found in the offering statement. PART I—NOTIFICATION The following information must be provided in the XML-based portion of Form 1–A available through the EDGAR portal and must be completed or updated before uploading each offering statement or amendment thereto. The format of Part I shown below may differ from the electronic version available on EDGAR. The electronic version of Part I will allow issuers to attach Part II and Part III for filing by means of EDGAR. All items must be addressed, unless otherwise indicated. * * * * * b No changes to the information required by Part I have occurred since the last filing of this offering statement. E:\FR\FM\20APR2.SGM 20APR2 21904 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations include notes payable, bonds, mortgages, and similar obligations. To determine ‘‘Total Revenues’’ for all companies selecting ‘‘Other’’ for their industry group, refer to Article 5– 03(b)(1) of Regulation S–X. For companies selecting ‘‘Insurance,’’ refer to Article 7–04 of Regulation S–X for calculation of ‘‘Total Revenues’’ and paragraphs 5 and 7(a) for ‘‘Costs and Expenses Applicable to Revenues’’. ITEM 1. Issuer Information Accounts Payable and Accrued Liabilities: l Deposits: llllllllllllllll Long Term Debt: lllllllllllll Total Liabilities: lllllllllllll Total Stockholders’ Equity: llllllll Total Liabilities and Equity: lllllll Income Statement Information Total Interest Income: llllllllll Total Interest Expense: llllllllll Depreciation and Amortization: llllll Net Income: lllllllllllllll Earnings Per Share—Basic: llllllll Earnings Per Share—Diluted: lllllll Balance Sheet Information [If ‘‘Insurance’’ is selected, display the following options in the Financial Statements table:] Exact name of issuer as specified in the issuer’s charter: lllllllllllll Jurisdiction of incorporation/organization: lllllllllllllllllllll Year of incorporation: llllllllll CIK: llllllllllllllllll Primary Standard Industrial Classification Code: llllllllllllllllll I.R.S. Employer Identification Number: lllllllllllllllllllll [If ‘‘Other’’ is selected, display the Total number of full-time employees: following options in the Financial llllllllllllllll Total number of part-time employees: lll Statements table:] Contact Information Address of Principal Executive Offices: lllllllllllllllllllll Telephone:(ll) llllllllllll Provide the following information for the person the Securities and Exchange Commission’s staff should call in connection with any pre-qualification review of the offering statement: llllllllllllllll lllllllllllllllllllll Name: lllllllllllllllll Address: llllllllllllllll Telephone: (ll) llllllllllll Provide up to two email addresses to which the Securities and Exchange Commission’s staff may send any comment letters relating to the offering statement. After qualification of the offering statement, such email addresses are not required to remain active: llll lllllllllllllllllllll Financial Statements Industry Group (select one): b Banking b Insurance b Other Use the financial statements for the most recent fiscal period contained in this offering statement to provide the following information about the issuer. The following table does not include all of the line items from the financial statements. Long Term Debt would Cash and Cash Equivalents: llllllll Investment Securities: llllllllll Accounts and Notes Receivable: llllll Property, Plant and Equipment (PP&E): ll Total Assets: llllllllllllll Accounts Payable and Accrued Liabilities: l Long Term Debt: lllllllllllll Total Liabilities: lllllllllllll Total Stockholders’ Equity: llllllll Total Liabilities and Equity: lllllll Income Statement Information Total Revenues: lllllllllllll Costs and Expenses Applicable to Revenues: lllllllllllllllllllll Depreciation and Amortization: llllll Net Income: lllllllllllllll Earnings Per Share—Basic: llllllll Earnings Per Share—Diluted: lllllll [If ‘‘Banking’’ is selected, display the following options in the Financial Statements table:] Balance Sheet Information Cash and Cash Equivalents: llllllll Investment Securities: llllllllll Loans: lllllllllllllllll Property and Equipment: lllllllll Total Assets: llllllllllllll Name of class (if any) Units outstanding Balance Sheet Information Cash and Cash Equivalents: llllllll Total Investments: llllllllllll Accounts and Notes Receivable: llllll Property and Equipment: lllllllll Total Assets: llllllllllllll Accounts Payable and Accrued Liabilities: l Policy Liabilities and Accruals: llllll Long Term Debt: lllllllllllll Total Liabilities: lllllllllllll Total Stockholders’ Equity: llllllll Total Liabilities and Equity: lllllll Income Statement Information Total Revenues: lllllllllllll Costs and Expenses Applicable to Revenues: Depreciation and Amortization: llllll Net Income: lllllllllllllll Earnings Per Share—Basic: llllllll Earnings Per Share—Diluted: lllllll [End of section that varies based on the selection of Industry Group] Name of Auditor (if any): lllllllll Outstanding Securities CUSIP (if any) Name of trading center or quotation medium (if any) Common Equity Preferred Equity Debt Securities mstockstill on DSK4VPTVN1PROD with RULES2 ITEM 2. Issuer Eligibility b Check this box to certify that all of the following statements are true for the issuer(s): • Organized under the laws of the United States or Canada, or any State, Province, Territory or possession thereof, or the District of Columbia. • Principal place of business is in the United States or Canada. • Not subject to section 13 or 15(d) of the Securities Exchange Act of 1934. • Not a development stage company that either (a) has no specific business VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 plan or purpose, or (b) has indicated that its business plan is to merge with an unidentified company or companies. • Not an investment company registered or required to be registered under the Investment Company Act of 1940. • Not issuing fractional undivided interests in oil or gas rights, or a similar interest in other mineral rights. • Not issuing asset-backed securities as defined in Item 1101(c) of Regulation AB. PO 00000 Frm 00100 Fmt 4701 Sfmt 4700 • 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 this offering statement. • Has filed with the Commission all the reports it was required to file, if any, pursuant to Rule 257 during the two years immediately before the filing of the offering statement (or for such shorter period that the issuer was required to file such reports). E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations ITEM 3. Application of Rule 262 b Check this box to certify that, as of the time of this filing, each person described in Rule 262 of Regulation A is either not disqualified under that rule or is disqualified but has received a waiver of such disqualification. b Check this box if ‘‘bad actor’’ disclosure under Rule 262(d) is provided in Part II of the offering statement. ITEM 4. Summary Information Regarding the Offering and Other Current or Proposed Offerings Check the appropriate box to indicate whether you are conducting a Tier 1 or Tier 2 offering: b Tier 1 b Tier 2 Check the appropriate box to indicate whether the annual financial statements have been audited: b Unaudited b Audited Types of Securities Offered in this Offering Statement (select all that apply): b Equity (common or preferred stock) b Debt b Option, warrant or other right to acquire another security b Security to be acquired upon exercise of option, warrant or other right to acquire security b Tenant-in-common securities b Other (describe)llllll Does the issuer intend to offer the securities on a delayed or continuous basis pursuant to Rule 251(d)(3)? Yes b No b Does the issuer intend this offering to last more than one year? Yes b No b Does the issuer intend to price this offering after qualification pursuant to Rule 253(b)? Yes b No b Will the issuer be conducting a best efforts offering? Yes b No b Has the issuer used solicitation of interest communications in connection with the proposed offering? Yes b No b Does the proposed offering involve the resale of securities by affiliates of the issuer? Yes b No b Number of securities offered:llllll Number of securities of that class already outstanding:llllll The information called for by this item below may be omitted if undetermined at the time of filing or submission, except that if a price range has been included in the offering statement, the midpoint of that range must be used to respond. Please refer to Rule 251(a) for the definition of ‘‘aggregate offering price’’ or ‘‘aggregate sales’’ as used in this item. Please leave the field blank if undetermined at this time and include a zero if a particular item is not applicable to the offering. Price per security: $llllll The portion of the aggregate offering price attributable to securities being offered on behalf of the issuer: $llllll The portion of the aggregate offering price attributable to securities being offered on behalf of selling securityholders: $llllll The portion of aggregate offering attributable to all the securities of the issuer sold pursuant to a qualified offering statement within the 12 months before the qualification of this offering statement: $llllll The estimated portion of aggregate sales attributable to securities that may be sold pursuant to any other qualified offering statement concurrently with securities being sold under this offering statement: $llllll Total: $llllll (the sum of the aggregate offering price and aggregate sales in the four preceding paragraphs). Anticipated fees in connection with this offering and names of service providers: Name of Service Provider Underwriters: ..................................................................................................................................................... Sales Commissions: .......................................................................................................................................... Finders’ Fees: ................................................................................................................................................... Audit: ................................................................................................................................................................. Legal: ................................................................................................................................................................. Promoters: ......................................................................................................................................................... Blue Sky Compliance: ....................................................................................................................................... CRD Number of any broker or dealer listed:llllll Estimated net proceeds to the issuer: $llllll Clarification of responses (if necessary):llllll ITEM 5. Jurisdictions in Which Securities are to be Offered mstockstill on DSK4VPTVN1PROD with RULES2 Using the list below, select the jurisdictions in which the issuer intends to offer the securities: [List will include all U.S. and Canadian jurisdictions, with an option to add and remove them individually, add all and remove all.] Using the list below, select the jurisdictions in which the securities are to be offered by underwriters, dealers or VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 21905 llllllll llllllll llllllll llllllll llllllll llllllll llllllll Fees $lllll $lllll $lllll $lllll $lllll $lllll $lllll sales persons or check the appropriate (2) Total amount of such securities box: issued b None (3) Amount of such securities sold by b Same as the jurisdictions in which the or for the account of any person who at issuer intends to offer the securities. the time was a director, officer, [List will include all U.S. and Canadian promoter or principal securityholder of jurisdictions, with an option to add and the issuer of such securities, or was an underwriter of any securities of such remove them individually, add all and issuer remove all.] (c)(1) Aggregate consideration for ITEM 6. Unregistered Securities Issued which the securities were issued and or Sold Within One Year basis for computing the amount thereof. b None lllllllllllllllllllll As to any unregistered securities lllllllllllllllllllll issued by the issuer or any of its lllllllllllllllllllll predecessors or affiliated issuers within (2) Aggregate consideration for which one year before the filing of this Form the securities listed in (b)(3) of this item 1–A, state: (if any) were issued and the basis for (a) Name of such issuer. computing the amount thereof (if (b) (1) Title of securities issued PO 00000 Frm 00101 Fmt 4701 Sfmt 4700 E:\FR\FM\20APR2.SGM 20APR2 21906 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations (4) For preliminary offering circulars, the legend required by Rule 254(a) must be included on the offering circular cover page (for issuers following the S– 1 or S–11 disclosure models, this legend must be included instead of the legend required by Item 501(b)(10) of Regulation S–K); and (5) For Tier 2 offerings where the lllllllllllllllllllll securities will not be listed on a PART II — INFORMATION REQUIRED registered national securities exchange IN OFFERING CIRCULAR upon qualification, the offering circular cover page must include the following (a) Financial statement requirements legend highlighted by prominent type or regardless of the applicable disclosure in another manner: format are specified in Part F/S of this Generally, no sale may be made to Form 1–A. The narrative disclosure you in this offering if the aggregate contents of offering circulars are purchase price you pay is more than specified as follows: 10% of the greater of your annual (1) The information required by: income or net worth. Different rules (i) the Offering Circular format apply to accredited investors and nondescribed below; or natural persons. Before making any (ii) The information required by Part representation that your investment I of Form S–1 (17 CFR 239.11) or Part does not exceed applicable thresholds, I of Form S–11 (17 CFR 239.18), except we encourage you to review Rule for the financial statements, selected 251(d)(2)(i)(C) of Regulation A. For financial data, and supplementary general information on investing, we financial information called for by those encourage you to refer to forms. An issuer choosing to follow the www.investor.gov. Form S–1 or Form S–11 format may (b) The Commission encourages the follow the requirements for smaller use of management’s projections of reporting companies if it meets the future economic performance that have definition of that term in Rule 405 (17 a reasonable basis and are presented in CFR 230.405). An issuer may only use an appropriate format. See Rule 175, 17 the Form S–11 format if the offering is CFR 230.175. eligible to be registered on that form; (c) Offering circulars need not follow The cover page of the offering circular the order of the items or the order of must identify which disclosure format is other requirements of the disclosure being followed. form except to the extent otherwise (2) The offering circular must describe specifically provided. Such information any matters that would have triggered may not, however, be set forth in such disqualification under Rule 262(a)(3) or a fashion as to obscure any of the (a)(5) but for the provisions set forth in required information or any information Rule 262(b)(1); necessary to keep the required (3) The legend required by Rule 253(f) information from being incomplete or of Regulation A must be included on the misleading. Information requested to be presented in a specified tabular format offering circular cover page (for issuers must be given in substantially the following the S–1 or S–11 disclosure tabular format specified. For models this legend must be included incorporation by reference, please refer instead of the legend required by Item to General Instruction III of this Form. 501(b)(7) of Regulation S–K); different from the basis described in (c)(1)). (e) Indicate the section of the Securities Act or Commission rule or regulation relied upon for exemption from the registration requirements of such Act and state briefly the facts relied upon for such exemption:lllllllll Price to public mstockstill on DSK4VPTVN1PROD with RULES2 Per share/unit: ........................ Total: ....................................... llllllllllll llllllllllll If the securities are to be offered on a best efforts basis, the cover page must set forth the termination date, if any, of Per share/unit: ........................ Total Minimum: ....................... Total Maximum: ...................... VerDate Sep<11>2014 20:46 Apr 17, 2015 llllllllllll llllllllllll llllllllllll Jkt 235001 PO 00000 Frm 00102 Item 1. Cover Page of Offering Circular The cover page of the offering circular must be limited to one page and must include the information specified in this item. (a) Name of the issuer. Instruction to Item 1(a): If your name is the same as, or confusingly similar to, that of a company that is well known, include information to eliminate any possible confusion with the other company. If your name indicates a line of business in which you are not engaged or you are engaged only to a limited extent, include information to eliminate any misleading inference as to your business. In some circumstances, disclosure may not be sufficient and you may be required to change your name. You will not be required to change your name if you are an established company, the character of your business has changed, and the investing public is generally aware of the change and the character of your current business. (b) Full mailing address of the issuer’s principal executive offices and the issuer’s telephone number (including the area code) and, if applicable, Web site address. (c) Date of the offering circular. (d) Title and amount of securities offered. Separately state the amount of securities offered by selling securityholders, if any. Include a crossreference to the section where the disclosure required by Item 14 of Part II of this Form 1–A has been provided; (e) The information called for by the applicable table below as to all the securities being offered, in substantially the tabular format indicated. If necessary, you may estimate any underwriting discounts and commissions and the proceeds to the issuer or other persons. Underwriting discount and commissions llllllllllll llllllllllll the offering, any minimum required sale and any arrangements to place the funds received in an escrow, trust, or similar Price to public OFFERING CIRCULAR Proceeds to issuer llllllllllll llllllllllll Fmt 4701 Sfmt 4700 llllll llllll arrangement. The following table must be used instead of the preceding table. Underwriting discount and commissions llllllllllll llllllllllll llllllllllll Proceeds to other persons Proceeds to issuer llllllllllll llllllllllll llllllllllll E:\FR\FM\20APR2.SGM 20APR2 Proceeds to other persons llllll llllll llllll mstockstill on DSK4VPTVN1PROD with RULES2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations Instructions to Item 1(e): 1. The term ‘‘commissions’’ includes all cash, securities, contracts, or anything else of value, paid, to be set aside, disposed of, or understandings with or for the benefit of any other persons in which any underwriter is interested, made in connection with the sale of such security. 2. Only commissions paid by the issuer in cash are to be indicated in the table. Commissions paid by other persons or any form of non-cash compensation must be briefly identified in a footnote to the table with a crossreference to a more complete description elsewhere in the offering circular. 3. Before the commencement of sales pursuant to Regulation A, the issuer must inform the Commission whether or not the amount of compensation to be allowed or paid to the underwriters, as described in the offering statement, has been cleared with FINRA. 4. If the securities are not to be offered for cash, state the basis upon which the offering is to be made. 5. Any finder’s fees or similar payments must be disclosed on the cover page with a reference to a more complete discussion in the offering circular. Such disclosure must identify the finder, the nature of the services rendered and the nature of any relationship between the finder and the issuer, its officers, directors, promoters, principal stockholders and underwriters (including any affiliates of such persons). 6. The amount of the expenses of the offering borne by the issuer, including underwriting expenses to be borne by the issuer, must be disclosed in a footnote to the table. (f) The name of the underwriter or underwriters. (g) Any legend or information required by the law of any state in which the securities are to be offered. (h) A cross-reference to the risk factors section, including the page number where it appears in the offering circular. Highlight this cross-reference by prominent type or in another manner. (i) Approximate date of commencement of proposed sale to the public. (j) If the issuer intends to rely on Rule 253(b) and a preliminary offering circular is circulated, provide (1) a bona fide estimate of the range of the maximum offering price and the maximum number of securities offered or (2) a bona fide estimate of the principal amount of the debt securities offered. The range must not exceed $2 for offerings where the upper end of the VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 range is $10 or less and 20% if the upper end of the price range is over $10. Instruction to Item 1(j): The upper limit of the price range must be used in determining the aggregate offering price for purposes of Rule 251(a). Item 2. Table of Contents On the page immediately following the cover page of the offering circular, provide a reasonably detailed table of contents. It must show the page numbers of the various sections or subdivisions of the offering circular. Include a specific listing of the risk factors section required by Item 3 of Part II of this Form 1–A. Item 3. Summary and Risk Factors (a) An issuer may provide a summary of the information in the offering circular where the length or complexity of the offering circular makes a summary useful. The summary should be brief and must not contain all of the detailed information in the offering circular. (b) Immediately following the Table of Contents required by Item 2 or the Summary, there must be set forth under an appropriate caption, a carefully organized series of short, concise paragraphs, summarizing the most significant factors that make the offering speculative or substantially risky. Issuers should avoid generalized statements and include only factors that are specific to the issuer. Item 4. Dilution Where there is a material disparity between the public offering price and the effective cash cost to officers, directors, promoters and affiliated persons for shares acquired by them in a transaction during the past year, or that they have a right to acquire, there must be included a comparison of the public contribution under the proposed public offering and the average effective cash contribution of such persons. Item 5. Plan of Distribution and Selling Securityholders (a) If the securities are to be offered through underwriters, give the names of the principal underwriters, and state the respective amounts underwritten. Identify each such underwriter having a material relationship to the issuer and state the nature of the relationship. State briefly the nature of the underwriters’ obligation to take the securities. Instructions to Item 5(a): 1. All that is required as to the nature of the underwriters’ obligation is whether the underwriters are or will be committed to take and to pay for all of PO 00000 Frm 00103 Fmt 4701 Sfmt 4700 21907 the securities if any are taken, or whether it is merely an agency or the type of best efforts arrangement under which the underwriters are required to take and to pay for only such securities as they may sell to the public. Conditions precedent to the underwriters’ taking the securities, including market outs, need not be described except in the case of an agency or best efforts arrangement. 2. It is not necessary to disclose each member of a selling group. Disclosure may be limited to those underwriters who are in privity of contract with the issuer with respect to the offering. (b) State briefly the discounts and commissions to be allowed or paid to dealers, including all cash, securities, contracts or other consideration to be received by any dealer in connection with the sale of the securities. (c) Outline briefly the plan of distribution of any securities being issued that are to be offered through the selling efforts of brokers or dealers or otherwise than through underwriters. (d) If any of the securities are to be offered for the account of securityholders, identify each selling securityholder, state the amount owned by the securityholder prior to the offering, the amount offered for his or her account and the amount to be owned after the offering. Provide such disclosure in a tabular format. At the bottom of the table, provide the total number of securities being offered for the account of all securityholders and describe what percent of the pre-offering outstanding securities of such class the offering represents. Instruction to Item 5(d): The term ‘‘securityholder’’ in this paragraph refers to beneficial holders, not nominee holders or other such holders of record. If the selling securityholder is an entity, disclosure of the persons who have sole or shared voting or investment power must be included. (e) Describe any arrangements for the return of funds to subscribers if all of the securities to be offered are not sold. If there are no such arrangements, so state. (f) If there will be a material delay in the payment of the proceeds of the offering by the underwriter to the issuer, the salient provisions in this regard and the effects on the issuer must be stated. (g) Describe any arrangement to (1) limit or restrict the sale of other securities of the same class as those to be offered for the period of distribution, (2) stabilize the market for any of the securities to be offered, or (3) withhold commissions, or otherwise to hold each E:\FR\FM\20APR2.SGM 20APR2 21908 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES2 underwriter or dealer responsible for the distribution of its participation. (h) Identify any underwriter that intends to confirm sales to any accounts over which it exercises discretionary authority and include an estimate of the amount of securities so intended to be confirmed. Instruction to Item 5: Attention is directed to the provisions of Rules 10b 9 [17 CFR 240.10b–9] and 15c2–4 [17 CFR 240.15c2–4] under the Securities Exchange Act of 1934. These rules outline, among other things, antifraud provisions concerning the return of funds to subscribers and the transmission of proceeds of an offering to a seller. Item 6. Use of Proceeds to Issuer State the principal purposes for which the net proceeds to the issuer from the securities to be offered are intended to be used and the approximate amount intended to be used for each such purpose. If the issuer will not receive any of proceeds from the offering, so state. Instructions to Item 6: 1. If any substantial portion of the proceeds has not been allocated for particular purposes, a statement to that effect must be made together with a statement of the amount of proceeds not so allocated. 2. State whether or not the proceeds will be used to compensate or otherwise make payments to officers or directors of the issuer or any of its subsidiaries. 3. For best efforts offerings, describe any anticipated material changes in the use of proceeds if all of the securities being qualified on the offering statement are not sold. 4. If an issuer must provide the disclosure described in Item 9(c) the use of proceeds and plan of operations should be consistent. 5. If any material amounts of other funds are to be used in conjunction with the proceeds, state the amounts and sources of such other funds and whether such funds are firm or contingent. 6. If any material part of the proceeds is to be used to discharge indebtedness, describe the material terms of such indebtedness. If the indebtedness to be discharged was incurred within one year, describe the use of the proceeds arising from such indebtedness. 7. If any material amount of the proceeds is to be used to acquire assets, otherwise than in the ordinary course of business, briefly describe and state the cost of the assets. If the assets are to be acquired from affiliates of the issuer or their associates, give the names of the persons from whom they are to be acquired and set forth the basis used in VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 determining the purchase price to the issuer. 8. The issuer may reserve the right to change the use of proceeds, so long as the reservation is prominently disclosed in the section where the use of proceeds is discussed. It is not necessary to describe the possible alternative uses of proceeds unless the issuer believes that a change in circumstances leading to an alternative use of proceeds is likely to occur. Item 7. Description of Business (a) Narrative description of business. (1) Describe the business done and intended to be done by the issuer and its subsidiaries and the general development of the business during the past three years or such shorter period as the issuer may have been in business. Such description must include, but not be limited to, a discussion of the following factors if such factors are material to an understanding of the issuer’s business: (i) The principal products and services of the issuer and the principal market for and method of distribution of such products and services. (ii) The status of a product or service if the issuer has made public information about a new product or service that would require the investment of a material amount of the assets of the issuer or is otherwise material. (iii) If material, the estimated amount spent during each of the last two fiscal years on company-sponsored research and development activities determined in accordance with generally accepted accounting principles. In addition, state, if material, the estimated dollar amount spent during each of such years on material customer-sponsored research activities relating to the development of new products, services or techniques or the improvement of existing products, services or techniques. (iv) The total number of persons employed by the issuer, indicating the number employed full time. (v) Any bankruptcy, receivership or similar proceeding. (vi) Any legal proceedings material to the business or financial condition of the issuer. (vii) Any material reclassification, merger, consolidation, or purchase or sale of a significant amount of assets not in the ordinary course of business. (2) The issuer must also describe those distinctive or special characteristics of the issuer’s operation or industry that are reasonably likely to have a material impact upon the issuer’s future financial performance. Examples of factors that might be discussed PO 00000 Frm 00104 Fmt 4701 Sfmt 4700 include dependence on one or a few major customers or suppliers (including suppliers of raw materials or financing), effect of existing or probable governmental regulation (including environmental regulation), material terms of and/or expiration of material labor contracts or patents, trademarks, licenses, franchises, concessions or royalty agreements, unusual competitive conditions in the industry, cyclicality of the industry and anticipated raw material or energy shortages to the extent management may not be able to secure a continuing source of supply. (b) Segment Data. If the issuer is required by generally accepted accounting principles to include segment information in its financial statements, an appropriate crossreference must be included in the description of business. (c) Industry Guides. The disclosure guidelines in all Securities Act Industry Guides must be followed. To the extent that the industry guides are codified into Regulation S–K, the Regulation S– K industry disclosure items must be followed. (d) For offerings of limited partnership or limited liability company interests, an issuer must comply with the Commission’s interpretive views on substantive disclosure requirements set forth in Securities Act Release No. 6900 (June 17, 1991). Item 8. Description of Property State briefly the location and general character of any principal plants or other material physical properties of the issuer and its subsidiaries. If any such property is not held in fee or is held subject to any major encumbrance, so state and briefly describe how held. Include information regarding the suitability, adequacy, productive capacity and extent of utilization of the properties and facilities used in the issuer’s business. Instruction to Item 8: Detailed descriptions of the physical characteristics of individual properties or legal descriptions by metes and bounds are not required and should not be given. Item 9. Management’s Discussion and Analysis of Financial Condition and Results of Operations Discuss the issuer’s financial condition, changes in financial condition and results of operations for each year and interim period for which financial statements are required, including the causes of material changes from year to year or period to period in financial statement line items, to the extent necessary for an understanding of E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations the issuer’s business as a whole. Information provided also must relate to the segment information of the issuer. Provide the information specified below as well as such other information that is necessary for an investor’s understanding of the issuer’s financial condition, changes in financial condition and results of operations. (a) Operating results. Provide information regarding significant factors, including unusual or infrequent events or transactions or new developments, materially affecting the issuer’s income from operations, and, in each case, indicating the extent to which income was so affected. Describe any other significant component of revenue or expenses necessary to understand the issuer’s results of operations. To the extent that the financial statements disclose material changes in net sales or revenues, provide a narrative discussion of the extent to which such changes are attributable to changes in prices or to changes in the volume or amount of products or services being sold or to the introduction of new products or services. Instruction to Item 9(a): 1. The discussion and analysis shall focus specifically on material events and uncertainties known to management that would cause reported financial information not to be necessarily indicative of future operating results or of future financial condition. This would include descriptions and amounts of (A) matters that would have an impact on future operations that have not had an impact in the past, and (B) matters that have had an impact on reported operations that are not expected to have an impact upon future operations. 2. Where the consolidated financial statements reveal material changes from year to year in one or more line items, Name Position the causes for the changes shall be described to the extent necessary to an understanding of the issuer’s businesses as a whole. If the causes for a change in one line item also relate to other line items, no repetition is required and a line-by-line analysis of the financial statements as a whole is not required or generally appropriate. Issuers need not recite the amounts of changes from year to year which are readily computable from the financial statements. The discussion must not merely repeat numerical data contained in the consolidated financial statements. 3. When interim period financial statements are included, discuss any material changes in financial condition from the end of the preceding fiscal year to the date of the most recent interim balance sheet provided. Discuss any material changes in the issuer’s results of operations with respect to the most recent fiscal year-to-date period for which an income statement is provided and the corresponding year-to-date period of the preceding fiscal year. (b) Liquidity and capital resources. Provide information regarding the following: (1) the issuer’s liquidity (both short and long term), including a description and evaluation of the internal and external sources of liquidity and a brief discussion of any material unused sources of liquidity. If a material deficiency in liquidity is identified, indicate the course of action that the issuer has taken or proposes to take to remedy the deficiency. (2) the issuer’s material commitments for capital expenditures as of the end of the latest fiscal year and any subsequent interim period and an indication of the general purpose of such commitments and the anticipated sources of funds needed to fulfill such commitments. (c) Plan of Operations. Issuers (including predecessors) that have not Term of Office (1) Age received revenue from operations during each of the three fiscal years immediately before the filing of the offering statement (or since inception, whichever is shorter) must describe, if formulated, their plan of operation for the 12 months following the commencement of the proposed offering. If such information is not available, the reasons for its unavailability must be stated. Disclosure relating to any plan must include, among other things, a statement indicating whether, in the issuer’s opinion, the proceeds from the offering will satisfy its cash requirements or whether it anticipates it will be necessary to raise additional funds in the next six months to implement the plan of operations. (d) Trend information. The issuer must identify the most significant recent trends in production, sales and inventory, the state of the order book and costs and selling prices since the latest financial year. The issuer also must discuss, for at least the current financial year, any known trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on the issuer’s net sales or revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results or financial condition. Item 10. Directors, Executive Officers and Significant Employees (a) For each of the directors, persons nominated or chosen to become directors, executive officers, persons chosen to become executive officers, and significant employees, provide the information specified below in substantially the following tabular format: Approximate hours per week for part-time employees (2) Executive Officers: mstockstill on DSK4VPTVN1PROD with RULES2 Directors: Significant Employees: VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 PO 00000 Frm 00105 Fmt 4701 Sfmt 4700 21909 E:\FR\FM\20APR2.SGM 20APR2 21910 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations (1) Provide the month and year of the start date and, if applicable, the end date. To the extent you are unable to provide specific dates, provide such other description in the table or in an appropriate footnote clarifying the term of office. If the person is a nominee or chosen to become a director or executive officer, it must be indicated in this column or by footnote. (2) For executive officers and significant employees that are working part-time, indicate approximately the average number of hours per week or month such person works or is anticipated to work. This column may be left blank for directors. The entire column may be omitted if all those listed in the table work full time for the issuer. In a footnote to the table, briefly describe any arrangement or understanding between the persons described above and any other persons (naming such persons) pursuant to which the person was or is to be selected to his or her office or position. Instructions to Item 10(a): 1. No nominee or person chosen to become a director or person chosen to be an executive officer who has not consented to act as such may be named in response to this item. 2. The term ‘‘executive officer’’ means the president, secretary, treasurer, any vice president in charge of a principal business function (such as sales, administration, or finance) and any other person who performs similar policy making functions for the issuer. Name 3. The term ‘‘significant employee’’ means persons such as production managers, sales managers, or research scientists, who are not executive officers, but who make or are expected to make significant contributions to the business of the issuer. (b) Family relationships. State the nature of any family relationship between any director, executive officer, person nominated or chosen by the issuer to become a director or executive officer or any significant employee. Instruction to Item 10(b): The term ‘‘family relationship’’ means any relationship by blood, marriage, or adoption, not more remote than first cousin. (c) Business experience. Give a brief account of the business experience during the past five years of each director, executive officer, person nominated or chosen to become a director or executive officer, and each significant employee, including his or her principal occupations and employment during that period and the name and principal business of any corporation or other organization in which such occupations and employment were carried on. When an executive officer or significant employee has been employed by the issuer for less than five years, a brief explanation must be included as to the nature of the responsibilities undertaken by the individual in prior positions to provide adequate disclosure of this prior business experience. What is required is information relating to the level of the Capacities in which compensation was received (e.g., Chief Executive Officer, director, etc.) employee’s professional competence, which may include, depending upon the circumstances, such specific information as the size of the operation supervised. (d) Involvement in certain legal proceedings. Describe any of the following events which occurred during the past five years and which are material to an evaluation of the ability or integrity of any director, person nominated to become a director or executive officer of the issuer: (1) A petition under the federal bankruptcy laws or any state insolvency law was filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such person, or any partnership in which he was general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing; or (2) Such person was convicted in a criminal proceeding (excluding traffic violations and other minor offenses). Item 11. Compensation of Directors and Executive Officers (a) Provide, in substantially the tabular format indicated, the annual compensation of each of the three highest paid persons who were executive officers or directors during the issuer’s last completed fiscal year. Cash compensation ($) Other compensation ($) Total compensation ($) mstockstill on DSK4VPTVN1PROD with RULES2 .................................................................................................... .................................................................................................... .................................................................................................... (b) Provide the aggregate annual compensation of the issuer’s directors as a group for the issuer’s last completed fiscal year. Specify the total number of directors in the group. (c) For Tier 1 offerings, the annual compensation of the three highest paid persons who were executive officers or directors and the aggregate annual compensation of the issuer’s directors may be provided as a group, rather than as specified in paragraphs (a) and (b) of this item. In such case, issuers must specify the total number of persons in the group. (d) Briefly describe all proposed compensation to be made in the future pursuant to any ongoing plan or arrangement to the individuals specified VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 in paragraphs (a) and (b) of this item. The description must include a summary of how each plan operates, any performance formula or measure in effect (or the criteria used to determine payment amounts), the time periods over which the measurements of benefits will be determined, payment schedules, and any recent material amendments to the plan. Information need not be included with respect to any group life, health, hospitalization, or medical reimbursement plans that do not discriminate in scope, terms or operation in favor of executive officers or directors of the issuer and that are available generally to all salaried employees. Instructions to Item 11: PO 00000 Frm 00106 Fmt 4701 Sfmt 4700 1. In case of compensation paid or to be paid otherwise than in cash, if it is impracticable to determine the cash value thereof, state in a note to the table the nature and amount thereof. 2. This item is to be answered on an accrual basis if practicable; if not so answered, state the basis used. Item 12. Security Ownership of Management and Certain Securityholders (a) Include the information specified in paragraph (b) of this item as of the most recent practicable date (stating the date used), in substantially the tabular format indicated, with respect to voting securities beneficially owned by: (1) all executive officers and directors as a group, individually naming each E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations director or executive officer who beneficially owns more than 10% of any class of the issuer’s voting securities; Title of class Name and address of beneficial owner (1) (1) The address given in this column may be a business, mailing, or residential address. The address may be included in an appropriate footnote to the table rather than in this column. (2) This column must include the amount of equity securities each beneficial owner has the right to acquire using the manner specified in Rule 13d– 3(d)(1) of the Securities Exchange Act of 1934. An appropriate footnote must be included if the column heading does not sufficiently describe the circumstances upon which such securities could be acquired. (3) This column must use the amounts contained in the two preceding columns to calculate the percent of class owned by such beneficial owner. mstockstill on DSK4VPTVN1PROD with RULES2 Item 13. Interest of Management and Others in Certain Transactions (a) Describe briefly any transactions or any currently proposed transactions during the issuer’s last two completed fiscal years and the current fiscal year, to which the issuer or any of its subsidiaries was or is to be a participant and the amount involved exceeds $50,000 for Tier 1 or the lesser of $120,000 and one percent of the average of the issuer’s total assets at year end for the last two completed fiscal years for Tier 2, and in which any of the following persons had or is to have a direct or indirect material interest, naming the person and stating his or her relationship to the issuer, the nature of the person’s interest in the transaction and, where practicable, the amount of such interest: (1) Any director or executive officer of the issuer; (2) Any nominee for election as a director; (3) Any securityholder named in answer to Item 12(a)(2); (4) If the issuer was incorporated or organized within the past three years, any promoter of the issuer; or (5) Any immediate family member of the above persons. An ‘‘immediate family member’’ of a person means such person’s child, stepchild, parent, stepparent, spouse, sibling, mother-inlaw, father-in-law, son-in-law, daughterin-law, brother-in-law, sister-in-law, or VerDate Sep<11>2014 20:46 Apr 17, 2015 (2) any other securityholder who beneficially owns more than 10% of any class of the issuer’s voting securities as such beneficial ownership would be Jkt 235001 Amount and nature of beneficial ownership PO 00000 Frm 00107 Fmt 4701 Sfmt 4700 calculated if the issuer were subject to Rule 13d–3(d)(1) of the Securities Exchange Act of 1934. (b) Beneficial Ownership Table: Amount and nature of beneficial ownership acquirable (2) any person (other than a tenant or employee) sharing such person’s household. Instructions to Item 13(a): 1. For purposes of calculating the amount of the transaction described above, all periodic installments in the case of any lease or other agreement providing for periodic payments must be aggregated to the extent they occurred within the time period described in this item. 2. No information need be given in answer to this item as to any transaction where: (a) The rates of charges involved in the transaction are determined by competitive bids, or the transaction involves the rendering of services as a common or contract carrier at rates or charges fixed in conformity with law or governmental authority; (b) The transaction involves services as a bank depositary of funds, transfer agent, registrar, trustee under a trust indenture, or similar services; (c) The interest of the specified person arises solely from the ownership of securities of the issuer and the specified person receives no extra or special benefit not shared on a pro-rata basis by all of the holders of securities of the class. 3. This item calls for disclosure of indirect as well as direct material interests in transactions. A person who has a position or relationship with a firm, corporation, or other entity which engages in a transaction with the issuer or its subsidiaries may have an indirect interest in such transaction by reason of the position or relationship. However, a person is deemed not to have a material indirect interest in a transaction within the meaning of this item where: (a) the interest arises only (i) from the person’s position as a director of another corporation or organization (other than a partnership) that is a party to the transaction, or (ii) from the direct or indirect ownership by the person and all other persons specified in paragraphs (1) through (5) of this item, in the aggregate, of less than a 10 percent equity interest in another person (other than a partnership) that is a party 21911 Percent of class (3) to the transaction, or (iii) from both such position and ownership; (b) the interest arises only from the person’s position as a limited partner in a partnership in which the person and all other persons specified in paragraphs (1) through (5) of this item had an interest of less than 10 percent; or (c) the interest of the person arises solely from the holding of an equity interest (unless the equity interest confers management rights similar to a general partner interest) or a creditor interest in another person that is a party to the transaction with the issuer or any of its subsidiaries and the transaction is not material to the other person. 4. Include the name of each person whose interest in any transaction is described and the nature of the relationships by reason of which such interest is required to be described. The amount of the interest of any specified person must be computed without regard to the amount of the profit or loss involved in the transaction. Where it is not practicable to state the approximate amount of the interest, the approximate amount involved in the transaction must be disclosed. 5. Information must be included as to any material underwriting discounts and commissions upon the sale of securities by the issuer where any of the specified persons was or is to be a principal underwriter or is a controlling person, or member, of a firm which was or is to be a principal underwriter. Information need not be given concerning ordinary management fees paid by underwriters to a managing underwriter pursuant to an agreement among underwriters, the parties to which do not include the issuer or its subsidiaries. 6. As to any transaction involving the purchase or sale of assets by or to any issuer or any subsidiary, otherwise than in the ordinary course of business, state the cost of the assets to the purchaser and, if acquired by the seller within two years before the transaction, the cost to the seller. 7. Information must be included in answer to this item with respect to transactions not excluded above which E:\FR\FM\20APR2.SGM 20APR2 21912 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations involve compensation from the issuer or its subsidiaries, directly or indirectly, to any of the specified persons for services in any capacity unless the interest of such persons arises solely from the ownership individually and in the aggregate of less than 10 percent of any class of equity securities of another corporation furnishing the services to the issuer or its subsidiaries. (b) If any expert named in the offering statement as having prepared or certified any part of the offering statement was employed for such purpose on a contingent basis or, at the time of such preparation or certification or at any time thereafter, had a material interest in the issuer or any of its parents or subsidiaries or was connected with the issuer or any of its subsidiaries as a promoter, underwriter, voting trustee, director, officer or employee, describe the nature of such contingent basis, interest or connection. mstockstill on DSK4VPTVN1PROD with RULES2 Item 14. Securities Being Offered (a) If capital stock is being offered, state the title of the class and furnish the following information regarding all classes of capital stock outstanding: (1) Outline briefly: (i) dividend rights; (ii) voting rights; (iii) liquidation rights; (iv) preemptive rights; (v) conversion rights; (vi) redemption provisions; (vii) sinking fund provisions; (viii) liability to further calls or to assessment by the issuer; (ix) any classification of the Board of Directors, and the impact of classification where cumulative voting is permitted or required; (x) restrictions on alienability of the securities being offered; (xi) any provision discriminating against any existing or prospective holder of such securities as a result of such securityholder owning a substantial amount of securities; and (xii) any rights of holders that may be modified otherwise than by a vote of a majority or more of the shares outstanding, voting as a class. (2) Briefly describe potential liabilities imposed on securityholders under state statutes or foreign law, for example, to employees of the issuer, unless such disclosure would be immaterial because the financial resources of the issuer or other factors are such as to make it unlikely that the liability will ever be imposed. (3) If preferred stock is to be offered or is outstanding, describe briefly any restriction on the repurchase or redemption of shares by the issuer while there is any arrearage in the payment of dividends or sinking fund installments. If there is no such restriction, so state. (b) If debt securities are being offered, outline briefly the following: VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 (1) Provisions with respect to interest, conversion, maturity, redemption, amortization, sinking fund or retirement. (2) Provisions with respect to the kind and priority of any lien securing the issue, together with a brief identification of the principal properties subject to such lien. (3) Material affirmative and negative covenants. Instruction to Item 14(b): In the case of secured debt there must be stated: (i) the approximate amount of unbonded property available for use against the issuance of bonds, as of the most recent practicable date, and (ii) whether the securities being issued are to be issued against such property, against the deposit of cash, or otherwise. (c) If securities described are to be offered pursuant to warrants, rights, or convertible securities, state briefly: (1) the amount of securities issuable upon the exercise or conversion of such warrants, convertible securities or rights; (2) the period during which and the price at which the warrants, convertible securities or rights are exercisable; (3) the amounts of warrants, convertible securities or rights outstanding; and (4) any other material terms of such securities. (d) In the case of any other kind of securities, include a brief description with comparable information to that required in (a), (b) and (c) of Item 14. Part F/S (a) General Rules (1) The appropriate financial statements set forth below of the issuer, or the issuer and its predecessors or any businesses to which the issuer is a successor must be filed as part of the offering statement and included in the offering circular that is distributed to investors. (2) Unless the issuer is a Canadian company, financial statements must be prepared in accordance with generally accepted accounting principles in the United States (US GAAP). If the issuer is a Canadian company, such financial statements must be prepared in accordance with either US GAAP or International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). If the financial statements comply with IFRS, such compliance must be explicitly and unreservedly stated in the notes to the financial statements and if the financial statements are audited, the auditor’s PO 00000 Frm 00108 Fmt 4701 Sfmt 4700 report must include an opinion on whether the financial statements comply with IFRS as issued by the IASB. (3) The issuer may elect to delay complying with any new or revised financial accounting standard until the date that a company that is not an issuer (as defined under section 2(a) of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201(a)) is required to comply with such new or revised accounting standard, if such standard also applies to companies that are not issuers. Issuers electing such extension of time accommodation must disclose it at the time the issuer files its offering statement and apply the election to all standards. Issuers electing not to use this accommodation must forgo this accommodation for all financial accounting standards and may not elect to rely on this accommodation in any future filings. (b) Financial Statements for Tier 1 Offerings (1) The financial statements prepared pursuant to this paragraph (b), including (b)(7), need not be prepared in accordance with Regulation S–X. (2) The financial statements prepared pursuant to paragraph (b), including (b)(7), need not be audited. If the financial statements are not audited, they shall be labeled as ‘‘unaudited’’. However, if an audit of these financial statements is obtained for other purposes and that audit was performed in accordance with either U.S. generally accepted auditing standards or the Standards of the Public Company Accounting Oversight Board by an auditor that is independent pursuant to either the independence standards of the American Institute of Certified Public Accountants (AICPA) or Rule 2– 01 of Regulation S–X, those audited financial statements must be filed, and an audit opinion complying with Rule 2–02 of Regulation S–X must be filed along with such financial statements. The auditor may, but need not, be registered with the Public Company Accounting Oversight Board. (3) Consolidated Balance Sheets. Age of balance sheets at filing and at qualification: (A) If the filing is made, or the offering statement is qualified, more than three months but no more than nine months after the most recently completed fiscal year end, include a balance sheet as of the two most recently completed fiscal year ends. (B) If the filing is made, or the offering statement is qualified, more than nine months after the most recently completed fiscal year end, include a balance sheet as of the two most E:\FR\FM\20APR2.SGM 20APR2 mstockstill on DSK4VPTVN1PROD with RULES2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations recently completed fiscal year ends and an interim balance sheet as of a date no earlier than six months after the most recently completed fiscal year end. (C) If the filing is made, or the offering statement is qualified, within three months after the most recently completed fiscal year end, include a balance sheet as of the two fiscal year ends preceding the most recently completed fiscal year end and an interim balance sheet as of a date no earlier than six months after the date of the most recent fiscal year end balance sheet that is required. (D) If the filing is made, or the offering statement is qualified, during the period from inception until three months after reaching the annual balance sheet date for the first time, include a balance sheet as of a date within nine months of filing or qualification. (4) Statements of comprehensive income, cash flows, and changes in stockholders’ equity. File consolidated statements of income, cash flows, and changes in stockholders’ equity for each of the two fiscal years preceding the date of the most recent balance sheet being filed or such shorter period as the issuer has been in existence. If a consolidated interim balance sheet is required by (b)(3) above, consolidated interim statements of income and cash flows shall be provided and must cover at least the first six months of the issuer’s fiscal year and the corresponding period of the preceding fiscal year. (5) Interim financial statements. Interim financial statements may be condensed as described in Rule 8–03(a) of Regulation S–X. The interim income statements must be accompanied by a statement that in the opinion of management all adjustments necessary in order to make the interim financial statements not misleading have been included. (6) Oil and Gas Producing Activities. Issuers engaged in oil and gas producing activities must follow the financial accounting and reporting standards specified in Rule 4–10 of Regulation S– X. (7) Financial Statements of Other Entities. The circumstances described below may require you to file financial statements of other entities in the offering statement. The financial statements of other entities must be presented for the same periods as if the other entity was the issuer as described above in paragraphs (b)(3) and (b)(4) unless a shorter period is specified by the rules below. The financial statement of other entities shall follow the same audit requirement as paragraph (b)(2) of this Part F/S. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 (i) Financial Statements of Guarantors and Issuers of Guaranteed Securities. Financial statements of a subsidiary that issues securities guaranteed by the parent or guarantees securities issued by the parent must be presented as required by Rule 3–10 of Regulation S– X. (ii) Financial Statements of Affiliates Whose Securities Collateralize an Issuance. Financial statements for an issuer’s affiliates whose securities constitute a substantial portion of the collateral for any class of securities being offered must be presented as required by Rule 3–16 of Regulation S– X. (iii) Financial Statements of Businesses Acquired or to be Acquired. File the financial statements required by Rule 8–04 of Regulation S–X. (iv) Pro Forma Financial Information. If financial statements are presented under paragraph (b)(7)(iii) above, file pro forma information showing the effects of the acquisition as described in Rule 8–05 of Regulation S–X. (v) Real Estate Operations Acquired or to be Acquired. File the financial information required by Rule 8–06 of Regulation S–X. Instructions to paragraph (b) in Part F/S: 1. Issuers should refer to Rule 257(b)(2) to determine whether a special financial report will be required after qualification of the offering statement. 2. If the last day that the financial statements included in the offering statement can be accepted, according to the age requirements of this item falls on a Saturday, Sunday, or holiday, such offering statement may be filed on the first business day following the last day of the specified period. 3. As an alternative, an issuer may— but need not—elect to comply with the provisions of paragraph (c). (c) Financial Statement Requirements for Tier 2 Offerings (1) In addition to the general rules in paragraph (a), provide the financial statements required by paragraph (b) of this Part F/S, except the following rules should be followed in the preparation of the financial statements: (i) The issuer and, when applicable, other entities for which financial statements are required, must comply with Article 8 of Regulation S–X, as if it was conducting a registered offering on Form S–1, except the age of interim financial statements may follow paragraphs (b)(3)–(4) of this Part F/S. (ii) Audited financial statements are required for Tier 2 offerings for the issuer and, when applicable, for financial statements of other entities. PO 00000 Frm 00109 Fmt 4701 Sfmt 4700 21913 However, interim financial statements may be unaudited. (iii) The audit must be conducted in accordance with either U.S. Generally Accepted Auditing Standards or the standards of the Public Company Accounting Oversight Board (United States) and the report and qualifications of the independent accountant shall comply with the requirements of Article 2 of Regulation S–X. Accounting firms conducting audits for the financial statements included in the offering circular may, but need not, be registered with the Public Company Accounting Oversight Board. PART III—EXHIBITS Item 16. Index to Exhibits (a) An exhibits index must be presented at the beginning of Part III. (b) Each exhibit must be listed in the exhibit index according to the number assigned to it under Item 17 below. (c) For incorporation by reference, please refer to General Instruction III of this Form. Item 17. Description of Exhibits As appropriate, the following documents must be filed as exhibits to the offering statement. 1. Underwriting agreement—Each underwriting contract or agreement with a principal underwriter or letter pursuant to which the securities are to be distributed; where the terms have yet to be finalized, proposed formats may be provided. 2. Charter and bylaws—The charter and bylaws of the issuer or instruments corresponding thereto as currently in effect and any amendments thereto. 3. Instruments defining the rights of securityholders— (a) All instruments defining the rights of any holder of the issuer’s securities, including but not limited to (i) holders of equity or debt securities being issued; (ii) holders of long-term debt of the issuer, and of all subsidiaries for which consolidated or unconsolidated financial statements are required to be filed. (b) The following instruments need not be filed if the issuer agrees to file them with the Commission upon request: (i) instruments defining the rights of holders of long-term debt of the issuer and all of its subsidiaries for which consolidated financial statements are required to be filed if such debt is not being issued pursuant to this Regulation A offering and the total amount of such authorized issuance does not exceed 5% of the total assets of the issuer and its subsidiaries on a consolidated basis; (ii) any instrument E:\FR\FM\20APR2.SGM 20APR2 mstockstill on DSK4VPTVN1PROD with RULES2 21914 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations with respect to a class of securities that is to be retired or redeemed before the issuance or upon delivery of the securities being issued pursuant to this Regulation A offering and appropriate steps have been taken to assure such retirement or redemption; and (iii) copies of instruments evidencing scrip certificates or fractions of shares. 4. Subscription agreement—The form of any subscription agreement to be used in connection with the purchase of securities in this offering. 5. Voting trust agreement—Any voting trust agreements and amendments. 6. Material contracts (a) Every contract not made in the ordinary course of business that is material to the issuer and is to be performed in whole or in part at or after the filing of the offering statement or was entered into not more than two years before such filing. Only contracts need be filed as to which the issuer or subsidiary of the issuer is a party or has succeeded to a party by assumption or assignment or in which the issuer or such subsidiary has a beneficial interest. Schedules (or similar attachments) to material contracts may be excluded if not material to an investment decision or if the material information contained in such schedules is otherwise disclosed in the agreement or the offering statement. The material contract filed must contain a list briefly identifying the contents of all omitted schedules, together with an agreement to furnish supplementally a copy of any omitted schedule to the Commission upon request. (b) If the contract is such as ordinarily accompanies the kind of business conducted by the issuer and its subsidiaries, it is made in the ordinary course of business and need not be filed unless it falls within one or more of the following categories, in which case it must be filed except where immaterial in amount or significance: (i) any contract to which directors, officers, promoters, voting trustees, securityholders named in the offering statement, or underwriters are parties, except where the contract merely involves the purchase or sale of current assets having a determinable market price, at such market price; (ii) any contract upon which the issuer’s business is substantially dependent, as in the case of continuing contracts to sell the major part of the issuer’s products or services or to purchase the major part of the issuer’s requirements of goods, services or raw materials or any franchise or license or other agreement to use a patent, formula, trade secret, process or trade name upon VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 which the issuer’s business depends to a material extent; (iii) any contract calling for the acquisition or sale of any property, plant or equipment for a consideration exceeding 15% of such fixed assets of the issuer on a consolidated basis; or (iv) any material lease under which a part of the property described in the offering statement is held by the issuer. (c) Any management contract or any compensatory plan, contract or arrangement including, but not limited to, plans relating to options, warrants or rights, pension, retirement or deferred compensation or bonus, incentive or profit sharing (or if not set forth in any formal document, a written description) is deemed material and must be filed except for the following: (i) ordinary purchase and sales agency agreements; (ii) agreements with managers of stores in a chain organization or similar organization; (iii) contracts providing for labor or salesperson’s bonuses or payments to a class of securityholders, as such; (iv) any compensatory plan, contract or arrangement that pursuant to its terms is available to employees generally and that in operation provides for the same method of allocation of benefits between management and nonmanagement participants. 7. Plan of acquisition, reorganization, arrangement, liquidation, or succession—Any material plan of acquisition, disposition, reorganization, readjustment, succession, liquidation or arrangement and any amendments thereto described in the offering statement. Schedules (or similar attachments) to these exhibits must not be filed unless such schedules contain information that is material to an investment decision and that is not otherwise disclosed in the agreement or the offering statement. The plan filed must contain a list briefly identifying the contents of all omitted schedules, together with an agreement to furnish supplementally a copy of any omitted schedule to the Commission upon request. 8. Escrow agreements—Any escrow agreement or similar arrangement which has been executed in connection with the Regulation A offering. 9. Letter re change in certifying accountant—A letter from the issuer’s former independent accountant regarding its concurrence or disagreement with the statements made by the issuer in the current report concerning the resignation or dismissal as the issuer’s principal accountant. 10. Power of attorney—If any name is signed to the offering statement pursuant to a power of attorney, signed copies of the power of attorney must be PO 00000 Frm 00110 Fmt 4701 Sfmt 4700 filed. Where the power of attorney is contained elsewhere in the offering statement or documents filed therewith, a reference must be made in the index to the part of the offering statement or document containing such power of attorney. In addition, if the name of any officer signing on behalf of the issuer is signed pursuant to a power of attorney, certified copies of a resolution of the issuer’s board of directors authorizing such signature must also be filed. A power of attorney that is filed with the Commission must relate to a specific filing or an amendment thereto. A power of attorney that confers general authority may not be filed with the Commission. 11. Consents— (a) Experts: The written consent of (i) any accountant, counsel, engineer, geologist, appraiser or any persons whose profession gives authority to a statement made by them and who is named in the offering statement as having prepared or certified any part of the document or is named as having prepared or certified a report or evaluation whether or not for use in connection with the offering statement; (ii) the expert that authored any portion of a report quoted or summarized as such in the offering statement, expressly stating their consent to the use of such quotation or summary; (iii) any persons who are referenced as having reviewed or passed upon any information in the offering statement, and that such information is being included on the basis of their authority or in reliance upon their status as experts. (b) All written consents must be dated and signed. 12. Opinion re legality—An opinion of counsel as to the legality of the securities covered by the Offering Statement, indicating whether they will when sold, be legally issued, fully paid and non-assessable, and if debt securities, whether they will be binding obligations of the issuer. 13. ‘‘Testing the waters’’ materials— Any written communication or broadcast script used under the authorization of Rule 255. Such materials need not be filed if they are substantively the same as materials previously filed with the offering statement. 14. Appointment of agent for service of process—A Canadian issuer must file Form F–X. 15. Additional exhibits— (a) Any non-public, draft offering statement previously submitted pursuant to Rule 252(d) and any related, non-public correspondence submitted by or on behalf of the issuer. E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations (b) Any additional exhibits which the issuer may wish to file, which must be so marked as to indicate clearly the subject matters to which they refer. SIGNATURES (Exact name of issuer as specified in its charter)lllllll llllllllllll By (Signature and Title)lllllll This offering statement has been signed by the following persons in the capacities and on the dates indicated. (Signature)lllllll llllllll (Title)lllllll llllllllll (Date)lllllll lllllllllll Instructions to Signatures: 1. The offering statement must be signed by 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. If a signature is by a person on behalf of any other person, evidence of authority to sign must be filed with the offering statement, except where an executive officer signs on behalf of the issuer. 2. The offering statement must be signed using a typed signature. Each signatory to the filing must also manually sign a signature page or other document authenticating, acknowledging or otherwise adopting his or her signature that appears in the filing. Such document must be executed before or at the time the filing is made and must be retained by the issuer for a period of five years. Upon request, the issuer must furnish to the Commission or its staff a copy of any or all documents retained pursuant to this section. 3. The name and title of each person signing the offering statement must be typed or printed beneath the signature. Note: The text of Form 1–A will not appear in the Code of Federal Regulations. mstockstill on DSK4VPTVN1PROD with RULES2 11. Revise § 239.91 to read as follows: § 239.91 Form 1–K. This form shall be used for filing annual reports under Regulation A (§§ 230.251–230.263 of this chapter). 12. Add Form 1–K (referenced in § 239.91) to read as follows: ■ VerDate Sep<11>2014 20:46 Apr 17, 2015 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 1–K Pursuant to the requirements of Regulation A, the issuer certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form 1–A and has duly caused this offering statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of llll, State of llll, on llll (date). ■ UNITED STATES Jkt 235001 GENERAL INSTRUCTIONS A. Rules as to Use of Form 1–K. (1) This Form shall be used for annual reports pursuant to Rule 257(b)(1) of Regulation A (§§ 230.251–230.263). (2) Annual reports on this Form shall be filed within 120 calendar days after the end of the fiscal year covered by the report. (3) This Form also shall be used for special financial reports filed pursuant to Rule 257(b)(2)(i)(A) of Regulation A. Such special financial reports shall be filed and signed in the manner set forth in this Form, but otherwise need only provide Part I and the financial statements required by Rule 257(b)(2)(i)(A). Special financial reports filed using this Form shall be filed within 120 calendar days after the qualification date of the offering statement. B. Preparation of Report. (1) Regulation A contains certain general requirements that are applicable to reports on any form, including amendments to reports. These general requirements should be carefully read and observed in the preparation and filing of reports on this Form. (2) This Form is not to be used as a blank form to be filled in, but only as a guide in the preparation of the report. (3) Except where information is required to be given for the fiscal year or as of a specified date, it shall be given as of the latest date reasonably practicable. (4) References in this Form to the items in Form 1–A are to the items set forth in Part II and Part III of Form 1– A, not Part I. (5) In addition to the information expressly required to be included in this Form, there shall be added such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading. C. Signature and Filing of Report. (1) The report 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). (2) The report must be signed by the issuer, its principal executive officer, PO 00000 Frm 00111 Fmt 4701 Sfmt 4700 21915 principal financial officer, principal accounting officer, and at least a majority of the members of its board of directors or other governing body. If a signature is by a person on behalf of any other person, evidence of authority to sign must be filed with the report, except where an executive officer signs on behalf of the issuer. (3) The report must be signed using a typed signature. Each signatory to the filing must also manually sign a signature page or other document authenticating, acknowledging or otherwise adopting his or her signature that appears in the filing. Such document must be executed before or at the time the filing is made and must be retained by the issuer for a period of five years. Upon request, the issuer must furnish to the Commission or its staff a copy of any or all documents retained pursuant to this paragraph. D. Incorporation by Reference and Cross-Referencing. (1) An issuer may incorporate by reference to other documents previously submitted or filed on EDGAR. Crossreferencing within the report is also encouraged to avoid repetition of information. For example, you may respond to an item of this Form by providing a cross-reference to the location of the information in the financial statements, instead of repeating such information. Descriptions of where the information incorporated by reference or crossreferenced can be found must be specific and must clearly identify the relevant document and portion thereof where such information can be found. For exhibits incorporated by reference, this description must be noted in the exhibits index for each relevant exhibit. All descriptions of where information incorporated by reference can be found must be accompanied by a separate hyperlink to the incorporated document on EDGAR. A hyperlink need not remain active after the filing of the report, except that amendments to the report must update any hyperlinks referred to in the amendment that are inactive. (2) Reference may not be made to any document if the portion of such document containing the pertinent information includes an incorporation by reference to another document. Incorporation by reference to documents not available on EDGAR is not permitted. Information shall not be incorporated by reference or crossreferenced in any case where such incorporation would render the statement or report incomplete, unclear, or confusing. Incorporating information E:\FR\FM\20APR2.SGM 20APR2 21916 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations into the financial statements from elsewhere is not permitted. (3) If any substantive modification has occurred in the text of any document incorporated by reference since such document was filed, the issuer must file with the reference a statement containing the text and date of such modification. PART I NOTIFICATION The following information must be provided in the XML-based portion of Form 1–K available through the EDGAR portal and must be completed or updated before uploading each offering statement or amendment thereto. The format of Part I shown below may differ from the electronic version available on EDGAR. The electronic version of Part I will allow issuers to attach Part II for filing by means of EDGAR. All items must be addressed, unless otherwise indicated. * * * * * This Form 1–K is to provide an b Annual Report OR b Special Financial Report for the fiscal year endedllllll Exact name of issuer as specified in the issuer’s charter:llllll Jurisdiction of incorporation/ organization:llllll I.R.S. Employer Identification Number:llllll Address of Principal Executive Offices: lllllllllllllllllllll Phone: (l) lllllllllllllll Title of each class of securities issued pursuant to Regulation A: lllllllllll lllllllllllllllllllll Summary Information Regarding Prior Offerings and Proceeds The following information must be provided for any Regulation A offering that has terminated or completed prior to the filing of this Form 1–K, unless such information has been previously reported in a manner permissible under Rule 257. If such information has been previously reported, check this box band leave the rest of Part I blank. Commission File Number of the offering statement:llllll Date of qualification of the offering statement:llllll Date of commencement of the offering:llllll Amount of securities qualified to be sold in the offering:llllll Amount of securities sold in the offering:llllll Price per security: $llllll The portion of aggregate sales attributable to securities sold on behalf of the issuer: $lllllll The portion of aggregate sales attributable to securities sold on behalf of selling securityholders: $lllllll Fees in connection with this offering and names of service providers: Name of Service Provider Underwriters: ...................................................................................................... Sales Commissions: ............................................................................................ Finders’ Fees: ...................................................................................................... Audit: ................................................................................................................... Legal: ................................................................................................................... Promoters: ........................................................................................................... Blue Sky Compliance: ........................................................................................ CRD Number of any broker or dealer listed:llllll Net proceeds to the issuer: $llllll Clarification of responses (if necessary):llllll Item 5. Interest of Management and Others in Certain Transactions Set forth the information required by Item 13 of Form 1–A. PART II INFORMATION TO BE INCLUDED IN REPORT Item 1. Business Set forth the information required by Item 7 of Form 1–A. mstockstill on DSK4VPTVN1PROD with RULES2 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Set forth the information required by Item 9(a), (b) and (d) of Form 1–A for the most recent two completed fiscal years. Item 3. Directors and Officers Set forth the information required by Items 10 and 11 of Form 1–A. Item 4. Security Ownership of Management and Certain Securityholders Set forth the information required by Item 12 of Form 1–A. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 llllllllllll llllllllllll llllllllllll llllllllllll llllllllllll llllllllllll llllllllllll Item 6. Other Information Set forth any information required to be disclosed in a report on Form 1–U during the last six months of the fiscal year covered by this Form 1–K, but not reported, whether or not otherwise required by this Form 1–K. If disclosure of such information is made under this item, it need not be repeated in a report on Form 1–U that would otherwise be required to be filed with respect to such information or in a subsequent report on Form 1–U. Item 7. Financial Statements (a) The appropriate audited financial statements set forth below of the issuer, or the issuer and its predecessors or any businesses to which the issuer is a successor must be filed as part of the Form 1–K. (b) Unless the issuer is a Canadian company, financial statements must be prepared in accordance with generally accepted accounting principles in the United States (US GAAP). If the issuer is a Canadian company, such financial PO 00000 Frm 00112 Fmt 4701 Sfmt 4700 Fees $llllllllllll $llllllllllll $llllllllllll $llllllllllll $llllllllllll $llllllllllll $llllllllllll statements must be prepared in accordance with either US GAAP or International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). If the financial statements comply with IFRS, such compliance must be explicitly and unreservedly 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. (c) The audit of the financial statements must be conducted in accordance with either U.S. Generally Accepted Auditing Standards or the standards of the Public Company Accounting Oversight Board (United States) and the report and qualifications of the independent accountant shall comply with the requirements of Article 2 of Regulation S–X. Accounting firms conducting audits for the financial statements may, but need not, be registered with the Public Company Accounting Oversight Board. (d) Balance Sheet. There shall be filed an audited consolidated balance sheet as of the end of each of the most recent two fiscal years. E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations (e) Statements of income, cash flows, and changes in stockholders’ equity. File audited consolidated statements of income, cash flows, and changes in stockholders’ equity for each of the two fiscal years preceding the date of the most recent balance sheet being filed or such shorter period as the issuer has been in existence. (f) Oil and Gas Producing Activities. Issuers engaged in oil and gas producing activities must follow the financial accounting and reporting standards specified in Rule 4–10 of Regulation S– X. (g) Financial Statements of Other Entities. The circumstances described below may require you to file financial statements of other entities. The financial statements of other entities must be presented for the same periods as the issuer’s financial statements described above in paragraphs (d) and (e) unless a shorter period is specified by the rules below. (1) Financial Statements of Guarantors and Issuers of Guaranteed Securities. Financial statements of a subsidiary that issues securities guaranteed by the parent or guarantees securities issued by the parent must be presented as required by Rule 3–10 of Regulation S–X. (2) Financial Statements of Affiliates Whose Securities Collateralize an Issuance. Financial statements for an issuer’s affiliates whose securities constitute a substantial portion of the collateral for any class of securities being offered must be presented as required by Rule 3–16 of Regulation S– X. By (Signature and Title) lllllllll (2) This Form is not to be used as a Date llllllllllllllllll blank form to be filled in, but only as Note: The text of Form 1–K will not appear in the Code of Federal Regulations. ■ 13. Add § 239.92 to read as follows: § 239.92 Form 1–SA. This form shall be used for filing semiannual reports under Regulation A (§§ 230.251–230.263 of this chapter). ■ 14. Add Form 1–SA (referenced in § 239.92) to read as follows: UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 1–SA [ ] SEMIANNUAL REPORT PURSUANT TO REGULATION A or [ ] SPECIAL FINANCIAL REPORT PURSUANT TO REGULATION A For the fiscal semiannual period ended ll lllllllllllllllllllll (Exact name of issuer as specified in its charter) State or other jurisdiction of incorporation or organization lllllllllllllll (I.R.S. Employer Identification No.) llll (Full mailing address of principal executive offices) lllllllllllllllll (Issuer’s telephone number, including area code) llllllllllllllllll GENERAL INSTRUCTIONS A. Rules as to Use of Form 1–SA. mstockstill on DSK4VPTVN1PROD with RULES2 (1) This Form shall be used for semiannual reports pursuant to Rule 257(b)(3) of Regulation A (§§ 230.251– 230.263). (2) Semiannual reports on this Form Item 8. Exhibits shall be filed within 90 calendar days (a) An exhibits index must be after the end of the semiannual period presented immediately preceding the covered by the report. first signature page of the report. (3) This Form also shall be used for (b) File, as exhibits to this Form, the special financial reports filed pursuant exhibits required by Form 1–A, except to Rule 257(b)(2)(i)(B) of Regulation A. for the exhibits required by paragraphs Such special financial reports shall be 1, 12, and 13 of Item 17. filed and signed in the manner set forth SIGNATURES in this Form, but otherwise need only provide the cover page and financial Pursuant to the requirements of Regulation A, the issuer has duly caused statements required by Rule 257(b)(2)(i)(B). Special financial reports this report to be signed on its behalf by filed using this Form shall be filed the undersigned, thereunto duly within 90 calendar days after the authorized. (Exact name of issuer as specified in its char- qualification date of the offering ter) lllllllllllllllllll statement. lllllllllllllllllllll By (Signature and Title) lllllllll Date llllllllllllllllll Pursuant to the requirements of Regulation A, this report has been signed below by the following persons on behalf of the issuer and in the capacities and on the dates indicated. By (Signature and Title) lllllllll Date llllllllllllllllll VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 21917 B. Preparation of Report. (1) Regulation A contains certain general requirements that are applicable to reports on any form, including amendments to reports. These general requirements should be carefully read and observed in the preparation and filing of reports on this Form. PO 00000 Frm 00113 Fmt 4701 Sfmt 4700 a guide in the preparation of the report. (3) In addition to the information expressly required to be included in this Form, there shall be added such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading. C. Signature and Filing of Report. (1) The report 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). (2) The report must be signed by the issuer, its principal executive officer, principal financial officer and principal accounting officer. If a signature is by a person on behalf of any other person, evidence of authority to sign must be filed with the report, except where an executive officer signs on behalf of the issuer. (3) The report must be signed using a typed signature. Each signatory to the filing must also manually sign a signature page or other document authenticating, acknowledging or otherwise adopting his or her signature that appears in the filing. Such document must be executed before or at the time the filing is made and must be retained by the issuer for a period of five years. Upon request, the issuer must furnish to the Commission or its staff a copy of any or all documents retained pursuant to this paragraph. D. Incorporation by Reference and Cross-Referencing. (1) An issuer may incorporate by reference to other documents previously submitted or filed on EDGAR. Crossreferencing within the report is also encouraged to avoid repetition of information. For example, you may respond to an item of this Form by providing a cross-reference to the location of the information in the financial statements, instead of repeating such information. Descriptions of where the information incorporated by reference or crossreferenced can be found must be specific and must clearly identify the relevant document and portion thereof where such information can be found. For exhibits incorporated by reference, this description must be noted in the exhibits index for each relevant exhibit. All such descriptions of where information incorporated by reference can be found must be accompanied by E:\FR\FM\20APR2.SGM 20APR2 21918 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations a separate hyperlink to the incorporated document on EDGAR. A hyperlink need not remain active after the filing of the report, except that amendments to the report must update any hyperlinks referred to in the amendment that are inactive. (2) Reference may not be made to any document if the portion of such document containing the pertinent information includes an incorporation by reference to another document. Incorporation by reference to documents not available on EDGAR is not permitted. Information shall not be incorporated by reference or crossreferenced in any case where such incorporation would render the statement or report incomplete, unclear, or confusing. Incorporating information into the financial statements from elsewhere is not permitted. (3) If any substantive modification has occurred in the text of any document incorporated by reference since such document was filed, the issuer must file with the reference a statement containing the text and date of such modification. INFORMATION TO BE INCLUDED IN REPORT Item 1. Management’s Discussion and Analysis of Financial Condition and Results of Operations Set forth the information required by Item 9(a), (b), and (d) of Form 1–A for the interim period for which financial statements are required by Item 3 below. mstockstill on DSK4VPTVN1PROD with RULES2 Item 2. Other Information Set forth any information required to be disclosed in a report on Form 1–U during the semiannual period covered by this Form 1–SA, but not reported, whether or not otherwise required by this Form 1–SA. If disclosure of such information is made under this item, it need not be repeated in a report on Form 1–U that would otherwise be required to be filed with respect to such information or in a subsequent report on Form 1–U. Item 3. Financial Statements The appropriate financial statements set forth below of the issuer, or the issuer and its predecessors or any businesses to which the issuer is a successor must be filed as part of the Form 1–SA. Unless the issuer is a Canadian company, financial statements must be prepared on a consolidated basis in accordance with generally accepted accounting principles in the United States (US GAAP). If the issuer is a Canadian company, such financial statements must be prepared in VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 accordance with either US GAAP or International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). If the financial statements comply with IFRS as issued by the IASB, such compliance must be explicitly and unreservedly stated in the notes to the financial statements. The financial statements included pursuant to this item may be condensed, unaudited, and are not required to be reviewed. For additional guidance on presentation of the financial statements refer to Rule 8–03(a) of Regulation S–X. The financial statements must include the following: (a) An interim consolidated balance sheet as of the end of the six month period covered by this report and a balance sheet as of the end of the preceding fiscal year. An interim balance sheet as of the end of the corresponding six month interim period of the preceding fiscal year need not be provided unless necessary for an understanding of the impact of seasonal fluctuations on the issuer’s financial condition. (b) Interim consolidated statements of income must be provided for the six month interim period covered by this report and for the corresponding period of the preceding fiscal year. Income statements must be accompanied by a statement that in the opinion of management all adjustments necessary in order to make the interim financial statements not misleading have been included. (c) Interim statements of cash flows must be provided for the six month interim period covered by this report and for the corresponding period of the preceding fiscal year. (d) Footnote and other disclosures should be provided as needed for fair presentation and to ensure that the financial statements are not misleading. Refer to Rule 8–03(b) of Regulation S– X for examples of disclosures that may be needed. (e) Financial Statements of Guarantors and Issuers of Guaranteed Securities. Financial statements of a subsidiary that issues securities guaranteed by the parent or guarantees securities issued by the parent must be presented as required by Rule 3–10 of Regulation S–X, except that the periods presented are those required by this item and the financial statements need not be audited. Item 4. Exhibits (a) An exhibits index must be presented immediately preceding the first signature page of the report. PO 00000 Frm 00114 Fmt 4701 Sfmt 4700 (b) File, as exhibits to this Form, the exhibits required by Form 1–A, except for the exhibits required by paragraphs 1, 12, and 13 of Item 17. SIGNATURES Pursuant to the requirements of Regulation A, the issuer has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Exact name of issuer as specified in its charter) lllllllllllllllllll By (Signature and Title) lllllllll Date llllllllllllllllll Pursuant to the requirements of Regulation A, this report has been signed below by the following persons on behalf of the issuer and in the capacities and on the dates indicated. By (Signature and Title) lllllllll Date llllllllllllllllll By (Signature and Title) lllllllll Date llllllllllllllllll Note: The text of Form 1–SA will not appear in the Code of Federal Regulations. ■ 15. Add § 239.93 to read as follows: § 239.93 Form 1–U. This form shall be used for filing current reports under Regulation A (§§ 230.251–230.263 of this chapter). ■ 16. Add Form 1–U (referenced in § 239.92) to read as follows: UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 1–U CURRENT REPORT PURSUANT TO REGULATION A Date of Report (Date of earliest event reported) lllllllllllllllll (Exact name of issuer as specified in its charter) lllllllllllllllllll State or other jurisdiction of incorporation or organization lllllllllllllll (I.R.S. Employer Identification No.) llll (Full mailing address of principal executive offices) lllllllllllllllll (Issuer’s telephone number, including area code) llllllllllllllllll Title of each class of securities issued pursuant to Regulation A: lllllllllll lllllllllllllllllllll GENERAL INSTRUCTIONS A. Rules as to Use of Form 1–U. (1) This Form shall be used for current reports pursuant to Rule 257(b)(4) of Regulation A (§§ 230.251– 230.263). (2) A report on this Form is required to be filed, as applicable, upon the occurrence of any one or more of the events specified in Items 1—9 of this Form. Unless otherwise specified, a E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations report is to be filed within four business days after occurrence of the event. If the event occurs on a Saturday, Sunday, or holiday on which the Commission is not open for business, then the four business day period shall begin to run on, and include, the first business day thereafter. (3) If the issuer previously has provided substantially the same information as required by this Form in a report required by Rule 257(b) of Regulation A, the issuer need not make an additional report of the information on this Form. To the extent that an item calls for disclosure of developments concerning a previously reported event or transaction, any information required in the new report or amendment about the previously reported event or transaction may be provided by incorporation by reference to the previously filed report, if a hyperlink to such report as filed with the Commission is included. (4) Copies of agreements, amendments or other documents or instruments are not required to be filed as exhibits to the Form 1–U unless specifically required by the applicable item. This instruction does not affect the requirement to otherwise file such agreements, amendments or other documents or instruments, including as exhibits to offering statements and periodic reports pursuant to the requirements of Regulation A. mstockstill on DSK4VPTVN1PROD with RULES2 B. Preparation of Report. (1) Regulation A contains certain general requirements which are applicable to reports on any form, including amendments to reports. These general requirements should be carefully read and observed in the preparation and filing of reports on this Form. (2) This Form is not to be used as a blank form to be filled in, but only as a guide in the preparation of the report. Nevertheless, the report shall contain the number and caption of each applicable item, but the text of such item may be omitted. All items that are not required to be answered in a particular report may be omitted and no reference thereto need be made in the report. All instructions should also be omitted. (3) In addition to the information expressly required to be included in this Form, there shall be added such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading. VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 C. Signature and Filing of Report. (1) The report 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). (2) The report must be signed by an officer duly authorized to sign on behalf of the issuer. The report must be signed using a typed signature. The signatory to the filing must also manually sign a signature page or other document authenticating, acknowledging or otherwise adopting his or her signature that appears in the filing. Such document must be executed before or at the time the filing is made and must be retained by the issuer for a period of five years. Upon request, the issuer must furnish to the Commission or its staff a copy of any or all documents retained pursuant to this paragraph. D. Incorporation by Reference and Cross-Referencing. (1) An issuer may incorporate by reference to other documents previously submitted or filed on EDGAR. Crossreferencing within the report is also encouraged to avoid repetition of information. For example, you may respond to an item of this Form by providing a cross-reference to the location of the information in another item, instead of repeating such information. Descriptions of where the information incorporated by reference or cross-referenced can be found must be specific and must clearly identify the relevant document and portion thereof where such information can be found. For exhibits incorporated by reference, this description must be noted in the exhibits index for each relevant exhibit. All such descriptions of where information incorporated by reference can be found must be accompanied by a separate hyperlink to the incorporated document on EDGAR. A hyperlink need not remain active after the filing of the report, except that amendments to the report must update any hyperlinks referred to in the amendment that are inactive. (2) Reference may not be made to any document if the portion of such document containing the pertinent information includes an incorporation by reference to another document. Incorporation by reference to documents not available on EDGAR is not permitted. Information shall not be incorporated by reference or crossreferenced in any case where such incorporation would render the statement or report incomplete, unclear, PO 00000 Frm 00115 Fmt 4701 Sfmt 4700 21919 or confusing. Incorporating information into any financial statements from elsewhere is not permitted. (3) If any substantive modification has occurred in the text of any document incorporated by reference since such document was filed, the issuer must file with the reference a statement containing the text and date of such modification. INFORMATION TO BE INCLUDED IN THE REPORT Item 1. Fundamental Changes (a) If the issuer has entered into or terminated a material definitive agreement that has resulted in or would reasonably be expected to result in a fundamental change to the nature of its business or plan of operations, disclose the following information to the extent applicable: (1) the date on which the agreement was entered into, amended, or terminated, the identity of the parties to the agreement or amendment, and a brief description of any material relationship between the issuer or its affiliates and any of the parties (other than the relationship created by the material definitive agreement or amendment); (2) a brief description of the material terms and conditions of the agreement; (3) a brief description of the material circumstances surrounding the termination; and (4) any material early termination penalties incurred by the issuer due to a termination. (b) For purposes of this item, a material definitive agreement means an agreement that provides for obligations that are material to and enforceable against the issuer, or rights that are material to the issuer and enforceable by the issuer against one or more other parties to the agreement, in each case whether or not subject to conditions. (c) File any material definitive agreement disclosed pursuant to this item as an exhibit to the report on this Form. Instructions to Item 1: 1. A material definitive agreement that is not made in the ordinary course of business is not necessarily required to be disclosed under this item if it does not result in, and would not reasonably be expected to result in, a fundamental change to the nature of the issuer’s business or plan of operations. 2. Without limiting the generality of the foregoing and solely for the purposes of this Item 1, a material definitive agreement is deemed to result in a fundamental change if it involves any of the following: E:\FR\FM\20APR2.SGM 20APR2 21920 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES2 a. An acquisition transaction for which the purchase price, as defined by U.S. GAAP or IFRS, exceeds fiftypercent of the total consolidated assets of the issuer as of the end of the most recently completed fiscal year. If the acquirer transferred assets to the acquiree than the carrying value of those assets should be excluded from the purchase price; b. A merger, consolidation, acquisition or similar transaction that requires approval by the issuer’s securityholders; or c. Any contract upon which the issuer’s business is substantially dependent, as in the case of continuing contracts to sell the major part of the issuer’s products or services or to purchase the major part of the issuer’s requirements of goods, services or raw materials or any franchise or license or other agreement to use a patent, formula, trade secret, process or trade name upon which the issuer’s business is substantially dependent. 3. An issuer must provide disclosure under this item if the issuer succeeds as a party to the agreement or amendment to the agreement by assumption or assignment (other than in connection with a merger or acquisition or similar transaction that is otherwise reported pursuant to this item). 4. No disclosure under this item is required regarding the termination of a material definitive agreement if: a. The agreement terminated on its stated termination date, or as a result of all parties completing their obligations under such agreement. b. Only negotiations or discussions regarding termination of a material definitive agreement are being conducted and the agreement has not been terminated. c. The issuer believes in good faith that the material definitive agreement has not been terminated, unless the issuer has received a notice of termination pursuant to the terms of agreement. Item 2. Bankruptcy or Receivership (a) If a receiver, fiscal agent or similar officer has been appointed for an issuer or its parent, in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state, federal, or Canadian laws, in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the issuer or its parent, or if such jurisdiction has been assumed by leaving the existing directors and officers in possession but subject to the supervision and orders of a court or governmental authority, disclose the following information: VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 (1) the name or other identification of the proceeding; (2) the identity of the court or governmental authority; (3) the date that jurisdiction was assumed; and (4) the identity of the receiver, fiscal agent or similar officer and the date of his or her appointment. (b) If an order confirming a plan of reorganization, arrangement or liquidation has been entered by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the issuer or its parent, disclose the following: (1) the identity of the court or governmental authority; (2) the date that the order confirming the plan was entered by the court or governmental authority; (3) a summary of the material features of the plan; (4) the number of shares or other units of the issuer or its parent issued and outstanding, the number reserved for future issuance in respect of claims and interests filed and allowed under the plan, and the aggregate total of such numbers; and (5) information as to the assets and liabilities of the issuer or its parent as of the date that the order confirming the plan was entered, or a date as close thereto as practicable. Instruction to Item 2: The information called for in paragraph (b)(5) of this item may be presented in the form in which it was furnished to the court or governmental authority. Item 3. Material Modification to Rights of Securityholders (a) If the constituent instruments defining the rights of the holders of any class of securities of the issuer that were issued pursuant to Regulation A have been materially modified, disclose the date of the modification, the title of the class of securities involved and briefly describe the general effect of such modification upon the rights of holders of such securities. (b) If the rights or benefits evidenced by any class of securities issued pursuant to Regulation A have been materially limited or qualified by the issuance or modification of any other class of securities by the issuer, briefly disclose the date of the issuance or modification, the general effect of the issuance or modification of such other class of securities upon the rights or benefits of the holders of the securities issued pursuant to Regulation A. Instruction to Item 3: Working capital restrictions and other limitations upon the payment of PO 00000 Frm 00116 Fmt 4701 Sfmt 4700 dividends must be reported pursuant to this item. Item 4. Changes in Issuer’s Certifying Accountant (a) If an independent accountant who was previously engaged as the principal accountant to audit the issuer’s financial statements, or an independent accountant upon whom the principal accountant expressed reliance in its report regarding a significant subsidiary, resigns (or indicates that it declines to stand for re-appointment after completion of the current audit) or is dismissed, disclose the information that would be required under Item 304(a)(1) of Regulation S–K (17 CFR 229.304(a)(1)), including compliance with Item 304(a)(3) of Regulation S–K (17 CFR 229.304(a)(3)) if the issuer were a ‘‘registrant.’’ (b) If a new independent accountant has been engaged as either the principal accountant to audit the issuer’s financial statements or as an independent accountant on whom the principal accountant is expected to express reliance in its report regarding a significant subsidiary, the issuer must disclose the information that would be required by Item 304(a)(2) of Regulation S–K (17 CFR 229.304(a)(2)) if the issuer were a ‘‘registrant.’’ Instructions to Item 4: 1. Information under this Item 4 is only required if the issuer’s most recent qualified offering statement on Form 1– A or report on Form 1–K, whichever is most recent, contains audited financial statements. 2. The resignation or dismissal of an independent accountant, or its refusal to stand for re-appointment, is a reportable event separate from the engagement of a new independent accountant. On some occasions, two reports on Form 1–U are required for a single change in accountants, the first on the resignation (or refusal to stand for re-appointment) or dismissal of the former accountant and the second when the new accountant is engaged. Information required in the second Form 1–U filing in such situations need not be provided to the extent that it has been reported previously in the first Form 1–U filing. Item 5. Non-reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review (a) If the issuer’s board of directors, a committee of the board of directors or the officer or officers of the issuer authorized to take such action if board action is not required, concludes that any previously issued financial E:\FR\FM\20APR2.SGM 20APR2 mstockstill on DSK4VPTVN1PROD with RULES2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations statements, covering one or more years or interim periods for which the issuer is required to provide financial statements under Regulation A, including Form 1–A, should no longer be relied upon because of an error in such financial statements as addressed in FASB Accounting Standards Codification Topic 250 or IAS 8, as may be modified, supplemented or succeeded, disclose the following information: (1) the date of the conclusion regarding the non-reliance and an identification of the financial statements and years or periods covered that should no longer be relied upon; (2) a brief description of the facts underlying the conclusion to the extent known to the issuer at the time of filing; and (3) a statement of whether the audit committee, or the board of directors in the absence of an audit committee, or authorized officer or officers, discussed with the issuer’s independent accountant the matters disclosed in the filing pursuant to this paragraph (a). (b) If the issuer is advised by, or receives notice from, its independent accountant that disclosure should be made or action should be taken to prevent future reliance on a previously issued audit report or completed interim review related to previously issued financial statements, disclose the following information: (1) the date on which the issuer was so advised or notified; (2) identification of the financial statements that should no longer be relied upon; (3) a brief description of the information provided by the accountant; and (4) a statement of whether the audit committee, or the board of directors in the absence of an audit committee, or authorized officer or officers, discussed with the independent accountant the matters disclosed in the filing pursuant to paragraph (b) of this item. (c) If the issuer receives advisement or notice from its independent accountant requiring disclosure under paragraph (b) of this item, the issuer must: (1) provide the independent accountant with a copy of the disclosures the issuer is making in response to this item and the independent accountant shall receive a copy no later than the day that the disclosures are filed with the Commission; (2) request the independent accountant to furnish to the issuer as promptly as possible a letter addressed to the Commission stating whether the independent accountant agrees with the VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 statements made by the issuer in response to this item and, if not, stating the respects in which it does not agree; and (3) amend the issuer’s previously filed Form 1–U by filing the independent accountant’s letter as an exhibit to the filed Form 1–U no later than two business days after the issuer’s receipt of the letter. Item 6. Changes in Control of Issuer (a) If, to the knowledge of the issuer’s board of directors, a committee of the board of directors, governing body similar to a board of directors, or authorized officer or officers of the issuer, a change in control of the issuer has occurred, furnish the following information: (1) the identity of the persons who acquired such control; (2) the date and a description of the transactions which resulted in the change in control; (3) the basis of the control, including the percentage of voting securities of the issuer now beneficially owned directly or indirectly by the persons who acquired control; (4) the amount of the consideration used by such persons; (5) the sources of funds used by the persons, unless all or any part of the consideration used is a loan made in the ordinary course of business by a bank as defined by Section 3(a)(6) of the Securities Exchange Act of 1934. (6) the identity of the persons from whom control was assumed; and (7) any arrangements or understandings among members of both the former and new control groups and their associates with respect to election of directors or other matters. (b) Describe any arrangements, known to the issuer, including any pledge by any person of securities of the issuer or any of its parents, the operation of which may at a subsequent date result in a change in control of the issuer. It is not necessary to describe ordinary default provisions contained in the charter, trust indentures, or other governing instruments relating to securities of the issuer in response to this paragraph. Item 7. Departure of Certain Officers If the issuer’s principal executive officer, principal financial officer, principal accounting officer, or any person performing similar functions, retires, resigns or is terminated from that position, disclose the fact that the event has occurred and the date of the event. Instruction to Item 7: The disclosure requirements of this item do not apply to an issuer that is a PO 00000 Frm 00117 Fmt 4701 Sfmt 4700 21921 wholly-owned subsidiary of an issuer with a class of securities registered under Section 12 of the Exchange Act (15 U.S.C. 78l), or that is required to file reports under Section 15(d) of the Exchange Act (15 U.S.C. 78o(d)) or under Regulation A. Item 8. Certain Unregistered Sales of Equity Securities (a) If the issuer sells equity securities in a transaction that is not registered under the Securities Act or qualified under Regulation A, furnish the information set forth in Item 6 of Part I of Form 1–A. For purposes of determining the required filing date for the Form 1–U under this item, the issuer has no obligation to disclose information under this item until the issuer enters into an agreement enforceable against the issuer, whether or not subject to conditions, under which the equity securities are to be sold. If there is no such agreement, the issuer must provide the disclosure within four business days after the occurrence of the closing or settlement of the transaction or arrangement under which the equity securities are to be sold. (b) No report need be filed if the equity securities sold, in the aggregate since its last report filed under this item or its last periodic report containing such disclosure, whichever is more recent, constitute less than 10% of the number of shares outstanding of the class of equity securities sold. Instructions to Item 8: 1. For purposes of this item, ‘‘the number of shares outstanding’’ refers to the actual number of shares of equity securities of the class outstanding and does not include outstanding securities convertible into or exchangeable for such equity securities. 2. It is not necessary to follow the format of Item 6 of Part I of Form 1–A when providing the information required by this item. Item 9. Other Events The issuer may, at its option, disclose under this item any events or information, the disclosure of which is not otherwise called for by this Form, that the issuer deems of importance to securityholders. SIGNATURES Pursuant to the requirements of Regulation A, the issuer has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Exact name of issuer as specified in its charter) lllllllllllllllllll By (Signature and Title) lllllllll E:\FR\FM\20APR2.SGM 20APR2 21922 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations Datellllll Washington, DC 20549 The format shown below may differ from the electronic version available on EDGAR. (2) An issuer filing this Form pursuant to Rule 257(a) must only complete the Preliminary Information and Part I. (3) An issuer filing this Form to suspend its duty to file reports under Rule 257(d) must complete the Preliminary Information and Part II. Such issuer must also provide Part I if it has not previously provided the Part I information in a Form 1–K filing. * * * * * FORM 1–Z PRELIMINARY INFORMATION EXIT REPORT UNDER REGULATION A Exact name of issuer as specified in the issuer’s charter:llllll Address of Principal Executive Offices:llllll Phone: (l) Commission File Number(s):llllll Note: The text of Form 1–U will not appear in the Code of Federal Regulations. ■ 17. Add § 239.94 to read as follows: § 239.94 Form 1–Z. This form shall be used to file an exit report under Regulation A (§§ 230.251– 230.263 of this chapter). ■ 18. Add Form 1–Z (referenced in § 239.94) to read as follows: UNITED STATES SECURITIES AND EXCHANGE COMMISSION GENERAL INSTRUCTIONS (1) The following information must be provided in the XML-based Form 1–Z available through the EDGAR portal. PART I Summary Information Regarding the Offering and Proceeds Date of qualification of the offering statement:llllll Date of commencement of the offering:llllll Amount of securities qualified to be sold in the offering:llllll Amount of securities sold in the offering:llllll Price per security: $llllll The portion of aggregate sales attributable to securities sold on behalf of the issuer: $ lllllll The portion of aggregate sales attributable to securities sold on behalf of selling securityholders: $lllllll Fees in connection with this offering and names of service providers: Name of Service Provider Underwriters: ...................................................................................................... Sales Commissions: ............................................................................................ Finders’ Fees: ...................................................................................................... Audit: ................................................................................................................... Legal: ................................................................................................................... Promoters: ........................................................................................................... Blue Sky Compliance: ........................................................................................ person signing the form must be typed or printed under the signature. The signatory to the filing must also manually sign a signature page or other document authenticating, acknowledging or otherwise adopting his or her signature that appears in the filing. Such document must be executed before or at the time the filing is made and must be retained PART II by the issuer for a period of five years. Upon Certification of Suspension of Duty to request, the issuer must furnish to the File Reports Commission or its staff a copy of any or all Title of each class of securities covered by documents retained pursuant to this this Form llllllllllllllll instruction. Note: The text of Form 1–Z will not appear Commission File Number(s) lllllll Approximate number of holders of record as in the Code of Federal Regulations. of the certification date: lllllllll PART 240—GENERAL RULES AND Pursuant to the requirements of Regulation A, lllll (Name of issuer as specified in REGULATIONS, SECURITIES charter) certifies that it meets all of the EXCHANGE ACT OF 1934 conditions for termination of Regulation A reporting specified in Rule 257(d) and that ■ 19. The authority citation for part 240 there are no classes of securities other than continues to read in part as follows: those that are the subject of this Form 1–Z regarding which the issuer has Regulation A Authority: 15 U.S.C. 77c, 77d, 77g, 77j, reporting obligations. lllll (Name of 77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, issuer as specified in charter) has caused this 77sss, 77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f, certification to be signed on its behalf by the 78g, 78i, 78j, 78j–1, 78k, 78k–1, 78l, 78m, undersigned duly authorized person. 78n, 78n–1, 78o, 78o–4, 78o–10, 78p, 78q, 78q–1, 78s, 78u–5, 78w, 78x, 78ll, 78mm, By: lllll Date: lllll 80a–20, 80a–23, 80a–29, 80a–37, 80b–3, 80b– Title: lllll 4, 80b–11, 7201 et seq.; and 8302; 7 U.S.C. Instruction: This Part II of Form 1–Z is 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. required by Rule 257(d) of Regulation A. An 1350; and Pub. L. 111–203, 939A, 124 Stat. officer of the issuer or any other duly 1376, (2010), unless otherwise noted. authorized person may sign, and must do so by typed signature. The name and title of the * * * * * CRD Number of any broker or dealer listed:llllll Net proceeds to the issuer: $llllll Clarification of responses (if necessary):llllll mstockstill on DSK4VPTVN1PROD with RULES2 llllllll llllllll llllllll llllllll llllllll llllllll llllllll VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 PO 00000 Frm 00118 Fmt 4701 Sfmt 4700 llll llll llll llll llll llll llll Fees $llllllll $llllllll $llllllll $llllllll $llllllll $llllllll llllllll llll llll llll llll llll llll llll 20. Section 240.12g5–1 is amended by adding paragraph (a)(7) to read as follows: ■ § 240.12g5–1 of record’’. Definition of securities ‘‘held (a) * * * (7) Other than when determining compliance with Rule 257(d)(2) of Regulation A (§ 230.257(d)(2) of this chapter), the definition of ‘‘held of record’’ shall not include securities issued in a Tier 2 offering pursuant to Regulation A by an issuer that: (i) Is required to file reports pursuant to Rule 257(b) of Regulation A (§ 230.257(b) of this chapter); (ii) Is current in filing annual, semiannual and special financial reports pursuant to such rule as of its most recently completed fiscal year end; (iii) Has engaged a transfer agent registered pursuant to Section 17A(c) of the Act to perform the function of a transfer agent with respect to such securities; and (iv) Had a public float of less than $75 million as of the last business day of its most recently completed semiannual period, computed by multiplying the aggregate worldwide number of shares of its common equity securities held by non-affiliates by the price at which such securities were last sold (or the average E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations bid and asked prices of such securities) in the principal market for such securities or, in the event the result of such public float calculation was zero, had annual revenues of less than $50 million as of its most recently completed fiscal year. An issuer that would be required to register a class of securities under Section 12(g) of the Act as a result of exceeding the applicable threshold in this paragraph (a)(7)(iv), may continue to exclude the relevant securities from the definition of ‘‘held of record’’ for a transition period ending on the penultimate day of the fiscal year two years after the date it became ineligible. The transition period terminates immediately upon the failure of an issuer to timely file any periodic report due pursuant to Rule 257 (§ 230.257 of this chapter) at which time the issuer must file a registration statement that registers that class of securities under the Act within 120 days. * * * * * ■ 21. Section 240.15c2–11 is amended by revising paragraphs (a)(3) and (d)(2)(i) to read as follows: § 240.15c2–11 Initiation or resumption of quotations without specific information. mstockstill on DSK4VPTVN1PROD with RULES2 * * * * * (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 ((§§ 230.251 through 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 VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 21923 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 information in paragraph (a) of this section pursuant to the applicable rule of the Financial Industry Regulatory Authority, Inc. or its successor organization; and * * * * * (3) Pursuant to an order exempting the exchange on which the issuer has securities listed from registration as a national securities exchange. * * * * * (e) Notwithstanding the foregoing in paragraphs (c) and (d) of this section, if the form is used for registration of a class of securities being offered under Regulation A, it shall become effective: (1) For the registration of a class of securities under Section 12(b), upon the latest of the filing of the form with the Commission, the qualification of the Regulation A offering statement or the receipt by the Commission of certification from the national securities exchange listed on the form; or (2) For the registration of a class of securities under Section 12(g), upon the later of the filing of the form and qualification of that Regulation A offering statement. ■ 24. Amend Form 8–A (referenced in § 249.208a) by revising it to read as follows: PART 249—FORMS, SECURITIES EXCHANGE ACT OF 1934 A. Rule as to Use of Form 8–A. (a) Subject to paragraph (b) below, this form may be used for registration pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934 of any class of securities of any issuer which is (1) required to file reports pursuant to Section 13 or 15(d) of that Act, (2) is concurrently qualifying a Tier 2 offering statement relating to that class of securities using the Form S–1 or Form S–11 disclosure models that includes financial statements that are audited in accordance with the standards of, and by an accounting firm that is registered with, the Public Company Accounting Oversight Board (United States), or (3) pursuant to an order exempting the exchange on which the issuer has securities listed from registration as a national securities exchange. (b) If the registrant would be required to file an annual report pursuant to Section 15(d) of the Act for its last fiscal year, except for the fact that the registration statement on this form will become effective before such report is required to be filed, an annual report for such fiscal year shall nevertheless be filed within the period specified in the appropriate annual report form. 22. The authority citation for part 249 continues to read in part as follows: ■ Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C. 5461 et seq.; and 18 U.S.C. 1350, unless otherwise noted. * * * * * 23. Section 249.208 is amended by: a. Revising paragraph (a); and b. Adding paragraph (e). The revision and addition read as follows: ■ ■ ■ § 249.208a Form 8–A, for registration of certain classes of securities pursuant to section 12 (b) or (g) of the Securities Exchange Act of 1934. (a) Subject to paragraph (b) of this section, this form may be used for registration pursuant to section 12(b) or (g) of the Securities Exchange Act of 1934 of any class of securities of any issuer which: (1) Is required to file reports pursuant to sections 13 and 15(d) of that Act; (2) Is concurrently qualifying a Tier 2 offering statement relating to that class of securities using the Form S–1 or Form S–11 disclosure models; or PO 00000 Frm 00119 Fmt 4701 Sfmt 4700 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8–A FOR REGISTRATION OF CERTAIN CLASSES OF SECURITIES PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 GENERAL INSTRUCTIONS E:\FR\FM\20APR2.SGM 20APR2 mstockstill on DSK4VPTVN1PROD with RULES2 21924 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations (c) If this form is used for the registration of a class of securities under Section 12(b), it shall become effective: (1) If a class of securities is not concurrently being registered under the Securities Act of 1933 (15 U.S.C. 77a et seq.) (‘‘Securities Act’’), upon the later of receipt by the Commission of certification from the national securities exchange listed on this form or the filing of the Form 8–A with the Commission; or (2) If a class of securities is concurrently being registered under the Securities Act, upon the latest of the filing of the Form 8–A with the Commission, receipt by the Commission of certification from the national securities exchange listed on this form or effectiveness of the Securities Act registration statement relating to the class of securities. (d) If this form is used for the registration of a class of securities under Section 12(g), it shall become effective: (1) If a class of securities is not concurrently being registered under the Securities Act, upon the filing of the Form 8–A with the Commission; or (2) If class of securities is concurrently being registered under the Securities Act, upon the later of the filing of the Form 8–A with the Commission or the effectiveness of the Securities Act registration statement relating to the class of securities. (e) Notwithstanding the foregoing in paragraphs (c) and (d) of this form, if this form is used for registration of a class of securities being offered under Regulation A, it shall become effective: (1) For the registration of a class of securities under Section 12(b), upon the latest of the filing of the Form 8–A with the Commission, the qualification of the Regulation A offering statement or the receipt by the Commission of certification from the national securities exchange listed on this form; or (2) For the registration of a class of securities under Section 12(g), upon the later of the filing of the Form 8–A and qualification of the Regulation A offering statement. (Note: Registration pursuant to paragraph (e) of this form is not permitted if the filing of the Form 8–A and, where applicable, the receipt by the Commission of certification from the national securities exchange listed on this form occurs more than five calendar days after the qualification of the Regulation A offering statement) B. Application of General Rules and Regulations. (a) The General Rules and Regulations under the Act contain certain general requirements which are applicable to VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 registration on any form. These general requirements should be carefully read and observed in the preparation and filing of registration statements on this form. (b) Particular attention is directed to Regulation 12B which contains general requirements regarding matters such as the kind and size of paper to be used, legibility, information to be given whenever the title of securities is required to be stated, incorporation by reference and the filing of the registration statement. The definitions contained in Rule 12b–2 should be especially noted. C. Preparation of Registration Statement. This form is not to be used as a blank form to be filled in, but only as a guide in the preparation of the registration statement on paper meeting the requirements of Rule 12b–12. The registration statement shall contain the item numbers and captions, but the text of the items may be omitted. The answers to the items shall be prepared in the manner specified in Rule 12b–13. D. Signature and Filing of Registration Statement. Eight complete copies of the registration statement, including all papers and documents filed as a part thereof (other than exhibits) shall be filed with the Commission and at least one such copy shall be filed with each exchange on which the securities are to be registered. Exhibits shall be filed with the Commission and with any exchange in accordance with the Instructions as to Exhibits. At least one copy of the registration statement filed with the Commission and one filed with each exchange shall be manually signed. Unsigned copies shall be conformed. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8–A FOR REGISTRATION OF CERTAIN CLASSES OF SECURITIES PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 lllllllllllllllllllll (Exact name of registrant as specified in its charter) lllllllllllllllllllll (State or other jurisdiction of incorporation or organization) lllllllllllllllllllll (Address of principal executive offices) lllllllllllllllllllll (I.R.S. Employer Identification No.) lllllllllllllllllllll (Zip Code) PO 00000 Frm 00120 Fmt 4701 Sfmt 4700 Securities to be registered pursuant to Section 12(b) of the Act: Title of each class to be so registered lllllllllllllllllllll lllllllllllllllllllll lllllllllllllllllllll Name of each exchange on which each class is to be registered lllllllllllllllllllll lllllllllllllllllllll lllllllllllllllllllll If this form relates to the registration of a class of securities pursuant to Section 12(b) of the Exchange Act and is effective pursuant to General Instruction A.(c) or (e), check the following box. b If this form relates to the registration of a class of securities pursuant to Section 12(g) of the Exchange Act and is effective pursuant to General Instruction A.(d) or (e), check the following box. b If this form relates to the registration of a class of securities concurrently with a Regulation A offering, check the following box. b Securities Act registration statement or Regulation A offering statement file number to which this form relates:llll (if applicable) Securities to be registered pursuant to Section 12(g) of the Act: lllllllllllllllllllll (Title of class) lllllllllllllllllllll (Title of class) INFORMATION REQUIRED IN REGISTRATION STATEMENT Item 1. Description of Registrant’s Securities to be Registered. Furnish the information required by Item 202 of Regulation S–K (§ 229.202 of this chapter), as applicable. Instruction. If a description of the securities comparable to that required here is contained in any prior filing with the Commission, such description may be incorporated by reference to such other filing in answer to this item. If such description will be included in a form of prospectus or an offering circular subsequently filed by the registrant pursuant to Rule 424(b) under the Securities Act (§ 230.424(b) of this chapter) or Rule 253(g) of Regulation A (§ 230.253(g) of this chapter), this registration statement shall state that such prospectus or offering circular shall be deemed to be incorporated by reference into the registration statement. If the securities are to be registered on a national securities exchange and the description has not previously been filed with such exchange, copies of the description shall be filed with copies of the application filed with the exchange. E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations exchange on which other securities of the registrant are registered, or are to be registered pursuant to Section 12(g) of the Act, copies of all constituent instruments defining the rights of the holders of each class of such securities, SIGNATURE including any contracts or other Pursuant to the requirements of documents which limit or qualify the Section l2 of the Securities Exchange rights of such holders, shall be filed as Act of 1934, the registrant has duly exhibits with each copy of the caused this registration statement to be registration statement filed with the signed on its behalf by the undersigned, Commission or with an exchange, thereto duly authorized. subject to Rule 12b–32 regarding (Registrant) lllllllllllllllllllll incorporation of exhibits by reference. Item 2. Exhibits. List below all exhibits filed as a part of the registration statement: Instruction. See the instructions as to exhibits, set forth below. Date lllllllllllllllllllll By lllllllllllllllllllll *Print the name and title of the signing officer under such officer’s signature. mstockstill on DSK4VPTVN1PROD with RULES2 INSTRUCTIONS AS TO EXHIBITS If the securities to be registered on this form are to be registered on an VerDate Sep<11>2014 20:46 Apr 17, 2015 Jkt 235001 Note: The text of Form 8–A will not appear in the Code of Federal Regulations. PART 260—GENERAL RULES AND REGULATIONS, TRUST INDENTURE ACT OF 1939 25. The authority citation for part 260 is revised to read as follows: ■ PO 00000 Frm 00121 Fmt 4701 Sfmt 9990 21925 Authority: 15 U.S.C. 77c, 77ddd, 77eee, 77ggg, 77nnn, 77sss, 78ll (d), 80b–3, 80b–4, and 80b–11, unless otherwise noted. 26. Section 260.4a–1 is revised to read as follows: ■ § 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. By the Commission. Dated: March 25, 2015. Brent J. Fields, Secretary. [FR Doc. 2015–07305 Filed 4–17–15; 8:45 am] BILLING CODE 8011–01–P E:\FR\FM\20APR2.SGM 20APR2

Agencies

[Federal Register Volume 80, Number 75 (Monday, April 20, 2015)]
[Rules and Regulations]
[Pages 21805-21925]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-07305]



[[Page 21805]]

Vol. 80

Monday,

No. 75

April 20, 2015

Part II





Securities and Exchange Commission





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17 CFR Parts 200, 230, 232, et al.





 Amendments for Small and Additional Issues Exemptions Under the 
Securities Act (Regulation A); Final Rule

Federal Register / Vol. 80 , No. 75 / Monday, April 20, 2015 / Rules 
and Regulations

[[Page 21806]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200, 230, 232, 239, 240, 249, and 260

[Release Nos. 33-9741; 34-74578; 39-2501; File No. S7-11-13]
RIN 3235-AL39


Amendments for Small and Additional Issues Exemptions Under the 
Securities Act (Regulation A)

AGENCY: Securities and Exchange Commission.

ACTION: Final rules.

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SUMMARY: We are adopting amendments to Regulation A and other rules and 
forms to implement Section 401 of the Jumpstart Our Business Startups 
(JOBS) Act. Section 401 of the JOBS Act added Section 3(b)(2) to the 
Securities Act of 1933, which directs the Commission to adopt rules 
exempting from the registration requirements of the Securities Act 
offerings of up to $50 million of securities annually. The final rules 
include issuer eligibility requirements, content and filing 
requirements for offering statements, and ongoing reporting 
requirements for issuers in Regulation A offerings.

DATES: The final rules and form amendments are effective on June 19, 
2015.

FOR FURTHER INFORMATION CONTACT: Zachary O. Fallon, Special Counsel; 
Office of Small Business Policy, Division of Corporation Finance, at 
(202) 551-3460; or Shehzad K. Niazi, Special Counsel; Office of 
Rulemaking, Division of Corporation Finance, at (202) 551-3430, U.S. 
Securities and Exchange Commission, 100 F Street NE., Washington, DC 
20549-3628.

SUPPLEMENTARY INFORMATION: We are amending Rules 251 through 263 \1\ of 
Regulation A under the Securities Act of 1933 (the ``Securities 
Act'').\2\
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    \1\ 17 CFR 230.251 through 230.263.
    \2\ 15 U.S.C. 77a et seq.
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    We are revising Form 1-A,\3\ rescinding Form 2-A,\4\ and adopting 
four new forms, Form 1-K (annual report), Form 1-SA (semiannual 
report), Form 1-U (current report), and Form 1-Z (exit report).
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    \3\ 17 CFR 239.90.
    \4\ 17 CFR 239.91.
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    Further, we are revising Rule 4a-1 \5\ under the Trust Indenture 
Act of 1939 (the ``Trust Indenture Act'') \6\ to increase the dollar 
ceiling of the exemption from the requirement to issue securities 
pursuant to an indenture. We are also amending Rule 12g5-1 \7\ of the 
Securities Exchange Act of 1934 (the ``Exchange Act'') \8\ to permit 
issuers to rely on a conditional exemption from mandatory registration 
of a class of securities under Section 12(g) of the Exchange Act, Rule 
15c2-11 \9\ of the Exchange Act 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, and Rule 30-1 \10\ of the Commission's organizational rules 
and provisions for delegated authority to permit the Division of 
Corporation Finance to issue notices of qualification and deny Form 1-Z 
filings. In addition, we are adopting a technical amendment to Exchange 
Act Rule 15c2-11 to update the outdated reference to ``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 240.12g5-1.
    \8\ 15 U.S.C. 78a et seq.
    \9\ 17 CFR 240.15c2-11.
    \10\ 17 CFR 200.30-1.
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    As a result of the revisions to Regulation A, we are adopting 
conforming and technical amendments to Securities Act Rules 157(a),\11\ 
505(b)(2)(iii),\12\ and Form 8-A. Additionally, we are revising Item 
101(a) \13\ of Regulation S-T \14\ to reflect the mandatory electronic 
filing of all issuer initial filing and ongoing reporting requirements 
under Regulation A. We are also revising Item 101(c)(6) \15\ of 
Regulation S-T to remove the reference to paper filings in a Regulation 
A offering, and removing and reserving Item 101(b)(8) \16\ of 
Regulation S-T dealing with the optional electronic filing of Form F-X 
by Canadian issuers.
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    \11\ 17 CFR 230.157(a).
    \12\ 17 CFR 230.505(b)(2)(iii).
    \13\ 17 CFR 232.101(a).
    \14\ 17 CFR 232.10 et seq.
    \15\ 17 CFR 232.101(c)(6).
    \16\ 17 CFR 232.101(b)(8).
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Table of Contents

I. Introduction
II. Final Rules and 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)
    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)
    1. Proposed Rules
    2. Comments on Proposed Rules
    3. Final Rules
    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
    1. Proposed Rules
    2. Comments on Proposed Rules
    3. Final Rules
    H. Relationship With State Securities Law
    1. Proposed Rules
    2. Comments on Proposed Rules
    3. Final Rules
    I. Additional Considerations Related to Smaller Offerings
    J. Transitional Guidance for Issuers Currently Conducting 
Regulation A Offerings
    K. Technical and Conforming Amendments
III. Economic Analysis
    A. Broad Economic Considerations
    B. Baseline
    1. Current Methods of Raising Up to $50 Million of Capital
    2. Investors
    3. Financial Intermediaries
    C. 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)
    D. Offering Statement
    1. Electronic Filing and Delivery
    2. Disclosure Format and Content
    3. Audited Financial Statements
    4. Other Accounting Requirements
    5. Continuous and Delayed Offerings
    6. Nonpublic Review of Draft Offering Statements
    E. Solicitation of Interest (``Testing the Waters'')
    F. Ongoing Reporting
    1. Periodic and Current Event Reporting Requirements
    2. Termination and Suspension of Reporting and Exit Reports
    3. Exchange Act Registration
    G. Insignificant Deviations
    H. Bad Actor Disqualification
    I. Relationship With State Securities Law
IV. Paperwork Reduction Act
    A. Background
    B. Estimated Number of Regulation A Offerings
    C. PRA Reporting and Cost Burden Estimates

[[Page 21807]]

    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 8-A: Short Form Registration Under the Exchange Act
    7. Form ID Filings
    8. Form F-X
    D. Collections of Information Are Mandatory
V. Final Regulatory Flexibility Act Analysis
    A. Need for the Rules
    B. Significant Issues Raised by Public Comments
    C. Small Entities Subject to the Rules
    D. Reporting, Recordkeeping, and Other Compliance Requirements
    E. Agency Action To Minimize Effect on Small Entities
VI. Statutory Basis and Text of Amendments

I. Introduction

    On December 18, 2013, we proposed rule and form amendments \17\ to 
implement Section 401 of the Jumpstart Our Business Startups Act (the 
``JOBS Act'').\18\ Section 401 of the JOBS Act amended Section 3(b) of 
the Securities Act by designating existing Section 3(b) as Section 
3(b)(1), and creating new Sections 3(b)(2)-(5). 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 12-month period. Sections 
3(b)(2)-(5) specify mandatory terms and conditions for such exempt 
offerings and also authorize the Commission to adopt other terms, 
conditions, or requirements as necessary in the public interest and for 
the protection of investors.\19\ In addition, Section 3(b)(5) directs 
the Commission to review the $50 million offering limit specified in 
Section 3(b)(2) not later than two years after the enactment of the 
JOBS Act and every two years thereafter, and authorizes the Commission 
to increase the annual offering limit if it determines that it would be 
appropriate to do so. Accordingly, we are revising Regulation A under 
the Securities Act to require issuers conducting offerings in reliance 
on Section 3(b)(2) to comply with terms and conditions established by 
the Commission's rules, and, where applicable, to make ongoing 
disclosure.
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    \17\ See Rel. No. 33-9497 [79 FR 3925] (Dec. 18, 2013) (the 
``Proposing Release''), available at: https://www.sec.gov/rules/proposed/2013/33-9497.pdf.
    \18\ Public Law 112-106, 126 Stat. 306.
    \19\ We are adopting a number of terms and conditions for 
Regulation A offerings pursuant to our discretionary authority under 
Sections 3(b)(2)-(5). Where we have done so, as discussed in detail 
in Section II. below, it is because we find such terms and 
conditions to be necessary in the public interest and for the 
protection of investors.
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II. Final Rules and Amendments to Regulation A

A. Overview

    We are adopting final rules to implement the JOBS Act mandate by 
expanding Regulation A into two tiers: Tier 1, for securities offerings 
of up to $20 million; and Tier 2, for offerings of up to $50 
million.\20\ The final rules 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. As 
proposed, and with the modifications described below, the final rules 
modernize the Regulation A filing process for all offerings, align 
practice in certain areas with prevailing practice for registered 
offerings, create additional flexibility for issuers in the offering 
process, and establish an ongoing reporting regime for Regulation A 
issuers. Under the final rules, Tier 2 issuers are required to include 
audited financial statements in their offering documents and to file 
annual, semiannual, and current reports with the Commission. With the 
exception of securities that will be listed on a national securities 
exchange upon qualification, purchasers in Tier 2 offerings must either 
be accredited investors, as that term is defined in Rule 501(a) of 
Regulation D, or 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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    \20\ An issuer of $20 million or less of securities could elect 
to proceed under either Tier 1 or Tier 2.
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    In developing the final rules, we considered the statutory language 
of JOBS Act Section 401, the JOBS Act legislative history, recent 
recommendations of the Commission's Government-Business Forum on Small 
Business Capital Formation,\21\ the Advisory Committee on Small and 
Emerging Companies,\22\ the Equity Capital Formation Task Force,\23\ 
comment letters received on Title IV of the JOBS Act before the 
Commission's proposed rules were issued in December of 2013,\24\ and 
comment letters received to date on the Commission's proposed rules to 
implement Section 401 of the JOBS Act.\25\
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    \21\ Recommendations of the Commission's Government-Business 
Forum on Small Business Capital Formation are available at: https://www.sec.gov/info/smallbus/sbforum.shtml.
    \22\ Recommendations of the Advisory Committee on Small and 
Emerging Companies are available at: https://www.sec.gov/info/smallbus/acsec.shtml.
    \23\ 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/.
    \24\ To facilitate public input on JOBS Act rulemaking before 
the issuance of rule proposals, the Commission 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.
    \25\ The comment letters received to date in response to the 
Proposing Release are available at: https://www.sec.gov/comments/s7-11-13/s71113.shtml.
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    The key provisions of the final rules and amendments to Regulation 
A follow: Scope of the exemption--the final rules:

 Establish two tiers of offerings:
 Tier 1: Annual offering limit of $20 million, including no 
more than $6 million on behalf of selling securityholders that are 
affiliates of the issuer.
 Tier 2: Annual offering limit of $50 million, including no 
more than $15 million on behalf of selling securityholders that are 
affiliates of the issuer.
 Limit sales by selling securityholders in an issuer's initial 
Regulation A offering and any subsequently qualified Regulation A 
offering within the first 12-month period following the date of 
qualification of the initial Regulation A offering to no more than 30% 
of the aggregate offering price.
 Preserve the existing issuer eligibility requirements of 
Regulation A, and also exclude 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 and issuers that are required to, but that have not, 
filed with the Commission the ongoing reports required by the final 
rules during the two years immediately preceding the filing of an 
offering statement.
 Limit the amount of securities that an investor who is not an 
accredited investor under Rule 501(a) of Regulation D can purchase in a 
Tier 2 offering to no more than: (a) 10% of the greater of annual 
income or net worth (for natural persons); or (b) 10% of the greater of 
annual revenue or net assets at fiscal year end (for non-natural 
persons). This limit will not apply to purchases of securities that 
will be listed on a national

[[Page 21808]]

securities exchange upon qualification.
 Exclude asset-backed securities, as defined in Regulation AB, 
from the list of eligible securities.
 Update the safe harbor from integration and provide 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'' with, or solicit 
interest in a potential offering from, 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.

    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 unless the issuer is 
subject to, and current in, Tier 2 ongoing reporting obligations. Where 
the issuer is subject to, and current in, a Tier 2 ongoing reporting 
obligation, issuers and intermediaries will only be required to comply 
with the general delivery requirements for offers.
 Modernize the qualification, communications, and offering 
processes in Regulation A to reflect analogous provisions of the 
Securities Act registration process: \26\
---------------------------------------------------------------------------

    \26\ See, e.g., Securities Offering Reform, Rel. No. 33-8591 
(July 19, 2005) [70 FR 44722].
---------------------------------------------------------------------------

     Permit issuers and intermediaries to satisfy their 
delivery requirements as to the final offering circular under an 
``access equals delivery'' model when sales are made on the basis of 
offers conducted during the prequalification period and the final 
offering circular is filed and available on the Commission's Electronic 
Data Gathering, Analysis and Retrieval system (EDGAR);
     Require issuers and intermediaries, not later than two 
business days after completion of a sale, to provide purchasers with a 
copy of the final offering circular or a notice with the uniform 
resource locator (URL) where the final offering circular 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; and
     Permit issuers to file offering circular updates and 
supplements after qualification of the offering statement in lieu of 
post-qualification amendments in certain circumstances, including to 
provide the types of information that may be excluded from a prospectus 
under Rule 430A.
 Permit continuous or delayed offerings, but require issuers in 
continuous or delayed Tier 2 offerings to be current in their annual 
and semiannual reporting obligations in order to do so.
 Permit issuers to qualify additional securities in reliance on 
Regulation A by filing a post-qualification amendment to a qualified 
offering statement.

    Offering statement:

 Require issuers to file offering statements with the 
Commission electronically on EDGAR.
 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 of Form 1-A.
 Update and clarify Model B (Narrative) disclosure format under 
Part II of Form 1-A (renamed, ``Offering Circular''), while continuing 
to permit Part I of Form S-1 narrative disclosure as an alternative.
 Permit real estate investment trusts (REITs) and similarly 
eligible companies to provide the narrative disclosure required by Part 
I of Form S-11 in Part II of Form 1-A.
 Require that offering statements be qualified by the 
Commission before sales may be made pursuant to Regulation A.
 Require Tier 1 and Tier 2 issuers to file balance sheets and 
related financial statements for the two previous fiscal year ends (or 
for such shorter time that they have been in existence).
 Require Tier 2 issuers to include financial statements in 
their offering circulars that are audited in accordance with either the 
auditing standards of the American Institute of Certified Public 
Accountants (AICPA) (referred to as U.S. Generally Accepted Auditing 
Standards or GAAS) or the standards of the Public Company Accounting 
Oversight Board (PCAOB).
 Require Tier 1 and Tier 2 issuers to include financial 
statements in Form 1-A that are dated not more than nine months before 
the date of non-public submission, filing, or 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 Tier 1 issuers to provide information about sales in 
such offerings and to update certain issuer information by 
electronically filing a Form 1-Z exit report with the Commission not 
later than 30 calendar days after termination or completion of an 
offering.
 Require Tier 2 issuers to file electronically with the 
Commission on EDGAR annual and semiannual reports, as well as current 
event reports.
 Require Tier 2 issuers to file electronically a special 
financial report to cover financial periods between the most recent 
period included in a qualified offering statement and the issuer's 
first required periodic report.
 Permit the ongoing reports filed by an issuer conducting a 
Tier 2 offering to satisfy a broker-dealer's obligations under Exchange 
Act Rule 15c2-11.
 Provide that Tier 2 issuers' reporting obligations under 
Regulation A would suspend when they are subject to the ongoing 
reporting requirements of Section 13 of the Exchange Act, and may also 
be suspended under Regulation A at any time by filing a Form 1-Z exit 
report after completing reporting for the fiscal year in which an 
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, or fewer than 1,200 persons for banks or bank 
holding companies, and offers or sales made in reliance on a qualified 
Tier 2 Regulation A offering statement are not ongoing. In certain 
circumstances, Tier 2 Regulation A reporting obligations may terminate 
when issuers are no longer subject to the ongoing reporting 
requirements of Section 13 of the Exchange Act.
 Require Tier 2 issuers 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

[[Page 21809]]

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.

    Exchange Act registration:

 Conditionally exempt securities issued in a Tier 2 offering 
from the mandatory registration requirements of Section 12(g) of the 
Exchange Act, for so long as the issuer engages the services of a 
transfer agent that is registered with the Commission under Section 17A 
of the Exchange Act, remains subject to a Tier 2 reporting obligation, 
is current in its annual and semiannual reporting at fiscal year end, 
and had a public float of less than $75 million as of the last business 
day of its most recently completed semiannual period, or, in the 
absence of a public float, had annual revenues of less than $50 million 
as of its most recently completed fiscal year.
 Permit Tier 2 issuers to use a Form 8-A short form 
registration statement concurrently with the qualification of a 
Regulation A offering statement that includes Part I of Form S-1 or 
Form S-11 narrative disclosure in Form 1-A in order to register a class 
of securities under Sections 12(g) or 12(b) of the Exchange Act.

    ``Bad actor'' disqualification provisions:

 Substantially conform the ``bad actor'' disqualification 
provisions of Rule 262 to Rule 506(d) and add a disclosure requirement 
similar to Rule 506(e).

    Application of state securities laws:

 Provide for the preemption of state securities law 
registration and qualification requirements for securities offered or 
sold to ``qualified purchasers,'' in light of the total package of 
investor protections included in the final rules. A qualified purchaser 
will be defined to be any person to whom securities are offered or sold 
in a Tier 2 offering.
    The Commission is required by Section 3(b)(5) of the Securities Act 
to review the Tier 2 offering limitation every two years. In addition 
to revisiting the Tier 2 offering limitation, the staff will also 
undertake to review the Tier 1 offering limitation at the same time. 
The staff also will undertake to study and submit a report to the 
Commission no later than 5 years following the adoption of the 
amendments to Regulation A, on the impact of both the Tier 1 and Tier 2 
offerings on capital formation and investor protection. The report will 
include, but not be limited to, a review of: (1) The amount of capital 
raised under the amendments; (2) the number of issuances and amount 
raised by both Tier 1 and Tier 2 offerings; (3) the number of placement 
agents and brokers facilitating the Regulation A offerings; (4) the 
number of Federal, State, or any other actions taken against issuers, 
placement agents, or brokers with respect to both Tier 1 and Tier 2 
offerings; and (5) whether any additional investor protections are 
necessary for either Tier 1 or Tier 2. Based on the information 
contained in the report, the Commission may propose to either decrease 
or increase the offering limit for Tier 1, as appropriate.

B. Scope of Exemption

1. Eligible Issuers
a. Proposed Rules
    Section 401 of the JOBS Act does not include any express issuer 
eligibility requirements. The proposed rules would have maintained 
Regulation A's existing issuer eligibility requirements and added two 
new categories of ineligible issuers.\27\ The two new categories would 
exclude 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 and issuers that 
are required to, but that have not, filed with the Commission the 
ongoing reports required by the final rules during the two years 
immediately preceding the filing of an offering statement. 
Additionally, we requested comment on other potential changes to the 
existing issuer eligibility requirements, including whether the 
exemption should be limited to ``operating companies,'' United States 
domestic issuers, or issuers that use a certain amount of the proceeds 
raised in a Regulation A offering in the United States. We also 
solicited comment on whether we should extend issuer eligibility to 
non-Canadian foreign issuers, business development companies as defined 
in Section 2(a)(48) of the Investment Company Act of 1940 (BDCs),\28\ 
blank check companies,\29\ or Exchange Act reporting companies, or, 
alternatively, eliminate shell companies or REITs from the exemptive 
regime.
---------------------------------------------------------------------------

    \27\ Existing Regulation A limits issuer eligibility to issuers 
organized, and with a principal place of business, in the United 
States or Canada, while excluding Exchange Act reporting companies, 
investment companies, including business development companies, 
development stage companies that have no specific business plan or 
purpose or have indicated that their business plan is to engage in a 
merger or acquisition with an unidentified company or companies, 
issuers of fractional undivided interests in oil or gas rights or a 
similar interest in other mineral rights, and issuers disqualified 
because of Rule 262, 17 CFR 230.262 (2014). See 17 CFR 230.251(a) 
(2014).
    \28\ 15 U.S.C. 80a-2(a)(48).
    \29\ ``Blank check companies'' are development stage companies 
that have no specific business plan or purpose or have indicated 
that their business plan is to engage in a merger or acquisition 
with an unidentified company or companies. See Securities Act Rule 
419(a)(2)(i), 17 CFR 230.419(a)(2)(i); 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).
---------------------------------------------------------------------------

b. Comments on the Proposed Rules
    Commenters expressed a wide range of views on the proposed issuer 
eligibility requirements. A number of commenters expressed general 
support for the proposed issuer eligibility requirements.\30\ Many 
commenters expressly supported the new proposed issuer eligibility 
criterion relating to the requirement to be current in Tier 2 ongoing 
reporting obligations.\31\ One commenter also expressly supported the 
proposed exclusion of issuers subject to an order of the Commission 
entered pursuant to Section 12(j) of the Exchange Act from the list of 
eligible issuers.\32\ Other commenters suggested additional limitations 
on issuer eligibility, including: a requirement that issuers be 
``operating companies,'' \33\

[[Page 21810]]

excluding shell companies and issuers of penny stock,\34\ and excluding 
other types of investment vehicles, such as commodity pools and 
investment funds that invest in gold or virtual currencies.\35\
---------------------------------------------------------------------------

    \30\ Letter from Catherine T. Dixon, Chair, Federal Regulation 
of Securities Committee, Business Law Section, American Bar 
Association, April 3, 2014 (``ABA BLS Letter''); Letter from 
Gabrielle Buckley, Chair, Section of International Law, American Bar 
Association, May 14, 2014 (``ABA SIL Letter''); Letter from Andrew 
F. Viles, Canaccord Letter Genuity Inc., March 27, 2014 (``Canaccord 
Letter''); Letter from Pw Carey, March 24, 2014 (``Carey Letter''); 
Letter from Kurt N. Schacht, CFA, Managing Director, Standards and 
Financial Market Integrity, and Linda L. Rittenhouse, Director, 
Capital Markets, CFA Institute, March 24, 2014 (``CFA Institute 
Letter''); Letter from Kim Wales, Executive Board Member, Crowdfund 
Intermediary Regulatory Advocates (CFIRA), May 14, 2014 (``CFIRA 
Letter 1''); Letter from Christopher Tyrrell, Chair, Crowdfunding 
Intermediary Regulatory Advocates, February 23, 2015 (``CFIRA Letter 
2''); Robert R. Kaplan, Jr. and T. Rhys James, Kaplan Voekler 
Cunningham & Frank PLC, March 23, 2014 (``KVCF Letter''); Letter 
from William F. Galvin, Secretary, Commonwealth of Massachusetts, 
March 24, 2014 (``Massachusetts Letter 2''); Letter from Morrison & 
Foerster LLP, March 26, 2014 (``MoFo Letter''); Letter from Andrea 
Seidt, President, North American Securities Administrators 
Association (NASAA) and Ohio Securities Commissioner, March 24, 2014 
(``NASAA Letter 2''); Letter from William M. Beatty, Securities 
Administrator, Washington Department of Financial Institutions, 
March 24, 2014 (``WDFI Letter''); Letter from William R. Hambrecht, 
Chairman, WR Hambrecht+ Co, March 4, 2014 (``WR Hambrecht + Co 
Letter'').
    \31\ ABA BLS Letter; CFA Institute Letter; Massachusetts Letter 
2; NASAA Letter 2; WDFI Letter.
    \32\ CFA Institute Letter.
    \33\ CFIRA Letter 1; WR Hambrecht + Co Letter (suggesting that 
limiting the availability of the exemption to, among other things, 
operating companies would provide investors with more confidence in 
the offerings conducted pursuant to Regulation A). But see KVCF 
Letter (suggesting that limiting availability of the exemption to 
operating companies would unnecessarily limit the utility of the 
exemption).
    \34\ ABA BLS Letter; MoFo Letter.
    \35\ Massachusetts Letter 2.
---------------------------------------------------------------------------

    A few commenters recommended allowing blank check companies and 
special purpose acquisition companies (SPACs) to rely on Regulation 
A.\36\ One of these commenters recommended allowing blank check 
companies seeking to raise at least $10 million to use Regulation A in 
the same manner as any other eligible issuer, but suggested that, if a 
company is raising less than $10 million in a Tier 2 offering, the 
Commission should implement certain additional requirements.\37\ 
Another commenter recommended allowing issuers of fractional interests 
in oil and gas or other mineral rights to rely on Regulation A based on 
a ``reasonable'' eligibility test to be developed by the 
Commission.\38\ Several commenters opposed any change to the proposed 
issuer eligibility requirements that would exclude REITs from 
participating in Regulation A offerings.\39\ Other commenters advocated 
expanding the current categories of eligible issuers, and specifically 
supported the continued inclusion of Canadian companies and shell 
companies as eligible issuers, as proposed.\40\
---------------------------------------------------------------------------

    \36\ Gilman Law Letter; Letter from Mark Goldberg, Chairman, 
Investment Program Association, March 24, 2014 (``IPA Letter''); 
Letter from David N. Feldman, Partner, Richardson Patel LLP, January 
15, 2014 (``Richardson Patel Letter''). 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.
    \37\ Richardson Patel Letter (recommending that for offerings of 
less than $10 million under Tier 2, the rules should require that: 
(a) Monies raised be placed into escrow, minus underwriters 
compensation and 10% for offering expenses, until a reverse merger 
is completed; (b) a combination with an operating business be 
completed within three years; (c) full Form 10 information be 
disclosed regarding a pending reverse merger to investors who will 
have 15-20 days to reconfirm their investment or receive their money 
back; (d) there be no requirement that a certain percentage of 
investors reconfirm; and (e) accredited investors have no limit on 
the investment they make in the offering).
    \38\ Letter from Mark Kosanke, President, Real Estate Investment 
Securities Association, March 24, 2014 (``REISA Letter'') 
(suggesting that the Commission base the eligibility test on the 
issuer having an ``established track record'' or some minimum amount 
of assets).
    \39\ ABA BLS Letter; Letter from Gilman Law LLC, March 24, 2014 
(``Gilman Law Letter''); MoFo Letter; Letter from Serenity Storage, 
January 5, 2014 (``Serenity Storage Letter'').
    \40\ Letter from Jonathan C. Guest, McCarter & English, LLP, 
February 19, 2014 (``McCarter & English Letter'') (also opposing any 
limitation on issuer eligibility on the basis of whether most of the 
offering proceeds were being used in connection with the issuer's 
operations in the United States, noting that many Canadian issuers 
would be excluded as a result); OTC Markets Letter.
---------------------------------------------------------------------------

(1) Non-Canadian Foreign Issuers
    Many commenters recommended making non-Canadian foreign companies 
eligible issuers under Regulation A.\41\ Several commenters suggested 
that the proposed approach to non-Canadian foreign companies is 
inconsistent with the treatment of foreign private issuers in 
registered offerings.\42\ Additionally, commenters noted a variety of 
benefits arising from allowing foreign companies to access the U.S. 
capital markets through Regulation A offerings, including job 
creation,\43\ increasing the amount of disclosure available for 
investors in foreign companies,\44\ encouraging domestic exchange 
listings,\45\ expanding investment opportunities for U.S. 
investors,\46\ and general economic benefits.\47\ One commenter 
recommended making all foreign private issuers eligible if they 
maintained a principal place of business in the United States.\48\ Two 
commenters also recommended permitting companies relying on Exchange 
Act Rule 12g3-2(b) to make offerings under Regulation A.\49\
---------------------------------------------------------------------------

    \41\ ABA SIL Letter; Letter from Scott Kupor, Managing Partner, 
Andreessen Horowitz, and Jeffrey M. Solomon, Chief Executive 
Officer, Cowen and Company, February 26, 2014 (``Andreessen/Cowen 
Letter''); Letter from BDO USA, LLP, March 20, 2104 (``BDO 
Letter''); Canaccord Letter (suggesting expanding issuer eligibility 
to companies organized in jurisdictions with ``robust securities 
regulation systems'' such as the United Kingdom and other countries 
in the European Union, Australia, and Asian markets such as 
Singapore and Hong Kong); McCarter & English Letter; OTC Markets 
Letter; Richardson Patel Letter; Letter from Michael T. Lempres, 
Assistant General Counsel, SVB Financial Group, March 21, 2014 
(``SVB Financial Letter''); Letter from Bill Soby, Managing 
Director, Silicon Valley Global Shares, March 24, 2014 (``SVGS 
Letter'').
    \42\ Andreessen/Cowen Letter; BDO Letter; Richardson Patel 
Letter. In the context of registered offerings, foreign private 
issuers may provide scaled disclosure if it qualifies as a ``smaller 
reporting company,'' which is defined in Item 10(f)(1) of Regulation 
S-K, 17 CFR 229.10(f)(1), Securities Act Rule 405, 17 CFR 230.405, 
and Exchange Act Rule 12b-2, 17 CFR 240.12b-2, and rely on other 
disclosure accommodations.
    \43\ ABA SIL Letter; SVGS Letter (noting that high-paying jobs 
would be created by expanding global tech companies).
    \44\ SVB Financial Letter.
    \45\ Andreessen/Cowen Letter; SVB Financial Letter.
    \46\ Andreessen/Cowen Letter; OTC Markets Letter.
    \47\ ABA SIL Letter; Andreessen/Cowen Letter; McCarter & English 
Letter; SVB Financial Letter.
    \48\ ABA SIL Letter.
    \49\ McCarter & English Letter; OTC Markets Letter. Rule 12g3-
2(b) generally provides foreign private issuers with an automatic 
exemption from registration under Section 12(g) if the issuer (i) is 
not required to file reports under Exchange Act Sections 13(a) or 
15(d); (ii) maintains a listing of the subject class of securities 
on one or two exchanges in non-U.S. jurisdictions that comprise more 
than 55% of its worldwide trading volume; and (iii) publishes in 
English on its Web site certain material items of information. See 
17 CFR 240.12g3-2(b).
---------------------------------------------------------------------------

(2) BDCs
    A number of commenters supported making BDCs eligible issuers under 
Regulation A.\50\ Most of these commenters noted that BDCs serve an 
important function in facilitating small or emerging business capital 
formation or in providing a bridge from the private to public 
markets.\51\ Several of these commenters recommended at least allowing 
small business investment company (SBIC) licensed BDCs to use the 
exemption given the review process such entities are required to 
undergo with the U.S. Small Business Administration.\52\ One of these 
commenters noted that if BDCs become eligible to use Regulation A, the 
Commission should consider requiring them to provide quarterly 
financial disclosure so as to enhance transparency and provide the 
market with critical investment information.\53\
---------------------------------------------------------------------------

    \50\ ABA BLS Letter; CFIRA Letter 1; Letter from Michael 
Sauvante, Executive Director, Commonwealth Fund LLC, March 21, 2014 
(``Commonwealth Fund Letter 1''); Letter from Michael Sauvante, 
Executive Director, Commonwealth Fund LLC, March 22, 2014 
(``Commonwealth Fund Letter 2''); KVCF Letter; Letter from Daniel 
Gorfine, Director, Financial Markets Policy, and Staci Warden, 
Executive Director, Center for Financial Markets, Milken Institute, 
March 19, 2014 (``Milken Institute Letter''); MoFo Letter; REISA 
Letter; SBIA Letter; WR Hambrecht + Co Letter.
    \51\ ABA BLS Letter; CFIRA Letter 1; Commonwealth Fund Letter 1; 
Commonwealth Fund Letter 2; KVCF Letter; Milken Institute Letter; 
MoFo Letter; REISA Letter; SBIA Letter; WR Hambrecht + Co Letter.
    \52\ Milken Institute Letter; SBIA Letter. A SBIC-licensed BDC 
is a company that is licensed by the Small Business Administration 
(SBA) to operate as such under the Small Business Investment Act of 
1958.
    \53\ Milken Institute Letter.
---------------------------------------------------------------------------

(3) Potential Limits on Issuer Size
    Several commenters opposed using the issuer's size to limit 
eligibility.\54\ Two of these commenters thought that the $50 million 
offering limit for Tier 2 would already limit the utility of the

[[Page 21811]]

exemption for issuers on the basis of issuer size--with smaller issuers 
likely benefitting most from the exemption--and recommended against 
size-based eligibility criteria that may be difficult to define.\55\ 
One commenter suggested that most issuers with a large public float 
would likely be subject to Exchange Act reporting requirements and 
therefore would be ineligible to use Regulation A.\56\ Another 
commenter noted that a size restriction based on public float would be 
particularly harmful to biotechnology companies, because they often 
have a public float that is disproportionately high in relation to 
their corporate structure, number of employees, or revenues.\57\
---------------------------------------------------------------------------

    \54\ Letter from E. Cartier Esham, Executive Vice President, 
Emerging Companies, Biotechnology Industry Organization (BIO), March 
11, 2014 (``BIO Letter''); IPA Letter; Letter from Tom Quaadman, 
Vice President, Center for Capital Markets Competitiveness, U.S. 
Chamber of Commerce, March 24, 2014 (``U.S. Chamber of Commerce 
Letter'').
    \55\ BIO Letter; U.S. Chamber of Commerce Letter.
    \56\ IPA Letter.
    \57\ BIO Letter.
---------------------------------------------------------------------------

(4) Exchange Act Reporting Companies
    A number of commenters supported allowing Exchange Act reporting 
companies to conduct offerings under Regulation A.\58\ Several of these 
commenters recommended allowing Exchange Act reporting companies that 
are current in their reporting obligations to conduct Tier 2 
offerings,\59\ with one commenter limiting its recommendation to 
companies with a non-affiliate float of less than $250 million.\60\ 
Three commenters further suggested that, if Exchange Act reporting 
companies are permitted to conduct offerings pursuant to Regulation A, 
Exchange Act reporting should satisfy any Regulation A reporting 
obligation.\61\ One such commenter further suggested that Exchange Act 
reporting companies should be required to be current in their Exchange 
Act reporting obligations in order to be eligible to rely on the 
exemption, in a manner that is consistent with Regulation A as it 
existed before 1992.\62\
---------------------------------------------------------------------------

    \58\ Andreessen/Cowen Letter; BIO Letter; OTC Markets Letter; 
Letter from U.S. Senator Pat Roberts, May 27, 2014 (``Sen. Roberts 
Letter''); Letter from Jack H. Brier, President and Founder, US 
Alliance Corporation, March 19, 2014 (``US Alliance Corp. Letter'').
    \59\ Andreessen/Cowen Letter; BIO Letter; OTC Markets Letter.
    \60\ BIO Letter.
    \61\ Andreessen/Cowen Letter; CFIRA Letter 1; OTC Markets 
Letter.
    \62\ CFIRA Letter 1. Before amendments to Regulation A were 
adopted in 1992, Exchange Act reporting companies were permitted to 
conduct offerings in reliance on Regulation A, provided they were 
current in their public reporting. See 17 CFR 230.252(f) (1992).
---------------------------------------------------------------------------

c. Final Rules
    We are adopting the issuer eligibility criteria as proposed. Under 
the final rules, Regulation A will be limited to companies organized in 
and with their principal place of business in the United States or 
Canada. It will be unavailable to:
     Companies subject to the ongoing reporting requirements of 
Section 13 or 15(d) of the Exchange Act;
     companies registered or required to be registered under 
the Investment Company Act of 1940 and BDCs;
     blank check companies;
     issuers of fractional undivided interests in oil or gas 
rights, or similar interests in other mineral rights;
     issuers that are required to, but that have not, filed 
with the Commission the ongoing reports required by the rules under 
Regulation A 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);
     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; 
\63\ and
---------------------------------------------------------------------------

    \63\ See Rule 251(b).
---------------------------------------------------------------------------

     issuers subject to ``bad actor'' disqualification under 
Rule 262.\64\
---------------------------------------------------------------------------

    \64\ See Rule 262.
---------------------------------------------------------------------------

    We expect that the amendments we are adopting will significantly 
expand the utility of the Regulation A offering exemption.
    Our approach in the final rules is generally to maintain the issuer 
eligibility requirements of existing Regulation A with the limited 
addition of two new categories of ineligible issuers. We believe this 
approach will provide important continuity in the Regulation A regime 
as it expands in the way Congress mandated. For this reason, we do not 
believe it is necessary to adopt final rules to exclude issuers that 
are currently eligible to conduct Regulation A offerings. Additionally, 
we recognize that expanding the categories of eligible issuers, as 
suggested by a number of commenters, could provide certain benefits, 
including increased investment opportunities for investors and avenues 
for capital formation for certain issuers. We are concerned, however, 
about the implications of extending issuer eligibility before the 
Commission has the ability to assess the impact of the changes to 
Regulation A being adopted today. In light of these changes, we believe 
it prudent to defer expanding the categories of eligible issuers (for 
example, by including non-Canadian foreign issuers, BDCs, or Exchange 
Act reporting companies) until the Commission has had the opportunity 
to observe the use of the amended Regulation A exemption and assess any 
new market practices as they develop.
    Additionally, we are not adopting further restrictions on 
eligibility at this time. In light of the disclosure requirements 
contained in the final rules, we do not believe that it is necessary to 
exclude additional types of issuers, such as shell companies, issuers 
of penny stock, or other types of investment vehicles, from relying on 
the exemption in Regulation A. At the same time, we are concerned about 
potentially increased risks to investors that could result from 
extending issuer eligibility to other types of entities, such as blank 
check companies, before the Commission has the opportunity to observe 
developing market practices. We therefore believe the prudent approach 
with respect to any potential expansion of issuer eligibility is to 
give the Regulation A market time to develop under rules that we are 
adopting today. We also do not believe it is necessary to limit 
availability of the exemption to issuers of a certain size, as we agree 
with commenters that suggested that the annual offering limit will 
serve to limit the utility of the exemption for larger issuers in need 
of greater amounts of capital. We further do not believe that it is 
appropriate to limit the availability of the exemption to ``operating 
companies,'' as that term would restrict availability of the exemption 
to fewer issuers than are currently eligible under Regulation A, such 
as by excluding shell companies.
    As proposed, the final rules include two new issuer eligibility 
requirements that add important investor protections to Regulation A. 
First, potential issuers must have filed all required ongoing reports 
under Regulation A 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) to remain eligible to conduct 
offerings pursuant to the rules. This requirement will benefit 
investors by providing them with more information, with respect to 
issuers that have previously made a Regulation A offering, to consider 
when making an investment decision, facilitate the development of an 
efficient secondary market in such securities, and enhance our ability 
to analyze and observe the Regulation A market. Second, issuers subject 
to orders by the Commission entered pursuant to Section 12(j) of the 
Exchange Act within a five-year period immediately preceding the filing 
of the offering statement will not be eligible to conduct an offering 
pursuant to Regulation A. This requirement will increase investor 
protection and

[[Page 21812]]

compliment the exclusion of delinquent Regulation A filers discussed 
immediately above by excluding issuers with a demonstrated history of 
delinquent filings under the Exchange Act from the pool of eligible 
issuers under Regulation A.
2. Eligible Securities
a. Proposed Rules
    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.'' \65\ 
The proposed rules would have limited 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) and also 
would have excluded asset-backed securities, as defined in Regulation 
AB, from the list of eligible securities.
---------------------------------------------------------------------------

    \65\ 15 U.S.C. 77c(b)(3).
---------------------------------------------------------------------------

b. Comments on the Proposed Rules
    Several commenters supported the exclusion of asset-backed 
securities from the list of eligible securities.\66\ One commenter 
recommended clarifying that warrants exercisable for equity or debt 
securities are eligible securities.\67\
---------------------------------------------------------------------------

    \66\ ABA BLS Letter; Carey Letter; Massachusetts Letter 2; NASAA 
Letter 2; WDFI Letter.
    \67\ ABA BLS Letter.
---------------------------------------------------------------------------

c. Final Rules
    We are adopting final rules that limit the types of securities 
eligible for sale under Regulation A to the specifically enumerated 
list in Section 3(b)(3), which includes warrants and convertible equity 
securities, among other equity and debt securities.\68\ The final rules 
exclude asset-backed securities from the list of eligible securities. 
Asset-backed securities are subject to the provisions of Regulation AB 
and other rules specifically tailored to the offering process, 
disclosure, and reporting requirements for such securities. These rules 
were not in effect when Regulation A was last updated in 1992.\69\ We 
do not believe that Section 401 of the JOBS Act was enacted to 
facilitate the issuance of asset-backed securities.
---------------------------------------------------------------------------

    \68\ See Rule 261(c); see also Rule 405 (defining ``equity 
security'' to include, among other things, warrants and certain 
convertible securities). We have also revised the proposed 
definition in Rule 261(c) to clarify that all securities, rather 
than just equity securities, that are convertible or exchangeable 
into equity interests are eligible, subject to the other terms of 
Regulation A.
    \69\ Regulation AB, 17 CFR 229.1100 et seq., went into effect in 
2005. See 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 its terms converts into cash within a finite time period.
---------------------------------------------------------------------------

3. Offering Limitations and Secondary Sales
a. Proposed Rules
    We proposed to amend Regulation A to create two tiers of 
requirements: Tier 1, for offerings of up to $5 million of securities 
in a 12-month period; and Tier 2, for offerings of up to $50 million of 
securities in a 12-month period.\70\ As proposed, issuers could conduct 
offerings of up to $5 million under either Tier 1 or Tier 2. Consistent 
with the existing provisions of Regulation A, we also proposed to 
permit sales by selling securityholders of up to 30% of the maximum 
offering amount permitted under the applicable tier ($1.5 million in 
any 12-month period for Tier 1 and $15 million in any 12-month period 
for Tier 2). Sales by selling securityholders under either tier would 
be aggregated with sales by the issuer for purposes of calculating the 
maximum permissible amount of securities that may be sold during any 
12-month period. In addition, we proposed 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.
---------------------------------------------------------------------------

    \70\ As proposed, 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.
---------------------------------------------------------------------------

b. Comments on the Proposed Rules
    Commenters were generally supportive of the proposed offering 
limitations on primary and secondary offerings. Many commenters, 
however, suggested changes to the proposed offering limits for both 
tiers, as well as to the proposed limits on secondary sales.
(1) Offering Limitation
    Several commenters recommended that the Commission increase the $50 
million offering limitation for Tier 2.\71\ As an alternative, one 
commenter recommended applying the $50 million limit on a per offering 
basis rather than on a 12-month basis, and suggested that the 
Commission consider eliminating the offering limits for certain types 
of issuers, such as those that have yet to generate revenue.\72\ 
Additionally, two commenters recommended that the Commission do more to 
increase the utility of Tier 1 offerings by raising the Tier 1 offering 
limitation to $10 million or more in a 12-month period.\73\ Another 
commenter suggested that the Commission create a third tier in between 
Tier 1 and Tier 2 that would have a $15 million offering 
limitation.\74\
---------------------------------------------------------------------------

    \71\ Letter from Salomon Kamalodine, Director, Investment 
Banking, B. Riley & Co., March 24, 2014 (``B. Riley Letter''); 
Letter from William Klehm, Chairman and CEO, Fallbrook Technologies, 
March 22, 2014 (``Fallbrook Technologies Letter'') (recommended 
raising the limit to $75 million); OTC Markets Letter (recommended 
raising the limit to $80 million); Jason Coombs, Co-Founder and CEO, 
Public Startup Company, Inc., March 24, 2014 (``Public Startup Co. 
Letter 1'') (recommended raising the limit to $75 million); 
Richardson Patel Letter (recommended raising the limit to $100 
million).
    \72\ Richardson Patel Letter.
    \73\ Letter from Samuel S Guzik, Guzik and Associates, March 24, 
2014 (``Guzik Letter 1'') (recommended raising the limit to ``at 
least $10 million''); Letter from Christopher Cole, Senior Vice 
President and Senior Regulatory Counsel, Independent Community 
Bankers of America, March 25, 2014 (``ICBA Letter'') (encouraged 
increasing the limit ``from $5 million to $10 million'').
    \74\ Public Startup Co. Letter 1.
---------------------------------------------------------------------------

    With respect to offering limit calculations, one commenter 
recommended that the aggregate offering price of the underlying 
security only be included in the $50 million offering limitation during 
the 12-month period in which such security is first convertible, 
exercisable, or exchangeable.\75\ This commenter suggested that its 
recommended approach would accommodate common small business offering 
structures that involve warrants exercisable at a premium over several 
years.
---------------------------------------------------------------------------

    \75\ Andreessen/Cowen Letter; cf. Proposing Release, fn. 112.
---------------------------------------------------------------------------

(2) Secondary Sales Offering Limitation
    Several commenters specifically supported the proposed limitations 
on secondary sales.\76\ While some commenters indicated their support 
for resale limitations,\77\ they expressed a preference for either 
proscribing resales entirely \78\ or requiring the approval of the 
resale offering by a majority of the issuer's independent directors 
upon a finding that the offering is in the best interests of both the 
selling securityholders and the issuer.\79\ One commenter recommended 
prohibiting

[[Page 21813]]

resales under Regulation A entirely.\80\ Another commenter recommended 
requiring selling securityholders to hold the issuer's securities for 
12 months before being eligible to sell pursuant to Regulation A, in 
order to distinguish between investors seeking to invest in a business 
and investors simply seeking to sell to the public for a gain.\81\
---------------------------------------------------------------------------

    \76\ Massachusetts Letter 2; NASAA Letter 2; Richardson Patel 
Letter; WDFI Letter.
    \77\ Massachusetts Letter 2; NASAA Letter 2; WDFI Letter.
    \78\ Massachusetts Letter 2; NASAA Letter 2.
    \79\ NASAA Letter 2 (supporting the proposed limits coupled with 
a board approval requirement in lieu of prohibiting resales 
entirely); WDFI Letter (not expressing a preference for prohibiting 
resales entirely).
    \80\ Carey Letter.
    \81\ Letter from Andrew M. Hartnett, Missouri Commissioner of 
Securities, March 24, 2014 (``MCS Letter'').
---------------------------------------------------------------------------

    Many other commenters recommended raising the resale limits or 
eliminating them entirely.\82\ One such commenter recommended 
alternatively removing non-affiliate securityholders from the resale 
limitation since concerns over investor information asymmetries would 
be reduced when dealing with non-affiliate securityholders.\83\ This 
commenter also recommended that the Commission reevaluate the need for 
resale limits within a year of implementing the rules. Another 
commenter also recommended allowing for unlimited sales by non-
affiliate selling securityholders and further suggested that the rules 
not aggregate such sales with issuer sales.\84\ Two commenters 
suggested that limitations on resales are contrary to the Congressional 
intent behind the enactment of Title IV of the JOBS Act.\85\
---------------------------------------------------------------------------

    \82\ ABA BLS Letter; B. Riley Letter; Canaccord Letter; CFIRA 
Letter 1; Milken Institute Letter; MoFo Letter; Richardson Patel 
Letter; WR Hambrecht + Co Letter.
    \83\ Milken Institute Letter.
    \84\ B. Riley Letter.
    \85\ CFIRA Letter 1; WR Hambrecht + Co Letter (noting that the 
JOBS Act contemplated an increase in the offering threshold to $50 
million, but did not limit the percentage that could be sold by 
selling securityholders).
---------------------------------------------------------------------------

(3) Rule 251(b)
    Many commenters specifically supported the proposed elimination of 
the requirement that issuers must have had net income from continuing 
operations in at least one of its last two fiscal years in order for 
affiliate resales to be permitted, generally noting that many companies 
have net losses for many years, including, for example, due to high 
research and development costs.\86\
---------------------------------------------------------------------------

    \86\ ABA BLS Letter; B. Riley Letter; Canaccord Letter; CFIRA 
Letter 1; Milken Institute Letter; MoFo Letter; WR Hambrecht + Co 
Letter.
---------------------------------------------------------------------------

c. Final Rules
    We are adopting the proposed amendments to Regulation A with 
modifications to the Tier 1 offering limitation and the secondary sales 
offering limitation. We discuss these amendments in detail below. We 
are also making a technical change to clarify the description of how 
compliance with the offering limitations is calculated in Rule 
251(a).\87\
---------------------------------------------------------------------------

    \87\ The proposed rules used the phrase ``aggregate offering 
price for all securities sold'' when discussing the gross proceeds 
resulting from prior or anticipated sales of securities under 
Regulation A. We have clarified Rule 257(a)(1) to define as 
``aggregate sales'' gross proceeds within the prior 12 month time 
frame contemplated by Regulation A. We have also made conforming 
changes elsewhere in the final rules and forms.
---------------------------------------------------------------------------

Tier 1
    As discussed more fully in the ``Additional Considerations for 
Smaller Offerings'' section below, we are making changes to the 
proposed rules in response to comments and to increase the utility of 
Tier 1 of the Regulation A exemption.\88\ Several commenters \89\ and a 
report on the impact of state securities law requirements on offerings 
conducted under Regulation A by the U.S Government Accountability 
Office (GAO), as required by Section 402 of the JOBS Act,\90\ 
highlighted the $5 million offering limitation in existing Regulation A 
as one of the main factors limiting the utility of the exemption. In 
certain circumstances, fixed costs associated with conducting 
Regulation A offerings, such as legal and accounting fees, may serve as 
a disincentive to use the exemption for lower offering amounts. We are 
therefore increasing the offering limitation in the final rules for 
Tier 1 offerings in a 12-month period from the proposed $5 million 
limitation to $20 million.\91\ We believe that raising the offering 
limitation for Tier 1 offerings, in addition to other changes discussed 
in Section II.I. below, will increase the utility of the exemption for 
smaller issuers by providing them with additional options for capital 
formation and potentially increasing the proceeds received by the 
issuer. Consistent with the proportionate limitation on secondary sales 
in the proposed rules, we are also increasing the limitation on 
secondary sales in Tier 1 offerings in a 12-month period from the 
proposed $1.5 million limitation to $6 million.
---------------------------------------------------------------------------

    \88\ See Section II.I. below.
    \89\ See, e.g., Guzik Letter 1; ICBA Letter; Public Startup Co. 
Letter 1.
    \90\ Factors that May Affect Trends in Regulation A Offerings, 
GAO-12-839 (July 2012) (the ``GAO Report'') (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.
    \91\ Rule 251(a)(1). We intend to revisit the Tier 1 offering 
limitation at the same time that we are required by Section 3(b)(5) 
of the Securities Act to review the Tier 2 offering limitation and 
will consider whether additional investor protections would be 
necessary if the Tier 1 offering limitation is increased.
---------------------------------------------------------------------------

Tier 2
    We are adopting the proposed $50 million Tier 2 offering 
limitation.\92\ Some commenters suggested that we raise the offering 
limitation to an amount above the statutory limitation set forth in 
Section 3(b)(2), but we do not believe an increase is warranted at this 
time. While Regulation A has existed as an exemption from registration 
for some time, today's changes are significant. We believe that the 
final rules for Regulation A will provide for a meaningful addition to 
the existing capital formation options of smaller companies while 
maintaining important investor protections. We are concerned, however, 
about expanding the offering limitation of the exemption beyond the 
level directly contemplated in Section 3(b)(2) at the outset of the 
adoption of final rules. As noted above in Section II.B.1., the final 
rules do not limit issuer eligibility on the basis of issuer size, as 
we believe that the $50 million annual offering limitation will serve 
to limit the utility of the exemption for larger issuers in need of 
greater amounts of capital. Similarly, we believe that the more 
extensive disclosure requirements associated with Exchange Act 
reporting are more appropriate for larger and generally more complex 
issuers that raise money in the public capital markets.\93\ We are 
therefore concerned that an increase in the offering limitation at this 
time may increase risks to investors by encouraging larger issuers to 
conduct offerings pursuant to Regulation A in instances where 
disclosure pursuant to a registered offering under the Securities Act 
would be more appropriate.
---------------------------------------------------------------------------

    \92\ Rule 251(a)(2).
    \93\ See discussion in Section III.C.3. below.
---------------------------------------------------------------------------

    The Commission is required by Section 401 of the JOBS Act to review 
the Section 3(b)(2) offering limitation every two years, and we will 
consider the use of the final rules by market participants as part of 
that review. We will therefore revisit the offering limitation by April 
2016, as required by the statute, with a view to considering whether to 
increase the $50 million offering limitation. We also are adopting the 
proposed $15 million limitation on secondary sales for Tier 2 as 
proposed, with a change in the application of the limitation for 
secondary sales under both Tier 1 and Tier 2 discussed in the following 
section.
Application of the Limitation on Secondary Sales
    As noted in the Proposing Release, secondary sales are an important 
part of Regulation A. We believe that allowing

[[Page 21814]]

selling securityholders access to avenues for liquidity will encourage 
them to invest in companies, although we acknowledge that providing for 
secondary sales in any amount may give rise to certain concerns. As 
highlighted by at least one commenter at the pre-proposing stage, 
permitting some secondary sales pursuant to Regulation A could place 
investors at an informational disadvantage to selling securityholders 
who have potentially greater access to inside information about the 
issuer and does not necessarily provide capital to the issuer.\94\ 
Other commenters stated that such concerns are misplaced in the context 
of secondary sales by non-affiliates, who generally do not have access 
to inside information.\95\
---------------------------------------------------------------------------

    \94\ Letter from A. Heath Abshure, President, NASAA, April 10, 
2013 (``NASAA (pre-proposal) Letter'').
    \95\ See, e.g., Milken Institute Letter.
---------------------------------------------------------------------------

    We do not believe that a wholesale prohibition on secondary sales, 
as suggested by some commenters, is appropriate or necessary for either 
Tier 1 or Tier 2 of Regulation A. However, in order to strike an 
appropriate balance between allowing selling securityholders continued 
access to avenues for liquidity in Regulation A and the concern that 
secondary offerings do not directly provide new capital to companies 
and could pose the potential risks to investors discussed above, the 
final rules continue to permit secondary sales but provide additional 
limitations on secondary sales in the first year. The final rules limit 
the amount of securities that selling securityholders can sell at the 
time of an issuer's first Regulation A offering and within the 
following 12 months to no more than 30% of the aggregate offering price 
of a particular offering.\96\ While the final rules continue to provide 
selling securityholders with the flexibility to sell securities during 
this period, we believe that this approach to the final rules will help 
to ensure that secondary sales at the time of such offerings will be 
made in conjunction with capital raising events by the issuer.
---------------------------------------------------------------------------

    \96\ Rule 251(a)(3) (Additional limitation on secondary sales in 
first year).
---------------------------------------------------------------------------

    Further, we are providing different requirements for secondary 
sales by affiliates and by non-affiliates. The final rules limit 
secondary sales by affiliates that occur following the expiration of 
the first year after an issuer's initial qualification of an offering 
statement to no more than $6 million, in the case of Tier 1 offerings, 
or no more than $15 million, in the case of Tier 2 offerings, over a 
12-month period. Secondary sales by non-affiliates that are made 
pursuant to a qualified offering statement following the expiration of 
the first year after an issuer's initial qualification of an offering 
statement will not be limited except by the maximum offering amount 
permitted by either Tier 1 or Tier 2.\97\ Although the secondary sales 
offering amount limitation will only apply to affiliates during this 
period, consistent with the proposal, non-affiliate secondary sales 
will be aggregated with sales by the issuer and sales by affiliates for 
purposes of calculating compliance with the maximum offering amount 
permissible under the respective tiers.\98\
---------------------------------------------------------------------------

    \97\ Rule 251(a).
    \98\ Secondary sales of shares acquired in a Regulation A 
offering--which are freely tradable--are not subject to limitations 
on secondary sales, but must be resold under an exemption from 
Securities Act registration (e.g., Section 4(a)(1), 15 U.S.C. 
77d(a)(1)).
---------------------------------------------------------------------------

    We do not believe that the concerns expressed by one commenter 
about informational disadvantages that may exist with affiliate sales 
are present with respect to resales by non-affiliates.\99\ On the 
contrary, in comparison to requirements for non-affiliate resales of 
restricted securities after the expiration of Securities Act Rule 144 
holding periods,\100\ we believe that Regulation A provides purchasers 
of such securities with the benefit of, among other things, narrative 
and financial disclosure that is reviewed and qualified by the 
Commission in transactions that are subject to Section 12(a)(2) 
liability and the antifraud provisions of Section 17 of the Securities 
Act.\101\
---------------------------------------------------------------------------

    \99\ NASAA (pre-proposal) Letter.
    \100\ Under Rule 144, non-affiliates of an issuer are, among 
other things, permitted to resell restricted securities after the 
expiration of a one-year holding period without limitations or 
requirements as to: (i) The availability of current public 
information about the issuer or its securities, (ii) the volume of 
resales, (iii) the manner of sale, or (iv) disclosure. See 17 CFR 
230.144.
    \101\ 15 U.S.C. 77l(a)(2), 77q.
---------------------------------------------------------------------------

    We also disagree with the commenters who suggested limitations on 
secondary sales are contrary to the legislative intent behind the 
enactment of Title IV of the JOBS Act. We note that Section 3(b)(2) 
expressly provides that the Commission may impose additional terms, 
conditions, or requirements as it deems necessary in the public 
interest and for the protection of investors.\102\ For the reasons 
discussed above, we believe that limiting secondary sales by affiliates 
is not only consistent with the language and purpose of the statute but 
also necessary in the public interest and for the protection of 
investors.
---------------------------------------------------------------------------

    \102\ See Section 3(b)(2)(G), 15 U.S.C. 77c(b)(2)(G).
---------------------------------------------------------------------------

Offering Limit Calculation
    Under the proposal, if the offering included securities that are 
convertible into, or exercisable or exchangeable for, other securities 
(rights to acquire), the offer and sale of the underlying securities 
also would generally be required to be qualified,\103\ 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.\104\ Consistent with 
the views of at least one commenter,\105\ we are concerned that the 
proposed requirement could have a greater impact on smaller issuers 
than larger issuers because smaller issuers frequently issue rights to 
acquire other securities in capital raising events. The proposed method 
of calculating the offering limit would presume the exercise price of 
underlying securities that, by their terms, may occur at a date in the 
distant future or only upon the occurrence of key events. By including 
all securities underlying any rights to acquire other securities in the 
offering limit calculation, the proposed rules could effectively limit 
the proceeds of an offering available to an issuer by requiring such 
issuers to include in the aggregate offering price at the time of 
qualification the securities underlying rights to acquire that may or 
may not become exercisable or exchangeable in the future. We are 
adopting final rules that will require issuers to aggregate the price 
of all securities for which qualification is currently being sought, 
including the securities underlying any rights to acquire that are 
convertible, exercisable, or exchangeable within the first year after 
qualification or at the discretion of the issuer. As such, and 
consistent with the treatment of rights to acquire in the context of 
registered offerings, if an offering includes rights to acquire other 
securities at a time more than one year after qualification and the 
issuer does not otherwise seek to qualify such underlying securities, 
the aggregate offering price would not include the aggregate 
conversion, exercise, or exchange price of the underlying 
securities.\106\ For purposes

[[Page 21815]]

of calculating the price of underlying securities that use a pricing 
formula, as opposed to a known conversion price, the issuer will be 
required to use the maximum estimated price for which such securities 
may be converted, exercised, or exchanged.\107\
---------------------------------------------------------------------------

    \103\ Qualification would not be required for securities 
transactions exempt from registration pursuant to Securities Act 
Section 3(a)(9), 15 U.S.C. 77c(a)(9). Section 3(a)(9) exempts from 
registration any security exchanged by the issuer with its existing 
security holders exclusively where no commission or other 
remuneration is paid or given directly or indirectly for soliciting 
such exchange.
    \104\ See note to proposed Rule 251(a).
    \105\ Andreessen/Cowen Letter.
    \106\ See note to Rule 251(a). In these circumstances, the 
securities underlying the rights to acquire would need to be 
separately qualified under Regulation A or, depending on the 
circumstances, registered, exempt from registration, or otherwise 
offered in an appropriate manner at the time of issuance.
    \107\ Id.
---------------------------------------------------------------------------

Rule 251(b)
    We are adopting as proposed final rules that eliminate the last 
sentence of Rule 251(b),\108\ which prohibited affiliate resales unless 
the issuer had net income from continuing operations in at least one of 
its last two fiscal years. We agree with the views expressed by 
commenters that the absence of net income, by itself, is not a 
sufficient indicator of an enhanced risk that existing shareholders 
will use informational advantages to transfer their holdings to the 
investing public that would necessitate the continued application of 
the prohibition in the final rules. Further, as noted in the Proposing 
Release, the Commission's current disclosure review and qualification 
processes and enforcement programs are significantly more sophisticated 
and robust than they were when this provision was added to Regulation A 
in its original form.\109\ In addition, the final rules being adopted 
today include revised ``bad actor'' disqualification provisions and 
additional issuer eligibility requirements aimed at limiting access to 
the exemption for market participants with demonstrated track records 
of non-compliance or abuse.\110\
---------------------------------------------------------------------------

    \108\ 17 CFR 230.251(b) (2014).
    \109\ See Proposing Release, at Section II.B.3.
    \110\ See discussions in Section II.G (Bad Actor 
Disqualification) below and Section II.B.1 (Eligible Issuers) above.
---------------------------------------------------------------------------

4. Investment Limitation
a. Proposed Rules
    Regulation A does not currently limit the amount of securities an 
investor can purchase in a qualified Regulation A offering. As we noted 
in the Proposing Release, however, we recognize that with the increased 
annual offering limitation provided in Section 3(b)(2) comes a risk of 
commensurately greater investor losses.\111\ To address that risk we 
proposed, among other things, 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 or their net worth. For this purpose, 
annual income and net worth would be calculated as provided in the 
accredited investor definition under Rule 501 of Regulation D.\112\ 
Under the proposal, issuers would be required to make investors aware 
of the investment limitations,\113\ 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.
---------------------------------------------------------------------------

    \111\ See Proposing Release, at Section II.B.4.
    \112\ 17 CFR 230.501.
    \113\ See paragraph (a)(5) to Part II of proposed Form 1-A.
---------------------------------------------------------------------------

b. Comments on Proposed Rules
    A number of commenters generally supported investment limitations 
for Tier 2 offerings.\114\ These commenters believed that an investment 
limitation would serve as an important investor protection. Several 
commenters recommended revisiting the necessity of the limitations 
after a one- to three- year trial period,\115\ and another commenter 
\116\ recommended extending the investment limitation to Tier 1 
offerings to make them more consistent with our proposed rules for 
securities-based crowdfunding transactions conducted pursuant to 
Section 4(a)(6) of the Securities Act.\117\ Some commenters' support 
for the proposed investment limitations was conditioned on suggested 
changes to the proposed rules that would require issuers to do more to 
ensure compliance with the limitations and that would impose adverse 
consequences on issuers for the failure to do so.\118\ One commenter 
believed that the 10% limitation is ``significantly higher'' than is 
appropriate for ``all but the wealthiest, least risk averse'' 
investors.\119\ Two commenters suggested that the 10% limitation should 
be aggregated across all Regulation A offerings instead of being 
applied on a per offering basis,\120\ while one commenter specifically 
argued against such an aggregated limit.\121\
---------------------------------------------------------------------------

    \114\ CFA Institute Letter; IPA Letter; Letter from Robert 
Kisel, Small Business Owner, March 18, 2014 (``Kisel Letter'') 
(erroneously referring to the 10% limit as a 5% limit); MCS Letter; 
REISA Letter; Richardson Patel Letter; WDFI Letter.
    \115\ CFIRA Letter 1; Kisel Letter; Milken Institute Letter.
    \116\ CFA Institute Letter.
    \117\ See Crowdfunding, Rel. No. 33-9470 [78 FR 66427] (Nov. 5, 
2013).
    \118\ CFA Institute Letter; MCS Letter; WDFI Letter.
    \119\ Letter from Barbara Roper, Director of Investor 
Protection, Consumer Federation of America, March 24, 2014 (``CFA 
Letter'').
    \120\ CFA Letter (not recommending this specifically, but noting 
this as one reason why the investment limit was not an adequate 
substitute for state review of Tier 2 offerings); William A. 
Jacobson, Clinical Professor of Law, Cornell Law School, and 
Director, Cornell Securities Law Clinic, March 24, 2014 (``Cornell 
Clinic Letter'').
    \121\ KVCF Letter.
---------------------------------------------------------------------------

    Numerous commenters recommended eliminating the investment 
limitation for Tier 2 offerings.\122\ Several of these commenters 
alternatively recommended at least doubling the limit if the provision 
is not eliminated entirely.\123\ Other commenters thought that the 
investment limitation is unnecessary in light of the other investor 
protections for Tier 2 offerings, such as the expanded disclosure 
requirements.\124\ Several commenters noted that the limit does not 
have a statutory basis and suggested that it may be contrary to 
Congressional intent,\125\ or contrary to the principles underlying 
federal securities law, which focus on fraud prevention and full 
disclosure.\126\ One commenter recommended eliminating the investment 
limitations only if the final rules do not preempt state law 
registration requirements for Tier 2 offerings, arguing that the 
limitations may conflict with state investor suitability 
standards,\127\ while another commenter indicated that investment 
limitations would be unnecessary with appropriate state oversight, but 
supported limits for retail investors in startup companies and high-
risk offerings.\128\ Another commenter recommended creating various 
categories of investor sophistication with corresponding requirements 
and limitations for each.\129\
---------------------------------------------------------------------------

    \122\ ABA BLS Letter; Andreessen/Cowen Letter; B. Riley Letter; 
CFIRA Letter 1; CFIRA Letter 2; Fallbrook Technologies Letter; 
Letter from Groundfloor Finance, Inc., Nov. 18, 2014 (``Groundfloor 
Letter''); Heritage Letter; ICBA Letter; IPA Letter; Letter from 
Ford C. Ladd, Esq., May 19, 2014 (``Ladd Letter 2''); Letter from 
John Rodenrys, Executive Director R&D, Leading Biosciences, Inc., 
March 24, 2014 (``Leading Biosciences Letter''); Milken Institute 
Letter; MoFo Letter; NASAA Letter 2; Letter from Michael L. Zuppone, 
Paul Hastings LLP, March 24, 2014 (``Paul Hastings Letter''); Letter 
from Jason Coombs, Co-Founder and CEO, Public Startup Company, Inc., 
April 2, 2014 (``Public Startup Co. Letter 7''); SVB Financial 
Letter.
    \123\ Fallbrook Technologies Letter; Leading Biosciences Letter; 
ICBA Letter.
    \124\ ABA BLS Letter; Andreessen/Cowen Letter; B. Riley Letter; 
MoFo Letter; Paul Hastings Letter; SVB Financial Letter.
    \125\ ABA BLS Letter; Andreessen/Cowen Letter; CFIRA Letter 1; 
Heritage Letter; MoFo Letter; WR Hambrecht + Co Letter.
    \126\ ABA BLS Letter; B. Riley Letter; Heritage Letter; Milken 
Institute Letter.
    \127\ Groundfloor Letter.
    \128\ NASAA Letter 2.
    \129\ Cornell Clinic Letter (recommending the tiered investment 
limits in our proposed rules for securities-based crowdfunding as an 
example).
---------------------------------------------------------------------------

    Many commenters, including those both for and against the 
investment limit, recommended providing exceptions to the limit for 
certain types of investors, such as accredited investors, or altering 
the application of

[[Page 21816]]

the limit to such types of investors.\130\ These commenters believed 
that the investor protections afforded by the investment limit would 
not be necessary for all types of investors or in all types of 
Regulation A offerings. Some commenters recommended eliminating the 
investment limit for accredited investors.\131\ One such commenter 
recommended eliminating the investment limit generally and, if not, at 
least for institutional investors and offerings of securities listed on 
securities exchanges.\132\ Several commenters recommended eliminating 
the investment limit for non-natural persons or institutional 
investors.\133\ Other commenters recommended eliminating the investment 
limits for other types of investors or offerings.\134\ Two commenters 
noted that it would be difficult to apply the investment limits to non-
natural persons (such as small businesses and IRAs) if the rules use an 
income or net worth test.\135\ One of these commenters recommended 
that, if the test applies to such investors, it should be based on 
assets or revenue.\136\
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    \130\ ABA BLS Letter; Andreessen/Cowen Letter; Canaccord Letter; 
Cornell Clinic Letter; Fallbrook Technologies Letter; Heritage 
Letter; Ladd Letter 2; Leading Biosciences Letter; McCarter & 
English Letter; MCS Letter; Milken Institute Letter; MoFo Letter; 
Paul Hastings Letter; Richardson Patel Letter; SVB Financial Letter; 
WR Hambrecht + Co Letter.
    \131\ ABA BLS Letter; Andreessen/Cowen Letter; Canaccord Letter; 
Fallbrook Technologies Letter; Heritage Letter; Ladd Letter 2; 
Leading Biosciences Letter; McCarter & English Letter; MCS Letter; 
MoFo Letter; Paul Hastings Letter; Richardson Patel Letter; SVB 
Financial Letter; cf. Cornell Clinic Letter (recommending an 
unspecified higher limit for accredited investors); Milken Institute 
Letter; WR Hambrecht + Co Letter (supporting eliminating the 
investment limit generally).
    \132\ Milken Institute Letter.
    \133\ ABA BLS Letter; Canaccord Letter; Milken Institute Letter; 
MoFo Letter; WR Hambrecht + Co Letter. Several of these commenters 
believed that, as proposed, the investment limitations would not 
apply to non-natural persons and asked the Commission to confirm or 
clarify this point.
    \134\ Cornell Clinic Letter (creating a separate, higher limit 
for institutional investors and other types of non-retail investors 
included in the ``accredited investor'' definition); Heritage Letter 
(eliminating the investment limit for ``any current or former 
investor, employee or officer of the issuer''); Ladd Letter 2 
(eliminating the investment limit for any non-accredited affiliates, 
founders, employees, agents, independent contractors and owners); 
Milken Institute Letter (eliminating the investment limit for 
investors that purchase Tier 2 securities on an exchange); Paul 
Hastings Letter (eliminating the investment limit for offerings 
conducted by registered broker-dealers); Richardson Patel Letter 
(eliminating the investment limit for any non-individual investor 
with at least $100,000 in assets or $100,000 in revenue in the 
previous fiscal year).
    \135\ McCarter & English Letter; Richardson Patel Letter.
    \136\ Richardson Patel Letter.
---------------------------------------------------------------------------

    Many commenters explicitly supported allowing issuers to rely on an 
investor's representation of compliance with the 10% investment 
limit.\137\ Most of these commenters stated that any more rigorous 
verification process would cause the compliance costs to be too high. 
One commenter recommended eliminating any obligation for the issuer to 
monitor the 10% investment limit and allowing the issuer to rely on a 
representation by the investor that he or she will notify the issuer 
upon exceeding the 10% limit.\138\ Another commenter recommended 
permitting an issuer to rely on representations from its underwriters 
or broker-dealers as to the 10% investment limit, rather than having to 
seek this directly from investors.\139\ This commenter believed that 
the issuers in most Tier 2 offerings would have little direct contact 
with the investors and that the intermediaries would be better 
positioned to assess compliance (possibly already having information 
about the investor's finances).
---------------------------------------------------------------------------

    \137\ Fallbrook Technologies Letter; Heritage Letter; IPA 
Letter; KVCF Letter; Leading Biosciences Letter; REISA Letter.
    \138\ REISA Letter.
    \139\ KVCF Letter.
---------------------------------------------------------------------------

    Several commenters disagreed with allowing investors to represent 
compliance with the investment limitation and recommended a standard 
that would require an issuer to do more to ensure compliance.\140\ Two 
commenters recommended adopting a standard requiring issuers to take 
reasonable steps to verify that the purchasers are in compliance with 
the 10% investment limit.\141\ Two commenters recommended requiring an 
issuer to have a ``reasonable belief'' or ``reasonable basis'' that it 
can rely on an investor's representation of compliance with the 10% 
investment limit.\142\ One such commenter also suggested allowing 
accredited investors to exceed the 10% investment limit, but requiring 
that the issuer take reasonable steps to verify accredited investor 
status.\143\ One commenter recommended requiring a ``duty of inquiry'' 
so that the issuer would have to follow-up on any ``red flags.'' \144\ 
Additionally, this commenter recommended that the Commission create an 
independent and secure means of verifying investor income or to require 
a mandatory questionnaire for individual investors to complete before 
buying a security issued under Regulation A.
---------------------------------------------------------------------------

    \140\ Letter from Paul Sigelman, President & CEO, Accredited 
Assurance, March 24, 2014 (``Accredited Assurance Letter''); CFA 
Letter; CFA Institute Letter; Cornell Clinic Letter; MCS Letter; 
WDFI Letter.
    \141\ Accredited Assurance Letter; WDFI Letter.
    \142\ CFA Institute Letter; MCS Letter.
    \143\ MCS Letter.
    \144\ Cornell Clinic Letter.
---------------------------------------------------------------------------

c. Final Rules
    We are adopting an investment limitation for Tier 2 offerings in 
the final rules, with minor modifications from the proposed rules. We 
believe that the investment limitation serves as an important investor 
protection and may help to mitigate the risk that with the increased 
annual offering limitation provided in Section 3(b)(2) comes a risk of 
commensurately greater investor losses. We do not believe that the 
limitation is needed for accredited investors because investors that 
qualify as accredited under our rules satisfy certain criteria that 
suggest they are capable of protecting themselves in transactions that 
are exempt from registration under the Securities Act.\145\ We also do 
not believe that the limitation is necessary for investments in 
securities that will be listed on a national securities exchange upon 
qualification because of the issuer listing requirements and the 
potential liquidity that exchanges provide to investors that seek to 
reduce their holdings. These both are important investor protections 
that help to mitigate concerns about the magnitude of loss that could 
potentially result from an investor purchasing a large amount of 
securities in a single offering.
---------------------------------------------------------------------------

    \145\ See Rule 501(a) of Regulation D, 17 CFR 230.501(a); see 
also SEC v. Ralston Purina Co., 346 U.S. 119 (1953).
---------------------------------------------------------------------------

    Under the final rules, the investment limitations for purchasers in 
Tier 2 offerings will not apply to purchasers who qualify as accredited 
investors under Rule 501 of Regulation D.\146\ Further, investment 
limitations in a Tier 2 offering will not apply to the sale of 
securities that will be listed on a national securities exchange upon 
qualification since such issuers will be required to meet the listing 
standards of

[[Page 21817]]

a national securities exchange \147\ and become subject to ongoing 
Exchange Act reporting, resulting in additional investor protections.
---------------------------------------------------------------------------

    \146\ See Rule 252(c)(2). Under Rule 501, natural persons are 
accredited investors if: (i) Their income exceeds $200,000 in each 
of the two most recent years (or $300,000 in joint income with a 
person's spouse), and they reasonably expect to reach the same 
income level in the current year; (ii) they serve as executives or 
directors of the issuer; or (iii) their net worth exceeds $1,000,000 
(individual or jointly with a spouse), excluding the value of their 
primary residence. Certain enumerated entities that satisfy an 
asset-based test also qualify as accredited investors, while others, 
including regulated entities such as banks and registered investment 
companies, are not subject to the asset test. See 17 CFR 230.501. 
The accredited investor definition is intended to encompass those 
individuals and entities ``whose financial sophistication and 
ability to sustain the risk of loss of investment or ability to fend 
for themselves render the protections of the Securities Act's 
registration process unnecessary.'' See, e.g., Rel. No. 33-6683 
(Jan. 16, 1987) [52 FR 3015] (Regulation D Revisions; Exemption for 
Certain Employee Benefit Plans).
    \147\ National securities exchanges impose certain requirements 
on issuers, in addition to those generally required by the 
Commission, in order for an issuer's securities to be approved for 
listing. See discussion of listing requirements for, and additional 
investor protections associated with, national securities exchanges 
in Section II.E.3.c. below; see also fns. 721, 722 below.
---------------------------------------------------------------------------

    In response to questions raised by commenters, we are clarifying 
that non-accredited, non-natural persons are subject to the investment 
limitation and should calculate the limitation based on no more than 
10% of the greater of the purchaser's revenue or net assets (as of the 
purchaser's most recent fiscal year end).\148\ Non-accredited, natural 
persons must calculate the investment limitations on the basis of 10% 
of the greater of the purchaser's annual income or net worth 
(determined as provided in Rule 501 of Regulation D).\149\
---------------------------------------------------------------------------

    \148\ Rule 251(d)(2)(i)(C)(1).
    \149\ Rule 251(d)(2)(i)(C)(2). See Securities Act Rule 501(a)(5) 
[17 CFR 230.501(a)(5)] (net worth). Consistent with this rule, the 
calculation of a natural person's net worth for purposes of the 
investment limit excludes the value of the primary residence of such 
person.
---------------------------------------------------------------------------

    If the investor is purchasing securities that are convertible into, 
or exercisable or exchangeable for, other securities, if such 
securities are exercisable within a year or otherwise are being 
qualified, the investment limitation will include the aggregate 
conversion, exercise, or exchange price of such securities, in addition 
to the purchase price.\150\ We believe this is an appropriate 
calculation because it is consistent with the offering limit 
calculation for the respective tiers \151\ and because it applies 
investment limitations to reasonably foreseeable investment decisions 
(i.e., those involving securities exercisable within a year or 
otherwise qualified by the issuer) while reducing the risk that issuers 
may seek to sell large amounts of securities that are convertible, 
exercisable or exchangeable into other securities in the near term at a 
low cost in an effort to avoid the 10% limitation.
---------------------------------------------------------------------------

    \150\ See note to Rule 251(d)(2)(i).
    \151\ See discussion in Section II.B.3.c. above.
---------------------------------------------------------------------------

    As proposed, we are adopting final rules that require issuers to 
notify investors of the investment limitations.\152\ Issuers may rely 
on a representation of compliance with the investment limitation from 
the investor, unless the issuer knew at the time of sale that any such 
representation was untrue.\153\ As we noted in the Proposing Release, 
we are cognizant of the privacy issues and practical difficulties 
associated with verifying individual income and net worth and, 
therefore, are not requiring investors to disclose personal information 
to issuers in order to verify compliance.\154\
---------------------------------------------------------------------------

    \152\ See paragraph (a)(5) to Part II of Form 1-A.
    \153\ Rule 251(d)(2)(i)(D). Similarly, issuers may also rely on 
representations of investor compliance with the investment 
limitations from participating broker-dealers, unless the issuer 
knew at the time of sale that any such representation was untrue.
    \154\ See Proposing Release, at Section II.B.4.
---------------------------------------------------------------------------

    Some commenters suggested requiring an issuer to have a reasonable 
belief that it can rely on an investor's representation of compliance 
with the investment limitations or to take reasonable steps to verify 
compliance, while other commenters suggested we establish consequences 
for issuers (and intermediaries, when applicable) if an investor failed 
to comply with the limitations.\155\ At the same time, many commenters 
supported the proposed approach, noting the low compliance costs and 
the certainty it would provide issuers and their intermediaries.\156\ 
We believe that the rules, as adopted, will limit potential losses for 
non-accredited investors with respect to individual offerings, while 
providing certainty to, and lower compliance costs for, issuers and 
intermediaries.
---------------------------------------------------------------------------

    \155\ See fn. 140-144 above.
    \156\ See fn. 137 above.
---------------------------------------------------------------------------

    We do not believe that additional requirements for issuers and 
their intermediaries, such as requiring issuers to take reasonable 
steps to verify an investors' compliance with the investment 
limitations, are necessary to protect investors in light of the total 
package of investor protections included in the final rules for Tier 2 
offerings.\157\ We believe that additional requirements, like the ones 
suggested by some commenters, may have an unintended consequence of 
dissuading issuers from selling to non-accredited investors in Tier 2 
offerings by increasing compliance uncertainties and obligations. We 
are therefore not adopting any additional compliance requirements with 
respect to investment limitations in the final rules.
---------------------------------------------------------------------------

    \157\ For example, the final rules include limitations on issuer 
eligibility, bad actor disqualification provisions, a requirement 
that offering statements must be qualified by the Commission, 
narrative and financial disclosure requirements, which for Tier 2 
offerings must include audited financial statements on an initial 
and annual basis, as well as annual, semiannual, and current event 
reporting.
---------------------------------------------------------------------------

    While many commenters urged the Commission to eliminate or provide 
less restrictive investment limitations in the final rules,\158\ we 
believe that these requirements, as proposed and adopted, usefully 
augment other requirements for, and investor protections applicable to, 
Tier 2 offerings. As we noted in the Proposing Release, Title IV of the 
JOBS Act mandates certain investor protections \159\ and suggests that 
the Commission consider others as part of its Section 3(b)(2) 
rulemaking.\160\ Congress recognized in Section 3(b)(2) that investor 
protections beyond those expressly provided in 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. . 
. .'' Limiting the amount of securities that a non-accredited investor 
can purchase in a particular Tier 2 offering (other than a Tier 2 
offering of securities listed on a national securities exchange) should 
help to mitigate concerns that such investors may not be able to absorb 
the potential loss of the investment and is consistent with the 
authority granted to the Commission in Section 3(b)(2).\161\ We further 
believe that setting the investment limitation at 10% of the greater of 
such investor's net worth/net assets and annual income/revenue, as 
opposed to some other percentage (e.g., 5% or 20%), is generally 
consistent with similar maximum investment limitations placed on 
investors in Title III of the JOBS Act and will help to set a loss 
limitation standard in such offerings.\162\
---------------------------------------------------------------------------

    \158\ See fn. 122 above.
    \159\ 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).
    \160\ 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).
    \161\ As proposed and adopted, 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 will not be 
considered an investor that is subject to the investment 
limitations.
    \162\ Section 301 of the JOBS Act; see also Securities Act 
Section 4(a)(6), 15 U.S.C. 77d(a)(6).
---------------------------------------------------------------------------

    Despite the suggestions of some commenters,\163\ we do not believe 
that further distinctions as to the applicability of investment 
limitations are appropriate among investors that do not qualify as 
accredited investors. On the contrary, we believe that the regulatory 
distinctions among accredited and non-accredited investors and the 
familiarity many market participants have with such terms will help to 
ease compliance with, and

[[Page 21818]]

determinations about the applicability of, the investment limitations 
and will avoid unnecessary complexity associated with other, additional 
distinctions.
---------------------------------------------------------------------------

    \163\ See fn. 134 above.
---------------------------------------------------------------------------

5. Integration
a. Proposed Rules
    We proposed amending Rule 251(c) of Regulation A, which governs the 
integration of Regulation A offerings with other offerings, to provide 
that offerings under Regulation A would not to be integrated with any 
of the following: \164\
---------------------------------------------------------------------------

    \164\ 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.
---------------------------------------------------------------------------

     Prior offers or sales of securities; or
     certain specified subsequent offers and sales of 
securities.\165\

    \165\ See proposed Rule 251(c), which included in the safe 
harbor subsequent offers or sales that are registered under the 
Securities Act, or made pursuant to Securities Act Rule 701, an 
employee benefit plan, Regulation S, proposed Regulation 
Crowdfunding (see Rel. No. 33-9470), or more than six months after 
completion of the Regulation A offering.
---------------------------------------------------------------------------

    The proposed safe harbor was substantially the same as the existing 
integration safe harbor in Rule 251(c), with the addition of a separate 
provision for securities-based crowdfunding transactions conducted 
pursuant to Section 4(a)(6) of the Securities Act.\166\
---------------------------------------------------------------------------

    \166\ Section 4(a)(6) was added to the Securities Act by Section 
302 of the JOBS Act.
---------------------------------------------------------------------------

    We further proposed 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) \167\ and institutional accredited 
investors permitted by Section 5(d) \168\ of the Securities Act.\169\ 
As proposed, an issuer (and any underwriter, broker, dealer, or agent 
that is acting on behalf of the issuer in connection with the proposed 
offering) soliciting interest in a Regulation A offering to persons 
other than QIBs and institutional accredited investors would need to 
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.\170\ The Proposing Release 
also provided guidance on the applicability of the integration doctrine 
for offerings conducted outside the scope of the safe harbor.\171\
---------------------------------------------------------------------------

    \167\ QIBs are large institutions meeting specific requirements 
outlined in Rule 144A, or entities the seller (or a person acting on 
its behalf) reasonably believes to be QIBs. See Rule 144A, 17 CFR 
230.144A.
    \168\ 15 U.S.C. 77e(d); see also fn. 537 below.
    \169\ Proposed Rule 255(e).
    \170\ Id.
    \171\ See Proposing Release, Section II.B.5.
---------------------------------------------------------------------------

b. Comments on the Proposed Rules
    One commenter specifically supported the proposed changes to the 
integration provisions of Regulation A.\172\ Another commenter objected 
to the proposed changes to the integration provisions and related 
guidance.\173\ This commenter cautioned that it would be very difficult 
to police compliance with these provisions and suggested that they 
would be used to evade regulatory requirements.
---------------------------------------------------------------------------

    \172\ ABA BLS Letter.
    \173\ CFA Letter.
---------------------------------------------------------------------------

c. Final Rules
    We are adopting, as proposed, an integration safe harbor, with one 
clarifying change. Under the final rules, offerings pursuant to 
Regulation A will not be integrated with:
     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 255(c);
     made pursuant to Rule 701 under the Securities Act;
     made pursuant to an employee benefit plan;
     made pursuant to Regulation S;
     made pursuant to Section 4(a)(6) of the Securities Act; or
     made more than six months after completion of the 
Regulation A offering.\174\
---------------------------------------------------------------------------

    \174\ Rule 251(c).
---------------------------------------------------------------------------

    We believe that the integration safe harbor has historically 
provided and, as amended, will continue to provide, issuers, 
particularly smaller issuers whose capital needs often change, with 
valuable certainty as to the contours of a given offering and their 
eligibility for an exemption from Securities Act registration. The 
addition of subsequent offers or sales made pursuant to Section 
4(a)(6), which is the only substantive change to the existing safe 
harbor being adopted today, should not significantly alter the 
application of the doctrine in practice. Given the unique capital 
formation method available to issuers and investors through Section 
4(a)(6) of the Securities Act and the small dollar amounts involved, we 
believe that the addition to the safe harbor list of subsequent 
crowdfunding offers and sales conducted pursuant to such section is 
appropriate and will not unduly increase risks to investors.\175\ As 
with any exemption from registration, the burden of proof of compliance 
with a claimed exemption rests with the party claiming it.\176\ In our 
view, the benefits of providing issuers with certainty as to the scope 
of the integration doctrine, particularly for Regulation A, outweighs 
the concern expressed by one commenter that compliance with the 
doctrine may be difficult to enforce.\177\ In light of the broad 
permissible target audience of Regulation A solicitations, the 
potential for expanded use of solicitation materials in Regulation A 
discussed more fully in Section II.D. below, and the addition of 
similar provisions for registered offerings under Section 5(d), we 
believe the integration provisions in the final rule are necessary to 
ensure that amended Regulation A functions as a viable capital raising 
option for issuers.
---------------------------------------------------------------------------

    \175\ See 15 U.S.C.77d(a)(6); see also Rel. No. 33-9470.
    \176\ See Ralston Purina Co., 346 U.S. 119.
    \177\ CFA Letter.
---------------------------------------------------------------------------

    We are also clarifying in the final rules the scope of the proposed 
safe harbor from integration in instances where an issuer abandons a 
contemplated Regulation A offering before qualification, but after 
soliciting interest in such offering to persons other than QIBs and 
institutional accredited investors. The proposed language could be read 
to imply that issuers must wait at least 30 calendar days to avoid 
integration with a subsequent registered offering or else be subject to 
integration. The final rules clarify that waiting less than 30 calendar 
days before a subsequent registered offering would not necessarily 
result in integration and would instead depend on the particular facts 
and circumstances.\178\
---------------------------------------------------------------------------

    \178\ See Note to Rule 251(c) and Rule 255(e); see also Section 
II.D. below for a discussion on solicitation materials.
---------------------------------------------------------------------------

    We are also reaffirming the integration guidance provided in the 
Proposing Release, which is consistent with guidance provided by the 
Commission in a 2007 rule proposal on Regulation D.\179\ As noted in 
the Proposing Release,

[[Page 21819]]

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. For example, an 
issuer conducting a concurrent exempt offering for which general 
solicitation is not permitted will 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.\180\ Alternatively, an issuer conducting a 
concurrent exempt offering for which general solicitation is permitted, 
for example, under Rule 506(c), could not include in any such general 
solicitation an advertisement of the terms of a Regulation A offering, 
unless that advertisement also included the necessary legends for, and 
otherwise complied with, Regulation A.\181\
---------------------------------------------------------------------------

    \179\ See Revision of Limited Offering Exemptions in Regulation 
D, Release No. 33-8828 (Aug. 3, 2007) (expressing the view that the 
determination as to whether the filing of the registration statement 
should be considered to be a general solicitation or general 
advertising that would affect the availability of an exemption under 
Securities Act Section 4(a)(2) for such a concurrent unregistered 
offering should be based on a consideration of whether the investors 
in the private placement were solicited by the registration 
statement or through some other means that would otherwise not 
foreclose the availability of the Section 4(a)(2) exemption).
    \180\ For a concurrent offering under Rule 506(b), an issuer 
will 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 Rel. No. 33-8828 (Aug. 3, 2007) 
[72 FR 45116].
    \181\ See discussion in Section II.D. below.
---------------------------------------------------------------------------

6. Treatment Under Section 12(g)
a. Proposed Rules
    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.\182\ We did not propose to exempt Regulation A 
securities from mandatory registration under Section 12(g), but we 
solicited comment on whether Regulation A securities should be granted 
such an exemption, either conditionally or otherwise.
---------------------------------------------------------------------------

    \182\ 15 U.S.C. 78l(g).
---------------------------------------------------------------------------

b. Comments on Proposed Rules
    Commenters generally expressed support for some form of exemption 
from the registration requirements under Section 12(g). Numerous 
commenters recommended exempting Regulation A securities from Section 
12(g).\183\ Several of these commenters expressed concern that the 
Section 12(g) record holder count would decrease the utility of the 
Regulation A exemption by incentivizing issuers to sell to accredited 
investors over non-accredited investors, likely resulting in issuers 
electing to rely on a potentially less costly exemption, such as Rule 
506 of Regulation D.\184\ These commenters also expressed concern that 
Section 12(g) would decrease the utility of the exemption because 
secondary trading in otherwise unrestricted Regulation A securities 
might result in issuers inadvertently crossing the Section 12(g) 
registration threshold.\185\ Other commenters questioned the extent to 
which Regulation A securities would be held in street name through 
brokers, which the proposal mentions as a factor that could potentially 
limit the impact of not proposing an exemption from Section 12(g).\186\ 
Some commenters suggested that the reporting regime under Tier 2 would 
be a sufficient means by which issuers could provide investors with 
current information and that therefore Exchange Act reporting would be 
unnecessary.\187\ Two commenters believed that the legislative history 
of the JOBS Act supported an exemption from Section 12(g).\188\
---------------------------------------------------------------------------

    \183\ B. Riley Letter; CFIRA Letter 1; CFIRA Letter 2; Fallbrook 
Technologies Letter; Letter from Jonathan Frutkin, Principal, The 
Frutkin Law Firm, PLC, March 24, 2014 (``Frutkin Law Letter''); 
Guzik Letter 1; Letter from Samuel S Guzik, October 25, 2014 
(``Guzik Letter 2''); Heritage Letter; IPA Letter; Ladd Letter 2; 
Milken Institute Letter; MoFo Letter; SBIA Letter (recommending that 
the trigger be ``raised or remedied,'' but not explicitly calling 
for elimination); US Alliance Corp. Letter; U.S. Chamber of Commerce 
Letter; WR Hambrecht + Co Letter.
    \184\ CFIRA Letter 1; Fallbrook Technologies Letter; Frutkin Law 
Letter; Heritage Letter; IPA Letter; Milken Institute Letter; MoFo 
Letter; SBIA Letter; U.S. Chamber of Commerce Letter.
    \185\ Id.
    \186\ Guzik Letter 1 (noting the statements of other 
commenters); Heritage Letter; Ladd Letter 2 (citing discussions with 
various brokers); MoFo Letter; SBIA Letter; WR Hambrecht + Co 
Letter; see also OTC Markets Letter (highlighting difficulties 
associated with issuer securities becoming eligible for Depository 
Trust Company (DTC) services, which services typically limit the 
number of an issuer's record holders thereby minimizing the impact 
of the Section 12(g) mandatory registration provisions; further 
suggesting that companies issuing Regulation A securities be 
required to use registered transfer agents).
    \187\ B. Riley Letter; Fallbrook Technologies Letter; Milken 
Institute Letter; MoFo Letter.
    \188\ Ladd Letter 2; WR Hambrecht + Co Letter.
---------------------------------------------------------------------------

    Several commenters recommended changing, delaying, or conditioning 
the application of Section 12(g)'s registration requirements, 
especially the corresponding Section 13 reporting obligations that come 
with registration.\189\ One of these commenters recommended delaying 
the application of Exchange Act reporting requirements for Tier 2 
issuers until the issuer's non-affiliate market capitalization reached 
$250 million, so long as the issuer filed reports under Regulation 
A.\190\ This commenter believed that non-affiliate market 
capitalization was a superior proxy for market interest than the 
thresholds under Section 12(g) and noted that the Commission uses the 
measure in establishing primary S-3 eligibility. Another commenter 
recommended exempting initial Tier 2 issuers from all or part of 
Exchange Act reporting obligations until the earliest of the occurrence 
of several events.\191\ Yet another commenter suggested exempting Tier 
2 issuers from Exchange Act reporting until they reach a certain 
unspecified level of revenue or market capitalization.\192\ Two 
commenters recommended deeming Tier 2 issuers' ongoing reports under 
Regulation A to satisfy the issuer's Exchange Act reporting obligations 
for a phase-in period.\193\ One commenter recommended at least allowing 
for 2,000 holders of record (whether accredited or not) without being 
subject to Exchange Act registration requirements,\194\ while two other 
commenters suggested eliminating the cap of 500 non-accredited 
investors.\195\ One commenter conditioned its support for a conditional 
exemption from Section 12(g) on the Commission requiring Tier 2 issuers 
to remain current in their ongoing Regulation A reporting 
requirements.\196\
---------------------------------------------------------------------------

    \189\ Heritage Letter; KVCF Letter; McCarter & English Letter; 
Milken Institute Letter; MoFo Letter; Paul Hastings Letter; SBIA 
Letter.
    \190\ Paul Hastings Letter.
    \191\ McCarter & English Letter (suggesting the earliest of: (1) 
The last day of any fiscal year of the issuer during which it had 
annual gross revenues of $250 million; (2) the last day of any 
fiscal year following the fifth anniversary of the date of the first 
sale of equity securities under Regulation A; and (3) the date on 
which the issuer has an aggregate worldwide market value of voting 
and non-voting equity held by its non-affiliates of at least $75 
million computed as of the last business day of the issuer's most 
recently completed second quarter).
    \192\ Milken Institute Letter.
    \193\ ABA BLS Letter (a 24 month phase-in period that could 
expire earlier if the company triggered Exchange Act reporting in 
some other manner); MoFo Letter.
    \194\ Heritage Letter.
    \195\ KVCF Letter; SBIA Letter.
    \196\ MoFo Letter.
---------------------------------------------------------------------------

c. Final Rules
    We are adopting today final rules that exempt securities issued in 
a Tier 2 offering from the provisions of Section 12(g) for so long as 
the issuer remains subject to, and is current in (as of its fiscal year 
end),\197\ its Regulation A

[[Page 21820]]

periodic reporting obligations.\198\ Additionally, in order for the 
conditional exemption to apply, issuers are required to engage the 
services of a transfer agent registered with the Commission pursuant to 
Section 17A of the Exchange Act. The final rules also provide that the 
exemption from Section 12(g) is only available to companies that meet 
requirements similar to those in the ``smaller reporting company'' 
definition under Securities Act and Exchange Act rules.\199\ As such, 
the conditional exemption in the final rules is limited to issuers that 
have a public float of less than $75 million, determined as of the last 
business day of its most recently completed semiannual period,\200\ or, 
in the absence of a public float, annual revenues of less than $50 
million, as of the most recently completed fiscal year.\201\ An issuer 
that exceeds either of the thresholds, in addition to exceeding the 
threshold in Section 12(g) of the Exchange Act, would be granted a two-
year transition period before it would be required to register its 
class of securities pursuant to Section 12(g), provided it timely files 
all ongoing reports due pursuant to Rule 257 during such period.\202\ 
Section 12(g) registration will only be required if, on the last day of 
the fiscal year in which the company exceeded the public float or 
annual revenue threshold, the company has total assets of more than $10 
million and the class of equity securities is held by more than 2,000 
persons or 500 persons who are not accredited investors.\203\ In such 
circumstances, an issuer that exceeds the thresholds in Section 12(g) 
and Rule 12g5-1(a)(7) would be required to begin reporting under the 
Exchange Act the fiscal year immediately following the end of the two-
year transition period.\204\ An issuer entering Exchange Act reporting 
will be considered an ``emerging growth company'' to the extent the 
issuer otherwise qualifies for such status.\205\
---------------------------------------------------------------------------

    \197\ The determination as to ``current'' reporting status is 
determined at the time of fiscal year end in reference to the filing 
of all periodic reports, including special financial reports, 
required to be filed during such fiscal year. For these purposes, a 
newly qualified issuer that at fiscal year end has not yet been 
obligated to file a periodic report, including, if applicable, a 
special financial report, would be considered ``current'' for these 
purposes.
    \198\ Rule 12g5-1(a)(7).
    \199\ ``Smaller reporting company'' is defined in Securities Act 
Rule 405, 17 CFR 230.405, Exchange Act Rule 12b-2, 17 CFR 240.12b-2, 
and Item 10(f)(1) of Regulation S-K, 17 CFR 229.10(f)(1). The 
provision of the smaller reporting company definition relating to 
initial registration statements under the Securities Act is not 
applicable to exempt offering pursuant to Regulation A. See Item 
10(f)(1)(a)(ii) of Regulation S-K, 17 CFR 229.10(f)(a)(ii). The 
final rules do not therefore incorporate this concept for purposes 
of Rule 12g5-1(a)(7). See Rule 12g5-1(a)(7).
    \200\ Consistent with the smaller reporting company definition, 
an issuer will calculate ``public float'' by multiplying the 
aggregate worldwide number of shares of its common equity securities 
held by non-affiliates by the price at which such securities were 
last sold (or the average bid and asked prices of such securities) 
in the principal market for such securities. Rule 12g5-1(a)(7). See 
also, e.g., Item 10(f)(1)(i) of Regulation S-K.
    \201\ Rule 12g5-1(a)(7). The Commission adopted the smaller 
reporting company regime in 2007. See SEC Rel. No. 33-8876 (Dec. 19, 
2007) [73 FR 934]. Some commentators, such as the Commission's 
Advisory Committee on Small and Emerging Companies, have suggested 
that the Commission revisit the smaller reporting company regime, 
including the definitional thresholds. 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, available at: https://www.sec.gov/info/smallbus/acsec/acsec-recommendation-032113-smaller-public-co-ltr.pdf. Although the Commission has not yet responded to 
this recommendation, in considering any potential changes to the 
smaller reporting company regime, we would expect to consider 
whether corresponding changes to the thresholds included in Rule 
12g5-1(a)(7) should also be made, taking into account how the 
Regulation A regime is working.
    \202\ Id.
    \203\ 15 U.S.C. 78l(g).
    \204\ Id. See Section II.E.4.b(2). below for a discussion on 
suspension or termination of the duty to file ongoing reports 
pursuant to Rule 257.
    \205\ See fn. 726 below and accompanying text.
---------------------------------------------------------------------------

    In determining to provide a conditional exemption from the 
provisions of Section 12(g), we have considered a number of factors. 
First, we believe the conditional exemption we are adopting today is 
consistent with the intent behind the original enactment of Section 
12(g) to the extent it ensures that relevant information about issuers 
will be made routinely available to investors and the marketplace.\206\ 
Second, we believe the additional requirement that Regulation A issuers 
use a registered transfer agent will provide an important investor 
protection in this context. The use of a transfer agent registered 
under the Exchange Act, which, in the absence of a conditional 
exemption from the provisions of Section 12(g), would be required of 
issuers when they register under the Exchange Act, will provide added 
comfort that securityholder records and secondary trades will be 
handled accurately. Third, we believe that phasing out the exemption 
once companies grow and expand their shareholder base is consistent 
with the intent behind Title IV of the JOBS Act, which was enacted to 
facilitate smaller company capital formation.\207\ Finally, we are 
concerned that, as commenters suggested, the lack of an exemption from 
mandatory registration under the Exchange Act may undermine the utility 
of amended Regulation A either by discouraging use of the exemption 
altogether or by dissuading issuers from making sales to non-accredited 
investors in Regulation A offerings in an effort to avoid the 
application of Section 12(g).
---------------------------------------------------------------------------

    \206\ 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. 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.
    \207\ See, e.g., H.R. Rep. No. 112-206 (2011), at 4 (``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.'').
---------------------------------------------------------------------------

    While we believe, as we noted in the Proposing Release, that the 
Section 12(g) record holder threshold continues to provide an important 
baseline above which issuers should generally be subject to the 
disclosure obligations of the Exchange Act, we are persuaded that this 
need not be the case where an issuer is a smaller company that is 
subject to, and current in, its periodic reporting obligations under 
Tier 2 of Regulation A and engages the services of a transfer agent 
that is registered with the Commission under the Exchange Act. 
Regulation A, as amended in the final rules, requires issuers that 
conduct Tier 2 offerings to provide periodic disclosure to their 
investors and updates for certain important corporate events.\208\ 
While such reports provide less information than is required of an 
Exchange Act reporting company, we believe a conditional exemption from 
registration under Section 12(g) is warranted for smaller Tier 2 
issuers since such companies are required to provide investors with 
ongoing information about themselves and the securities offered, and 
the ongoing reporting regime we are adopting today is more 
appropriately tailored for such companies. Additionally, in order to 
address situations where an issuer that conducts a Tier 2 offering 
could remain subject to its ongoing reporting requirements indefinitely 
and thereby avoid having to comply with Exchange Act reporting 
requirements regardless of the size of its shareholder base, we note 
that the exemption from Section 12(g) is conditional and that an issuer 
that does not meet its conditions, including the limitation on public 
float and annual revenues, will be required to register under the 
Exchange Act.
---------------------------------------------------------------------------

    \208\ See Rule 257.
---------------------------------------------------------------------------

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.\209\ The provision permits electronic filing of

[[Page 21821]]

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 investor funds, and other appropriate matters.
---------------------------------------------------------------------------

    \209\ 15 U.S.C. 77c(b)(2)(G)(i).
---------------------------------------------------------------------------

1. Electronic Filing; Delivery Requirements
a. Proposed Rules
    Consistent with the language of Section 3(b)(2)(G)(i), we proposed 
to require Regulation A offering statements to be filed with the 
Commission electronically on EDGAR.\210\ We further proposed to amend 
Form 1-A, but to continue to have the form consist of three parts:
---------------------------------------------------------------------------

    \210\ See proposed Rule 252(e).
---------------------------------------------------------------------------

     Part I: An eXtensible Markup Language (XML) based fillable 
form;
     Part II: A text file attachment containing the body of the 
disclosure document and financial statements; and
     Part III: Text file attachments, containing the 
signatures, exhibits index, and the exhibits to the offering 
statement.\211\
---------------------------------------------------------------------------

    \211\ See Proposing Release, at Section II.C.1.
---------------------------------------------------------------------------

    We further proposed 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.\212\
---------------------------------------------------------------------------

    \212\ Id.
---------------------------------------------------------------------------

    Additionally, we proposed an access equals delivery model for 
Regulation A final offering circulars.\213\ Under the proposed rules, 
issuers would be required to include a notice in any preliminary 
offering circular used that would inform potential investors that the 
issuer may satisfy its delivery obligations for the final offering 
circular electronically.\214\ As with registered offerings, we also 
proposed aftermarket delivery obligations for dealers that would be 
satisfied if the final offering circular is filed and available on 
EDGAR and the appropriate notice was given by the dealer.\215\
---------------------------------------------------------------------------

    \213\ Id.
    \214\ See proposed Rule 254(a).
    \215\ As proposed, a dealer would generally be required to 
deliver a copy of the current offering circular to purchasers for 
all sales that occur within 90 calendar days after qualification, 
although this requirement would be satisfied when the final offering 
circular is filed and available on EDGAR and the dealer has 
otherwise complied with the obligation to deliver a notice of sales 
to the purchaser not later than two business days after completion 
of such sale. See proposed Rules 251(d)(2)(ii)-(iii).
---------------------------------------------------------------------------

    Consistent with prior Commission releases on the use of electronic 
media for delivery purposes, we proposed that ``electronic-only'' 
offerings of Regulation A securities would not be prohibited, but an 
issuer and its participating intermediaries would have to obtain the 
consent of investors to the electronic delivery of:
     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.\216\
---------------------------------------------------------------------------

    \216\ See Proposing Release, at Section II.C.1.
---------------------------------------------------------------------------

    We further proposed to maintain the existing requirements in 
Regulation A, which require dealers to deliver a copy of the current 
offering circular to purchasers for sales that take place within 90 
calendar days after qualification.\217\ We proposed to update and amend 
Rule 251(d)(2)(i) \218\ to require issuers and participating broker-
dealers to deliver only a preliminary offering circular to prospective 
purchasers \219\ at least 48 hours in advance of sale when a 
preliminary offering circular is used during the prequalification 
period to offer such securities to potential investors. We also 
proposed to continue to require a final offering circular to accompany 
or precede any written communication that constitutes an offer in the 
post-qualification period.\220\
---------------------------------------------------------------------------

    \217\ See proposed Rule 251(d)(2)(iii).
    \218\ 17 CFR 230.251(d)(2)(i) (2014).
    \219\ See proposed Rule 251(d)(2)(i).
    \220\ See proposed Rule 251(d)(1)(iii).
---------------------------------------------------------------------------

    In addition to the revised delivery requirements discussed above, 
we proposed to add a provision analogous to Rule 173,\221\ which would 
require issuers, underwriters, and dealers, not later than two business 
days after completion of a sale, to provide purchasers with a copy of 
the final offering circular or a notice stating that the sale occurred 
pursuant to a qualified offering statement.\222\ As proposed, the 
notice must include the Web site address \223\ 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 how it may request and receive a final 
offering circular from the issuer.\224\
---------------------------------------------------------------------------

    \221\ 17 CFR 230.173.
    \222\ See proposed Rule 251(d)(2)(ii).
    \223\ 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.
    \224\ See proposed Rule 251(d)(2)(ii).
---------------------------------------------------------------------------

    We further proposed 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 has been sold and such 
offering statement is not the subject of a Commission order temporarily 
suspending a Regulation A exemption. 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. These withdrawal and abandonment procedures are similar to 
the ones that apply to registration statements under the Securities 
Act.\225\
---------------------------------------------------------------------------

    \225\ See Securities Act Rule 477, 17 CFR 230.477, and Rule 479, 
17 CFR 230.479.
---------------------------------------------------------------------------

b. Comments on the Proposed Rules
    No commenters opposed the proposed requirement that issuers be 
required to file offering statements and related material 
electronically with the Commission on EDGAR, while two commenters 
expressly supported such a requirement.\226\ One commenter recommended 
only requiring preliminary or final offering circular delivery 48 hours 
in advance of sale for initial public offerings and not for offerings 
by issuers that are already subject to Tier 2 ongoing reporting 
requirements.\227\ This commenter also recommended eliminating dealer 
offering circular delivery requirements for Tier 2 issuers that are 
subject to ongoing reporting.
---------------------------------------------------------------------------

    \226\ See MCS Letter; OTC Markets Letter.
    \227\ Paul Hastings Letter.
---------------------------------------------------------------------------

    A few commenters opposed an access equals delivery model of final 
offering circular delivery.\228\ These commenters raised concerns about 
the perceived challenge of finding these materials on EDGAR and not 
requiring delivery 48 hours in advance of sale in all circumstances.
---------------------------------------------------------------------------

    \228\ Massachusetts Letter 2; NASAA Letter 2; WDFI Letter.
---------------------------------------------------------------------------

    One commenter recommended, in addition to requiring electronic 
filing on EDGAR, requiring issuers to maintain a corporate Web site 
where the public may access copies of all non-confidential filings in a 
timely manner so that investors not familiar with EDGAR may access the 
most complete information provided to the

[[Page 21822]]

Commission.\229\ In addition to suggested changes to the filing process 
itself, several commenters encouraged the Commission to find ways to 
reduce the staff's review time for offering statements.\230\
---------------------------------------------------------------------------

    \229\ Ladd Letter 2.
    \230\ Frutkin Law Letter; Heritage Letter (suggesting that the 
review time needs to be reduced by two-thirds); Letter from Gregory 
S. Fryer, Esq., Partner, Verrill Dana LLP, February 28, 2014 
(``Verrill Dana Letter 1'') (recommending providing guidance to 
issuers, staff training, and more discretion to the staff to make 
materiality determinations and to work informally with issuers); 
Letter from Ted J. Coombs, Chief Technology Officer, Workers On 
Call, March 24, 2014 (``WOC Letter'').
---------------------------------------------------------------------------

c. Final Rules
(1) Filing Requirements
    We are adopting provisions for electronic filing and delivery 
requirements in the final rules for Regulation A substantially as 
proposed.\231\ We agree with commenters that support requiring 
electronic filing of offering and related materials and believe that 
this requirement will ultimately benefit issuers and investors by 
streamlining the offering process. As adopted, issuers must file their 
Regulation A offering statements with the Commission electronically on 
EDGAR.\232\ Further, as proposed, we are amending Form 1-A to consist 
of the following three parts:
---------------------------------------------------------------------------

    \231\ In conjunction with the adoption of final rules for 
electronic filing and delivery, we are making clarifying revisions 
to the proposed rules that renumber some of the proposed provisions 
in the final rules. See, e.g., Rule 251(e), (f) (originally proposed 
Rules 252(c), (e), respectively).
    \232\ See Rule 101(a)(vii), (xvii) of Regulation S-T, 17 CFR 
232.101(a)(xvii); see also Rule 251(f). As proposed, and in 
conjunction with this change, Item 101(c)(6) of Regulation S-T (17 
CFR 232.101(c)(6)) is revised so that it no longer prohibits 
electronic submission of filings related to Regulation A offerings.
---------------------------------------------------------------------------

     Part I: An eXtensible Markup Language (XML) based fillable 
form, which captures key information about the issuer and its offering 
using an easy to complete online form, similar to Form D, with drop-
down menus, indicator boxes or buttons, and text boxes, and assists 
issuers in determining their ability to rely on the exemption. The XML-
based fillable form will provide a convenient means of assembling and 
transmitting information to EDGAR, without requiring the issuer to 
purchase or maintain additional software or technology; \233\
---------------------------------------------------------------------------

    \233\ 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.
---------------------------------------------------------------------------

     Part II: 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; 
\234\ and
---------------------------------------------------------------------------

    \234\ Part II (Offering Circular) of Form 1-A. See discussion in 
Section II.C.3.b. below.
---------------------------------------------------------------------------

     Part III: Text file attachments, containing the 
signatures, exhibits index, and the exhibits to the offering statement, 
formatted in HTML or ASCII to be compatible with the EDGAR filing 
system.\235\

    \235\ Part III (Exhibits) of Form 1-A. See discussion in Section 
II.C.3.c. below.
---------------------------------------------------------------------------

As proposed and adopted, all other documents required to be submitted 
or filed with the Commission in conjunction with a Regulation A 
offering, such as ongoing reports, must generally be submitted or filed 
electronically on EDGAR.\236\ As materials will be available on EDGAR, 
we do not see a need to separately require issuers to maintain a 
corporate Web site where the public may access all non-confidential 
filings. Issuers may, however, elect to provide the filings on their 
Web site or to their EDGAR filing page. Consistent with current 
Regulation A, there are no filing fees associated with the Regulation A 
filing and qualification process.
---------------------------------------------------------------------------

    \236\ For a discussion on the ongoing reporting requirements, 
see Section II.E. below.
---------------------------------------------------------------------------

    We believe the approach to electronic filing adopted today will be 
both practical and useful for issuers of Regulation A securities, 
investors in such securities, and other market participants. Issuers 
will be able to maintain better control over their filing process, 
reduce the printing costs associated with filings, obtain immediate 
confirmation of acceptance of an offering statement, and ultimately 
save time in the qualification process. Investors will gain real-time 
access to the information contained in Regulation A filings.\237\ We 
anticipate that 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, electronic filing on EDGAR will allow for more efficient 
storing, processing, and disseminating of Regulation A filings than 
paper filings, which should improve the efficiency of the staff review 
and qualification processes.
---------------------------------------------------------------------------

    \237\ Investors would not, however, have immediate access to 
non-public submissions of draft offering statements. See discussion 
in Section II.C.2. below.
---------------------------------------------------------------------------

    Electronic filing also will facilitate the capture of important 
financial and other information about Regulation A issuers and 
offerings that will enable the Commission and market participants to 
analyze any market that develops in Regulation A securities, including, 
for example, information about 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 Regulation A offerings.\238\
---------------------------------------------------------------------------

    \238\ The specific disclosure requirements included in the XML-
based fillable form are discussed more fully in Section II.C.3.a. 
below.
---------------------------------------------------------------------------

    We appreciate that requiring EDGAR filing will impose some new 
costs on issuers, as addressed more fully in the Economic Analysis 
section of the release.\239\ We do not, however, believe that the 
incremental cost associated with the EDGAR filing requirements 
justifies maintaining a paper-only filing requirement. On the contrary, 
we believe that the potential additional cost to issuers associated 
with the EDGAR filing requirement should be minimal and electronic 
filing on EDGAR would eliminate any processing delays and costs 
otherwise associated with the current paper filing system, such as 
printing or mailing costs.
---------------------------------------------------------------------------

    \239\ See Section III. below.
---------------------------------------------------------------------------

(2) Delivery Requirements
    We are adopting, as proposed, an access equals delivery model for 
Regulation A final offering circulars when sales are made on the basis 
of offers conducted during the prequalification period and the final 
offering circular is filed and available on EDGAR. The expanded use of 
the Internet and continuing technological developments suggest that we 
should update the final offering circular delivery method for 
Regulation A in a manner that is consistent with similar updates to 
delivery requirements for registered offerings.\240\ Contrary to the 
views of some commenters,\241\ we do not believe that access to EDGAR 
generally has proven to be a challenge for investors in registered 
offerings since the adoption of the Securities Offering Reform Release 
in 2005. We also do not believe that it will be a challenge for 
investors under Regulation A or raise investor protection concerns, 
particularly in light of our final delivery requirements (including, 
where applicable, the inclusion of hyperlinks to offering materials on 
EDGAR that must be provided to investors by issuers and 
intermediaries).\242\ Therefore, where sales of Regulation A securities 
occur

[[Page 21823]]

after qualification on the basis of offers made using a preliminary 
offering circular, issuers and intermediaries can presume that 
investors have access to the Internet and may satisfy their delivery 
requirements for the final offering circular by filing it on 
EDGAR.\243\ Issuers are, however, required to include a notice in any 
preliminary offering circular that will inform potential investors that 
the issuer may satisfy its delivery obligations for the final offering 
circular electronically.\244\
---------------------------------------------------------------------------

    \240\ See Securities Offering Reform, Rel. No. 33-8591.
    \241\ See fn. 228 above.
    \242\ See Rule 251(d)(2), Rule 254(a), and Rule 255(b) and (d).
    \243\ Cf. Rel. No. 33-8591, at 244.
    \244\ See Rule 254(a).
---------------------------------------------------------------------------

    Further, as proposed, ``electronic-only'' offerings of Regulation A 
securities will be permitted under the final rules, provided that 
issuers and intermediaries comply with relevant Commission 
guidance.\245\ Specifically, in such offerings, an issuer and its 
participating intermediaries must obtain the consent of investors to, 
or otherwise be able to evidence the receipt of, the electronic 
delivery of:
---------------------------------------------------------------------------

    \245\ 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 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), Rel. 
No. 34-42728 (Apr. 28, 2000) [65 FR 25843] (Use of Electronic 
Media), and Rel. No. 33-7233 (Oct. 6, 1995) [60 FR 53458] (Use of 
Electronic Media for Delivery Purposes).
---------------------------------------------------------------------------

     The preliminary offering circular and information other 
than the final offering circular, in instances where the issuer sells 
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 made during the post-qualification period using a final 
offering circular.
    As we noted in the Proposing Release, in light of the proposed 
requirements for electronic delivery and in order to be consistent with 
requirements for registered offerings, we believe it appropriate to 
permit dealers, during the aftermarket delivery period, to be deemed to 
satisfy their final offering circular delivery requirements if such 
document is filed and available on EDGAR.\246\ We are amending Rule 
251(d)(2)(ii) of existing Regulation A to make clear that dealers, like 
issuers and intermediaries, can also rely on the provisions for access 
equals delivery.\247\ Additionally, the amendment clarifies that a 
dealer can rely on access equals delivery for a final offering circular 
provided it complies with the requirements of Rule 251(d)(2)(ii). This 
clarifying amendment is necessary to avoid any confusion that the final 
rules could be read to impose a double delivery requirement on dealers 
during the aftermarket delivery period.
---------------------------------------------------------------------------

    \246\ See Proposing Release, at Section II.C.1.
    \247\ See Rule 251(d)(2)(ii). Notwithstanding the final delivery 
requirements, broker-dealers remain subject to the anti-fraud 
provisions of Section 15 of the Exchange Act.
---------------------------------------------------------------------------

    Separately, we are modifying the terms of Rule 251(d)(2)(ii) to 
make it more consistent with the dealer delivery requirements for 
registered offerings under Securities Act Rule 174.\248\ As proposed, 
the rules would have required dealers in all circumstances to deliver a 
copy of the current offering circular to purchasers for sales that take 
place within 90 calendar days after qualification.\249\ Consistent with 
the suggestion of one commenter,\250\ we are revising the proposed 
rules to more closely align the Regulation A delivery requirements with 
those required in Securities Act Rules 174(b) and (d).\251\ We, 
therefore, are adopting the proposed 90 calendar day dealer delivery 
requirement, but eliminating the dealer delivery requirement when the 
issuer is subject immediately prior to filing the offering statement to 
Tier 2 ongoing reporting \252\ and reducing the length of the delivery 
requirement to 25 calendar days after the later of the qualification 
date of the offering statement or the first bona fide offering of 
securities if the securities will be listed on a national securities 
exchange.\253\ As adopted, the final rules reduce dealer aftermarket 
delivery requirements, which should aid dealers in compliance with the 
final rules.
---------------------------------------------------------------------------

    \248\ While we have made clarifying revisions to proposed Rule 
251(d)(2)(iii) and renumbered it as Rule 251(d)(2)(ii), the final 
rule is consistent with Rule 174, as there is no need for an analog 
to Rule 174(g), which covers the dealer delivery obligations in 
registered offerings by blank check companies under Rule 174(g). 
Blank check companies are ineligible issuers under Regulation A. See 
Rule 251(b).
    \249\ See proposed Rule 251(d)(2)(iii).
    \250\ Paul Hastings Letter.
    \251\ See 17 CFR 230.174(b), (d).
    \252\ Rule 251(d)(2)(ii)(D); see also Securities Act Rule 
174(b).
    \253\ Rule 251(d)(2)(ii)(C); see also Securities Act Rule 
174(d).
---------------------------------------------------------------------------

    The final rules also update and amend Rule 251(d)(2)(i) to align 
with changes in the prospectus delivery requirements for registered 
offerings that have occurred since these requirements were last updated 
in Regulation A.\254\ We believe the delivery of the preliminary 
offering circular to potential investors before they make an investment 
decision on the basis of information provided during the 
prequalification period remains an important investor protection that 
the final rules should preserve, 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, as discussed further in Section II.D. below.\255\ 
We also recognize that updating and amending Regulation A's offering 
circular delivery requirements will likely benefit market participants 
by minimizing discrepancies between the requirements of broker-dealers 
in Regulation A and registered offerings.
---------------------------------------------------------------------------

    \254\ See Proposing Release, at Section II.C.1.
    \255\ See Securities Offering Reform, 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).
---------------------------------------------------------------------------

    We therefore are amending, as proposed, Rule 251(d)(2)(i) to 
require issuers and participating broker-dealers to deliver only a 
preliminary offering circular to prospective purchasers \256\ at least 
48 hours in advance of sale only when a preliminary offering circular 
is used during the prequalification period to offer such securities to 
potential investors.\257\ To make the final rules more consistent with 
the requirements of Exchange Act Rule 15c2-8(b) for issuers who already 
provide continuous, ongoing information to investors and the market, 
the final rules do not require an issuer or its intermediaries to 
deliver a preliminary offering circular at least 48 hours in advance of 
sale where the issuer is already subject to a Tier 2 reporting 
obligation. In such instances, however, the issuer and its 
intermediaries will otherwise remain subject to the general delivery 
requirements of the rules, including compliance with the requirements 
for making offers pursuant to Rule 251(d)(1) and for including a 
preliminary offering circular in any solicitation materials used after 
filing the offering statement with the Commission pursuant to Rule 255. 
As proposed and adopted, the delivery requirements under the final 
rules apply to both issuers and

[[Page 21824]]

participating broker-dealers.\258\ We believe these delivery 
requirements are an important investor protection that should apply to 
issuers in advance of sale, in addition to their intermediaries, and is 
consistent with current Regulation A.\259\ We are also adopting, as 
proposed, the requirement that a final offering circular must accompany 
or precede any written communications that constitute offers in the 
post-qualification period.\260\
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    \256\ Prospective purchasers 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 Rule 
251(d)(2)(i).
    \257\ In accordance with time of sale provisions discussed in 
Securities Offering Reform, see Rel. No. 33-8591, at p. 173 et seq., 
the final rules provide that the 48-hour delivery obligation must be 
made 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.
    \258\ Issuers may rely on reasonable assurances of delivery from 
participating broker-dealers to satisfy their delivery obligations.
    \259\ See also 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.
    \260\ See Rule 251(d)(1)(iii). For written confirmations and 
notices of allocation in the post-qualification period, issuers and 
intermediaries may rely on the EDGAR filing of the final offering 
circular to satisfy any delivery requirements that may apply under 
Rule 251(d)(1)(iii). This approach is consistent with Rule 172(a) in 
the context of registered offerings. For a discussion of Rule 
172(a), see Securities Offering Reform, Rel. No. 33-8591, at 251.
---------------------------------------------------------------------------

    In addition to the revised delivery requirements discussed above, 
we are adopting, as proposed, final rules analogous to Securities Act 
Rule 173.\261\ Rule 251(d)(2)(ii) requires issuers and participating 
broker-dealers, not later than two business days after completion of 
the sale, to 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.\262\ The notice must include the URL 
\263\ 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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    \261\ 17 CFR 230.173.
    \262\ See Rule 251(d)(2)(ii).
    \263\ As proposed, the final rules make clear that, 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. See Rule 
251(d)(2)(ii)(E).
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(3) Withdrawal of an Offering Statement
    The final rules will, as proposed, permit 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.\264\ The final 
rules also permit, as proposed, the Commission 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.\265\ These withdrawal and abandonment procedures are similar 
to the ones that apply to issuers in registered offerings.
---------------------------------------------------------------------------

    \264\ See Rule 259(a). As discussed in Section II.C.5. below in 
the context of qualification, we are amending the delegated 
authority of the director of the Division of Corporation Finance to 
permit the Division to consent to the withdrawal of an offering 
statement or to declare an offering statement abandoned, as opposed 
to requiring the Commission to issue an order. Rule 30-1(b)(3), 17 
CFR 200.30-1(b)(3).
    \265\ See Rule 259(b).
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2. Non-Public Submission of Draft Offering Statements
a. Proposed Rules
    We proposed to allow the non-public submission of draft offering 
statements by issuers of Regulation A securities. As we noted in the 
Proposing Release, such submissions would not be subject to the 
statutorily-mandated confidentiality of draft initial public offering 
(IPO) registration statements confidentially submitted by ``emerging 
growth companies'' \266\ under Title I of the JOBS Act.\267\ Instead, 
where an issuer seeks to non-publicly submit a draft offering 
statement, the proposal indicated it could do so in compliance with the 
Commission's Rule 83.\268\ We also sought comment on whether we should 
instead adopt a new rule relating to confidential treatment of draft 
offering statements in Regulation A.
---------------------------------------------------------------------------

    \266\ 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).
    \267\ 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.
    \268\ See proposed Rule 252(f); see also Proposing Release, at 
fn. 212.
---------------------------------------------------------------------------

    Under the proposed rules, 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 by emerging growth 
companies, 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 and 
available on EDGAR as exhibits to the offering statement not less than 
21 calendar days before qualification of the offering statement.\269\ 
Unlike emerging growth companies in registered offerings, 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.
---------------------------------------------------------------------------

    \269\ See proposed Rule 252(f).
---------------------------------------------------------------------------

b. Comments on Proposed Rules
    Commenters were generally supportive of the proposed non-public 
submission process for Regulation A offerings.\270\ One commenter 
recommended keeping all filings confidential other than the final 
qualified version and possibly any interim version actually used in 
conjunction with solicitation materials.\271\ Another commenter 
recommended requiring the inclusion of a legend on non-public offering 
statements so that the confidentiality of such submissions would be 
automatic, without the need for a separate confidentiality 
request,\272\ while another commenter recommended treating the proposed 
non-public submissions the same way that draft registration statements 
are treated under Title I of the JOBS Act.\273\
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    \270\ BIO Letter; McCarter & English Letter; Paul Hastings 
Letter; Richardson Patel Letter.
    \271\ Verrill Dana Letter 1.
    \272\ McCarter & English Letter. The Proposing Release indicated 
that issuers seeking to non-publicly submit offering statements 
should submit such statements under cover of the Commission's Rule 
83, 17 CFR 200.83, which deals with confidential treatment requests.
    \273\ Milken Institute Letter (recommending that the Commission 
seek Congressional authority, if necessary, to protect these 
submissions from requests under the FOIA.
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c. Final Rules
    We are adopting rules that will, as proposed, provide for the 
submission of non-public draft offering statements under Regulation 
A.\274\ In a change from the proposal, however, the final rules do not 
require an issuer seeking non-public staff review of its draft offering 
statement to submit such draft pursuant to the Commission's Rule 83. 
Instead, all such draft offering statements under Rule 252(a) shall 
receive non-public review. The final rules only permit

[[Page 21825]]

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 to submit to the 
Commission a draft offering statement for non-public review. Consistent 
with the treatment of draft registration statements in registered 
offerings by emerging growth companies, a non-publicly submitted 
offering statement must be substantially complete upon submission in 
order for staff of the Division of Corporation Finance to begin its 
review. All non-public submissions of draft offering statements must be 
submitted via EDGAR, and the initial non-public submission, all non-
public amendments thereto, and correspondence submitted by or on behalf 
of the issuer to the Commission staff regarding such submissions must 
be publicly filed and available on EDGAR as exhibits to the offering 
statement not less than 21 calendar days before qualification of the 
offering statement.
---------------------------------------------------------------------------

    \274\ See Rule 252(d).
---------------------------------------------------------------------------

    We do not believe, as was suggested by at least one commenter,\275\ 
that requiring issuers to file only the qualified version of the 
offering statement and any earlier versions used in conjunction with 
solicitation materials would provide investors with sufficient 
disclosure to make informed investment decisions. Further, in light of 
the preemption of state securities laws registration requirements for 
Tier 2 offerings in the final rules,\276\ the 21 calendar day filing 
requirement will insure that state securities regulators are able to 
require first-time issuers that non-publicly submit draft offering 
statements to file such material with them for a minimum of 21 calendar 
days before any potential sales to investors in their respective 
states.\277\ Unlike emerging growth companies, the timing requirement 
for filing by issuers seeking qualification under Regulation A does not 
depend on whether or not the issuer conducts a road show or tests the 
waters in a contemplated offering before qualification.\278\
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    \275\ Verrill Dana Letter 1.
    \276\ See discussion in Section II.H. below.
    \277\ Notwithstanding the final rules that provide for the 
preemption of state securities laws' registration and qualification 
requirements of Tier 2 offerings, state securities regulators 
retain, among other things, their authority to require the filing 
with them of any documents filed with the Commission. See, e.g., 
Section 18(c)(2) of the Securities Act. The timing of filing 
requirements at the state level, however, may reduce the time period 
in which an offering statement and related materials are on file 
with the state before Commission qualification.
    \278\ See Section II.D. below for a discussion on the timing and 
requirements for the use of solicitation materials under Rule 255. 
Regulation A's testing the waters provisions encompass a variety of 
activities, including, but not limited to, activities that could 
constitute a traditional road show.
---------------------------------------------------------------------------

    Unlike Title I of the JOBS Act, Title IV does not provide for 
confidential submissions of offering statements under Regulation 
A.\279\ Consequently, the requirements of the FOIA are controlling on 
the scope of the Commission's ability to adopt confidentiality rules 
for non-publicly submitted offering statements. We are therefore not 
adopting any specific additional rule or requirement for non-public 
submissions that would deem such submissions ``confidential.'' However, 
where an issuer seeks confidential treatment for non-publicly submitted 
offering materials, or any portion thereof, for which it believes an 
exemption from the FOIA exists, it should continue to do so in 
compliance with the Commission's Rule 83.\280\
---------------------------------------------------------------------------

    \279\ See fn. 267 above.
    \280\ See 17 CFR 200.83. Where an issuer seeks confidential 
treatment of any information included in a publicly filed offering 
statement or related materials, it should do so in compliance with 
Securities Act Rule 406. See 17 CFR 230.406. See Rule 251(e) 
(confidential treatment).
---------------------------------------------------------------------------

    While non-publicly submitted offering statements must be submitted 
electronically on EDGAR, the Commission and its staff will not make 
such offering statements publicly available on EDGAR as a matter of 
course.\281\ The treatment of non-public submissions in this regard is 
consistent with the Commission staff's approach to the public 
availability of draft registration statements submitted by foreign 
private issuers for registered offerings.\282\ As there is no statutory 
basis for withholding non-public submissions from production, absent an 
exemption from the FOIA,\283\ issuers that rely on our provisions for 
non-public submission should be aware that the Commission may, under 
certain circumstances, be compelled to provide such materials to a 
requesting party (or to otherwise make them publicly available) before 
the date on which an issuer would otherwise have been required to 
publicly file on EDGAR.
---------------------------------------------------------------------------

    \281\ This is in contrast to publicly filed draft and final 
offering statements that will be made automatically available on 
EDGAR at the time of filing.
    \282\ See Non-Public Submissions from Foreign Private Issuers, 
available at: https://www.sec.gov/divisions/corpfin/internatl/nonpublicsubmissions.htm.
    \283\ See 5 U.S.C. 552.
---------------------------------------------------------------------------

3. Form and Content
    Section 3(b)(2)(G)(i) of the Securities Act identifies certain 
disclosure requirements that the Commission may require for offerings 
relying on the Regulation A exemption. The requirements largely 
coincide with the existing offering statement disclosure requirements 
of Form 1-A, such as financial statements,\284\ a description of the 
issuer's business operations,\285\ financial condition,\286\ and use of 
investor funds.\287\ The proposed rules, comments received on the 
proposed rules, and the final rules being adopted today for each of 
Part I, II, and III of Form 1-A are discussed in detail below.
---------------------------------------------------------------------------

    \284\ See Form 1-A, Part II, Part F/S (2014). Section 
3(b)(2)(G)(i) also contemplates that the Commission may require 
issuers to submit audited financial statements. Currently, the 
financial statements required under Regulation A need to be audited 
only if the issuer has them otherwise available.
    \285\ Id., Part II, e.g., Model B, Item 6 (Description of 
Business).
    \286\ Id., e.g., Part F/S.
    \287\ Id., e.g., Item 5 (Use of Proceeds to Issuer).
---------------------------------------------------------------------------

a. Part I (Notification)
(1) Proposed Rules
    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.\288\ As proposed, 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 would be filed online 
with the Commission.\289\ The information would be publicly available 
on EDGAR, as an online data cover sheet, but not otherwise required to 
be distributed to investors.\290\
---------------------------------------------------------------------------

    \288\ Rel. No. 33-6275 [46 FR 2637], at 2638.
    \289\ 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.
    \290\ The Commission would make the information available on 
EDGAR 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.
---------------------------------------------------------------------------

(2) Comments on Proposed Rules
    We received several comments with recommendations specific to 
certain items on Part I of Form 1-A. With respect to Item 1 of Part I, 
one commenter recommended defining the term ``publicly traded,'' 
eliminating the ``Financial Statements'' section of Item 1 of Part I or 
conforming it to the existing disclosures required by Item 301 of 
Regulation S-K, or conforming the line item descriptions in Item 1 to 
those in Regulation S-X.\291\ Other commenters recommended clarifying 
that an auditor and related fees need not

[[Page 21826]]

be listed in Part I if audited financial statements are not 
included.\292\ With respect to Item 5 of Part I, another commenter 
supported the proposal's inclusion of checkboxes specifying the 
jurisdictions in which the securities are intended to be offered,\293\ 
while a different commenter recommended expanding the list of 
jurisdictions so that issuers could indicate the Canadian provinces in 
which they intended to conduct their offerings.\294\ With respect to 
Item 6 of Part I, one commenter recommended defining the term 
``affiliated issuer.'' \295\ This commenter recommended defining the 
term to refer to entities controlled by the issuer, noting that 
otherwise it may require disclosure by parent and sister entities, 
which is information unrelated to the capitalization of the issuer.
---------------------------------------------------------------------------

    \291\ Letter from Ernst & Young LLP, March 24, 2014 (``E&Y 
Letter'').
    \292\ Letter from Cynthia M. Fornelli, Executive Director, 
Center for Audit Quality, March 24, 2014 (``CAQ Letter''); Letter 
from Deloitte & Touche LLP, March 24, 2014 (``Deloitte Letter''); 
E&Y Letter; Letter from PricewaterhouseCoopers LLP, March 24, 2014 
(``PwC Letter'').
    \293\ NASAA Letter 2.
    \294\ Letter from Mike Liles, Jr., Attorney, Karr Tuttle 
Campbell, January 17, 2014 (``Karr Tuttle Letter'').
    \295\ Paul Hastings Letter.
---------------------------------------------------------------------------

    Other commenters recommended including additional disclosure in 
Part I. Two of these commenters recommended requiring issuers to 
include their Web site address and the jurisdiction of their principal 
place of business.\296\ These commenters also objected to removing the 
disclosure and contact information for persons that are covered by the 
bad actor rules.\297\
---------------------------------------------------------------------------

    \296\ NASAA Letter 2; WDFI Letter. These commenters requested 
that this information be included in XBRL format, rather than XML. 
We note that XBRL is a form of XML, and generally requires labeling 
information with data ``tags'' rather than providing the information 
through fillable forms.
    \297\ NASAA Letter 2; WDFI Letter.
---------------------------------------------------------------------------

    (3) Final Rules
    With the exception of technical clarifications, we are adopting 
provisions for Part I as proposed. The notification in Part I of Form 
1-A will require disclosure in response to the following items:
     Item 1. (Issuer Information) will require information 
about the issuer's identity, industry, number of employees, financial 
statements and capital structure, as well as contact information.\298\
---------------------------------------------------------------------------

    \298\ 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 already required to be included on the 
cover page of Form 1-A.
---------------------------------------------------------------------------

     Item 2. (Issuer Eligibility) will require the issuer to 
certify that it meets various issuer eligibility criteria.
     Item 3. (Application of Rule 262 (``bad actor'' 
disqualification and disclosure)) will require the issuer to certify 
that no disqualifying events have occurred and to indicate whether 
related disclosure will be 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).\299\
---------------------------------------------------------------------------

    \299\ See discussion of 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) will include indicator boxes or 
buttons and text boxes eliciting information about the offering 
(including whether the issuer is 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 sales of any concurrent offerings pursuant to Regulation A, 
anticipated fees in connection with the offering, and the names of 
audit and legal service providers, underwriters, and certain others 
providing services in connection with the offering).
     Item 5. (Jurisdictions in Which Securities are to be 
Offered) will include information about the jurisdiction(s) in which 
the securities will be offered.
     Item 6. (Unregistered Securities Issued or Sold Within One 
Year) will require disclosure about unregistered issuances or sales of 
securities within the last year, but will not include a requirement to 
provide the names and identities of the persons to whom unregistered 
securities were issued.
    We are adopting, as proposed, further changes to Part I of Form 1-
A. We are eliminating 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 are requiring only narrative disclosure in Part II of Form 
1-A when the issuer has determined that a relevant party has a 
disclosable, but not disqualifying, ``bad actor'' event.\300\ We also 
are eliminating Item 3 of current Part I relating to affiliate sales, 
because we are eliminating the current restrictions on affiliate 
resales under Rule 251(b).\301\ Information about the amount of 
expected secondary sales and the existence of affiliate sales in the 
offering, however, will continue to be disclosed in Item 4. Item 6 
(Other Present or Proposed Offerings) and Item 9 (Use of a Solicitation 
of Interest Document) of current Part I will be incorporated into Item 
4 (Summary Information Regarding the Offering and Other Current or 
Proposed Offerings). We also are eliminating 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).
---------------------------------------------------------------------------

    \300\ See discussion in Section II.G. below.
    \301\ The primary purpose of Item 3 (Affiliate Sales) in Part I 
of Form 1-A (2014) is to ensure compliance with certain restrictions 
on affiliate resales under Rule 251(b). See discussion in Section 
II.B.3. above.
---------------------------------------------------------------------------

    Some of the technical changes from the proposed rules are non-
substantive procedural revisions to the form that are needed to conform 
the form with the technical requirements of EDGAR, while the others 
will, as suggested by commenters, provide clarifications to the terms 
and requirements of Part I.
    We do not, however, believe that the additional disclosure items 
suggested by some commenters,\302\ such as the issuer's Web site 
address and the jurisdiction of the issuer's principal place of 
business, are necessary additional disclosures in Part I of Form 1-A. 
As proposed and adopted, Item 1 (Issuer Information) of Part I requires 
issuers to disclose the location of their principal executive offices, 
while Item 1 (Cover Page of Offering Circular) of Part II requires 
issuers to provide investors with their Web site address, if the issuer 
has a Web site. In light of these required disclosures, we do not 
believe that the additional suggested disclosure items for Part I are 
necessary or would provide investors with any additional relevant 
information about the issuer. Additionally, notwithstanding the view of 
some commenters,\303\ we do not believe that the disclosure 
requirements for the application of Rule 262 (Disqualification 
Provisions) in Item 3 to Part I of Form 1-A need to include 
descriptions and addresses of persons that trigger disqualification for 
several reasons. An issuer that has a disqualified person involved in 
its offering will not be eligible to conduct a Regulation A offering, 
issuers will have to certify their compliance with Rule 262, and, with 
the exception of the addresses of covered persons, much of the 
requested disclosure, as it applies to persons that would have been 
disqualified but whose conduct occurred before effectiveness of the 
final rules or have received a waiver from disqualification,\304\ will 
be required in Part II of the offering statement.\305\

[[Page 21827]]

Therefore, as proposed and adopted, the final rules for Part I of Form 
1-A no longer require the disclosure of such information.
---------------------------------------------------------------------------

    \302\ NASAA Letter 2; WDFI Letter.
    \303\ Id.
    \304\ Rule 262(b)(1)-(2).
    \305\ See paragraph (a)(2) to Part II of Form 1-A. Additionally, 
underwriters, those receiving sales commissions and finders' fees, 
promoters, counsel, executive officers, directors, and significant 
securityholders, among others, must be identified in the offering 
statement in most instances. See, e.g., Item 4 of Part I and Items 
1, 10, and 11 of the Offering Circular, Part II of Form 1-A.
---------------------------------------------------------------------------

    Consistent with a comment received,\306\ we are making technical 
amendments to the financial statement requirements of Item 1 (Issuer 
Information) of Part I to clarify and require the use of certain 
industry-specific terminology and, wherever possible, to use 
terminology that is consistent with Regulation S-X and GAAP. These 
changes are designed to minimize potential confusion on the part of 
issuers in the banking and insurance industries that could result from 
the use of more general financial accounting terminology. We disagree, 
however, with the suggestion that we eliminate the financial statement 
section.\307\ As we noted in the Proposing Release, the disclosure of 
this type of information will provide the Commission (and market 
participants) with more information about the Regulation A market as it 
develops to use as it considers potential changes to the regulation in 
the future. We also believe that the disclosure of this information 
will provide relevant and useful information about issuers and their 
offerings to investors and market participants that will help to 
facilitate informed investment decisions. We do not anticipate that the 
disclosure of financial information in response to Item 1 to Part I of 
Form 1-A will materially alter the compliance obligations of issuers 
given that the requirements draw from disclosure already required in 
the financial statements included in the offering circular. 
Additionally, we are revising Item 1 to require issuers to provide up 
to two email addresses to which the Commission's staff may send comment 
letters relating to an offering statement, rather than making this 
optional as proposed. The email addresses, however, will no longer be 
disseminated with the filings. We believe this change will result in 
faster reviews of offering statements by the Commission's staff.\308\ 
Finally, consistent with the concerns underlying a comment we received, 
we recognize that the use of the term ``publicly traded'' in the 
outstanding securities table of Item 1 may be confusing in the context 
of a Regulation A offering.\309\ Accordingly, we have revised Item 1 to 
only request the name of the trading center or quotation medium, if 
any, for outstanding securities.
---------------------------------------------------------------------------

    \306\ E&Y Letter.
    \307\ Id.
    \308\ In the review of registered offerings the Commission's 
staff will call filers to obtain email addresses so as to issue 
comment letters electronically. Depending on the responsiveness of 
the filer, this can be a time consuming process.
    \309\ See E&Y Letter.
---------------------------------------------------------------------------

    Consistent with the views of several commenters,\310\ we are 
clarifying that in the fee table included in Item 4 of Part I (Summary 
Information Regarding the Offering and Other Current or Proposed 
Offerings), auditor fees only need to be disclosed when the issuer is 
providing audited financial statements because, for example, an auditor 
might not be used for a Tier 1 offering.\311\ This and similar items in 
the fee table could be left blank if not applicable and responses could 
be clarified in the text box following the table.
---------------------------------------------------------------------------

    \310\ See fn. 292 above.
    \311\ Disclosure is only required in the fee table to the extent 
applicable fees were incurred by the issuer in connection with the 
offering.
---------------------------------------------------------------------------

    As suggested by one commenter,\312\ we are expanding the list of 
jurisdictions in Item 5 (Jurisdiction in Which Securities are to be 
Offered) so that issuers can indicate the Canadian provinces in which 
they intend to conduct their offerings.\313\
---------------------------------------------------------------------------

    \312\ Karr Tuttle Letter.
    \313\ Item 5 of Part I of proposed Form 1-A did not include 
Canadian provinces, despite Canadian issuers being eligible issuers. 
Item 5, as adopted, corrects the form for Canadian issuers or for 
offerings that contemplate offers or sales in Canada.
---------------------------------------------------------------------------

    Finally, in response to one comment,\314\ we are clarifying, in 
this release, that the scope of the term ``affiliated issuer'' in 
proposed Item 6 of Part I is only meant to include affiliates of the 
issuer that are issuing securities in the same offering for which 
qualification is currently being sought under Regulation A. We believe 
this clarification is necessary in the final rules in order to avoid 
potential confusion among issuers as to the scope of the definition, in 
light of the broader definition of ``affiliate'' as it appears in 
Securities Act Rule 405.\315\
---------------------------------------------------------------------------

    \314\ Paul Hastings Letter.
    \315\ Rule 405 defines ``affiliate'' to include, among other 
things, persons controlling the issuer or under common control with 
the issuer. 17 CFR 230.405.
---------------------------------------------------------------------------

b. Part II (Offering Circular)
(1) Narrative Disclosure
(a) Proposed Rules for Narrative Disclosure
    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.\316\ We proposed to eliminate the Model A 
question-and-answer format 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.\317\
---------------------------------------------------------------------------

    \316\ Non-corporate issuers are not permitted to use Model A.
    \317\ See Proposing Release, at Section II.C.3.
---------------------------------------------------------------------------

    We further proposed to create new requirements for 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.\318\ As proposed, 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 12 
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.\319\
---------------------------------------------------------------------------

    \318\ See Proposing Release, at Section II.C.3(b)(1).
    \319\ See Item 9(c) of Offering Circular, Part II of proposed 
Form 1-A.
---------------------------------------------------------------------------

    Consistent with the treatment of issuers in registered offerings, 
we further proposed to permit issuers to incorporate by reference into 
Part II of Form 1-A certain items previously submitted or filed on 
EDGAR, regardless of whether they were provided pursuant to Regulation 
A disclosure requirements. As proposed, incorporation by reference 
would be limited to documents publicly submitted or filed under 
Regulation A and issuers would have to be subject to the ongoing 
reporting obligations for Tier 2 offerings.\320\ Issuers would be 
required to describe the information incorporated by reference, and 
include a separate hyperlink to the relevant document on EDGAR, which 
need not remain active after the filing of the related offering 
statement.
---------------------------------------------------------------------------

    \320\ 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 (other than Item 11(e)) 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 format of proposed Part II of Form 
1-A and Part I of Form S-1 do not align.
---------------------------------------------------------------------------

(b) Comments on Proposed Rules
    Several commenters recommended against the proposed elimination of 
the Model A disclosure format, and instead recommended that the 
Commission retain an updated version of the

[[Page 21828]]

format.\321\ Two of these commenters recommended including a Model A 
disclosure format that reflects the most recent version of NASAA's Form 
U-7.\322\ One commenter recommended retaining existing Form 1-A with 
minor changes until such time as the Commission and NASAA could develop 
an improved form.\323\ Six commenters, however, suggested that the 
Commission eliminate Model A and the proposed Offering Circular 
disclosure formats and instead recommended requiring disclosure by 
reference to Regulation S-K (with reduced disclosure requirements in 
some instances).\324\ These commenters believed that such a change 
would increase efficiency and comparability. One of these commenters 
was concerned that differences between Items 303 and 402 of Regulation 
S-K and the comparable disclosure requirements of the Offering Circular 
format might cause confusion.\325\ Two commenters recommended requiring 
REITs to incorporate certain of the items contained in Industry Guide 5 
and Form S-11.\326\
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    \321\ BIO Letter; Karr Tuttle Letter; NASAA Letter 2; Verrill 
Dana Letter 1; WDFI Letter.
    \322\ Karr Tuttle Letter; Verrill Dana Letter 1.
    \323\ NASAA Letter 2.
    \324\ Canaccord Letter; CFIRA Letter 1; E&Y Letter; Ladd Letter 
2 (recommending the change only to the extent that the Commission 
believed it would increase the speed of staff reviews); McCarter & 
English Letter; WR Hambrecht + Co Letter.
    \325\ E&Y Letter.
    \326\ ABA BLS Letter; MoFo Letter.
---------------------------------------------------------------------------

    Several commenters had specific recommendations on disclosure 
requirements. Four commenters recommended that the Commission find a 
way to require more concise risk factor disclosure.\327\ One of these 
commenters recommended possibly imposing a limit on the number of risk 
factors or guidance to avoid repetition and emphasizing that disclosure 
should not be repeated throughout the offering circular.\328\ Two 
commenters recommended expanding the dilution disclosure requirement in 
the Offering Circular format's Item 4.\329\ As proposed, Item 4 only 
requires disclosure of any material disparity between the public 
offering price and the effective cash cost to insiders over the past 
year. These commenters recommended removing the one year restriction. 
One commenter recommended focusing the disclosure requirements in the 
offering statement on valuation assessments and a discussion of 
management's expectations about the company's future performance, 
including projections.\330\ Another commenter recommended requiring 
disclosure of the names of ``those holding more than 20% of shares'' 
and a description of the ownership and capital structure, including 
descriptions of how the exercise of rights by principal shareowners 
could negatively affect the purchasers of shares being offered.\331\ 
Two commenters recommended reducing and clarifying the disclosure 
obligations for executive compensation and management's discussion and 
analysis for smaller offerings.\332\ One commenter recommended 
requiring disclosure regarding the existence of a code of ethics and 
corporate governance principles in a manner that would encourage 
issuers to adopt internal controls.\333\
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    \327\ CFIRA Letter 1; MoFo Letter; SVB Financial Letter; WR 
Hambrecht + Co Letter.
    \328\ WR Hambrecht + Co Letter.
    \329\ NASAA Letter 2; WDFI Letter.
    \330\ WR Hambrecht + Co Letter (indicating that, absent this 
requirement, such information would be shared orally by management 
or research analysts with only the biggest investors).
    \331\ CFA Institute Letter.
    \332\ Letter from Rutheford B. Campbell, Jr., Spears-Gilbert 
Professor of Law, University of Kentucky, March 5, 2014 (``Campbell 
Letter''); MoFo Letter (recommending that the Commission reduce and 
clarify the disclosure obligations for executive compensation and 
management's discussion and analysis by eliminating the need to 
repeat information already required to be included in the financial 
statements, reducing the number of years of business experience 
disclosure required to be included and clarifying the instructions 
of the executive compensation section).
    \333\ Ladd Letter 2 (referring to PCAOB AU 325 and 9325).
---------------------------------------------------------------------------

(c) Final Rules for Narrative Disclosure
    With the exception of clarifying changes, certain additional scaled 
disclosure items applicable to Tier 1 offerings, and additional 
guidance to issuers designed to streamline disclosure, we are adopting 
final rules for narrative disclosure in Form 1-A substantially as 
proposed. As adopted, Offering Circular disclosure in Part II of Form 
1-A will cover: \334\
---------------------------------------------------------------------------

    \334\ Financial statements disclosure requirements for Part F/S 
of Form 1-A are discussed in Section II.C.3.b(2)(c). below.
---------------------------------------------------------------------------

     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);
     Table of Contents (Item 2);
     The most significant factors that make the offering 
speculative or substantially risky (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 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 
interim periods, if required; 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 (or since 
inception, whichever is shorter), the plan of operations for the 12 
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);
     Group-level executive compensation disclosure for the most 
recent fiscal year for the three highest paid executive officers or 
directors with Tier 2 requiring individual disclosure of the three 
highest paid executive officers or directors (Item 11: Compensation of 
Directors and Executive 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); and
     Any events that would have triggered disqualification of 
the offering under Rule 262 if the issuer could not

[[Page 21829]]

rely on the provisions in Rule 262(b)(1).\335\
---------------------------------------------------------------------------

    \335\ See discussion of the final disqualification provisions in 
Section II.G. below. The final rules require issuers to provide this 
``bad actor'' disclosure even if it elects to follow the Part I of 
Form S-1 disclosure format.
---------------------------------------------------------------------------

    The final rules eliminate Model A as a disclosure format for 
Regulation A offerings, as proposed. While some commenters suggested 
that the Commission should preserve Model A as an additional disclosure 
format for Part II of Form 1-A or update existing Model A with NASAA's 
more recent Form U-7, we are not persuaded that a question-and-answer 
format should be retained in the final rules. As we noted in the 
Proposing Release, the Model A disclosure format has historically been 
used less frequently, and resulted in less-uniform disclosure and a 
longer time to qualification than the Model B disclosure format.\336\ 
We do not believe that the use of Form U-7, which is largely similar to 
Model A and is also in a question-and-answer format, will alter this 
result. While the question-and-answer disclosure format does provide 
issuers with additional flexibility, we believe that the Offering 
Circular disclosure format (formerly called Model B) and Part I of 
Forms S-1 or S-11 provide issuers with sufficient flexibility in 
choosing their disclosure format without any of the potential delays or 
uniform disclosure issues associated with Model A, either currently or 
even if it is updated with Form U-7. We are further concerned that a 
question-and-answer format may not best serve the interests of 
investors in Regulation A offerings by providing them with less-uniform 
disclosure in a potentially unfamiliar format. Additionally, we are 
concerned that a question-and-answer format may incorrectly lead 
issuers to believe that, despite the guidance contained in the form 
itself, less complete disclosure is required under this format, thereby 
causing unnecessary delays in the qualification process. Lastly, and 
particularly with respect to Tier 2 offerings, we do not believe that a 
question-and-answer format is appropriate for issuers and investors in 
larger-sized offerings that generally benefit from disclosure that is 
comparable between offerings in format and information disclosed. For 
similar reasons, we do not believe that this format is appropriate in 
offerings of any size by issuers that seek to foster potential trading 
in the secondary markets.\337\
---------------------------------------------------------------------------

    \336\ See Proposing Release, at Section II.C.3.
    \337\ See Section II.E. below for a discussion of the final 
rules for ongoing reporting.
---------------------------------------------------------------------------

    As proposed, the final rules will require issuers to provide 
disclosure in Part II of Form 1-A that follows the Offering Circular or 
Part I of Form S-1 disclosure format. Additionally, we agree with 
commenters that certain additional disclosure requirements may be 
appropriate for offerings by REITs and similar issuers. The final 
rules, therefore, also permit issuers to follow, in addition to the 
Offering Circular and Part I of Form S-1 formats, the form disclosure 
requirements of Part I of Form S-11.\338\ An issuer may, however, only 
use Part I of Form S-11 if the securities are eligible to be registered 
on that form. As proposed and adopted with respect to disclosure under 
Part I of Form S-1, issuers following Part I of Form S-11 may follow 
smaller reporting company narrative disclosure requirements if they 
meet the definition of that term in Securities Act Rule 405.\339\
---------------------------------------------------------------------------

    \338\ As proposed, issuers must choose one format to follow for 
the offering circular and may not combine items from different 
formats. See General Instruction II to proposed and final Form 1-A. 
In order to avoid confusion and to facilitate the review of offering 
circulars by investors and the Commission's staff, the final rules 
will also require issuers to indicate on the offering circular cover 
page which format they are following. See Part II(a)(1) of Form 1-A.
    \339\ 17 CFR 230.405.
---------------------------------------------------------------------------

    Contrary to the suggestions of some commenters, we are not adopting 
rules that would limit the number of risk factors disclosed. While we 
appreciate the concern that certain issuers and their advisors may take 
an overly cautious approach to the application of our disclosure 
requirements resulting in numerous risk disclosures, the decision as to 
the appropriate mix of information that should be disclosed to 
investors must be based on the particular facts and circumstances of 
each company. We do not believe that a limit on risk factor disclosure 
is an appropriate substitute for the judgments of issuers and their 
advisors. A form-based limitation on the number of risk factors, beyond 
the guidance in Item 3 of Part II, could lead to incomplete disclosure 
that may place investors at a higher risk of potential loss and issuers 
at a higher risk for potential litigation if it results in appropriate 
risk factors being excluded.
    Further, we believe that certain other commenter concerns and 
suggestions as to specific narrative disclosures are already 
appropriately addressed by the final rules. For example, one commenter 
suggested that we require disclosure of the names of those holding more 
than 20% beneficial ownership of the issuer and a description of the 
issuer's ownership and capital structure, including descriptions of the 
exercise of rights of principal shareholders.\340\ The final rules 
substantially address these topics. Item 12 of the Offering Circular, 
as proposed and adopted, requires disclosure relating to more than 10% 
beneficial ownership and Item 14, which is adopted as proposed, 
requires disclosure of the terms of all classes of outstanding capital 
stock.
---------------------------------------------------------------------------

    \340\ CFA Institute Letter.
---------------------------------------------------------------------------

    As adopted, the Offering Circular includes disclosure based on 
disclosure guidelines set forth in the Securities Act Industry Guides 
as well as guidance applicable to limited partnerships and limited 
liability companies.\341\ As suggested by commenters,\342\ in order to 
create more flexibility in disclosure matters for smaller issuers, we 
are adding a materiality threshold for disclosure as it relates to time 
and dollar expenditures on research and development.\343\ Additionally, 
the final rules require issuers to provide financial statements, which 
in the case of Tier 2 offerings must be audited,\344\ as well as a 
section on management's discussion and analysis (MD&A) of the issuer's 
liquidity, capital resources, and results of operations.\345\ We are 
amending the MD&A disclosure requirements in Item 9 to align more 
closely with the language in Regulation S-K that applies to domestic 
registrants \346\ and smaller reporting companies.\347\ Consistency 
with Regulation S-K in this regard may assist companies with compliance 
with the rules for registered offerings to the extent Tier 2 issuers 
eventually become Exchange Act reporting companies, while also making 
sure that Regulation A issuers do not have a greater disclosure 
obligation than registered

[[Page 21830]]

domestic issuers.\348\ Further, consistent with the proposed rules, 
issuers that have not generated revenue from operations during each of 
the three fiscal years immediately before the filing of the offering 
statement (or since inception, whichever is shorter) will be required 
to describe their plan of operations for the 12 months following 
qualification of the offering statement.\349\ For companies that have 
been in existence for less than three years, the final rules clarify 
that this disclosure requirement applies to them since inception.\350\
---------------------------------------------------------------------------

    \341\ See Item 7(c)-(d) of Offering Circular, Part II of Form 1-
A ; see also Rel. No. 33-6900 (June 17, 1991) [56 FR 28979] (setting 
forth the Commission's view on the disclosure requirements for 
limited partnerships).
    \342\ CFIRA Letter 1; MoFo Letter; WR Hambrecht + Co Letter.
    \343\ Item 7(a)(1)(iii) of Offering Circular, Part II of Form 1-
A.
    \344\ See discussion in Section II.C.3.b(2)(c). below.
    \345\ See Item 9 of Offering Circular, Part II of Form 1-A.
    \346\ Item 9(b)(1) of Offering Circular, Part II of proposed 
Form 1-A is amended to track more closely the language and 
requirements of domestic issuers, as opposed to foreign private 
issuers. As proposed, the language more closely followed the 
requirements contained in Form 20-F for foreign private issuers.
    \347\ We are eliminating proposed Item 9(b)(2)-(3) of Offering 
Circular, Part II of Form 1-A. As proposed, these disclosures would 
have increased the disclosure obligations of Regulation A issuers in 
comparison to those required of smaller reporting companies under 
Item 305 of Regulation S-K. 17 CFR 229.305.
    \348\ See also discussion of the final rules for simplifying 
Exchange Act registration of Tier 2 issuers in Section II.E.3.c. 
below.
    \349\ Item 9(c) of Offering Circular, Part II of Form 1-A.
    \350\ Id.
---------------------------------------------------------------------------

    The changes to the Offering Circular format adopted today will 
result in Offering Circular disclosure, particularly for Tier 2 
offerings, more akin to what is required of smaller reporting companies 
in a prospectus for a registered offering. For example, the final rules 
require issuers in both Tier 1 and Tier 2 offerings to disclose 
beneficial ownership of their voting securities, as opposed to record 
ownership of voting and non-voting securities.\351\ With respect to 
transactions with related persons, promoters, and certain control 
persons in Tier 2 offerings, issuers will no longer be required to 
disclose transactions in excess of $50,000 in the prior two years (or 
similar transactions currently contemplated), but rather must 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.\352\ We originally proposed to apply this 
threshold to Tier 1 offerings also, but believe that the 1% of average 
total assets threshold could result in a lower disclosure threshold for 
smaller issuers than was otherwise required of such issuers under the 
existing rules. The final rules therefore preserve the related party 
transaction disclosure requirements of Regulation A, as they existed 
before the adoption of final rules today, for Tier 1 offerings so that 
issuers in such offerings are only required to disclose such 
transactions in excess of $50,000 in the prior two years (or similar 
transactions currently contemplated).\353\
---------------------------------------------------------------------------

    \351\ Item 12 of Offering Circular, Part II of Form 1-A.
    \352\ Item 13 of Offering Circular, Part II of Form 1-A. As 
adopted, Tier 2 issuers that have more than $5 million in average 
total assets at year end for the last two completed fiscal years 
would be required to disclose related party transactions at a higher 
threshold (i.e., 1% or more) than was previously required under 
Regulation A, which required the disclosure of transactions in 
excess of $50,000 in the prior two years.
    \353\ Id.
---------------------------------------------------------------------------

    In addition to preserving the related party transaction disclosure 
threshold for Tier 1 offerings, we are adopting a change applicable to 
Tier 1 that will provide an additional scaled disclosure option for 
issuers in the Offering Circular. This change is consistent with the 
general views of a number of commenters that urged the Commission to 
consider additional potential scaling for smaller issuers generally and 
Tier 1 offerings in particular.\354\ The final rules alter the format 
of, but not the ultimate aggregate amount of information required to be 
disclosed in, the proposed executive compensation disclosure 
requirements for Tier 1 offerings. Instead of providing executive 
compensation data on an individual basis for the three highest paid 
officers or directors and on a group basis for all directors, as was 
proposed for both Tier 1 and Tier 2, issuers in Tier 1 offerings will 
instead be required to disclose only group-level compensation data as 
it applies to the three highest paid executives or directors and all 
directors as a collective group, including the number of persons 
comprising such group, covering the period of the issuer's last 
completed fiscal year.\355\ In this regard, the final rules for Tier 1 
offerings will continue to require the disclosure of important 
compensation data to investors, but on an aggregate, rather than 
individual, basis. The group-level disclosure format for the highest 
paid executives and all directors should help smaller issuers avoid 
some of the harm that could follow compensation disclosure of 
individual executives or directors to the market and competitors, 
especially when disclosure of such information would not necessarily be 
required in the context of a private placement or other exempt 
offering.\356\ Further, the additional requirement to disclose the 
total number of persons comprising any group for which group-level data 
is required to be disclosed will preserve the ability of investors in 
Tier 1 offerings to determine the average compensation paid to all 
persons within the group.\357\ Consistent with the suggestions of some 
commenters,\358\ we believe that this change to the final rules will 
assist smaller issuers with more appropriately tailored executive 
compensation disclosure requirements and will provide investors with 
useful information.
---------------------------------------------------------------------------

    \354\ See, e.g., Campbell Letter; MoFo Letter.
    \355\ See Item 11 of Offering Circular, Part II of Form 1-A. The 
number of persons comprising the director-level group data is also 
required of issuers providing compensation data under Tier 2.
    \356\ For example, there are no rule-based disclosure 
requirements for private placements pursuant to Rule 506 of 
Regulation D, 17 CFR 230.500 et seq., when the issuer only sells to 
accredited investors. Contrary to the requirements of Regulation D, 
we believe mandated compensation (and other) disclosure is 
appropriate in the context of a public offering under Regulation A. 
Additionally, however, we believe that the final disclosure rules 
for such information are appropriately tailored to provide 
information to investors.
    \357\ This requirement is a change to the disclosure 
requirements of group-level data in both Tiers. Although this 
information would have been ascertainable under Tier 2 by comparing 
the group-level disclosure of director compensation to the number of 
directors disclosed pursuant to Item 10 of the Offering Circular, we 
believe the change will facilitate investors' calculations of 
average director compensation without significantly increasing the 
burden on Tier 2 issuers.
    \358\ Campbell Letter; MoFo Letter.
---------------------------------------------------------------------------

    We do not, however, believe that further scaling of smaller 
issuers' MD&A is necessary under the final rules. As we noted in the 
Proposing Release, while the final rules provide issuers with more 
detailed instructions on MD&A disclosure, similar disclosure is already 
called for under existing requirements.\359\ The final MD&A 
requirements clarify existing requirements and will likely save issuers 
time by providing more express guidance regarding the type of 
information and analysis that should be included. We believe the 
clearer requirements will lead to improved MD&A disclosure, which will 
provide investors with better visibility into management's perspective 
on the issuer's financial condition and operations. The final 
provisions for MD&A disclosure in the Offering Circular, however, are 
not as extensive as those required under Item 303 of Regulation S-
K.\360\ As proposed, the final Offering Circular format includes 
detailed guidance and requirements similar to Item 303 with respect to 
liquidity, capital resources, and results of operations, including the 
most significant trend information,\361\ but does not separately call 
for disclosure of off-balance sheet arrangements or a table of 
contractual obligations.\362\ Similar to

[[Page 21831]]

smaller reporting companies in registered offerings, Regulation A 
issuers are required to disclose information about the issuer's results 
of operations for the two most recently completed fiscal years and 
interim periods, when applicable.\363\
---------------------------------------------------------------------------

    \359\ 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.
    \360\ 17 CFR 229.303.
    \361\ 17 CFR 303(a)(1)-(3). Cf. Form 20-F, at Item 5.
    \362\ An issuer may, however, be required to disclose such 
information during the course of the qualification process, if 
material to an understanding of the issuer's financial condition.
    \363\ When management's discussion and analysis of the financial 
condition and results of operations is provided for interim period 
financial statements, any material change in financial condition 
from the end of the preceding fiscal year to the date of the most 
recent interim balance sheet should be discussed. Also, any material 
changes in results of operations with respect to the most recent 
fiscal year-to-date period for which an income statement is provided 
and the corresponding year-to-date period of the preceding fiscal 
year shall be discussed. See Instruction 3 to Item 9(a) of the 
Offering Circular, Part II of Form 1-A.
---------------------------------------------------------------------------

    Except as noted above, the updates to the Offering Circular 
disclosure requirements will not result in an overall increase in an 
issuer's disclosure obligations. For example, as mentioned above, 
certain issuers will have a higher threshold for reporting related 
party transactions than would have previously been required under 
Regulation A. Additionally, Tier 1 issuers (which will likely be 
smaller companies) will, in comparison to the proposed rules, benefit 
from further scaling of related party transactions and compensation-
related disclosures. Further, as proposed, all issuers will 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.\364\ While we disagree with commenters that 
suggested we should expand disclosure provisions related to 
dilution,\365\ the final rules, which reduce the disclosure time period 
from three years to one year, are consistent with their view that the 
disclosure of this information should not depend on when such shares 
were acquired. We do not believe that information regarding dilution 
covering more than the prior year is necessary for the smaller issuers 
likely to conduct Regulation A offerings, nor do we believe that a 
reduction in the required disclosure from three years to one year, as 
proposed and adopted, will negatively affect investor protection. 
Additionally, the final provisions for MD&A disclosure clarify existing 
requirements and should benefit issuers by providing more express 
guidance regarding the type of information and analysis that should be 
included, including instructions about disclosure of operating results. 
We believe that these clarifications should also lead to improved MD&A 
disclosure, which will provide investors with better visibility into 
management's perspective on the issuer's financial condition and 
results of operations. Investors, particularly in Tier 2 offerings, 
will also benefit from disclosure that is more consistent across 
issuers in both registered offerings and Regulation A offerings.
---------------------------------------------------------------------------

    \364\ See Item 4 (Dilution) of the Offering Circular, Part II of 
Form 1-A.
    \365\ See NASAA Letter 2, at fn. 50; WDFI Letter, at 9.
---------------------------------------------------------------------------

    We are making one change to the disclosure requirements of Item 6 
(Use of Proceeds) in the final rules. As proposed, issuers were 
required to disclose if any material amount of other funds are to be 
used in conjunction with the proceeds raised in the offering. If so, an 
issuer would be required to state the amounts and sources of such other 
funds. The final rules include these proposed provisions, but add a 
requirement that the issuer further provide disclosure about whether 
such other funds are firm or contingent. While we did not receive any 
comment specifically addressing this issue, where applicable, this type 
of information would generally be required to be disclosed as part of 
the staff review and comment process before qualification. We believe 
an express requirement in the final rules will ultimately save issuers 
time in the qualification process and therefore are including language 
addressing this issue in the final rules.\366\
---------------------------------------------------------------------------

    \366\ See Instruction 5 to Item 6 (Use of Proceeds) of Part II 
of Form 1-A.
---------------------------------------------------------------------------

    For clarity, we are moving the requirements to furnish certain 
supplemental information found in Item 7 (Business Description) of Part 
II to Form 1-A to General Instruction IV (Supplemental Information) to 
Form 1-A, where similar requirements are found. We believe that 
providing these instructions in one place will help issuers understand 
and comply with the process for furnishing supplemental information to 
the Commission. The process for furnishing supplemental information to 
the Commission pursuant to Form 1-A is similar to the treatment of such 
information in registered offerings.\367\ Additionally, since we 
believe it is important for the Commission to be aware of the 
existence--rather than the non-existence--of such reports, the final 
rules no longer require an issuer to inform the Commission if no such 
report has been prepared. Item 7 is further revised to clarify that 
issuers must only disclose distinctive or special characteristics of 
the issuer's operation or industry that are reasonably likely to have a 
material impact on its future financial performance.\368\
---------------------------------------------------------------------------

    \367\ In this regard, we have also clarified in General 
Instruction IV that supplemental information provided to the 
Commission may be returned in certain circumstances and will be 
handled by the Commission in a similar manner to supplemental 
information provided in connection with registered offerings.
    \368\ The language in proposed Item 7 to Part II of Form 1-A 
indicated that issuers had to disclose characteristics that ``may'' 
have a material impact on its future financial performance. We 
believe this clarifying change in the final rules will help 
facilitate compliance by smaller issuers.
---------------------------------------------------------------------------

    The final rules also clarify in Item 5 (Plan of Distribution and 
Selling Securityholders) the calculation of selling securityholder 
ownership prior to an offering, which we believe will facilitate 
compliance with, and calculations pursuant to, this requirement. 
Additionally, in order to avoid potential confusion as to the scope of 
Items 11 and 13 to Part II of Form 1-A, the final rules make clear that 
issuers are required to provide disclosure for ``executive officers'' 
rather than ``officers.'' \369\ Contrary to the suggestion of one 
commenter,\370\ we do not believe that requiring disclosure regarding 
the existence of a code of ethics and corporate governance principles 
should be a required disclosure item for the types of issuers likely to 
conduct Regulation A offerings. While nothing in Part II of Form 1-A 
would prevent an issuer from providing more disclosure than is 
otherwise required in the form itself, we do not believe it would be 
appropriate to mandate this type of disclosure for all issuers because 
we anticipate that issuers of Regulation A securities will generally be 
smaller companies with less complex organizational structures.\371\ We 
further believe that the disclosure requirements of Part II of Form 1-A 
will provide investors with the information they need to adequately 
evaluate an issuer's business and securities.
---------------------------------------------------------------------------

    \369\ The language in proposed Items 11 and 13 to Part II of 
Form 1-A indicated that issuers had to disclose information 
regarding directors and officers. We believe the clarifying language 
will help smaller issuers comply with the final rules.
    \370\ Ladd Letter 2 (referring to PCAOB AU 325 and 9325).
    \371\ See fn. 93 above and Section III.C.3. below.
---------------------------------------------------------------------------

    As proposed, the final rules permit issuers to incorporate by 
reference into Part II of Form 1-A certain items previously submitted 
or filed on EDGAR. In a change from the proposed rules, issuers will be 
permitted to incorporate by reference any documents publicly submitted 
or filed on EDGAR, as opposed to being limited to documents submitted 
or filed pursuant to Regulation A. We believe that this

[[Page 21832]]

change will continue to facilitate the provision of required 
information to investors, while taking a consistent approach to 
information previously provided to the Commission and publicly 
available on EDGAR. Issuers following the Offering Circular disclosure 
model will be permitted to incorporate by reference into Items 2 
through 14; issuers following the narrative disclosure in Part I of 
Form S-1 will be permitted to incorporate by reference into Items 3 
through 11 (other than Item 11(e)) of Part I of Form S-1; issuers 
following the narrative disclosure in Part I of Form S-11 will be 
permitted to incorporate by reference into Items 3 through 26, Item 28, 
and Item 30 of Part I of Form S-11.\372\ The final rules require 
issuers to describe the information incorporated by reference, and 
include a separate hyperlink to the relevant document on EDGAR, which 
need not remain active after the filing of the related offering 
statement. Additionally, Form 1-A encourages issuers to cross-reference 
items within the form, where applicable.\373\ Further, in order to 
avoid incorporation by reference to stale information without requiring 
the latest version of the document to be filed, Form 1-A indicates 
that, if any substantive modification has occurred in the text of any 
document incorporated by reference since such document was filed, the 
issuer must file with the reference a statement containing the text and 
date of such modification.\374\
---------------------------------------------------------------------------

    \372\ See General Instruction III to Form 1-A. Since, as 
proposed, the financial statements required by Part F/S would apply 
to those following the Form S-1 format, rather than Item 11(e), we 
have removed the reference to that item in General Instruction III 
for clarity. Although, as proposed, Items 11(f) and (g) are also not 
required for those following the Form S-1 format, we continue to 
specifically allow for cross-referencing and incorporation by 
reference in those items for those voluntarily choosing to provide 
such disclosure. As with Model B, the item numbers in the Offering 
Circular format of Part II of Form 1-A and Part I of Form S-1 do not 
align.
    \373\ Id. Issuers may, for example, add a cross-reference to 
disclosure found in the financial statements. However, they may not 
incorporate by reference or add a cross-reference within the 
financial statements to disclosures found elsewhere. See General 
Instruction III to Form 1-A, which does not allow for incorporation 
by reference in Part F/S.
    \374\ Cf. Securities Act Rule 411(c) and Exchange Act Rule 12b-
32 (providing a similar requirement when incorporating exhibits by 
reference in filings under the Securities Act and Exchange Act).
---------------------------------------------------------------------------

(2) Financial Statements
(a) Proposed Rules for Financial Statements
    Part F/S of Form 1-A currently requires issuers \375\ in Regulation 
A offerings to provide the following financial statements prepared in 
accordance with U.S. GAAP: \376\
---------------------------------------------------------------------------

    \375\ The requirements also apply to the issuer's predecessors 
or any business to which the issuer is a successor.
    \376\ See Form 1-A, Part F/S (2014).
---------------------------------------------------------------------------

     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 or to be 
acquired businesses; and
     pro forma information relating to significant business 
combinations.
The required financial statements may be unaudited unless the issuer 
has already obtained an audit for another purpose.\377\
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    \377\ The issuer would be considered to have audited financial 
statements if the qualifications and reports of the auditor meet the 
requirements of Article 2 of Regulation S-X (17 CFR 210.1 et seq.) 
and the audit was conducted in accordance with U.S. GAAS or the 
standards of the PCAOB. The auditor is not required to be registered 
with the PCAOB.

    We proposed to generally maintain the existing financial statement 
requirements of current Part F/S of Form 1-A for Tier 1 offerings, 
while requiring Tier 2 issuers to file audited financial 
statements.\378\ We proposed 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. As proposed, financial statements 
for U.S.-domiciled issuers would be required to be prepared in 
accordance with U.S. GAAP. Additionally, however, we proposed 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).\379\
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    \378\ See paragraph (c) of Part F/S of proposed Form 1-A.
    \379\ If the proposed 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.
---------------------------------------------------------------------------

    As proposed, issuers conducting Tier 1 offerings would be required 
to follow the requirements for the form and content of their financial 
statements set out in Part F/S, rather than the requirements in 
Regulation S-X. In certain less common circumstances, however, such as 
for an acquired business or subsidiary guarantors, Part F/S would 
direct issuers conducting Tier 1 offerings to comply with certain 
portions of Regulation S-X, which provides guidance on the financial 
statements required for entities other than the issuer.\380\
---------------------------------------------------------------------------

    \380\ We proposed 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 
proposed 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). 
As proposed, 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, the proposed rules would require issuers 
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.\381\
---------------------------------------------------------------------------

    \381\ Tier 2 issuers would, however, follow paragraph (a)(3) of 
Part F/S of proposed Form 1-A with respect to the age of the 
financial statements and the periods to be presented. In Tier 2 
offerings, the form and contents of financial statements for other 
entities follow the requirements of Article 8 of Regulation S-X.
---------------------------------------------------------------------------

    As proposed, issuers conducting Tier 2 offerings would be required 
to have their financial statements audited. As with Tier 1 offerings, 
the auditor of financial statements would need to 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.\382\ 
Unlike Tier 1

[[Page 21833]]

issuers, issuers conducting Tier 2 offerings would be required to 
provide financial statements that are audited in accordance with the 
standards issued by the PCAOB.
---------------------------------------------------------------------------

    \382\ See Part F/S of proposed Form 1-A (referencing Article 2 
of Regulation S-X, 17 CFR 210.2-01 et seq.).
---------------------------------------------------------------------------

    Additionally, we proposed to update the Form 1-A financial 
statement requirements to be consistent with the proposed timetable for 
ongoing reporting.\383\ Under existing Regulation A, 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 approved by the Commission upon a showing of good 
cause.\384\ In practice, issuers often receive a six-month 
accommodation. 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.\385\
---------------------------------------------------------------------------

    \383\ The rules for ongoing reporting are discussed in Section 
II.E. below.
    \384\ See Form 1-A, Part F/S (2014).
    \385\ Id.
---------------------------------------------------------------------------

    We proposed 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.\386\ We also 
proposed 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.\387\ 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.\388\ 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.\389\ If interim 
financial statements are required, they would be required to cover a 
period of at least six months.\390\ In the Proposing Release, we noted 
that requiring issuers to file 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.\391\ We proposed 
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.\392\ While 
not proposed, we additionally solicited comment on whether Tier 2 
issuers should be required to submit financial statements in 
interactive data format using the eXtensible Business Reporting 
Language (XBRL).
---------------------------------------------------------------------------

    \386\ 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.
    \387\ Form 1-A currently 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.
    \388\ See paragraph (a)(3)(i) to Part F/S of proposed Form 1-A.
    \389\ Id.
    \390\ See paragraph (a)(3)(iv) to Part F/S of proposed Form 1-A.
    \391\ See discussion in Section II.E.1. below.
    \392\ See paragraph (a)(3)(i) to Part F/S of proposed Form 1-A.
---------------------------------------------------------------------------

(b) Comments on Proposed Rules
    We received numerous detailed suggestions from commenters on our 
proposed financial statement requirements for Part F/S of Form 1-A. 
Commenters were generally supportive of the proposed rules, but also 
raised concerns as to the effect some of the proposed requirements for 
audits in Tier 2 offerings could have on issuers and recommended 
clarifying revisions that would help to make the financial statements 
more consistent in some respects with those required in registered 
offerings, while also eliminating potentially confusing or inconsistent 
terminology.
    Commenters generally supported the proposed increase to two years 
of balance sheets.\393\ One commenter noted that the Commission's 
proposal to require two years of balance sheets was appropriate, 
particularly in light of the existing requirement to provide statements 
of income, cash flows and stockholders' equity for two years.\394\ 
Another commenter, however, argued against two years of balance sheets 
for Tier 1 issuers instead of the one year required under existing 
Regulation A.\395\
---------------------------------------------------------------------------

    \393\ See, e.g., CFA Institute Letter; ABA BLS Letter.
    \394\ ABA BLS Letter (noting that in light of the existing 
requirements, the proposed change did not seem unduly burdensome).
    \395\ Campbell Letter.
---------------------------------------------------------------------------

    While commenters generally approved of the proposed rules not 
requiring audits for Tier 1 issuers,\396\ many recommended making 
changes to the proposed auditing requirements for the financial 
statements included in an offering.\397\ One commenter recommended not 
requiring audited financial statements until after the first year of 
operations as a ``public startup company'' or not at all for companies 
that are pre-revenue or that have paid-in capital, assets and revenues 
below a specified threshold.\398\ Many commenters recommended allowing 
Tier 1 issuers to designate financial statements as ``audited'' if the 
auditor was only independent in accordance with the rules of the AICPA 
and not in accordance with the Commission's auditor independence 
rules.\399\ These commenters noted that the proposed requirements for 
financial statements only to qualify as ``audited'' if the auditor 
complies with the independence standards of Article 2 of Regulation S-
X, as opposed to the independence standards of the AICPA, may increase 
costs to smaller issuers due to the increased likelihood that an issuer 
would need to have their financial statements audited a second time by 
an auditor who was independent under Rule 2-01 of Regulation S-X. One 
commenter requested clarification of whether a Tier 1 issuer could 
voluntarily provide an audit opinion on its financial statements that 
was obtained for other purposes if the auditor complied with U.S. GAAS, 
including AICPA independence standards, but not with the Commission's 
independence rules.\400\ Several commenters recommended requiring Tier 
1 issuers that provide unaudited financial statements to label them as 
unaudited.\401\
---------------------------------------------------------------------------

    \396\ See, e.g., CFA Institute Letter; ABA BLS Letter; Campbell 
Letter.
    \397\ ABA BLS Letter; BDO Letter; Canaccord Letter; CAQ Letter; 
CFA Letter; CFIRA Letter 2; Deloitte Letter; E&Y Letter; Letter from 
KPMG LLP, March 24, 2014 (``KPMG Letter''); Letter from McGladrey 
LLP (``McGladrey Letter''); MoFo Letter; WOC Letter; WR Hambrecht + 
Co Letter.
    \398\ Letter from Jason Coombs, Co-Founder and CEO, Public 
Startup Company, Inc., March 25, 2014 (``Public Startup Co. Letter 
3'') (suggesting three tiers, where at least the first two would not 
require audited financial statements); Public Startup Co. Letter 6.
    \399\ BDO Letter; CAQ Letter; Deloitte Letter; E&Y Letter; KPMG 
Letter; McGladrey Letter.
    \400\ CAQ Letter.
    \401\ CAQ Letter (recommending that such issuers disclose that 
the financial statements have not been subject to an audit or review 
by an independent accountant); E&Y Letter; KPMG Letter.
---------------------------------------------------------------------------

    Many commenters recommended allowing financial statements in Tier 2 
offerings to be audited in accordance

[[Page 21834]]

with either PCAOB standards or U.S. GAAS.\402\ One commenter limited 
its recommendation to smaller Tier 2 issuers and conditioned this 
recommendation on the Commission not altering the requirement that 
auditors be independent under Rule 2-01 of Regulation S-X.\403\ This 
commenter also recommended conditioning the ability to follow U.S. GAAS 
under Tier 2 on the issuer's showing of undue cost and impracticability 
in the offering statement and also limiting this relief to the issuer's 
initial Tier 2 offering. One commenter noted that because Regulation A 
issuers are not ``issuers'' (as defined in Section 2(a)(7) of the 
Sarbanes-Oxley Act of 2002),\404\ when the audit is performed in 
accordance with PCAOB standards, AICPA rules would require the audit to 
be compliant with both AICPA and PCAOB standards and the auditor's 
report would have to reference both AICPA and PCAOB standards. This 
commenter also noted, however, that given recent changes to the 
auditor's report under AICPA standards, it may not be possible for the 
auditor to be in compliance with both AICPA and PCAOB standards from a 
reporting perspective.\405\
---------------------------------------------------------------------------

    \402\ ABA BLS Letter; BDO Letter; Canaccord Letter; Deloitte 
Letter; E&Y Letter; KPMG Letter; McGladrey Letter; MoFo Letter; WR 
Hambrecht + Co Letter.
    \403\ ABA BLS Letter.
    \404\ 15 U.S.C. 7201(a) et seq.
    \405\ KPMG Letter.
---------------------------------------------------------------------------

    Additionally, two commenters expressed concern about potential 
confusion that could result from requiring PCAOB standards in Tier 2 
offerings, but not requiring PCAOB registration.\406\ One of these 
commenters recommended avoiding any potential confusion by allowing for 
audits under U.S. GAAS in Tier 2 offerings.\407\ Another commenter 
stated that the issue could be resolved by requiring either the use of 
PCAOB-registered auditors for Tier 2 offerings or appropriate 
disclosure of the auditor's PCAOB registration status, noting that the 
disclosure option would result in lower costs to the issuer and fewer 
instances in which an issuer would need to have its financial 
statements audited a second time under PCAOB standards.\408\
---------------------------------------------------------------------------

    \406\ BDO Letter; Deloitte Letter.
    \407\ Deloitte Letter.
    \408\ BDO Letter.
---------------------------------------------------------------------------

    One commenter asked the Commission to clarify issues relating to 
transition reporting for Tier 1 issuers that have previously conducted 
an offering pursuant to the exemption under Section 4(a)(6) and were 
required to file reviewed annual financial statements.\409\ Another 
commenter asked the Commission to clarify the application of the audit 
requirements applicable to Tier 1 issuers that have audited financial 
statements prepared for other purposes, in light of potentially 
contradictory references in proposed Form 1-A to the ``standards of the 
PCAOB'' and the PCAOB auditing standards.\410\ One commenter 
recommended not requiring audited financials under either Tier 1 or 
Tier 2 for ``small companies with limited revenues and assets.'' \411\ 
Another commenter raised concerns about allowing Tier 1 issuers to 
include financial statements audited using U.S. GAAS and not requiring 
that all audits be conducted by PCAOB-registered auditors.\412\
---------------------------------------------------------------------------

    \409\ E&Y Letter.
    \410\ CAQ Letter.
    \411\ WOC Letter.
    \412\ CFA Letter.
---------------------------------------------------------------------------

    Many commenters recommend making other changes to the financial 
statement requirements not directly related to audit requirements.\413\ 
A number of commenters suggested allowing companies to use alternatives 
under U.S. GAAP for non-public business entities when preparing their 
financial statements, since Regulation A issuers would otherwise be 
considered ``public business entities'' under FASB standards.\414\ 
These commenters were concerned about the need for issuers to have 
their financial statements prepared and audited a second time under 
U.S. GAAP applicable to public business entities, as discussed in 
greater detail below. One commenter did not address this issue with 
respect to Tier 1, but recommended allowing the smallest Tier 2 issuers 
to follow alternatives under U.S. GAAP applicable to non-public 
business entities.\415\ One commenter recommended allowing companies to 
include financial statements prepared in accordance with alternatives 
under U.S. GAAP for non-public business entities in offerings up to a 
specified minimum, suggesting $10 million or $20 million.\416\ Another 
commenter recommended explicitly stating that Regulation A issuers are 
subject to ``public business entity'' requirements if the final rules 
do not provide for the use of, or a non-costly transition from, 
financial statements based on alternatives under U.S. GAAP for non-
public business entities.\417\ One commenter limited its recommendation 
with respect to the applicability of alternatives under U.S. GAAP for 
non-public business entities to Tier 1 issuers and to entities whose 
financial statements are required to be included in offering statements 
relying on Tier 1.\418\ Another commenter noted that significant 
acquired businesses will qualify as ``public business entities'' 
because their financial statements are filed with the Commission.\419\ 
As a result, financial statements of those businesses would also need 
to be revised, and an issuer would potentially need to have their 
financial statements prepared and audited a second time under U.S. GAAP 
applicable to public business entities.
---------------------------------------------------------------------------

    \413\ ABA BLS Letter; BDO Letter; Letter from Frederick D. 
Lipman, Blank Rome LLP, March 17, 2014 (``Blank Rome Letter''); 
Canaccord Letter; CAQ Letter; CFIRA Letter 1; Deloitte Letter; E&Y 
Letter; KPMG Letter; Karr Tuttle Letter; McGladrey Letter; MoFo 
Letter; PwC Letter; WR Hambrecht + Co Letter.
    \414\ ABA BLS Letter; Canaccord Letter; CAQ Letter; CFIRA Letter 
1; Deloitte Letter; E&Y Letter; KPMG Letter; McGladrey Letter; MoFo 
Letter; WR Hambrecht + Co Letter.
    \415\ ABA BLS Letter.
    \416\ McGladrey Letter.
    \417\ KPMG Letter.
    \418\ E&Y Letter.
    \419\ Deloitte Letter.
---------------------------------------------------------------------------

    Several commenters recommended allowing issuers under Regulation A 
to defer adopting new or revised accounting standards effective for 
public companies if non-public business entities have a delayed 
effective date (similar to accommodations for emerging growth companies 
under Section 102(b) of the JOBS Act).\420\ Two commenters recommended 
either clarifying how the disclosure requirements for pro forma 
financial information in Part F/S for Tier 1 issuers differ from Rule 
8-05 of Regulation S-X or requiring such Tier 1 issuers to follow Rule 
8-05.\421\ One commenter recommended allowing companies formed within 
nine months of the filing date of the offering statement to provide 
only a discussion of their financial condition and operations since 
inception, rather than financial statements as of a date within nine 
months of the date of filing.\422\ This commenter further recommended 
aligning the financial statement updating requirements with the timing 
of periodic reports (e.g., allowing for 120 days before year end 
financial statements are required in the offering statement, rather 
than 90 days).\423\ This commenter also recommended that the Commission 
consider additional scaling for Regulation A offerings in the 
requirements concerning the financial statements of: Acquired or to-be-

[[Page 21835]]

acquired businesses; guarantors of issuers of guaranteed securities; 
and, affiliates that collateralize an issuance.\424\
---------------------------------------------------------------------------

    \420\ CAQ Letter; Deloitte Letter; E&Y Letter; KPMG Letter.
    \421\ CAQ Letter; PwC Letter.
    \422\ E&Y Letter.
    \423\ Id.
    \424\ Id.
---------------------------------------------------------------------------

    Another commenter recommended that Tier 2 issuers not be subject to 
Rule 8-04(b)(3) of Regulation S-X when the to-be-acquired business has 
significant loss operations.\425\ This commenter recommended at least 
not applying Rule 8-04(b)(3) in situations where companies intend to 
eliminate the losses by dropping certain products or service lines of 
business that produced the loss. Another commenter recommended 
clarifying whether financial statements should also be dated within 
nine months of the qualification date of the offering statement.\426\
---------------------------------------------------------------------------

    \425\ Blank Rome Letter.
    \426\ E&Y Letter (referring to paragraphs (a)(3)(i) and (b)(2) 
of Part F/S of proposed Form 1-A).
---------------------------------------------------------------------------

    One commenter made a number of specific recommendations that we 
clarify language in particular paragraphs of the proposed requirements 
for financial statements in Part F/S of Form 1-A.\427\ A different 
commenter indicated that proposed Form 1-A seemed to require issuers to 
disclose ``selected financial information'' and objected to any such 
requirement as being more onerous than the requirements otherwise 
applicable to smaller reporting companies.\428\
---------------------------------------------------------------------------

    \427\ E&Y Letter, Appendix B.
    \428\ CAQ Letter. See Section II.C.3.a. above.
---------------------------------------------------------------------------

    Several commenters specifically supported allowing Canadian issuers 
to prepare their financial statements in accordance with IFRS as issued 
by the IASB, as proposed.\429\ More generally, many commenters 
recommended allowing foreign issuers to use IFRS as issued by the IASB 
to prepare their financial statements.\430\ One commenter recommended 
allowing U.S. companies to use IFRS when conducting offerings in 
Canada.\431\ This comment was made within the context of providing U.S. 
companies the ability to list on a Canadian exchange without being 
subject to resale restrictions imposed by Regulation S. Three 
commenters specifically opposed adding an XBRL requirement.\432\
---------------------------------------------------------------------------

    \429\ ABA BLS Letter; Canaccord Letter; MoFo Letter; NASAA 
Letter 2; PwC Letter.
    \430\ ABA BLS Letter (although supporting excluding non-Canadian 
foreign companies); Andreessen/Cowen Letter; Canaccord Letter 
(stating generally that the Commission should clarify that companies 
may use IFRS); CAQ Letter; Deloitte Letter; PwC Letter.
    \431\ Karr Tuttle Letter.
    \432\ BIO Letter; MoFo Letter; U.S. Chamber of Commerce Letter.
---------------------------------------------------------------------------

(c) Final Rules for Financial Statements
    As discussed more fully below, we are adopting requirements for 
financial statements in Part F/S of Form 1-A with changes from the 
proposed rules that are designed to simplify and lower the cost of 
compliance for issuers, while maintaining important investor 
protections. As proposed, the final rules require Tier 1 and Tier 2 
issuers to file balance sheets and other required financial statements 
as of the two most recently completed fiscal year ends (or for such 
shorter time that they have been in existence). With the exception of 
the requirement to file two years of balance sheets, the final rules 
largely maintain the existing financial statement requirements of 
current Part F/S for Tier 1 offerings, while requiring Tier 2 issuers 
to file audited financial statements in Part F/S.
    Financial statements for U.S.-domiciled issuers will be required to 
be prepared in accordance with U.S. GAAP, as is currently the case. 
Canadian issuers, however, may 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).\433\
---------------------------------------------------------------------------

    \433\ 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 Form 1-A.
---------------------------------------------------------------------------

    Additionally, consistent with the suggestions of commenters and in 
order to be consistent with the treatment of emerging growth companies 
under Section 102(b)(1) of the JOBS Act, the final rules permit 
issuers, where applicable, to delay the implementation of new 
accounting standards to the extent such standards provide for delayed 
implementation by non-public business entities.\434\ In this regard, 
with respect to the delayed implementation of new or revised financial 
accounting standards, if the issuer chooses to take advantage of the 
extended transition period to the same extent that a ``non-issuer'' 
company is permitted to, the issuer:
---------------------------------------------------------------------------

    \434\ CAQ Letter; Deloitte Letter; E&Y Letter; KPMG Letter. See 
also Section 7(a)(2)(B) of the Securities Act, 15 U.S.C. 
77g(a)(2)(B), and Section 13(a) of the Exchange Act, 15 U.S.C. 
78m(a).
---------------------------------------------------------------------------

     Must disclose such choice at the time the issuer files the 
offering statement; and
     May not take advantage of the extended transition period 
with respect to some standards and not others, but must apply the same 
choice to all standards.\435\
---------------------------------------------------------------------------

    \435\ See paragraph (a)(3) of Part F/S of Form 1-A.
---------------------------------------------------------------------------

    However, issuers electing not to use this accommodation must forgo 
this accommodation for all financial accounting standards and may not 
elect to rely on this accommodation in any future filings.\436\
---------------------------------------------------------------------------

    \436\ Id.
---------------------------------------------------------------------------

    As proposed, the final rules require issuers conducting Tier 1 
offerings to 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.\437\ However, consistent with a comment 
received,\438\ in certain less common circumstances, such as for an 
acquired business or subsidiary guarantors, Part F/S directs issuers 
conducting Tier 1 offerings to certain portions of Regulation S-X that 
provide guidance on when financial statements for entities other than 
the issuer are required.\439\ In Tier 1 offerings the form and content 
of the financial statements for those other entities also follow the 
requirements set out in Part F/S. We believe this guidance will assist 
issuers with compliance with the general requirements for financial 
statement disclosure in these less common circumstances and is an 
appropriate change in the final rules. In an effort to reduce 
confusion, as suggested by commenters,\440\ the final rules also direct 
issuers to Rule 8-05 of Regulation S-X for pro forma information 
disclosure requirements. Additionally, the final rules require 
compliance with Rule 8-06 of Regulation S-X for real estate operations 
acquired because real estate companies and REITs are eligible issuers.
---------------------------------------------------------------------------

    \437\ See paragraph (b) of Part F/S of Form 1-A.
    \438\ E&Y Letter.
    \439\ We are updating 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 are also providing 
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), financial statements provided in connection with oil and gas 
producing activities (Rule 4-10 of Regulation S-X), pro forma 
financial information (Rule 8-05 of Regulation S-X) and income 
statements for real estate operations acquired or to be acquired 
(Rule 8-06 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 those financial 
statements for other purposes.
    \440\ CAQ Letter; PwC Letter.
---------------------------------------------------------------------------

    The final rules require Tier 2 issuers to follow the financial 
statement requirements of Article 8 of Regulation S-X, as if the issuer 
were a smaller reporting company, unless otherwise

[[Page 21836]]

noted in Part F/S.\441\ This requirement also includes any financial 
information required for Tier 1 offerings, as discussed above, such as 
acquired businesses required by Rule 8-04 and 8-05 of Regulation S-
X.\442\
---------------------------------------------------------------------------

    \441\ See paragraph (c) of Part F/S of Form 1-A.
    \442\ Tier 2 issuers would, however, follow paragraphs (c)(1) of 
Part F/S of Form 1-A with respect to the age of the financial 
statements and the periods to be presented. In Tier 2 offerings, the 
form and content of financial statements for other entities follow 
the requirement of Article 8 of Regulation S-X.
---------------------------------------------------------------------------

    As adopted, financial statements in a Tier 1 offering are not 
required to be audited. Consistent with the suggestions of 
commenters,\443\ and in order to avoid potential confusion as to the 
presentation of financial statements, issuers in Tier 1 offerings that 
do not provide audited financial statements must label their financial 
statements as unaudited. However, the final rules clarify 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. GAAS or the standards of the PCAOB, 
and the auditor followed the independence standards of either Rule 2-01 
of Regulation S-X or the independence standards of the AICPA, then 
those audited financial statements must be filed.\444\ We believe the 
requirement to file already available audited financial statements will 
benefit investors. The auditor need not be registered with the PCAOB. 
While audited financial statements are not generally required to be 
filed for Tier 1 offerings, allowing auditors to follow the 
independence standards of the AICPA or Rule 2-01 of Regulation S-X is 
consistent with the suggestions of most commenters and will provide 
smaller issuers that seek to submit ``audited'' financial statements in 
Tier 1 offerings with greater flexibility in satisfying the financial 
statement requirements.\445\ We agree that, when available, financial 
statements that satisfy the financial statement requirements and that 
have been audited by an auditor that meets the independence standards 
of the AICPA should be deemed ``audited'' for purposes of Tier 1 
offerings.
---------------------------------------------------------------------------

    \443\ CAQ Letter; E&Y Letter; KPMG Letter.
    \444\ See CAQ Letter (requesting clarification on this issue).
    \445\ While not a requirement, issuers in Tier 1 offerings may 
have independent business reasons why they seek to provide, or 
investors that may otherwise demand, audited financial statements.
---------------------------------------------------------------------------

    Issuers conducting Tier 2 offerings are, by contrast, required to 
have their financial statements audited. 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.\446\ In a change from the proposed rules, and consistent 
with the suggestions of commenters,\447\ the final rules require 
issuers conducting Tier 2 offerings to provide financial statements 
that are audited in accordance with either U.S. GAAS or the standards 
issued by the PCAOB.
---------------------------------------------------------------------------

    \446\ See paragraph (c)(1)(iii) of Part F/S of Form 1-A.
    \447\ ABA BLS Letter; BDO Letter; Canaccord Letter; Deloitte 
Letter; E&Y Letter; KPMG Letter; McGladrey Letter; MoFo Letter; WR 
Hambrecht + Co Letter.
---------------------------------------------------------------------------

    As noted above, one commenter indicated that, because Regulation A 
issuers are not ``issuers,'' as defined by Section 2(a)(7) of the 
Sarbanes-Oxley Act of 2002, AICPA rules would require the audit to be 
compliant with U.S. GAAS even if the auditor has conducted the audit in 
accordance with PCAOB standards. Staff of the Commission consulted with 
the AICPA on this issue and has been advised that an audit performed by 
its members of an issuer conducting an offering pursuant to Regulation 
A would be required to comply with U.S. GAAS in accordance with the 
AICPA's Code of Professional Conduct.\448\ As a result, an auditor for 
a Regulation A issuer who is conducting its audit in accordance with 
PCAOB standards would also be required to comply with U.S. GAAS, and 
the auditor would need to comply with the reporting requirements of 
both the AICPA standards and the PCAOB standards. As further noted by 
this commenter,\449\ there may be some question as to whether an 
auditor can currently comply with both sets of standards when issuing 
its auditor's report. Commission staff also consulted with the AICPA on 
this issue and has been informed that the AICPA will consider taking 
action to address this potential conflict so that an auditor's report 
would be able to comply with both sets of auditing standards.
---------------------------------------------------------------------------

    \448\ The AICPA Code of Professional Conduct is available at: 
https://pub.aicpa.org/codeofconduct/ethicsresources/et-cod.pdf.
    \449\ See KPMG Letter.
---------------------------------------------------------------------------

    Thus, requiring issuers in Tier 2 offerings to have their financial 
statements audited in accordance with PCAOB standards would have the 
effect of requiring issuers to comply with two sets of auditing 
standards and potentially result in audits for Tier 2 issuers being 
subject to additional incremental costs than would be required for 
registered offerings (which are only subject to PCAOB auditing 
standards). To avoid such a result, the final rules permit Tier 2 
issuers the option of following U.S. GAAS or the standards of the 
PCAOB.\450\
---------------------------------------------------------------------------

    \450\ As discussed above, however, compliance with PCAOB 
standards could also require compliance with U.S. GAAS.
---------------------------------------------------------------------------

    We believe that providing issuers with this option could help 
reduce the cost of required audits in Tier 2 offerings while 
maintaining appropriate safeguards for investors. We believe audits 
conducted in accordance with U.S. GAAS provide sufficient protection 
for investors in Regulation A offerings, especially in light of the 
requirement that auditors for Tier 2 offerings must be independent 
under Rule 2-01 of Regulation S-X. Moreover, we believe that the 
flexibility adopted in the final rules is more appropriately tailored 
for the different types of issuers likely to conduct Tier 2 offerings 
because it will not only eliminate the potential that existed under the 
proposed rules that some issuers would need to have their financial 
statements audited a second time under PCAOB standards, but also 
continue to permit issuers, such as those that may seek concurrent 
registration of a class of securities under the Exchange Act, to comply 
with the PCAOB standards if they so choose.\451\
---------------------------------------------------------------------------

    \451\ See, e.g., Section II.E.3.c (Exchange Act Registration of 
Regulation A Securities) below.
---------------------------------------------------------------------------

    An issuer that includes financial statements audited in accordance 
with U.S. GAAS and PCAOB standards will likely incur additional 
incremental costs compared with an issuer that includes financial 
statements audited only in accordance with U.S. GAAS. However, we 
assume that an issuer would only elect to comply with both sets of 
auditing standards because it has concluded that the benefit of doing 
so (for example, to facilitate Exchange Act registration) justify these 
additional incremental costs. Commission staff understands that many 
firms that conduct audits using PCAOB standards have developed their 
methodology in a manner that would comply with both sets of standards, 
which could help contain the costs related to complying with both U.S. 
GAAS and PCAOB auditing standards.
    An issuer conducting a Regulation A offering that seeks to 
concurrently register its securities under the Exchange Act would be 
required to file audited financial statements that are prepared in 
accordance with the standards of the PCAOB by an auditor that is PCAOB-
registered.\452\ The final rules therefore provide Regulation A

[[Page 21837]]

issuers with the option to provide financial statements in Part F/S of 
Form 1-A that comply with correlating requirements under the Exchange 
Act.\453\
---------------------------------------------------------------------------

    \452\ See Section 12 of the Exchange Act, Section 102 of the 
Sarbanes Oxley Act of 2002 and Article 2 of Regulation S-X.
    \453\ If the final rules did not permit issuers to prepare 
audited financial statements in accordance with the standards of the 
PCAOB, Regulation A issuers that rely on the amendments to Form 8-A 
adopted today in order to register a class of securities pursuant to 
Section 12 of the Exchange Act would have to have their financial 
statements audited a second time under PCAOB standards by a PCAOB 
registered auditor.
---------------------------------------------------------------------------

    The Form 1-A financial statement requirements are being further 
updated to be consistent with the timetable for ongoing reporting.\454\ 
The final rules 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 
requirement for semiannual interim reporting.\455\ As proposed, the 
final rules add a new limitation on the age of financial statements at 
qualification, under which an offering statement cannot be qualified if 
the date of the most recent balance sheet included under Part F/S is 
more than nine months before the date of qualification.\456\ For 
filings made more than three months but no more than nine months after 
the end of the issuer's most recently completed fiscal year end, 
issuers are required to include a balance sheet as of the two most 
recently completed fiscal year ends.\457\ For filings made more than 
nine months after the end of the issuer's most recently completed 
fiscal year end, the balance sheet is required to be dated as of the 
two most recently completed fiscal year ends and an interim balance 
sheet must be included as of a date no earlier than six months after 
the end of the most recently completed fiscal year.\458\ If interim 
financial statements are required, they are required to cover a period 
of at least six months.\459\ Requiring issuers to file interim 
financial statements no older than nine months and covering a minimum 
of six months has the beneficial effect of eliminating what would 
otherwise be a requirement for certain issuers to provide quarterly 
interim financial statements during the qualification process and is 
consistent with the timing of the ongoing reporting requirements 
adopted today.\460\ We are generally maintaining the 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 are changing the interval from 90 calendar days to 
three months, which we believe will simplify compliance by allowing 
issuers to follow full months. In order to further simplify compliance 
with the final rules, we also revised Part F/S of Form 1-A to 
streamline the application of, and simplify the language in, the rules 
without substantively changing the required content.
---------------------------------------------------------------------------

    \454\ Our final rules for ongoing reporting are discussed in 
Section II.E.1. below.
    \455\ See paragraph(s) (b)(3)-(4) of Part F/S of Form 1-A for 
Tier 1 issuers, which also apply to Tier 2 issuers by virtue of 
paragraph (c)(1) of Part F/S of Form 1-A.
    \456\ Id.
    \457\ See paragraph (b)(3)(A) of Part F/S of Form 1-A.
    \458\ See paragraph (b)(3)(B) of Part F/S of Form 1-A.
    \459\ See paragraph (b)(4) of Part F/S of Form 1-A.
    \460\ See, e.g., discussion in Section II.E.1. below.
---------------------------------------------------------------------------

    Although we solicited comment 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 XBRL, we are not adopting any such requirement in the 
final rules.\461\ Commenters that addressed this issue opposed 
requiring the use of XBRL in Regulation A filings.\462\ We agree and do 
not believe that requiring the use of XBRL in Regulation A filings 
would be an appropriately tailored requirement for smaller issuers at 
this time.\463\
---------------------------------------------------------------------------

    \461\ 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 Rel. No. 33-9002 (Jan. 
30, 2009) [74 FR 6776].
    \462\ BIO Letter; MoFo Letter; US Chamber of Commerce Letter.
    \463\ We recognize, however, that future technological 
developments may lessen the burden to smaller issuers associated 
currently with XBRL, at which time we may revisit this initial 
determination.
---------------------------------------------------------------------------

    On December 23, 2013, after we proposed rules for Regulation A, the 
Financial Accounting Standards Board (FASB) and Private Company Council 
(PCC) issued a guide for evaluating financial accounting and reporting 
for non-public business entities.\464\ The PCC was created in 2012 by 
the FASB and the Financial Accounting Foundation (FAF) to improve the 
standard-setting process, and provide for accounting and reporting 
alternatives, for non-public business entities under U.S. GAAP.\465\ As 
the standards for non-public business entities are new, there are 
currently very few distinctions between U.S. GAAP for public and non-
public business entities. Over time, however, more distinctions between 
non-public business entity and public company accounting standards 
could develop.
---------------------------------------------------------------------------

    \464\ The Private Company Decision-Making Framework: A Guide for 
Evaluating Financial Accounting and Reporting for Private Companies 
(the ``PCC Guide''), available at: https://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176163703583.
    \465\ For a brief history behind the creation of the PCC, see: 
https://www.fasb.org/cs/ContentServer?c=Page&pagename=FASB%2FPage%2FSectionPage&cid=1351027243391.
---------------------------------------------------------------------------

    Issuers that offer securities pursuant to Regulation A will be 
considered ``public business entities'' as defined by the FASB and, 
therefore, ineligible to rely on any alternative accounting or 
reporting standards for non-public business entities.\466\ Even though 
issuers of securities in a Regulation A offering fit within the 
definition of ``public business entity,'' the Commission retains the 
authority to determine whether or not such issuers would be permitted 
to rely on the developing non-public business entity standards.\467\
---------------------------------------------------------------------------

    \466\ See numbered paragraph 12 of the PCC Guide, p. 3.
    \467\ Id.
---------------------------------------------------------------------------

    The distinction between public and non-public business entity 
standards was not directly contemplated in the Proposing Release, as 
the FASB/PCC Guide was issued after the Regulation A proposal was 
approved by the Commission.\468\ Commenters, however, generally 
expressed concern about the costs associated with requiring non-public 
business entities (e.g., non-Exchange Act reporting companies) to 
follow public company U.S. GAAP accounting standards, particularly on a 
going forward basis.\469\ Commenters also expressed concern about the 
potential that an issuer would need to have its financial statements 
prepared and audited a second time, which would likely increase the 
costs associated with any previously obtained financial statements by a 
non-public business entity that would not comply with the financial 
statement requirements of an exemption that requires such issuer to 
follow the standards applicable to public business entities.\470\
---------------------------------------------------------------------------

    \468\ The Commission approved the proposed rules on December 18, 
2013, while the PCC Guide was issued on December 23, 2013.
    \469\ ABA BLS Letter; Canaccord Letter; CAQ Letter; CFIRA Letter 
1; Deloitte Letter; E&Y Letter; KPMG Letter; McGladrey Letter; MoFo 
Letter; WR Hambrecht + Co Letter.
    \470\ Id.
---------------------------------------------------------------------------

    The final rules do not allow Regulation A issuers to use the 
alternatives available to non-public business entities under U.S. GAAP 
in the preparation of their financial statements. One of the 
significant factors considered by the FASB in developing its definition 
of ``public business entity'' was the number of primary users of the 
financial statements and their access to

[[Page 21838]]

management.\471\ As the FASB noted, ``users of private company 
financial statements have continuous access to management and the 
ability to obtain financial information throughout the year.'' \472\ As 
the number of investors increases and the ability to influence 
management decreases, it is important that all investors receive or 
have timely access to comprehensive financial information. As a result, 
the Commission believes that investor protection is enhanced by 
Regulation A issuers providing financial statements prepared in the 
same manner as other entities meeting the FASB's definition of ``public 
business entity.''
---------------------------------------------------------------------------

    \471\ PCC Guide, p. 6.
    \472\ Id.
---------------------------------------------------------------------------

c. Part III (Exhibits)
    We proposed to maintain the existing exhibit requirements in Part 
III of Form 1-A. Additionally, we proposed to continue to permit 
issuers to incorporate by reference certain information in documents 
filed under Regulation A that is already available on EDGAR, but also 
require issuers to describe the information incorporated by reference 
and include a hyperlink to such exhibit on EDGAR.\473\ As proposed, 
issuers also would have to be subject to the ongoing reporting 
obligations for Tier 2 offerings in order to avail themselves of this 
accommodation.
---------------------------------------------------------------------------

    \473\ 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.
---------------------------------------------------------------------------

    We did not receive any comments on the proposed exhibit 
requirements for Part III of Form 1-A, and are adopting the proposed 
exhibit requirements substantially as proposed. As adopted, issuers 
will be required 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; plan of acquisition, 
reorganization, arrangement, liquidation, or succession; escrow 
agreements; consents; opinion regarding legality; ``testing the 
waters'' materials; appointment of agent for service of process; and 
any additional exhibits the issuer may wish to file.\474\ In a change 
from the proposed requirements, however, the final rules no longer 
require issuers to file schedules (or similar attachments) to material 
contracts in all instances. As adopted, issuers are permitted to 
exclude schedules (or similar attachments) to material contracts if not 
material to an investment decision or if the material information 
contained in such schedules is otherwise disclosed in the agreement or 
the offering statement. Any material contract filed in response to Item 
17, however, must contain a list briefly identifying the contents of 
all omitted schedules, together with an agreement to furnish 
supplementally a copy of any omitted schedule to the Commission upon 
request.
---------------------------------------------------------------------------

    \474\ See Part III (Exhibits) of Form 1-A.
---------------------------------------------------------------------------

    We are adopting final rules that permit issuers to incorporate by 
reference certain information that is already available on EDGAR. In a 
change from the proposed rules, incorporation by reference will not be 
limited to documents previously filed pursuant to Regulation A and will 
not be limited to issuers subject to Tier 2 ongoing reporting 
obligations. We believe that this change will continue to facilitate 
the provision of required information to investors, while taking a 
consistent approach to information previously provided to the 
Commission and publicly available on EDGAR. Issuers that seek to 
incorporate by reference are further required to describe the 
information incorporated by reference and include a hyperlink to such 
exhibit on EDGAR.\475\ As proposed, such issuers must be subject to the 
ongoing reporting obligations for Tier 2 offerings. Additionally, as 
proposed, to the extent post-qualification amendments to offering 
statements must include audited financial statements, the final rules 
require the consent of the certifying accountant to the use of such 
accountant's report in connection with amended financial statements to 
be included as an exhibit.\476\ The final rule, however, clarifies that 
the requirement to file the consent of the certifying accountant only 
applies where the financial statements required to be filed are 
amended.\477\
---------------------------------------------------------------------------

    \475\ See General Instruction III to Form 1-A. The hyperlink 
must be active at the time of filing, but need not remain active 
after filing.
    \476\ This is consistent with current practice under Regulation 
A, but will be made an express requirement under the final rules. 
See Rule 252(f)(1)(ii).
    \477\ See id.
---------------------------------------------------------------------------

d. Signature Requirements
    Similar to the requirement for issuers in registered offerings, we 
proposed to require issuers to manually sign a copy of the offering 
statement before or at the time of filing and retain it for a period of 
five years.\478\ Issuers would be required to produce the manually 
signed copy to the Commission, upon request.\479\ Additionally, we 
proposed to eliminate the requirement that, where an issuer filing a 
Form 1-A is a Canadian issuer, its authorized representative in the 
United States is required to sign the offering statement.\480\ Also, we 
proposed to maintain the requirement that Canadian issuers file a Form 
F-X \481\ 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.\482\
---------------------------------------------------------------------------

    \478\ See Instructions 2 and 3 to Signatures in proposed Form 1-
A; cf. Rule 402(e), 17 CFR 230.402(e).
    \479\ Id.
    \480\ See 17 CFR 230.252(f) (2014) and Instruction 1 to 
Signatures of Form 1-A (2014).
    \481\ 17 CFR 239.42.
    \482\ See Rel. No. 33-6902 (June 21, 1991) [56 FR 30036] 
(adopting the multijurisdictional disclosure system).
---------------------------------------------------------------------------

    We did not receive any comments on this aspect of the proposal, and 
are adopting these provisions, as proposed, in the final rules.\483\
---------------------------------------------------------------------------

    \483\ See Instructions to Signatures, Form 1-A.
---------------------------------------------------------------------------

4. Continuous or Delayed Offerings and Offering Circular Supplements
a. Proposed Rules
    Rule 251(d)(3) currently allows for continuous or delayed offerings 
under Regulation A if permitted by Rule 415.\484\ By reference to the 
undertakings of Item 512(a) of Regulation S-K,\485\ 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.\486\ On the other hand, 
currently 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 to be qualified in a process 
similar to the Commission staff review, comment and qualification 
process for initial offering statements.\487\ The requalification

[[Page 21839]]

process can be costly and time consuming for smaller issuers conducting 
continuous offerings of securities pursuant to Regulation A. We 
proposed to clarify in the rules for Regulation A the scope of 
permissible continuous or delayed offerings and the related concept of 
offering circular supplements.
---------------------------------------------------------------------------

    \484\ 17 CFR 230.415. Certain shelf offerings, however, are only 
permissible in offerings on Form S-3, which Regulation A issuers are 
ineligible to use. See, e.g., Rule 415(a)(1)(x).
    \485\ 17 CFR 230.415(a)(3).
    \486\ 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).
    \487\ See 17 CFR 230.253(e) (2014); 17 CFR 230.252(h)(1) (2014).
---------------------------------------------------------------------------

    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.\488\ Prior to the adoption of 
final rules today, Rule 251(d)(3) of Regulation A allowed for 
continuous or delayed offerings under Regulation A if permitted by Rule 
415.\489\ 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.\490\ Since 
Rule 415 only addresses registered offerings, however, the precise 
scope of continuous or delayed offerings under Regulation A has been 
unclear.
---------------------------------------------------------------------------

    \488\ See 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).
    \489\ 17 CFR 230.415.
    \490\ 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 Rel. No. 33-4936 [33 FR 
18617] (Dec. 9, 1968) (adopting Guide 4 and other Commission 
guides).
---------------------------------------------------------------------------

    The proposed rules would clarify the scope of permissible 
continuous or delayed offerings under Regulation A and the related 
concept of offering circular supplements, and otherwise continue to 
allow for certain traditional shelf offerings to promote flexibility, 
efficiency, and to reduce unnecessary offerings costs.\491\ Further, as 
proposed, an issuer's ability to sell securities in a continuous or 
delayed offering would be conditioned on being current with the Tier 2 
ongoing reporting requirements at the time of sale.\492\
---------------------------------------------------------------------------

    \491\ See Proposing Release, at Section II.C.4.
    \492\ Proposed Rule 251(d)(3)(i)(F).
---------------------------------------------------------------------------

    To provide clarity regarding the application of Rule 415 concepts 
to Regulation A offerings, we proposed to add a provision to Regulation 
A similar to Rule 415, but with limitations that we believed would be 
appropriate for Regulation A. The provision would establish time limits 
similar to those in Rule 415 and make conforming changes as 
necessary.\493\
---------------------------------------------------------------------------

    \493\ Proposed Rule 251(d)(3).
---------------------------------------------------------------------------

    In the Proposing Release we proposed excluding types of shelf 
offerings that cannot be conducted under existing Regulation A, such as 
offerings requiring registration on Form F-6, offerings requiring 
primary eligibility to use Forms S-3 or F-3,\494\ offerings conducted 
by issuers ineligible to use Regulation A,\495\ as well as certain 
offerings that we do not currently believe would be appropriate to 
include in the Regulation A framework. Further, we proposed prohibiting 
all ``at the market'' offerings under Regulation A.\496\
---------------------------------------------------------------------------

    \494\ See also fn. 484 above.
    \495\ Rule 415(a)(1)(xi) discusses investment companies and 
BDCs.
    \496\ See proposed Rule 251(d)(3)(ii).
---------------------------------------------------------------------------

    Additionally, as proposed, changes in the information contained in 
the offering statement would no longer necessarily trigger an 
obligation to amend.\497\ Offering circulars for continuous Regulation 
A offerings would, however, continue to be required to be updated 
annually through the filing of a post-qualification amendment. These 
annual post-qualification amendments would include updated financial 
statements and post-qualification amendments would also be required 
when updating the offering circular 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.\498\
---------------------------------------------------------------------------

    \497\ See proposed Rule 252(h)(2).
    \498\ Id.
---------------------------------------------------------------------------

    In addition to these post-qualification amendments to the offering 
statement that must be qualified, we also proposed to allow issuers to 
use offering circular supplements in certain situations.\499\ Further, 
we proposed to permit issuers in continuous offerings to qualify 
additional securities in reliance on Regulation A by a post-
qualification amendment.\500\
---------------------------------------------------------------------------

    \499\ See proposed Rule 253(g).
    \500\ See proposed Rule 251(d)(3)(i)(F) and note to proposed 
Rule 253(b).
---------------------------------------------------------------------------

    We also proposed 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.\501\ Further, these proposed provisions 
would require offering circulars that contain substantive changes in 
information previously provided in the last offering circular (other 
than information omitted in reliance on proposed Rule 253(b)) to be 
filed within five business days after the date such offering circular 
is first used after qualification.\502\ 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.\503\
---------------------------------------------------------------------------

    \501\ See proposed Rule 253(g).
    \502\ See proposed Rule 253(g)(2).
    \503\ See proposed Rule 253(g)(4).
---------------------------------------------------------------------------

b. Comments on Proposed Rules
    Commenters were generally supportive of the proposed modernization 
of Regulation A's offering process, in general, and the provisions for 
continuous or delayed offerings, in particular.\504\ Two commenters, 
however, recommended allowing for at the market offerings under 
Regulation A.\505\ Additionally, one commenter recommended allowing for 
at the market offerings in non-penny stocks on established trading 
markets.\506\ Another commenter recommended allowing for at the market 
offerings in securities that qualify for the actively-traded securities 
exceptions in Rules 101 and 102 of Regulation M.\507\ This commenter 
suggested that the offering amount could be determined by using the 
calculation set forth in Securities Act Rule 457(c) \508\ as of a 
specified date within five business days of qualification of the 
offering statement.
---------------------------------------------------------------------------

    \504\ See, e.g., ABA BLS Letter; KVCF Letter; OTC Markets 
Letter; Paul Hastings Letter.
    \505\ OTC Markets Letter; Paul Hastings Letter.
    \506\ OTC Markets Letter. This commenter also recommended that 
securities offered under Regulation A that are not penny stocks and 
that trade on an established public market should be treated as 
having a ``ready market'' and thus be considered eligible for margin 
purposes, which the commenter believed would increase the value of 
securities and their liquidity.
    \507\ Paul Hastings Letter. Regulation M was adopted by the 
Commission in 1996 and is intended to prevent potentially 
manipulative practices by underwriters, issuers, selling 
securityholders, and other participants in a securities offering. 
See Rel. No. 38067 (December 20, 1996) [62 FR 520].
    \508\ Rule 457(c) specifies that Securities Act registration 
fees for securities offered on the basis of fluctuating market 
prices shall be calculated as follows: Either the average of the 
high and low prices reported in the consolidated reporting system 
(for last sale reported over-the-counter securities) or the average 
of the bid and asked price (for other over-the-counter securities) 
as of a specified date within 5 business days prior to the date of 
filing the offering statement.
---------------------------------------------------------------------------

c. Final Rules
    We believe the proposed rules sufficiently update existing rules, 
while providing issuers with adequate flexibility with respect to, and 
additional guidance on, the permissible scope of continuous or delayed 
Regulation A offerings and offering

[[Page 21840]]

circular supplements. We are adopting these rules as proposed.
    The final rules add Rule 251(d)(3) to Regulation A, without changes 
from the proposed rule. This provision is similar to Rule 415, but its 
scope is limited to permissible Regulation A offerings.\509\ In this 
regard, the final rules for Regulation A will continue to allow for 
certain traditional shelf offerings to promote flexibility, efficiency, 
and to reduce unnecessary offerings costs.\510\ The final rules will 
condition the ability of an issuer to sell securities in a continuous 
offering on being current in its annual and semiannual report filing, 
if required under Rule 257(b), at the time of sale.\511\ As we 
indicated in the Proposing Release, 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 promote parity of information in the 
secondary markets.
---------------------------------------------------------------------------

    \509\ Rule 251(d)(3).
    \510\ See 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.'').
    \511\ This condition only applies to continuous offerings under 
Rule 251(d)(3)(i)(F).
---------------------------------------------------------------------------

    As proposed, the final rules provide for the following types of 
continuous or delayed offerings:
     Securities offered or sold by or on behalf of a person 
other than the issuer or its subsidiary or a person of which the issuer 
is a 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 that are part of an offering which commences 
within two calendar days after the qualification date, will be offered 
on a continuous basis, may continue to be offered 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.\512\
---------------------------------------------------------------------------

    \512\ Id.
---------------------------------------------------------------------------

    Notwithstanding the suggestions of commenters regarding at the 
market offerings, we continue to believe that such offerings are not 
appropriate for Regulation A offerings, particularly at the outset of 
the adoption of today's amendments to the existing rules. 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 
determination as to whether the exemption would be an appropriate 
method for such offerings should occur in the future. 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.
    Under the final rules, as proposed, changes in the information 
contained in the offering statement will no longer necessarily trigger 
an obligation to amend.\513\ Offering circulars for continuous or 
delayed Regulation A offerings will 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.\514\ In addition to post-qualification 
amendments to the offering statement that must be qualified, the final 
rules also will allow issuers to use offering circular supplements in 
certain situations.\515\ Further, issuers in continuous offerings will 
be permitted to qualify additional securities in reliance on Regulation 
A by a post-qualification amendment.\516\
---------------------------------------------------------------------------

    \513\ Rule 252(f)(2).
    \514\ Id.
    \515\ Rule 253(g).
    \516\ Rule 251(d)(3)(i)(F) and note to Rule 253(b).
---------------------------------------------------------------------------

    The final rules will, as proposed, permit offering circular 
supplements to be used for final pricing information, where the 
offering statement is qualified on the basis of a bona fide price range 
estimate.\517\ Additionally, the final rules permit offering circulars 
to omit information with respect to the underwriting syndicate 
analogous to the provisions for registered offerings under Rule 
430A.\518\ However, the final rules do not allow an issuer to omit the 
volume of securities (the number of equity securities or aggregate 
principal amount of debt securities) to be offered.\519\ The final 
rules also permit, as proposed, offering circular supplements to 
reflect 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, 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.\520\ 
Notwithstanding this provision, 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 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.\521\ Under no circumstances, however, 
would an issuer be able to amend its offering statement or rely on the 
provisions for offering circular supplements 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 
Rule 251(a) or if the increase in aggregate offering price would result 
in a Tier 1 offering becoming a Tier 2 offering.\522\
---------------------------------------------------------------------------

    \517\ Rule 253(b)(2). The bona fide price range estimate may 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.
    \518\ 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).
    \519\ Rule 253(b)(4).
    \520\ See note to Rule 253(b).
    \521\ Id.
    \522\ Id.
---------------------------------------------------------------------------

    We are also adopting as proposed provisions similar to Rule 424 
that require issuers omitting certain pricing and price-related 
information from an offering statement at the time of qualification, in 
reliance on 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.\523\ 
These provisions require offering circulars that contain substantive 
changes (other than information omitted in reliance on 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.\524\ Offering circular supplements 
that are not filed within the required time frames provided by the 
rules are required to be

[[Page 21841]]

filed as soon as practicable after the discovery of the failure to 
file.\525\
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    \523\ Rule 253(g)(1).
    \524\ Rule 253(g)(2).
    \525\ Rule 253(g)(4).
---------------------------------------------------------------------------

5. Qualification
    Under existing 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.\526\ In such 
instances, the issuer includes a delaying notation on the cover of the 
Form 1-A stating that the offering statement shall only be qualified by 
order of the Commission.\527\ 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.\528\ An offering statement that does not include a 
delaying notation will be qualified without Commission action on the 
20th calendar day after filing.\529\
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    \526\ 17 CFR 230.252(g)(2) (2014).
    \527\ Id.
    \528\ 17 CFR 230.252(g)(3) (2014).
    \529\ 17 CFR 230.252(g)(1) (2014).
---------------------------------------------------------------------------

    We proposed 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. A few commenters generally 
supported the proposed elimination of qualification without Commission 
action.\530\ No commenters opposed this aspect of the proposal.
---------------------------------------------------------------------------

    \530\ CFA Letter; CFA Institute Letter; MCS Letter.
---------------------------------------------------------------------------

    We are adopting, substantially as proposed, final rules that 
require Commission action before a Regulation A offering statement may 
be qualified. The final rules modify the proposed rules by permitting 
the offering statements to be declared qualified by a ``notice of 
qualification'' issued by the Division of Corporation Finance, pursuant 
to delegated authority, rather than requiring the Commission itself to 
issue an order.\531\ The notice of qualification is analogous to a 
notice of effectiveness in registered offerings.\532\ We are therefore 
amending the Commission's organization rules, as they relate to the 
delegated authority of the Director of the Division of Corporation 
Finance, to permit the Division to issue qualification orders pursuant 
to Regulation A.\533\ The final rules also eliminate 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 the electronic filing processes we are 
adopting,\534\ the scaled disclosure requirements for Tier 1 and Tier 2 
offerings,\535\ and the preemption of state securities law registration 
and qualification requirements for Tier 2 offerings,\536\ we believe it 
is appropriate to ensure that the Commission staff has the opportunity 
to review and comment on an offering statement before it becomes 
qualified.
---------------------------------------------------------------------------

    \531\ See Rule 252(e).
    \532\ See 17 CFR 200.30-1(a)(5) (The Director of the Division of 
Corporation Finance has the delegated authority to declare 
registration statements to be effective within shorter periods of 
time than 20 days after filing, consistent with Section 8(a) of the 
Securities Act (15 U.S.C. 77h).
    \533\ Rule 30-1(b)(2)-(4).
    \534\ See discussion in Section II.C.1. above.
    \535\ See discussion in Section II.C.3.b. above.
    \536\ See discussion in Section II.H.3. below.
---------------------------------------------------------------------------

D. Solicitation of Interest (Testing the Waters)

1. Proposed Rules
    Under Securities Act Section 3(b)(2)(E), issuers may test the 
waters for interest in an offering--without restriction as to the types 
of investors solicited--before filing an offering statement on such 
terms and conditions as the Commission prescribes. We proposed 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 of solicitation materials and 
disclaimers.\537\ As we noted in the Proposing Release, the investor 
protections with respect to solicitation materials in existing 
Regulation A would remain in place as these materials remain subject to 
the antifraud and other civil liability provisions of the federal 
securities laws.\538\ As proposed, 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. We 
further proposed to require issuers to publicly file their offering 
statements not later than 21 calendar days before qualification so that 
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 the preliminary offering circular. The proposed rules 
would amend the requirements for submission or filing of solicitation 
materials, 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.
---------------------------------------------------------------------------

    \537\ 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.''
    \538\ 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 Rel. No. 33-6924, at fn. 48.
---------------------------------------------------------------------------

    As proposed, Rule 255(b) would require all soliciting materials to 
bear certain legends or disclaimers.\539\ Further, we did not propose 
to limit testing the waters to QIBs and institutional accredited 
investors (as is currently the case with testing the waters by emerging 
growth companies under Securities Act Section 5(d)).
---------------------------------------------------------------------------

    \539\ Proposed Rule 255(b). As proposed, Rule 255(b) would 
largely follow similar provisions in the context of registered 
offerings. See Rule 134(d), 17 CFR 230.134(d) (requiring a 
disclaimer for solicitations of interest in registered offerings).
---------------------------------------------------------------------------

2. Comments on Proposed Rules
    Most commenters generally supported the proposed amendments to the 
testing the waters provisions.\540\ Several commenters, however, 
recommended requiring the filing of testing the waters materials prior 
to first use.\541\ These commenters suggested that the antifraud and 
other civil liability provisions of the federal securities laws are not 
an adequate substitute for the investor protections afforded by an 
advance filing requirement for solicitation materials. They further 
suggested that their concerns about the proposed testing the waters 
provisions are compounded by an access equals delivery model of final 
offering circular delivery. One commenter recommended allowing states 
to have immediate access to all testing the waters materials filed with 
the Commission.\542\ Another commenter recommended making the filing of 
testing the waters materials a condition to the exemption,\543\ while a 
third commenter specifically opposed that recommendation.\544\
---------------------------------------------------------------------------

    \540\ BIO Letter; Letter from Daniel McElroy, DuMoulin Black 
LLP, April 1, 2014 (``DuMoulin Letter''); Ladd Letter 2; Paul 
Hastings Letter; Richardson Patel Letter.
    \541\ Massachusetts Letter 2; NASAA Letter 2; WDFI Letter.
    \542\ Ladd Letter 2.
    \543\ MCS Letter.
    \544\ BIO Letter.

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

[[Page 21842]]

    Two commenters recommended ensuring that any testing the waters 
materials that are filed with the Commission be kept confidential, at 
least until the offering statement is qualified.\545\ One commenter 
recommended removing any requirement to file testing the waters 
materials publicly,\546\ while another commenter recommended not 
requiring testing the waters materials to be filed for Tier 2 
offerings.\547\ One commenter supported the use of legends on testing 
the waters materials or, in lieu of legends, restricting testing the 
waters to certain types of investors, such as QIBs and accredited 
investors.\548\
---------------------------------------------------------------------------

    \545\ Heritage Letter; Ladd Letter 2.
    \546\ BIO Letter.
    \547\ MoFo Letter.
    \548\ CFA Institute Letter.
---------------------------------------------------------------------------

    Several commenters suggested that the Commission provide market 
participants with communication safe harbors from Section 12(a)(2) 
liability for regular business communications by a Regulation A 
issuer.\549\
---------------------------------------------------------------------------

    \549\ ABA BLS Letter; Canaccord Letter; CFIRA Letter 1; CFIRA 
Letter 2; MoFo Letter; Public Startup Co. Letter 6; WR Hambrecht + 
Co Letter. See also discussion of Section 12(a)(2) liability in 
Proposing Release, Section II.B.7.
---------------------------------------------------------------------------

3. Final Rules
    We are adopting testing the waters provisions in the final rules as 
proposed. Under the final rules, issuers will be permitted to test the 
waters with all potential investors and use solicitation materials both 
before and after the offering statement is filed, subject to issuer 
compliance with the rules on filing and disclaimers.\550\
---------------------------------------------------------------------------

    \550\ Rule 255. For a discussion of the use of solicitation 
materials as it relates to (i) the doctrine of integration, see 
Section II.B.5.c. above and Rule 255(e), and (ii) the application of 
state securities laws, see Section II.H.3. below.
---------------------------------------------------------------------------

    The final rules require, as proposed, that testing the waters 
materials used by an issuer or its intermediaries after the issuer 
publicly files an offering statement be accompanied by a current 
preliminary offering circular or contain a notice informing potential 
investors where and how the most current preliminary offering circular 
can be obtained.\551\ This requirement may be satisfied by providing 
the URL where the preliminary offering circular or the offering 
statement may be obtained. Solicitation materials will remain subject 
to the antifraud and other civil liability provisions of the federal 
securities laws.\552\ Further, the final rules require issuers and 
intermediaries that use testing the waters materials after publicly 
filing the offering statement to update and redistribute such material 
in a substantially similar manner as such materials were originally 
distributed to the extent that either the material itself or the 
preliminary offering circular attached thereafter becomes inadequate or 
inaccurate in any material respect.\553\
---------------------------------------------------------------------------

    \551\ Rule 255(b)(4).
    \552\ See fn. 538 above.
    \553\ 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 may be obtained and that URL 
continues to link to the most recent version of the preliminary 
offering circular. See Rule 255(d).
---------------------------------------------------------------------------

    As discussed in Section II.C.2. above, first-time issuers that are 
eligible for, and elect to, non-publicly submit draft offering 
statements are required to publicly file their offering statements not 
later than 21 calendar days before qualification so that any 
solicitation of interest made in the 21 calendar days before the 
earliest date of potential sales of securities by such issuers will be 
conducted while potential investors have access to the most recent 
version of the preliminary offering circular. Additionally, in light of 
the preemption of state securities laws registration requirements in 
the final rules for Tier 2 offerings, the 21 calendar day requirement 
will enable state securities regulators to require such issuers to file 
such materials with them for a minimum of 21 calendar days before any 
potential sales to investors in their respective states.\554\
---------------------------------------------------------------------------

    \554\ See fn. 277 above.
---------------------------------------------------------------------------

    As proposed, the final rules require that issuers submit or file 
solicitation materials as an exhibit when the offering statement is 
either submitted for non-public review or filed (and update for 
substantive changes in such material after the initial non-public 
submission or filing). However, issuers are no longer required to 
submit solicitation materials at or before the time of first use.\555\ 
The treatment of solicitation materials in Regulation A offerings is 
generally consistent with the Commission staff's treatment of 
solicitation materials used by emerging growth companies under 
Securities Act Section 5(d), with two exceptions that we believe will 
provide investors in Regulation A offerings with additional 
protections:
---------------------------------------------------------------------------

    \555\ Rule 255.
---------------------------------------------------------------------------

     Solicitation materials used in Regulation A offerings are 
required to be included with the offering statement; \556\ and
---------------------------------------------------------------------------

    \556\ See Item 17 (Exhibits), Part III of Form 1-A.
---------------------------------------------------------------------------

     solicitation materials used by Regulation A issuers that 
file an offering statement with the Commission will be publicly 
available as a matter of course.
    Contrary to the views of commenters that suggested we keep 
solicitation materials confidential, or not require such materials to 
be filed (either publicly or at all), we believe the submission and 
filing requirements for solicitation materials are important elements 
of the final rules for the use of solicitation materials.\557\ We 
believe that issuers should be accountable for the content of 
solicitation materials and that such information must be consistent 
with the information contained in the offering circular. We believe 
that making these materials publicly available as an exhibit to the 
offering statement, and thereby subjecting them to staff review and 
comment and scrutiny by the public, will help ensure that issuers use 
solicitation materials with appropriate caution. However, for the 
reasons discussed in Section II.F. below, we do not believe that the 
filing of such materials should be a condition to relying on the 
Regulation A exemption.
---------------------------------------------------------------------------

    \557\ BIO Letter; Heritage Letter; Ladd Letter 2; MoFo Letter.
---------------------------------------------------------------------------

    We are adopting as proposed the required legends for solicitation 
materials. The legends provide that sales made pursuant to Regulation A 
are contingent upon the qualification of the offering statement.\558\ 
Additionally, to provide greater flexibility when using solicitation 
materials, the final rules eliminate, as proposed, the requirement in 
existing Regulation A for testing the waters materials to identify the 
issuer's chief executive officer, business, and products. Solicitation 
materials used before qualification will, therefore, be required to 
bear a legend or disclaimer indicating that: (1) No money or other 
consideration is being solicited, and if sent, will not be accepted; 
(2) no sales will be made or commitments to purchase accepted until the 
offering statement is qualified; and (3) a prospective purchaser's 
indication of interest is non-binding.\559\ While the expansion of use 
of solicitation materials after filing may result in investors 
receiving more sales literature in marketed offerings, in such 
circumstances, potential investors will also be afforded more time with 
the preliminary offering circular before making an investment decision 
because, as noted above, testing the waters materials used by an issuer 
or its intermediaries after the issuer publicly

[[Page 21843]]

files an offering statement must be accompanied by a current 
preliminary offering circular or contain a notice informing potential 
investors where and how the most current preliminary offering circular 
can be obtained.\560\
---------------------------------------------------------------------------

    \558\ See Rule 255(a).
    \559\ See Rule 255(b).
    \560\ Cf. The Regulation of Securities Offerings, 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).
---------------------------------------------------------------------------

    We believe the approach to solicitation materials that we are 
adopting today is consistent with existing Regulation A that allows 
issuers to test the waters and will make the use of solicitation 
materials more beneficial for issuers and investors. For issuers, the 
final rules will generally reduce compliance burdens and entirely 
eliminate the filing requirement for issuers that, after testing the 
waters, decide not to proceed with an offering. With respect to 
investors, we note that the final rules contain significant safeguards 
that should help mitigate the concerns expressed by some commenters 
that not requiring testing the waters materials to be submitted or 
filed with the Commission before first use will result in a reduction 
in investor protections.\561\ These include the requirements to make 
the most recent preliminary offering circular available with 
solicitation materials after filing, to redistribute solicitation 
materials after filing to the extent that either the material itself or 
the preliminary offering circular attached thereafter becomes 
inadequate or inaccurate in any material respect, to deliver the 
preliminary offering circular at least 48 hours in advance of sale if 
the issuer is not subject to a Tier 2 reporting obligation, to deliver 
the final offering circular (or a notice of the final offering 
circular) no later than two business days after sale in all instances, 
and the minimum 21 calendar day filing requirement for issuers that 
non-publicly submit draft offering statements as well as the continued 
application of the antifraud provisions of the federal securities laws. 
Additionally, state securities regulators have the ability under the 
final rules to require issuers to file with them any materials required 
to be filed with the Commission.\562\ From an investor protection 
standpoint, we also note that sales under Regulation A may occur only 
in connection with a qualified offering statement that is filed with 
the Commission and that is subject to review by the staff.
---------------------------------------------------------------------------

    \561\ See fn. 541 above.
    \562\ See also fn. 277 above and discussion in Section II.H. 
below. Where states elect to require issuers to file such 
information with them, their respective securities regulators will, 
for example, have access to solicitation materials relied upon by 
first-time issuers that non-publicly submit draft offering 
statements for a minimum of 21 calendar days before the first date 
of any potential sales.
---------------------------------------------------------------------------

    Lastly, to address the concerns of commenters regarding an issuers' 
ability to conduct routine communications with customers and suppliers 
at or near the time of a contemplated Regulation A offering,\563\ we 
are confirming, consistent with Rule 169's existing exemption from 
Sections 2(a)(10) and 5(c) of the Securities Act for regularly released 
factual business communications,\564\ that we do not believe such 
communications constitute solicitation of interest materials under 
Regulation A. Ultimately, whether or not a communication is limited to 
factual business information depends on the facts and circumstances, 
but issuers may generally look to the provisions of Rule 169 for 
guidance in making this determination in the Regulation A context. More 
generally, we note that factual business information means information 
about the issuer, its business, financial condition, products, 
services, or advertisement of such products or services.\565\ Factual 
business information generally does not include such things as 
predictions, projections, forecasts, or opinions with respect to 
valuation of a security.\566\ The approach we are taking today with 
respect to factual business information is consistent with the 
Commission's stated position on such communications for registered 
offerings and clarifies its application to Regulation A solicitation of 
interest materials.
---------------------------------------------------------------------------

    \563\ See fn. 549 above
    \564\ 17 CFR 230.169.
    \565\ See Rel. No. 33-5180 (Aug. 20, 1971) (Guidelines for 
Release of Information by Issuers Whose Securities are in 
Registration).
    \566\ Id.
---------------------------------------------------------------------------

E. Ongoing Reporting

    Section 3(b)(2) of the Securities Act 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 may provide for the suspension and 
termination of such a requirement with respect to that issuer.''
    As we noted in the Proposing Release, we are mindful that a one-
size-fits-all ongoing reporting regime may not be suitable for all 
types of entities and investors.\567\ In the final rules for Regulation 
A, we have endeavored to achieve an appropriate balance between the 
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.
---------------------------------------------------------------------------

    \567\ See Proposing Release, at Section II.E.
---------------------------------------------------------------------------

1. Continuing Disclosure Obligations
a. Proposed Rules for Continuing Disclosure Obligations
    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 the offering.\568\ We proposed to rescind Form 2-A, but 
to continue to require Regulation A issuers to file with the Commission 
electronically on EDGAR after the termination or completion of the 
offering the information generally disclosed in Form 2-A.\569\ As 
proposed, issuers conducting Tier 1 offerings would be required to 
provide this information on Part I of proposed Form 1-Z not later than 
30 calendar days after termination or completion of the offering,\570\ 
while issuers conducting Tier 2 offerings have the flexibility to 
provide this information on either Part I of Form 1-Z at the time of 
filing an exit report or proposed Form 1-K as part of their annual 
report, whichever is filed first.\571\
---------------------------------------------------------------------------

    \568\ See 17 CFR 230.257 (2014); see also 17 CFR 239.91 (Form 2-
A).
    \569\ We did not propose to continue to require issuers to 
disclose the use of proceeds currently disclosed in Form 2-A, as 
issuers would already have to disclose this information in Part II 
of proposed Form 1-A and changes in the use of proceeds after 
qualification not previously disclosed may require issuers to file a 
post-qualification amendment or offering circular supplement to 
update such disclosure. See discussion of continuous or delayed 
offerings and offering circular supplements in Section II.C.4. 
above.
    \570\ Proposed Form 1-Z (exit report) is discussed in Section 
II.E.4. below.
    \571\ Proposed Rule 257(a), (b)(1).
---------------------------------------------------------------------------

    As proposed, Tier 2 issuers would be subject to a Regulation A 
ongoing reporting regime that would require, in addition to annual 
reports and summary information about a recently completed offering, 
semiannual reports on proposed Form 1-SA, current event reports on 
proposed Form 1-U, and, when eligible and electing to do so, notice to 
the Commission of the suspension of ongoing reporting

[[Page 21844]]

obligations on Part II of proposed Form 1-Z. All of these reports would 
be filed electronically on EDGAR.
b. Comments on the Proposed Rules
    We received both general comments and specific comments on the 
proposed forms. These comments are discussed in turn below.
General Comments
    Commenters generally approved of the continuing disclosure 
obligations for Tier 2 offerings.\572\ One commenter noted favorably 
that professional fees, other costs, and the time burden associated 
with the proposed rules would likely be substantially lower for 
Regulation A issuers than for issuers subject to Exchange Act 
reporting.\573\ Another commenter remarked that the proposed ongoing 
reporting regime strikes an appropriate balance between the benefits of 
disclosure and costs to issuers.\574\
---------------------------------------------------------------------------

    \572\ ABA BLS Letter; Campbell Letter; Canaccord Letter; CFA 
Letter; McCarter & English Letter; NASAA Letter 2; Letter from Jason 
Coombs, Co-Founder and CEO, Public Startup Company, Inc., March 26, 
2014 (``Public Startup Co. Letter 5''); US Alliance Corp. Letter; 
WDFI Letter.
    \573\ US Alliance Corp. Letter.
    \574\ McCarter & English Letter.
---------------------------------------------------------------------------

    Other commenters expressed general support, but also recommended 
changes to the semiannual reporting requirement or the content of Form 
1-U.\575\ One commenter supported the general policy that it should not 
be easier or harder to exit the Regulation A reporting system than it 
would be to exit the Exchange Act reporting system.\576\ Several 
commenters recommended including an ongoing disclosure requirement for 
Tier 1 issuers, including disclosure at a level lower than what was 
proposed for Tier 2,\577\ ongoing disclosure with yearly audited 
financials,\578\ or some unspecified continuous disclosure 
obligation.\579\ Another commenter recommended extending continuing 
disclosure obligations into Tier 1, but further suggested that the 
Commission replace any requirement to provide audited financial 
statements with an affidavit from management attesting to the accuracy 
of the financial statements.\580\ A few commenters generally 
recommended reducing the disclosure burden on Tier 2 issuers.\581\ One 
of these commenters recommended making continuing disclosure 
requirements contingent upon factors other than offering size, such as 
whether the issuer has taken steps to foster a market in its 
securities.\582\ This commenter also recommended allowing issuers to 
either avoid ongoing reporting or to file only financial statements and 
a management letter regarding operations and results if, shortly after 
commencing the offering upon qualification, issuers have less than 300 
record holders. Another commenter recommended allowing Canadian 
companies to rely on Rule 12g3-2(b) to avoid having to file ongoing 
reports under Regulation A.\583\ As an alternative, this commenter 
recommended allowing Canadian companies to furnish reports under cover 
of Form 6-K rather than using the Regulation A reports. One commenter 
recommended that, to the extent that the final rules allow foreign 
private issuers to use Regulation A, such issuers should be permitted 
to follow the ongoing reporting rules applicable to them in the 
Exchange Act context in lieu of Regulation A ongoing reporting 
requirements,\584\ while another commenter specifically opposed this 
suggestion.\585\ Another commenter recommended requiring officers, 
directors, and controlling shareholders of companies that offer 
securities under Regulation A to make ongoing disclosure of 
transactions in company securities, similar to reporting on Forms 3, 4, 
and 5 and Schedules 13D, 13G, and 13F in the registered context.\586\
---------------------------------------------------------------------------

    \575\ ABA BLS Letter; Canaccord Letter; NASAA Letter 2; WDFI 
Letter.
    \576\ ABA BLS Letter (raising the issue particularly with 
respect to ``very small issuers'' under Tier 2).
    \577\ Guzik Letter 1 (suggesting that Tier 1 ongoing disclosure 
requirements could parallel Tier 2's requirements but without the 
requirement for semiannual reports).
    \578\ Ladd Letter 2.
    \579\ SVB Financial Letter.
    \580\ Public Startup Co. Letter 5.
    \581\ Heritage Letter; IPA Letter (providing estimated costs of 
compliance for offering statement and periodic reports).
    \582\ Heritage Letter.
    \583\ DuMoulin Letter.
    \584\ McCarter & English Letter (noting Exchange Act Form 20-F, 
40-F, Form 6-K, and ongoing home country reports).
    \585\ Andreessen/Cowen Letter.
    \586\ OTC Markets Letter.
---------------------------------------------------------------------------

Comments on Form 1-K
    One commenter recommended revising proposed Form 1-K to expressly 
not require the disclosure of an issuer's plan of operations, as 
described in Item 9(c) of Part II of Form 1-A.\587\ This commenter 
further recommended clarifying whether a Tier 2 issuer is required to 
comply with Rules 3-10, 3-16, and 8-04 of Regulation S-X in Form 1-K, 
in light of the reference to segmented data in Item 7(b) to Part F/S of 
proposed Form 1-A.\588\ This same commenter recommended that the 
Commission clarify whether a Tier 2 issuer is required to comply with 
Rule 8-04 of Regulation S-X in proposed Form 1-K, particularly with 
respect to probable acquisitions.\589\
---------------------------------------------------------------------------

    \587\ E&Y Letter (noting the Commission's intent to follow this 
approach, as mentioned in the Proposing Release at fn. 397).
    \588\ Id.
    \589\ Id.
---------------------------------------------------------------------------

Comments on Form 1-SA
    Several commenters recommended requiring or permitting quarterly 
reporting rather than semiannual reporting on proposed Form 1-SA.\590\ 
One of these commenters stated that quarterly reporting is standard in 
the United States and is not overly burdensome.\591\ Two other 
commenters stated that quarterly reporting was necessary for investor 
protection and to reduce the risk of insider trading.\592\ Other 
commenters noted that quarterly reporting might be preferred by market 
participants but supported a semiannual requirement.\593\
---------------------------------------------------------------------------

    \590\ E&Y Letter; Massachusetts Letter 2; NASAA Letter 2; OTC 
Markets Letter; WDFI Letter.
    \591\ OTC Markets Letter.
    \592\ Massachusetts Letter 2; WDFI Letter.
    \593\ B. Riley Letter; Milken Institute Letter.
---------------------------------------------------------------------------

    One commenter agreed with our proposal not to require Tier 2 
issuers to have their Form 1-SA financial statements reviewed by an 
independent accountant, particularly with respect to smaller 
issuers.\594\ Another commenter recommended either requiring the 
financial statements in Form 1-SA to be reviewed by an independent 
accountant or requiring issuers to disclose on Form 1-SA that the 
financial statements were not subject to review.\595\ Yet another 
commenter recommended that there be no requirement to provide Rule 3-16 
of Regulation S-X financial statements or summarized financial 
information in semiannual reports (to align with requirements for 
existing registrants that are not required to include this in Form 10-
Q).\596\ This commenter also recommended clarifying if the financial 
statements in Form 1-SA can be presented using a condensed format 
consistent with Rule 8-03(a) of Regulation S-X and if additional 
disclosure requirements of Rule 8-03(b) are applicable.\597\ This same 
commenter recommended removing Item 3(d) of Form 1-SA, because neither 
this statement nor a statement of changes in stockholders' equity is an 
existing requirement on Form 10-Q.\598\
---------------------------------------------------------------------------

    \594\ ABA BLS Letter. As proposed, such reviews would not be 
required for any Form 1-SA filing.
    \595\ KPMG Letter.
    \596\ E&Y Letter.
    \597\ Id.
    \598\ Id.

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[[Page 21845]]

Comments on Form 1-U
    Commenters made a number of suggestions regarding the current 
report requirements. Some commenters recommended eliminating the 
requirement to file Form 1-U for the smallest issuers, based on a 
measure such as asset size or market capitalization.\599\ Other 
commenters recommended extending the proposed filing requirement from 
four business days after the triggering event to fifteen business days 
after such event.\600\ Several commenters recommended changing or 
clarifying the ``fundamental change'' standard in Item 1 of proposed 
Form 1-U.\601\ One of these commenters expressed concerns about whether 
this item will be consistently interpreted and whether the use of the 
term ``fundamental change,'' in light of the use of the same term in 
Item 512 of Regulation S-K, would cause additional confusion.\602\ This 
commenter further recommended that, for contracts involving business 
acquisitions, the measurement of significance in this item should be 
limited to the investment test and the numerical threshold should be 
increased to at least 50% to be more consistent with the stated 
disclosure objective. Three commenters recommended moving to a 
materiality standard so as to be consistent with the standards in the 
anti-fraud provisions of federal securities laws, suggesting that this 
would help avoid confusion.\603\ One commenter recommended allowing 
(but not requiring) Tier 1 issuers to report material information on 
Form 1-U, including the financial statements of significant acquired 
businesses.\604\
---------------------------------------------------------------------------

    \599\ ABA BLS Letter; Milken Institute Letter.
    \600\ ABA BLS Letter; E&Y Letter; Milken Institute Letter.
    \601\ E&Y Letter; Massachusetts Letter 2; NASAA Letter 2; WDFI 
Letter.
    \602\ E&Y Letter. For description of Item 512, see fn. 486 
above.
    \603\ Massachusetts Letter 2; NASAA Letter 2; WDFI Letter.
    \604\ E&Y Letter. Two commenters made a similar recommendation 
without specifying which form should be used for that purpose. See 
ABA BLS Letter; Canaccord Letter.
---------------------------------------------------------------------------

    Other commenters suggested changes to the substance of what would 
need to be reported on Form 1-U. One commenter generally recommended 
cross-referencing existing disclosure requirements when a proposed 
disclosure standard is meant to be the same.\605\ For example, this 
commenter suggested that Form 1-U include a cross-reference to Form 8-K 
when disclosure requirements are meant to be the same. One commenter 
recommended permitting companies to disclose: (1) A change in 
accountants in the next periodic filing instead of reporting it on Form 
1-U if the change does not involve a disagreement or reportable event 
(as defined in Item 304 of Regulation S-K); and (2) sales of equity 
securities in the next periodic filing if the price was not below that 
of previous primary offerings.\606\ Two of these commenters recommended 
eliminating the requirement to report unregistered sales of securities 
on Form 1-U, or to raise the reporting threshold to only cover 
offerings that represent at least 10% of the issuer's pre-transaction 
outstanding shares.\607\
---------------------------------------------------------------------------

    \605\ PwC Letter.
    \606\ E&Y Letter.
    \607\ ABA BLS Letter; MoFo Letter.
---------------------------------------------------------------------------

c. Final Rules for Continuing Disclosure Obligations
    We are adopting rules for continuing disclosure obligations under 
Regulation A generally as proposed, with certain technical 
modifications and clarifications. The final rules eliminate Form 2-A 
and in its place require the disclosure of similar information pursuant 
to Part I of Form 1-Z for Tier 1 issuers and, depending on when the 
issuer's offering is terminated or completed, in either Form 1-K or 
Part I of Form 1-Z for Tier 2 issuers. As proposed, the respective 
disclosure requirements in Part I of Forms 1-K and 1-Z will include the 
date the offering was qualified and commenced, the amount of securities 
qualified, the amount of securities sold in the offering, the price of 
the securities, the portions of the offering that were sold on behalf 
of the issuer and any selling securityholders, any fees associated with 
the offering, and the net proceeds to the issuer.\608\ We believe that 
summary information and data about an issuer and its Regulation A 
offering is most valuable when obtained after the offering is completed 
or terminated.\609\ Therefore, as proposed, issuers will only be 
required to disclose such information after the termination or 
completion of the offering.
---------------------------------------------------------------------------

    \608\ See Part I of Form 1-K and Part I of Form 1-Z. For 
clarification purposes, we have changed the references in Part I in 
these forms from ``number of securities'' to ``amount of 
securities.'' These changes should avoid confusion when reporting 
debt offerings where a quantifiable number of securities is not 
being offered. In such cases, issuers will be able to report the 
aggregate sales of securities in the offering.
    \609\ Additionally, in continuous offerings, issuers are 
required to file post-qualification amendments with the Commission 
every twelve months to the extent that sales are ongoing at that 
time. See Rule 252(f)(2)(i).
---------------------------------------------------------------------------

    As noted in the Proposing Release, we are concerned that uniform 
ongoing reporting requirements for all issuers of Regulation A 
securities could disproportionately affect issuers in smaller 
offerings. For that reason, the final rules do not require any ongoing 
reporting for issuers conducting Tier 1 offerings, other than the 
disclosure of the summary information discussed above.\610\ Issuers in 
smaller offerings will, however, have the option to conduct a Tier 2 
offering and subject themselves to ongoing reporting and other Tier 2 
requirements.\611\
---------------------------------------------------------------------------

    \610\ See Rule 257(a).
    \611\ An issuer offering up to $20 million in a Tier 2 offering 
would, in addition to providing ongoing reports to the Commission on 
an annual and semiannual basis, with interim current event updates, 
be required to file audited financial statements in the offering 
statement, just as issuers in larger Tier 2 offerings are required 
to do. See Section II.C.3.b(2)(c). above.
---------------------------------------------------------------------------

    The final rules for ongoing reporting for Tier 2 issuers are being 
adopted as proposed, except where noted below, and will require issuers 
to file annual reports on Form 1-K,\612\ file semiannual reports on 
Form 1-SA,\613\ file current event reports on Form 1-U,\614\ and 
provide notice to the Commission of the suspension of their ongoing 
reporting obligations on Part II of Form 1-Z.\615\ All reports for Tier 
1 and Tier 2 offerings are required to be filed electronically on 
EDGAR.\616\
---------------------------------------------------------------------------

    \612\ Rule 257(b)(1).
    \613\ Rule 257(b)(3).
    \614\ Rule 257(b)(4).
    \615\ Rule 257(d)(2).
    \616\ Subject, in certain cases, to the hardship exemptions set 
forth in Rules 201 and 202 of Regulation S-T. 17 CFR 232.201-202.
---------------------------------------------------------------------------

    As discussed above, commenters suggested that the Commission 
consider various potential changes to the proposed ongoing reporting 
requirements for Tier 2 issuers, including: Extending ongoing reporting 
to Tier 1 offerings with some modifications; increasing the ongoing 
reporting requirements for Tier 2 issuers to include analogs to 
Exchange Act Forms 3, 4, and 5 and beneficial ownership reporting on 
Schedules 13D, 13G and 13F; basing the ongoing reporting requirements 
on characteristics of the issuer, such as whether the issuer has taken 
steps to foster a secondary market; or providing different requirements 
for Canadian companies or foreign private issuers. Another commenter 
suggested that we allow issuers to either avoid ongoing reporting or to 
file only financial statements and a management letter regarding 
operations and results if, shortly after commencing the offering upon 
qualification, issuers have less than 300 record holders.\617\
---------------------------------------------------------------------------

    \617\ Heritage Letter.
---------------------------------------------------------------------------

    We do not, however, believe that the changes suggested by 
commenters

[[Page 21846]]

described above are advisable at this time. Instead, we believe the 
approach to ongoing reporting adopted in the final rules is preferable 
and will support a regular flow of information about issuers conducting 
Tier 2 offerings, which will benefit investors in these larger 
offerings and also help foster the development of a secondary market in 
such securities, while balancing the compliance burden that would be 
imposed on smaller issuers. We do not believe that requiring ongoing 
reporting for Tier 1 issuers, other than the requirement to file a Form 
1-Z upon completion or termination of the offering, is necessary for 
Tier 1 offerings. We believe issuers in Tier 1 offerings will be small 
companies whose businesses revolve around products, services, and a 
customer base that will likely be more local in nature than issuers in 
Tier 2 offerings.\618\ Further, we believe Tier 1 offerings will be 
conducted by issuers that are unlikely to seek the creation of a 
secondary trading market in their securities.\619\ In light of this, we 
do not believe that it is necessary to require ongoing reporting for 
Tier 1 issuers. Consistent with our experience under existing 
Regulation A, we do not believe that a lack of ongoing reporting for 
issuers in Tier 1 offerings will adversely affect investors that base 
purchasing decisions on the narrative and financial statement 
disclosure requirements included in the offering statement and, with 
respect to continuous offerings lasting for more than one year, updated 
annually by post-qualification amendment thereafter. Further, 
notwithstanding the suggestions of some commenters,\620\ we believe 
that adopting different ongoing reporting requirements for Canadian 
issuers \621\ would not be consistent with our goal to adopt a uniform 
reporting standard for Tier 2 issuers that provides investors with 
certainty as to the amount of information they can expect to receive 
from an issuer in a Tier 2 offering on an ongoing basis. We believe 
that the final rules will provide investors and potential investors 
with the information they need to make investment decisions and 
facilitate capital formation for smaller companies.
---------------------------------------------------------------------------

    \618\ See fn. 830 in Section II.H.3. below.
    \619\ See discussion of the nature of offerings in Section 
II.H.3. below.
    \620\ DuMoulin Letter; see also McCarter & English Letter.
    \621\ Commenters also suggested that their proposed ongoing 
reporting for Canadian issuers apply to foreign private issuers. As 
noted above in Section II.B.1.c., however, non-Canadian foreign 
issuers are not eligible under Regulation A.
---------------------------------------------------------------------------

    We are therefore adopting the following ongoing reporting 
requirements for Tier 2 offerings:
(1) Annual Reports on Form 1-K
    As proposed and adopted, Form 1-K will consist of two parts: Part I 
(Notification) and Part II (Information to be included in the report). 
The contents of and requirements for Part I and Part II are, with the 
exception of technical amendments to the forms, amendments that are 
necessary to reflect corresponding changes to the required audit 
standards of financial statements filed under Part F/S of Form 1-A, and 
additional guidance designed to streamline disclosure, adopted without 
changes from the proposed rules.
(a) Part I (Notification)
    As adopted, Part I of Form 1-K will be an online XML-based fillable 
form that will 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, the issuer 
will be required to provide certain updated summary information about 
itself and such offering in Part I, including the date the offering was 
qualified and commenced, the amount of securities qualified, the amount 
of securities sold in the offering, the price of the securities, the 
portions of the offering that were sold on behalf of the issuer and any 
selling securityholders, any fees associated with the offering, and the 
net proceeds to the issuer.
    As proposed and adopted, issuers will only be required to fill out 
the XML-based portion of Part I of Form 1-K that relates to the summary 
information about a terminated or completed offering once per offering. 
An issuer that elects to terminate its ongoing reporting obligation 
under Tier 2 of 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, will be required to file the summary 
offering information in Part I of Form 1-K by filing a Form 1-Z (exit 
report) that includes such information.\622\
---------------------------------------------------------------------------

    \622\ General Instruction (3) to Form 1-Z.
---------------------------------------------------------------------------

    The summary information disclosed will facilitate analysis of 
Regulation A offerings by the Commission, other regulators, third-party 
data providers, and market participants and thereby enable the 
Commission and others to evaluate the use and effectiveness of 
Regulation A as a capital formation tool.\623\ The fillable form will 
enable issuers to provide the required information in a convenient 
medium and capture relevant data about the recently terminated or 
completed Regulation A offering. The required disclosure will be 
publicly available on EDGAR. Consistent with Part I of Form 1-A, the 
issuer will not be required to obtain specialty software to file Part I 
of Form 1-K on EDGAR.
---------------------------------------------------------------------------

    \623\ See also discussion in Section II.E.4. below.
---------------------------------------------------------------------------

(b) Part II (Information To Be Included in the Report)
    As with Part II of Form 1-A, the final rules require that the 
issuer submit Part II of Form 1-K electronically as a text file 
attachment containing the body of the disclosure document and financial 
statements, formatted to be compatible with the EDGAR filing system. 
Part II will require issuers to disclose information about themselves 
and their business based on the financial statement and narrative 
disclosure requirements of Form 1-A.\624\
---------------------------------------------------------------------------

    \624\ Part II of Form 1-K.
---------------------------------------------------------------------------

    As adopted, Item 2 to Part II of Form 1-K (Management's Discussion 
and Analysis of Financial Condition and Results of Operation) requires 
issuers, by cross-reference to the requirements of Form 1-A, to provide 
information for the two most recently completed fiscal years. As 
suggested by one commenter,\625\ we are clarifying that the Form 1-K 
cross-reference to the requirements of Item 9 to Part II of Form 1-A 
does not require issuers to include the additional MD&A disclosure 
required in Item 9(c) for issuers that have not received revenue from 
operations during each of the three fiscal years immediately before the 
filing of the offering statement (or since inception, whichever is 
shorter).\626\
---------------------------------------------------------------------------

    \625\ E&Y Letter.
    \626\ See Item 2 to Part II of Form 1-K.
---------------------------------------------------------------------------

    Additionally, we are revising the financial statement requirements 
in Item 7 to Part II of Form 1-K. As proposed, Form 1-K directed 
issuers to the financial statement requirements of Part F/S of Form 1-
A. We are revising this portion of the form so as to include the 
financial statement requirements directly in Item 7 to Part II of Form 
1-K. We believe this change to Item 7 will make it easier for issuers 
to comply by clarifying, as one commenter recommended,\627\ the 
specific portions of Regulation S-X relating to financial

[[Page 21847]]

statements for entities other than the issuer that are required in Form 
1-K. Additionally, since Tier 2 issuers are now permitted to file 
financial statements that are audited in accordance with either U.S. 
GAAS or the standards of the PCAOB, a corresponding change has been 
made to the financial statement requirements of Item 7 of Form 1-
K.\628\ As proposed, the auditor of financial statements would need to 
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. Further, in comparison to the proposed rules, Item 
7(a) no longer requires issuers to provide a list of the financial 
statements included in Form 1-K at the beginning of the financial 
statement section. We eliminated this requirement in the final rules 
because we do not believe that there is a need for a separate list of 
the financial statements at the beginning of this section, when the 
financial statements themselves will be labeled.
---------------------------------------------------------------------------

    \627\ E&Y Letter.
    \628\ See discussion in Section II.C.3.b(2)(c). above.
---------------------------------------------------------------------------

    Form 1-K will permit issuers to incorporate by reference certain 
information previously filed on EDGAR, but will require issuers to 
include a hyperlink to such material on EDGAR.\629\ In a change from 
the proposed rules, the final rules do not limit the availability of 
incorporation by reference to information previously filed pursuant to 
Regulation A. We believe that this change will facilitate the provision 
of required information to investors, while taking a consistent 
approach to information previously provided to the Commission and 
publicly available on EDGAR. Additionally, to avoid unnecessary 
repetition of disclosure items, Form 1-K encourages issuers to cross-
reference items within the form, where applicable.\630\ Further, in 
order to avoid incorporation by reference to stale information without 
requiring the latest version of the document to be filed, Form 1-K 
indicates that, if any substantive modification has occurred in the 
text of any document incorporated by reference since such document was 
filed, the issuer must file with the reference a statement containing 
the text and date of such modification.\631\ Form 1-K will cover:
---------------------------------------------------------------------------

    \629\ General Instruction D. to Form 1-K. The hyperlink to EDGAR 
need only be active at the time of filing of the Form 1-K. Cf. 
Securities Act Rule 411(c) and Exchange Act Rule 12b-32.
    \630\ Id. Issuers may, for example, add a cross-reference to 
disclosure in the financial statements. We have clarified, however, 
that like with Form 1-A, they may not add a cross-reference within 
the financial statements themselves to disclosures elsewhere.
    \631\ Id.
---------------------------------------------------------------------------

     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 executive officers or directors;
     MD&A of the issuer's liquidity, capital resources, and 
results of operations covering the two most recently completed fiscal 
years; and
     Two years of audited financial statements.\632\
---------------------------------------------------------------------------

    \632\ Part II of Form 1-K.
---------------------------------------------------------------------------

    We anticipate that issuers will generally be able to use the 
offering materials as a basis to prepare their ongoing disclosure.
    As adopted in the final rules, Form 1-K includes requirements for 
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.\633\ Form 1-K must be filed within 120 calendar 
days after the issuer's fiscal year end.\634\ A manually signed copy of 
the Form 1-K must 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.\635\ Issuers will be required to produce the manually 
signed copy to the Commission, upon request.\636\ Any amendments to the 
form must comply with the requirements of the applicable items and be 
filed under cover of Form 1-K/A.\637\
---------------------------------------------------------------------------

    \633\ See Item 7 (Financial Statements), Part II of Form 1-K.
    \634\ See General Instruction A.(2), Form 1-K.
    \635\ See General Instruction C., Form 1-K.
    \636\ Id.
    \637\ See Rule 257(c) (also requiring the signature on behalf of 
an authorized representative of the issuer and the inclusion of any 
specified certifications).
---------------------------------------------------------------------------

(2) Semiannual Reports on Form 1-SA
    We are adopting final rules for semiannual interim reporting for 
Regulation A issuers generally as proposed, with technical amendments 
and additional guidance designed to streamline the disclosure 
requirements for Tier 2 issuers and harmonize them with the 
requirements of issuers subject to an ongoing reporting obligation 
under the Exchange Act.\638\ As proposed, we continue to believe that a 
semiannual, rather than a quarterly, reporting requirement strikes an 
appropriate balance between the need to provide information to the 
market and the cost of compliance for smaller issuers, especially given 
the further flexibility provided to issuers in Form 1-U to provide 
quarterly information if they elect to do so.\639\ Issuers will be 
required to provide semiannual reports on Form 1-SA that, much like 
reports on Form 10-Q, consist primarily of financial statements and 
MD&A.\640\ Unlike Form 10-Q, however, Form 1-SA does not require 
disclosure about quantitative and qualitative market risk, controls and 
procedures, updates to risk factors, or defaults on senior 
securities.\641\ We do not believe such disclosure is necessary for 
ongoing reports under Regulation A, as we believe such disclosure is 
not applicable to, or appropriately tailored for, the types of issuers 
likely to conduct Regulation A offerings.
---------------------------------------------------------------------------

    \638\ Rule 257(b)(3); Form 1-SA.
    \639\ Consistent with the suggestions of commenters, we are 
clarifying that issuers seeking to voluntarily report information to 
the market on a more frequent basis may do so under the final rules 
for current reporting on Form 1-U. See discussion in Section 
II.E.1.c(3). below; see also discussion in Section II.E.2.c. below 
regarding the provision of ongoing reports as it applies to 
Securities Act Rule 144.
    \640\ See Part I (Financial Information) of Form 10-Q, 17 CFR 
249.308a.
    \641\ See Item 3 and Item 4 of Part I of Form 10-Q.
---------------------------------------------------------------------------

    Consistent with the technical, specialized suggestions of several 
commenters,\642\ we are including provisions in Form 1-SA that will 
help issuers comply with the form requirements, eliminate potential 
confusion over such requirements, and streamline and harmonize 
disclosure to make the requirements for Tier 2 issuers no more onerous 
than, and consistent with, the ongoing disclosures required of smaller 
reporting companies under the Exchange Act. Specifically, the final 
rules:
---------------------------------------------------------------------------

    \642\ See, e.g., E&Y Letter; KPMG letter.
---------------------------------------------------------------------------

     Add clarifying language to Item 1 (Management Discussion 
and Analysis of Financial Condition and Results of Operations) of Form 
1-SA to indicate that compliance with this disclosure requirement only 
applies to the interim financial statements required by Item 3 to Form 
1-SA and that, similar to our clarification of Form 1-K's requirements, 
issuers are not required to

[[Page 21848]]

include the additional MD&A disclosure required by Item 9(c) of Form 1-
A; \643\
---------------------------------------------------------------------------

    \643\ See Section II.F.1.c.(1)(b) above for a discussion of this 
clarification in Form 1-K.
---------------------------------------------------------------------------

     Update the financial statement disclosure requirements of 
Form 1-SA to more clearly delineate the requirements for compliance 
with Item 3 of Form 1-SA;
     Provide that the financial statements that must be 
included pursuant to Item 3 may be condensed, in addition to being 
unaudited, and that the financial statements are not required to be 
reviewed;
     Amend the final form to note that additional guidance on 
the presentation of financial statements and footnotes and other 
disclosures can be found in Rule 8-03 of Regulation S-X; \644\
---------------------------------------------------------------------------

    \644\ Tier 2 issuers are required under Part F/S of Form 1-A to 
provide financial statements that comply with Article 8 of 
Regulation S-X.
---------------------------------------------------------------------------

     Revise the requirements of Item 3(e) of Form 1-SA to match 
the disclosure language contained in Rule 3-10 of Regulation S-X for 
smaller reporting companies;
     Delete the requirement in Item 3(d) of proposed Form 1-SA 
to present interim statements of changes in financial position for the 
period between the end of the preceding fiscal year and the end of the 
interim period covered by this report, and for the corresponding period 
of the preceding fiscal year, as this is not required of issuers under 
Rule 8-03 of Regulation S-X; and
     Make the ongoing reporting requirements under Item 3 of 
Form 1-SA more consistent with what is required of issuers subject to 
an ongoing reporting obligation under the Exchange Act, consistent with 
the suggestion of one commenter,\645\ by eliminating the line item 
requirements of Item 3(f) and (g), as Rule 3-16 and Rule 4-10 of 
Regulation S-X generally do not require the disclosure of such 
information other than in registration statements and annual reports.
---------------------------------------------------------------------------

    \645\ E&Y Letter.
---------------------------------------------------------------------------

    As adopted, Form 1-SA will require disclosure of updates otherwise 
reportable on Form 1-U. The final rules permit issuers to incorporate 
by reference in Form 1-SA certain information previously filed on 
EDGAR, but must include a hyperlink to such material on EDGAR.\646\ In 
a change from the proposed rules, the final rules do not limit the 
availability of incorporation by reference to information previously 
filed pursuant to Regulation A. We believe that this change will 
continue to facilitate the provision of required information to 
investors, while taking a consistent approach to information previously 
provided to the Commission and publicly available on EDGAR. 
Additionally, in a change from the proposed form that seeks to avoid 
unnecessary repetition of disclosure items, Form 1-SA encourages 
issuers to cross-reference items within the form, where 
applicable.\647\ Further, in order to avoid incorporation by reference 
to stale information without requiring the latest version of the 
document to be filed, Form 1-SA indicates that, if any substantive 
modification has occurred in the text of any document incorporated by 
reference since such document was filed, the issuer must file with the 
reference a statement containing the text and date of such 
modification.\648\
---------------------------------------------------------------------------

    \646\ General Instruction D. to Form 1-SA. The hyperlink to 
EDGAR need only be active at the time of filing of the Form 1-SA. 
Cf. Securities Act Rule 411(c) and Exchange Act Rule 12b-32.
    \647\ Id. Issuers may, for example, add a cross-reference to 
disclosure in the financial statements. We have clarified, however, 
that like with Form 1-A, they may not add a cross-reference within 
the financial statements themselves to disclosures elsewhere.
    \648\ Id.
---------------------------------------------------------------------------

    Form 1-SA must be filed within 90 calendar days after the end of 
the first six months of the issuer's fiscal year.\649\ The first such 
obligation to file will commence immediately 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 six months of the fiscal year following the 
most recent full fiscal year, for the first six months of the following 
fiscal year.\650\ As proposed, a manually signed copy of the Form 1-SA 
must be executed by the issuer and related signatories before or at the 
time of filing, retained by the issuer for a period of five years, and 
produced by the issuer to the Commission, upon request.\651\ The final 
rules require, as proposed, any amendments to the form to comply with 
the requirements of the applicable items and be filed under cover of 
Form 1-SA/A.\652\
---------------------------------------------------------------------------

    \649\ See General Instruction A.(2), Form 1-SA.
    \650\ For example, where an offering statement is filed in 
October 2015 and includes full financial statements for the fiscal 
years ended December 31, 2014 and December 31, 2013 and interim 
financial statements for the six months ended June 30, 2015 and June 
30, 2014 and is qualified in December 2015, the Form 1-SA will not 
be required until within 90 days following the first six months of 
the following fiscal year (i.e., within 90 days following June 30, 
2016).
    If, however, the offering statement is filed in March 2015 and 
qualified in June of 2015 than the first Form 1-SA would cover the 
six months ended June 30, 2015 and June 30, 2014 and would not be 
required to be filed until within 90 days following June 30, 2015.
    \651\ See General Instruction C. to Form 1-SA.
    \652\ See Rule 257(c).
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(3) Current Reports on Form 1-U
    In addition to the annual report on Form 1-K and semiannual report 
on Form 1-SA, the final rules require issuers to submit current reports 
on Form 1-U. The final rules are being adopted largely as proposed with 
one change and some technical amendments and additional guidance 
designed to ease compliance with the final rules and eliminate 
potential confusion as to the scope and applicability of the disclosure 
requirements. The final rules require issuers to submit a report on 
Form 1-U when it experiences one (or more) of the following events:
     Fundamental changes; \653\
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    \653\ As discussed below, disclosure pursuant to this 
requirement is limited to the entry into or termination of material 
definitive agreements resulting in fundamental changes in the nature 
of an issuer's business. More generally, a fundamental change in the 
nature of an issuer's business includes 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.
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     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 10% or more of outstanding equity 
securities.
    Additionally, as proposed, Item 9 of final Form 1-U contains 
provisions for disclosing other events not directly required of issuers 
in the form. As noted above in the context of suggestions by commenters 
to require or permit quarterly reporting by issuers,\654\ issuers that 
elect to provide relevant information to the market on, for example, a 
quarterly basis may do so pursuant to Item 9 (Other Events) of Form 1-
U.\655\
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    \654\ See fn. 639 and 604 above.
    \655\ An issuer seeking to, for example, report information that 
satisfies, and on a frequency that accords with, the requirements of 
Exchange Act Rule 15c2-11(a)(5) and (g) or Securities Act Rule 
144A(d)(4) may do so pursuant to Item 9 of Form 1-U.
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    Notwithstanding the view of some commenters,\656\ we believe that 
Form 1-U should be required of all Tier 2

[[Page 21849]]

issuers, including smaller issuers. We believe that, on balance, the 
benefit of requiring a uniform base level of disclosure to investors of 
current event reporting for all issuers in Tier 2 offerings outweighs 
any potential additional compliance cost to smaller issuers. 
Additionally, given the inclusion of only the most significant events 
in the list of disclosable current events on Form 1-U, we do not 
anticipate that issuers, particularly smaller issuers, will on average 
be required to file many reports in this regard.
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    \656\ ABA BLS Letter; Milken Institute Letter.
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    In a change from the proposed rules, and consistent with the 
suggestions of commenters,\657\ the final rules increase the threshold 
below which an issuer need not report unregistered sales of equity 
securities pursuant to Item 8 of Form 1-U from 5% to 10% of the number 
of shares outstanding of the class of equity securities sold. We 
believe that this increase in the threshold below which an issuer would 
not be required to report such sales remains consistent with our 
general approach to the final rules for Form 1-U--namely, that Form 1-U 
should reflect the most significant or substantial events that an 
issuer may experience in the interim period between the filing of the 
required periodic reports.
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    \657\ ABA Letter; MoFo Letter.
---------------------------------------------------------------------------

    We are not amending Item 1 of Form 1-U to alter the use of the term 
``fundamental change,'' as suggested by some commenters.\658\ We are, 
however, revising Instruction 2 to Item 1 to make clear that the 
transactions described therein are deemed to be ``fundamental changes'' 
solely for purposes of Item 1 of Form 1-U and should not be read to 
influence the definition of that term in other contexts.\659\ Item 1 of 
Form 1-U is meant to require issuers to disclose material definitive 
agreements, including agreements to acquire other entities, which 
result or would reasonably be expected to result in fundamental changes 
to the nature of the issuer's business or plan of operations. As 
Instruction 2 to Item 1 indicates, certain transactions are deemed to 
involve fundamental changes, and disclosure of these transactions, as 
prescribed by Item 1 is required. Consistent with the suggestion of one 
commenter,\660\ we are narrowing from the proposed rules the 
applicability of Instruction 2(a) so that an acquisition transaction 
will only result in a fundamental change for these purposes if the 
purchase price, as defined by U.S. GAAP and IFRS, exceeds 50% of the 
total consolidated assets of the issuer as of the end of the most 
recently completed fiscal year.\661\ We believe that this is consistent 
with our general goal of only requiring disclosure of significant and 
substantial matters that may affect an issuer's business or plan of 
operations. We believe that this requirement is appropriately tailored 
for the types of issuers likely to conduct Tier 2 offerings by 
providing them with important flexibility as to the determination of a 
``fundamental change,'' while providing clear guidance that certain 
transactions will always trigger disclosure under Item 1.
---------------------------------------------------------------------------

    \658\ See E&Y Letter; see also ABA BLS Letter; Canaccord Letter.
    \659\ Item 1(d) to Form 1-U.
    \660\ E&Y Letter.
    \661\ Instruction(s) 2(b)-(c) to Item 1 of Form 1-U are adopted, 
as proposed.
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    On a related point, we continue to believe, despite the suggestions 
of some commenters,\662\ that a fundamental change standard for some of 
the disclosure requirements in Form 1-U is a more appropriately 
tailored standard for Tier 2 issuers than a broader materiality 
standard. A fundamental (as opposed to a material) change to the nature 
of an issuer's business includes major and substantial changes to the 
issuer's business or plan of operations or changes reasonably expected 
to result in such changes.\663\ The final rules reflect our belief 
that, on balance, Tier 2 issuers should only be required make 
disclosures in Form 1-U that reflect major and substantial changes to 
business plans or operations, as opposed to material events that are 
otherwise reportable in their periodic reports. Moreover, we do not 
believe that a fundamental change standard will cause confusion or 
raise concerns as to the applicability of other standards applicable in 
the anti-fraud provisions of the federal securities laws.
---------------------------------------------------------------------------

    \662\ E&Y Letter; Massachusetts Letter 2; NASAA Letter 2; WDFI 
Letter.
    \663\ See Instruction 2(a) to Item 1 for the circumstances when 
an acquisition transaction would be deemed to trigger a fundamental 
change for purposes of Form 1-U.
---------------------------------------------------------------------------

    Additionally, we note that Item 6 of Form 1-K and Item 2 of Form 1-
SA permit issuers to disclose any information required to be disclosed 
under Form 1-U, but not so reported. For example, if an event occurs 
that would, under normal circumstances, require an issuer to file a 
Form 1-U within four business days, but such issuer is due to file 
either its annual or semiannual report within that period, then the 
issuer may instead report such information in its periodic report.
    Finally, contrary to the suggestions of some commenters,\664\ we 
continue to believe that the requirement to report unregistered sales 
of securities in Item 8 of Form 1-U will provide investors with 
valuable current information as to significant capital raising events 
by the issuer and should be disclosed in a timely manner to the market. 
We therefore retain this disclosure requirement in the final 
rules.\665\
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    \664\ ABA BLS Letter; MoFo Letter.
    \665\ Item 8 to Form 1-U. We have also clarified in Item 8(b) 
that only periodic reports that contain disclosure regarding 
unregistered sales of equity securities will reset the five percent 
reporting threshold for unregistered sales of securities, rather 
than any periodic report.
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    As adopted, Form 1-U must be filed within four business days after 
the occurrence of any of the triggering events, and, where applicable, 
will permit issuers to incorporate by reference certain information 
previously filed on EDGAR.\666\ Notwithstanding the suggestions of some 
commenters,\667\ we believe that requiring issuers to file the form 
within four business days, as opposed to fifteen business days, is 
appropriate in an ongoing reporting regime that otherwise only requires 
issuers to provide annual and semiannual reports. Further, we are 
concerned that extending the filing deadline for Form 1-U reports would 
make the reporting of disclosable events no longer ``current.'' We are 
therefore adopting the timing requirements, as proposed. Additionally, 
in a change from the proposed rules, the final rules do not limit the 
availability of incorporation by reference to information previously 
filed pursuant to Regulation A. We believe that this change will 
continue to facilitate the provision of required information to 
investors, while taking a consistent approach to information previously 
provided to the Commission and publicly available on EDGAR.
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    \666\ General Instruction D. to Form 1-U. The hyperlink to EDGAR 
need only be active at the time of filing of the Form 1-U. Cf. 
Securities Act Rule 411(c) and Exchange Act Rule 12b-32.
    \667\ ABA BLS Letter; E&Y Letter; Milken Institute Letter.
---------------------------------------------------------------------------

    Additionally, consistent with the changes made to Form 1-K and Form 
1-SA and suggestions of at least one commenter,\668\ Form 1-U 
encourages issuers to cross-reference items within the form, where 
applicable.\669\ Further, in order to avoid incorporation by reference 
to stale information without requiring the latest version of the

[[Page 21850]]

document to be filed, Form 1-U indicates that, if any substantive 
modification has occurred in the text of any document incorporated by 
reference since such document was filed, the issuer must file with the 
reference a statement containing the text and date of such 
modification.\670\ A manually signed copy of the Form 1-U must 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.\671\ 
Issuers are required to produce the manually signed copy to the 
Commission, upon request.\672\ Any amendments to the Form 1-U must 
comply with the requirements of the applicable items, and be filed 
under cover of Form 1-U/A.\673\
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    \668\ PwC Letter.
    \669\ General Instruction D. to Form 1-U. We have clarified, 
however, that like with Form 1-A, they may not add a cross-reference 
within any financial statements that may be included to disclosures 
elsewhere.
    \670\ Id.
    \671\ See General Instruction C to proposed Form 1-U.
    \672\ Id.
    \673\ Rule 257(c).
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(4) Special Financial Reports on Form 1-K and Form 1-SA
    We did not receive any comment on the proposed provisions for 
special financial reports and are adopting them as proposed with one 
minor clarifying change. This report serves 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. Where applicable, issuers conducting Tier 2 
offerings must provide special financial reports analogous to those 
required under Exchange Act Rule 15d-2.\674\ The special financial 
report requires audited financial statements for the issuer's most 
recent fiscal year (or for the life of the issuer if less than a full 
fiscal year) to be filed not later than 120 calendar days after 
qualification of the offering statement if the offering statement does 
not include such financial statements.\675\ The special financial 
report requires 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 does not include such financial statements and the 
offering statement was qualified in the second half of the issuer's 
current fiscal year.\676\ The special financial report must be filed 
under cover of Form 1-K if it includes audited year end financial 
statements and under cover of Form 1-SA if it includes semiannual 
financial statements for the first six months of the issuer's fiscal 
year.\677\ The financial statement and auditing requirements must 
follow the requirements of those forms, and the issuer must indicate on 
the front page of the applicable form that only financial statements 
are included.\678\
---------------------------------------------------------------------------

    \674\ 17 CFR 240.15d-2.
    \675\ Rule 257(b)(2)(ii). As adopted, we are revising Rule 
257(b)(2)(ii) to reference the fiscal year or other period specified 
in Rule 257(b)(2)(i)(A), in order to avoid potential confusion about 
which most recent fiscal year is covered.
    \676\ Id.
    \677\ Id.
    \678\ See General Instruction A.(3) to Form 1-K and General 
Instruction A.(3) to Form 1-SA.
---------------------------------------------------------------------------

(5) Reporting by Successor Issuers
    We did not receive any comment on reporting by successor issuers, 
and we are adopting the proposed rules without change. 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 are issued to the holders of any class of securities of an issuer 
that is subject to ongoing reporting under Tier 2, the issuer 
succeeding to that class of securities must continue to file the 
reports required for Tier 2 offerings on the same basis as would have 
been required of the original Tier 2 issuer.\679\ The successor issuer 
may suspend or terminate its reporting obligations on the same basis as 
the original issuer under Rule 257(d).\680\
---------------------------------------------------------------------------

    \679\ See Rule 257(b)(5).
    \680\ See Section II.E.4. below for a discussion of the 
suspension or termination of disclosure obligations.
---------------------------------------------------------------------------

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.\681\ 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.\682\ 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.\683\ 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.\684\
---------------------------------------------------------------------------

    \681\ 17 CFR 240.15c2-11.
    \682\ See Rel. No. 34-39670 (Feb. 17, 1998) (Publication or 
Submission of Quotations Without Specified Information) (describing 
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).
    \683\ 17 CFR 240.15c2-11(a); See also Rel. No. 34-29094 (April 
17, 1991) [56 FR 19148].
    \684\ See 17 CFR 240.15c2-11 (Preliminary Note).
---------------------------------------------------------------------------

    A broker-dealer can 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 and includes, 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.\685\
---------------------------------------------------------------------------

    \685\ 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 private issuers 
that claim the registration exemption or information specified in 
Rule 15c2-11(a)(5) for non-reporting issuers.
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a. Proposed Rules
    As proposed, the 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 semiannual 
basis, with additional provisions for current reporting, would satisfy 
a broker-dealer's obligations under Rule 15c2-11 to review and maintain 
records of basic information about an issuer and its securities. In 
this regard, we proposed 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.\686\
---------------------------------------------------------------------------

    \686\ In addition, we proposed a technical amendment to Rule 
15c2-11 to amend subsection (d)(2)(i) of the rule to update the 
outdated reference to ``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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[[Page 21851]]

    We also solicited comment on other potential effects that Tier 2 
ongoing reporting under Regulation A could have under other provisions 
of the federal securities laws, such as whether timely ongoing 
Regulation A reporting under Tier 2 should constitute ``adequate 
current public information'' for purposes of paragraph (c) of Rule 
144.\687\ Under this provision, issuers are required to make available 
adequate current public information about themselves, which, for 
issuers not subject to Exchange Act reporting, must include certain 
information described in Exchange Act Rule 15c2-11(a)(5).\688\ We also 
solicited comment on whether ongoing Regulation A reporting for Tier 2 
offerings should satisfy the information requirements of paragraph 
(d)(4) of Rule 144A.\689\ 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.'' \690\
---------------------------------------------------------------------------

    \687\ 17 CFR 230.144(c).
    \688\ 17 CFR 230.144(c)(2); see also 17 CFR 230.15c2-11(a), (g).
    \689\ 17 CFR 230.144A(d)(4).
    \690\ Id.
---------------------------------------------------------------------------

b. Comments on Proposed Rules
    All commenters that addressed Rule 15c2-11 supported amending the 
rule in the manner proposed.\691\ Some commenters recommended further 
amending Rule 15c2-11(g) to provide that an issuer that is current in 
its Tier 2 obligations would be deemed to have ``reasonably current'' 
financial information, even if its most current balance sheet is as of 
a date up to nine months old and it has not provided other updated 
information.\692\ Most commenters also recommended amending Rule 144(c) 
to allow for ongoing reporting under Tier 2 to constitute ``adequate 
current public information.'' \693\ Other commenters recommended 
amending Rule 144A(d)(4) to allow for ongoing reporting under Tier 2 to 
satisfy the ``reasonably current information'' requirements of that 
rule.\694\ Although the proposal did not solicit comment on Rule 
144(i), one commenter recommended amending this rule to allow former 
shell companies to rely on Rule 144 if they have been current in their 
ongoing reporting under Regulation A for a certain period of time and 
without having to file a Form 10.\695\ One commenter also supported 
allowing use of the Rule 144 safe harbor for former shell companies 
that were not previously registered under the Exchange Act and that are 
now selling securities under Regulation A.\696\ Another commenter 
requested that the Commission limit the prohibitions on reliance on 
Rule 144 only to Exchange Act registered issuers.\697\
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    \691\ ABA BLS Letter; Canaccord Letter; CFIRA Letter 1; KVCF 
Letter; Milken Institute Letter; MoFo Letter; Paul Hastings Letter; 
Public Startup Co. Letter 1; REISA Letter; WR Hambrecht + Co Letter.
    \692\ ABA BLS Letter; Canaccord Letter; Milken Institute Letter; 
MoFo Letter.
    \693\ ABA BLS Letter; Canaccord Letter; CFIRA Letter 1; McCarter 
& English Letter; Paul Hastings Letter; KVCF Letter; Milken 
Institute Letter; Richardson Patel Letter; REISA Letter; WR 
Hambrecht + Co Letter.
    \694\ ABA BLS Letter; Canaccord Letter; Milken Institute Letter; 
MoFo Letter.
    \695\ McCarter & English Letter.
    \696\ Public Startup Co. Letter 1.
    \697\ Letter from Jason Coombs, Co-Founder and CEO, Public 
Startup Company, Inc., March 24, 2014 (``Public Startup Co. Letter 
2'').
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c. Final Rules
    We are adopting final rules for Regulation A that, as proposed, 
amend Exchange Act Rule 15c2-11(a) so that an issuer's ongoing reports 
filed under Tier 2 will satisfy the specified information about an 
issuer and its security that a broker-dealer must review before 
publishing a quotation for a security (or submitting a quotation for 
publication) in a quotation medium. In addition, we are adopting, as 
proposed, a technical amendment to Rule 15c2-11 to amend subsection 
(d)(2)(i) of the rule to update the outdated reference to ``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.
    We are not following the suggestions of some commenters that we 
adopt provisions in the final rules so that Tier 2 ongoing reports will 
satisfy the current information requirements of Rule 144 and Rule 144A 
for the entirety of an issuer's fiscal year. While commenters were 
generally supportive, we do not believe that the frequency of the 
required Tier 2 ongoing reporting merits a broad determination that 
such reports will constitute ``adequate public information'' or 
``reasonably current information'' on a year-round basis. On the 
contrary, quarterly reporting is an integral part of the resale safe 
harbors provided for in Rule 144 and Rule 144A that contemplate the 
provision of ongoing and continuous information.\698\ While the 
semiannual reporting required under the final rules for Tier 2 
offerings will result in issuers only having ``reasonably current 
information'' and ``adequate current public information'' for the 
portions of the year during which the financial statements of such 
issuers continue to satisfy the respective rules,\699\ we note that 
issuers may voluntarily submit on Form 1-U quarterly financial 
statements or other information necessary to satisfy the respective 
rule requirements.\700\ In such instances, and provided that the 
financial statements otherwise meet the financial statement 
requirements of Form 1-SA, such voluntarily provided quarterly 
information could satisfy the ``reasonably current information'' and 
``adequate current public information'' requirements of Rule 144 and 
Rule 144A. An issuer that is therefore current in its semiannual 
reporting required under the rules and voluntarily provides quarterly 
financial statements on Form 1-U will have provided reasonably current 
and adequate current public information for the entirety of such year 
under Rule 144 and Rule 144A.
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    \698\ See, e.g., Rel. No. 33-6099 (Aug. 2, 1979) (Question 20). 
See also Section 13(a) of the Exchange Act, which contemplates, but 
does not prescribe, reasonably current information in the context of 
annual and quarterly reporting. 15 U.S.C. 78m(a).
    \699\ See Securities Act Rule 144(c)(2); Securities Act Rule 
144A(d)(4)(ii); Exchange Act Rule 15c2-11(a) and Rule 15c2-11(g).
    \700\ See Item 9 of Form 1-U; see also Section II.E.1.c(3). and 
fn. 655 above.
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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.\701\ 
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.\702\
---------------------------------------------------------------------------

    \701\ 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.
    \702\ See also Section II.B.6. above for a discussion of the 
conditional exemption from Section 12(g) adopted in the final rules 
today.
---------------------------------------------------------------------------

    An issuer registering a class of securities under Section 12 of the 
Exchange Act must file either a Form

[[Page 21852]]

10 \703\ or Form 8-A \704\ with the Commission. Form 10 is the general 
form 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 to avoid having the issuer restate the 
contents of its Securities Act registration statement in its Exchange 
Act registration statement.\705\
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    \703\ 17 CFR 249.210. Foreign private issuers must file a Form 
20-F, 17 CFR 249.220f, or, where available, a Form 8-A.
    \704\ 17 CFR 249.208a.
    \705\ See 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.'').
---------------------------------------------------------------------------

a. Proposed Rules
    As proposed, issuers conducting offerings under Regulation A that 
seek to list their securities on a national securities exchange or 
otherwise register a class of securities under the Exchange Act would 
be required to file a registration statement on Form 10. We solicited 
comment, however, on whether we should provide a simplified means for 
Regulation A issuers to register a class of securities under the 
Exchange Act, for example, by 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.
    We also invited 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.
b. Comments on Proposed Rules
    Many commenters recommended that Regulation A issuers be allowed to 
use Form 8-A to register a class of securities under the Exchange Act 
in Tier 2 offerings.\706\ Some of these commenters limited their 
recommendation to when the issuer follows the requirements of Part I of 
Form S-1 in its offering circular.\707\ Separately, three commenters 
recommended allowing issuers to use a ``super'' Form 8-A that would 
require issuers to include any disclosure that is required in a Form 
10, but is not included in the chosen offering circular format under 
Form 1-A.\708\ Several commenters suggested allowing issuers to use a 
Form 10 that would go effective immediately as an alternative to filing 
a Form 8-A.\709\ This process could be used to register securities 
under the Exchange Act when a simultaneous exchange listing was not 
contemplated. Other commenters recommended limiting the use of Form 8-A 
to situations contemporaneous with qualification of an offering 
statement,\710\ within 12 months of qualification,\711\ or after a 
brief time period after an offering statement is qualified.\712\ 
Separately, two commenters recommended that Regulation A issuers that 
become Exchange Act reporting companies be considered ``emerging growth 
companies.'' \713\ One commenter recommended allowing issuers to use 
Form 8-A but to continue using Regulation A reports until its non-
affiliate market capitalization reached $250 million.\714\
---------------------------------------------------------------------------

    \706\ ABA BLS Letter; Canaccord Letter; CFIRA Letter 1; CFIRA 
Letter 2; Fallbrook Technologies Letter; Frutkin Law Letter; 
McCarter & English Letter; Milken Institute Letter; MoFo Letter; OTC 
Markets Letter; Paul Hastings Letter; Richardson Patel Letter; WR 
Hambrecht + Co Letter.
    \707\ ABA BLS Letter; CFIRA Letter 1; WR Hambrecht + Co Letter.
    \708\ Canaccord Letter; Milken Institute Letter; MoFo Letter.
    \709\ ABA BLS Letter; Canaccord Letter; MoFo Letter.
    \710\ Milken Institute Letter.
    \711\ Frutkin Law Letter; Richardson Patel Letter.
    \712\ McCarter & English Letter.
    \713\ ABA BLS Letter; MoFo Letter.
    \714\ Paul Hastings Letter.
---------------------------------------------------------------------------

    Two commenters encouraged the Commission to foster the development 
of venture exchanges on which Regulation A securities could be 
traded,\715\ while another commenter largely opposed the creation of 
venture exchanges.\716\
---------------------------------------------------------------------------

    \715\ Heritage Letter; SBIA Letter.
    \716\ OTC Markets Letter.
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c. Final Rules
    In the final rules, and consistent with the views of many 
commenters,\717\ we are simplifying Exchange Act registration in 
connection with Regulation A offerings conducted pursuant to Tier 2 so 
that issuers wishing to register a class of Regulation A securities 
under the Exchange Act may do so by filing a Form 8-A in conjunction 
with the qualification of a Form 1-A. Only issuers that follow Part I 
of Form S-1 or the Form S-11 disclosure model in the offering circular 
will be permitted to use Form 8-A.\718\ An issuer registering a class 
of securities under the Exchange Act concurrently with the 
qualification of a Regulation A offering statement will become an 
Exchange Act reporting company upon effectiveness of the Form 8-A and, 
if applicable, its obligation to file ongoing reports under Regulation 
A will be suspended for the duration of the resulting reporting 
obligation under Section 13 of the Exchange Act.\719\ While some 
commenters suggested that we permit issuers to rely on the Form 8-A to 
register a class of securities for up to 12 months following the 
qualification of an offering statement, we believe limiting short form 
registration to situations in which an offering statement is being 
concurrently qualified will help ensure that the disclosures 
incorporated by reference into the Form 8-A, including financial 
statements contained in the offering statement are current.\720\ The 
final rules would not, however, prevent an issuer from registering a 
class of securities under the Exchange Act on Form 8-A concurrent with 
the re-qualification of a previously qualified offering statement.
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    \717\ See fn. 706 above.
    \718\ See Form 8-A, General Instructions A(c).
    \719\ As discussed more fully in in Section II.E.4. below, a 
Tier 2 issuer may terminate its Regulation A ongoing disclosure 
obligation when it is no longer subject to the ongoing reporting 
requirements of Section 13 of the Exchange Act. See also Rule 
257(e).
    \720\ In order to ensure that registration on Form 8-A is 
limited to a concurrently qualified Regulation A offering statement, 
the amendments to Form 8-A expressly limit the use of the form to 
instances where the filing of the Form 8-A and, where applicable, 
the receipt by the Commission of certification from the national 
securities exchange listed on the form occur within five calendar 
days after the qualification of the Regulation A offering statement.
---------------------------------------------------------------------------

    We recognize that Exchange Act reporting requires more 
comprehensive ongoing reporting than the Regulation A disclosure 
regime, which is why facilitating issuers' entrance into the Exchange 
Act reporting system on Form 8-A concurrent with the qualification of a 
Regulation A offering statement will benefit investors. At a minimum, 
issuers pursuing this route to exchange listing must meet listing 
standards of, and be certified by, the exchange before the Form 8-A 
will be declared effective. In order to be approved for listing on an 
exchange, issuers generally must meet certain size, financial, minimum 
securities distribution (or liquidity), and corporate governance 
criteria.\721\

[[Page 21853]]

Additionally, in order to maintain listing on an exchange, issuers must 
maintain certain qualitative and quantitative continued listing 
standards.\722\ Therefore, in addition to the provision of ongoing 
Exchange Act reports, investors will benefit from the issuer's 
satisfaction of the exchange's initial and ongoing listing standards, 
and may benefit from greater liquidity for their shares as a result.
---------------------------------------------------------------------------

    \721\ See, e.g., Initial Listing Guide for the NASDQAQ Stock 
Market, available at: https://listingcenter.nasdaq.com/assets/initialguide.pdf; U.S. Listing Standards for the New York Stock 
Exchange (NYSE), available at: https://www.nyse.com/publicdocs/nyse/listing/NYSE%20_Initial_Listing_Standards_Summary.pdf.
    \722\ See, e.g., Continued Listing Guide for the NASDQAQ Stock 
Market, available at: https://listingcenter.nasdaq.com/assets/continuedguide.pdf; Continued Listing Standards for the New York 
Stock Exchange (NYSE), available at: https://www.nyse.com/get-started/reference.
---------------------------------------------------------------------------

    As suggested by commenters, we believe that our accommodation 
should be limited to instances where an issuer provides disclosure in 
Part II of Form 1-A that follows Part I of Form S-1 or Form S-11, 
instead of the Offering Circular format. While all formats require 
extensive disclosure that, with the exception of item numbering, is 
similar in many respects, we believe that an issuer entering Exchange 
Act reporting should provide disclosure in a manner that is generally 
consistent with the requirements of issuers entering the Exchange Act 
reporting regime through registered offerings.\723\ In this regard, we 
note that issuers qualifying an offering statement that follows Part I 
of Form S-1 or Form S-11 will, however, be required to follow the 
financial statement requirements of Part F/S of Form 1-A. For purposes 
of concurrent Exchange Act registration, the financial statements 
included in Form 1-A must be audited in accordance with the standards 
of the PCAOB by a PCAOB-registered auditor that is independent pursuant 
to Article 2 of Regulation S-X.\724\ After effectiveness of the Form 8-
A, they will be subject to Exchange Act reporting and compliance with 
the financial statement requirements of Exchange Act reporting 
companies.
---------------------------------------------------------------------------

    \723\ See Section II.C.3.b(2)(c). above for a description of the 
financial statement requirements.
    \724\ See General Instruction A.(a) to Form 8-A.
---------------------------------------------------------------------------

    Consistent with the suggestion of commenters,\725\ we agree that 
issuers entering Exchange Act reporting under a qualified Regulation A 
offering statement and Form 8-A will be considered ``emerging growth 
companies'' to the extent the issuers otherwise qualify for such 
status. Issuers should base status determinations on the definition of 
an emerging growth company as it appears in the Securities Act and the 
Exchange Act.\726\
---------------------------------------------------------------------------

    \725\ ABA BLS Letter; MoFo Letter.
    \726\ 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). See also Section 3(a)(80) of the Exchange Act (which 
repeats the same definition). 15 U.S.C. 78c(a)(80).
---------------------------------------------------------------------------

    As noted above, the Proposing Release sought comment on whether we 
should consider encouraging the development of venture exchanges or 
other trading venues to facilitate the secondary market trading of 
Regulation A securities. We are considering venture exchanges as a way 
to provide liquidity for smaller issuers, and are contemplating their 
use for Regulation A securities as part of that consideration.
4. Exit Report on Form 1-Z
a. Proposed Rules
(1) Summary Information on Terminated or Completed Offerings
    As discussed in Section II.E.1. above, we proposed 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 Form 1-K,\727\ we proposed to convert the Form 2-A information 
into an online XML-based fillable form with indicator boxes or buttons 
and text boxes to be filed electronically with the Commission as Part I 
of proposed 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.\728\ As 
proposed, the summary offering information disclosed on Form 1-Z would 
be publicly available on EDGAR (but not otherwise required to be 
distributed to investors) and 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.
---------------------------------------------------------------------------

    \727\ See also discussion in Section II.C.1. (Electronic Filing; 
Delivery Requirements) and Section II.C.3.a. (Part I (Notification)) 
above.
    \728\ See Section II.E.1. above for a discussion of the 
requirements for proposed Form 1-K.
---------------------------------------------------------------------------

(2) Termination or Suspension of Tier 2 Disclosure Obligations
    We further proposed to permit a Tier 2 issuer that has filed all 
ongoing reports required by Regulation A for the shorter of (1) the 
period since the issuer became subject to such reporting obligation or 
(2) 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.\729\ 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 with the 
Commission on Part II of proposed 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.\730\ Issuers would be required to produce 
the manually signed copy to the Commission, upon request.\731\
---------------------------------------------------------------------------

    \729\ See proposed Rule 257(d)(2).
    \730\ See Instruction to proposed Form 1-Z.
    \731\ Id.
---------------------------------------------------------------------------

    We further proposed 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 effectiveness of a registration statement 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 is 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 is not eligible to file a Form 1-Z 
at that time, it would need to recommence its Regulation A reporting 
with a report covering any financial period not completely covered by 
an effective registration statement or filed Exchange Act report.\732\
---------------------------------------------------------------------------

    \732\ See proposed Rule 257(d)(1) and (e).

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[[Page 21854]]

b. Final Rules
(1) Summary Information on Terminated or Completed Offerings
    The single commenter on this issue approved of the proposed 
requirement to file summary information after the termination or 
completion of a Regulation A offering under both tiers.\733\ We are 
adopting this requirement without changes.
---------------------------------------------------------------------------

    \733\ CFA Institute Letter.
---------------------------------------------------------------------------

(2) Termination or Suspension of Tier 2 Disclosure Obligations
    We are adopting, with a change from the proposal, final rules that 
will 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.\734\ As proposed, the final rules permit a Tier 2 issuer that has 
filed all reports required by Regulation A for the shorter of: (1) The 
period since the issuer became subject to such reporting obligation, or 
(2) 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 Tier 2 offering 
statement are not ongoing.\735\ In a change from the proposal, in order 
to be consistent with Title VI of the JOBS Act, the final rules permit 
banks or bank holding companies \736\ to immediately suspend their 
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 1,200 
persons, instead of 300 persons, and offers or sales made in reliance 
on a qualified Tier 2 offering statement are not ongoing.\737\ As 
proposed, an issuer's obligation to continue to file ongoing reports in 
a Tier 2 offering under Regulation A will be suspended immediately upon 
the filing of a notice to the Commission on Part II of proposed Form 1-
Z.\738\ As proposed, a manually signed copy of the Form 1-Z must 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.\739\ 
Issuers must produce the manually signed copy to the Commission, upon 
request.\740\
---------------------------------------------------------------------------

    \734\ See Exchange Act Section 15(d), 15 U.S.C. 78o(d); Exchange 
Act Rule 12h-3, 17 CFR 240.12h-3.
    \735\ Rule 257(d)(2).
    \736\ The Commission recently proposed changes to its rules 
regarding Exchange Act registration to implement Title V and Title 
VI of the JOBS Act. See Rel. No. 33-9693 (Dec. 18, 2014) [79 FR 
78343]. These proposed changes would, among other things, apply the 
registration thresholds applicable to banks and bank holding 
companies, as set forth in Section 12(g) of the Exchange Act, to 
savings and loan holding companies. Should we adopt this provision 
in the final rules for Section 12(g), we would anticipate making a 
corresponding change to the termination provisions of Rule 257(d).
    \737\ Rule 257(d)(2). The final rules, as they apply to the 
number of record holders of other types of issuers, are adopted 
without changes from the proposal. Although Rule 257(d)(2) relies on 
the definition of ``held of record'' in Rule 12g5-1, issuers seeking 
to terminate or suspend their Tier 2 ongoing disclosure obligations 
are specifically excluded from relying on the amendment to such 
definition, which exclude securities issued in Tier 2 offerings. See 
Rule 12g5-1(a)(7) and Section II.B.6 above.
    \738\ Id. In this regard, we have clarified that the Commission 
may only deny a Form 1-Z filing if the issuer is ineligible to use 
the form. See Rule 257(d).
    \739\ See Instruction to Form 1-Z.
    \740\ Id.
---------------------------------------------------------------------------

    We otherwise adopt the proposed rules for the termination or 
suspension of a Tier 2 ongoing reporting obligation as proposed and 
without changes.

F. Insignificant Deviations From a Term, Condition or Requirement

    We did not propose any changes to the existing insignificant 
deviation provisions of Rule 260. 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.\741\ The provisions 
of Regulation A regarding issuer eligibility, offering limits, offers, 
and continuous or delayed offerings of Regulation A are deemed to be 
significant to the offering as a whole, and any deviations from these 
provisions result in the issuer's loss of the exemption.
---------------------------------------------------------------------------

    \741\ 17 CFR 230.260.
---------------------------------------------------------------------------

    One commenter generally supported the concept of allowing for 
insignificant deviations from the rules without the loss of the 
exemption.\742\ This commenter recommended that the Commission give 
notice of violations and allow companies to have an opportunity to cure 
any such violation. The commenter also recommended imposing lesser 
sanctions, such as fines, if less significant violations could not be 
cured. Another commenter recommended including deviations from the 
prohibitions on the timing of sales and the amounts sold to investors 
on the list of matters deemed significant in proposed Rule 260, noting 
that, in its view, it would be difficult for issuers to show a good 
faith and reasonable attempt was made to comply with the requirements 
of Rule 251(d)(2).\743\ This commenter noted that issuers, investors 
and state regulators need clear boundaries to know what actions will 
disqualify an offering from exemption and thus, with respect to the 
proposed provisions for Tier 2 offerings, would result in a loss of 
state preemption.
---------------------------------------------------------------------------

    \742\ Heritage Letter.
    \743\ MCS Letter.
---------------------------------------------------------------------------

    The final rules maintain the existing provisions for insignificant 
deviations, as proposed. Under the final rules, a failure to comply 
with a term, condition or requirement of Regulation A will not result 
in the loss of the exemption 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 the 
offering limitations, issuer eligibility criteria, or requirements for 
offers or continuous or delayed offerings will 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.\744\
---------------------------------------------------------------------------

    \744\ Rule 260.
---------------------------------------------------------------------------

    We believe that provisions for insignificant deviations serve an 
important function by allowing for certain errors that can occur in the 
offering process, while clearly delineating those provisions from which 
an issuer may not deviate. We believe the current provisions provide 
assurances to investors that issuers will not be able to deviate from 
certain fundamental requirements in the rules and avoid undue hardship 
that could befall issuers for inadvertent errors, such as loss of the 
exemption and, with respect to Tier 2 offerings, the loss of preemption 
of state securities law registration and qualification requirements. We 
are not expanding the list of provisions from which an issuer may not 
deviate. We note that whether a deviation from the requirements would 
be significant to the offering as a whole would depend on the facts and

[[Page 21855]]

circumstances related to the offering and the deviation. We also note 
that in certain situations, such as in the event of pre-qualification 
sales, it may be difficult for issuers to establish a good faith 
attempt at compliance. In such circumstances, an issuer would not be 
able to rely on the provision.

G. Bad Actor Disqualification

1. Proposed Rules
    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 amended Regulation A. 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) together with a related 
disclosure requirement in Rule 506(e) on July 10, 2013.\745\
---------------------------------------------------------------------------

    \745\ Rel. No. 33-9414 (July 10, 2013) [78 FR 44729]. The 
Commission proposed rules substantially similar to those adopted 
pursuant to Section 926 of the Dodd-Frank Act in the Proposing 
Release for securities-based crowdfunding transactions under Title 
III of the JOBS Act. See Rel. No. 33-9470, at 284.
---------------------------------------------------------------------------

    We proposed amendments to Regulation A's bad actor disqualification 
provisions that would make those provisions substantially similar to 
those adopted under Rule 506 of Regulation D. We also sought comment on 
the proposed disqualification rules and the categories of persons and 
types of events covered by the proposed rules. Additionally, we sought 
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 the proposed disqualification provisions for Regulation A as 
well as our proposed rules for securities-based crowdfunding 
transactions.
2. Comments on Proposed Rules
    In general, commenters did not oppose the proposed amendments to 
Regulation A's bad actor disqualification rules. Some commenters 
expressly supported the proposed rules.\746\ Some commenters, however, 
recommended changes to particular provisions of the proposal. One 
commenter recommended revising the look-back periods for disqualifying 
events to run from the time of sale, not from the time of filing of the 
offering statement as proposed.\747\ Another commenter recommended 
adding final orders of Canadian provincial regulators to the list of 
disqualifying events.\748\ This commenter noted that some Canadian 
provinces have information publicly posted on their Web sites that 
would facilitate the bad actor diligence process. One commenter 
recommended that the Commission develop an online bad actor 
database.\749\ Another commenter supported bad actor provisions as 
extensive as those under Rule 506(d).\750\ Finally, one commenter 
recommended defining voting equity securities for purposes of the bad 
actor disqualifications provisions using the definition in Rule 12b-2 
of the Exchange Act.\751\
---------------------------------------------------------------------------

    \746\ See, e.g., KVCF Letter; MCS Letter;
    \747\ KVCF Letter.
    \748\ Karr Tuttle Letter.
    \749\ Ladd Letter 2.
    \750\ MCS Letter.
    \751\ ABA BLS Letter (suggesting ``voting securities'' be deemed 
securities the holders of which are presently entitled to vote for 
the election of directors (or the equivalent)).
---------------------------------------------------------------------------

3. Final Rules
    We are adopting bad actor disqualification provisions for 
Regulation A, substantially as proposed with the exception of one 
change to further align the final rules for Regulation A with similar 
provisions in Rule 506(d). The covered persons and triggering events in 
the final rules for Regulation A are substantially the same as the 
covered persons and triggering events included in Rule 506(d).\752\ The 
covered persons include managing members of limited liability 
companies; compensated solicitors of investors; underwriters; executive 
officers and other officers participating in the offering; and 
beneficial owners of 20% or more of the issuer's outstanding voting 
equity securities, calculated on the basis of voting power.\753\ 
Consistent with the bad actor disqualification rules under Rule 506(d), 
the final rules also include two new disqualification triggers not 
previously present in Regulation A: (1) Final orders and bars of 
certain state and other federal regulators,\754\ and (2) 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.\755\ In order to clarify the scope of the term ``final 
order'' as it appears in Rule 262, we are including a definition of 
that term in Regulation A that is consistent with the term as it 
appears in Rule 501(g) of Regulation D. As adopted, a ``final order'' 
shall mean a written directive or declaratory statement issued by a 
federal or state agency described in Rule 262(a)(3) under applicable 
statutory authority that provides for notice and an opportunity for 
hearing, which constitutes a final disposition or action by that 
federal or state agency.\756\ We believe that creating a uniform set of 
bad actor triggering events should simplify due diligence, particularly 
for issuers that may engage in different types of exempt offerings. For 
this reason, consistent with the disqualification provisions of Rule 
506(d), the final rules do not include final orders of Canadian 
provincial regulators in the list of disqualifying events.
---------------------------------------------------------------------------

    \752\ 17 CFR 230.506(d).
    \753\ Rule 262(a).
    \754\ Rule 262(a)(3).
    \755\ Rule 262(a)(5).
    \756\ Rule 261(d).
---------------------------------------------------------------------------

    The final disqualification rules in Regulation A also specify that 
an order must bar the covered person at the time of filing 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.\757\ This clarification accords with the current provisions of 
Rule 262 and is appropriate for Regulation A because there is no filing 
requirement before the time of first sale in Rule 506.\758\ We are 
further adopting a reasonable care exception to the disqualification 
provisions on a basis consistent with Rule 506(d).\759\ Under the final 
rules, an issuer will not lose the benefit of the Regulation A 
exemption if it is able to show that it did not know, and in the 
exercise of reasonable care could not have known, of the existence of a 
disqualification.\760\ As proposed, and consistent with the provisions 
of existing Regulation A, the final rules permit issuers that are 
disqualified from relying on the exemption to request a waiver of 
disqualification from the Commission.\761\
---------------------------------------------------------------------------

    \757\ Rule 506(d), 17 CFR 230.506(d).
    \758\ 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).
    \759\ See Rule 262(b)(4).
    \760\ Id.
    \761\ Rule 262(b)(2).
---------------------------------------------------------------------------

    In the Proposing Release, we solicited comment 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 
262 as well as our

[[Page 21856]]

proposed rules for securities-based crowdfunding transactions. 
Consistent with the views of at least one commenter,\762\ we have 
reconsidered our initial views on the interpretation of ``voting equity 
securities.'' We believe that it is appropriate to refine our initial 
interpretation,\763\ as it applies to our bad actor disqualification 
rules,\764\ and create a ``bright-line'' standard that is consistent 
with the definition of the term ``voting securities'' in Rule 405 of 
the Securities Act.\765\ In this regard, we believe that such a term 
should include only those voting equity securities which, by their 
terms, currently entitle the holder to vote for the election of 
directors. In other words, we believe the term should be read to denote 
securities having a right to vote that are presently exercisable. 
Additionally, while the ability to control or significantly influence 
the management or policies of the issuer may be derived in part from 
the power to vote for the election of directors, in order to dispel any 
uncertainty as to the scope of our interpretation, we believe the term 
``voting equity securities'' should be interpreted based on the present 
right to vote for the election of directors, irrespective of the 
existence of control or significant influence.
---------------------------------------------------------------------------

    \762\ ABA BLS Letter.
    \763\ 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.'' See SEC Rel. No. 33-9414 (July 10, 2013) [78 FR 
44729], text accompanying fn. 62. In light of concerns that our 
initial interpretation may be overbroad and that a ``bright line'' 
test may be more workable and would facilitate compliance, as we 
indicated in the Proposing Release, we are reconsidering our initial 
views. See Proposing Release, at Section II.G.
    \764\ In addition to Regulation A, this interpretive position 
would apply to Rule 505 and Rule 506 of Regulation D.
    \765\ In Securities Act Rule 405, the term voting securities 
means securities the holders of which are presently entitled to vote 
for the election of directors. 17 CFR 230.405.
---------------------------------------------------------------------------

    Under the final rules, offerings that would have been disqualified 
from reliance on Regulation A under Rule 262 as in effect before 
today's amendments will continue to be disqualified. Triggering events 
that were not previously included in the bad actor rules for Regulation 
A and that pre-date effectiveness of the final rules will not cause 
disqualification, but instead must be disclosed on a basis consistent 
with Rule 506(e). Specifically, issuers will be required to indicate in 
Part I of Form 1-A that none of the persons described in Rule 262 are 
disqualified and, where applicable, 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.\766\
---------------------------------------------------------------------------

    \766\ As discussed in Section II.C.3.a. above, Part I of Form 1-
A focuses, in part, on issuer eligibility, and requires issuers to 
make an eligibility determination at the outset of filling out Form 
1-A.
---------------------------------------------------------------------------

    We believe that the final rules are appropriate in light of the 
Section 3(b)(2)(G)(ii) mandate, the benefits of creating a more uniform 
set of standards for all exemptions that include bad actor 
disqualification, and the required disclosure in the offering circular 
of persons subject to events that would have triggered 
disqualification, but occurred before the effective date of the final 
rules.

H. Relationship With State Securities Law

1. Proposed Rules
    Although Section 401(b) of the JOBS Act does not exempt offerings 
made under Section 3(b)(2) and the related rules from state law 
registration and qualification requirements, it added Section 
18(b)(4)(D) to the Securities Act.\767\ 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.''
---------------------------------------------------------------------------

    \767\ 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.'' 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).
---------------------------------------------------------------------------

    Commenters in the pre-proposal stage suggested that the cost of 
state securities law compliance, which they identified as an obstacle 
to the use of Regulation A, would discourage market participants from 
using the new exemption. In addition, the GAO, as required by Section 
402 of the JOBS Act, conducted a study on the impact of state 
securities laws registration and qualification requirements on 
offerings conducted under Regulation A and found that state securities 
laws were among several central factors that may have contributed to 
the lack of use of Regulation A.\768\
---------------------------------------------------------------------------

    \768\ See fn. 90 above.
---------------------------------------------------------------------------

    In light of the issues raised by commenters and in the GAO Report, 
as well the substantial investor protections included in the proposed 
rules to amend Regulation A and implement Title IV of the JOBS Act, we 
proposed to define the term ``qualified purchaser'' in a Regulation A 
offering to consist of: (1) All offerees in a Regulation A offering and 
(2) all purchasers in a Tier 2 offering.\769\ We indicated in the 
Proposing Release that we believed this approach would protect offerees 
and purchasers in Regulation A securities, while streamlining 
compliance and reducing transaction costs.
---------------------------------------------------------------------------

    \769\ Proposed Rule 256.
---------------------------------------------------------------------------

    We proposed to preempt state securities laws registration and 
qualification requirements with respect to all offerees in a Regulation 
A offering, in order to allow issuers relying on Regulation A to 
communicate with potential investors about their offerings using the 
internet, social media, and other means of widespread communication, 
without concern that such communications might trigger registration 
requirements under state law.\770\ We further proposed to preempt state 
securities laws registration and qualification requirements with 
respect to all purchasers in a Tier 2 offering to help make Regulation 
A a more workable means of capital formation. We also noted our belief 
that the substantial investor protections embedded in the proposed 
rules, including issuer eligibility conditions, limitations on 
investment, disclosure requirements, qualification process, and ongoing 
reporting requirements of Tier 2, in combination, could address 
potential concerns that may arise as a result of preemption.
---------------------------------------------------------------------------

    \770\ 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).
---------------------------------------------------------------------------

    Under the proposed rules, state securities regulators would retain 
their authority to:
     Require the filing of any document filed with the 
Commission and the payment of filing fees;
     investigate and bring enforcement actions against 
fraudulent securities transactions and unlawful conduct by broker-
dealers in such offerings; and

[[Page 21857]]

     enforce the filing and fee requirements by suspending the 
offer or sale of securities within a given state for the failure to 
file or pay the appropriate fee.\771\
---------------------------------------------------------------------------

    \771\ Section 18(c) (Preservation of Authority) of the 
Securities Act, 15 U.S.C. 77r(c).
---------------------------------------------------------------------------

    As noted in the Proposing Release, it was our preliminary view that 
the additional requirements for Tier 2 offerings would meaningfully 
bolster the protections otherwise embedded in Regulation A and 
therefore a different treatment than Tier 1 offerings is appropriate.
2. Comments on Proposed Rules
    The preemption of state securities law registration and 
qualification requirements contemplated in the proposed ``qualified 
purchaser'' definition received an extensive amount of public 
commentary. Commenters were sharply divided on the need for state 
securities law preemption in Regulation A.
    Many commenters objected to the preemption of state securities law 
registration and qualification requirements.\772\ The views of these 
commenters were based on the following arguments:
---------------------------------------------------------------------------

    \772\ Letter from A. Heath Abshure, Arkansas Securities 
Commissioner, February 20, 2014 (``ASD Letter''); CFA Letter; CFA 
Institute Letter; Letter from Rep. Stephen F. Lynch, et al, U.S. 
House of Representatives, June 3, 2014 (``Congressional Letter 2''); 
Letter from Sen. Barbara Boxer, et al, U.S. Senate, Aug. 1, 2014 
(``Congressional Letter 4''); Cornell Clinic Letter; Groundfloor 
Letter (suggesting that the Commission should at least evaluate 
NASAA's coordinated review program for 12 months); Karr Tuttle 
Letter (acknowledging that state preemption may still be necessary 
for states not participating in NASAA's new coordinated review 
program); Letter from William F. Galvin, Secretary, Commonwealth of 
Massachusetts, December 18, 2013 (``Massachusetts Letter 1''); 
Massachusetts Letter 2; MCS Letter; Letter from Andrea Seidt, 
President, et al., North American Securities Administrators 
Association (NASAA), February 19, 2014 (``NASAA Letter 1''); NASAA 
Letter 2; Letter from William Beatty, President, North American 
Securities Administrators Association (NASAA), February 11, 2015 
(``NASAA Letter 3''); Letter from Jack E. Herstein, Assistant 
Director, Nebraska Department of Banking and Finance, February 10, 
2014 (``NDBF Letter''); Letter from Chad Johnson, Bureau Chief, 
Investor Protection Bureau, New York State Attorney General's 
Office, New York, May 7, 2014 (``NYIPB Letter''); Letter from Irving 
L. Faught, Administrator, Oklahoma Department of Securities, March 
24, 2014 (``ODS Letter''); Letter from Damaris Mendoza-Rom[aacute]n, 
Assistant Commissioner, Office of the Commissioner of Financial 
Institutions, Puerto Rico, March 5, 2014 (``PRCFI Letter''); Letter 
from Hon. Jesse White, Illinois Secretary of State, et al., March 4, 
2014 (``Secretaries of State Letter''); Letter from Lindsay M. 
Scherber, May 8, 2014 (``Scherber Letter''); Letter from Janet M. 
Tavakoli, President, Tavakoli Structured Finance, Inc., February 24, 
2014 (``Tavakoli Letter''); Letter from John Morgan, Securities 
Commissioner, Texas State Securities Board, March 21, 2014 (``TSSB 
Letter''); WDFI Letter.
---------------------------------------------------------------------------

     A ``qualified purchaser'' means a purchaser with 
specialized skill, experience or knowledge.\773\
---------------------------------------------------------------------------

    \773\ See, e.g., ASD Letter; CFA Letter; Congressional Letter 4; 
Cornell Clinic Letter; Massachusetts Letter 1; NASAA Letter 2; ODS 
Letter; PRCFI Letter; WDFI Letter.
---------------------------------------------------------------------------

     The qualifications of the purchaser are key, not the 
nature of the issuer or the offering. Thus, the proposed definition of 
``qualified purchaser'' is contrary to the plain meaning of this 
term.\774\
---------------------------------------------------------------------------

    \774\ See, e.g., CFA Letter; Massachusetts Letter 1; NASAA 
Letter 2; PRCFI Letter; Tavakoli Letter; WDFI Letter.
---------------------------------------------------------------------------

     The legislative history of the National Securities Markets 
Improvement Act of 1996 (NSMIA) \775\ suggests that definitions of 
``qualified purchaser'' must include an investor sophistication 
test.\776\ The Commission made similar statements on the ``qualified 
purchaser'' definition in a 2001 Proposing Release.\777\
---------------------------------------------------------------------------

    \775\ Pub. L. 104-290, 110 Stat. 3416 (Oct. 11, 1996).
    \776\ See, e.g., ASD Letter; Karr Tuttle Letter; Congressional 
Letter 4; Massachusetts Letter 1; Massachusetts Letter 2; NASAA 
Letter 1; NASAA Letter 2; NDBF Letter; NYIPB Letter; ODS Letter; 
PRCFI Letter; Secretaries of State Letter; Tavakoli Letter; WDFI 
Letter.
    \777\ Rel. No. 33-8041 (Dec. 27, 2001) (the ``2001 Proposing 
Release'').
---------------------------------------------------------------------------

     Congress considered preemption in the context of a 
provision to preempt offerings conducted through a broker-dealer in an 
early draft of Title IV of the JOBS Act, but then purposefully excluded 
such broad preemption from the final statute.\778\
---------------------------------------------------------------------------

    \778\ See, e.g., ASD Letter; CFA Letter; Congressional Letter 2; 
Congressional Letter 4; Groundfloor Letter; Massachusetts Letter 1; 
Massachusetts Letter 2; NASAA Letter 2; NDBF Letter; NYIPB Letter; 
Secretaries of State Letter; Tavakoli Letter; WDFI Letter.
---------------------------------------------------------------------------

     The Commission's cost-benefit analysis of preemption was 
inadequate because it largely ignored investor protections, the 
benefits of state regulation, perceived resource constraints at the 
Commission, and preemption's impact on investor confidence in the 
markets.\779\
---------------------------------------------------------------------------

    \779\ See, e.g., CFA Letter; Groundfloor Letter; Massachusetts 
Letter 2; NASAA Letter 2; Scherber Letter; WDFI Letter.
---------------------------------------------------------------------------

     Although the GAO Report conducted under Section 402 of the 
JOBS Act cited compliance with state securities law review and 
qualification requirements as a factor in the lack of use of Regulation 
A, it also noted lengthy Commission reviews of Form 1-A filings.\780\
---------------------------------------------------------------------------

    \780\ See, e.g., CFA Letter; Massachusetts Letter 2; NASAA 
Letter 2; WDFI Letter.
---------------------------------------------------------------------------

     States play a unique role in regulating securities 
offerings due to their localized knowledge and resources, which aid in 
detecting fraud and facilitating issuer compliance.\781\
---------------------------------------------------------------------------

    \781\ See, e.g., NASAA Letter 1; ODS Letter; PRCFI Letter; WDFI 
Letter.
---------------------------------------------------------------------------

     The investor protections included in the proposal do not 
act as an adequate substitute for state review and comment on offering 
statements.\782\
---------------------------------------------------------------------------

    \782\ See, e.g., CFA Letter; CFA Institute Letter; MCS Letter; 
NASAA Letter 2; Scherber Letter; TSSB Letter; WDFI Letter.
---------------------------------------------------------------------------

     The states have adopted and implemented a new coordinated 
review program, designed to address many of the perceived 
inefficiencies associated with state registration.\783\
---------------------------------------------------------------------------

    \783\ See, e.g., ASD Letter; CFA Institute Letter; Cornell 
Clinic Letter; Groundfloor Letter; Karr Tuttle Letter; Massachusetts 
Letter 1; Massachusetts Letter 2; NASAA Letter 1; NASAA Letter 2; 
NASAA Letter 3; NYIPB Letter; PRCFI Letter; Secretaries of State 
Letter; Tavakoli Letter; TSSB Letter; WDFI Letter.
---------------------------------------------------------------------------

    Many other commenters expressed their support for preemption, as 
proposed.\784\ These commenters made the following arguments:
---------------------------------------------------------------------------

    \784\ ABA BLS Letter; Letter from Kendall Almerico, Crowdfunding 
Expert, Attorney and CEO, Fund Hub and ClickStartMe, February 11, 
2014 (``Almerico Letter''); Andreessen/Cowen Letter; B. Riley 
Letter; BIO Letter; Campbell Letter; Canaccord Letter; CFIRA Letter 
1; CFIRA Letter 2; Letter from Rep. David Schweikert, et al, U.S. 
House of Representatives, Sept. 25, 2014 (``Congressional Letter 
3''); DuMoulin Letter (noting that Canadian issuers conducting 
simultaneous offerings in Canada would otherwise be subject to three 
levels of review); Letter from Stanley Keller, Edwards Wildman 
Palmer LLP, April 3, 2014 (``Edwards Wildman Letter'') (recommending 
defining ``qualified purchasers'' as ``accredited investors'' if the 
proposed preemption is not adopted); Letter from Daniel Eng, CEO, 
March 20, 2014 (``Eng Letter''); Fallbrook Technologies Letter; 
Gilman Law Letter; McCarter & English Letter; Guzik Letter 1 (see 
also Guzik Letter 2 (suggesting that if the proposed preemption is 
not adopted to consider adopting an accredited investor style 
definition for ``qualified purchaser,'' but with a lower income or 
net worth test)); Letter from Todd Hart, Aug. 20, 2014 (``Hart 
Letter''); Heritage Letter; Letter from Charles Huynh, February 24, 
2014 (``Huynh Letter''); IPA Letter; Kisel Letter; Letter from 
Akbert P. Kretz, Ph.D., Founder/Manager, Mentor, March 11, 2014 
(``Kretz Letter''); KVCF Letter; Ladd Letters; Leading Biosciences 
Letter; Letter from Bruce E. Methven, Securities Law Attorney, March 
23, 2014 (``Methven Letter''); Milken Institute Letter; MoFo Letter; 
Letter from Donald R. Hancock, CEO, Moloney Securities Co., Inc., 
February 20, 2014 (``Moloney Letter''); Letter from Jason Akel, 
President, New Food Ventures LLC, March 12, 2014 (``New Food 
Letter''); OTC Markets Letter; Letter from Jesse J. Palomino, 
February 25, 2014 (``Palomino Letter''); Paul Hastings Letter; 
Public Startup Co. Letters; REISA Letter; Richardson Patel Letter; 
SBIA Letter; Letter from Bradley L. Staples, MBA, University of 
Utah, February 21, 2014 (``Staples Letter''); Letter from Chris 
Sugai, February 21, 2014 (``Sugai Letter''); SVB Financial Letter; 
SVGS Letter; Letter from Ryan Hawxhurst, Founder and CEO of 
Unorthodocs Printing LLC, February 21, 2014 (``Unorthodocs 
Letter''); U.S. Chamber of Commerce Letter; Letter from Gregory S. 
Fryer, Esq., Partner, Verrill Dana LLP, July 15, 2014 (``Verrill 
Dana Letter 2''); Letter from John Warren, Esq., February 24, 2014 
(``Warren Letter''); WR Hambrecht + Co Letter.

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

[[Page 21858]]

     The proposed rules provide substantial investor 
protections to investors.\785\
---------------------------------------------------------------------------

    \785\ See, e.g., ABA BLS Letter; Almerico Letter; B. Riley 
Letter; Campbell Letter; Canaccord Letter; CFIRA Letter 1; 
Congressional Letter 3; Edwards Wildman Letter; Fallbrook 
Technologies Letter; Gilman Law Letter; Guzik Letter 1; Guzik Letter 
2; KVCF Letter; Leading Biosciences Letter; Milken Institute Letter; 
MoFo Letter; OTC Markets Letter; Paul Hastings Letter; Richardson 
Patel Letter; Verrill Dana Letter 2; WR Hambrecht + Co Letter.
---------------------------------------------------------------------------

     State securities law review of offering statements is a 
significant impediment to the use of Regulation A.\786\
---------------------------------------------------------------------------

    \786\ See, e.g., ABA BLS Letter; Almerico Letter; BIO Letter; 
Campbell Letter; Canaccord Letter; Congressional Letter 3; DuMoulin 
Letter; Edwards Wildman Letter; Fallbrook Technologies Letter; 
Gilman Law Letter; Guzik Letter 1; Guzik Letter 2; Kisel Letter; 
Kretz Letter; KVCF Letter; Ladd Letters; Leading Biosciences Letter; 
McCarter & English Letter; Milken Institute Letter; Moloney Letter; 
OTC Markets Letter; Paul Hastings Letter; REISA Letter; Richardson 
Patel Letter; SBIA Letter; Staples Letter; SVB Financial Letter; 
U.S. Chamber of Commerce Letter; Verrill Dana Letter 2.
---------------------------------------------------------------------------

     The Commission has the authority to preempt state 
qualification and review requirements.\787\
---------------------------------------------------------------------------

    \787\ See, e.g., ABA BLS Letter; BIO Letter; Campbell Letter; 
Edwards Wildman Letter; Guzik Letter 1; Heritage Letter; IPA Letter; 
KVCF Letter; Public Startup Co. Letters; Richardson Patel Letter; 
U.S. Chamber of Commerce Letter; Verrill Dana Letter 2.
---------------------------------------------------------------------------

     States continue to have the authority to, among other 
things, bring anti-fraud enforcement actions and to review the publicly 
filed disclosure documents before sales occur.\788\
---------------------------------------------------------------------------

    \788\ See, e.g., Congressional Letter 3; Heritage Letter; KVCF 
Letter; Methven Letter; REISA Letter.
---------------------------------------------------------------------------

     NASAA's coordinated review program as implemented will 
remain inefficient due to internal conflict, the application of merit 
review standards and the program's inability to bind participants in 
the event of disagreements among the states.\789\
---------------------------------------------------------------------------

    \789\ See, e.g., ABA BLS Letter; BIO Letter; Canaccord Letter; 
Congressional Letter 3; Edwards Wildman Letter; Guzik Letter 2; KVCF 
Letter; Ladd Letters; Milken Institute Letter; Paul Hastings Letter; 
REISA Letter; Richardson Patel Letter; SVB Financial Letter; Verrill 
Dana Letter 2.
---------------------------------------------------------------------------

    Many commenters that expressed general support for preemption, as 
proposed, also recommended applying it on an expanded basis.\790\ Some 
commenters recommended preempting state regulation of secondary trading 
in Regulation A securities,\791\ and some recommended preempting state 
regulation of Tier 1 offerings.\792\
---------------------------------------------------------------------------

    \790\ ABA BLS Letter; Campbell Letter; Congressional Letter 3; 
Guzik Letter 1; Hart Letter; Heritage Letter; IPA Letter; KVCF 
Letter; Ladd Letter 2; Milken Institute Letter; OTC Markets Letter; 
Paul Hastings Letter; Public Startup Co. Letter 1; SVB Financial 
Letter.
    \791\ ABA BLS Letter; IPA Letter (recommending preempting for 
resales of all securities of a Tier 2 issuer that is current in 
Regulation A reporting); KVCF Letter; OTC Markets Letter 
(recommending preemption for at least Regulation A securities that 
are not penny stocks); Paul Hastings Letter; SVB Financial Letter.
    \792\ Andreessen/Cowen Letter; Campbell Letter; Congressional 
Letter 3; Guzik Letter 1 (recommending preemption with audited 
financial statements and a substantially lighter disclosure regime 
compared to Tier 2); Heritage Letter; Ladd Letter 2 (recommending 
preemption if company adopts internal controls and meets continuing 
disclosure requirements, including yearly audited financials); 
Milken Institute Letter (recommending preemption if audited 
financial statements are included in the ``initial filing''); Public 
Startup Co. Letter 1; SVB Financial Letter (recommending preemption 
with additional, unspecified disclosure obligations). See Section 
II.I. below for additional recommended changes to Tier 1.
---------------------------------------------------------------------------

    Alternatively, several commenters recommended possibly eliminating 
the Commission's review of Regulation A offerings to varying 
extents.\793\ Two commenters recommended eliminating the Commission's 
review of Tier 1 offerings.\794\ One of these commenters recommended 
only doing this for offerings that are ``local'' in nature.\795\ One 
commenter recommended having a single state review, in lieu of a review 
and qualification by the Commission, if the Commission's staff is 
unwilling to review Regulation A offerings ``promptly with content-
appropriate standards.'' \796\ One commenter recommended completely 
eliminating the Commission's review if NASAA's coordinated review 
program promotes a ``robust'' Regulation A market.\797\
---------------------------------------------------------------------------

    \793\ Groundfloor Letter; Ladd Letter 2; Public Startup Co. 
Letter 5; Verrill Dana Letter 2.
    \794\ Ladd Letter 2; Public Startup Co. Letter 5.
    \795\ Public Startup Co. Letter 5.
    \796\ Verrill Dana Letter 2.
    \797\ Groundfloor Letter.
---------------------------------------------------------------------------

3. Final Rules
    For the reasons discussed below, we are adopting the ``qualified 
purchaser'' definition in Regulation A, substantially as proposed. In 
the final rules, a ``qualified purchaser'' for purposes of Section 
18(b)(4)(D)(ii) of the Securities Act includes any person to whom 
securities are offered or sold in a Tier 2 offering. Because of the 
requirements for all Tier 2 offerings, all purchasers in Tier 2 
offerings persons must be either accredited investors or persons who 
limit their investment amount to no more than 10% of the greater of 
annual income or net worth (for natural persons), or 10% of the greater 
of annual revenue or net assets at fiscal year end (for non-natural 
persons).
    To address commenter concerns and avoid potential confusion as to 
the application of the preemption provisions in Tier 1 offerings, the 
final definition of ``qualified purchaser'' does not include offerees 
in Tier 1 offerings. While the final rules permit Regulation A issuers 
to test the waters and make offers in the pre-qualification period at 
the federal level, in light of the concerns raised by state regulators 
about the proposed rule's expanded use of solicitation materials \798\ 
and what we anticipate to be the generally more local nature of Tier 1 
offerings,\799\ we believe it is appropriate, in this context, for the 
states to retain oversight over how these offerings are conducted. 
Although we acknowledge that this could potentially inhibit the use of 
solicitation materials in certain Tier 1 offerings, for these smaller, 
more localized offerings, we think the states should be permitted to 
regulate the use of solicitation materials.
---------------------------------------------------------------------------

    \798\ Massachusetts Letter 2; NASAA Letter 2; WDFI Letter. These 
commenters suggested that the Commission require the filing of 
solicitation materials before the time of first use, as, in their 
view, the antifraud and other civil liability provisions of the 
federal securities laws are not an adequate substitute for the 
investor protections afforded by an advance filing requirement for 
solicitation materials, while also noting that problems with the use 
of solicitation materials are compounded by the provisions for 
access equals delivery of final offering circulars.
    \799\ See Section II.H.3.d. below; see also fn. 830 below.
---------------------------------------------------------------------------

    Given the sharply divided views of commenters on the ``qualified 
purchaser'' definition included in the Proposing Release, we want to 
clarify the scope of the Commission's authority under the Securities 
Act to define such a term and the effect the final qualified purchaser 
definition will have on the continued ability of the states to regulate 
offers and sales within their jurisdiction. We continue to believe that 
the substantial investor protections embedded in the final rules for 
Tier 2 offerings, including the requisite qualifications of the issuer, 
offering, and eventual purchasers, as well as the particular 
characteristics associated with this category of securities, support 
the limited preemption of state securities laws registration and 
qualification requirements adopted in the final rules.
a. NSMIA and the JOBS Act
    As noted above, some commenters questioned the ability of the 
Commission to adopt a ``qualified purchaser'' definition that includes 
any person to whom securities are offered or sold in a Tier 2 
offering.\800\ These commenters suggested that a qualified purchaser 
definition under Section 18(b)(3) of the Securities Act must be based 
on attributes of the purchaser, not the nature of the issuer or 
offering. These commenters stated that broad preemption was 
contemplated in the legislative history of Title IV of the JOBS Act and 
expressly rejected by Congress.
---------------------------------------------------------------------------

    \800\ See fn. 772 above.

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

[[Page 21859]]

    Title I of the NSMIA, referred to as the ``Capital Markets 
Efficiency Act of 1996'' (the ``Efficiency Act''),\801\ was, as its 
name suggests, enacted to promote efficiency and capital formation in 
the financial markets.\802\ The Efficiency Act realigned the respective 
responsibilities of federal and state securities regulators in the 
context of the dual system of securities offering registration that 
existed before enactment of the statute.\803\ The Efficiency Act 
achieved this regulatory realignment by amending Section 18 of the 
Securities Act to provide for exemption from state law registration and 
qualification requirements for certain categories of securities, 
defined as ``covered securities.''
---------------------------------------------------------------------------

    \801\ NSMIA, section 101 (Short Title).
    \802\ H.R. Rep. No. 622, 104th Cong. 2d Sess. at 1 (1996) (House 
Report).
    \803\ As enacted, NSMIA included five separate titles, each of 
which served a different purpose in the overarching statutory goal 
of improving national securities markets. See preamble and Section 1 
to NSMIA.
---------------------------------------------------------------------------

    Section 18(b)(3) provides that ``[a] security is a covered security 
with respect to the offer or sale of the security to qualified 
purchasers, as defined by the Commission by rule.'' Congress stated in 
Section 18(b)(3) 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.'' The JOBS Act \804\ amended Section 18 by adding to its 
list of ``covered securities'' transactions involving securities that 
are exempt from registration pursuant to a rule or regulation adopted 
pursuant to Section 3(b)(2) and that are ``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.'' \805\
---------------------------------------------------------------------------

    \804\ The stated purpose of the JOBS Act is to ``increase 
American job creation and economic growth by improving access to the 
public capital markets. . . .'' See JOBS Act (Preamble).
    \805\ JOBS Act section 401(b) (adding Section 18(b)(4)(D)(ii) to 
the Securities Act). Section 401(b) also included in the list of 
``covered securities'' transactions involving Section 3(b)(2) 
securities that are offered or sold on a national securities 
exchange, see Section 18(b)(4)(D)(i). See also Title III of the JOBS 
Act, which added to the list of ``covered securities'' in Section 
18(b)(4)(C) transactions involving securities issued pursuant to 
Section 4(a)(6).
---------------------------------------------------------------------------

    By its terms, Section 18(b)(3) provides the Commission with the 
express authority to adopt rules that define a ``qualified purchaser.'' 
The provision does not prescribe specific criteria that the Commission 
must consider in determining, or the manner in which it must determine, 
a purchaser to be ``qualified.'' Furthermore, Section 18(b)(3) states 
that the definition of qualified purchaser may be different for 
different categories of securities. This means that, rather than 
considering the characteristics of the purchaser in isolation, the 
Commission may adopt a qualified purchaser definition that is also 
tailored to reflect the characteristics of the particular type of 
issuer or transaction. Further, Section 18(b)(3) does not proscribe any 
particular terms or characteristics that the Commission must include in 
any rules defining qualified purchaser with respect to a given category 
of securities. What it does instead is require that any rules so 
adopted be consistent with the public interest and the protection of 
investors.
    Unlike Section 18(b)(3), which provides for preemption with respect 
to offers or sales to qualified purchasers in any context, Section 
18(b)(4)(D)(ii) provides for preemption specifically with respect to 
transactions exempt from registration pursuant to Section 3(b)(2). As 
such, the preemption afforded under Section 18(b)(4)(D)(ii) necessarily 
encompasses the mandatory requirements for conducting an exempt 
offering pursuant to Section 3(b)(2). These include, among other 
things, that the civil liability provisions of Section 12(a)(2) must 
apply and that an issuer must file audited financial statements with 
the Commission annually.\806\ Other potential requirements left to the 
discretion of the Commission include provisions for ongoing reporting, 
bad actor disqualification, and requirements for electronic filing of 
offering materials.\807\
---------------------------------------------------------------------------

    \806\ 15 U.S.C. 77c(b)(2)(D), (F).
    \807\ See 15 U.S.C. 77c(b)(2)(G); 15 U.S.C. 77c(b)(4).
---------------------------------------------------------------------------

    We believe that the terms of Section 18(b)(3) and Section 
18(b)(4)(D)(ii)--read in conjunction--provide the Commission with 
discretionary authority to adopt a ``qualified purchaser'' definition 
that reflects the particular characteristics of transactions exempt 
from registration pursuant to Section 3(b)(2). Thus, in determining who 
should be considered a qualified purchaser for purposes of the 
amendments to Regulation A, we have considered not only the mandatory 
features of Section 3(b)(2), but also many of the discretionary 
features contained in our final rules, such as the requirement that 
purchasers in Tier 2 offerings be limited to accredited investors or 
persons otherwise subject to specified investment limitations.
    We recognize that a number of commenters disagreed with this 
approach.\808\ Some stated that a ``qualified purchaser'' definition 
adopted by the Commission must at a minimum be based on attributes of 
the purchaser, such as a person's wealth, income, or 
sophistication,\809\ and noted that the Commission had highlighted such 
factors in a 2001 Proposing Release to define a ``qualified purchaser'' 
pursuant to Section 18(b)(3).\810\ The 2001 Proposing Release, however, 
contemplated that state securities review and qualification 
requirements would be preempted in all categories of transactions to 
the extent that sales were made to ``accredited investors.'' By 
contrast, our rules to implement Title IV of the JOBS Act provide for 
preemption in the more limited circumstances in which the requirements 
of Section 3(b)(2) and the rules adopted thereunder are satisfied.
---------------------------------------------------------------------------

    \808\ See fn. 772 above.
    \809\ See, e.g., NASAA Letter 2.
    \810\ 2001 Proposing Release. In this release, the Commission 
proposed to define a ``qualified purchaser'' to be an ``accredited 
investor,'' as that term is defined under Rule 501(a) of Regulation 
D.
---------------------------------------------------------------------------

    In the 2001 Proposing Release, we noted that certain aspects of 
NSMIA's legislative history suggest that a qualified purchaser 
definition should include investors that are sophisticated and capable 
of protecting themselves. In addition, we asked questions about the 
proposed approach to the definition and whether other potential factors 
mentioned in the legislative history, such as the national character of 
an offering, could or should bear on potential qualified purchaser 
definitions adopted pursuant to Section 18(b)(3).\811\
---------------------------------------------------------------------------

    \811\ See 2001 Proposing Release, Section II.B. (for example, 
asking questions about the national character of offerings and the 
potential for eliminating redundancies and inefficiencies in the 
application of disparate state standards); see also House Report, at 
31.
---------------------------------------------------------------------------

    We do not believe that the 2001 Proposing Release is inconsistent 
with the qualified purchaser definition for Regulation A that we are 
adopting today. The 2001 Proposing Release was not a Commission 
statement on the scope of all permissible definitions for a qualified 
purchaser adopted pursuant to Section 18(b)(3). Rather, it expressed a 
preliminary interpretive view of certain aspects of the legislative 
history of NSMIA in the context of a proposed rulemaking that would 
have equated ``qualified purchaser'' with the definition of an 
``accredited investor'' for sales by any category of issuer in any type 
of transaction.\812\ While it may have been appropriate to focus on 
attributes of the purchaser when crafting a ``qualified purchaser'' 
definition that would have applied in a broad set of possible 
transactions, as in the 2001

[[Page 21860]]

Proposing Release, the definition being adopted today serves a 
different purpose because it applies only in Regulation A offerings. 
Indeed, Section 18(b)(3) contemplates that the term ``qualified 
purchaser'' can be defined ``differently with respect to different 
categories of securities.''
---------------------------------------------------------------------------

    \812\ See 2001 Proposing Release, Section I.C., II.B. The 
Commission did not adopt final rules based on the 2001 Proposing 
Release.
---------------------------------------------------------------------------

    The enactment of the JOBS Act in 2012, and in particular its 
addition of Section 18(b)(4)(D)(ii) to the Securities Act has caused us 
to consider the definition of qualified purchaser specifically within 
the context of transactions under the new Section 3(b)(2) exemption. 
This is a new and different context in which to consider the definition 
of qualified purchaser than existed at the time of the 2001 Proposing 
Release. In this new context, we believe that the definition of 
qualified purchaser that we are adopting is appropriately tailored to 
these transactions because, as explained above, the requirements 
applicable to Tier 2 offerings include numerous provisions designed to 
protect investors, including, among other things, a requirement that 
all purchasers in these offerings be either accredited investors or 
persons who are subject to investment limitations.
    We do not agree with the commenters who assert that broad state 
securities law preemption was expressly rejected by Congress in Title 
IV of the JOBS Act. The legislative record indicates that the only form 
of state securities law preemption directly contemplated, but not 
adopted, in the drafting of Title IV of the JOBS Act was for offers and 
sales through a broker or dealer.\813\
---------------------------------------------------------------------------

    \813\ See, e.g., Congressional Record Volume 157, Number 166 
(Wednesday, Nov. 2, 2011), p. 7231 (Statement of Rep. Peters: 
``Finally, the gentleman [Rep. Schweikert (AZ)] has also worked with 
Democrats on the remaining issue of contention, and that was the 
preemption of State law. [Rep. Schweikert's] substitute amendment to 
H.R. 1070 removes the exemption from State level review that was 
previously provided to an issuer using a broker-dealer to distribute 
and [sic] issue.'') Cf. H.R. Rep. No. 112-206, at 2 (2011).
---------------------------------------------------------------------------

b. Section 18 of the Securities Act and the Effect of Preemption on 
State Securities Laws
    As discussed above, some commenters expressed concern about the 
effect preemption would have on the ability of state securities 
regulators to remain actively involved in Regulation A offerings.\814\ 
We believe it is important to clarify the effect preemption will have 
on the ability of state securities regulators to continue to play a 
vital role in the supervision of Regulation A securities.
---------------------------------------------------------------------------

    \814\ See, e.g., NASAA Letter 2, at 10.
---------------------------------------------------------------------------

    Under Section 18(a) of the Securities Act, no law, rule or 
regulation of any state requiring the registration or qualification of 
securities applies to a covered security or to a security that will be 
a covered security upon completion of the transaction.\815\ Further, 
with respect to a covered security, no state law, rule or regulation 
shall prohibit, limit, or impose, among other things, any conditions 
upon the use of any offering document \816\ that is prepared by or on 
behalf of the issuer, or, based on the merits of such offering or 
issuer, upon the offer or sale of any covered security.\817\
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    \815\ 15 U.S.C. 77r(a)(1).
    \816\ Under Section 18(d), the term ``offering document'' has 
the same meaning given the term ``prospectus'' in first portion of 
section 2(a)(10) and includes a communication that is not deemed to 
offer a security pursuant to a rule of the Commission. For these 
purposes, the term ``prospectus'' means any prospectus, notice, 
circular, advertisement, letter, or communication, written or by 
radio or television, which offers any security for sale or confirms 
the sale of any security.
    \817\ 15 U.S.C. 77r(a)(2)-(3).
---------------------------------------------------------------------------

    While covered security status under Section 18 prohibits the states 
from requiring the registration or qualification of such securities, 
Section 18(c) preserves the power of the states in several important 
areas.\818\ Under Section 18(c), the states retain:
---------------------------------------------------------------------------

    \818\ 15 U.S.C. 77r(c).
---------------------------------------------------------------------------

     The jurisdiction to investigate and bring enforcement 
actions with respect to fraudulent securities transactions and unlawful 
conduct by broker-dealers; \819\
---------------------------------------------------------------------------

    \819\ 15 U.S.C. 77r(c)(1).
---------------------------------------------------------------------------

     the ability to require issuers to file with the states any 
document filed with the Commission, solely for notice purposes and the 
assessment of fees, together with a consent to service of process and 
any required fee; \820\ and
---------------------------------------------------------------------------

    \820\ 15 U.S.C. 77r(c)(2). For example, even though state 
securities law registration requirements are preempted in offerings 
pursuant to Rule 506 of Regulation D, 17 CFR 230.506, many states 
continue to require the filing of Form D notices and amendments, and 
most of them charge a filing fee. See, e.g., https://www.efdnasaa.org; cf. 15 U.S.C. 77r(b)(4)(E).
---------------------------------------------------------------------------

     the power to enforce the filing and fee requirements by 
suspending the offer or sale of securities within a given state for the 
failure to file or pay the appropriate fee.\821\
---------------------------------------------------------------------------

    \821\ 15 U.S.C. 77r(c)(3).
---------------------------------------------------------------------------

    As the name of the statute that added Section 18 to the Securities 
Act suggests, the preemption of state securities laws is about 
improving the ``efficiency'' of our capital markets by eliminating 
unnecessary, duplicative regulation of securities offerings at both the 
federal and state level.\822\ It is not about eliminating investor 
protections or otherwise limiting the continued involvement of the 
states in such offerings.\823\
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    \822\ House Report, at 1.
    \823\ Id., at 16 (Noting the reason behind the legislation that 
eventually became NSMIA was a clear need for modernization and that 
``there continues to be a substantial degree of duplication between 
Federal and State securities regulation, and that this duplication 
tends to raise the cost of capital to American issuers of securities 
without providing commensurate protection to investors or our 
markets.'').
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c. State Coordinated Review Program for Section 3(b)(2) Securities
    Since the proposed rules to implement Title IV of the JOBS Act were 
issued in December 2013, NASAA has implemented a multi-state 
coordinated review program for Regulation A offerings, the goal of 
which is to reduce the state law disclosure and compliance obligations 
of Regulation A issuers.\824\ Under the coordinated review program, 
issuers are required to file Regulation A offering materials with the 
states via electronic mail. The administrator of the coordinated review 
program must then select a lead disclosure examiner and, where 
applicable, a lead merit examiner, which are responsible for drafting 
and circulating comment letters to the participating jurisdictions, and 
for seeking resolution of those comments with the issuer and its 
counsel. As enacted, the program contemplates a twenty-one business day 
turnaround from the time of filing of an offering statement until the 
issuer receives comments from the states.\825\ The coordinated review 
program's review protocol also modifies (or disapplies altogether) 
certain of NASAA statements of policy for offerings undergoing 
coordinated review. Where, however, an issuer elects to offer or sell 
Regulation A securities in at least one merit state, the coordinated 
review program may require the issuer to apply NASAA's statements of 
policy to the offering as a whole (i.e., not solely for purposes of 
offers or sales within such merit review state(s)).
---------------------------------------------------------------------------

    \824\ A description of NASAA's coordinated review program can be 
found at: https://www.nasaa.org/industry-resources/corporation-finance/coordinated-review/regulation-a-offerings/. The Proposing 
Release also discusses this program, as it was contemplated and 
proposed at that time. See Proposing Release, at Section II.H.
    \825\ An illustrated timeline for NASAA's multi-state 
coordinated review program is available at: https://www.nasaa.org/wp-content/uploads/2015/03/Coordinated-Review-Chart.pdf.
---------------------------------------------------------------------------

    At the proposing stage, we indicated that a number of open 
questions remained about the then-proposed multi-state review program. 
In the intervening time, many questions have been answered, largely 
relating to the final adoption and implementation of

[[Page 21861]]

the program by a vast majority of the states.\826\ Other crucial 
questions, however, remain, such as whether the program will be able to 
address the concerns related to state securities law compliance 
identified by the GAO Report and commenters,\827\ and whether the 
program can continue, as contemplated, in the face of numerous filings 
by issuers that seek to participate in the streamlined process. As of 
the date of this release, we are aware of three issuers that have 
elected to seek qualification at the state level pursuant to the 
protocols of the multi-state coordinated review program.\828\ While the 
program, as contemplated in its enactment, could potentially reduce the 
state law disclosure and compliance obligations of issuers,\829\ the 
limited experience of issuers with the program prevents us from being 
able to fully evaluate it at this time. We note that Tier 1 issuers may 
well benefit from the coordinated review program as it continues to 
develop. We remain concerned, however, that, even under the coordinated 
review program, state securities law registration and qualification 
requirements would be unnecessarily duplicative for, and impose 
unnecessary costs on, securities issued in Tier 2 offerings. In light 
of the recent efforts of state securities regulators to address 
concerns about the costs associated with state qualification of 
Regulation A offering statements, however, the ongoing implementation 
and development of the coordinated review program, particularly as it 
may operate within Tier 1 offerings, may provide additional data that 
will aid any future evaluation of whether such a program could 
effectively operate within the context of larger, more national Tier 2 
offerings as an alternative to preemption.
---------------------------------------------------------------------------

    \826\ At this time, it is our understanding that 49 of NASAA's 
53 constituent members have agreed to participate in the coordinated 
review program.
    \827\ 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, e.g., ABA BLS 
Letter, at 14.
    \828\ See, e.g., Groundfloor Letter (the first issuer to rely on 
NASAA's coordinate review program, with the exception of having to 
seek qualification outside of the coordinated review program in the 
state of Georgia).
    \829\ Id. (suggesting that in its experience the benefits of 
NASAA's coordinated review program outweighed the approximately 
$50,000 cost of the average Regulation A offering); see also NASAA 
Letter 3.
---------------------------------------------------------------------------

d. Application of State Securities Law in Tier 1 and Tier 2 Offerings
    As we noted in the Proposing Release, in light of the issues raised 
by commenters and in the GAO report, we remain concerned that costs 
associated with state securities law compliance, even under a 
coordinated review program, may deter issuers from using amended 
Regulation A, which could significantly limit the impact of the 
exemption as a tool for capital formation. In considering our approach 
to preemption in the final rules, particularly as we evaluate what is 
consistent with the public interest and the protection of investors, we 
have taken into account the amended Regulation A regime, including the 
distinctions between the two tiers and in particular the additional 
protections provided in Tier 2 beyond the requirements of Tier 1.
    In addition to certain basic requirements that are applicable to 
both tiers, Tier 2 issuers will be subject to significant additional 
requirements, some arising directly from Section 3(b)(2) and others 
that we have imposed through our discretionary authority under that 
section. For example, the financial statements that Tier 2 issuers 
include in their offering circulars are required to be audited, and 
Tier 2 issuers must file audited financial statements with the 
Commission annually. Tier 2 issuers also must provide ongoing reports 
on an annual and semiannual basis with additional requirements for 
interim current event updates, assuring a continuous flow of 
information to investors and the market. In addition, purchasers in 
Tier 2 offerings must be either accredited investors or subject to 
limitations in the amount they may invest in a single offering. 
Finally, as with Tier 1 offerings, Tier 2 offering statements will be 
filed electronically, reviewed and qualified by Commission staff, and 
the offerings are subject to both limitations on eligible issuers and 
``bad actor'' disqualification provisions. In consideration of these 
requirements, as well as our view, as discussed in greater detail 
below, that Tier 2 offerings are more likely to be national rather than 
local in nature, we believe that preemption of state securities law 
registration and qualification requirements is appropriate for 
purchasers in these offerings.
    We believe that the final rules for Regulation A create two 
different categories of securities for purposes of Section 18(b)(3). 
The requirements for Tier 1 issuers create a category of securities 
that is more local in character, while Tier 2 offerings involve a 
category of securities that is more national in character. In this 
regard, to the extent an issuer seeks to raise money through a public 
offering pursuant to Regulation A, the distinctions between the 
requirements for Tier 1 and Tier 2 will provide issuers with a 
meaningful choice at the outset between initial and ongoing offering 
costs and requirements.
    Tier 1 issuers are not required to include audited financial 
statements in their offering statements, nor are they required--as 
contemplated by Section 3(b)(2)--to file audited financial statements 
with the Commission annually. They are further not subject to any 
ongoing reporting, beyond the requirements contained in Part I of Form 
1-Z. While the final rules raise the offering limitation in Tier 1 to 
$20 million in a 12-month period, which we believe should increase the 
general utility of the tier, such offerings by virtue of the lower 
dollar amounts that can be raised in comparison to Tier 2 offerings, as 
well as the form filing requirements and the lack of ongoing reporting, 
will likely be conducted by a different set of issuers than those that 
conduct offerings pursuant to Tier 2. Specifically, we think that 
issuers conducting Tier 1 offerings are likely to be smaller companies 
whose businesses revolve around products, services, and a customer base 
that will more likely be located within a single state, region, or a 
small number of geographically dispersed states.\830\ We believe that 
these issuers will typically not seek or, on the basis of their 
business models, be able to: (i) Raise capital on a national scale; or 
(ii) create a secondary trading market in their Regulation A 
securities.
---------------------------------------------------------------------------

    \830\ For example, issuers of securities in the seven offering 
statements qualified by the Commission pursuant to Regulation A in 
2014 indicated, on average, that they were seeking qualification in 
approximately five states per offering. The financial statements 
provided by these issuers further indicated, on average, that 
issuers had approximately $1.2 million in assets. No issuer 
indicated assets greater than $3.6 million, while two issuers 
indicated assets of less than $20,000.
---------------------------------------------------------------------------

    By contrast, we believe that the higher offering limitation for 
Tier 2 offerings, the higher costs associated with complying with the 
audited financial statement and ongoing reporting requirements, as well 
as the requirement to sell to ``accredited investors'' or otherwise 
limit the amount of securities sold to non-accredited investors, will 
necessitate that such offerings be offered and sold on a larger and 
more national scale. Additionally, an issuer electing to conduct a Tier 
2 offering would likely do so, or be required by its investors to do 
so, in order to provide ongoing reports in a manner that will 
facilitate, or otherwise result in, secondary trading on a national 
level. While issuers conducting Regulation A offerings for less than 
$20 million are free to choose between the requirements of either tier, 
we believe that the initial and ongoing costs and limitations 
associated with

[[Page 21862]]

complying with Tier 2 will provide for the natural separation of 
offerings into the respective tiers with issuers in more local 
offerings electing to comply with the less onerous requirements of Tier 
1.
    As noted above, some of the basic requirements of the offering 
statement are applicable to both tiers, and issuers of securities 
pursuant to either tier will remain subject to the same review and 
comment process by the staff of the Division of Corporation Finance 
before qualification. On this basis, some commenters argued that the 
same reasons supporting the preemption of state securities law 
registration requirements for Tier 2 offerings suggests that the 
Commission should also extend preemption to Tier 1 offerings.\831\
---------------------------------------------------------------------------

    \831\ Andreessen/Cowen Letter; Campbell Letter; Guzik Letter 1; 
Heritage Letter; Ladd Letter 2; Milken Institute Letter; Public 
Startup Co. Letter 1; SVB Letter.
---------------------------------------------------------------------------

    The distinctions between the tiers in the final rules for purposes 
of the preemption of state securities law registration requirements are 
based only in part on the form distinctions and process requirements 
for issuers at the time of qualification at the federal level. The 
preemption of state securities law registration requirements in the 
final rules for Tier 2 offerings is additionally related to the 
inefficiencies of qualification at the state and federal level, the 
differing characteristics of Tier 1 and Tier 2 offerings, and the 
statutory purposes behind the enactment of the Efficiency Act that are 
served by deeming Tier 2 offerings to involve a covered class of 
securities.
    While, as some commenters suggest, the review and qualification of 
Tier 1 offerings at the state level will involve inefficiencies to 
which Tier 2 issuers will not be subject, we believe that continued 
state involvement in Tier 1 offerings is consistent with the policy 
underlying the enactment of NSMIA that suggests that states should 
``generally retain their authority to regulate small, regional, or 
intrastate securities offerings.'' \832\ As noted above, we believe 
that the implementation of NASAA's multi-state coordinated review 
program has the potential to ameliorate some of these inefficiencies. 
We will observe issuers' experience under the coordinated review 
program and amended Regulation A, and whether changes to the rule could 
be beneficial. We also believe that the requirements for Tier 2 
offerings will advance ``the development of national securities markets 
and eliminate the costs and burdens of duplicative and unnecessary 
regulation.'' \833\ The absence of preemption in Tier 2 offerings would 
unnecessarily subject issuers in such offerings to a substantial degree 
of duplication between federal and state securities regulation in the 
qualification of offering statements, which would raise the cost of 
capital to issuers without providing commensurate additional protection 
to investors or our markets.\834\
---------------------------------------------------------------------------

    \832\ House Report, at 16. See also WDFI Letter, at 3 (``Given 
the relatively small size of these offerings and the low probability 
of attracting the attention of national broker-dealers to distribute 
them, these offerings are likely to be local in nature.''). The 
Commission is exploring the possibility of establishing a program 
whereby a representative of NASAA, or of a state securities 
regulator, would be assigned to work at the Commission in the 
Division of Corporation Finance to assist the staff as it implements 
the final rules.
    \833\ House Report, at 16. While further preemption of state 
securities law regulation of the secondary trading of Regulation A 
securities issued in a Tier 2 offerings could, as some commenters 
suggest, further advance the development of a national securities 
market by easing the compliance obligations of investors that trade 
in the secondary markets, we believe that the approach to preemption 
of state securities laws adopted today is more appropriate at the 
outset and will afford the Commission time to subsequently review 
the development of, and consider potential changes to, the final 
rules for primary and secondary Regulation A markets.
    \834\ See id.; see also, e.g., ABA BLS Letter, at 13 (noting the 
challenges posed to smaller companies that arise when having to 
respond to both federal and state reviews and coordinating 
overlapping or potentially inconsistent comments and approvals); 
Groundfloor Letter (noting the existence of, and additional costs 
associated with, duplicative qualification requirements at the state 
and federal level, as well as potential complications between 
investment limitations at the federal level and state suitability 
standards).
---------------------------------------------------------------------------

    As noted above, under Section 18(c), the states retain authority to 
(1) investigate and bring enforcement actions with respect to 
fraudulent transactions, (2) require the filing of any documents filed 
with the Commission ``solely for notice purposes and the assessment of 
any fee,'' and (3) enforce filing and fee requirements by suspending 
offerings within a given state. We see no reason why state securities 
regulators could not continue to rely on the multi-state coordinated 
review program as a mechanism to allow Tier 2 issuers to make notice 
filings of their offering statements with the states consistent with 
Section 18(c). In this regard, notice filings of offering statements of 
Tier 2 issuers would be available to the states for a period of time 
prior to the qualification of the offering.\835\ For example, the final 
rules for Regulation A require an issuer that non-publicly submits its 
offering statement for review to the Commission to publicly file its 
offering statement and related documents with the Commission not less 
than 21 calendar days before qualification. At that time, the states 
would be permitted to require issuers to also make notice filings of 
such materials with them and to assess any filing fees under Section 
18(c)(2).
---------------------------------------------------------------------------

    \835\ See, e.g., comment letters cited in fn. 788 above; see 
also Letter from A. Heath Abshure, President, NASAA, September 27, 
2013 (comments on SEC. Rel. No. 33-9416 (Proposed Amendments to 
Regulation D, Form D and Rule 156 under the Securities Act)) 
(indicating that although ``states are preempted from requiring 
registration of securities that are sold in compliance with Rule 506 
. . . state regulators routinely review Form D filings to ensure 
that the offerings actually qualify for an exemption . . . and to 
look for ``red flags'' that may indicate a fraudulent offering. The 
absence of a Form D filing complicates our efforts to protect the 
investing public.''). The concerns of the states, as they relate to 
Form D filings, would be addressed in the final rules for Regulation 
A that require the filing with the Commission of substantive 
offering materials, thereby triggering any notice filing 
requirements with the states, before sales can be made.
---------------------------------------------------------------------------

I. Additional Considerations Related to Smaller Offerings

    As we noted in the Proposing Release, a number of factors have 
influenced the use of Regulation A in the form it has taken since its 
last substantive update in 1992, 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.\836\ 
In developing the final rules we are adopting, we have attempted to 
create a more efficient and effective method to raise capital under 
Regulation A that incorporates important investor protections. We are 
also cognizant of how issuers seeking to raise relatively smaller 
amounts of capital could consider a range of possible approaches to 
capital raising.\837\
---------------------------------------------------------------------------

    \836\ See, e.g., Proposing Release, at Section I.C.; see also 
GAO Report.
    \837\ These methods include, for example, Rules 504, 505 and 506 
under Regulation D and Section 4(a)(6) of the Securities Act and any 
rules adopted thereunder. See also Proposing Release, at Section 
II.I.
---------------------------------------------------------------------------

    Under our proposal, offerings for up to $5 million conducted under 
Tier 1 would benefit from the proposed updates to Regulation A's filing 
and qualification processes, but the proposed amendments did not 
otherwise substantially alter the existing exemption for such 
offerings.\838\ We were mindful of the possibility that additional 
changes to Tier 1 could expand its use by, and thus potentially 
benefit, issuers conducting smaller offerings. We therefore solicited

[[Page 21863]]

comment on additional considerations with respect to Tier 1 and a 
potential intermediate tier for offerings incrementally larger than 
Tier 1 offerings and how such offerings would affect investor 
protection and capital formation.
---------------------------------------------------------------------------

    \838\ Some commenters at the pre-proposal stage suggested that 
the Commission should largely preserve the requirements of the then-
existing Regulation A in the final rules. See Proposing Release, at 
fn. 505.
---------------------------------------------------------------------------

    Many commenters recommended making changes to proposed Tier 1 to 
make it a more viable option for small business capital formation.\839\ 
Some of these commenters recommended preempting state regulation of 
Tier 1 offerings, as mentioned above.\840\ Two commenters recommended 
raising the offering limit of Tier 1 to $10 million or more.\841\ 
Several commenters recommended including an ongoing disclosure 
requirement for Tier 1 issuers, including disclosure at a level lower 
than what is required for Tier 2,\842\ ongoing disclosure with yearly 
audited financials,\843\ or some unspecified continuous disclosure 
obligation.\844\ One commenter recommended lowering the Tier 1 
disclosure obligations from the current proposed requirements, 
particularly for offerings of $2 million or less.\845\ One commenter 
recommended expanding the offering limit for Tier 1 to $15 million and 
creating a new tier below Tier 1 with fewer disclosure 
requirements.\846\ Many commenters recommended changes to proposed Tier 
1, but did not address preemption.\847\ Several of these commenters 
made recommendations with respect to the financial statement and 
auditing requirements in Form 1-A.\848\
---------------------------------------------------------------------------

    \839\ Andreessen/Cowen Letter; BDO Letter; Letter from Kevin 
Bernard, Sept. 3, 2014 (``Bernard Letter''); Campbell Letter; CAQ 
Letter; Deloitte Letter; E&Y Letter; Guzik Letter 1; Heritage 
Letter; ICBA Letter; KPMG Letter; Ladd Letter 2; McGladrey Letter; 
Milken Institute Letter; Public Startup Co. Letter 1; SVB Financial 
Letter; Verrill Dana Letter 1; WR Hambrecht + Co Letter.
    \840\ Andreessen/Cowen Letter; Bernard Letter; Campbell Letter; 
Guzik Letter 1; Heritage Letter; Ladd Letter 2; Milken Institute 
Letter; Public Startup Co. Letter 1; SVB Financial Letter.
    \841\ Guzik Letter 1; ICBA Letter.
    \842\ Guzik Letter 1 (suggesting that Tier 1 ongoing disclosure 
requirements could parallel Tier 2's requirements, but without the 
requirement for semiannual reports).
    \843\ Ladd Letter 2.
    \844\ SVB Financial Letter.
    \845\ Campbell Letter.
    \846\ Public Startup Co. Letter 1. As mentioned in the relevant 
sections above, this commenter recommended three tiers based on 
offering size. The first tier could potentially only require state 
review and would be ``local'' in nature. This tier would include 
some form of ongoing reporting with the states, but not audited 
financials. Instead directors and officers would have to certify 
under penalty of perjury that the financial statements were 
accurate. The second tier would only require audited financial 
statements if they were otherwise available, would preempt state 
review and would require periodic reporting. This tier might allow 
for more flexibility with respect to auditor independence. The third 
tier would require more reporting than currently proposed for Tier 2 
and would appear to require PCAOB-registered auditors.
    \847\ BDO Letter; CAQ Letter; Deloitte Letter; E&Y Letter; ICBA 
Letter; KPMG Letter; McGladrey Letter.
    \848\ BDO Letter; CAQ Letter; Deloitte Letter; E&Y Letter; KPMG 
Letter; McGladrey Letter.
---------------------------------------------------------------------------

    The final rules for Regulation A take into account some of the 
suggestions by commenters on ways to improve the requirements for 
smaller offerings, particularly in Tier 1. The comments we received did 
not reflect any consensus on the particular provisions in Tier 1 that 
were most in need of amendment. As noted above, we do not agree that 
preemption of state securities laws registration and qualification 
requirements is appropriate for Tier 1 offerings.\849\ Further, while 
some commenters suggested that preemption of state securities laws may 
improve the attractiveness of Tier 1 offerings, they did so on the 
condition that other aspects of the tier should change accordingly, 
such as by requiring Tier 1 issuers to provide audited financial 
statements in the offering statement and possibly on an ongoing basis. 
For the reasons discussed in Section II.C.3.b(2)(c) above, however, we 
have not adopted such changes in Tier 1. Alternatively, some commenters 
suggested that the Commission adopt a third tier either expressly or 
through the flexible applicability of the proposed tier requirements. 
While a third tier may provide issuers with some additional flexibility 
for capital formation under Regulation A, this additional flexibility 
would also have potential costs. For example, a third tier may 
unnecessarily complicate compliance with Regulation A for smaller 
issuers, and could potentially confuse investors as to the type of 
Regulation A offering an issuer was undertaking and the type of 
information such investor could expect to receive as a result, thereby 
lessening the viability of the exemption as a whole. For this reason, 
we are not adopting a third or intermediate tier in Regulation A.
---------------------------------------------------------------------------

    \849\ See Section II.H.3. above.
---------------------------------------------------------------------------

    We are adopting certain changes in the final rules that are 
intended to make Tier 1 more useful for small business capital 
formation. As discussed above, in line with the suggestions of 
commenters, we have raised the offering limitation in Tier 1 to $20 
million in a 12-month period, including no more than $6 million on 
behalf of selling securityholders that are affiliates of the 
issuer.\850\ With respect to the offering circular narrative disclosure 
requirements,\851\ we have adopted certain additional scaled disclosure 
requirements for Tier 1 that are intended to lessen the compliance 
obligations for issuers. For example, Tier 1 issuers will be required 
to disclose related party transactions at the thresholds in current 
Regulation A, as opposed to the lower thresholds in the proposed rules, 
and simplified executive compensation data. We are further providing 
issuers under both Tiers with the accommodation provided to emerging 
growth companies in Securities Act Section 7(a) to delay the 
implementation of new accounting standards to the extent such standards 
provide for delayed implementation by non-public business entities. 
Lastly, we have provided Tier 1 issuers with additional flexibility 
with respect to auditor independence standards. As originally proposed, 
an issuer electing to provide audited financial statements in a Tier 1 
offering--even though audited financial statements would not generally 
be required--would have had to engage the services of an auditor that 
followed the independence standards outlined in Article 2 of Regulation 
S-X. Commenters suggested that we should permit auditors of the 
financial statements of Tier 1 issuers to alternatively follow the 
independence standards of the AICPA or Article 2 of Regulation S-
X.\852\ In the view of these comments, allowing auditors of Tier 1 
issuer financial statements the option to follow the independence 
standards of the AICPA would permit more issuers to include financial 
statements that would be deemed audited under the requirements for Tier 
1 in the first instance, thereby avoiding any fees associated with an 
issuer having their existing financial statements audited a second time 
under PCAOB standards. As noted above,\853\ we agree with commenters 
that this accommodation may benefit smaller issuers in Tier 1 offerings 
who wish to file audited final statements for purposes of the offering 
statement and thus are adopting this suggestion.
---------------------------------------------------------------------------

    \850\ See Section II.B.3.c. above.
    \851\ See Section II.C.3.b(1). above.
    \852\ BDO Letter; CAQ Letter; Deloitte Letter; E&Y Letter; KPMG 
Letter; McGladrey Letter.
    \853\ See Section II.C.3.b(2)(c). above.
---------------------------------------------------------------------------

    In the light of the changes discussed above, we believe that the 
final rules we are adopting will provide Tier 1 issuers with a 
meaningful choice within Regulation A between the costs and benefits 
associated with compliance with the requirements for Tier 1 and Tier 2 
and therefore do not believe that an intermediate or other tier is 
necessary at this time.

[[Page 21864]]

J. Transitional Guidance for Issuers Currently Conducting Regulation A 
Offerings

    While Regulation A has been used infrequently in recent years, 
there are issuers that are currently conducting, or that have filed 
offering statements, under the preexisting Regulation A rules. By way 
of transitional guidance, we are clarifying that issuers currently 
conducting sales of securities pursuant to a qualified Regulation A 
offering statement may continue to do so. Such offerings will be 
considered Tier 1 offerings after the effectiveness of the final rules. 
Qualified offering statements under the preexisting rules for 
Regulation A are, however, incompatible with the final requirements for 
Tier 2 offerings and, as discussed below, issuers that wish to 
transition to a Tier 2 offering will need to file a post-qualification 
amendment that satisfies the requirements for Tier 2.
    Upon effectiveness of the final rules, issuers currently conducting 
Regulation A offerings under the preexisting rules must begin to comply 
with the final rules for Tier 1 offerings, including, for example, the 
requirement of electronic filing and the rules for post-qualification 
amendments, at the time of their next filing under Regulation A. 
Additionally, after effectiveness of the final rules, to the extent 
that issuers provided offering statements that were qualified using the 
Model A disclosure format of Part II of the Form 1-A, any subsequently 
required filing or amendment to such offering statement must be filed 
using a disclosure format that is permissible under the final rules for 
Tier 1 offerings. Model A will no longer be appropriate or permitted 
for post-qualification amendments of qualified offerings that pre-date 
effectiveness of the final rules. Lastly, an issuer that is offering 
securities pursuant to a qualified offering statement under the 
preexisting rules will, upon effectiveness of the final rules, no 
longer be required to file a Form 2-A, but instead be required to file 
a Form 1-Z with the Commission electronically upon completion or 
termination of the offering.
    Issuers that are currently in the review process for the 
qualification of a Regulation A offering statement may continue to 
follow the preexisting rules for Regulation A until the effective date 
of the final rules. On or after the effective date, such an issuer will 
be required to comply with the final rules, including the requirements 
for electronic filing and, where applicable, transitioning to a 
disclosure format that is approved for Regulation A offerings. The 
issuer may also elect to proceed at that time with its offering under 
the final requirements for either Tier 1 or Tier 2 offerings, provided 
it follows the requirements for the respective tiers.
    Issuers in ongoing offerings that were qualified before 
effectiveness of the final rules that wish to transition to a Tier 2 
offering may do so by filing a post-qualification amendment that 
satisfies all of the requirements for Tier 2. Such issuers will 
transition to the requirements for Tier 2 upon qualification of the 
post-qualification amendment. For purposes of calculating the maximum 
offering amount permissible under Rule 251(a), an issuer must reduce 
the maximum offering amount sought to be qualified under the final 
rules for the respective tiers by the amount which such issuer has sold 
during the previous 12-month period pursuant to the preexisting rules 
for Regulation A.

K. Technical and Conforming Amendments

    The final rules for Regulation A amend existing Rules 251-263.\854\ 
The amendments take into account changes to Regulation A associated 
with the addition of Section 3(b)(2) to the Securities Act, and the 
items detailed in this release.
---------------------------------------------------------------------------

    \854\ 17 CFR 230.251 through 230.263.
---------------------------------------------------------------------------

    As a result of the revisions to Regulation A, we are adopting 
conforming and technical amendments to Securities Act Rules 
157(a),\855\ 505(b)(2)(iii),\856\ and Form 8-A. Additionally, we are 
revising Item 101(a) \857\ of Regulation S-T \858\ to reflect the 
mandatory electronic filing of all issuer initial filing and ongoing 
reporting requirements under Regulation A. We are also revising Item 
101(c)(6) \859\ of Regulation S-T to remove the reference to paper 
filings in a Regulation A offering, and removing and reserving Item 
101(b)(8) \860\ of Regulation S-T dealing with the optional electronic 
filing of Form F-X by Canadian issuers.
---------------------------------------------------------------------------

    \855\ 17 CFR 230.157(a).
    \856\ 17 CFR 230.505(b)(2)(iii).
    \857\ 17 CFR 232.101(a).
    \858\ 17 CFR 232.10 et seq.
    \859\ 17 CFR 232.101(c)(6).
    \860\ 17 CFR 232.101(b)(8).
---------------------------------------------------------------------------

III. Economic Analysis

    In this section, we analyze the expected economic effects of the 
final rules relative to the current baseline, which is the market 
situation in existence today, including current methods of raising up 
to $50 million in capital available to potential issuers. Our analysis 
considers the anticipated costs and benefits for market participants 
affected by the final rules as well as the impact of the final rules on 
efficiency, competition, and capital formation relative to the 
baseline. This includes the likely economic effects of the specific 
provisions of the final rules related to the scope of the exemption, 
the format and contents of the offering statement, solicitation of 
interest, ongoing reporting, insignificant deviations, bad actor 
disqualification, and relationship with state securities law.
    The final rules to implement Section 401 of the JOBS Act and amend 
Regulation A seek to promote capital formation, efficiency and 
competition for small companies, and provide for meaningful investor 
protection. We are mindful of the costs imposed by, and the benefits to 
be obtained from, our rules. Securities Act Section 2(b) \861\ and 
Exchange Act Section 3(f) \862\ require 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) \863\ 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.
---------------------------------------------------------------------------

    \861\ 15 U.S.C. 77b(b).
    \862\ 15 U.S.C. 78c(f).
    \863\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The final rules include provisions mandated by the statute as well 
as provisions that rely on our discretionary authority. As a result, 
while many of the costs and benefits of the final rules stem from the 
statutory mandate of Title IV of the JOBS Act, certain benefits and 
costs are affected by the discretion we exercise in connection with 
implementing this mandate. For purposes of this economic analysis, we 
address the benefits and costs resulting from the mandatory statutory 
provisions and our exercise of discretion together because the two 
types of benefits and costs are not readily separable. We also analyze 
the benefits and costs of significant alternatives to the final rules 
that were suggested by commenters and that we considered. Many of the 
benefits and costs discussed below are difficult to quantify when 
analyzing the likely effects of the final rules on efficiency, 
competition, and capital formation. For example, the extent to which 
the amendments to Regulation A will

[[Page 21865]]

promote future reliance by issuers on this offering method, and the 
extent to which future use of Regulation A will affect the use of other 
offering methods, is difficult to precisely estimate. Similarly, there 
is some uncertainty as to the effect of some of the provisions in the 
final rules on investor protection. Therefore, much of the discussion 
is qualitative in nature but, where possible, we attempted to quantify 
the potential costs and benefits of the final rules.

A. Broad Economic Considerations

    One of the primary objectives of Section 401 was to expand the 
capital raising options available to smaller and emerging companies and 
thereby to promote capital formation within the larger economy.\864\ 
With this objective in mind, and as background to our analysis of the 
likely costs and benefits of the final rule provisions, we consider the 
broader impact of amended Regulation A on capital formation. As 
discussed below, this will depend on whether issuers that currently 
raise capital elect to rely on amended Regulation A in place of other 
offering methods and whether issuers that have been unable to raise 
capital, or raise enough capital, avail themselves of amended 
Regulation A because it is preferable over other capital rising methods 
otherwise available to them. To the extent that amended Regulation A 
provides a method of raising capital for issuers that currently have no 
method of doing so, it could enhance the overall level of capital 
formation in the economy in addition to any redistributive effect that 
could arise from issuers changing their capital raising methods.
---------------------------------------------------------------------------

    \864\ Congress enacted Section 3(b)(2) against a background of 
public commentary suggesting that Regulation A, an exemption for 
small offerings originally adopted by the Commission in 1936 under 
the authority of Section 3(b) of the Securities Act, should be 
expanded and updated to make it more useful to small issuers. H.R. 
1070 (Small Company Capital Formation Act of 2011) was introduced in 
April 2011. In its September 2011 report, the Committee on Financial 
Services noted: ``H.R. 1070, the Small Company Capital Formation 
Act, raises the offering threshold for companies exempted from 
registration with the U.S. Securities and Exchange Commission (SEC) 
under Regulation A from $5 million--the threshold set in the early 
1990s--to $50 million. Raising the offering threshold helps small 
companies gain access to capital markets without the costs and 
delays associated with the full-scale securities registration 
process . . .'' See H.R. Rep. No. 112-206 (2011).
---------------------------------------------------------------------------

    The impact of the final rules on an issuer's ability to raise 
capital will also depend on whether new investor capital is attracted 
to the Regulation A market, and on whether investors reallocate 
existing capital among various types of offerings. Investor demand for 
securities offered under amended Regulation A will depend on the 
expected risk, return and liquidity of the offered securities, and in 
particular, how these characteristics compare to what investors can 
obtain from securities in other exempt offerings and in registered 
offerings. Investor demand also will depend on whether Regulation A 
disclosure requirements are sufficient to enable investors to evaluate 
the aforementioned characteristics of Regulation A offerings.
    To assess the likely impact of the final rules on capital 
formation, we consider the features of amended Regulation A that 
potentially could increase the use of Regulation A by new issuers and 
by issuers that already rely on private and registered offerings.
    The amendments to Regulation A we are adopting remove certain 
burdens identified by commenters and others in existing Regulation A. 
Offerings relying on existing Regulation A must be qualified by the 
states and the Commission, which also requires a review and 
qualification process for issuers to access capital.\865\ Amended 
Regulation A removes the requirement of state qualification for Tier 2 
offerings, thereby eliminating the cost and other burdens of the 
duplicative review under existing Regulation A. Issuance costs may also 
be reduced, as a percentage of proceeds, by increasing the maximum 
offering size from $5 million annually under existing Regulation A, to 
$20 million for Tier 1 offerings and to $50 million for Tier 2 
offerings relying on amended Regulation A.
---------------------------------------------------------------------------

    \865\ See GAO Report. According to the GAO Report, the limited 
use of Regulation A appears to have been influenced by multiple 
factors, including ``the type of investors businesses sought to 
attract, the process of filing the offering with SEC, state 
securities laws, and the cost-effectiveness of Regulation A relative 
to other SEC exemptions. For example, identifying and addressing 
individual state's securities registration requirements can be both 
costly and time-consuming for small businesses, according to 
research, an organization that advocates for small businesses, and 
securities attorneys that GAO interviewed. Additionally, another SEC 
exemption [Regulation D] is viewed by securities attorneys that GAO 
met with as more cost-effective for small businesses . . .''
---------------------------------------------------------------------------

    We believe that the potential use of amended Regulation A for Tier 
2 offerings depends largely on how issuers perceive, the trade-off 
between the costs of qualification and ongoing disclosure requirements 
and the benefits to issuers from access to a broad investor base, 
expansion of the offering size, the preemption of state securities law 
registration requirements and the potential for enhanced secondary 
market liquidity.
    With respect to Tier 1 offerings, the potential use of amended 
Regulation A depends largely on how issuers perceive the trade-off 
between state review and qualification requirements, limited disclosure 
requirements (with potentially greater information asymmetry between 
issuers and investors) and the $20 million maximum offering size.
    We also recognize that the level of investor protection resulting 
from the final rules is an important consideration that could affect 
the ultimate use and success of amended Regulation A. For example, if 
preempting state review of Tier 2 offerings, or not requiring audited 
financials or ongoing disclosures in Tier 1 offerings, leads to 
undisclosed risks or misconduct in the offering process, then investors 
may be unwilling to participate in those types of Regulation A 
offerings. On the other hand, Commission staff review of the offerings 
and investment limitations for Tier 2 offerings may mitigate some of 
these concerns for certain investors.
    Many of the potential issuers of securities under amended 
Regulation A may be small companies, particularly early-stage and high-
growth companies, seeking capital through equity-based financing 
because they do not have sufficient collateral or the cash flows 
necessary to support the fixed repayment schedule of debt 
financing.\866\ Currently, these companies often seek capital from 
institutional or accredited investors through offerings that are exempt 
from registration under the Securities Act or through registered public 
offerings. In the future, whether issuers opt to rely instead on 
Regulation A will depend on the perceived utility of the amended 
Regulation A exemption compared to: (i) Other available exemptions from 
registration, and (ii) registered public offerings. Below we discuss 
each of these considerations in turn.
---------------------------------------------------------------------------

    \866\ See 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 and 
Finance 22(6), pp. 613-673.
---------------------------------------------------------------------------

    Some issuers may prefer to offer securities under amended 
Regulation A relative to using other offering methods exempt from 
registration because of potentially limiting features associated with 
the other exemptions. In particular, securities sold pursuant to the 
exemptions from registration under Regulation D,\867\ which account for 
a significant amount of exempt offerings,\868\ are generally subject to

[[Page 21866]]

restrictions on resale or limits on participation by non-accredited 
investors in ways that can limit the ability to raise capital. In 
contrast to Rule 506 of Regulation D, companies relying on amended 
Regulation A can sell securities to an unlimited number of non-
accredited investors,\869\ and the securities will not be restricted 
securities for purposes of the federal securities laws, which will 
allow for a more diffuse investor base and potential liquidity 
benefits.
---------------------------------------------------------------------------

    \867\ 17 CFR 230.500 through 230.508.
    \868\ See V. Ivanov, and S. Bauguess, 2013, Capital Raising in 
the U.S.: An Analysis of Unregistered Offerings Using the Regulation 
D Exemption, 2009-2012, available at: https://www.sec.gov/divisions/riskfin/whitepapers/dera-unregistered-offerings-reg-d.pdf.
    \869\ Non-accredited investors in Tier 2 offerings will be 
subject to an investment limitation.
---------------------------------------------------------------------------

    The use of amended Regulation A may also depend on whether 
companies considering seeking capital through an exempt offering 
believe that the benefits from access to a broader investor base under 
amended Regulation A offset the costs of qualification and, with 
respect to Tier 2 offerings, ongoing disclosure requirements. Other 
offering exemptions could remain attractive relative to amended 
Regulation A. For example, general solicitation is now permissible 
under Rule 506(c) of Regulation D. Issuers relying on Rule 506(c) to 
solicit offerings may now more easily reach institutional and 
accredited investors, making it less necessary for them to seek capital 
from a broader non-accredited investor base, especially if trading 
platforms aimed at accredited investors in privately placed securities 
continue to develop.\870\
---------------------------------------------------------------------------

    \870\ For example, ``NASDAQ Private Market's affiliated 
marketplace is an electronic network of Member Broker-Dealers who 
provide accredited institutions and individual clients with access 
to the market. Companies use a private portal to enable approved 
parties to access certain information and transact in its 
securities.'' See NASDAQ Private Market overview, available at: 
https://www.nasdaqprivatemarket.com/market/overview.
---------------------------------------------------------------------------

    Finally, the conditional exemption from registration of a class of 
securities under Section 12(g) available to some Tier 2 issuers may 
encourage them to pursue a Regulation A offering as a means to avoid 
the associated costs and requirements of Exchange Act registration and 
reporting.\871\ This effect may be limited by the imposition of the 
conditions on the Section 12(g) exemption, in particular, the condition 
limiting the availability of the exemption to smaller companies that do 
not exceed certain thresholds for public float or, in the absence of 
float, revenues. Larger issuers of Regulation A securities or issuers 
using Regulation A to raise capital as part of a growth strategy, or 
seeking to increase liquidity through a broader investor base, may 
still be subject to a Section 12(g) registration requirement in the 
future.
---------------------------------------------------------------------------

    \871\ See Section II.B.6.c.
---------------------------------------------------------------------------

    The trade-offs between amended Regulation A and a registered 
offering are somewhat different. In a registered offering, issuers can 
offer the securities directly to all potential investors, without a 
limitation on the aggregate offering amount and with no resale 
restrictions. Moreover, securities issued through registered offerings 
often trade on national securities exchanges and can offer a degree of 
liquidity to investors that is generally not available for securities 
issued in private offerings. However, the issuance costs associated 
with small registered public offerings are generally a significant 
percentage of proceeds and issuers in registered offerings must bear 
the costs arising from ongoing disclosure requirements under the 
Exchange Act. These costs are perceived to be one of the determinants 
of the relatively low incidence of initial public offerings (``IPOs'') 
over the past decade and may be a motivating factor for potential 
issuers to prefer offering securities under amended Regulation A.\872\ 
Relative to registered public offerings, offerings under amended 
Regulation A will provide smaller issuers with access to sources of 
capital without necessarily imposing the full ongoing reporting 
requirements of the Exchange Act.
---------------------------------------------------------------------------

    \872\ See IPO Task Force, Rebuilding the IPO On-Ramp (Oct. 20, 
2011), available at: https://www.sec.gov/info/smallbus/acsec/rebuilding_the_ipo_on-ramp.pdf (``IPO Task Force'').
    There are other possible explanations for the decline in IPOs, 
for example, macro-economic effects on investment opportunities in 
the economy and the cost of capital. See Lowry, M., 2003, Why does 
IPO volume fluctuate so much? Journal of Financial Economics 67(1), 
pp. 3-40. Another possible explanation is an increase in the 
benefits of being acquired by a larger entity relative to the 
benefits of operating as an independent firm. See Gao, X., J. 
Ritter, and Z. Zhu, 2013, Where have all the IPOs gone? Journal of 
Financial and Quantitative Analysis 48(6), pp. 1663-1692.
---------------------------------------------------------------------------

    The use of amended Regulation A may depend on the extent to which 
companies considering a traditional IPO believe that amended Regulation 
A is a viable alternative. These potential issuers will need to assess 
whether the cost savings from reduced reporting requirements under 
amended Regulation A offset the potential reduction in secondary market 
liquidity compared to registered offerings that meet the listing 
requirements of national securities exchanges. In particular, 
securities listed on a national securities exchange are likely to 
benefit from increased liquidity as a result of greater access to 
potential investors and a lower level of information asymmetry due to 
more extensive reporting requirements. At present, only some securities 
issued under existing Regulation A trade over-the-counter, with the 
majority not known to trade in any secondary market.
    The liquidity trade-off faced by issuers considering amended 
Regulation A relative to other exempt or registered offering methods 
may ultimately center on whether the ongoing reporting requirements of 
Tier 2 offerings can generate sufficient information for secondary 
markets to provide the intended liquidity benefits. Academic studies 
have found a close relationship between disclosure requirements and 
liquidity.\873\ The disclosure requirements in the final rules seek to 
balance the burden of disclosure requirements on issuers and the demand 
of investors for information by offering issuers a capital raising 
option with lower compliance costs while still mandating relevant 
information about the issuer and the securities for the market.
---------------------------------------------------------------------------

    \873\ For example, one study found improved liquidity at 
companies that chose to comply with Exchange Act reporting 
requirements in order to remain eligible for quotation on OTCBB. See 
Bushee, B., and C. Leuz, 2005, Economic consequences of SEC 
disclosure regulation: Evidence from the OTC bulletin board, Journal 
of Accounting and Economics 39(2), pp. 233-264.
    Another study found significant decreases in liquidity for 
issuers that deregistered their securities, with the subsequent loss 
of liquidity attributed to decreased disclosure separate from the 
effect of delisting from a major exchange. This study also shows 
that some companies choose to deregister under Section 12(b) and 
trade on less liquid OTC markets instead of trading on national 
securities exchanges, indicating that, for such companies, the 
expected costs of reporting under the Exchange Act outweigh the 
expected liquidity benefits. See Leuz, C., A. Triantis, and T. Wang, 
2008, Why do firms go dark? Causes and economic consequences of 
voluntary SEC deregistrations, Journal of Accounting and Economics 
45(2-3), pp. 181-208.
---------------------------------------------------------------------------

    Overall, amended Regulation A could increase the aggregate amount 
of capital raised in the economy if used by private issuers that have 
until now been limited in their ability to raise capital through other 
types of exempt offerings or by smaller private issuers that seek a 
public market for their securities but that are not sufficiently large 
to bear the fixed costs of being an Exchange Act reporting company. The 
impact of amended Regulation A on capital formation could also be 
redistributive in nature by encouraging issuers to shift from one 
method of capital raising to another. This potential outcome may have 
significant net positive effects on capital formation and allocative 
efficiency by providing issuers with access to capital at a lower cost 
than alternative capital raising methods and by providing

[[Page 21867]]

investors with additional investment opportunities.
    The net effect of the final rules on capital formation will depend 
on whether issuers that rely on amended Regulation A do so in addition 
to or instead of other methods of raising capital. The effect will also 
depend on whether investors find Regulation A disclosure requirements 
and investor protections to be sufficient to evaluate the expected 
return and risk of such offerings and to choose between offerings 
reliant on Regulation A, other exempt offerings and registered 
offerings. Due to a lack of data, we are not able to estimate the 
effects of the final rules on the potential rate of substitution 
between alternative methods of raising capital and amended Regulation A 
and the overall expansion, if any, in capital raising by potential 
issuers eligible for amended Regulation A.

B. Baseline

    As we described in the Proposing Release, the baseline for our 
economic analysis of amended Regulation A is market conditions as they 
exist today, in which issuers 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.\874\ The baseline 
discussion below also includes a description of investors in offerings 
of similar amounts and a discussion of the role of intermediaries that 
may be affected by the final rules.
---------------------------------------------------------------------------

    \874\ Other rules mandated by the JOBS Act have been proposed 
but not adopted by the Commission. The baseline does not account for 
potential changes that may result from future adoption of proposed 
rules.
---------------------------------------------------------------------------

1. Current Methods of Raising up to $50 Million of Capital
    Issuers seeking to raise up to $50 million over a twelve-month 
period are expected to be affected directly by amended Regulation A. As 
we described in the Proposing Release, while there are a number of 
factors that companies consider when determining how to raise capital, 
one of the primary considerations 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 
reporting requirements. The choice of offering method may depend on the 
size of the issuer, the type of investors the issuer seeks to attract 
and the amount of new capital sought. Registered offerings entail 
considerable initial and ongoing costs that can weigh more heavily on 
smaller issuers, providing incentives to remain private and to raise 
capital outside of public markets.\875\ To the extent that these 
issuance costs constrain small firms' access to capital, they may 
result in underinvestment in some value-generating projects and thus 
potentially less efficient allocation of capital to investment 
projects. This section describes the various currently available 
offering methods and the prevalence of their use.
---------------------------------------------------------------------------

    \875\ See IPO Task Force.
---------------------------------------------------------------------------

a. Exempt Offerings
    Currently, small issuers can raise capital by relying on an 
exemption from registration under the Securities Act, such as Section 
3(a)(11),\876\ Section 4(a)(2),\877\ Regulation D,\878\ and Regulation 
A. Each of these exemptions, however, has requirements that may limit 
its utility for issuers. 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 non-accredited 
investors. Additionally, offerings relying on existing Regulation A 
require preparation of offering materials and qualification of an 
offering statement by the Commission and may require qualification or 
registration in multiple states.\879\ The table below summarizes the 
main features of each exemption.
---------------------------------------------------------------------------

    \876\ Under Securities Act Section 3(a)(11), except as expressly 
provided, the provisions of the Securities Act (including Section 5 
registration requirement) 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).
    \877\ Securities Act Section 4(a)(2) provides that the 
provisions of Section 5 shall not apply to ``transactions by an 
issuer not involving a public offering.'' 15 U.S.C. 77d(4)(a)(2).
    \878\ Regulation D contains rules providing exemptions and safe 
harbors from the Securities Act's registration requirements, 
allowing some companies to offer and sell their securities without 
having to register the offering with the Commission. 17 CFR 230.504, 
505, 506.
    \879\ See Campbell, R., 2005, Regulation A: Small business' 
search for a moderate capital, Delaware Journal of Corporate Law 
31(1), pp. 77-123. See also GAO Report.
    \880\ Aggregate offering limit on securities sold within a 
twelve-month period.
    \881\ Resale restrictions are determined by state securities 
laws, which typically restrict in-state resales for a one-year 
period.
    \882\ Section 4(a)(2) of the Securities Act provides a statutory 
exemption for ``transactions by an issuer not involving any public 
offering.'' See SEC v. Ralston Purina Co., 346 U.S. 119 (1953) 
(holding that an offering to those who are shown to be able to fend 
for themselves is a transaction ``not involving any public 
offering.'')
    \883\ This description is based on Regulation A before the 
adoption of the final rules today.
    \884\ No general solicitation or advertising is permitted unless 
the offering is registered in a state requiring the use of a 
substantive disclosure document or sold under a state exemption for 
sales to accredited investors with general solicitation.
    \885\ Filing is not a condition of the exemption.
    \886\ Restricted unless the offering is registered in a state 
requiring the use of a substantive disclosure document or sold under 
a state exemption for sale to accredited investors.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                   Offering limit                          Issuer and investor         Filing             Resale          Blue sky law
        Type of offering                \880\           Solicitation          requirements          requirement        restrictions        preemption
--------------------------------------------------------------------------------------------------------------------------------------------------------
Section 3(a)(11)...............  None..............  No limitations....  All issuers and         None.............  Restricted in      No.
                                                                          investors must be                          some cases.
                                                                          resident in state.                         \881\
Section 4(a)(2)................  None..............  No general          Transactions by an      None.............  Restricted         No.
                                                      solicitation.       issuer not involving                       securities.
                                                                          any public offering.
                                                                          \882\
Regulation A \883\.............  $5 million with     Testing the waters  U.S. or Canadian        File testing the   No...............  No.
                                  $1.5 million        permitted before    issuers, excluding      waters
                                  limit on            filing.             investment companies,   materials, Form
                                  secondary sales.                        blank-check             1-A, Form 2-A.
                                                                          companies, reporting
                                                                          companies, and
                                                                          issuers of fractional
                                                                          undivided interests
                                                                          in oil or gas rights,
                                                                          or similar interests
                                                                          in other mineral
                                                                          rights.
Rule 504 Regulation D..........  $1 million........  General             Excludes investment     File Form D \885\  Restricted in      No.
                                                      solicitation        companies, blank-                          some cases.
                                                      permitted in some   check companies, and                       \886\
                                                      cases. \884\        Exchange Act
                                                                          reporting companies.
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 21868]]


--------------------------------------------------------------------------------------------------------------------------------------------------------
                                   Offering limit                          Issuer and investor         Filing             Resale          Blue sky law
        Type of offering                \887\           Solicitation          requirements          requirement        restrictions        preemption
--------------------------------------------------------------------------------------------------------------------------------------------------------
Rule 505 Regulation D..........  $5 million........  No general          Unlimited accredited    File Form D \888\  Restricted         No.
                                                      solicitation.       investors and up to                        securities.
                                                                          35 non-accredited
                                                                          investors.
Rule 506 Regulation D..........  None..............  General             Unlimited accredited    File Form D \891\  Restricted         Yes.
                                                      solicitation        investors.                                 securities.
                                                      permitted in some   Limitations on non-
                                                      cases. \889\        accredited investors.
                                                                          \890\
--------------------------------------------------------------------------------------------------------------------------------------------------------

    While we do not have data on offerings relying on an exemption 
under Section 3(a)(11) or Section 4(a)(2), available data related to 
Regulation D and Regulation A filings allow us to gauge how frequently 
issuers currently use these exemptions when raising capital.
---------------------------------------------------------------------------

    \887\ Aggregate offering limit on securities sold within a 
twelve-month period.
    \888\ Filing is not a condition of the exemption.
    \889\ 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.
    \890\ 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.
    \891\ Filing is not a condition of the exemption.
---------------------------------------------------------------------------

i. Regulation A Offerings
    As we described in the Proposing Release, issuers rarely rely on 
existing Regulation A to raise capital. The chart below, from the GAO 
Report shows the number of filed and qualified Regulation A offerings 
in fiscal years 1992 to 2011.\892\
---------------------------------------------------------------------------

    \892\ For the purposes of this chart, 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 staff has 
reviewed the offering materials and determined that all conditions 
have been met. Therefore, offerings that are filed and not qualified 
are either pending, withdrawn, or abandoned.
[GRAPHIC] [TIFF OMITTED] TR20AP15.000

    In calendar years 2012 to 2014, 26 Regulation A offerings, 
excluding amendments, were qualified by the Commission.\893\
---------------------------------------------------------------------------

    \893\ In cases in which an issuer made multiple Form 1-A filings 
over this time period, only the first qualified offering by that 
issuer was included in the number of qualified Regulation A 
offerings. The estimate also excludes amendments filed on Form 1-A/
A, including post-qualification amendments to earlier Form 1-A 
filings, as well as abandoned and withdrawn filings.
---------------------------------------------------------------------------

    Section 402 of the JOBS Act required the GAO to study the impact of 
state securities 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 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 Commission's filing and 
qualification process; and (4) the type of investors businesses sought 
to attract.
    As identified by the GAO, compliance with state securities laws is 
one of the factors that impacts the use of existing Regulation A. The 
GAO did not provide an estimate of the compliance costs. For issuers 
seeking to offer securities in multiple states, differences in 
securities laws and applicable procedures across states may result in 
significant legal costs \894\ and a time consuming process for issuers, 
which could adversely affect their efforts to raise capital in a timely 
and cost-effective manner. NASAA has recently initiated a Coordinated 
Review Program for Regulation A offerings.\895\ Only a limited number 
of issuers have undergone state review through this process to date, so 
we are unable to conclude whether it may result in lower costs or a 
shorter amount of review time than was the case prior to its inception.
---------------------------------------------------------------------------

    \894\ See discussion in Section III.I below.
    \895\ A description of NASAA's coordinated review program can be 
found at: https://www.nasaa.org/industry-resources/corporation-finance/coordinated-review/regulation-a-offerings/. See discussion 
in Section III.I below.
---------------------------------------------------------------------------

    The GAO also identified costs associated with the Commission's 
filing and qualification process for Regulation A offerings as another 
factor contributing to its limited current use.

[[Page 21869]]

While existing Regulation A permits offerings to an unlimited number of 
non-accredited investors, the total offering amount must not exceed $5 
million in a twelve-month period, limiting the opportunity to scale the 
fixed component of these costs as a percentage of proceeds.
    As described above, a business that relies on Regulation A must 
file an offering statement with the Commission that must be qualified 
by Commission staff before the offering can proceed. From 2002 through 
2011, Regulation A filings took an average of 228 days to qualify.\896\ 
Average time to qualification exceeded 300 days in 2012-2014.\897\ 
Factors that affect the time to qualification include the paper filing 
method, quality of the initial filing, time taken by the Commission 
staff, and time taken by the issuer to provide required information or 
address questions from previous correspondence with the Commission 
staff.
---------------------------------------------------------------------------

    \896\ See GAO Report.
    \897\ This estimate is generated by staff from the Commission's 
Division of Economic and Risk Analysis using Form 1-A filings and is 
determined as the difference between the filing date for the initial 
Form 1-A filing and the final disposition date for the final Form 1-
A or 1-A/A filing through which the offering was qualified.
---------------------------------------------------------------------------

    Our analysis of the Regulation A filings qualified between 2002 and 
2014 shows that approximately half of the issuers operated in the 
financial industry and the majority of offerings involved equity 
securities. Offerings with affiliate sales were rare, likely due not 
only to the requirement of the existing Regulation A that the issuer 
have net income from continuing operations in the prior two years but 
also due to the perceptions that adverse selection concerns may limit 
investor demand in securities offerings with affiliate sales.\898\
---------------------------------------------------------------------------

    \898\ See Bettis, J., J. Coles, and M. Lemmon, 2000, Corporate 
policies restricting trading by insiders, Journal of Financial 
Economics 57, pp. 191-220 (discussing adverse selection issues and 
corporate policies restricting trading by insiders. See also 
Michaely, R., and W. Shaw, 1994, The pricing of initial public 
offerings: Tests of adverse-selection and signaling theories, Review 
of Financial Studies 7(2), pp. 279-319 (analyzing the role of 
adverse selection and the possibility of informed trading in IPOs).
---------------------------------------------------------------------------

ii. Regulation D Offerings
    Based on the information available to us, it appears that the most 
common way to issue up to $50 million of securities is pursuant to an 
offering under a Regulation D exemption. Eligible issuers can rely on 
Rule 504 to raise up to $1 million within a twelve-month period, on 
Rule 505 to raise up to $5 million within a twelve-month period, and on 
Rule 506 to raise an unlimited amount of capital. In total, based on 
the analysis of offering amounts reported on Form D in calendar year 
2014, Regulation D offerings accounted for over one trillion dollars. 
Most issuers choose to raise capital by relying on Rule 506, even when 
their offering size would have potentially permitted reliance on Rule 
504 or Rule 505.\899\ For example, in 2014, we identified 11,228 
Regulation D offerings that would have been potentially eligible to be 
conducted under amended Regulation A. Of those, 10,671 offerings relied 
on Rule 506, 376 on Rule 504, and 181 on Rule 505. We summarize their 
characteristics in the table below.
---------------------------------------------------------------------------

    \899\ This tendency could, in part, be attributed to two 
features of Rule 506: State securities law preemption and unlimited 
offering amount. See also GAO Report.
    \900\ Based on an analysis performed by staff in the Division of 
Economic and Risk Analysis of Form D filings submitted for calendar 
year 2014. The numbers exclude offerings by reporting companies, 
non-Canadian foreign issuers and pooled investment funds, as well as 
offerings of interests in claims on natural resources, which are not 
eligible for amended Regulation A. We do not have a scalable way of 
excluding blank check companies, which are also not eligible for 
amended Regulation A, from this sample, which leads to a higher 
estimate of the number of issuers that would be eligible to rely on 
amended Regulation A.

     Regulation D Offerings in 2014 by Issuers That Would Be Eligible To Rely on Amended Regulation A \900\
----------------------------------------------------------------------------------------------------------------
                                                     Rule 504        Rule 505                Rule 506
                  Offering size                  ---------------------------------------------------------------
                                                       <=$1M           <=$5M          <=$20M          $20-50M
----------------------------------------------------------------------------------------------------------------
Current Reg A Eligible..........................             Yes             Yes       Up to $5M              No
Amended Reg A Eligible..........................             Yes             Yes             Yes             Yes
Number of filings...............................             376             181          10,071             600
Average offering amount ($ million).............             0.4             1.4             3.2            31.6
Offerings with non-accredited investors.........             58%             31%              6%              2%
Median number of investors......................               3               7               6               9
----------------------------------------------------------------------------------------------------------------

    As shown in the table above, approximately 95% of Regulation D 
offerings that would be eligible for amended Regulation A relied on 
Rule 506. A comparison of Rule 506 offerings over $20 million to those 
below $20 million shows that larger offerings generally had a higher 
number of investors and were less likely to have non-accredited 
investors.
    Additional data on Regulation D offerings that would have been 
eligible for amended Regulation A exemption is provided in the graph 
below, which displays the offering size distribution of Rule 506 
offerings and other Regulation D offerings that would have been 
potentially eligible for the amended Regulation A exemption in calendar 
year 2014. Approximately 95% of Regulation D offerings that would have 
been potentially eligible for amended Regulation A had offering amounts 
below $20 million.
---------------------------------------------------------------------------

    \901\ Based on an analysis performed by staff in the Division of 
Economic and Risk Analysis of Form D filings submitted for calendar 
year 2014.

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

[[Page 21870]]

[GRAPHIC] [TIFF OMITTED] TR20AP15.001


[[Page 21871]]


    Approximately seventy percent of Regulation D issuers that would be 
eligible for amended Regulation A declined to disclose their revenue 
range in their Form D filings for 2014. Of the remaining 30%, 13% 
reported ``no revenues.'' The portion of issuers with no revenues is 
noteworthy because it may be more difficult for issuers without regular 
cash flows to obtain debt financing (without collateral or a 
guarantee).
b. Registered Offerings
    Issuers may seek to raise capital by registering the offer and sale 
of securities under the Securities Act. In calendar year 2014, using 
data from Thomson Reuters, we identified 75 IPOs and 246 seasoned 
equity offerings (SEOs) of up to $50 million by issuers that would have 
been potentially eligible for amended Regulation A.\902\
---------------------------------------------------------------------------

    \902\ The sample excludes offerings from non-Canadian foreign 
issuers, blank check companies, and investment companies, which 
would not be eligible to rely on amended Regulation A. Offerings 
with gross proceeds below $1,000 are excluded to minimize 
measurement error. Issuers of interests in claims on natural 
resources, which also would not be eligible for amended Regulation 
A, were not separately eliminated due to data constraints.
---------------------------------------------------------------------------

    There has been a general decline in the number of IPOs, 
particularly those undertaken by small firms, since the late 
1990s.\903\ One possible reason behind the relatively low number of 
IPOs under $50 million is that public offerings may be too costly to be 
a viable capital raising option for smaller issuers.\904\ Fees paid to 
underwriters average 7% for IPOs, 5% for SEOs, and 1% for bond 
issuances.\905\ Issuers conducting registered public offerings also 
incur 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.\906\ Two surveys cited in the IPO 
Task Force report concluded that regulatory compliance costs of IPOs 
average $2.5 million initially, followed by an average ongoing cost of 
$1.5 million per year.\907\
---------------------------------------------------------------------------

    \903\ See IPO Task Force. However, a recent study notes that the 
decline in IPOs has been partly reversed in 2012-2014. See Dambra, 
M., L. Field, and M. Gustafson, 2014, The JOBS Act and IPO volume: 
Evidence that disclosure costs affect the IPO decision, Journal of 
Financial Economics (forthcoming), available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2459591.
    \904\ Other potential reasons, such as macro-economic 
conditions, are discussed below.
    \905\ See Chen, H., and J. Ritter, 2000, The seven percent 
solution, Journal of Finance 55(3), pp. 1105-1131; Abrahamson, M., 
T. Jenkinson, and H. Jones, 2011, Why don't U.S. issuers demand 
European fees for IPOs? Journal of Finance 66(6), pp. 2055-2082; 
Corwin, S., 2000, The determinants of underpricing for seasoned 
equity offers, Journal of Finance 58(5), pp. 2249-2279; Huang, R., 
and D. Zhang, 2011, Managing underwriters and the marketing of 
Seasoned Equity Offerings, Journal of Financial and Quantitative 
Analysis 46(1), pp. 141-170; Fang, L., 2005, Investment bank 
reputation and the price and quality of underwriting services, 
Journal of Finance 60(6), pp. 2729-2761.
    \906\ According to the survey cited in the IPO Task Force 
report, 92% of the surveyed CEOs listed the ``Administrative Burden 
of Public Reporting'' as being one of the most significant 
challenges of an IPO. See IPO Task Force.
    \907\ See IPO Task Force. However, some studies conclude that 
the decline in U.S. small-firm IPOs predated the adoption of the 
Sarbanes-Oxley Act. See Gao, X., J. Ritter, and Z. Zhu, 2013, Where 
have all the IPOs gone? Journal of Financial and Quantitative 
Analysis 48(6), pp. 1663-1692. See also Doidge, C., A. Karolyi, and 
R. Stulz, 2013, The U.S. left behind? Financial globalization and 
the rise of IPOs outside the U.S., Journal of Financial Economics 
110(3), pp. 546-573.
---------------------------------------------------------------------------

    Because of the fixed-cost nature of some of the compliance-related 
fees associated with public offerings, compliance-related fees as a 
percentage of offering proceeds tend to decline as offering size 
increases, as illustrated in the table below. Offerings below $50 
million, and especially offerings below $20 million, incur 
significantly higher registration, legal and accounting-related fees, 
as a percentage of proceeds.

       Certain Non-Underwriter IPO-Related Fees as a Percentage of Offering Proceeds From 1992-2014 \908\
----------------------------------------------------------------------------------------------------------------
                                                                     Offering     Offering  $20-     Offering
                                                                     <=$20M  %        $50M  %        >$50M  %
----------------------------------------------------------------------------------------------------------------
SEC Registration Fees...........................................            0.11            0.04            0.03
Blue Sky Fees...................................................            0.35            0.05            0.02
Accounting Fees.................................................            1.38            0.84            0.56
Legal Fees......................................................            2.32            1.18            0.81
----------------------------------------------------------------------------------------------------------------

    In addition to compliance costs, there are other possible 
explanations for the trends in IPOs. A decline in public offerings also 
could result from macro-economic effects on investment opportunities 
and the cost of capital \909\ or an increase in the economies of scope 
from being acquired by a larger entity relative to the benefits of 
operating as an independent firm.\910\
---------------------------------------------------------------------------

    \908\ Fee information is compiled from Thomson Reuters SDC data 
on IPOs for 1992-2014. The sample excludes offerings from non-
Canadian foreign issuers, blank-check companies, and investment 
companies. Averages are computed based on observations with non-
missing data (where a particular type of fees is separately 
reported). Offerings with gross proceeds below $1,000 are excluded 
to minimize measurement error.
    The analysis includes legal, accounting, blue sky, and 
registration fees, to which we collectively refer as ``compliance 
fees''. Blue Sky Fees denotes fees and expenses related to 
compliance with state securities regulations. We note that Blue Sky 
fees associated with small registered offerings may over- or under-
estimate similar expenses for Regulation A offerings of the same 
size.
    \909\ See Lowry, M., 2003, Why does IPO volume fluctuate so 
much? Journal of Financial Economics 67(1), pp. 3-40.
    \910\ See Gao, X., J. Ritter, and Z. Zhu, 2013, Where have all 
the IPOs gone? Journal of Financial and Quantitative Analysis 48(6), 
pp. 1663-1692.
---------------------------------------------------------------------------

    Several other trade-offs may affect an issuer's willingness to 
pursue an IPO. According to the IPO Task Force survey, 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.\911\ Additionally, issuers in certain 
industries, such as high-technology sectors, may be sensitive to the 
costs of disclosure of proprietary information and may find private 
capital sources more attractive.\912\ Access to capital may be 
especially time-sensitive for the types of issuers most likely to 
conduct small offerings, such as startups and small businesses, 
rendering these issuers unwilling to go through a potentially lengthy 
registration process. Directors and officers of small issuers also may 
not want to subject themselves to the increased liability and takeover 
threats that come with dispersed ownership.\913\
---------------------------------------------------------------------------

    \911\ See IPO Task Force.
    \912\ See Verrecchia, R., 2001, Essays on disclosure, Journal of 
Accounting and Economics 32, pp. 97-180.
    \913\ See Burkart, M., D. Gromb, and F. Panunzi, 2000, Agency 
conflicts in public and negotiated transfers of corporate control, 
Journal of Finance 55(2), pp. 647-677.
---------------------------------------------------------------------------

    The cost and disclosure requirements of IPOs have been affected by 
the recent adoption of scaled reporting requirements for emerging 
growth companies (EGCs) under Title I of the

[[Page 21872]]

JOBS Act, which can ease the compliance obligations of certain issuers 
in registered offerings. There is some evidence that Title I has 
contributed to an increase in IPO volume in 2012-2014, particularly in 
industries with high proprietary disclosure costs, such as 
biotechnology and pharmaceuticals.\914\ Some recent studies, however, 
suggest that the overall cost of going public for EGCs has not 
decreased whereas the indirect cost (e.g., IPO underpricing) has 
increased.\915\
---------------------------------------------------------------------------

    \914\ See Dambra, M., L. Field, and M. Gustafson, 2014, The JOBS 
Act and IPO volume: Evidence that disclosure costs affect the IPO 
decision, Journal of Financial Economics (forthcoming), available 
at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2459591.
    \915\ See Chaplinsky, S., K. Hanley, and S. K. Moon, 2014, The 
JOBS Act and the costs of going public, Working paper, available at: 
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2492241; Barth, 
M., W. Landsman, and D. Taylor, 2014, The JOBS Act and information 
uncertainty in IPO firms, Working paper, available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2465927; Westfall, T.J., 
and T.C. Omer, 2014, The impact of emerging growth company status on 
initial public offering valuation and the associated auditor risk 
and effort, Working paper, available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2512605.
---------------------------------------------------------------------------

c. Private Debt Financing
    Equity, including principal owner equity, accounts for a 
significant proportion of the total capital of a typical small 
business. Other sources of capital for small businesses include loans 
from commercial banks, finance companies and other financial 
institutions, and trade credit.\916\
---------------------------------------------------------------------------

    \916\ See Berger, A., and G. Udell, 2006, Small business credit 
availability and relationship lending: The importance of bank 
organisational structure, Economic Journal 112(477), pp. 32-53. In 
this study, equity accounted for approximately half of the total 
capital, including approximately 31% (45% for the smallest firms--
that is, those, with less than $1 million in revenues or less than 
twenty employees) attributed to the principal owner. The remainder 
came from debt financing, with about one quarter accounted for by 
loans from commercial banks, finance companies and other financial 
institutions, and another 16% comprised of trade credit. The study 
was conducted based on the 1993 edition of the Federal Reserve 
Board's Survey of Small Business Finances, which collects 
information on small businesses in the United States.
---------------------------------------------------------------------------

    Borrowing is relatively costly for many early-stage issuers as they 
may have low revenues, irregular cash-flow projections, insufficient 
assets to offer as collateral and high external monitoring costs.\917\ 
For example, a small growth company, such as a technology or life 
sciences startup, without steady revenues or substantial tangible 
assets is likely to have trouble obtaining a loan or a line of credit 
from a bank because it would have difficulty proving its ability to 
repay. Financial institutions generally require such small business 
borrowers to provide collateral or a guarantee by owners,\918\ which 
some issuers may be unable or reluctant to provide.
---------------------------------------------------------------------------

    \917\ See Robb, A., and D. Robinson, 2014, The capital structure 
decisions of new firms, Review of Financial Studies 27(1), pp. 153-
179.
    \918\ 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, A., and G. Udell, 1995, Relationship 
lending and lines of credit in small firm finance, Journal of 
Business 68(3), pp. 351-381. Some studies of small business lending 
also document the creation of local captive markets with higher 
borrowing costs for small, opaque firms as a result of strategic use 
of soft information by local lenders. See Agarwal, Sumit, and Robert 
Hauswald, 2010, Distance and private information in lending, Review 
of Financial Studies 13(7), pp. 2757-2788.
---------------------------------------------------------------------------

2. Investors
    There are currently no limitations on who can invest in existing 
Regulation A offerings. In considering the baseline for the amendments 
to Regulation A, we also examine the investors in other existing 
methods of raising up to $50 million in capital because the final rules 
we are adopting may impact an issuer's choice of offering method and 
the potential investor base of the offering. For example, as discussed 
above, while there are no limitations on the number of non-accredited 
investors that can invest in offerings made pursuant to Rule 504 of 
Regulation D and in registered public offerings, offerings made 
pursuant to Rule 505 and Rule 506(b) of Regulation D are limited to a 
maximum of 35 non-accredited investors. Issuers making offerings 
pursuant to Rule 506(c) of Regulation D must take reasonable steps to 
verify that investors are accredited investors.
    While non-accredited investors can participate in Regulation D 
offerings, subject to limitations described above, data from Form D 
filings suggests that non-accredited investors are not significantly 
involved in Regulation D offerings of up to $50 million. Offerings 
involving non-accredited investors are typically smaller than those 
that do not involve non-accredited investors. In 2014, we estimate that 
approximately 152,641 investors participated in Regulation D offerings 
of less than $50 million by issuers that would be eligible for amended 
Regulation A.\919\ Such offerings had an average of 13.6 investors per 
offering. Approximately 8% of such offerings involved one or more non-
accredited investors.
---------------------------------------------------------------------------

    \919\ Based on an analysis by staff from the Commission's 
Division of Economic and Risk Analysis of initial Form D filings 
submitted during calendar year 2014. The estimated number of 
investors likely exceeds the actual number of Regulation D investors 
because investors could have participated in more than one offering.
---------------------------------------------------------------------------

    The total number of households estimated to qualify as accredited 
investors is substantially larger than the total number of investors 
reported to have participated in an unregistered offering. As of 2013, 
we estimated that over 9 million U.S. households qualified as 
accredited investors based on the net worth standard alone, 
approximately 8 million U.S. households qualified as accredited 
investors based on the income standard alone, and approximately 12.4 
million U.S. households qualified based on either the income standard 
or the net worth standard.\920\
---------------------------------------------------------------------------

    \920\ These estimates are based on an analysis by staff from the 
Commission's Division of Economic and Risk Analysis, using the 
Federal Reserve Board's 2013 Survey of Consumer Finances.
---------------------------------------------------------------------------

3. Financial Intermediaries
    Regulation A amendments may also affect financial intermediaries 
that may become involved in the placement and quotation of Regulation A 
securities. Currently, there is limited involvement of intermediaries 
in a Regulation A offering. However, financial intermediaries are used 
in certain of the other types of offerings, including registered 
offerings and certain exempt offerings. To the extent that the 
amendments to Regulation A that we are adopting today impact the number 
and the overall amount of capital raised in other types of offerings, 
financial intermediaries may be affected. 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. While intermediaries are used 
less frequently in Regulation D offerings, they play a role in some 
offerings. We estimate that fewer than 10% of Regulation D offerings 
that would have been potentially eligible under amended Regulation A 
involved an intermediary (the estimate is based on information about 
sales compensation or sales compensation recipients reported in 
connection with the offering).\921\
---------------------------------------------------------------------------

    \921\ Based on an analysis performed by staff in the Division of 
Economic and Risk Analysis of Form D filings for calendar year 2014.
---------------------------------------------------------------------------

C. Scope of Exemption

1. Eligible Issuers
    Consistent with the restrictions in existing Regulation A, the 
final rules exclude non-Canadian foreign issuers, investment companies 
(including BDCs), Exchange Act reporting companies, blank check 
companies, and issuers of fractional undivided interests in oil or gas 
rights, or similar interests

[[Page 21873]]

in other mineral rights, from relying on the exemption.
    The final rules also exclude two additional categories of issuers: 
(i) issuers that are or have been 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 (ii) issuers that are required to, but that 
have not, filed with the Commission the ongoing reports required by the 
final rules during the two years immediately preceding the filing of an 
offering statement.
    Excluding issuers that have not complied with Regulation A's 
ongoing reporting requirements in the two-year period immediately 
preceding the filing of a new offering statement will incentivize 
issuers that intend to rely on amended Regulation A exemption in the 
future to comply with its ongoing reporting requirements. Similarly, 
excluding issuers that were 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 will incentivize registrants to comply with 
their obligations under the Exchange Act, including their ongoing 
reporting obligations, and will prevent issuers with a history of non-
compliance from relying on Regulation A after they terminate or suspend 
their Exchange Act reporting obligations. At the same time, neither of 
these exclusions should result in additional compliance costs for 
issuers because they do not impose any reporting or other requirements 
on issuers beyond those already mandated by existing regulations.
    We recognize that excluding these additional categories of issuers 
would have an effect on capital formation as it could prevent 
Regulation A offerings by issuers who otherwise might have utilized the 
Regulation A exemption rather than other methods of capital raising. 
However, to the extent that the information contained in required past 
reports provides investors in follow-on offerings of Regulation A 
securities with a more complete picture of the issuer's business and 
financial condition and is relevant for current investment decisions, 
the exclusion of issuers that are not compliant with Regulation A's 
reporting requirements and issuers subject to an order by the 
Commission pursuant to Section 12(j) should therefore enhance investor 
protection and the informational efficiency of prices of Regulation A 
securities by allowing investors to make better informed investment 
decisions. Moreover, we believe that these additional issuer 
eligibility requirements will complement each other in facilitating 
compliance with our rules.
    To the extent that more issuers use the amended Regulation A 
exemption, the final rules may promote competition among eligible 
issuers in the market for investor capital and in the market for goods 
and services. The final rules may also promote competition in the 
product market between small issuers and larger issuers.
    As suggested by some commenters, we could have expanded the 
categories of eligible Regulation A issuers to include non-Canadian 
foreign issuers,\922\ blank check companies,\923\ BDCs,\924\ and 
issuers of fractional undivided interests in oil or gas rights, or 
similar interests in other mineral rights.\925\ These alternatives 
could potentially enhance capital formation and competition.\926\
---------------------------------------------------------------------------

    \922\ See ABA SIL Letter; Andreessen/Cowen Letter; BDO Letter; 
McCarter & English Letter; OTC Markets Letter; Richardson Patel 
Letter; SVB Letter; SVGS Letter.
    \923\ See Gilman Law Letter; IPA Letter; Richardson Patel 
Letter.
    \924\ See ABA BLS Letter; CFIRA Letter 1; Commonwealth Fund 
Letters 1 and 2; KVCF Letter; Milken Institute Letter; MoFo Letter; 
REISA Letter; SBIA Letter; WR Hambrecht + Co Letter. Most of these 
commenters noted that BDCs serve an important function in 
facilitating small or emerging business capital formation or in 
providing a bridge from private to public markets.
    \925\ See REISA Letter.
    \926\ If eligibility under amended Regulation A had been 
extended to investment companies and BDCs, and such companies 
obtained a lower cost of capital and passed savings through to the 
companies in which they invest, the latter could also realize 
indirect capital formation benefits.
---------------------------------------------------------------------------

    However, it may be potentially difficult and costly for investors, 
especially less sophisticated investors, to determine the valuation and 
risk of securities of non-Canadian foreign issuers, blank check 
companies and issuers of fractional undivided interests in oil or gas 
rights, or similar interests in other mineral rights, so extending 
eligibility to such issuers may also decrease investor protection. To 
the extent that such information asymmetries are not fully mitigated by 
initial and ongoing Regulation A disclosure requirements, which are 
generally less extensive than the disclosure requirements for 
registered offerings, the prices of Regulation A securities of these 
issuers could be less informationally efficient. Along the same lines, 
we believe the specialized nature of capital formation and investment 
strategies at BDCs warrants disclosures that are more specialized than 
what is required by existing or amended Regulation A for a proper 
understanding of an investment in the securities of these types of 
issuers.
    We also could have expanded the categories of eligible Regulation A 
issuers to include issuers that are subject to the ongoing reporting 
requirements of Section 13 or 15(d) of the Exchange Act (``reporting 
companies''), as suggested by some commenters.\927\ Although reporting 
companies sometimes conduct offerings exempt from registration, we are 
unable to estimate the number of reporting companies that would use the 
amended Regulation A exemption if it were made available to them. We 
recognize that some reporting companies may have benefited from this 
alternative due to, for example, the lower costs of preparation of a 
Regulation A offering statement than a registration statement.\928\ 
Additionally, some reporting companies whose securities are not listed 
on a national securities exchange could potentially benefit from 
savings of time and dollar expenditures that may result from the state 
securities law preemption in Tier 2 offerings. However, because 
Exchange Act disclosure requirements for reporting companies are more 
extensive than those under amended Regulation A, reporting companies 
would not be able to derive the benefit of reduced ongoing reporting 
costs under amended Regulation A. Other commenters suggested imposing 
more restrictive issuer eligibility criteria, by excluding issuers that 
are not ``operating companies'' \929\ or excluding shell companies and 
issuers of penny stock.\930\ While these additional exclusions may 
create some investor protection benefits, such additional exclusions 
would be likely to limit capital formation and competition among small 
issuers, which are more likely to fall into the penny stock

[[Page 21874]]

category, or some early-stage companies, which may not meet the 
definition of an ``operating company.'' Overall, due to the 
implications of extending issuer eligibility before the Commission has 
the ability to assess the impact of the changes to Regulation A being 
adopted today, we believe that it is prudent to defer consideration of 
potential changes to the categories of eligible issuers until we have 
the opportunity to observe the use of the amended Regulation A 
exemption and assess any new market practices as they develop.
---------------------------------------------------------------------------

    \927\ Three commenters recommended allowing Exchange Act 
reporting companies that are current in their reporting obligations 
to conduct Tier 2 offerings. See Andreessen/Cowen Letter; BIO 
Letter; OTC Markets Letter. One of these three commenters limited 
its recommendation to companies with a non-affiliate float of less 
than $250 million. See BIO Letter. The other two commenters further 
commented that Exchange Act reporting should satisfy Regulation A 
reporting obligations if the Commission adopted their 
recommendation. See Andreessen/Cowen Letter and OTC Markets Letter.
    \928\ According to one commenter, Form S-1 registration may be 
too costly for micro-cap companies, and the eligibility requirements 
of Form S-3 limit primary capital raising for issuers with a small 
public float. See Andreessen/Cowen Letter. But see earlier 
discussion of indirect costs of issuance for issuers using scaled 
disclosures in Section III.B.1.b.
    \929\ See CFIRA Letter 1 and WR Hambrecht + Co Letter.
    \930\ See ABA BLS Letter and MoFo Letter.
---------------------------------------------------------------------------

2. Eligible Securities
    Consistent with the statute, the final rules apply to offerings of 
equity securities, debt securities, and securities convertible or 
exchangeable to equity interests, for example, warrants, including any 
guarantees of such securities.\931\
---------------------------------------------------------------------------

    \931\ See discussion in Section II.B.2 above.
---------------------------------------------------------------------------

    Similar to the proposal, the final rules exclude offerings of 
asset-backed securities (``ABS'') from eligibility for Regulation A. As 
discussed above, we believe that ABS issuers are not the intended 
beneficiaries of the mandated expansion of Regulation A. ABS are 
subject to the provisions of Regulation AB and other rules specifically 
tailored to the offering process, disclosure and reporting requirements 
for such securities, and we do not believe that Regulation A's 
requirements are suitable for offerings of such securities. 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 that, in certain cases, permitting ABS offerings to be 
conducted under Regulation A could lower the cost of capital for 
underlying borrowers whose loans are eventually securitized by ABS 
issuers and therefore indirectly facilitate capital formation.\932\ In 
practice, however, the vast majority of ABS offerings are much larger 
than the maximum allowable offering size under amended Regulation 
A.\933\ As a result, we believe that excluding ABS offerings from 
eligibility for Regulation A likely will not have a significant adverse 
effect on capital formation.
---------------------------------------------------------------------------

    \932\ This indirect effect may result because, due to bank 
accounting standards and capital requirements, securitization allows 
originators to move assets off the 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 Pennacchi, G., 1995, Loan sales 
and the cost of bank capital, Journal of Finance 43(2), pp. 375-396; 
Carlstrom, C., and K. Samolyk, 1995, Loan sales as a response to 
market-based capital constraints, Journal of Banking and Finance 
19(3), pp. 627-646.
    \933\ Our analysis indicates that from 2011-2013, approximately 
2.9% of ABS issuances were below $50 million. This estimate uses the 
AB Alert and CM Alert databases and includes only private label ABS 
deals.
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3. Offering Limitations and Secondary Sales
a. Offering Limitations
    As explained above, the final rules introduce two tiers of 
offerings compared with the baseline of one tier in existing Regulation 
A. The tiered approach in the final rules allows us to scale regulatory 
requirements based on offering size, to give issuers more flexibility 
in raising capital under Regulation A, and to provide appropriately 
tailored protections for investors in each tier. Issuers seeking to 
raise a larger amount of capital are, among other things, required to 
provide more extensive initial and ongoing disclosures, but are also 
able to take advantage of the larger maximum offering size in Tier 2 
(up to $50 million in a twelve-month period). In light of this larger 
maximum offering size, the final rules impose additional disclosure 
requirements and other provisions to provide protection to investors in 
Tier 2 offerings. Issuers seeking a smaller amount of capital retain 
the advantage of more scaled disclosures required in Tier 1 offerings 
but must comply with a lower offering size limit.
    We recognize that the cost associated with greater disclosure 
requirements for offerings made under Tier 2 in amounts up to $20 
million may place Tier 2 issuers at a relative competitive disadvantage 
as compared to issuers seeking to raise an amount below $20 million in 
a Tier 1 offering. Such potential competitive effects are likely to be 
mitigated by the ability of issuers to evaluate the trade-off between 
the costs associated with more extensive disclosure requirements for 
Tier 2 offerings and the benefit of a potentially higher securities 
valuation stemming from a reduction in information asymmetry between 
issuers and investors due to the more extensive disclosure requirements 
for Tier 2 offerings.
    In a change from the proposal, and in line with the suggestions of 
some commenters, the final rules raise the Tier 1 maximum offering size 
from $5 million to $20 million in a twelve-month period in order to 
provide smaller issuers with additional flexibility to meet their 
financing needs.\934\ We expect the higher Tier 1 maximum offering size 
will facilitate capital formation under Regulation A for those issuers 
seeking to raise between $5 and $20 million in a twelve-month period. 
We expect the resulting capital formation benefits to be greater for 
smaller issuers for which the incremental costs of the Tier 2 
disclosure regime--relative to the costs of complying with state 
registration--exceed the benefits of more extensive disclosure.
---------------------------------------------------------------------------

    \934\ Some commenters recommended raising the Tier 1 offering 
limitation to $10 million or more. See Guzik Letter 1 and ICBA 
Letter.
---------------------------------------------------------------------------

    Compared to the baseline, the increase in the maximum offering size 
to $20 million for Tier 1 offerings and the creation of Tier 2 with the 
maximum offering size of $50 million will provide issuers with 
increased flexibility with regard to their offering size and should 
lower the burden of fixed costs associated with conducting Regulation A 
offerings as a percentage of proceeds.\935\ This could make amended 
Regulation A more cost effective and attractive to issuers than 
existing Regulation A, resulting in potential favorable effects on 
capital formation and competition. The increase in the maximum offering 
size could also make Regulation A attractive to a broader range of 
issuers, including larger issuers. This could provide investors with a 
broader range of investment opportunities in the Regulation A market 
and potentially result in a more efficient allocation of investor 
capital.
---------------------------------------------------------------------------

    \935\ To the extent that issuers in Tier 2 offerings face 
additional costs due to revised disclosure requirements under 
amended Regulation A, issuance costs as a percentage of proceeds may 
remain unchanged or may increase.
---------------------------------------------------------------------------

    The increased maximum offering size could also contribute to 
improved liquidity for Regulation A securities, to the extent that 
larger issues may encourage greater breadth of equity ownership, 
assuming sufficient secondary market demand develops.\936\ Improved 
liquidity would enable investors in Regulation A offerings to unwind 
their investments more easily and at a lower cost, thus making such 
investments more attractive to potential investors. On the other hand, 
if investor demand for securities offered under amended Regulation A is 
low, this could negatively affect security prices and liquidity.
---------------------------------------------------------------------------

    \936\ We recognize the possibility that, despite the absence of 
resale restrictions, even large Regulation A offerings with heavy 
investor participation may fail to attain sufficient liquidity due 
to a lack of secondary trading and a lack of breadth of 
institutional ownership, and thus may be associated with a higher 
cost of capital due to the illiquidity premium. In such a scenario, 
some issuers and investors may still benefit from having access to a 
type of offering that provides greater liquidity than Regulation D 
securities offerings although less liquidity than registered 
offerings of securities listed on major national exchanges.

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[[Page 21875]]

    If investor demand for Regulation A securities and information 
about issuers is sufficient, the increase in maximum offering size 
could also contribute to the development of intermediation services, 
such as market making, and to the coverage of Regulation A securities 
by analysts.\937\ It is possible that an underwriting market may 
develop to provide Regulation A offering services, especially in larger 
Tier 2 offerings. The presence of these services could have a positive 
impact on investor participation and aftermarket liquidity of 
Regulation A securities, further increasing demand for such services. 
It is also possible, however, that investor demand for Regulation A 
securities will not expand sufficiently to make such services 
economically feasible.
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    \937\ Academic studies show that firm size is an important 
predictor of analyst coverage, so if larger issuers are attracted to 
the Regulation A market, they may be more likely to be covered by 
analysts than smaller issuers, all else equal. See Barth, M., R. 
Kasznik, and M. McNichols, 2001, Analyst coverage and intangible 
assets, Journal of Accounting Research 39(1), pp. 1-34.
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    Finally, the increase in the maximum offering size could result in 
increased competition among Regulation A issuers for investor capital. 
If the number of issuers seeking to raise larger amounts of capital 
pursuant to Regulation A increases more than the size of the accredited 
and non-accredited investor base, investors considering Regulation A 
securities will have more choice of investment opportunities in the 
Regulation A market, resulting in greater competition among issuers for 
prospective investors. Increased competition, in turn, could result in 
more efficient allocation of capital by investors. The intensity of 
competition among issuers for investor capital may not change, however, 
if issuers are able to attract additional numbers of accredited and 
non-accredited investors as the Regulation A market develops.
    Alternatively, as suggested by some commenters, we could have 
increased the Tier 2 maximum offering size above $50 million, for 
example, to $75 or $100 million.\938\ This alternative could result in 
benefits that are similar to the benefits of the increase in the 
maximum offering size contained in the final rules but of a potentially 
larger magnitude. However, there is reason to believe that the 
magnitude of the increase in such benefits may be limited. In 
particular, although Rule 506 does not limit maximum offering size, few 
Regulation D offerings by issuers that would be eligible for amended 
Regulation A exceeded $50 million.\939\ To the extent that the current 
use of other types of exempt offerings is indicative of future 
Regulation A offerings, the alternative of raising the Tier 2 offering 
size above $50 million may not lead to a significant increase in the 
number of issuers.
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    \938\ See B. Riley Letter; Fallbrook Technologies Letter; OTC 
Markets Letter; Public Startup Co. Letter 1; Richardson Patel 
Letter.
    \939\ Based on an analysis of Form D filings for 2014 by staff 
from Commission's Division of Economic and Risk Analysis, less than 
3% of Regulation D offerings by issuers that would be eligible for 
amended Regulation A had offering size greater than $50 million.
     We also considered the overall distribution of registered 
offerings (initial public offerings and seasoned equity offerings). 
The overall number of Regulation D offerings significantly exceeded 
the number of registered equity offerings, thus the combined 
distribution of registered and Regulation D offerings closely 
resembles the distribution of Regulation D offerings. In 2014, most 
(92.2%) of the offerings conducted in the form of registered equity 
offerings or Regulation D offerings had offer sizes up to $50 
million. In 2014, offerings in the $50-$75 million range accounted 
for 1.0% of Regulation D offerings and approximately 10% of 
registered equity offerings. Data on registered offerings was 
obtained from Thomson Reuters, as described in Section III.B.1.b.
---------------------------------------------------------------------------

    However, we recognize that historical use of Regulation D may not 
fully represent future potential use of Regulation A, particularly to 
the extent that the amended rules facilitate offerings by issuers that 
do not currently rely on other private offering exemptions and that are 
seeking a broader investor base and enhanced liquidity for their issued 
securities. In particular, amended Regulation A may attract issuers 
seeking a public ownership status, and for whom a likely alternative is 
a registered offering. An increase in the Tier 2 offering size above 
$50 million could result in some issuers shifting from conducting a 
registered offering to conducting a Tier 2 offering. As discussed 
earlier, amended Regulation A may facilitate offerings that would not 
otherwise be conducted given the cost of registered offerings. However, 
it is also possible that an increase in the Tier 2 offering size above 
$50 million will not result in a significant number of issuers shifting 
from conducting a registered offering to conducting a Tier 2 offering 
given that the relative cost savings from a Tier 2 offering compared to 
a registered offering may be lower for offerings in the $50 million to 
$75 million range than for those below $50 million.\940\
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    \940\ The fixed costs of registered offerings represent a 
significantly higher portion of offering proceeds as offering sizes 
decrease. For instance, compliance related costs (registration, 
legal and accounting expenses and fees) increase from an average of 
an average of 1.7% for IPOs and 0.5% for SEOs in the $50-$75 million 
range to an average of 2.9% for IPOs and 1.6% for SEOs in the below 
$50 million range. Fee information is compiled from Thomson Reuters 
SDC data for 1992-2014, excluding offerings from non-Canadian 
foreign issuers, blank-check companies, and investment companies. 
Average compliance fees and expenses for this calculation are based 
on observations with non-missing data (where all four types of 
fees--legal, accounting, blue sky, and registration fees, to which 
we collectively refer as compliance fees--are separately reported). 
Offerings with gross proceeds below $1,000 are excluded to minimize 
measurement error.
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    An increased maximum offering size for Tier 1 offerings could 
increase the overall amount of securities being offered to the general 
public that are subject to less extensive initial disclosure 
requirements and not subject to ongoing disclosure requirements, which 
may reduce the ability of investors to make informed investment 
decisions. However, some issuers that conduct offerings that are 
eligible for Tier 1 may instead choose a Tier 2 offering, for example, 
to take advantage of the benefits of more extensive disclosure, such as 
potentially greater secondary market liquidity, and the benefits of a 
single level of regulatory review.
    An increased maximum offering size for Tier 2 Regulation A 
offerings could increase the overall amount of securities being offered 
to the general public that are subject to initial and ongoing 
disclosure requirements that are less extensive than the requirements 
for registered offerings being offered to the general public, which may 
result in less informed decisions by investors, thus potentially 
impacting investor protection. This may be partly mitigated by the 
investment limitations imposed on non-accredited investors in Tier 2 
offerings. Further, larger issuers are more likely to conduct 
registered offerings, associated with the more extensive disclosure 
requirements of the Exchange Act.\941\ We believe that the

[[Page 21876]]

annual offering limitation for Tier 2 will serve to limit the utility 
of the Regulation A exemption for larger issuers and thus will make it 
more likely that they will continue to raise money through registered 
offerings and provide the corresponding disclosure.
---------------------------------------------------------------------------

    \941\ Early in the firm's life cycle, it may be optimal for a 
firm to remain private, but as it grows larger, it may become 
optimal to conduct a registered IPO. See Chemmanur, Thomas J., and 
Paolo Fulghieri, 1999, A theory of the going-public decision, Review 
of Financial Studies 12(2), pp. 249-279. Privately held firms tend 
to be significantly smaller than firms with publicly traded 
securities. See Asker, John, Joan Farre-Mensa, and Alexander 
Ljungqvist, 2014, Corporate investment and stock market listing: A 
puzzle? Review of Financial Studies 28(2), pp. 342-390. Asker, John, 
Joan Farre-Mensa, and Alexander Ljungqvist, 2011, What do private 
firms look like? Data appendix, available at: https://ssrn.com/abstract_id=1659926. Other studies support the notion that larger 
firms are more likely to conduct a registered IPO. See Pagano, 
Marco, Fabio Panetta, and Luigi Zingales, 1998, Why do computers go 
public? An empirical analysis, Journal of Finance 53, 27-64 (showing 
that size predicts going public using Italian data). See also 
Chemmanur, Thomas J., Shan He, and Debarshi K. Nandy, 2010, The 
going-public decision and the product market, Review of Financial 
Studies 23(5), pp. 1855-1908 (showing that size predicts a higher 
likelihood of conducting a registered IPO using US data). In turn, 
smaller firms that have undertaken an IPO in the past are more 
likely to go private later on. See Mehran, Hamid, and Stavros 
Peristiani, 2010, Financial visibility and the decision to go 
private, Review of Financial Studies, 23(2), pp. 519-547.
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b. Secondary Sales
    The final rules continue to permit secondary sales as part of a 
Regulation A offering, subject to the following conditions. The amount 
of securities that selling securityholders can sell at the time of an 
issuer's initial offering and within the following 12-month period may 
not exceed 30% of the aggregate offering price (offering size) of a 
particular offering. Following the expiration of the first 12-month 
period after an issuer's initial qualification of an offering 
statement, the amount of securities that affiliate securityholders can 
sell in a Regulation A offering in any 12-month period will be limited 
to $6 million in Tier 1 offerings and $15 million in Tier 2 
offerings.\942\ After the initial 12-month period, sales by non-
affiliate securityholders made pursuant to the offering statement will 
not be subject to a limit on secondary sales but will be aggregated 
with sales by the issuer and affiliates for the purposes of compliance 
with the maximum offering limitation for the respective tier. The final 
rules also eliminate the provision in the current Rule 251(b), which 
prohibits resales by affiliates unless the issuer has had net income 
from continuing operations in at least one of the last two years.\943\
---------------------------------------------------------------------------

    \942\ The dollar limits are broadly consistent with existing 
Regulation A, which limits sales by existing securityholders to $1.5 
million, or 30% of the $5 million maximum offering size, in a 12-
month period.
    \943\ Tier 1 offerings may still be subject to state law 
limitations on secondary sales and sales by affiliates.
---------------------------------------------------------------------------

    Several commenters recommended eliminating limits on sales by 
existing securityholders,\944\ including one commenter that recommended 
eliminating restrictions on sales by non-affiliate securityholders 
since concerns over information asymmetries between potential investors 
and non-affiliate securityholders would be reduced.\945\ Other 
commenters recommended either proscribing resales entirely \946\ or 
requiring the approval of the resale offering by a majority of the 
issuer's independent directors upon a finding that the offering is in 
the best interests of both the selling securityholders and the 
issuer.\947\ Another commenter recommended requiring a twelve-month 
holding period for selling shareholders in order to distinguish between 
investors seeking to invest in a business and investors simply seeking 
to sell to the public for a gain or limiting securityholders not 
qualifying for the twelve-month holding period to selling a fraction of 
their shares, such as 50%.\948\
---------------------------------------------------------------------------

    \944\ See ABA BLS Letter; B. Riley Letter; Canaccord Letter; 
CFIRA Letter 1; CFIRA Letter 2; Milken Institute Letter; MoFo 
Letter; WR Hambrecht + Co Letter.
    \945\ See Milken Institute Letter.
    \946\ See Massachusetts Letter 2; NASAA Letter 2; Carey Letter.
    \947\ See NASAA Letter 2 (supporting the proposed limits coupled 
with a board approval requirement in lieu of prohibiting resales 
entirely) and WDFI Letter (not expressing a preference for 
prohibiting resales entirely).
    \948\ See MCS Letter.
---------------------------------------------------------------------------

    Whether and to what extent securityholders should be permitted to 
sell in a Regulation A offering involves a trade-off between enhancing 
liquidity for selling securityholders and limiting the potential harm 
to investors that could arise from such sales. The final rules attempt 
to balance these considerations. The trade-off between these 
countervailing considerations will depend in large part on whether the 
selling securityholder is an affiliate of the issuer. There are two 
concerns about sales by affiliates. One is that there is an information 
asymmetry between an affiliate and outside investors. In particular, an 
affiliate selling securityholder is likely to have an informational 
advantage that it may potentially utilize to the detriment of outside 
investors.\949\ The other concern is the alignment of incentives. With 
respect to affiliates, 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.\950\ Thus, 
it can be important that insiders retain an ownership stake in the 
company to ensure that their incentives are aligned.\951\ A divestiture 
of the ownership stake of an affiliate owner may therefore exacerbate 
agency conflicts, thus suggesting that large affiliate sales can be 
detrimental to current and future investors.
---------------------------------------------------------------------------

    \949\ See Easley, D., and M. O'Hara, 2004, Information and the 
cost of capital, Journal of Finance 59(4), pp. 1553-1583. We note 
that these potential effects may be limited to the extent that 
purchasers are aware that they may be transacting with better 
informed affiliates in the course of offerings with affiliate 
securityholder sale disclosures, in which case these informational 
asymmetries could be partially or fully reflected in lower security 
prices and lower proceeds at the time of the offering.
    \950\ See Jensen, M., and W. Meckling, 1976, Theory of the firm: 
Managerial behavior, agency costs and ownership structure, Journal 
of Financial Economics 3(4), pp. 305-360.
    \951\ See Core, J., R. Holthausen, and D. Larcker, 1999, 
Corporate governance, chief executive officer compensation, and firm 
performance, Journal of Financial Economics 51(3), pp. 371-406; 
Mehran, H., 1995, Executive compensation structure, ownership, and 
firm performance, Journal of Financial Economics 38(2), pp. 163-184.
---------------------------------------------------------------------------

    We recognize, however, that there are benefits to be realized from 
permitting affiliate securityholders, such as company founders and 
employees, to sell in a Regulation A offering. Because entrepreneurs 
and other affiliates consider available exit options before 
participating in a new venture, permitting secondary sales increases 
their incentives to make the original investment, which may promote 
innovation and business formation.\952\ Allowing exit could also 
facilitate efficient reallocation of capital and talents of 
entrepreneurs to new ventures.\953\ Additionally, exit of a large 
affiliate shareholder could potentially result in a broader base of 
investors.
---------------------------------------------------------------------------

    \952\ See Cumming, D., and J. MacIntosh, 2003, Venture-capital 
exits in Canada and the United States, University of Toronto Law 
Journal 53(2), pp. 101-199.
    \953\ See Zhang, J., 2011, The advantage of experienced start-up 
founders in venture capital acquisition: Evidence from serial 
entrepreneurs, Small Business Economics 36(2), pp. 187-208. See also 
Gompers, P., A. Kovner, J. Lerner, and D. Scharfstein, 2006, Skill 
vs. luck in entrepreneurship and venture capital: Evidence from 
serial entrepreneurs, Working paper No. w12592, National Bureau of 
Economic Research.
---------------------------------------------------------------------------

    As noted above, the final rules relax the existing limitations on 
secondary sales by affiliates by eliminating the net income test for 
affiliate resales in existing Rule 251(b). We are concerned that this 
criterion may not be the best measure of financial health and 
investment opportunities for some issuers eligible for amended 
Regulation A and thus may inappropriately disadvantage those issuers, 
and their affiliates, with respect to secondary sales.\954\ In 
particular, this change should benefit growth and R&D-intensive issuers 
that may experience longer periods of negative revenues. Several 
commenters supported the elimination of the net income test for 
affiliate resales, generally noting that some issuers may have net 
losses for several years, including due to high R&D costs.\955\ We 
recognize that eliminating this criterion could lead to reduced 
investor protection due to

[[Page 21877]]

insiders in Regulation A offerings being able to sell securities in 
issuers that have not reported net income. However, we note that the 
disclosures required for Regulation A offerings, as well as the overall 
limits on secondary sales during the initial 12-month period and 
subsequent limits on secondary sales by affiliates, should partly 
mitigate this cost.
---------------------------------------------------------------------------

    \954\ See Davila, A., and G. Foster, 2005, Management accounting 
systems adoption decisions: Evidence and performance implications 
from early-stage/startup companies, Accounting Review 80(4), pp. 
1039-1068 (suggesting that standard accounting measures are often 
poor indicators of financial health in small companies).
    \955\ See ABA BLS Letter; B. Riley Letter; Canaccord Letter; 
CFIRA Letter 1; Milken Institute Letter; MoFo Letter; WR Hambrecht + 
Co Letter.
---------------------------------------------------------------------------

    The trade-off between enhanced liquidity and investor protection is 
different with respect to sales by non-affiliates, because these 
securityholders are less likely to have access to inside information, 
and their sales do not raise the incentive alignment concerns discussed 
above in the context of affiliate securityholders. The option to exit 
through a Regulation A offering provides additional liquidity to 
existing non-affiliate securityholders. During the initial 12-month 
period, the final rules enable selling securityholders to access 
liquidity through a Regulation A offering while ensuring that secondary 
sales at the time of such offerings are made in conjunction with new 
capital raising by the issuer. After the expiration of the initial 12-
month period, the ability of non-affiliate securityholders to sell 
securities pursuant to a qualified Regulation A offering statement 
without limitation (except the maximum Regulation A offering size) 
should make Regulation A securities more attractive to prospective 
investors, which may encourage initial investment and increase capital 
formation. Non-affiliate securityholders who hold restricted securities 
purchased in reliance on another exemption will be able to sell them 
freely after a one-year holding period. Purchasers of the securities 
from such non-affiliate securityholders would not have the benefit of 
the more robust disclosure provisions of a Regulation A offering, where 
the seller will be subject to Section 12(a)(2) liability. Thus, 
allowing secondary sales in a Regulation A offering will provide an 
additional measure of protection for purchasers as compared to 
transactions in the secondary market.\956\ Consequently, we believe 
that removing restrictions on non-affiliate securityholder sales in 
Regulation A offerings will not have an adverse effect on investor 
protection.
---------------------------------------------------------------------------

    \956\ See Securities Act Section 3(b)(2)(D) (expressly providing 
for Section 12(a)(2) liability for any person offering or selling 
Section 3(b)(2) securities).
---------------------------------------------------------------------------

    Although secondary sales increase the liquidity for existing 
securityholders, since secondary sales will be aggregated with issuer 
sales for purposes of compliance with the maximum offering amount 
permissible under the respective tiers, secondary sales may reduce the 
maximum amount of issuer sales in a Regulation A offering. The 30% 
limit on secondary sales imposed during the initial 12-month period 
partly mitigates this potential effect.
4. Investment Limitation
    Regulation A currently does not place limits on the amount of 
securities that may be purchased by an investor. The proposed rules 
included a 10% investment limit for all investors in Tier 2 offerings. 
Several commenters recommended providing exceptions to the limit, or 
altering the limit, for certain types of investors, such as accredited 
investors,\957\ and for securities that will be listed on an exchange 
upon qualification.\958\
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    \957\ See ABA BLS Letter; Andreessen/Cowen Letter; Canaccord 
Letter; Cornell Clinic Letter; Fallbrook Technologies Letter; 
Heritage Letter; Ladd Letter 2; Leading Biosciences Letter; McCarter 
& English Letter; MCS Letter; Milken Institute Letter; MoFo Letter; 
Paul Hastings Letter; Richardson Patel Letter; SVB Letter; WR 
Hambrecht + Co Letter.
    \958\ See Milken Institute Letter.
---------------------------------------------------------------------------

    We recognize that there are potential investor protection benefits 
as well as costs from imposing investment limits in Regulation A 
offerings. To help balance those benefits and costs, the final rules 
seek to focus these limits on those investors who may be less likely to 
be able to fend for themselves and sustain losses. Accordingly, non-
accredited investors in Tier 2 offerings will be limited to purchases 
of no more than 10% of the greater of annual income or net worth (for 
natural persons) or the greater of annual revenue or net assets (for 
non-natural persons), as proposed.\959\ In a change from the proposal, 
the final rules do not apply the investment limit to investors in Tier 
2 offerings that are accredited investors as defined in Rule 501 of 
Regulation D. We believe that accredited investors, due to their level 
of income or net worth, are more likely to be able to withstand losses 
from an undiversified exposure to an individual offering.
---------------------------------------------------------------------------

    \959\ 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.
---------------------------------------------------------------------------

    We also recognize that there are costs associated with investment 
limits. In particular, the investment limitation could limit potential 
gains for non-accredited investors in Tier 2 offerings. The investment 
limitation could require some issuers to solicit a greater number of 
investors or to solicit additional accredited investors, which could 
impose additional costs on those issuers or limit capital formation if 
they are unable to attract additional investors.\960\ Despite these 
costs, we believe that this limitation, as tailored in the final rules, 
is an appropriate means of protecting investors while promoting 
efficiency, competition and capital formation.
---------------------------------------------------------------------------

    \960\ An issuer would, however, be able to conduct a Tier 1 
offering, which does not impose investment limitations.
---------------------------------------------------------------------------

    The investment limitation could also lead to a more dispersed non-
accredited investor base or a higher proportion of accredited investors 
in the investor base to the extent that the 10% threshold impacts 
investor participation. This could facilitate increased liquidity as 
there would be more investors with which to trade. More diffuse 
ownership could also exacerbate the shareholder collective action 
problem and weaken external monitoring by non-affiliated shareholders 
to the extent that coordination costs with other shareholders increase. 
We do not believe, however, that either of these outcomes is a likely 
consequence of the 10% investment limit.
    In a change from the proposal, the final rules exclude sales of 
securities that will be listed on a national securities exchange upon 
qualification from Tier 2 investment limitations. This provision may 
provide additional investment opportunities for some investors and may 
enhance capital formation for some issuers. We do not anticipate that 
this provision will reduce investor protection since such issuers will 
be required to meet the listing standards of a national securities 
exchange and become subject to ongoing Exchange Act reporting, 
resulting in a high level of investor protection.
    As an alternative to the final rules, we considered imposing more 
restrictive investment limitations, as suggested by various comments, 
including extending investment limitations to Tier 1 offerings,\961\ 
imposing a limit lower than 10% on ``all but the wealthiest, least risk 
averse'' investors,\962\ or imposing a 10% investment limitation across 
investments in all Regulation A offerings rather than applying the 
limitation on a per offering basis.\963\ Applying the investment 
limitation in Tier 1 offerings could marginally enhance investor 
protection, especially since these offerings will be subject to less 
extensive disclosure and transactional requirements. However, given 
that Tier 1 offerings will remain

[[Page 21878]]

subject to state registration requirements, it is unclear whether 
investment limits would significantly enhance investor protection in 
these offerings.\964\ Moreover, adding the investment limitation in 
Tier 1 offerings could have an adverse effect on capital formation for 
the smallest Regulation A issuers, which may face greater hurdles than 
larger issuers in attracting a broad investor base.
---------------------------------------------------------------------------

    \961\ See CFA Institute Letter.
    \962\ See CFA Letter.
    \963\ See CFA Letter (not recommending this specifically, but 
noting this as one reason why the investment limit was not an 
adequate substitute for state review of Tier 2 offerings) and 
Cornell Clinic Letter.
    \964\ One commenter noted that the investment limitation is 
unnecessary with appropriate state oversight. See NASAA Letter 2.
---------------------------------------------------------------------------

    The alternative of imposing a cap that is lower than 10% on ``all 
but the wealthiest, least risk averse'' investors may confer additional 
investor protection benefits on investors that are unable to withstand 
significant investment losses. However, this alternative could also 
limit some investors from pursuing attractive investment opportunities 
and limit capital formation for some issuers. Further, since risk 
preferences vary considerably among investors, objectively identifying 
``risk averse'' investors in a way that is broadly applicable is a 
challenge. In contrast, the 10% investment limitation in the final 
rules that applies to all investors in a Tier 2 offering, except 
accredited investors, defined pursuant to Rule 501 of Regulation D, 
provides a standard that market participants can easily implement.
    The alternative of imposing the 10% investment limitation that is 
aggregated across investments in all Regulation A offerings rather than 
applying the limitation on a per offering basis may strengthen investor 
protection. Because the risk profiles of different securities offerings 
by the same issuer are likely to be correlated, and some issuers may 
participate in multiple Regulation A offerings over time, such an 
alternative definition of the limitation may prevent a non-accredited 
investor from using a significant share (potentially, significantly in 
excess of 10%) of their net worth or income to establish a highly 
undiversified exposure to a single issuer. However, this alternative 
could also limit some investors from pursuing attractive investment 
opportunities and limit capital formation for issuers. Moreover, 
different offerings by the same issuer under Regulation A may have 
different risk profiles, depending on security type and class, thus for 
some investors, depending on their preferences, investing a larger 
aggregate amount in multiple offerings by the same issuer may be 
optimal.
    Overall, while such additional restrictions may strengthen investor 
protection, their incremental contribution to investor protection may 
be small in light of other provisions of amended Regulation A. At the 
same time, such additional restrictions may prevent some investors from 
taking advantage of potentially beneficial investment opportunities and 
may limit the attractiveness of Regulation A to prospective issuers, 
reducing capital formation and competition benefits.
    The final rules permit issuers to rely on an investor's 
representation that the investment represents no more than 10% of the 
greater of the investor's net worth and annual income, unless the 
issuer has knowledge that such representation is untrue. The ability to 
rely on investor representations should help mitigate potential costs 
that issuers could incur to comply with the investment limitation 
provisions. At the same time, we realize that investors might make 
inaccurate representations, whether intentionally or not, which could 
expose these investors to increased losses.
    As an alternative to investor representations, we could have 
imposed additional requirements on the issuer to verify that investors 
in Tier 2 offerings are compliant with the 10% investment limit, as 
suggested by some commenters.\965\ Such additional provisions could 
strengthen investor protections. At the same time, they would likely 
result in a disproportionate increase in the cost of compliance, 
especially for smaller issuers in Tier 2 offerings, and might deter 
some investors from participating in such offerings due to the 
potential burdens of the verification process and privacy concerns.
5. Integration
---------------------------------------------------------------------------

    \965\ See Accredited Assurance Letter; CFA Letter; CFA Institute 
Letter; Cornell Clinic Letter; MCS Letter; WDFI Letter.
---------------------------------------------------------------------------

    The final rules provide issuers with a safe harbor from integration 
that, with the exception of the addition of security-based crowdfunding 
transactions conducted pursuant to Section 4(a)(6) of the Securities 
Act, preserves the provisions of existing Regulation A.
    We believe that the final rules provide issuers with valuable 
certainty as to the contours of offerings conducted before, or close in 
time with, Regulation A offerings. This certainty may be particularly 
beneficial for smaller issuers whose capital needs, and thus preferred 
capital raising methods, may change frequently.
    As an alternative, we could have eliminated the integration safe 
harbor. We believe that the elimination of the safe harbor, however, 
would inject uncertainty into offerings conducted before, or close in 
time with, Regulation A offerings and would, in turn, decrease the 
utility of the exemption. Uncertainty as to the contours of offerings, 
as they relate to Regulation A, could possibly cause issuers to prefer 
other offering methods to Regulation A, which may have an effect on 
investor protection. For example, if issuers rely more on Regulation D, 
this alternative could result in investors receiving less information 
about an issuer before making an investment, thereby reducing investor 
protection. Instead, if issuers rely more on registered offerings, this 
alternative could potentially provide investors with the more extensive 
disclosure required of, and liability protections associated with, such 
offerings, although it would cause smaller issuers to incur the higher 
initial and ongoing costs associated with such offerings.
6. Treatment Under Section 12(g)
    Existing rules currently do not exempt Regulation A securities from 
the requirements of Section 12(g), but the Proposing Release requested 
comment on whether we should adopt such an exemption. A number of 
commenters recommended exempting Regulation A securities from Section 
12(g) of the Exchange Act,\966\ and several commenters recommended 
changing or delaying the application of Section 12(g).\967\ In a change 
from the proposed rules, the final rules exempt securities issued in a 
Tier 2 offering from the provisions of Section 12(g) for so long as the 
issuer remains subject to, and is current in, its periodic Regulation A 
reporting obligations as of its fiscal year end,\968\ engages the 
services of a transfer agent registered with the Commission pursuant to 
Section 17A of the Exchange Act, and had a public float of less than 
$75 million as of the last business day of its most recently completed 
semiannual period, or, in the absence of a public float, had annual 
revenues of less than $50 million as of

[[Page 21879]]

its most recently completed fiscal year.\969\
---------------------------------------------------------------------------

    \966\ See B. Riley Letter; CFIRA Letter 1; CFIRA Letter 2; 
Fallbrook Technologies Letter; Frutkin Law Letter; Guzik Letter 1 
and Letter 3; Heritage Letter; IPA Letter; Ladd Letter 2; Milken 
Institute Letter; MoFo Letter; SBIA Letter (recommending that the 
trigger be ``raised or remedied,'' but not explicitly calling for 
elimination); U.S. Chamber of Commerce Letter; WR Hambrecht + Co 
Letter.
    \967\ See Heritage Letter; KVCF; McCarter & English Letter; 
Milken Institute Letter; MoFo Letter; Paul Hastings Letter; SBIA 
Letter.
    \968\ See Rule 12g5-1(a)(7).
    \969\ Id.
---------------------------------------------------------------------------

    The final rules are intended to provide sufficient disclosure to 
help investors make informed decisions while limiting the costs imposed 
on issuers. We believe that the initial and ongoing disclosures 
required for Tier 2 offerings in the final rules accomplish this 
objective and that the final rules also provide an appropriate balance 
between providing investor protection and promoting capital formation. 
The size of Tier 2 offerings, combined with the investment limitation 
and the ability to offer Tier 2 securities to the general public, may 
result in the number of an issuer's shareholders of record exceeding 
Section 12(g) thresholds. A conditional Section 12(g) exemption for 
small issuers of Tier 2 securities in such instances is expected to 
reduce the compliance cost for small issuers and facilitate capital 
formation and the creation of a broad investor base in offerings made 
pursuant to Regulation A by small Tier 2 issuers. This will benefit 
those small Regulation A issuers that are not seeking to list on a 
national securities exchange \970\ and that may find the costs of 
Exchange Act reporting to be too high given their size.
---------------------------------------------------------------------------

    \970\ Issuers seeking to list on a national securities exchange 
will be required to register with the Commission under Section 
12(b).
---------------------------------------------------------------------------

    Regulation A offerings may be particularly attractive to small 
private companies whose shareholder bases are approaching the Section 
12(g) registration threshold. The conditional Section 12(g) exemption 
may enable small private issuers of Tier 2 securities under amended 
Regulation A to expand their shareholder base over time, as a result of 
secondary market trading, to the extent that such a market develops, or 
through subsequent security issuances, without incurring the costs 
associated with reporting company status.\971\
---------------------------------------------------------------------------

    \971\ See IPO Task Force. Based on two surveys, regulatory 
compliance costs of IPOs average $2.5 million initially, followed by 
an ongoing cost of $1.5 million per year.
---------------------------------------------------------------------------

    While the additional requirement to use a registered transfer agent 
will impose costs on issuers,\972\ it should provide investor 
protection benefits by helping to ensure that securityholder records 
and secondary trades will be handled accurately. As it is a conditional 
exemption from Section 12(g), however, issuers that are not concerned 
with registration under the Exchange Act, perhaps because they do not 
believe that Exchange Act registration will be required as a result of 
a Regulation A offering, would not be required to retain the services 
of a registered transfer agent in order to conduct a Tier 2 offering.
---------------------------------------------------------------------------

    \972\ We lack the information to provide a precise quantitative 
estimate of transfer agent costs for Tier 2 issuers. However, we 
have some sources of information about transfer agent costs in 
analogous contexts.
    According to the Securities Transfer Association (STA), the 
registered transfer agent industry is highly competitive and many of 
its members can develop business models that will suit the needs of 
small issuers and at the same time provide adequate protection to 
investors. The STA further noted that it did not anticipate most 
small issuers to require some of the services, such as the 
processing of dividends, that raise the cost of recordkeeping 
services. See STA letter on JOBS Act regulatory initiatives, 
available at: https://www.sec.gov/comments/jobs-title-i/general/general-207.pdf. STA estimated that monthly transfer agent fees 
would be $75[hyphen]$300 for security-based crowdfunding issuers, 
which translates into annual fees of $900-$3600. See STA letter on 
proposed crowdfunding rules, available at: https://www.sec.gov/comments/s7-09-13/s70913-96.pdf. In 2014, average transfer agent and 
registrar fees amounted to approximately $9,000 in registered IPOs 
with offering sizes below $50 million, based on Thomson Reuters SDC 
data, excluding offerings from non-Canadian foreign issuers, blank-
check companies, and investment companies. Offerings with proceeds 
below $1,000 are excluded to minimize measurement error. While 
estimates for security-based crowdfunding issuers are likely to 
underestimate the cost for a typical Tier 2 issuer, estimates for 
IPOs are likely to overestimate the cost of transfer agent services 
for a typical Tier 2 issuer. Costs of transfer agent services for a 
typical Tier 2 issuer may be in the range between the two sets of 
estimates.
---------------------------------------------------------------------------

    The final rules also include an issuer size limit in the 
eligibility requirements for the Section 12(g) exemption for Tier 2 
offerings, consistent with providing a conditional exemption tailored 
to facilitate small company capital formation. The issuer size limit 
may make Regulation A less attractive for larger issuers and issuers 
anticipating growth or capital appreciation that expect to reach 
Section 12(g) thresholds after conducting a Tier 2 offering or 
subsequent secondary market trading. The two-year transition period 
before reporting must begin may partly mitigate some of these costs to 
issuers. Due to the uncertainty about the future composition of the 
issuer and investor base in Tier 2 offerings, we cannot determine the 
proportion of Tier 2 issuers whose number of shareholders of record 
will exceed Section 12(g) thresholds or the proportion of those issuers 
that will not qualify for an exemption due to their size.\973\
---------------------------------------------------------------------------

    \973\ Based on the analysis by the staff of Division of Economic 
and Risk Analysis of 2013 data on registrants under Section 12(g), 
excluding issuers with a class of securities registered under 
Section 12(b), approximately three-quarters of Section 12(g) 
registrants would have been below the issuer size limit (defined 
similarly to smaller reporting company (SRC) criteria). These 
figures may not be representative of the proportion of issuers that 
would be below the issuer size limit among future Regulation A 
issuers that would potentially exceed Section 12(g) thresholds for 
the number of shareholders of record.
---------------------------------------------------------------------------

    Some issuers may be able to limit the number of shareholders of 
record by adopting a minimum investment size requirement. This may 
potentially limit the breadth of investor base and the availability of 
investment opportunities to some investors. We are not able to 
determine the extent to which the issuer size limit may affect overall 
capital formation and whether large or growth issuers will proceed with 
a Tier 2 offering or pursue a registered offering, a Regulation D 
offering or another method of financing. In addition, the issuer size 
limit may place at a competitive disadvantage those potential issuers 
that exceed the size limit but for which the costs of registration 
remain high, relative to potential issuers that are close to the size 
limit but that qualify for the Section 12(g) conditional exemption.
    We recognize that there are costs associated with the conditional 
exemption adopted today. Under this exemption, some issuers in Tier 2 
offerings with a large number of shareholders could avoid--potentially 
indefinitely--the comprehensive disclosure requirements of the Exchange 
Act, which may decrease the informational efficiency of prices and 
potentially result in less informed investment decisions by a larger 
number of investors than in the absence of a conditional Section 12(g) 
exemption. The issuer size limit partly mitigates this concern. For the 
same reasons, however, the inclusion of a conditional exemption from 
Section 12(g) may entice small issuers that would have otherwise 
generally preferred to raise capital in private offerings to enter the 
public markets through a Tier 2 offering pursuant to Regulation A.\974\ 
In this regard, the conditional exemption could increase the 
availability of information about companies that would otherwise remain 
relatively obscure in the private markets. On balance, we believe that 
provisions such as the initial and periodic disclosure requirements and 
the investment limit in Tier 2 offerings appropriately balance investor 
protections and issuer compliance costs while facilitating the creation 
of a broad investor base in Tier 2 offerings for small issuers.
---------------------------------------------------------------------------

    \974\ For example, issuers may be more willing to raise capital 
publicly and become subject to some ongoing reporting requirements 
if such requirements are less costly to the issuer than the costs 
generally associated with the ongoing reporting requirements of the 
Exchange Act.
---------------------------------------------------------------------------

    We have considered the alternative of providing a conditional 
exemption from Section 12(g) registration that does not

[[Page 21880]]

incorporate an issuer size limitation. Such an alternative would enable 
a broader class of potential Tier 2 issuers to remain exempt from 
Exchange Act registration. Larger Regulation A issuers could generate a 
more vibrant OTC trading market, providing enhanced liquidity to those 
issuers that may not otherwise be of sufficient size to make listing on 
a national market exchange cost-effective. Providing an exemption from 
Section 12(g) could provide incentive for these larger issuers to 
broaden their investor base while still providing the ongoing 
disclosure of the Tier 2 reporting regime. This could result in 
potentially beneficial effects on capital formation, competition, and 
informational efficiency of prices. However, such an alternative would 
potentially create a class of securities permanently exempt from 
Exchange Act registration regardless of issuer size and thus subject to 
less extensive disclosure requirements than public reporting companies, 
which may affect investor protection.

D. Offering Statement

1. Electronic Filing and Delivery
    The final rules preserve the current three-part structure of Form 
1-A but make various revisions and updates to the form to streamline 
the information included in the form. 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.\975\
---------------------------------------------------------------------------

    \975\ For the purposes of the Paperwork Reduction Act (``PRA''), 
we estimate that compliance with the requirements of amended Form 1-
A will result in a burden of approximately 750 hours per response 
(compared to the current burden associated with Form 1-A of 608 
hours per response). We estimate that compliance with the 
requirements of amended Form 1-A will result in an aggregate annual 
burden of 140,625 hours of in-house personnel time and an aggregate 
annual cost of $18,750,000 for the services of outside 
professionals. See Section IV below.
---------------------------------------------------------------------------

    Under existing Regulation A, offering materials are submitted to 
the Commission in paper form. The final rules require electronic 
submission of offering materials. Electronic submission is expected to 
offer benefits to issuers and investors. Paper documents are difficult 
to process both for the Commission and for investors. Electronic filing 
is therefore expected to reduce processing delays and costs associated 
with the current paper filing system, improve the overall efficiency of 
the filing process for issuers, benefit investors by providing them 
with faster access to the offering statement, and allow offering 
materials to be more easily accessed and analyzed by regulators and 
analysts.
    We anticipate that electronic access to offering materials may 
promote the informational efficiency of prices of Regulation A 
securities.\976\ Evidence, obtained from the adoption of EDGAR for 10-K 
filings by reporting companies, suggests that the use of EDGAR has 
favorably affected small investors.\977\ Moreover, the adoption of XML 
format for Part I of Form 1-A, which captures key information about the 
issuer and the offering, should allow more efficient access to 
information and more systematic tracking of offering details by 
investors, analysts, other market participants and regulators. The XML 
format for Part I will provide a convenient and efficient means of 
gathering information from issuers and transmitting it to EDGAR.\978\
---------------------------------------------------------------------------

    \976\ In the case of reporting companies, one study found that 
EDGAR e-filing was associated with an increase in the speed with 
which information was incorporated into share prices (thus, 
increased informational efficiency of prices) and presented evidence 
of a larger market reaction to 10-K and 10-Q filings in the EDGAR 
period relative to the pre-EDGAR period. See Griffin, P., 2003, Got 
information? Investor response to Form 10-K and Form 10-Q EDGAR 
filings, Review of Accounting Studies 8(4), pp. 433-460.
    \977\ One study has examined the effect of the switch to EDGAR 
filing for annual reports on Form 10-K on small versus large 
investors. See Asthana, S., S. Balsam, and S. Sankaraguruswam, 2004, 
Differential response of small versus large investors to 10-K 
filings on EDGAR, Accounting Review 79(3), pp. 571-589.
    \978\ See Part I (Notification) of Form 1-A. As discussed more 
fully in Section II.C.3.a., 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.
---------------------------------------------------------------------------

    At the same time, we recognize that an electronic filing 
requirement may impose compliance costs on issuers, particularly, 
issuers that have not previously used the EDGAR system, which include 
filing Form ID (the application form for access codes to permit EDGAR 
filing) \979\ and converting filings into EDGAR format. Some of these 
compliance burdens will be mitigated by the savings of printing and 
mailing costs.
---------------------------------------------------------------------------

    \979\ For purposes of the PRA, Form ID is estimated to result in 
0.15 burden hours per form, for an additional aggregate annual 
burden due to the rule amendments of 28.20 hours of in-house 
personnel time. See Section IV.
---------------------------------------------------------------------------

    Some commenters have expressed investor protection concerns in 
relation to the access equals delivery model (discussed in Section 
II.C.1) arising from the perceived challenge of finding these materials 
on EDGAR and not requiring delivery 48 hours in advance of sale in all 
circumstances.\980\ As discussed above, we do not believe that access 
to EDGAR generally has proven to be a challenge for investors in 
registered offerings since the adoption of Securities Offering Reform 
in 2005, nor do we believe that it will be a challenge for investors 
under Regulation A or raise investor protection concerns, particularly 
in light of our final delivery requirements (including, where 
applicable, the inclusion of hyperlinks to offering materials on EDGAR 
that must be provided to investors by issuers and intermediaries). 
Additionally, given that the final offering circular delivery 
obligations generally affect investors only after they have made their 
investment decisions and that, taking into account advancements in 
technology and expanded use of the Internet, investors will have access 
to the final offering circular upon its filing, we believe that using a 
means other than physical delivery to satisfy the final offering 
circular delivery obligation will not have an adverse effect on 
investor protection. Overall, we believe that there will be benefits to 
issuers of streamlining delivery requirements for the final offering 
circular, consistent with similar updates to delivery requirements for 
registered offerings.\981\
---------------------------------------------------------------------------

    \980\ See Massachusetts Letter 2; NASAA Letter 2; WDFI Letter.
    \981\ See Securities Offering Reform, Rel. No. 33-8591.
---------------------------------------------------------------------------

2. Disclosure Format and Content
    Under the existing Regulation A, issuers can choose among three 
models for providing narrative disclosure in Part II of the offering 
statement: Model A, Model B, and Part I of Form S-1. Similar to the 
proposal, the final rules eliminate Model A but preserve Model B, with 
certain changes to the contents, and Part I of Form S-1.\982\
---------------------------------------------------------------------------

    \982\ See Section II.C.3.b for a more detailed description.
---------------------------------------------------------------------------

    We believe that eliminating Model A, which uses a question-and-
answer format, may benefit investors by avoiding possible confusion 
that could result from the lack of uniformity of information presented 
in the question-and-answer format. Several commenters disagreed with 
the elimination of the Model A format, recommending that an updated 
version of the Model A disclosure format be retained.\983\ The Model A 
format may be easier to understand for non-accredited investors, who 
may lack the sophistication to analyze information presented in 
alternative disclosure formats. Compared to other formats, the Model A 
format might also result in lower costs of initial preparation of the 
offering statement, including, in some instances,

[[Page 21881]]

lessen the need to retain outside securities counsel.\984\ While a 
question-and-answer format may lower the cost of initial preparation, 
it often requires more substantive revisions after filing and before 
qualification, in order for the disclosure to sufficiently address the 
form requirements. We believe that most of the benefits associated with 
the lower cost of initial preparation are negated subsequently during 
the qualification process. Consequently, we are not persuaded that 
there are sufficient benefits to retaining the Model A format.
---------------------------------------------------------------------------

    \983\ See BIO Letter; Karr Tuttle Letter; NASAA Letter 2; 
Verrill Dana Letter 1; WDFI Letter.
    \984\ See Karr Tuttle Letter and WDFI Letter. The Karr Tuttle 
Letter also refers to the experience of issuers in Rule 504 
offerings, indicating that NASAA's Form U-7, upon which Model A is 
based, has proved convenient for issuers in Rule 504 offerings 
qualified by states without the use of securities counsel.
---------------------------------------------------------------------------

    The changes to Model B include updated disclosure requirements, 
including a new section containing management discussion and analysis 
of the issuer's liquidity, capital resources and business operations. 
While these updates may impose costs on the issuer, they are expected 
to increase investor protection and informational efficiency of prices 
by providing important information to investors. The updated disclosure 
requirements are, however, generally designed to assist issuers with 
more guidance as to the required disclosures that, while they may 
increase the cost to issuers associated with the initial preparation of 
the offering circular, should lower the overall cost of, and time to, 
qualification, when the process is considered in its entirety. Overall, 
we believe that the availability of two alternative disclosure 
formats--a revised Model B format and Part I of Form S-1--provides 
sufficient flexibility to issuers in choosing their disclosure format 
while preserving the benefits of disclosure of relevant information to 
prospective investors.
    Some commenters suggested eliminating all three disclosure formats 
and instead creating a new disclosure format similar to Part I of Form 
S-1 that would reference Regulation S-K requirements (with reduced 
disclosure requirements in some instances).\985\ Another commenter 
recommended reducing the disclosure requirements for offerings of $2 
million or less,\986\ while another suggested increasing disclosure 
requirements as an issuer grows in size and complexity.\987\ We 
recognize that scaling the disclosure requirements for Form 1-A, as 
suggested by commenters, could ease compliance costs for Regulation A 
issuers. However, additional scaling of disclosure requirements within 
tiers may reduce the comparability of disclosures within the same tier 
and result in pricing inefficiencies.
---------------------------------------------------------------------------

    \985\ See Canaccord Letter; CFIRA Letter 1; E&Y Letter; Ladd 
Letter 2; McCarter & English Letter; WR Hambrecht + Co Letter.
    \986\ See Campbell Letter.
    \987\ See SVB Letter.
---------------------------------------------------------------------------

3. Audited Financial Statements
    The final rules require issuers conducting Tier 2 offerings to 
include audited financial statements in their offering materials. 
Audited financial statements should provide investors in Tier 2 
offerings with greater confidence in the accuracy and quality of the 
financial statements of issuers seeking to raise larger amounts of 
capital. This, in turn, could benefit issuers by lowering the cost of 
capital or increasing the amount of capital supplied by investors.
    We recognize that audited financial statements could also entail 
significant costs to issuers, and that the costs of an audit could 
discourage the use of Tier 2 offerings. Based on data from registered 
IPOs below $50 million in 2014 by issuers that would have been 
potentially eligible for amended Regulation A, average total accounting 
fees amounted to 1.65% of gross offering proceeds, where reported 
separately.\988\
---------------------------------------------------------------------------

    \988\ This estimate is based on Thomson Reuters SDC data on IPOs 
with issue dates in 2014, excluding offerings from non-Canadian 
foreign issuers, blank check companies, and investment companies. 
Offerings with proceeds below $1,000 are excluded to minimize 
measurement error. Issuers of interests in claims on natural 
resources, which also would not be eligible for amended Regulation 
A, were not separately eliminated due to data constraints. 
Accounting fees include the cost of preparing accounting statements, 
in addition to the cost of an audit. We also note that costs 
incurred by issuers in registered IPOs may not be representative of 
costs incurred by issuers in Tier 2 offerings. We lack the 
information to provide a quantitative estimate of audit costs that 
would be incurred by Regulation A issuers in Tier 2 offerings.
---------------------------------------------------------------------------

    The final rules require issuers in Tier 2 offerings to include 
audited financial statements in their offering circulars that are 
audited in accordance with either the auditing standards of the 
American Institute of Certified Public Accountants (AICPA) (referred to 
as U.S. Generally Accepted Auditing Standards or GAAS) or the standards 
of the Public Company Accounting Oversight Board (PCAOB), as suggested 
by some commenters.\989\ We expect this provision in the final rules to 
provide issuers with flexibility that may help contain issuer 
compliance costs, compared to requiring financial statements that are 
audited in accordance with the standards of the PCAOB. As noted 
above,\990\ because AICPA rules would require an audit of a Regulation 
A issuer conducted in accordance with PCAOB standards to also comply 
with U.S. GAAS, an issuer who includes financial statements audited in 
accordance with PCAOB standards will likely incur additional 
incremental costs compared with an issuer who includes financial 
statements audited only in accordance with U.S. GAAS. However, we 
assume that an issuer would only elect to comply with both sets of 
auditing standards because it has concluded that the benefits of doing 
so (for example, to facilitate Exchange Act registration) justify these 
additional incremental costs.
---------------------------------------------------------------------------

    \989\ See ABA BLS Letter; BDO Letter; Canaccord Letter; Deloitte 
Letter; E&Y Letter; KPMG Letter; McGladrey Letter; MoFo Letter; WR 
Hambrecht + Co Letter.
    \990\ See Section II.C.3.
---------------------------------------------------------------------------

    As an alternative, we could have not required the audited financial 
statements until after the first year of operation as a ``public 
startup company'' or indefinitely for issuers that are pre-revenue or 
that have paid-in capital, assets and revenues below a modest 
threshold, as suggested by commenters.\991\ While this alternative may 
decrease issuer compliance costs, it may also lower the accuracy of 
information provided to investors in Tier 2 offerings, resulting in 
reduced investor protection. The large offering limit in Tier 2 
offerings may make some of the fixed costs of an audit relatively less 
burdensome. In addition, we note that smaller issuers may opt to forgo 
the cost of an audit and elect a Tier 1 offering or a Regulation D 
offering, which does not require audited financial statements.
---------------------------------------------------------------------------

    \991\ See Public Startup Co. Letter 3 (also suggesting three 
tiers, where at least the first two would not require this) and 
Public Startup Co. Letter 11.
---------------------------------------------------------------------------

    On the other hand, other commenters advised the Commission to 
require audited financial statements for Tier 1 offerings.\992\ While 
we acknowledge that requiring audited statements is likely to result in 
stronger investor protections due to reduced likelihood of fraudulent 
financial statements being presented, this alternative would likely 
place a relatively greater burden on smaller issuers due to the fixed-
cost nature of some of the audit costs. Also, given the relatively low 
maximum offering size for Tier 1, this could result in Tier 1 offerings 
becoming not cost-effective.
---------------------------------------------------------------------------

    \992\ See Guzik Letter 1 and Milken Institute Letter.
---------------------------------------------------------------------------

4. Other Accounting Requirements
    The final rules permit Canadian issuers to prepare financial 
statements in accordance with either U.S. GAAP or International 
Financial Reporting

[[Page 21882]]

Standards (IFRS) as issued by the International Accounting Standards 
Board (IASB). This is expected to benefit Canadian issuers that 
currently use IFRS as issued by the IASB by helping such issuers 
contain compliance costs associated with Regulation A offerings, 
compared to requiring Canadian issuers to prepare financial statements 
in accordance with U.S. GAAP. Several commenters specifically supported 
allowing Canadian issuers to prepare their financial statements in 
accordance with IFRS as issued by the IASB.\993\
---------------------------------------------------------------------------

    \993\ See ABA BLS Letter; Canaccord Letter; NASAA Letter 2; MoFo 
Letter; PwC Letter.
---------------------------------------------------------------------------

5. Continuous and Delayed Offerings
    The final rules explicitly allow for continuous or delayed 
offerings.\994\ As a result, it is now clear that eligible issuers have 
greater flexibility to select the timing of their offerings. Such 
flexibility is expected to benefit issuers by allowing them to adjust 
their capital raising based on macro-economic factors or company 
conditions.\995\ These factors should facilitate financing decisions 
and capital market efficiency. For example, existing research on 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, are lower than through traditional 
registration.\996\ The final rules condition the ability to sell 
securities in a continuous or delayed Tier 2 offering on being current 
with ongoing reporting requirements at the time of sale. This should 
not impose incremental costs on eligible issuers as they already file 
periodic updates and amendments.
---------------------------------------------------------------------------

    \994\ Existing Regulation A allows for continuous or delayed 
offerings to the extent permitted by Rule 415. Since Rule 415 only 
discusses ``registered offerings,'' the reference to it may have 
caused confusion as to the scope of its application in Regulation A 
offerings.
    \995\ See Bayless, M., and S. Chaplinsky, 1996, Is there a 
window of opportunity for seasoned equity issuance? Journal of 
Finance 51(1), pp. 253-278.
    \996\ See Bethel, J., and L. Krigman, 2008, Managing the cost of 
issuing common equity: The role of registration choice, Quarterly 
Journal of Finance and Accounting 47(4), pp. 57-85. We recognize 
that the evidence based on registered offerings may not be 
indicative of the effects on Regulation A offerings.
---------------------------------------------------------------------------

    The final rules restrict all ``at the market'' secondary offerings. 
Existing Regulation A prohibited primary ``at the market'' offerings, 
but did not necessarily restrict such offerings by selling 
securityholders. Some commenters suggested allowing such offerings, 
including primary offerings by the issuer.\997\ We recognize that not 
allowing secondary ``at the market'' offerings may limit flexibility 
for those issuers that are uncertain about the offering price that will 
attract sufficient investor demand. However, the benefit of the new 
restriction as it applies to secondary sales is that it helps ensure 
that issuers do not lose their Regulation A exemption due to 
unanticipated market factors by inadvertently offering securities in an 
amount that exceeds the offering limitation. Future offerings made in 
reliance on the final rules may provide more information to determine 
whether a robust market capable of supporting ``at the market'' 
offerings develops and whether the Regulation A exemption could be an 
appropriate method for such offerings in the future.
---------------------------------------------------------------------------

    \997\ See OTC Markets Letter and Paul Hastings Letter.
---------------------------------------------------------------------------

6. Nonpublic Review of Draft Offering Statements
    Under the final rules, 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 will be permitted to submit to the Commission a draft 
offering statement for non-public review, so long as all such documents 
are publicly filed not later than 21 calendar days before 
qualification. The option of non-public submission of a draft offering 
statement is expected to reduce the barriers to entry for issuers using 
Regulation A. In this regard, a potential issuer could reduce the 
amount of time between disclosing possibly sensitive information to its 
competitors in its offering statement and the related sale of its 
securities. Furthermore, companies that are tentative about conducting 
an offering could start the qualification process and then abandon the 
offering any time before the initial public filing without receiving 
the related stigma in the market. To the extent that this accommodation 
lowers the barriers to entry, it may encourage capital formation and 
competition. Moreover, we do not believe that the option of draft 
offering statement submission will significantly affect investor 
protection. Disclosure requirements are unchanged for issuers that 
elect the option of non-public submission of draft offering statement. 
The initial non-public statement, all non-public statement amendments, 
and all correspondence with Commission staff regarding such submissions 
must be publicly filed and available on EDGAR as exhibits to the 
offering statement not less than 21 calendar days before qualification 
of the offering statement.

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

    Under existing 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. The final rules permit issuers to test the waters and 
use solicitation materials both before and after the offering statement 
is filed, subject to issuer compliance with the rules on filing 
information and disclaimers.\998\ Under the final rules, testing the 
waters materials will be required to be included as an exhibit to the 
offering statement at the time of initial submission or filing with the 
Commission, and updated thereafter.
---------------------------------------------------------------------------

    \998\ As noted in Section II.H.3. above, some state securities 
laws may impose limitations on the use of testing the waters by Tier 
1 issuers.
---------------------------------------------------------------------------

    In general, allowing issuers to gauge interest through expanded 
testing the waters will reduce uncertainty about whether an offering 
could be completed successfully. 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. If 
after testing the waters, the issuer is not confident that it will 
attract sufficient investor interest, the issuer can consider alternate 
methods of raising capital and thereby avoid the costs of an 
unsubscribed or under-subscribed offering. Allowing testing the waters 
at any time prior to qualification of the offering statement, rather 
than only prior to filing of the offering statement with the 
Commission, may increase the likelihood that the issuer will raise the 
desired amount of capital. This option may be useful for smaller 
issuers, especially early-stage issuers, first-time issuers, issuers in 
lines of business characterized by a considerable degree of 
uncertainty, and other issuers with a high degree of information 
asymmetry. This provision may attract certain issuers--those that may 
be uncertain about the prospects of raising investor capital--to 
consider using amended Regulation A when they might not otherwise, thus 
potentially promoting competition for investor capital as well as 
capital formation in the Regulation A market.
    Expanding the permissible use of testing the waters communications 
could also increase the type and extent of information available to 
investors, which could lead to more efficient prices for the offered 
securities. The final rules permit testing the waters for an expanded 
period of time compared to the baseline. As a result, it may be easier

[[Page 21883]]

for investors to become aware of a larger and more diverse set of 
investment opportunities in private offerings, which may allow these 
investors to more efficiently allocate their capital. The net effect 
could be to enhance both capital formation and allocative efficiency. 
Further, requiring issuers using testing the waters solicitations after 
the offering statement is publicly filed to provide the offering 
statement with the testing the waters materials (or provide information 
about where it can be accessed), and to update it and redistribute 
updates in the event of material changes, will allow investors to make 
informed investment decisions.
    We recognize that there may also be potential costs associated with 
expanding the use of testing the waters communications. If the contents 
of the offering circular differ substantively from the material 
distributed through testing the waters communications, and if investors 
rely on testing the waters materials, this may lead investors to make 
less informed investment decisions. Some commenters were concerned that 
the expanded use of permissible testing the waters may facilitate 
misleading statements to investors and may lead to a heightened risk of 
fraud.\999\ We believe, however, that this potential investor 
protection concern is mitigated by the application of Section 12(a)(2) 
liability to Regulation A offerings and the general anti-fraud 
provisions of the federal securities laws.
---------------------------------------------------------------------------

    \999\ See Massachusetts Letter 2; NASAA Letter 2; WDFI Letter.
---------------------------------------------------------------------------

    We considered the alternative, suggested by some commenters,\1000\ 
of requiring submission and review of testing the waters materials 
before or concurrent with first use, rather than at the time the 
offering statement is submitted for non-public review or filed, which 
could aid regulators in detecting fraudulent solicitation of interest 
communications, potentially resulting in investor protection benefits. 
However, requiring initial submission and review of testing the waters 
materials prior to their use could dissuade issuers, particularly 
smaller or less experienced issuers, from engaging in testing the 
waters communications, thereby undermining many of the benefits of 
permitting such communications discussed above.
---------------------------------------------------------------------------

    \1000\ See Massachusetts Letter 2; NASAA Letter 2; WDFI Letter.
---------------------------------------------------------------------------

    We also considered the views of other commenters who suggested we 
relax some of the proposed requirements for the use of testing the 
waters. For example, we could have treated the solicitation materials 
as non-public when filed with the Commission, at least until the 
offering statement is qualified,\1001\ or removed the requirement for 
public filing of solicitation materials for all Regulation A offerings 
or for Tier 2 offerings.\1002\ Issuers that have elected to use testing 
the waters communications have already incurred the cost of preparing 
the materials, so the incremental direct cost of the requirement to 
file the materials with the Commission will be low. We recognize that 
permitting issuers to file the solicitation materials non-publicly with 
the Commission could reduce the indirect costs of some issuers by 
limiting the ability of the issuer's competitors to discover 
information about the issuer.
---------------------------------------------------------------------------

    \1001\ See Heritage Letter and Ladd Letter 2.
    \1002\ See BIO Letter and MoFo Letter.
---------------------------------------------------------------------------

    However, we note that this information may become available to 
competitors in any event through the solicitation process and removing 
the requirement to publicly file the materials may result in adverse 
effects on the protection of investors to the extent that it may 
facilitate fraudulent statements by issuers to all or a selected group 
of investors that may fail to compare the statements in the 
solicitation materials against the offering circular. On balance, we 
believe that the final rule's requirements governing the use of testing 
the waters communications appropriately balance the goals of providing 
flexibility to issuers and protection to investors.

F. Ongoing Reporting

    Currently, Regulation A issuers do not have ongoing reporting 
obligations. The final rules prescribe an ongoing reporting regime for 
issuers that conduct Tier 2 offerings that requires, in addition to 
annual reports on Form 1-K, semiannual reports on Form 1-SA, current 
event reporting on Form 1-U, and notice to the Commission of the 
suspension of ongoing reporting obligations on Form 1-Z.
    These reporting requirements will have benefits and costs. These 
reporting requirements should strengthen investor protection and 
decrease the extent of information asymmetries between issuers and 
investors in the Regulation A market, relative to existing Regulation 
A. Requiring ongoing disclosures for Tier 2 offerings will provide 
investors with periodically updated information, allowing them to 
identify investment opportunities best suited for their level of risk 
tolerance and re-evaluate the issuer's prospects through time, 
resulting in better informed investment decisions and improved 
allocative efficiency of capital. By standardizing the content, timing, 
and format of these disclosures, the amendments to Regulation A will 
make it easier for investors to compare information across issuers, 
both within and outside of the new Regulation A market.
    The additional reporting requirements for Tier 2 offerings increase 
the availability of public information that can be used for valuing 
securities. A reduction in information risk due to improvements in 
disclosure can lower the issuer's cost of capital.\1003\ Because there 
are no resale restrictions, some securities issued in amended 
Regulation A offerings are likely to be quoted on the OTC market, and 
required ongoing disclosure requirements will provide investors with 
updated information about their underlying value, and as a result, 
lower the inherent asymmetric information risks associated with trading 
in this market.\1004\ The enhanced information environment should 
facilitate more informationally efficient pricing and better liquidity 
for amended Regulation A securities.\1005\ Tier 2 ongoing disclosure 
requirements should also provide timely and relevant issuer information 
at a lower cost to broker-dealers that initiate quotations and make 
markets in these securities. Increased secondary market liquidity can 
make securities more attractive to prospective investors, which can 
promote capital formation. Hence, there may be significant benefits for 
capital formation from the ongoing reporting requirements in the final 
rules.
---------------------------------------------------------------------------

    \1003\ See Diamond, D., and R. Verrecchia, 1991, Disclosure, 
liquidity, and the cost of capital, Journal of Finance 46(4), pp. 
1325-1359; Easley, D., and M. O'Hara, 2004, Information and the cost 
of capital, Journal of Finance 59(4), 1553-1583; Easley, D., S. 
Hvidkjaer, and M. O'Hara, 2002, Is information risk a determinant of 
asset returns? Journal of Finance 57(5), pp. 2185-2221.
    \1004\ See Ang, A., A. Shtauber, and P. Tetlock, 2013, Asset 
pricing in the dark: The cross section of OTC stocks, Review of 
Financial Studies 26(12), pp. 2985-3028.
    \1005\ See Graham, J., C. Harvey, and S. Rajgopal, 2005, The 
economic implications of corporate financial reporting, Journal of 
Accounting and Economics 40(1-3), pp. 3-73; Durnev, A., R. Morck, 
and B. Yeung, 2003, Value enhancing capital budgeting and firm-
specific stock return variation, Journal of Finance 59(1), pp. 65-
106.
---------------------------------------------------------------------------

    Although reporting obligations for Tier 2 issuers are less 
extensive than for reporting companies, we recognize that they will 
still result in a significant direct cost of compliance. One commenter 
estimated the qualification and reporting costs of a Tier 2 issuer to 
be approximately $400,000 in the first year and $200,000 annually 
thereafter (per issuer).\1006\ For the purposes of the PRA, we estimate 
that compliance with

[[Page 21884]]

the requirements of Forms 1-K, 1-SA, and 1-U for issuers with an 
ongoing reporting obligation under Regulation A will result in an 
aggregate annual burden of 115,351 hours of in-house personnel time and 
an aggregate annual cost of $13,450,272 for the services of outside 
professionals.\1007\
---------------------------------------------------------------------------

    \1006\ See IPA Letter.
    \1007\ See Section IV below.
---------------------------------------------------------------------------

    In addition to the direct costs of preparing the mandatory 
disclosures, issuers of securities in Tier 2 offerings will be subject 
to indirect disclosure costs of revealing to their competitors and 
other market participants information about their business not 
previously required to be disclosed.\1008\ These disclosures can inform 
the issuer's competitors about the issuer's strategic decisions 
regarding investment, financing, management and other aspects of 
business. For issuers seeking to reduce such costs of disclosure, Rule 
506(c) of Regulation D could be more appealing. Based on the scope of 
disclosures required, an issuer's combination of direct and indirect 
costs of disclosure is likely to be lowest for a Regulation D Rule 506 
offering, followed by a Tier 1 offering, a Tier 2 offering and, 
finally, a registered public offering.
---------------------------------------------------------------------------

    \1008\ See Verrecchia, R., 2001, Essays on disclosure, Journal 
of Accounting and Economics 32, pp. 97-180.
---------------------------------------------------------------------------

    We evaluate below the different provisions of the ongoing reporting 
requirements and the alternatives we have considered.
1. Periodic and Current Event Reporting Requirements
    Currently, Regulation A issuers do not have ongoing reporting 
obligations. Tier 2 issuers in a Regulation A offering will have 
periodic and current event reporting obligations under the final rules. 
As noted above, these ongoing reporting requirements will result in 
both direct and indirect costs to Tier 2 issuers.
    Commenters made various suggestions for expanding the ongoing 
disclosure requirements for Tier 2 issuers. For example, several 
commenters suggested we require quarterly reporting instead of semi-
annual reporting.\1009\ Another commenter suggested we require 
officers, directors and controlling shareholders of issuers that offer 
securities under Regulation A to make ongoing disclosure of 
transactions in company securities, similar to reporting on Forms 3, 4 
and 5 and Schedules 13D, 13G and 13F in the registered securities 
context.\1010\ While additional requirements that would bring the Tier 
2 disclosure obligations closer to the reporting company disclosure 
obligations are likely to have informational efficiency and investor 
protection benefits, they are also likely to make Regulation A more 
costly and less attractive to prospective issuers and may not promote 
capital formation as much as the final rules.
---------------------------------------------------------------------------

    \1009\ See Massachusetts Letter 2; NASAA Letter 2; OTC Markets 
Letter; WDFI Letter.
    \1010\ See OTC Markets Letter.
---------------------------------------------------------------------------

    Other commenters recommended reducing the continuing disclosure 
burden on Tier 2 issuers \1011\ or making continuing disclosure 
requirements contingent upon factors other than offering tier, such as 
whether the issuer has taken steps to foster a market in its 
securities.\1012\ These alternatives would likely reduce compliance 
costs for Tier 2 issuers; however, they also may cause investors to 
have less information upon which to make investment decisions, 
resulting in weaker investor protections and less informationally 
efficient prices.
---------------------------------------------------------------------------

    \1011\ See Heritage Letter and IPA Letter.
    \1012\ See Heritage Letter.
---------------------------------------------------------------------------

    Other commenters recommended requiring ongoing disclosures for 
issuers in Tier 1 offerings, including disclosures at a level lower 
than is required for Tier 2,\1013\ ongoing disclosure with yearly 
audited financials,\1014\ or some unspecified continuous disclosure 
obligation.\1015\ Such alternatives, particularly if accompanied by the 
requirement of audited financial statements, would increase the 
availability and quality of financial information provided to investors 
in Tier 1 offerings and strengthen investor protection by enabling 
investors to make better informed decisions. However, due to the fixed 
component of disclosure costs, and the likely smaller size of Tier 1 
offerings relative to Tier 2 offerings, such requirements may limit 
capital formation and place Tier 1 issuers at a competitive 
disadvantage relative to Tier 2 issuers. We note that small issuers 
that value informational efficiency gains from ongoing disclosures 
above the cost of such disclosures have the option of conducting a Tier 
2 offering.
---------------------------------------------------------------------------

    \1013\ See Guzik Letter 1 (suggesting that Tier 1 ongoing 
disclosure requirements could parallel Tier 2's requirements, but 
without the requirement for semiannual reports).
    \1014\ See Ladd Letter 2.
    \1015\ See SVB Letter.
---------------------------------------------------------------------------

2. Termination and Suspension of Reporting and Exit Reports
    The final rules permit issuers in Tier 2 offerings that have filed 
all periodic and current reports required by Regulation A for a 
specified period to suspend their 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 Tier 2 offering statement are not ongoing. For banks or bank 
holding companies, the termination threshold is fewer than 1,200 
persons, consistent with Title VI of the JOBS Act. The option to cease 
reporting could be beneficial, especially for issuers that do not seek 
secondary market liquidity and for smaller issuers that find the costs 
of compliance with the ongoing disclosure requirements to be a 
relatively greater burden. At the same time, the option might be costly 
for investors because it will decrease the amount of information 
available about the issuer, making it more difficult to monitor the 
issuer and accurately price its securities or to find a trading venue 
that will allow liquidation of the investment. The public availability 
of information in bank regulatory filings is expected to mitigate some 
of these effects for bank issuers undertaking Regulation A offerings. 
Termination of reporting also might make it easier for inside 
shareholders to use an informational advantage to the detriment of 
minority outside investors.
    The final rules require Tier 1 issuers to notify the Commission 
upon completion of their offerings by filing Form 1-Z (exit report). 
Issuers in Tier 2 offerings will be required to provide this 
information on Form 1-Z at the time of filing the exit report, if they 
have not previously provided this information on Form 1-K as part of 
their annual report. Form 1-Z contains limited summary information 
about the issuer and the completed offering and, therefore, should not 
impose substantial additional compliance costs on the issuer.\1016\ The 
enhanced availability of Form 1-Z information is likely to benefit 
investors and facilitate evaluation of Regulation A market activity. 
For example, this information should allow the Commission and others to 
assess whether issuers have been able to raise the projected amount of 
capital in Regulation A offerings. We recognize, however, that, since 
information about the completed offering has value to an issuer's

[[Page 21885]]

competitors, its disclosure may also impose an indirect cost on 
issuers.
---------------------------------------------------------------------------

    \1016\ For the purposes of the PRA, we estimate that filing the 
Form 1-Z exit report will result in an aggregate annual burden of 
235.5 hours of in-house personnel time. See Section IV below.
---------------------------------------------------------------------------

3. Exchange Act Registration
    Generally, an issuer of Regulation A securities would not be 
subject to Exchange Act reporting obligations unless it separately 
registers a class of securities under Section 12 of the Exchange Act or 
conducts a registered public offering. This results in significantly 
lower costs of periodic reporting for Regulation A issuers relative to 
reporting companies.\1017\
---------------------------------------------------------------------------

    \1017\ Ongoing compliance costs were estimated to be $1.5 
million per year, following an IPO, according to two surveys cited 
in the IPO Task Force report.
---------------------------------------------------------------------------

    The final rules permit issuers seeking to register a class of 
Regulation A securities under the Exchange Act to do so by filing a 
Form 8-A in conjunction with the qualification of a Form 1-A that 
follows Part I of Form S-1 or the Form S-11 disclosure model in the 
offering circular. In some circumstances this option may provide more 
flexibility, for instance, with respect to testing the waters, to 
issuers seeking to register a class of securities. The obligation to 
file ongoing reports in a Tier 2 offering is 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. Given that Exchange Act reporting obligations are more 
extensive than those of Regulation A, the entry of such issuers into 
the Exchange Act reporting system upon qualification of a Regulation A 
offering statement is expected to have a beneficial effect on investor 
protection and informational efficiency of prices. While registration 
pursuant to the Exchange Act is likely to impose additional costs on 
issuers, only issuers that opt into such registration are affected. As 
a result, we anticipate that only those issuers for whom the perceived 
benefits of registration justify the accompanying costs will elect to 
use this provision.

G. Insignificant Deviations

    Under the final rules, offerings with ``certain insignificant 
deviations from a term, condition or requirement'' of Regulation A 
remain exempt from registration. This is the same as the rules in 
existing Regulation A. As a result, the only change from the baseline 
is that these rules will likely apply to a greater number of offerings 
due to the expanded availability of amended Regulation A. Further, as 
in existing Regulation A, the final rules explicitly classify as 
significant those deviations that are related to issuer eligibility, 
aggregate offering price, offers and continuous or delayed offerings. 
This provision benefits investors by providing certainty about the 
provisions from which the issuer may not deviate without losing the 
exemption. At the same time, it enables issuers to continue to rely on 
the exemption and obtain its capital formation benefits even if they 
have an ``insignificant deviation'' from the final rules. This 
provision may be especially beneficial for issuers with limited 
experience with Regulation A offerings as their limited experience may 
make them more susceptible to an inadvertent error. In this way, the 
provision may encourage more issuers to engage in Regulation A 
transactions and thereby facilitate capital formation.

H. Bad Actor Disqualification

    The final rules amend Rule 262 to include bad actor 
disqualification provisions in substantially the same form as adopted 
under Rule 506(d).\1018\ The final rules specify that the covered 
person's status is tested at the time of filing of the offering 
statement. Consistent with the disqualification provisions of Rule 
506(d), the final rules add two new disqualification triggers to those 
in existing Regulation A: 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 and the final orders 
and bars of certain state and other federal regulators. While these 
provisions may impose an incremental cost on issuers and other covered 
persons relative to the cost imposed by the disqualification provisions 
of existing Regulation A, they should strengthen investor protection 
from potential fraud.
---------------------------------------------------------------------------

    \1018\ See 17 CFR 230.506(d).
---------------------------------------------------------------------------

    If one of these new triggering events occurred prior to the 
effective date of the final rules, the event will not cause 
disqualification, but instead must be disclosed on a basis consistent 
with Rule 506(e). This approach will not preclude the participation of 
bad actors whose disqualifying events occurred prior to the effective 
date of the final rules, which could expose investors to the risks that 
arise when bad actors are associated with an offering. These risks to 
investors may be partly mitigated since investors will have access to 
relevant 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 by prior bad actors to avoid 
such disclosures.
    We expect that the bad actor disqualification provisions in the 
final rules will lead most issuers to restrict bad actor participation 
in Regulation A offerings, which could help reduce the potential for 
fraud in these types of offerings and thus strengthen investor 
protection compared with an alternative of not including bad actor 
disqualification provisions. If disqualification standards lower the 
risk premium associated with the risk of fraud due to the presence of 
bad actors in securities offerings, they could also reduce the cost of 
capital for issuers that rely on amended Regulation A. 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 disqualification provisions also impose costs on issuers and 
covered persons. Issuers that are disqualified from using amended 
Regulation A may experience an increased cost of capital or a reduced 
availability of capital, which could have negative effects on capital 
formation. In addition, issuers may incur costs related to seeking 
disqualification waivers from the Commission and replacing personnel or 
avoiding the participation of covered persons who are subject to 
disqualifying events. Issuers also might incur costs to restructure 
their share ownership to avoid beneficial ownership of 20% or more of 
the issuer's outstanding voting equity securities, calculated on the 
basis of voting power, by individuals subject to disqualifying events.
    As discussed above, the final rules also provide a reasonable care 
exception on a basis consistent with Rule 506(d).\1019\ We anticipate 
that the reasonable care exception would result in benefits and costs, 
compared with an alternative of not providing a reasonable care 
exception. For example, a reasonable care exception could facilitate 
capital formation by encouraging issuers to proceed with Regulation A 
offerings in situations in which issuers otherwise 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 also could increase the potential 
for fraud, compared with an alternative of not providing a reasonable 
care exception, by limiting issuers' incentives to determine whether 
bad

[[Page 21886]]

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 with respect to the nature and extent of the factual 
inquiry required could allow an issuer to tailor its factual inquiry as 
appropriate to its particular circumstances, thereby potentially 
limiting costs.
---------------------------------------------------------------------------

    \1019\ See Proposed Rule 262(b)(4).
---------------------------------------------------------------------------

    One commenter recommended revising the look-back periods for 
disqualifying events to run from the time of sale rather than the time 
of filing of the offering statement.\1020\ These changes would relax 
the bad actor disqualification standard, by allowing bad actors to 
participate in Regulation A offerings during the qualification process. 
We believe that timing application of the bad actor disqualification 
rules to the time of filing of the offering statement, as opposed to 
the time of qualification, is therefore more appropriate under the 
final rules.
---------------------------------------------------------------------------

    \1020\ See KVCF Letter.
---------------------------------------------------------------------------

I. Relationship With State Securities Law

    The final rules preempt state registration and qualification 
requirements for Tier 2 offerings but preserve these requirements for 
Tier 1 offerings, consistent with state registration of Regulation A 
offerings of up to $5 million under existing Regulation A.
    The GAO Report found that compliance with state securities review 
and qualification requirements was one of the factors that appeared to 
have influenced the infrequent use of Regulation A by small 
businesses.\1021\ Various commenters supporting preemption of state 
securities laws in the final rules noted that state review of offering 
statements is a significant impediment to the use of Regulation A and 
that the process of qualification in multiple states will remain 
inefficient despite NASAA's implementation of a coordinated review 
program.\1022\ More broadly, commenters as well as the GAO Report 
indicated that the existing regime of federal and state qualification 
has been a significant disincentive to the use of Regulation A for 
capital raising. With respect to time and compliance costs associated 
with state qualification, we believe preemption will likely reduce 
issuers' costs, although we lack comprehensive, independent data to 
estimate the precise amount. Only a few commenters provided specific 
monetary estimates of cost components. One commenter indicated that a 
revenue-generating business seeking to conduct a debt or equity 
offering under existing Regulation A can produce a conforming offering 
statement for state and federal review for approximately $50,000.\1023\ 
According to another commenter, an issuer seeking state registration in 
50 states would incur $80,000 to $100,000 in legal fees.\1024\
---------------------------------------------------------------------------

    \1021\ See GAO Report. The GAO Report also cites other factors 
that may have discouraged issuer use of the Regulation A exemption, 
including a comparatively low $5 million offering limitation, a slow 
and costly filing process associated with Commission qualification, 
and the availability of other exemptions under the federal 
securities laws.
    A recent study performs a comparison of Rule 506 offerings with 
Rule 505 and Rule 504 offerings that ``suggests that the Blue Sky 
law preemption feature unique to Rule 506 offerings has greater 
value to issuers than the unique features of Rule 504 or Rule 505 
offerings.'' See Ivanov, V., and S. Bauguess, 2013, Capital raising 
in the U.S.: An analysis of unregistered offerings using the 
Regulation D exemption, 2009-2012, available at: https://www.sec.gov/divisions/riskfin/whitepapers/dera-unregistered-offerings-reg-d.pdf.
    See also Leading Biosciences Letter referencing recommendations 
supporting preemption from the SEC Government-Business Forum on 
Small Business Capital Formation in 2011 and 2012. Similar 
recommendations were made in the final report of the SEC Forum on 
Small Business Capital Formation in 2013, available at: https://www.sec.gov/info/smallbus/gbfor32.pdf.
    \1022\ See ABA BLS Letter; Andreessen/Cowen Letter; Almerico 
Letter; B. Riley Letter; BIO Letter; Campbell Letter; Canaccord 
Letter; CFIRA Letter 1; CFIRA Letter 2; Congressional Letter 3; 
DuMoulin Letter; Eng Letter; Fallbrook Technologies Letter; Gilman 
Law Letter; Guzik Letter 1; Hart Letter; Heritage Letter; Huynh 
Letter; IPA Letter; Edwards Wildman Letter; Kisel Letter; Kretz 
Letter; KVCF Letter; Ladd Letter 2; Leading Biosciences Letter; 
McCarter & English Letter; Methven Letter; Milken Institute Letter; 
MoFo Letter; Moloney Letter; New Food Letter; OTC Markets Letter; 
Paul Hastings Letter; Palomino Letter; Public Startup Co. (several 
letters); REISA Letter; Richardson Patel Letter; SBIA Letter; 
Staples Letter; Sugai Letter; SVB Letter; SVGS Letter; Unorthodocs 
Letter; U.S. Chamber of Commerce Letter; Verrill Dana Letter 2; 
Warren Letter; WR Hambrecht + Co Letter.
    \1023\ See Groundfloor Letter. This commenter does not 
separately estimate the component of the cost due to state 
registration.
    \1024\ See Letter from Paul Hastings, LLP, November 26, 2013.
     Another commenter referenced one issuer's offering in the State 
of Washington in the amount of $750,000, with legal and accounting 
expenses estimated at $10,000 and the offering statement prepared 
without outside securities counsel and reviewed by the state within 
less than three months. See WDFI Letter. We do not believe that this 
cost estimate would be representative of costs for issuers 
registering in multiple states rather than a single state or for 
issuers involving outside securities counsel.
---------------------------------------------------------------------------

    As one commenter noted, ``[t]he challenges posed by the necessity 
of responding to both federal and state reviews and coordinating 
overlapping but potentially inconsistent comments and approvals have 
helped to make the existing Regulation A scheme unworkable for most 
smaller companies.'' \1025\ Preemption of state securities review and 
qualification requirements for Tier 2 offerings will eliminate the 
burdens of responding to multiple reviews and thus provide for a more 
streamlined review process than exists under existing Regulation A. We 
expect that this, in turn, will make Tier 2 a more attractive capital 
raising option for issuers than existing Regulation A. Accordingly, we 
believe that by eliminating the requirement for state qualification, 
the final rules' preemption for Tier 2 offerings will result in greater 
use of amended Regulation A and thereby facilitate capital formation.
---------------------------------------------------------------------------

    \1025\ See ABA BLS Letter.
---------------------------------------------------------------------------

    We recognize that commenters were divided on the issue of 
preemption, and those who objected to preemption of state securities 
review and qualification requirements cited benefits of state 
review.\1026\ These include additional investor protection benefits 
arising from the localized knowledge and resources of state regulators 
that may aid in detecting fraud and facilitating issuer 
compliance.\1027\ Some of these commenters also noted that the launch 
of NASAA's coordinated review program could streamline state review of 
offerings among participating states.
---------------------------------------------------------------------------

    \1026\ See ASD Letter; Cornell Clinic Letter; CFA Letter; CFA 
Institute Letter; Groundfloor Letter (arguing that the Commission 
should at least evaluate NASAA's coordinated review program for 12 
months); Karr Tuttle Letter (acknowledging that state preemption may 
still be necessary for states not participating in NASAA's new 
coordinated review program); MCS Letter; Congressional Letter 2; 
Congressional Letter 4; NASAA Letter 1; NASAA Letter 2; NASAA Letter 
3; NDBF Letter; NYIPB Letter; ODS Letter; PRCFI Letter; Scherber 
Letter; Secretaries of State Letter; Massachusetts Letter 1; 
Massachusetts Letter 2; Tavakoli Letter; TSSB Letter; WDFI Letter. 
One commenter stated its view that the Commission's proposal to 
preempt state regulatory review contained little consideration of 
the adverse costs that come with preemption, particularly the 
potential harm to investors, including harm investors might incur in 
the absence of state review in the area of small and thinly traded 
company offerings. See NASAA Letter 2.
    \1027\ According to the 2014 NASAA enforcement report for 2013, 
securities violations related to unregistered securities sold by 
unlicensed individuals, including fraudulent offerings marketed 
through the Internet, remain an important enforcement concern. The 
report does not detail the number and category of violations by type 
of exemption from registration. See NASAA Enforcement Report, 
available at: https://www.nasaa.org/wp-content/uploads/2011/08/2014-Enforcement-Report-on-2013-Data_110414.pdf.
---------------------------------------------------------------------------

    We acknowledge that the preemption of state qualification for Tier 
2 offerings may have an impact on investor protection by eliminating 
one level of government review. In addition, merit-based review of 
offerings undertaken by some states may, in some cases, provide a level 
of investor protections different from the disclosure-based review

[[Page 21887]]

undertaken by the Commission. State regulators may also have a better 
knowledge of local issuers, which could help in detecting fraud, 
especially in offerings by small, localized issuers. If investors 
require higher returns because of a perceived increase in the risk of 
fraud as a result of preemption, issuers may face a higher cost of 
capital. We are unable to predict how the amendments to Regulation A 
will affect the incidence of fraud that may arise in Regulation A 
offerings.
    Several factors could mitigate these potential impacts. First, 
under Section 18(c), the states retain the ability to require the 
filing with them of any documents filed with the Commission and to 
investigate and bring enforcement actions with respect to fraudulent 
transactions. Second, we believe that amended Regulation A provides 
substantial protections to purchasers in Tier 2 offerings. Under the 
final rules, a Regulation A offering statement will continue to provide 
substantive narrative and financial disclosures about the issuer. 
Further, the final rules require offering statements to be qualified by 
the Commission before an issuer can conduct sales. Additional investor 
protections would be afforded by Regulation A's limitations on eligible 
issuers and bad actor disqualification provisions. The final rules for 
Tier 2 offerings provide further protection by requiring audited 
financial statements in the offering circular, ongoing reporting, and 
an investment limitation for purchasers who do not qualify as 
accredited investors.
    The anticipated costs and benefits of state preemption will depend 
on key offering characteristics and issuer disclosure requirements. In 
particular, smaller offerings with a narrow investor base, such as 
those expected to be conducted under Tier 1, are more likely to be 
concentrated in fewer states and to benefit from geographic-specific 
information of state regulators as part of the review process.\1028\ In 
contrast, larger offerings that seek a broader investor base, such as 
those expected to be conducted under Tier 2, are more likely to span 
multiple states. For Tier 2 offerings, the additional disclosure, 
audited financial statements, and transactional requirements relative 
to Tier 1 offerings are expected to provide an additional layer of 
investor protection, thus reducing the need for, and the expected 
benefits of, state review. State preemption for Tier 2 offerings should 
lower the compliance burdens imposed on issuers, and partly offset the 
costs of the increased disclosure and transactional requirements.
---------------------------------------------------------------------------

    \1028\ We believe that issuers conducting Tier 1 offerings are 
more likely to be smaller companies whose businesses revolve around 
products, services, and a customer base that will more likely be 
located within a single state or region or a small number of 
geographically dispersed states. For example, based on our analysis, 
issuers of securities in the seven offering statements qualified by 
the Commission pursuant to Regulation A in 2014 indicated, on 
average, that they were seeking qualification in approximately five 
states per offering. The financial statements provided by these 
issuers further indicated, on average, that issuers had 
approximately $1.2 million in assets. No issuer indicated assets 
greater than $3.6 million, while two issuers indicated assets of 
less than $20,000. We recognize, however, that the characteristics 
of Tier 1 issuers in Tier 1 offerings relying on amended Regulation 
A in the future may differ from the characteristics of issuers that 
rely on existing Regulation A (for example, due to the higher 
maximum offering size for Tier 1 offerings in the final rules, 
compared with the maximum offering size in existing Regulation A).
---------------------------------------------------------------------------

    In general, we expect that issuers in Tier 1 offerings will face 
significantly lower offering costs as a result of not being subjected 
to the requirements of audited financial statements and ongoing 
reporting in the final rules. For these offerings, the local knowledge 
of state regulators is anticipated to add value to the review process 
to the extent that the issuer and the investor base are more likely to 
be localized. Thus, state qualification is more likely to have 
incremental investor protection benefits in Tier 1 offerings relative 
to Tier 2 offerings. Moreover, to the extent that Tier 1 offerings are 
more likely to be concentrated in fewer states, the cost of complying 
with state review procedures is likely to be diminished for these types 
of offerings.
    Some commenters also pointed to the increased burden on Commission 
resources as a cost of state preemption.\1029\ Compared with the 
baseline of the existing Regulation A, we anticipate a possible 
increase in the burden on Commission resources as a result of the 
increase in the Regulation A maximum offering size and other provisions 
intended to make Regulation A more attractive to prospective issuers. 
However, we believe this increase would also occur under the 
alternative of no state preemption for Tier 2 offerings. While state 
review of Tier 2 offerings could potentially confer incremental 
investor protection benefits to the extent a thorough Commission staff 
review is constrained by the increased burden on agency resources, 
overall we do not believe this effect will be substantial.
---------------------------------------------------------------------------

    \1029\ See WDFI Letter and NASAA Letter 2.
---------------------------------------------------------------------------

    As an alternative to preemption for Tier 2 offerings, we considered 
the option of state qualification by one state or a subset of states or 
the option of state review under NASAA's coordinated review 
program.\1030\ According to one commenter, the coordinated review 
program creates value by defining concrete service standards regarding 
the timeliness of various steps of the qualification process and by 
introducing more legal certainty.\1031\ According to another commenter, 
the coordinated review program will eliminate costs of identifying and 
addressing individual state requirements and will provide an expedient 
registration process.\1032\ We recognize that the coordinated review 
process ultimately may reduce processing time and streamline certain 
state requirements for issuers registering in multiple states when 
compared to independent review conducted by individual states. To date, 
however, we are aware of only a few issuers that have utilized the 
coordinated review process, so currently there is limited evidence 
available to us to evaluate the effectiveness and timeliness of 
coordinated review, especially in the event that more potential 
Regulation A issuers seek state qualification under this process. While 
it is possible that the coordinated review process may reduce costs for 
issuers as compared to individual state review and qualification, it 
would add cost and complexity for issuers seeking an exemption under 
amended Regulation A when compared to Commission review and 
qualification alone. To the extent that disclosure or merit review (if 
applicable to one of the participating jurisdictions in which the 
issuer is seeking to offer securities) standards of participating 
jurisdictions impose more extensive requirements on the issuer than 
Commission rules, some issuers may incur additional compliance expense 
or require additional time to address comments. In light of the recent 
efforts of state securities regulators to address concerns about the 
cost of state review and qualification of Regulation A offerings, 
however, the ongoing implementation and development of the coordinated 
review program, particularly as it may operate within Tier 1 offerings, 
may, in the future, provide additional data that will aid our future 
evaluation of whether such a program could effectively operate within 
the context of larger, more national Tier 2 offerings.
---------------------------------------------------------------------------

    \1030\ A description of NASAA's coordinated review program can 
be found at: https://www.nasaa.org/industry-resources/corporation-finance/coordinated-review/regulation-a-offerings/.
    \1031\ See Groundfloor Letter.
    \1032\ See WDFI Letter.

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[[Page 21888]]

    We believe the final rules strike appropriate balance between 
mitigating cost and time demands on issuers and providing investor 
protections.

IV. Paperwork Reduction Act

A. Background

    Certain provisions of the final rules contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (PRA).\1033\ We published a notice requesting 
comment on the collection of information requirements in the Proposing 
Release, and we submitted these requirements to the Office of 
Management and Budget (OMB) for review in accordance with the PRA and 
its implementing regulations.\1034\ While several commenters provided 
qualitative comments on the possible costs of the proposed rules and 
amendments, we did not receive comments on our PRA analysis and thus 
are adopting our estimates substantially as proposed, except as 
otherwise noted herein. The titles for the collections of information 
are:
---------------------------------------------------------------------------

    \1033\ 44 U.S.C. 3501 et seq.
    \1034\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

    (1) ``Regulation A (Form 1-A and Form 2-A)'' (OMB Control Number 
3235-0286);
    (2) ``Form 1-K'' (OMB Control Number 3235-0720);
    (3) ``Form 1-SA'' (OMB Control Number 3235-0721);
    (4) ``Form 1-U'' (OMB Control Number 3235-0722);
    (5) ``Form 1-Z'' (OMB Control Number 3235-0723);
    (6) ``Form 8-A'' (OMB Control Number 3235-0056);
    (7) ``Form ID'' (OMB Control Number 3235-0328); and
    (8) ``Form F-X'' (OMB Control Number 3235-0379).\1035\
---------------------------------------------------------------------------

    \1035\ Although the final rules do not amend Form F-X, the total 
burden hours associated with that form may increase minimally as a 
result of the increased number of issuers relying on Regulation A. 
The Commission submitted the revised burden estimate for Form F-X to 
OMB for review in accordance with the PRA, although the potential 
minimal increase in burden hours was not noted in the Proposing 
Release.
---------------------------------------------------------------------------

    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 applied for OMB control numbers 
for the new collections of information in accordance with 44 U.S.C. 
3507(j) and 5 CFR 1320.13, and OMB assigned a control number to each 
new collection, as specified above. Responses to these new collections 
of information would be mandatory for issuers raising capital under 
Regulation A.
    The hours and costs associated with preparing disclosure, filing 
forms, and retaining records constitute reporting and cost burdens 
imposed by the collections of information. In deriving estimates of 
these hours and costs, we recognize that the burdens likely will 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 will experience costs in excess 
of the average and some issuers may experience less than the average 
costs.

B. Estimated Number of Regulation A Offerings

    Data regarding current market practices may help identify the 
potential number of offerings that will be conducted in reliance on the 
final rules.\1036\ We estimate that there are currently approximately 
26 Regulation A offering statements filed by issuers per year.\1037\ 
While it is not possible to predict with certainty the number of 
offering statements that will be filed by issuers relating to offerings 
made in reliance on amended Regulation A, for purposes of this PRA 
analysis, we estimate that the number will be 250 offerings statements 
per year. We base this estimate on (i) the current approximate number 
of annual Form 1-A filings under the existing rules, plus (ii) 65 
percent of the estimated number of registered offering of securities 
that would have been eligible to be conducted under Regulation A,\1038\ 
plus (iii) an additional 16 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.\1039\ For 
purposes of this PRA analysis, we assume that each offering statement 
for a unique Regulation A offering that is filed represents a unique 
issuer, such that approximately 250 issuers are estimated to conduct 
Regulation A offerings each year under the final rules.
---------------------------------------------------------------------------

    \1036\ See Section III. above for a discussion of the data 
regarding current market practices.
    \1037\ From 2009 through 2014, there were 158 Form 1-As filed 
with the Commission.
    \1038\ See figures and graphs for registered offerings cited in 
Section III.B.b. above (citing approximately 320 registered initial 
public offerings or follow-on offerings in calendar year 2014 that 
would have been potentially eligible to be conducted under amended 
Regulation A).
    \1039\ See figures and graphs for registered and exempt 
offerings under Regulation D cited in Section III.B.1.a.ii. above 
(citing 11,228 issuances under Regulation D in calendar year 2014 
that would have been potentially eligible to be conducted under 
amended Regulation A).
---------------------------------------------------------------------------

C. PRA Reporting and Cost Burden Estimates

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 one administrative burden hour 
associated with it, while current Form 1-A is estimated to take 
approximately 608 hours to prepare and Form 2-A is estimated to take 
approximately 12 hours to prepare.\1040\ We do not anticipate that the 
one administrative burden hour associated with Regulation A will change 
as a result of the final rules. As discussed more fully below, we 
believe the burden hours associated with Form 1-A will change, while 
Form 2-A and the associated burden hours are eliminated as a result of 
today's proposal.\1041\
---------------------------------------------------------------------------

    \1040\ See Form 1-A at 1; Form 2-A at 1.
    \1041\ See discussion in Section II.E. above.
---------------------------------------------------------------------------

    Under the final rules, an issuer conducting a transaction in 
reliance on Regulation A will be able to conduct either a Tier 1 
offering or a Tier 2 offering.\1042\ In either case, a Regulation A 
issuer will continue to be required to file with the Commission 
specified disclosures on a Form 1-A: Offering Statement.\1043\ An 
issuer will also be required to file amendments to Form 1-A to address 
comments from Commission staff and to disclose material changes in the 
disclosure previously provided to the Commission or investors.\1044\ In 
light of the electronic filing requirements for Regulation A offering 
materials discussed above,\1045\ issuers are no longer required to file 
a manually signed copy of Form 1-A with the Commission.\1046\ Issuers 
are, however, required to manually sign a copy of the offering 
statement before or at the time of non-public submission or filing that 
must be retained by the issuer for a period of five years and produced 
to the Commission, upon request.\1047\ As issuers are currently 
required to manually sign the Form 1-A and file it with the Commission, 
we do not anticipate that the Form 1-A retention requirement adopted in 
the final rules will alter an issuer's compliance

[[Page 21889]]

burden. As adopted, Form 1-A is similar to existing Form 1-A. In some 
instances, Form 1-A, contains fewer disclosure items than existing Form 
1-A (e.g., Part I (Notification) of Form 1-A does not require 
disclosure of ``Affiliate Sales''; Part II (Offering Circular) of Form 
1-A requires a description of the issuer's business for a period of 
three years, rather than five years). Part II of Form 1-A no longer 
permits disclosure in reliance on the Model A disclosure format, but 
directs issuers to follow the provisions of Model B (renamed ``Offering 
Circular''), Part I of Form S-1, or, where applicable, Part I of Form 
S-11.\1048\ In other instances, Form 1-A contains more disclosure items 
than existing Form 1-A (e.g., Part I of Form 1-A requires additional 
disclosure of certain summary information regarding the issuer and the 
offering; Part II of Form 1-A requires more detailed management 
discussion and analysis of the issuer's liquidity and capital resources 
and results of operations). Form 1-A requires disclosure similar to 
that required in a Form S-1 registration statement for registered 
offerings under the Securities Act, but with fewer disclosure items 
(e.g., it requires 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, Form 1-A does not require issuers to 
file audited financial statements.\1049\
---------------------------------------------------------------------------

    \1042\ See discussion in Section II.B.3. above.
    \1043\ See Rule 252.
    \1044\ See Rule 252(f).
    \1045\ See discussion in Section II.C.1. above.
    \1046\ See discussion in Section II.C.3.d. above.
    \1047\ See Instruction 2 to Signatures in Form 1-A.
    \1048\ See discussion at Section II.C.3.b. above.
    \1049\ See discussion in Section II.C.3.b(2). above.
---------------------------------------------------------------------------

    We expect that issuers relying on Regulation A for Tier 1 offerings 
of up to $20 million in a 12-month period will largely be at a similar 
stage of development to issuers relying on existing Regulation A and 
will therefore not experience an increased compliance burden with Form 
1-A. Given the increased annual offering amount limit of $50 million 
for Tier 2 offerings, however, we expect that issuers conducting such 
offerings pursuant to Regulation A may be at a more advanced stage of 
development than issuers offering securities under Tier 1. In such 
cases, the complexity of the required disclosure and, in turn, the 
burden of compliance with the requirements of Form 1-A may be greater 
for some issuers than for issuers relying on existing Form 1-A. We 
believe that the burden hours associated with amended Form 1-A will be 
greater than the current estimated 608 burden hours per response but 
will not be as great as the current estimated 972.32 burden hours per 
response for Form S-1. We therefore estimate that the total burden to 
prepare and file Form 1-A, as adopted today, including any amendments 
to the form, will increase on average across all issuers in comparison 
to existing Form 1-A to approximately 750 hours.\1050\ We estimate that 
the issuer will internally carry 75 percent of the burden of 
preparation and that outside professionals retained by the issuer at an 
average cost of $400 per hour will carry 25 percent.\1051\
---------------------------------------------------------------------------

    \1050\ By comparison, we estimate the burden per response for 
preparing Form S-1 to be 972.32 hours. See Form S-1, at 1.
    \1051\ 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 will 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 
will require 187,500 burden hours (250 offering statements x 750 hours/
offering statement) in aggregate each year, which corresponds to 
140,625 aggregated hours carried by the issuer internally (250 offering 
statements x 750 hours/offering statement x 0.75) and aggregated costs 
of $18,750,000 (250 offering statements x 750 hours/offering statement 
x 0.25 x $400) for the services of outside professionals. As stated 
above, we estimate that the proposed amendments to Regulation A will 
not change the one administrative burden hour associated with the 
review of Regulation A and will require 250 burden hours (250 offering 
statements x one hour/offering statement) in aggregate each year, which 
corresponds to 187 aggregated hours carried by the issuer internally 
(250 offering statements x 0.75) and aggregated costs of $25,000 (250 
offering statements x one hour/offering statement x 0.25 x $400) for 
services of outside professionals. When combined with the estimates for 
Form 1-A, the administrative burden hour results in an estimated total 
compliance burden of 751 hours per offering statement and an estimated 
annual compliance burden of 187,750 hours (250 offering statements x 
751 hours/offering statement) and aggregated costs of $18,775,000 (250 
offering statements x 751 hours/offering statement x 0.25 x $400).
2. Form 1-K: Annual Report
    Under the final rules, any issuer that conducts a Tier 2 offering 
pursuant to Regulation A is required to file an annual report with the 
Commission on Form 1-K: Annual Report.\1052\ A manually signed copy of 
Form 1-K must 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 the 
Commission.\1053\ We do not anticipate that the requirement to retain a 
manually signed copy of Form 1-K will affect an issuer's compliance 
burden. We believe the compliance burden associated with disclosure 
provided in Form 1-K will be less than the compliance burden associated 
with reporting required under Exchange Act Sections 13 or 15(d). We 
also believe the burden is more analogous to the compliance burden 
attendant to Form 1-A. Unlike the disclosure required in Form 1-A, 
however, offering-specific disclosure in Form 1-K is not required. 
Additionally, under certain circumstances, an issuer will be required 
to disclose information similar to the information previously required 
of issuers on Form 2-A.\1054\ Unlike the disclosure previously required 
on Form 2-A, however, an issuer is not required to provide disclosure 
about the use of proceeds. We estimate that the burden to prepare and 
file a Form 1-K will be less than that required to prepare and file a 
Form 1-A. We estimate that compliance with Form 1-K will result in a 
burden of 600 hours per response.\1055\ We further estimate that 75 
percent of the burden of preparation will be carried by the issuer 
internally and that 25 percent will be carried by outside professionals 
retained by the issuer at an average cost of $400 per hour. While we do 
not know the exact number of issuers that will conduct Tier 2 offerings 
in reliance on amended Regulation A, we estimate 75 percent of all 
issuers filing a Form 1-A (or 188 issuers, 250 issuers x .75) will 
conduct Tier 2 offerings, enter the Regulation A ongoing reporting 
regime and therefore be required to file Form 1-K.\1056\
---------------------------------------------------------------------------

    \1052\ See Rule 257(b)(1).
    \1053\ See General Instruction C to Form 1-K and related 
discussion in Section II.E.1.c. above.
    \1054\ Id.
    \1055\ We estimate that the burden of preparing the information 
required by Form 1-K will be approximately \3/4 \of the burden for 
filing Form 1-A due to the lack of offering-specific disclosure and 
an issuer's ability to update previously provided disclosure.
    \1056\ This estimate includes any special financial reports 
required to be filed on Form 1-K.
---------------------------------------------------------------------------

    We estimate that compliance with the requirements of Form 1-K for 
issuers with an ongoing reporting obligation under Regulation A will 
require 112,800 burden hours (188 issuers x 600 hours/issuer) in the 
aggregate each year, which corresponds to 84,600 hours carried by the 
issuer internally (188 issuers x 600

[[Page 21890]]

hours/issuer x 0.75) and costs of $11,280,000 (188 issuers x 600 hours/
issuer x 0.25 x $400) for the services of outside professionals.
3. Form 1-SA: Semiannual Report
    Under the final rules, any issuer that conducts a Tier 2 offering 
in reliance on Regulation A will be required to file a semiannual 
report with the Commission on Form 1-SA: Semiannual Report.\1057\ A 
manually signed copy of the Form 1-SA must 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 the Commission.\1058\ We do not anticipate that the 
requirement to retain a manually signed copy of the Form 1-SA will 
affect an issuer's compliance burden. Issuers must provide semiannual 
updates on Form 1-SA, which, like a Form 10-Q,\1059\ consists primarily 
of financial statements and MD&A. Unlike Form 10-Q, Form 1-SA does not 
require disclosure regarding quantitative and qualitative market risk 
or controls and procedures.\1060\ We estimate, however, that on balance 
the reduction in burden attributable to eliminating these two items in 
Form 1-SA will 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 will be similar to the compliance burden for 
issuers filing a Form 10-Q under the Exchange Act.\1061\ Therefore, for 
purposes of this PRA analysis, we estimate that the burden to prepare 
and file a Form 1-SA will equal the burden to prepare and file Form 10-
Q, which we have previously estimated as 187.43 hours per 
response.\1062\ Unlike 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 
prepare more of the required disclosures internally. Accordingly, we 
estimate that 85 percent of the burden of preparation will be carried 
by the issuer internally and that 15 percent will be carried by outside 
professionals retained by the issuer at an average cost of $400 per 
hour.
---------------------------------------------------------------------------

    \1057\ See Rule 257(b)(3).
    \1058\ See General Instruction C to Form 1-SA and related 
discussion in Section II.E.1.c(2). above.
    \1059\ 17 CFR 249.308a.
    \1060\ See discussion in Section II.E.1.c(2). above.
    \1061\ Issuers will, however, have to file Form 1-SA, a 
semiannual report, less frequently than Form 10-Q, a quarterly 
report.
    \1062\ See Form 10-Q, at 1.
---------------------------------------------------------------------------

    We estimate that compliance with the requirements of Form 1-SA for 
issuers with an ongoing reporting obligation under Regulation A will 
require 35,237 burden hours (188 issuers x 187 hours/issuer/filing x 1 
filing/year) in the aggregate each year, which corresponds to 29,952 
hours carried by the issuer internally (188 issuers x 187 hours/issuer/
filing x 1 filing/year x 0.85) and costs of $2,113,872 (188 issuers x 
187 hours/issuer/filing x 1 filing/year x 0.15 x $400) for the services 
of outside professionals.\1063\
---------------------------------------------------------------------------

    \1063\ This estimate includes any special financial reports 
required to be filed on Form 1-SA.
---------------------------------------------------------------------------

4. Form 1-U: Current Reporting
    Under the final rules, any issuer that conducts a Tier 2 offering 
in reliance on Regulation A is required to promptly file current 
reports on Form 1-U with the Commission.\1064\ A manually signed copy 
of the Form 1-U must 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.\1065\ 
We do not anticipate that the requirement to retain a manually signed 
copy of the Form 1-U will affect an issuer's compliance burden. Issuers 
are 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.\1066\ The requirement to file a Form 1-U, however, will be 
triggered by significantly fewer corporate events than those that 
trigger a reporting requirement on a Form 8-K, and the form itself will 
be slightly less burdensome for issuers to fill out.\1067\ Thus, the 
frequency of filing the required disclosure and the burden to prepare 
and file a Form 1-U will be considerably less than for Form 8-K. We 
estimate that the burden to prepare and file each current report will 
be 5 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 will be required to file one current report annually.\1068\ 
Therefore, we estimate that an issuer's compliance with Form 1-U will 
result in an annual aggregate burden of 5 hours (1 current report 
annually x 5 hours per current report) per issuer.
---------------------------------------------------------------------------

    \1064\ See Rule 257(b)(4).
    \1065\ See General Instruction C to Form 1-U and related 
discussion in Section II.E.1.c(3). above.
    \1066\ We estimate the burden per response for preparing a Form 
8-K to be 5.71 hours. See Form 8-K, at 1.
    \1067\ See discussion at Section II.E.1.c(3). above.
    \1068\ 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 will be considerably less than a 
Form 8-K, we are estimating that each issuer will 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 will be carried by the issuer internally and that 15 
percent will be carried by outside professionals retained by the issuer 
at an average cost of $400 per hour. We estimate that compliance with 
the requirements of Form 1-U will require 940 burden hours (188 issuers 
x 1 current report annually x 5 hours per current report) in aggregate 
each year, which corresponds to 799 hours carried by the issuer 
internally (188 issuers x 5 hours/issuer/year x 0.85) and costs of 
$56,400 (188 issuers x 5 hours/issuer/year x 0.15 x $400) for the 
services of outside professionals.
5. Form 1-Z: Exit Report
    Under the final rules, all Regulation A issuers are required to 
file a notice under cover of Form 1-Z: Exit Report. Issuers conducting 
Tier 1 offerings will be required to file Part I of Form 1-Z that 
discloses information similar to the information previously required of 
issuers on Form 2-A.\1069\ Issuers conducting Tier 2 offerings will 
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 will also 
be required to complete 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.\1070\ In 
Tier 2 offerings, an issuer's 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, 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.\1071\ A manually 
signed copy of the Form 1-Z must be executed by the issuer and related 
signatories before or at the time of electronic filing, retained

[[Page 21891]]

by the issuer for a period of five years and, if requested, produced to 
Commission.\1072\ We do not anticipate that the requirement to retain a 
manually signed copy of the Form 1-Z will affect an issuer's compliance 
burden. We estimate that all of the issuers conducting Tier 1 offerings 
(63 issuers, 250 total estimated issuers x 0.25) and 50 percent of 
issuers conducting Tier 2 offerings (94 issuers, 188 issuers with an 
ongoing reporting obligation x 0.50) will file a Form 1-Z in the second 
fiscal year after qualification of the offering statement (157 total 
issuers, 63 + 94). Although we believe that the vast majority of 
issuers subject to ongoing reporting under Regulation A will qualify 
for termination in the second fiscal year after qualification, we 
believe that only half or 50 percent of such issuers will actually 
choose to terminate their reporting obligations. An issuer may have 
many reasons for continuing its reporting obligations, such as a desire 
to facilitate continued quotations in the over-the-counter (OTC) 
markets pursuant to revisions to Exchange Act Rule 15c2-11.\1073\
---------------------------------------------------------------------------

    \1069\ See discussion in Section II.E.4.b. above.
    \1070\ See Rule 257(d).
    \1071\ See Rule 252(f)(2).
    \1072\ See Instruction to Form 1-Z and related discussion in 
Section II.E.4.b. above.
    \1073\ See discussion in Section II.E.2. above.
---------------------------------------------------------------------------

    The Form 1-Z is 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).\1074\ Therefore, we estimate that compliance with the Form 1-Z 
will result in a similar burden as compliance with Form 15 that is, a 
burden of 1.50 hours per response. We estimate that 100% of the burden 
will be carried by the issuer internally. We estimate that compliance 
with Form 1-Z will result in a burden of 235.5 hours (157 issuers 
filing Form 1-Z x 1.50 hours/issuer) in the aggregate.
---------------------------------------------------------------------------

    \1074\ We currently estimate the burden per response for 
preparing a Form 15 to be 1.50 hours. See Form 15 at 1.
---------------------------------------------------------------------------

6. Form 8-A: Short Form Registration Under the Exchange Act
    Under the final rules, Regulation A issuers in Tier 2 offerings 
that elect to list securities offered pursuant to a qualified offering 
statement on a national securities exchange or that seek to register 
the class of securities offered pursuant to a qualified offering 
statement under the Exchange Act may do so by filing a Form 8-A (short 
form) registration statement with the Commission.\1075\ In such 
circumstances, an issuer will be required to comply with the form 
requirements of Form 8-A, which will generally allow issuers to 
incorporate by reference in the form information provided in the 
related Form 1-A. While we do not know the exact number of issuers 
conducting Tier 2 offerings that will seek to register a class of 
securities under the Exchange Act at or near the time of qualification 
of an offering statement, for purpose of this PRA analysis, we estimate 
2 percent of all issuers filing a Form 1-A (or 5 issuers, 250 issuers x 
.02) will elect to register a class of securities under the Exchange 
Act and file a Form 8-A.
---------------------------------------------------------------------------

    \1075\ See discussion in Section II.E.3. above.
---------------------------------------------------------------------------

    The final rules do not alter the burden hour per response of Form 
8-A, but rather amend the existing Form 8-A to permit issuers in Tier 2 
offerings to rely on the form. Therefore, we estimate that compliance 
with the Form 8-A will not change as a result of the final rules, a 
burden of 3 hours per response.\1076\ We estimate that compliance with 
Form 8-A by issuers conducting a Tier 2 offering will result in a 
burden of 15 hours (5 issuers filing Form 8-A x 3 hours/issuer) in 
aggregate each year. We estimate that 100% of the burden will be 
carried by the issuer internally.
---------------------------------------------------------------------------

    \1076\ 17 CFR 249.208a.
---------------------------------------------------------------------------

7. Form ID Filings
    Under the final rules, an issuer will be required to file specified 
disclosures with the Commission on EDGAR.\1077\ We anticipate that many 
issuers relying on Regulation A for the first time will not have 
previously filed an electronic submission with the Commission and so 
will need to file a Form ID. Form ID is the application form for access 
codes to permit filing on EDGAR. The final rules will not change the 
form itself, but we anticipate that the number of Form ID filings will 
increase due to an increase in issuers relying on Regulation A. For 
purposes of this PRA analysis, we estimate that 75 percent of the 
issuers who seek to offer and sell securities in reliance on amended 
Regulation A will not have previously filed an electronic submission 
with the Commission and will, therefore, be required to file a Form ID. 
As noted above, we estimate that approximately 250 issuers per year 
will seek to offer and sell securities in reliance on Regulation A, 
which corresponds to approximately 188 additional Form ID filings. We 
estimate that 100% of the burden will be carried by the issuer 
internally. As a result, we estimate the additional annual burden will 
be approximately 28.20 hours (188 filings x 0.15 hours/filing).\1078\
---------------------------------------------------------------------------

    \1077\ See Rules 252 and 257.
    \1078\ We currently estimate the burden associated with Form ID 
is 0.15 hours per response. See Form ID at 1.
---------------------------------------------------------------------------

8. Form F-X
    Under the final rules, Canadian issuers are required to file a Form 
F-X, which furnishes to the Commission a written irrevocable consent 
and power of attorney at the time of filing the offering statement 
required by Rule 252. It is used to appoint an agent for service of 
process by Canadian issuers eligible to use Regulation A, issuers 
registering securities on Forms F-8 or F-10 under the Securities Act or 
filing periodic reports on Form 40-F under the Exchange Act, as well as 
in certain other circumstances.
    The final rules will not change Form F-X itself, but will amend the 
rules to allow for the form to be filed electronically for offerings 
under Regulation A. Canadian companies are the only type of issuer that 
will be required to use this form under the final rules and we estimate 
that 100% of the burden will be carried by the issuer internally. We 
estimate that approximately 2 percent of issuers utilizing amended 
Regulation A will be Canadian companies (or 5 responses, 250 issuers x 
0.02) resulting in an annual burden of approximately 10 hours (2 hours 
per response x 5 responses).\1079\
---------------------------------------------------------------------------

    \1079\ In this regard, we note that no Canadian issuers filed a 
Form 1-A in 2013.
---------------------------------------------------------------------------

D. Collections of Information Are Mandatory

    The collections of information required under Rules 251 through 263 
will 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 will not be kept confidential, although an issuer may request 
confidential treatment for non-publicly submitted offering materials, 
or any portion thereof, for which it believes an exemption from the 
FOIA exists.\1080\ It is anticipated that most material not subject to 
a confidential treatment request will be made public when the offering 
is qualified. A Form 1-A that is non-publicly submitted by an issuer 
and later abandoned before being publicly filed with the Commission and 
responses on Form ID will, however, remain non-public, absent a request 
for

[[Page 21892]]

such information under the Freedom of Information Act.\1081\
---------------------------------------------------------------------------

    \1080\ See Commission Rule 83, 17 CFR 200.83, and Securities Act 
Rule 406, 17 CFR 230.406.
    \1081\ 5 U.S.C. 552. The Commission's regulations that implement 
the Freedom of Information Act are at 17 CFR 200.80 et seq.
---------------------------------------------------------------------------

V. Final Regulatory Flexibility Act Analysis

    This Final Regulatory Flexibility Analysis has been prepared in 
accordance with the Regulatory Flexibility Act, 5 U.S.C. 603. It 
relates to the following:
     Amendments to Rule 157(a), Rules 251 through 263 of 
Regulation A, Rule 505 of Regulation D, Form 1-A, Form 8-A, Rule 30-1 
of the Commission's organizational rules, Rule 4a-1 under the Trust 
Indenture Act, Rule 12g5-1 and Rule 15c2-11 under the Exchange Act, and 
Item 101 of Regulation S-T;
     new Forms 1-K, 1-SA, 1-U, and 1-Z; and
     the rescission of Form 2-A.
    An Initial Regulatory Flexibility Analysis (IRFA) was prepared in 
accordance with the Regulatory Flexibility Act and included in the 
Proposing Release.

A. Need for the Rules

    The 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 
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 12-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.
    Our primary objective is to implement Section 401 of the JOBS Act 
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 crafted a revision of Regulation A that both promotes 
small company capital formation and provides 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 from 
registration more frequently relied upon, thereby facilitating capital 
formation for small businesses.

B. Significant Issues Raised by Public Comments

    In the Proposing Release, we requested comment on every aspect of 
the IRFA, including the number of small entities that would be affected 
by the proposed amendments, 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 did not 
receive any comments specifically addressing the IRFA. We did, however, 
receive comments from members of the public on matters that could 
potentially impact small entities. These comments are discussed at 
length by topic in the corresponding subsections of Section II. above.
    While the proposed rules contemplated that small entities would be 
able to elect to proceed under the requirements of either Tier 1 or 
Tier 2, as discussed more fully below, an entity considered a small 
business under our rules would only be required to file ongoing reports 
under Regulation A if it elected to conduct a Tier 2 offering.\1082\ 
The following discussion therefore focuses on the suggestions of 
commenters, as they relate to the proposed and final requirements for 
Tier 1 offerings, which is the tier most likely to be relied upon by 
small entities.\1083\
---------------------------------------------------------------------------

    \1082\ The distinction between a Tier 1 offering and Tier 2 
offering is discussed in Section II. above.
    \1083\ For a more comprehensive discussion of commenter 
suggestions as to the proposed rules for both Tier 1 and Tier 2 that 
could potentially impact small entities, see Section II. above.
---------------------------------------------------------------------------

    Many commenters recommended making changes to proposed rules that, 
in their view, would make Regulation A a more viable capital raising 
option for smaller issuers.\1084\ Some commenters recommended improving 
the utility of Regulation A for smaller issuers by preempting state 
regulation of Tier 1 offerings.\1085\ Others, however, opposed 
preemption for all Regulation A offerings.\1086\ Some commenters 
recommended that we adopt a third tier, either expressly or through 
fleixble applicability of the proposed tier requirements.\1087\ Some 
commenters suggested that raising the offering limit of Tier 1 from $5 
million to $10 million or more would make Tier 1 more useful,\1088\ 
while others recommended including various forms of ongoing disclosure 
at a level lower than what was proposed to be required for Tier 
2.\1089\ One commenter suggested reducing the Tier 1 narrative 
disclosure obligations, particularly for offerings of $2 million or 
less, so that such requirements would be more appropriately tailored 
for smaller issuers.\1090\ Several commenters made recommendations with 
respect to the financial statement and auditing requirements in Form 1-
A, as they relate to the requirements for Tier 1.\1091\
---------------------------------------------------------------------------

    \1084\ Andreessen/Cowen Letter; BDO Letter; Bernard Letter; 
Campbell Letter; CAQ Letter; Public Startup Co. Letter 1; Deloitte 
Letter; E&Y Letter; Guzik Letter 1; Heritage Letter; ICBA Letter; 
KPMG Letter; McGladrey Letter; Milken Institute Letter; Ladd Letter 
2; SVB Financial Letter; Verrill Dana Letter 1; WR Hambrecht + Co 
Letter.
    \1085\ Andreessen/Cowen Letter; Bernard Letter; Campbell Letter; 
Public Startup Co. Letter 1; Guzik Letter 1; Heritage Letter; Milken 
Institute Letter; Ladd Letter 2; SVB Financial Letter.
    \1086\ See fn. 772 above.
    \1087\ See, e.g., Public Startup Co. Letter 1.
    \1088\ Guzik Letter 1; ICBA Letter.
    \1089\ Guzik Letter 1 (suggesting that Tier 1 ongoing disclosure 
requirements could parallel Tier 2's requirements, but without the 
requirement for semiannual reports); Ladd Letter 2; Public Startup 
Co. Letters 1 and 5; SVB Financial Letter.
    \1090\ Campbell Letter.
    \1091\ BDO Letter; CAQ Letter; Deloitte Letter; E&Y Letter; KPMG 
Letter; McGladrey Letter.
---------------------------------------------------------------------------

    The final rules for Regulation A take into account some of the 
suggestions by commenters on ways to make Tier 1 more useful for small 
entities. For example, the final rules raise the offering limit of Tier 
1 to $20 million. Also, with respect to the offering circular narrative 
disclosure requirements,\1092\ we have adopted certain additional 
scaled disclosure requirements for Tier 1 that are intended to lessen 
the compliance obligations for smaller issuers. We are further 
providing issuers under both tiers with the accommodation provided to 
emerging growth companies in Securities Act Section 7(a) to use the 
extended transition periods applicable to private companies for 
complying with new or revised accounting standards under U.S. GAAP. 
Additionally, we have provided Tier 1 issuers with additional 
flexibility with respect to auditor independence standards.
---------------------------------------------------------------------------

    \1092\ See Section II.C.3.b(1). above.
---------------------------------------------------------------------------

    As noted in Section II.H.3. above, however, we do not agree with 
the position of some commenters that preemption of state securities 
laws registration and qualification requirements is necessary or 
appropriate for Tier 1 offerings.\1093\ We note that some commenters 
who suggested that preemption of state securities laws may improve the 
attractiveness of Tier 1 offerings did so on the condition that other 
aspects of the tier should change accordingly, namely requiring Tier 1

[[Page 21893]]

issuers to provide audited financial statements in the offering 
statement and possibly on an ongoing basis. For the reasons discussed 
in Section II.D.3.b(2)(c). above, we have not adopted such changes in 
Tier 1.
---------------------------------------------------------------------------

    \1093\ See Section II.H.3. above.
---------------------------------------------------------------------------

    Additionally, as noted in Section II.I. above, we do not believe 
that the creation of a third tier, as suggested by some commenters, 
would meaningfully alter a smaller entity's options for capital 
formation under Regulation A. While a third tier may provide issuers 
with some additional flexibility for capital formation under Regulation 
A, this additional flexibility would have potential costs. For example, 
a third tier may unnecessarily complicate compliance with Regulation A 
for smaller entities, and could potentially confuse investors as to the 
type of Regulation A offering an issuer was undertaking and the type of 
information such investor could expect to receive as a result, thereby 
lessening the viability of the exemption as a whole. For this reason, 
we are not adopting a third or intermediate tier in Regulation A.
    In the light of the changes discussed above, we believe that the 
final rules we are adopting today provide smaller issuers with an 
appropriately tailored regulatory regime that takes into account the 
needs of small entities to have a viable capital formation option in 
Regulation A, while maintaining appropriate investor protections.

C. Small Entities Subject to the Rules

    For purposes of the Regulatory Flexibility Act, under our rules, an 
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.\1094\
---------------------------------------------------------------------------

    \1094\ Securities Act Rule 157 [17 CFR 230.157]. We note that 
currently this rule refers to ``the dollar limitation prescribed by 
Section 3(b) of the Securities Act.'' 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 Rule 157, we are adopting a technical correction to replace the 
reference to ``Section 3(b)'' with a reference to ``Section 
3(b)(1).''
---------------------------------------------------------------------------

    While Regulation A is available for offerings of up to $50 million 
in securities in a 12-month period, only offerings up to $5 million in 
securities in a 12-month period will constitute offerings by small 
entities under the definition set forth above. It is difficult to 
predict the number of small entities that will use Regulation A due to 
the many variables included in the amendments. Nevertheless, we believe 
that the final rules for 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. 
above.
    Regulation A is currently limited to offerings with an aggregate 
offering price and aggregate sales of $5 million or less.\1095\ From 
2009 through 2014, 158 issuers filed offering statements and 36 
offering statements were qualified by the Commission, or an average of 
approximately six qualified offering statements per year. Of the 36 
offering statements that were qualified, 28 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 five 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 five small businesses will conduct offerings under Regulation A 
per year.
---------------------------------------------------------------------------

    \1095\ As explained in Section II.B.3. above, aggregate sales 
under Regulation A include prior sales generated from Regulation A 
offerings that occurred in the 12 months preceding the current 
offering.
---------------------------------------------------------------------------

D. Reporting, Recordkeeping, and Other Compliance Requirements

    As discussed above in Section II., the final rules include 
reporting, recordkeeping and other compliance requirements. In 
particular, the final rules impose certain reporting requirements on 
issuers offering and selling securities in a transaction relying on the 
exemption provided by Section 3(b) and Regulation A. The final rules 
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.\1096\ Such issuers 
are also 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 does not require the financial statements to be 
audited unless the issuer has already had them audited for another 
purpose.
---------------------------------------------------------------------------

    \1096\ See discussion in Section II.C.3.b. above.
---------------------------------------------------------------------------

    As discussed above in Section II.E.1.c., issuers conducting Tier 2 
offerings are also required to file annual reports on new Form 1-K, 
semiannual updates on new Form 1-SA, current event reporting on new 
Form 1-U, and to provide notice to the Commission of the termination of 
their ongoing reporting obligations on new Form 1-Z.
    An issuer subject to the Tier 2 periodic and current event 
reporting described above is 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 
consists 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 requires 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.
    Form 1-Z is 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 also will 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; however, we expect its use by small entities will be 
limited.
    Although we estimated in the Proposing Release that approximately 
188 issuers would enter the proposed Tier 2 ongoing reporting regime 
every year, we believe that very few small

[[Page 21894]]

businesses will do so. A small business under our rules will only be 
required to file ongoing reports under Regulation A if it elects to 
conduct a Tier 2 offering.

E. Agency Action To Minimize Effect on Small Entities

    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 final amendments and 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 final rules for small entities. We have made several changes 
from the proposal that may reduce compliance burdens on small entities. 
For example, in response to public comment, the final rules provide for 
the further scaling of disclosure items pertaining to executive 
compensation and related party transactions for entities offering 
securities pursuant to Tier 1, which are likely to be smaller 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.\1097\
---------------------------------------------------------------------------

    \1097\ See Section II.C.3.b. above.
---------------------------------------------------------------------------

    We also considered whether there should be an exemption from 
coverage of the rules, or any parts of the rules, for small entities. 
As discussed above, we are adopting different compliance reporting 
requirements for issuers that qualify $20 million or less in securities 
annually under Tier 1. Those issuers, which are more likely to be small 
entities, are not subject to ongoing reporting requirements and the 
requirement to provide audited financial statements, although such 
entities retain the flexibility to comply with more rigorous initial 
and ongoing compliance obligations if they so choose. While audited 
financial statements are not a Tier 1 requirement, in comparison to the 
proposed rules, the final rules provide certain additional flexibility 
as to the independence standards required to be followed by auditors of 
financial statements for issuers of less than $20 million that conduct 
Tier 1 offerings--to the extent an issuer elects to provide audited 
financial statements--by allowing such auditors to comply with the 
independence standards of either the AICPA or Article 2 of Regulation 
S-X. We believe that further distinctions in compliance requirements 
for Form 1-A users beyond the different sets of requirements for Tier 1 
and Tier 2 issuers 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 preparing 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.\1098\ For these reasons, we believe that small 
entities should be covered by the final rules to the extent specified 
above.
---------------------------------------------------------------------------

    \1098\ See discussion in Section IV.A.1. above.
---------------------------------------------------------------------------

VI. Statutory Basis and Text of Amendments

    The amendments and forms contained in this document are being 
adopted under the authority set forth in Sections 3(b), 19 and 28 of 
the Securities Act of 1933, as amended, Sections 12, 15, 23(a) and 36 
of the Securities Exchange Act of 1934, as amended, and Section 304 of 
the Trust Indenture Act of 1939, as amended.

List of Subjects

17 CFR Part 200

    Administrative practice and procedure, Authority delegations 
(Government agencies), Organization and functions (Government 
agencies).

17 CFR Parts 230, 232, 239, 240, 249, and 260

    Reporting and recordkeeping requirements, Securities.

    In accordance with the foregoing, title 17, chapter II of the Code 
of Federal Regulations is amended as follows:

PART 200--ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND 
REQUESTS

0
1. The authority citation for part 200 is revised to read in part as 
follows:

    Authority:  15 U.S.C. 77c, 77o, 77s, 77z-3, 77sss, 78d, 78d-1, 
78d-2, 78o-4, 78w, 78ll(d), 78mm, 80a-37, 80b-11, 7202, and 7211 et 
seq., unless otherwise noted.
* * * * *

0
2. Section 200.30-1 is amended by:
0
a. Revise paragraphs (b)(2) and (3); and
0
b. Add paragraph (b)(4).
    The revisions and addition read as follows:


Sec.  200.30-1  Delegation of authority to Director of Division of 
Corporation Finance.

* * * * *
    (b) * * *
    (2) To determine the date and time of qualification for offering 
statements and amendments to offering statements pursuant to Rule 
252(e) (Sec.  230.252(e) of this chapter);
    (3) To consent to the withdrawal of an offering statement or to 
declare an offering statement abandoned pursuant to Rule 259 (Sec.  
230.259 of this chapter); and
    (4) To deny a Form 1-Z filing pursuant to Rule 257 (Sec.  230.257 
of this chapter).
* * * * *

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

0
3. 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
4. In 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, mean 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

[[Page 21895]]

proposes to conduct an offering of securities which does not exceed the 
dollar limitation prescribed by section 3(b)(1) of the Securities Act.
* * * * *

0
5. Sections 230.251 through 230.263 are revised to read as follows:
Sec.
230.251 Scope of exemption.
230.252 Offering statement.
230.253 Offering circular.
230.254 Preliminary offering circular.
230.255 Solicitations of interest and other communications.
230.256 Definition of ``qualified purchaser''.
230.257 Periodic and current reporting; exit report.
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.


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), pursuant to 
Regulation A 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) Tier 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 gross proceeds 
for all securities sold pursuant to other offering statements within 
the 12 months before the start of and during the current offering of 
securities (``aggregate sales'') does not exceed $20,000,000, including 
not more than $6,000,000 offered by all selling securityholders that 
are affiliates of the issuer (``Tier 1 offerings'').
    (2) Tier 2. Offerings pursuant to Regulation A in which the sum of 
the aggregate offering price and aggregate sales does not exceed 
$50,000,000, including not more than $15,000,000 offered by all selling 
securityholders that are affiliates of the issuer (``Tier 2 
offerings'').
    (3) Additional limitation on secondary sales in first year. The 
portion of the aggregate offering price attributable to the securities 
of selling securityholders shall not exceed 30% of the aggregate 
offering price of a particular offering in:
    (i) The issuer's first offering pursuant to Regulation A; or
    (ii) Any subsequent Regulation A offering that is qualified within 
one year of the qualification date of the issuer's first offering.

    Note to paragraph (a).  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 or aggregate sales 
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 or aggregate sales 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 and 
such securities are convertible, exercisable, or exchangeable within 
one year of the offering statement's qualification or at the 
discretion of the issuer, the underlying securities must also be 
qualified and the aggregate offering price must include the actual 
or maximum estimated 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 or acquire 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 reports required to be filed, 
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 or 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) Exempt from registration under Rule 701 (Sec.  230.701);
    (iii) Made pursuant to an employee benefit plan;
    (iv) Exempt from registration under Regulation S (Sec. Sec.  
230.901 through 203.905);
    (v) Made more than six months after the completion of the 
Regulation A offering; or
    (vi) Exempt from registration under Section 4(a)(6) of the 
Securities Act (15 U.S.C. 77d(a)(6)).

    Note to paragraph (c).  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.

    (d) Offering conditions--(1) Offers. (i) Except as allowed by Rule 
255 (Sec.  230.255), no offer of securities may be made unless an 
offering statement has been filed with the Commission.
    (ii) After the 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) Solicitations of interest and other communications pursuant to 
Rule 255 (Sec.  230.255) may be made.
    (iii) Offers may be made after the offering statement has been 
qualified, but 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:
    (A) Until the offering statement has been qualified;
    (B) By issuers that are not currently required to file reports 
pursuant to Rule 257(b) (Sec.  230.257(b)), until 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) In a Tier 2 offering of securities that are not listed on a 
registered

[[Page 21896]]

national securities exchange upon qualification, unless the purchaser 
is either an accredited investor (as defined in Rule 501 (Sec.  
230.501)) or the aggregate purchase price to be paid by the purchaser 
for the securities (including the actual or maximum estimated 
conversion, exercise, or exchange price for any underlying securities 
that have been qualified) is no more than ten percent (10%) of the 
greater of such purchaser's:
    (1) Annual income or net worth if a natural person (with annual 
income and net worth for such natural person purchasers determined as 
provided in Rule 501 (Sec.  230.501)); or
    (2) Revenue or net assets for such purchaser's most recently 
completed fiscal year end if a non-natural person.

    Note to paragraph (d)(2)(i)(C).  When securities underlying 
warrants or convertible securities are being qualified pursuant to 
Tier 2 of Regulation A one year or more after the qualification of 
an offering for which investment limitations previously applied, 
purchasers of the underlying securities for which investment 
limitations would apply at that later date may determine compliance 
with the ten percent (10%) investment limitation using the 
conversion, exercise, or exchange price to acquire the underlying 
securities at that later time without aggregating such price with 
the price of the overlying warrants or convertible securities.

    (D) The issuer may rely on a representation of the purchaser when 
determining compliance with the ten percent (10%) investment limitation 
in this paragraph (d)(2)(i)(C), 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 by a dealer within 90 calendar days after 
qualification of the offering statement, 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, subject to the following 
provisions:
    (A) If the sale was by the issuer and was not effected by or 
through an underwriter or dealer, the issuer is responsible for 
delivering the Final Offering Circular as if the issuer were an 
underwriter;
    (B) For continuous or delayed offerings pursuant to paragraph 
(d)(3) of this section, the 90 calendar day period for dealers shall 
commence on the day of the first bona fide offering of securities under 
such offering statement;
    (C) If the security is listed on a registered national securities 
exchange, no offering circular need be delivered by a dealer more than 
25 calendar days after the later of the qualification date of the 
offering statement or the first date on which the security was bona 
fide offered to the public;
    (D) No offering circular need be delivered by a dealer if the 
issuer is subject, immediately prior to the time of the filing of the 
offering statement, to the reporting requirements of Rule 257(b) (Sec.  
230.257(b)); and
    (E) The Final Offering Circular delivery requirements set forth in 
paragraph (d)(2)(ii) of this section may be satisfied by delivering a 
notice to the effect that the sale was made pursuant to a qualified 
offering statement that includes the uniform resource locator 
(``URL''), which, in the case of an electronic-only offering, must be 
an active hyperlink, where the Final Offering Circular, or the offering 
statement of which such Final Offering Circular is part, may be 
obtained on the Commission's Electronic Data Gathering, Analysis and 
Retrieval System (``EDGAR'') and contact information sufficient to 
notify a purchaser where a request for a Final Offering Circular can be 
sent and received in response.
    (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 calendar 
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 calendar 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 to 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.
    (e) 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.
    (f) Electronic filing. Documents filed or otherwise provided to the 
Commission pursuant to this Regulation A must be submitted in 
electronic format by means of EDGAR in accordance with the EDGAR rules 
set forth in Regulation S-T (17 CFR part 232).


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.

[[Page 21897]]

    (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) 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 in the manner prescribed by Form 
1-A. 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.
    (d) 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 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 with the Commission 
of:
    (1) The initial non-public submission;
    (2) All non-public amendments; 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 Rule 
251(e) (Sec.  230.251(e)).
    (e) Qualification. An offering statement and any amendment thereto 
can be qualified only at such date and time as the Commission may 
determine.
    (f) Amendments. (1)(i) Amendments to an offering statement must be 
signed and filed with the Commission in the same manner as the initial 
filing. 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 amended audited financial 
statements must include the consent of the certifying accountant to the 
use of such accountant's certification 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 the requirements of paragraph (f)(1)(i) of this section, 
except that such amendments may be limited to 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) Information that may be omitted. Notwithstanding paragraph (a) 
of this section, a qualified 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 or 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 to paragraph (b).  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) or (3) (Sec.  
230.253(g)(1) or (3)) 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)) 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) Filing of omitted information. The information omitted from the 
offering circular in reliance upon paragraph (b) of this section must 
be contained in an offering circular filed with the Commission pursuant 
to paragraph (g) of this section; 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 section 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.

[[Page 21898]]

    (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 section 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 sale. 
If an offering circular filed pursuant to this paragraph (g)(2) 
consists of an offering circular supplement attached to an offering 
circular that previously had been filed or was not required to be filed 
pursuant to paragraph (g) of this section 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 section, provided that the cover page of the 
offering circular supplement identifies 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) of this section must 
be filed with the Commission no later than 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 sale.
    (4) An offering circular required to be filed pursuant to paragraph 
(g) of this section that is not filed within the time frames specified 
in paragraphs (g)(1) through (3) of this section, as applicable, must 
be filed pursuant to this paragraph (g)(4) as soon as practicable after 
the discovery of such failure to file.
    (5) Each offering circular filed under this section must contain in 
the upper right corner of the cover page the paragraphs of paragraphs 
(g)(1) through (4) of this section 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 circular.

    After the filing of an offering statement, but before its 
qualification, written offers of securities may be made if they meet 
the following requirements:
    (a) Outside front cover page. 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) Other contents. The Preliminary Offering Circular contains 
substantially the information required to be in an offering circular by 
Form 1-A (Sec.  239.90 of this chapter), except that certain 
information may be omitted under Rule 253(b) (Sec.  230.253(b)) subject 
to the conditions set forth in such rule.
    (c) Filing. The Preliminary Offering Circular is filed as a part of 
the offering statement.


Sec.  230.255  Solicitations of interest and other communications.

    (a) Solicitation of interest. 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) Conditions. 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 
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) Indications of interest. 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) Revised solicitations of interest. If solicitation of interest 
materials are used after the public filing of the offering statement 
and such solicitation of interest materials contain information

[[Page 21899]]

that is inaccurate or inadequate in any material respect, revised 
solicitation of interest materials must be redistributed in a 
substantially similar manner as 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 (ii) of this 
section, no such redistribution is required in the following 
circumstances:
    (1) in the case of paragraph (b)(4)(i) of this section, 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 section, 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) Abandoned offerings. Where an issuer decides to register an 
offering under the Securities Act after soliciting interest in a 
contemplated, but subsequently abandoned, Regulation A offering, the 
abandoned Regulation A offering would not be subject to integration 
with the registered offering if the issuer engaged in solicitations of 
interest pursuant to this rule only to qualified institutional buyers 
and institutional accredited investors permitted by Section 5(d) of the 
Securities Act. If the issuer engaged in solicitations of interest to 
persons other than qualified institutional buyers and institutional 
accredited investors, an abandoned Regulation A offering would not be 
subject to integration if the issuer (and any underwriter, broker, 
dealer, or agent used by the issuer in connection with the proposed 
offering) waits 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'' means any person to whom 
securities are offered or sold pursuant to a Tier 2 offering of this 
Regulation A.


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 of 
this chapter) not later than 30 calendar days after the termination or 
completion of the offering.
    (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:
    (1) Annual reports. An annual report on Form 1-K (Sec.  239.91 of 
this chapter) 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 section. Annual reports must be filed within the 
period specified in Form 1-K.
    (2) Special financial report. (i) A special financial report on 
Form 1-K or Form 1-SA if the offering statement did not contain the 
following:
    (A) Audited financial statements for the issuer's most recent 
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) unaudited financial statements covering the first six months of 
the issuer's current fiscal year if the offering statement was 
qualified during the last six months of that fiscal year.
    (ii) The special financial report described in paragraph 
(b)(2)(i)(A) of this section 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 fiscal 
year or other period specified in that paragraph, as the case may be. 
The special financial report described in paragraph (b)(2)(i)(B) of 
this section 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 six months 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 of this chapter) within the period specified in Form 1-SA. 
Semiannual reports must cover the first six months of each fiscal year 
of the issuer, commencing with the first six months of the fiscal year 
immediately 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 six 
months of the fiscal year following the most recent full fiscal year, 
for the first six months of the following fiscal year.
    (4) Current reports. Current reports on Form 1-U (Sec.  239.93 of 
this chapter) 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 Form 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 section 
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 section 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 section, unless that 
issuer is exempt from filing such reports or the duty to file such 
reports is terminated or suspended under paragraph (d) of this section.
    (c) Amendments. All amendments to the reports described in 
paragraphs (a) and (b) of this section 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) 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 section 
with respect to a class of securities held of

[[Page 21900]]

record (as defined in Rule 12g5-1 (Sec.  240.12g5-1 of this chapter)) 
by less than 300 persons, or less than 1,200 persons for a bank (as 
defined in Section 3(a)(6) of the Exchange Act (15 U.S.C. 78c(a)(6)), 
or a bank holding company (as defined in section 2 of the Bank Holding 
Company Act of 1956 (12 U.S.C. 1841)), shall be suspended for such 
class of securities immediately upon filing with the Commission an exit 
report on Form 1-Z (Sec.  239.94 of this chapter) 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.
    (3) For the purposes of paragraph (d)(2) of this section, 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 if it is denied because the issuer was 
ineligible to use the form, the issuer must, within 60 calendar 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.
    (4) The ability to suspend reporting, as described in paragraph 
(d)(2) of this section, is not available for any class of securities 
if:
    (i) During that fiscal year a Tier 2 offering statement was 
qualified;
    (ii) The issuer has not filed an annual report under this rule or 
the Exchange Act for the fiscal year in which a Tier 2 offering 
statement was qualified; or
    (iii) Offers or sales of securities of that class are being made 
pursuant to a Tier 2 Regulation A offering.
    (e) Termination of duty to file reports. If the duty to file 
reports is suspended pursuant to paragraph (d)(1) of this section and 
such suspension ends because the issuer terminates or suspends its duty 
to file reports under the Exchange Act, the issuer's obligation to file 
reports under paragraph (b) of this section shall:
    (1) Automatically terminate if the issuer is eligible to suspend 
its duty to file reports under paragraphs (d)(2) and (3) of this 
section; or
    (2) Recommence with the report covering the most recent financial 
period after that included in any effective registration statement or 
filed Exchange Act report.


Sec.  230.258  Suspension of the exemption.

    (a) Suspension. 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;
    (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) through 
(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) Notice and hearing. Upon the entry of an order under paragraph 
(a) of this section, 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) Suspension order. If no hearing is requested and none is 
ordered by the Commission, an order entered under paragraph (a) of this 
section 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) Permanent suspension. 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 
section. Any such order shall remain in effect until vacated by the 
Commission.
    (e) Notice procedures. 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) Withdrawal. If none of the securities that are the subject of 
an offering statement has 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 and must be signed by an authorized representative 
of the issuer. Any withdrawn document will remain in the Commission's 
files, as well as the related request for withdrawal.
    (b) Abandonment. 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) Failure to comply. 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

[[Page 21901]]

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 Rule 
251(a), (b), and (d)(1) and (3) (Sec.  230.251(a), (b), and (d)(1) and 
(3)) 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) Action by Commission. 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 section, the failure to 
comply shall nonetheless be actionable by the Commission under section 
20 of the Securities Act.
    (c) Suspension. 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) Affiliated issuer. An affiliate (as defined in Rule 501 (Sec.  
230.501)) of the issuer that is issuing securities in the same 
offering.
    (b) Business day. Any day except Saturdays, Sundays or United 
States federal holidays.
    (c) Eligible securities. Equity securities, debt securities, and 
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.
    (d) Final order. A written directive or declaratory statement 
issued by a federal or state agency described in Rule 262(a)(3) (Sec.  
230.262(a)(3)) under applicable statutory authority that provides for 
notice and an opportunity for hearing, which constitutes a final 
disposition or action by that federal or state agency.
    (e) Final offering circular. The more recent of: the current 
offering circular contained in a qualified offering statement; and any 
offering circular filed pursuant to Rule 253(g) (Sec.  230.253(g)). If, 
however, the issuer is relying on Rule 253(b) ((Sec.  230.253(b)), the 
Final Offering Circular is the most recent of the offering circular 
filed pursuant to Rule 253(g)(1) or (3) (Sec.  230.253(g)(1) or (3)) 
and any subsequent offering circular filed pursuant to Rule 253(g) 
(Sec.  230.253(g)).
    (f) Offering statement. An offering statement prepared pursuant to 
Regulation A.
    (g) Preliminary offering circular. The offering circular described 
in Rule 254 (Sec.  230.254).


Sec.  230.262  Disqualification provisions.

    (a) Disqualification events. 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:
    (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 (as defined in Rule 261 (Sec.  
230.261)) 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 filing of the offering 
statement;
    (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. 78o(b) or 78o-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. 
78o(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

[[Page 21902]]

    (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 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) Transition, waivers, reasonable care exception. Paragraph (a) 
of this section shall not apply:
    (1) With respect to any order under Sec.  230.262(a)(3) or (5) that 
occurred or was issued before June 19, 2015;
    (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 section 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 section.

    Note 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) Affiliated issuers. For purposes of paragraph (a) of this 
section, 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 paragraphs (a)(3) and (5) 
of this section but occurred before June 19, 2015. 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.


Sec.  230.263  Consent to service of process.

    (a) If the issuer is not organized under the laws of any of the 
states or territories of the United States of America, it shall furnish 
to the Commission a written irrevocable consent and power of attorney 
on Form F-X (Sec.  239.42 of this chapter) at the time of filing the 
offering statement required by Rule 252 (Sec.  230.252).
    (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
6. Section 230.505(b)(2)(iii)(A) and (B) are revised 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
7. 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.; and 18 U.S.C. 1350, 
unless otherwise noted.
* * * * *


0
8. Section 232.101 is amended by:
0
a. Revising paragraph (a)(1)(vii), (xv), and (xvi), and (c)(6);
0
b. Adding paragraph (a)(1)(xvii); and
0
c. Removing and reserving paragraph (b)(8).
    The revisions and addition 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 of this chapter);
* * * * *
    (xv) Form ABS-EE (Sec.  249.1401 of this chapter);
    (xvi) Form ABS-15G (as defined in Sec.  249.1400 of this chapter); 
and
    (xvii) Filings made pursuant to Regulation A (Sec. Sec.  230.251-
230.263 of this chapter).
* * * * *
    (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
9. 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, unless otherwise noted.
* * * * *


0
10. Amend Form 1-A (referenced in Sec.  239.90) by revising it to read 
as follows:

[[Page 21903]]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 1-A

REGULATION A OFFERING STATEMENT UNDER THE SECURITIES ACT OF 1933

GENERAL INSTRUCTIONS

I. Eligibility Requirements for Use of Form 1-A.

    This Form is to be used for securities offerings made pursuant to 
Regulation A (17 CFR 230.251 et seq.). Careful attention should be 
directed to the terms, conditions and requirements of Regulation A, 
especially Rule 251, because the exemption is not available to all 
issuers or for every type of securities transaction. Further, the 
aggregate offering price and aggregate sales of securities in any 12-
month period is strictly limited to $20 million for Tier 1 offerings 
and $50 million for Tier 2 offerings, including no more than $6 million 
offered by all selling securityholders that are affiliates of the 
issuer for Tier 1 offerings and $15 million by all selling 
securityholders that are affiliates of the issuer for Tier 2 offerings. 
Please refer to Rule 251 of Regulation A for more details.

II. Preparation, Submission and Filing of the Offering Statement.

    An offering statement must be prepared by all persons seeking 
exemption under the provisions of Regulation A. Parts I, II and III 
must be addressed by all issuers. Part II, which relates to the content 
of the required offering circular, provides alternative formats, of 
which the issuer must choose one. General information regarding the 
preparation, format, content, and submission or filing of the offering 
statement is contained in Rule 252. Information regarding non-public 
submission of the offering statement is contained in Rule 252(d). 
Requirements relating to the offering circular are contained in Rules 
253 and 254. The offering statement must be submitted or filed with the 
Securities and Exchange 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) for such submission or filing.

III. Incorporation by Reference and Cross-Referencing.

    An issuer may incorporate by reference to other documents 
previously submitted or filed on EDGAR. Cross-referencing within the 
offering statement is also encouraged to avoid repetition of 
information. For example, you may respond to an item of this Form by 
providing a cross-reference to the location of the information in the 
financial statements, instead of repeating such information. 
Incorporation by reference and cross-referencing are subject to the 
following additional conditions:
    (a) The use of incorporation by reference and cross-referencing in 
Part II of this Form is limited to the following items:
    (1) Items 2-14 of Part II if following the Offering Circular 
format;
    (2) Items 3-11 (other than Item 11(e)) of Form S-1 if following the 
Part I of Form S-1 format; or
    (3) Items 3-26, 28, and 30 of Form S-11 if following the Part I of 
Form S-11 format.
    (b) Descriptions of where the information incorporated by reference 
or cross-referenced can be found must be specific and must clearly 
identify the relevant document and portion thereof where such 
information can be found. For exhibits incorporated by reference, this 
description must be noted in the exhibits index for each relevant 
exhibit. All descriptions of where information incorporated by 
reference can be found must be accompanied by a hyperlink to the 
incorporated document on EDGAR, which hyperlink need not remain active 
after the filing of the offering statement. Inactive hyperlinks must be 
updated in any amendment to the offering statement otherwise required.
    (c) Reference may not be made to any document if the portion of 
such document containing the pertinent information includes an 
incorporation by reference to another document. Incorporation by 
reference to documents not available on EDGAR is not permitted. 
Incorporating information into the financial statements from elsewhere 
is not permitted. Information shall not be incorporated by reference or 
cross-referenced in any case where such incorporation would render the 
statement or report incomplete, unclear, or confusing.
    (d) If any substantive modification has occurred in the text of any 
document incorporated by reference since such document was filed, the 
issuer must file with the reference a statement containing the text and 
date of such modification.

IV. Supplemental Information.

    The information specified below must be furnished to the Commission 
as supplemental information, if applicable. Supplemental information 
shall not be required to be filed with or deemed part of the offering 
statement, unless otherwise required. The information shall be returned 
to the issuer upon request made in writing at the time of submission, 
provided that the return of such information is consistent with the 
protection of investors and the provisions of the Freedom of 
Information Act [5 U.S.C. 552] and the information was not filed in 
electronic format.
    (a) A statement as to whether or not the amount of compensation to 
be allowed or paid to the underwriter has been cleared with the 
Financial Industry Regulatory Authority (FINRA).
    (b) Any engineering, management, market, or similar report 
referenced in the offering circular or provided for external use by the 
issuer or by a principal underwriter in connection with the proposed 
offering. There must also be furnished at the same time a statement as 
to the actual or proposed use and distribution of such report or 
memorandum. Such statement must identify each class of persons who have 
received or will receive the report or memorandum, and state the number 
of copies distributed to each such class along with a statement as to 
the actual or proposed use and distribution of such report or 
memorandum.
    (c) Such other information as requested by the staff in support of 
statements, representations and other assertions contained in the 
offering statement or any correspondence to the staff.
    Correspondence appropriately responding to any staff comments made 
on the offering statement must also be furnished electronically. When 
applicable, such correspondence must clearly indicate where changes 
responsive to the staff's comments may be found in the offering 
statement.

PART I--NOTIFICATION

    The following information must be provided in the XML-based portion 
of Form 1-A available through the EDGAR portal and must be completed or 
updated before uploading each offering statement or amendment thereto. 
The format of Part I shown below may differ from the electronic version 
available on EDGAR. The electronic version of Part I will allow issuers 
to attach Part II and Part III for filing by means of EDGAR. All items 
must be addressed, unless otherwise indicated.
* * * * *
[ballot] No changes to the information required by Part I have occurred 
since the last filing of this offering statement.

[[Page 21904]]

ITEM 1. Issuer Information

Exact name of issuer as specified in the issuer's charter:-------------

Jurisdiction of incorporation/organization:

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

Year of incorporation:-------------------------------------------------

CIK:-------------------------------------------------------------------

Primary Standard Industrial Classification Code:-----------------------

I.R.S. Employer Identification Number:
-----------------------------------------------------------------------

Total number of full-time employees:
-----------------------------------------------------------------------

____Total number of part-time employees:-------------------------------

Contact Information

Address of Principal Executive Offices:
-----------------------------------------------------------------------

Telephone:(__)---------------------------------------------------------

Provide the following information for the person the Securities and 
Exchange Commission's staff should call in connection with any pre-
qualification review of the offering statement:------------------------

-----------------------------------------------------------------------
Name:------------------------------------------------------------------

Address:---------------------------------------------------------------

Telephone: (__)--------------------------------------------------------

Provide up to two email addresses to which the Securities and Exchange 
Commission's staff may send any comment letters relating to the 
offering statement. After qualification of the offering statement, such 
email addresses are not required to remain active:---------------------

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

Financial Statements

Industry Group (select one): [ballot] Banking [ballot] Insurance 
[ballot] Other
    Use the financial statements for the most recent fiscal period 
contained in this offering statement to provide the following 
information about the issuer. The following table does not include all 
of the line items from the financial statements. Long Term Debt would 
include notes payable, bonds, mortgages, and similar obligations. To 
determine ``Total Revenues'' for all companies selecting ``Other'' for 
their industry group, refer to Article 5-03(b)(1) of Regulation S-X. 
For companies selecting ``Insurance,'' refer to Article 7-04 of 
Regulation S-X for calculation of ``Total Revenues'' and paragraphs 5 
and 7(a) for ``Costs and Expenses Applicable to Revenues''.

[If ``Other'' is selected, display the following options in the 
Financial Statements table:]

Balance Sheet Information

Cash and Cash Equivalents:---------------------------------------------

Investment Securities:-------------------------------------------------

Accounts and Notes Receivable:-----------------------------------------

Property, Plant and Equipment (PP&E):----------------------------------

Total Assets:----------------------------------------------------------

Accounts Payable and Accrued Liabilities:------------------------------

Long Term Debt:--------------------------------------------------------

Total Liabilities:-----------------------------------------------------

Total Stockholders' Equity:--------------------------------------------

Total Liabilities and Equity:------------------------------------------

Income Statement Information
Total Revenues:--------------------------------------------------------

Costs and Expenses Applicable to Revenues:
-----------------------------------------------------------------------

Depreciation and Amortization:-----------------------------------------

Net Income:------------------------------------------------------------

Earnings Per Share--Basic:---------------------------------------------

Earnings Per Share--Diluted:-------------------------------------------

[If ``Banking'' is selected, display the following options in the 
Financial Statements table:]

Balance Sheet Information

Cash and Cash Equivalents:---------------------------------------------

Investment Securities:-------------------------------------------------

Loans:-----------------------------------------------------------------

Property and Equipment:------------------------------------------------

Total Assets:----------------------------------------------------------

Accounts Payable and Accrued Liabilities:------------------------------

Deposits:--------------------------------------------------------------

Long Term Debt:--------------------------------------------------------

Total Liabilities:-----------------------------------------------------

Total Stockholders' Equity:--------------------------------------------

Total Liabilities and Equity:------------------------------------------

Income Statement Information
Total Interest Income:-------------------------------------------------

Total Interest Expense:------------------------------------------------

Depreciation and Amortization:-----------------------------------------

Net Income:------------------------------------------------------------

Earnings Per Share--Basic:---------------------------------------------

Earnings Per Share--Diluted:-------------------------------------------

[If ``Insurance'' is selected, display the following options in the 
Financial Statements table:]

Balance Sheet Information
Cash and Cash Equivalents:---------------------------------------------

Total Investments:-----------------------------------------------------

Accounts and Notes Receivable:-----------------------------------------
Property and Equipment:------------------------------------------------

Total Assets:----------------------------------------------------------

Accounts Payable and Accrued Liabilities:------------------------------

Policy Liabilities and Accruals:---------------------------------------

Long Term Debt:--------------------------------------------------------

Total Liabilities:-----------------------------------------------------

Total Stockholders' Equity:--------------------------------------------

Total Liabilities and Equity:------------------------------------------

Income Statement Information

Total Revenues:--------------------------------------------------------

Costs and Expenses Applicable to Revenues:-----------------------------

Depreciation and Amortization:-----------------------------------------

Net Income:------------------------------------------------------------

Earnings Per Share--Basic:---------------------------------------------

Earnings Per Share--Diluted:-------------------------------------------

[End of section that varies based on the selection of Industry Group]

Name of Auditor (if any):----------------------------------------------

Outstanding Securities

----------------------------------------------------------------------------------------------------------------
                                                                                              Name of trading
                    Name of class (if any)     Units outstanding        CUSIP (if any)      center or quotation
                                                                                              medium (if any)
----------------------------------------------------------------------------------------------------------------
Common Equity       ......................  ......................  .....................  .....................
Preferred Equity    ......................  ......................  .....................  .....................
Debt Securities     ......................  ......................  .....................  .....................
----------------------------------------------------------------------------------------------------------------

ITEM 2. Issuer Eligibility

[ballot] Check this box to certify that all of the following statements 
are true for the issuer(s):
     Organized under the laws of the United States or Canada, 
or any State, Province, Territory or possession thereof, or the 
District of Columbia.
     Principal place of business is in the United States or 
Canada.
     Not subject to section 13 or 15(d) of the Securities 
Exchange Act of 1934.
     Not a development stage company that either (a) has no 
specific business plan or purpose, or (b) has indicated that its 
business plan is to merge with an unidentified company or companies.
     Not an investment company registered or required to be 
registered under the Investment Company Act of 1940.
     Not issuing fractional undivided interests in oil or gas 
rights, or a similar interest in other mineral rights.
     Not issuing asset-backed securities as defined in Item 
1101(c) of Regulation AB.
     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 this offering 
statement.
     Has filed with the Commission all the reports it was 
required to file, if any, pursuant to Rule 257 during the two years 
immediately before the filing of the offering statement (or for such 
shorter period that the issuer was required to file such reports).

[[Page 21905]]

ITEM 3. Application of Rule 262

[ballot] Check this box to certify that, as of the time of this filing, 
each person described in Rule 262 of Regulation A is either not 
disqualified under that rule or is disqualified but has received a 
waiver of such disqualification.
[ballot] Check this box if ``bad actor'' disclosure under Rule 262(d) 
is provided in Part II of the offering statement.

ITEM 4. Summary Information Regarding the Offering and Other Current or 
Proposed Offerings

    Check the appropriate box to indicate whether you are conducting a 
Tier 1 or Tier 2 offering:
[ballot] Tier 1 [ballot] Tier 2
    Check the appropriate box to indicate whether the annual financial 
statements have been audited:
[ballot] Unaudited [ballot] Audited
    Types of Securities Offered in this Offering Statement (select all 
that apply):
    [ballot] Equity (common or preferred stock)
    [ballot] Debt
    [ballot] Option, warrant or other right to acquire another security
    [ballot] Security to be acquired upon exercise of option, warrant 
or other right to acquire security
    [ballot] Tenant-in-common securities
    [ballot] Other (describe)______
    Does the issuer intend to offer the securities on a delayed or 
continuous basis pursuant to Rule 251(d)(3)?
Yes [ballot] No [ballot]
    Does the issuer intend this offering to last more than one year?
Yes [ballot] No [ballot]
    Does the issuer intend to price this offering after qualification 
pursuant to Rule 253(b)?
Yes [ballot] No [ballot]
    Will the issuer be conducting a best efforts offering?
Yes [ballot] No [ballot]
    Has the issuer used solicitation of interest communications in 
connection with the proposed offering?
Yes [ballot] No [ballot]
    Does the proposed offering involve the resale of securities by 
affiliates of the issuer?
Yes [ballot] No [ballot]
Number of securities offered:______

Number of securities of that class already outstanding:______
    The information called for by this item below may be omitted if 
undetermined at the time of filing or submission, except that if a 
price range has been included in the offering statement, the midpoint 
of that range must be used to respond. Please refer to Rule 251(a) for 
the definition of ``aggregate offering price'' or ``aggregate sales'' 
as used in this item. Please leave the field blank if undetermined at 
this time and include a zero if a particular item is not applicable to 
the offering.
Price per security: $______
    The portion of the aggregate offering price attributable to 
securities being offered on behalf of the issuer:
$______
    The portion of the aggregate offering price attributable to 
securities being offered on behalf of selling securityholders:
$______
    The portion of aggregate offering attributable to all the 
securities of the issuer sold pursuant to a qualified offering 
statement within the 12 months before the qualification of this 
offering statement:
$______
    The estimated portion of aggregate sales attributable to securities 
that may be sold pursuant to any other qualified offering statement 
concurrently with securities being sold under this offering statement:
$______
    Total: $______ (the sum of the aggregate offering price and 
aggregate sales in the four preceding paragraphs).
    Anticipated fees in connection with this offering and names of 
service providers:

------------------------------------------------------------------------
                                   Name of Service
                                       Provider              Fees
------------------------------------------------------------------------
Underwriters:..................            ________   $_____
 
Sales Commissions:.............            ________   $_____
 
Finders' Fees:.................            ________   $_____
 
Audit:.........................            ________   $_____
 
Legal:.........................            ________   $_____
 
Promoters:.....................            ________   $_____
 
Blue Sky Compliance:...........            ________   $_____
 
------------------------------------------------------------------------

CRD Number of any broker or dealer listed:______

Estimated net proceeds to the issuer: $______

Clarification of responses (if necessary):______

ITEM 5. Jurisdictions in Which Securities are to be Offered

    Using the list below, select the jurisdictions in which the issuer 
intends to offer the securities:

[List will include all U.S. and Canadian jurisdictions, with an option 
to add and remove them individually, add all and remove all.]

    Using the list below, select the jurisdictions in which the 
securities are to be offered by underwriters, dealers or sales persons 
or check the appropriate box:
[ballot] None
[ballot] Same as the jurisdictions in which the issuer intends to offer 
the securities.

[List will include all U.S. and Canadian jurisdictions, with an option 
to add and remove them individually, add all and remove all.]

ITEM 6. Unregistered Securities Issued or Sold Within One Year

[ballot] None
    As to any unregistered securities issued by the issuer or any of 
its predecessors or affiliated issuers within one year before the 
filing of this Form 1-A, state:
    (a) Name of such issuer.
    (b) (1) Title of securities issued
    (2) Total amount of such securities issued
    (3) Amount of such securities sold by or for the account of any 
person who at the time was a director, officer, promoter or principal 
securityholder of the issuer of such securities, or was an underwriter 
of any securities of such issuer
    (c)(1) Aggregate consideration for which the securities were issued 
and basis for computing the amount thereof.

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

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

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

    (2) Aggregate consideration for which the securities listed in 
(b)(3) of this item (if any) were issued and the basis for computing 
the amount thereof (if

[[Page 21906]]

different from the basis described in (c)(1)).
(e) Indicate the section of the Securities Act or Commission rule or 
regulation relied upon for exemption from the registration requirements 
of such Act and state briefly the facts relied upon for such 
exemption:_________

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

PART II -- INFORMATION REQUIRED IN OFFERING CIRCULAR

    (a) Financial statement requirements regardless of the applicable 
disclosure format are specified in Part F/S of this Form 1-A. The 
narrative disclosure contents of offering circulars are specified as 
follows:
    (1) The information required by:
    (i) the Offering Circular format described below; or
    (ii) The information required by Part I of Form S-1 (17 CFR 239.11) 
or Part I of Form S-11 (17 CFR 239.18), except for the financial 
statements, selected financial data, and supplementary financial 
information called for by those forms. An issuer choosing to follow the 
Form S-1 or Form S-11 format may follow the requirements for smaller 
reporting companies if it meets the definition of that term in Rule 405 
(17 CFR 230.405). An issuer may only use the Form S-11 format if the 
offering is eligible to be registered on that form;
    The cover page of the offering circular must identify which 
disclosure format is being followed.
    (2) The offering circular must describe any matters that would have 
triggered disqualification under Rule 262(a)(3) or (a)(5) but for the 
provisions set forth in Rule 262(b)(1);
    (3) The legend required by Rule 253(f) of Regulation A must be 
included on the offering circular cover page (for issuers following the 
S-1 or S-11 disclosure models this legend must be included instead of 
the legend required by Item 501(b)(7) of Regulation S-K);
    (4) For preliminary offering circulars, the legend required by Rule 
254(a) must be included on the offering circular cover page (for 
issuers following the S-1 or S-11 disclosure models, this legend must 
be included instead of the legend required by Item 501(b)(10) of 
Regulation S-K); and
    (5) For Tier 2 offerings where the securities will not be listed on 
a registered national securities exchange upon qualification, the 
offering circular cover page must include the following legend 
highlighted by prominent type or in another manner:
    Generally, no sale may be made to you in this offering if the 
aggregate purchase price you pay is more than 10% of the greater of 
your annual income or net worth. Different rules apply to accredited 
investors and non-natural persons. Before making any representation 
that your investment does not exceed applicable thresholds, we 
encourage you to review Rule 251(d)(2)(i)(C) of Regulation A. For 
general information on investing, we encourage you to refer to 
www.investor.gov.
    (b) The Commission encourages the use of management's projections 
of future economic performance that have a reasonable basis and are 
presented in an appropriate format. See Rule 175, 17 CFR 230.175.
    (c) Offering circulars need not follow the order of the items or 
the order of other requirements of the disclosure form except to the 
extent otherwise specifically provided. Such information may not, 
however, be set forth in such a fashion as to obscure any of the 
required information or any information necessary to keep the required 
information from being incomplete or misleading. Information requested 
to be presented in a specified tabular format must be given in 
substantially the tabular format specified. For incorporation by 
reference, please refer to General Instruction III of this Form.

OFFERING CIRCULAR

Item 1. Cover Page of Offering Circular

    The cover page of the offering circular must be limited to one page 
and must include the information specified in this item.
    (a) Name of the issuer.
    Instruction to Item 1(a):
    If your name is the same as, or confusingly similar to, that of a 
company that is well known, include information to eliminate any 
possible confusion with the other company. If your name indicates a 
line of business in which you are not engaged or you are engaged only 
to a limited extent, include information to eliminate any misleading 
inference as to your business. In some circumstances, disclosure may 
not be sufficient and you may be required to change your name. You will 
not be required to change your name if you are an established company, 
the character of your business has changed, and the investing public is 
generally aware of the change and the character of your current 
business.
    (b) Full mailing address of the issuer's principal executive 
offices and the issuer's telephone number (including the area code) 
and, if applicable, Web site address.
    (c) Date of the offering circular.
    (d) Title and amount of securities offered. Separately state the 
amount of securities offered by selling securityholders, if any. 
Include a cross-reference to the section where the disclosure required 
by Item 14 of Part II of this Form 1-A has been provided;
    (e) The information called for by the applicable table below as to 
all the securities being offered, in substantially the tabular format 
indicated. If necessary, you may estimate any underwriting discounts 
and commissions and the proceeds to the issuer or other persons.

----------------------------------------------------------------------------------------------------------------
                                                         Underwriting
                                   Price to public       discount and     Proceeds to issuer   Proceeds to other
                                                          commissions                               persons
----------------------------------------------------------------------------------------------------------------
Per share/unit:................  ____________         ____________        ____________        ______
Total:.........................  ____________         ____________        ____________        ______
----------------------------------------------------------------------------------------------------------------

    If the securities are to be offered on a best efforts basis, the 
cover page must set forth the termination date, if any, of the 
offering, any minimum required sale and any arrangements to place the 
funds received in an escrow, trust, or similar arrangement. The 
following table must be used instead of the preceding table.

----------------------------------------------------------------------------------------------------------------
                                                         Underwriting
                                   Price to public       discount and     Proceeds to issuer   Proceeds to other
                                                          commissions                               persons
----------------------------------------------------------------------------------------------------------------
Per share/unit:................  ____________         ____________        ____________        ______
Total Minimum:.................  ____________         ____________        ____________        ______
Total Maximum:.................  ____________         ____________        ____________        ______
----------------------------------------------------------------------------------------------------------------


[[Page 21907]]

    Instructions to Item 1(e):
    1. The term ``commissions'' includes all cash, securities, 
contracts, or anything else of value, paid, to be set aside, disposed 
of, or understandings with or for the benefit of any other persons in 
which any underwriter is interested, made in connection with the sale 
of such security.
    2. Only commissions paid by the issuer in cash are to be indicated 
in the table. Commissions paid by other persons or any form of non-cash 
compensation must be briefly identified in a footnote to the table with 
a cross-reference to a more complete description elsewhere in the 
offering circular.
    3. Before the commencement of sales pursuant to Regulation A, the 
issuer must inform the Commission whether or not the amount of 
compensation to be allowed or paid to the underwriters, as described in 
the offering statement, has been cleared with FINRA.
    4. If the securities are not to be offered for cash, state the 
basis upon which the offering is to be made.
    5. Any finder's fees or similar payments must be disclosed on the 
cover page with a reference to a more complete discussion in the 
offering circular. Such disclosure must identify the finder, the nature 
of the services rendered and the nature of any relationship between the 
finder and the issuer, its officers, directors, promoters, principal 
stockholders and underwriters (including any affiliates of such 
persons).
    6. The amount of the expenses of the offering borne by the issuer, 
including underwriting expenses to be borne by the issuer, must be 
disclosed in a footnote to the table.
    (f) The name of the underwriter or underwriters.
    (g) Any legend or information required by the law of any state in 
which the securities are to be offered.
    (h) A cross-reference to the risk factors section, including the 
page number where it appears in the offering circular. Highlight this 
cross-reference by prominent type or in another manner.
    (i) Approximate date of commencement of proposed sale to the 
public.
    (j) If the issuer intends to rely on Rule 253(b) and a preliminary 
offering circular is circulated, provide (1) a bona fide estimate of 
the range of the maximum offering price and the maximum number of 
securities offered or (2) a bona fide estimate of the principal amount 
of the debt securities offered. 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.
    Instruction to Item 1(j):
    The upper limit of the price range must be used in determining the 
aggregate offering price for purposes of Rule 251(a).

Item 2. Table of Contents

    On the page immediately following the cover page of the offering 
circular, provide a reasonably detailed table of contents. It must show 
the page numbers of the various sections or subdivisions of the 
offering circular. Include a specific listing of the risk factors 
section required by Item 3 of Part II of this Form 1-A.

Item 3. Summary and Risk Factors

    (a) An issuer may provide a summary of the information in the 
offering circular where the length or complexity of the offering 
circular makes a summary useful. The summary should be brief and must 
not contain all of the detailed information in the offering circular.
    (b) Immediately following the Table of Contents required by Item 2 
or the Summary, there must be set forth under an appropriate caption, a 
carefully organized series of short, concise paragraphs, summarizing 
the most significant factors that make the offering speculative or 
substantially risky. Issuers should avoid generalized statements and 
include only factors that are specific to the issuer.

Item 4. Dilution

    Where there is a material disparity between the public offering 
price and the effective cash cost to officers, directors, promoters and 
affiliated persons for shares acquired by them in a transaction during 
the past year, or that they have a right to acquire, there must be 
included a comparison of the public contribution under the proposed 
public offering and the average effective cash contribution of such 
persons.

Item 5. Plan of Distribution and Selling Securityholders

    (a) If the securities are to be offered through underwriters, give 
the names of the principal underwriters, and state the respective 
amounts underwritten. Identify each such underwriter having a material 
relationship to the issuer and state the nature of the relationship. 
State briefly the nature of the underwriters' obligation to take the 
securities.
    Instructions to Item 5(a):
    1. All that is required as to the nature of the underwriters' 
obligation is whether the underwriters are or will be committed to take 
and to pay for all of the securities if any are taken, or whether it is 
merely an agency or the type of best efforts arrangement under which 
the underwriters are required to take and to pay for only such 
securities as they may sell to the public. Conditions precedent to the 
underwriters' taking the securities, including market outs, need not be 
described except in the case of an agency or best efforts arrangement.
    2. It is not necessary to disclose each member of a selling group. 
Disclosure may be limited to those underwriters who are in privity of 
contract with the issuer with respect to the offering.
    (b) State briefly the discounts and commissions to be allowed or 
paid to dealers, including all cash, securities, contracts or other 
consideration to be received by any dealer in connection with the sale 
of the securities.
    (c) Outline briefly the plan of distribution of any securities 
being issued that are to be offered through the selling efforts of 
brokers or dealers or otherwise than through underwriters.
    (d) If any of the securities are to be offered for the account of 
securityholders, identify each selling securityholder, state the amount 
owned by the securityholder prior to the offering, the amount offered 
for his or her account and the amount to be owned after the offering. 
Provide such disclosure in a tabular format. At the bottom of the 
table, provide the total number of securities being offered for the 
account of all securityholders and describe what percent of the pre-
offering outstanding securities of such class the offering represents.
    Instruction to Item 5(d):
    The term ``securityholder'' in this paragraph refers to beneficial 
holders, not nominee holders or other such holders of record. If the 
selling securityholder is an entity, disclosure of the persons who have 
sole or shared voting or investment power must be included.
    (e) Describe any arrangements for the return of funds to 
subscribers if all of the securities to be offered are not sold. If 
there are no such arrangements, so state.
    (f) If there will be a material delay in the payment of the 
proceeds of the offering by the underwriter to the issuer, the salient 
provisions in this regard and the effects on the issuer must be stated.
    (g) Describe any arrangement to (1) limit or restrict the sale of 
other securities of the same class as those to be offered for the 
period of distribution, (2) stabilize the market for any of the 
securities to be offered, or (3) withhold commissions, or otherwise to 
hold each

[[Page 21908]]

underwriter or dealer responsible for the distribution of its 
participation.
    (h) Identify any underwriter that intends to confirm sales to any 
accounts over which it exercises discretionary authority and include an 
estimate of the amount of securities so intended to be confirmed.
    Instruction to Item 5:
    Attention is directed to the provisions of Rules 10b 9 [17 CFR 
240.10b-9] and 15c2-4 [17 CFR 240.15c2-4] under the Securities Exchange 
Act of 1934. These rules outline, among other things, antifraud 
provisions concerning the return of funds to subscribers and the 
transmission of proceeds of an offering to a seller.

Item 6. Use of Proceeds to Issuer

    State the principal purposes for which the net proceeds to the 
issuer from the securities to be offered are intended to be used and 
the approximate amount intended to be used for each such purpose. If 
the issuer will not receive any of proceeds from the offering, so 
state.
    Instructions to Item 6:
    1. If any substantial portion of the proceeds has not been 
allocated for particular purposes, a statement to that effect must be 
made together with a statement of the amount of proceeds not so 
allocated.
    2. State whether or not the proceeds will be used to compensate or 
otherwise make payments to officers or directors of the issuer or any 
of its subsidiaries.
    3. For best efforts offerings, describe any anticipated material 
changes in the use of proceeds if all of the securities being qualified 
on the offering statement are not sold.
    4. If an issuer must provide the disclosure described in Item 9(c) 
the use of proceeds and plan of operations should be consistent.
    5. If any material amounts of other funds are to be used in 
conjunction with the proceeds, state the amounts and sources of such 
other funds and whether such funds are firm or contingent.
    6. If any material part of the proceeds is to be used to discharge 
indebtedness, describe the material terms of such indebtedness. If the 
indebtedness to be discharged was incurred within one year, describe 
the use of the proceeds arising from such indebtedness.
    7. If any material amount of the proceeds is to be used to acquire 
assets, otherwise than in the ordinary course of business, briefly 
describe and state the cost of the assets. If the assets are to be 
acquired from affiliates of the issuer or their associates, give the 
names of the persons from whom they are to be acquired and set forth 
the basis used in determining the purchase price to the issuer.
    8. The issuer may reserve the right to change the use of proceeds, 
so long as the reservation is prominently disclosed in the section 
where the use of proceeds is discussed. It is not necessary to describe 
the possible alternative uses of proceeds unless the issuer believes 
that a change in circumstances leading to an alternative use of 
proceeds is likely to occur.

Item 7. Description of Business

    (a) Narrative description of business.
    (1) Describe the business done and intended to be done by the 
issuer and its subsidiaries and the general development of the business 
during the past three years or such shorter period as the issuer may 
have been in business. Such description must include, but not be 
limited to, a discussion of the following factors if such factors are 
material to an understanding of the issuer's business:
    (i) The principal products and services of the issuer and the 
principal market for and method of distribution of such products and 
services.
    (ii) The status of a product or service if the issuer has made 
public information about a new product or service that would require 
the investment of a material amount of the assets of the issuer or is 
otherwise material.
    (iii) If material, the estimated amount spent during each of the 
last two fiscal years on company-sponsored research and development 
activities determined in accordance with generally accepted accounting 
principles. In addition, state, if material, the estimated dollar 
amount spent during each of such years on material customer-sponsored 
research activities relating to the development of new products, 
services or techniques or the improvement of existing products, 
services or techniques.
    (iv) The total number of persons employed by the issuer, indicating 
the number employed full time.
    (v) Any bankruptcy, receivership or similar proceeding.
    (vi) Any legal proceedings material to the business or financial 
condition of the issuer.
    (vii) Any material reclassification, merger, consolidation, or 
purchase or sale of a significant amount of assets not in the ordinary 
course of business.
    (2) The issuer must also describe those distinctive or special 
characteristics of the issuer's operation or industry that are 
reasonably likely to have a material impact upon the issuer's future 
financial performance. Examples of factors that might be discussed 
include dependence on one or a few major customers or suppliers 
(including suppliers of raw materials or financing), effect of existing 
or probable governmental regulation (including environmental 
regulation), material terms of and/or expiration of material labor 
contracts or patents, trademarks, licenses, franchises, concessions or 
royalty agreements, unusual competitive conditions in the industry, 
cyclicality of the industry and anticipated raw material or energy 
shortages to the extent management may not be able to secure a 
continuing source of supply.
    (b) Segment Data. If the issuer is required by generally accepted 
accounting principles to include segment information in its financial 
statements, an appropriate cross-reference must be included in the 
description of business.
    (c) Industry Guides. The disclosure guidelines in all Securities 
Act Industry Guides must be followed. To the extent that the industry 
guides are codified into Regulation S-K, the Regulation S-K industry 
disclosure items must be followed.
    (d) For offerings of limited partnership or limited liability 
company interests, an issuer must comply with the Commission's 
interpretive views on substantive disclosure requirements set forth in 
Securities Act Release No. 6900 (June 17, 1991).

Item 8. Description of Property

    State briefly the location and general character of any principal 
plants or other material physical properties of the issuer and its 
subsidiaries. If any such property is not held in fee or is held 
subject to any major encumbrance, so state and briefly describe how 
held. Include information regarding the suitability, adequacy, 
productive capacity and extent of utilization of the properties and 
facilities used in the issuer's business.
    Instruction to Item 8:
    Detailed descriptions of the physical characteristics of individual 
properties or legal descriptions by metes and bounds are not required 
and should not be given.

Item 9. Management's Discussion and Analysis of Financial Condition and 
Results of Operations

    Discuss the issuer's financial condition, changes in financial 
condition and results of operations for each year and interim period 
for which financial statements are required, including the causes of 
material changes from year to year or period to period in financial 
statement line items, to the extent necessary for an understanding of

[[Page 21909]]

the issuer's business as a whole. Information provided also must relate 
to the segment information of the issuer. Provide the information 
specified below as well as such other information that is necessary for 
an investor's understanding of the issuer's financial condition, 
changes in financial condition and results of operations.
    (a) Operating results. Provide information regarding significant 
factors, including unusual or infrequent events or transactions or new 
developments, materially affecting the issuer's income from operations, 
and, in each case, indicating the extent to which income was so 
affected. Describe any other significant component of revenue or 
expenses necessary to understand the issuer's results of operations. To 
the extent that the financial statements disclose material changes in 
net sales or revenues, provide a narrative discussion of the extent to 
which such changes are attributable to changes in prices or to changes 
in the volume or amount of products or services being sold or to the 
introduction of new products or services.
    Instruction to Item 9(a):
    1. The discussion and analysis shall focus specifically on material 
events and uncertainties known to management that would cause reported 
financial information not to be necessarily indicative of future 
operating results or of future financial condition. This would include 
descriptions and amounts of (A) matters that would have an impact on 
future operations that have not had an impact in the past, and (B) 
matters that have had an impact on reported operations that are not 
expected to have an impact upon future operations.
    2. Where the consolidated financial statements reveal material 
changes from year to year in one or more line items, the causes for the 
changes shall be described to the extent necessary to an understanding 
of the issuer's businesses as a whole. If the causes for a change in 
one line item also relate to other line items, no repetition is 
required and a line-by-line analysis of the financial statements as a 
whole is not required or generally appropriate. Issuers need not recite 
the amounts of changes from year to year which are readily computable 
from the financial statements. The discussion must not merely repeat 
numerical data contained in the consolidated financial statements.
    3. When interim period financial statements are included, discuss 
any material changes in financial condition from the end of the 
preceding fiscal year to the date of the most recent interim balance 
sheet provided. Discuss any material changes in the issuer's results of 
operations with respect to the most recent fiscal year-to-date period 
for which an income statement is provided and the corresponding year-
to-date period of the preceding fiscal year.
    (b) Liquidity and capital resources. Provide information regarding 
the following:
    (1) the issuer's liquidity (both short and long term), including a 
description and evaluation of the internal and external sources of 
liquidity and a brief discussion of any material unused sources of 
liquidity. If a material deficiency in liquidity is identified, 
indicate the course of action that the issuer has taken or proposes to 
take to remedy the deficiency.
    (2) the issuer's material commitments for capital expenditures as 
of the end of the latest fiscal year and any subsequent interim period 
and an indication of the general purpose of such commitments and the 
anticipated sources of funds needed to fulfill such commitments.
    (c) Plan of Operations. Issuers (including predecessors) that have 
not received revenue from operations during each of the three fiscal 
years immediately before the filing of the offering statement (or since 
inception, whichever is shorter) must describe, if formulated, their 
plan of operation for the 12 months following the commencement of the 
proposed offering. If such information is not available, the reasons 
for its unavailability must be stated. Disclosure relating to any plan 
must include, among other things, a statement indicating whether, in 
the issuer's opinion, the proceeds from the offering will satisfy its 
cash requirements or whether it anticipates it will be necessary to 
raise additional funds in the next six months to implement the plan of 
operations.
    (d) Trend information. The issuer must identify the most 
significant recent trends in production, sales and inventory, the state 
of the order book and costs and selling prices since the latest 
financial year. The issuer also must discuss, for at least the current 
financial year, any known trends, uncertainties, demands, commitments 
or events that are reasonably likely to have a material effect on the 
issuer's net sales or revenues, income from continuing operations, 
profitability, liquidity or capital resources, or that would cause 
reported financial information not necessarily to be indicative of 
future operating results or financial condition.

Item 10. Directors, Executive Officers and Significant Employees

    (a) For each of the directors, persons nominated or chosen to 
become directors, executive officers, persons chosen to become 
executive officers, and significant employees, provide the information 
specified below in substantially the following tabular format:

----------------------------------------------------------------------------------------------------------------
                                                                                          Approximate hours per
                  Name                      Position      Age     Term of Office \(1)\     week for part-time
                                                                                             employees \(2)\
----------------------------------------------------------------------------------------------------------------
Executive Officers:
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Directors:
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Significant Employees:
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------


[[Page 21910]]

    (1) Provide the month and year of the start date and, if 
applicable, the end date. To the extent you are unable to provide 
specific dates, provide such other description in the table or in an 
appropriate footnote clarifying the term of office. If the person is a 
nominee or chosen to become a director or executive officer, it must be 
indicated in this column or by footnote.
    (2) For executive officers and significant employees that are 
working part-time, indicate approximately the average number of hours 
per week or month such person works or is anticipated to work. This 
column may be left blank for directors. The entire column may be 
omitted if all those listed in the table work full time for the issuer.
    In a footnote to the table, briefly describe any arrangement or 
understanding between the persons described above and any other persons 
(naming such persons) pursuant to which the person was or is to be 
selected to his or her office or position.
    Instructions to Item 10(a):
    1. No nominee or person chosen to become a director or person 
chosen to be an executive officer who has not consented to act as such 
may be named in response to this item.
    2. The term ``executive officer'' means the president, secretary, 
treasurer, any vice president in charge of a principal business 
function (such as sales, administration, or finance) and any other 
person who performs similar policy making functions for the issuer.
    3. The term ``significant employee'' means persons such as 
production managers, sales managers, or research scientists, who are 
not executive officers, but who make or are expected to make 
significant contributions to the business of the issuer.
    (b) Family relationships. State the nature of any family 
relationship between any director, executive officer, person nominated 
or chosen by the issuer to become a director or executive officer or 
any significant employee.
    Instruction to Item 10(b):
    The term ``family relationship'' means any relationship by blood, 
marriage, or adoption, not more remote than first cousin.
    (c) Business experience. Give a brief account of the business 
experience during the past five years of each director, executive 
officer, person nominated or chosen to become a director or executive 
officer, and each significant employee, including his or her principal 
occupations and employment during that period and the name and 
principal business of any corporation or other organization in which 
such occupations and employment were carried on. When an executive 
officer or significant employee has been employed by the issuer for 
less than five years, a brief explanation must be included as to the 
nature of the responsibilities undertaken by the individual in prior 
positions to provide adequate disclosure of this prior business 
experience. What is required is information relating to the level of 
the employee's professional competence, which may include, depending 
upon the circumstances, such specific information as the size of the 
operation supervised.
    (d) Involvement in certain legal proceedings. Describe any of the 
following events which occurred during the past five years and which 
are material to an evaluation of the ability or integrity of any 
director, person nominated to become a director or executive officer of 
the issuer:
    (1) A petition under the federal bankruptcy laws or any state 
insolvency law was filed by or against, or a receiver, fiscal agent or 
similar officer was appointed by a court for the business or property 
of such person, or any partnership in which he was general partner at 
or within two years before the time of such filing, or any corporation 
or business association of which he was an executive officer at or 
within two years before the time of such filing; or
    (2) Such person was convicted in a criminal proceeding (excluding 
traffic violations and other minor offenses).

Item 11. Compensation of Directors and Executive Officers

    (a) Provide, in substantially the tabular format indicated, the 
annual compensation of each of the three highest paid persons who were 
executive officers or directors during the issuer's last completed 
fiscal year.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                Capacities in which compensation was received  (e.g.,    Cash  compensation    Other  compensation   Total compensation
            Name                      Chief Executive Officer, director, etc.)                   ($)                   ($)                   ($)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                              ........................................................  ....................  ....................  ....................
                              ........................................................  ....................  ....................  ....................
                              ........................................................  ....................  ....................  ....................
--------------------------------------------------------------------------------------------------------------------------------------------------------

    (b) Provide the aggregate annual compensation of the issuer's 
directors as a group for the issuer's last completed fiscal year. 
Specify the total number of directors in the group.
    (c) For Tier 1 offerings, the annual compensation of the three 
highest paid persons who were executive officers or directors and the 
aggregate annual compensation of the issuer's directors may be provided 
as a group, rather than as specified in paragraphs (a) and (b) of this 
item. In such case, issuers must specify the total number of persons in 
the group.
    (d) Briefly describe all proposed compensation to be made in the 
future pursuant to any ongoing plan or arrangement to the individuals 
specified in paragraphs (a) and (b) of this item. The description must 
include a summary of how each plan operates, any performance formula or 
measure in effect (or the criteria used to determine payment amounts), 
the time periods over which the measurements of benefits will be 
determined, payment schedules, and any recent material amendments to 
the plan. Information need not be included with respect to any group 
life, health, hospitalization, or medical reimbursement plans that do 
not discriminate in scope, terms or operation in favor of executive 
officers or directors of the issuer and that are available generally to 
all salaried employees.
    Instructions to Item 11:
    1. In case of compensation paid or to be paid otherwise than in 
cash, if it is impracticable to determine the cash value thereof, state 
in a note to the table the nature and amount thereof.
    2. This item is to be answered on an accrual basis if practicable; 
if not so answered, state the basis used.

Item 12. Security Ownership of Management and Certain Securityholders

    (a) Include the information specified in paragraph (b) of this item 
as of the most recent practicable date (stating the date used), in 
substantially the tabular format indicated, with respect to voting 
securities beneficially owned by:
    (1) all executive officers and directors as a group, individually 
naming each

[[Page 21911]]

director or executive officer who beneficially owns more than 10% of 
any class of the issuer's voting securities;
    (2) any other securityholder who beneficially owns more than 10% of 
any class of the issuer's voting securities as such beneficial 
ownership would be calculated if the issuer were subject to Rule 13d-
3(d)(1) of the Securities Exchange Act of 1934.
    (b) Beneficial Ownership Table:

----------------------------------------------------------------------------------------------------------------
                        Name and address of                           Amount and nature of
    Title of class        beneficial owner     Amount and nature of   beneficial ownership    Percent of class
                               \(1)\           beneficial ownership     acquirable \(2)\            \(3)\
----------------------------------------------------------------------------------------------------------------
                       .....................  .....................  .....................  ....................
----------------------------------------------------------------------------------------------------------------

    (1) The address given in this column may be a business, mailing, or 
residential address. The address may be included in an appropriate 
footnote to the table rather than in this column.
    (2) This column must include the amount of equity securities each 
beneficial owner has the right to acquire using the manner specified in 
Rule 13d-3(d)(1) of the Securities Exchange Act of 1934. An appropriate 
footnote must be included if the column heading does not sufficiently 
describe the circumstances upon which such securities could be 
acquired.
    (3) This column must use the amounts contained in the two preceding 
columns to calculate the percent of class owned by such beneficial 
owner.

Item 13. Interest of Management and Others in Certain Transactions

    (a) Describe briefly any transactions or any currently proposed 
transactions during the issuer's last two completed fiscal years and 
the current fiscal year, to which the issuer or any of its subsidiaries 
was or is to be a participant and the amount involved exceeds $50,000 
for Tier 1 or the lesser of $120,000 and one percent of the average of 
the issuer's total assets at year end for the last two completed fiscal 
years for Tier 2, and in which any of the following persons had or is 
to have a direct or indirect material interest, naming the person and 
stating his or her relationship to the issuer, the nature of the 
person's interest in the transaction and, where practicable, the amount 
of such interest:
    (1) Any director or executive officer of the issuer;
    (2) Any nominee for election as a director;
    (3) Any securityholder named in answer to Item 12(a)(2);
    (4) If the issuer was incorporated or organized within the past 
three years, any promoter of the issuer; or
    (5) Any immediate family member of the above persons. An 
``immediate family member'' of a person means such person's child, 
stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-
in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law, or 
any person (other than a tenant or employee) sharing such person's 
household.
    Instructions to Item 13(a):
    1. For purposes of calculating the amount of the transaction 
described above, all periodic installments in the case of any lease or 
other agreement providing for periodic payments must be aggregated to 
the extent they occurred within the time period described in this item.
    2. No information need be given in answer to this item as to any 
transaction where:
    (a) The rates of charges involved in the transaction are determined 
by competitive bids, or the transaction involves the rendering of 
services as a common or contract carrier at rates or charges fixed in 
conformity with law or governmental authority;
    (b) The transaction involves services as a bank depositary of 
funds, transfer agent, registrar, trustee under a trust indenture, or 
similar services;
    (c) The interest of the specified person arises solely from the 
ownership of securities of the issuer and the specified person receives 
no extra or special benefit not shared on a pro-rata basis by all of 
the holders of securities of the class.
    3. This item calls for disclosure of indirect as well as direct 
material interests in transactions. A person who has a position or 
relationship with a firm, corporation, or other entity which engages in 
a transaction with the issuer or its subsidiaries may have an indirect 
interest in such transaction by reason of the position or relationship. 
However, a person is deemed not to have a material indirect interest in 
a transaction within the meaning of this item where:
    (a) the interest arises only (i) from the person's position as a 
director of another corporation or organization (other than a 
partnership) that is a party to the transaction, or (ii) from the 
direct or indirect ownership by the person and all other persons 
specified in paragraphs (1) through (5) of this item, in the aggregate, 
of less than a 10 percent equity interest in another person (other than 
a partnership) that is a party to the transaction, or (iii) from both 
such position and ownership;
    (b) the interest arises only from the person's position as a 
limited partner in a partnership in which the person and all other 
persons specified in paragraphs (1) through (5) of this item had an 
interest of less than 10 percent; or
    (c) the interest of the person arises solely from the holding of an 
equity interest (unless the equity interest confers management rights 
similar to a general partner interest) or a creditor interest in 
another person that is a party to the transaction with the issuer or 
any of its subsidiaries and the transaction is not material to the 
other person.
    4. Include the name of each person whose interest in any 
transaction is described and the nature of the relationships by reason 
of which such interest is required to be described. The amount of the 
interest of any specified person must be computed without regard to the 
amount of the profit or loss involved in the transaction. Where it is 
not practicable to state the approximate amount of the interest, the 
approximate amount involved in the transaction must be disclosed.
    5. Information must be included as to any material underwriting 
discounts and commissions upon the sale of securities by the issuer 
where any of the specified persons was or is to be a principal 
underwriter or is a controlling person, or member, of a firm which was 
or is to be a principal underwriter. Information need not be given 
concerning ordinary management fees paid by underwriters to a managing 
underwriter pursuant to an agreement among underwriters, the parties to 
which do not include the issuer or its subsidiaries.
    6. As to any transaction involving the purchase or sale of assets 
by or to any issuer or any subsidiary, otherwise than in the ordinary 
course of business, state the cost of the assets to the purchaser and, 
if acquired by the seller within two years before the transaction, the 
cost to the seller.
    7. Information must be included in answer to this item with respect 
to transactions not excluded above which

[[Page 21912]]

involve compensation from the issuer or its subsidiaries, directly or 
indirectly, to any of the specified persons for services in any 
capacity unless the interest of such persons arises solely from the 
ownership individually and in the aggregate of less than 10 percent of 
any class of equity securities of another corporation furnishing the 
services to the issuer or its subsidiaries.
    (b) If any expert named in the offering statement as having 
prepared or certified any part of the offering statement was employed 
for such purpose on a contingent basis or, at the time of such 
preparation or certification or at any time thereafter, had a material 
interest in the issuer or any of its parents or subsidiaries or was 
connected with the issuer or any of its subsidiaries as a promoter, 
underwriter, voting trustee, director, officer or employee, describe 
the nature of such contingent basis, interest or connection.

Item 14. Securities Being Offered

    (a) If capital stock is being offered, state the title of the class 
and furnish the following information regarding all classes of capital 
stock outstanding:
    (1) Outline briefly: (i) dividend rights; (ii) voting rights; (iii) 
liquidation rights; (iv) preemptive rights; (v) conversion rights; (vi) 
redemption provisions; (vii) sinking fund provisions; (viii) liability 
to further calls or to assessment by the issuer; (ix) any 
classification of the Board of Directors, and the impact of 
classification where cumulative voting is permitted or required; (x) 
restrictions on alienability of the securities being offered; (xi) any 
provision discriminating against any existing or prospective holder of 
such securities as a result of such securityholder owning a substantial 
amount of securities; and (xii) any rights of holders that may be 
modified otherwise than by a vote of a majority or more of the shares 
outstanding, voting as a class.
    (2) Briefly describe potential liabilities imposed on 
securityholders under state statutes or foreign law, for example, to 
employees of the issuer, unless such disclosure would be immaterial 
because the financial resources of the issuer or other factors are such 
as to make it unlikely that the liability will ever be imposed.
    (3) If preferred stock is to be offered or is outstanding, describe 
briefly any restriction on the repurchase or redemption of shares by 
the issuer while there is any arrearage in the payment of dividends or 
sinking fund installments. If there is no such restriction, so state.
    (b) If debt securities are being offered, outline briefly the 
following:
    (1) Provisions with respect to interest, conversion, maturity, 
redemption, amortization, sinking fund or retirement.
    (2) Provisions with respect to the kind and priority of any lien 
securing the issue, together with a brief identification of the 
principal properties subject to such lien.
    (3) Material affirmative and negative covenants.
    Instruction to Item 14(b):
    In the case of secured debt there must be stated: (i) the 
approximate amount of unbonded property available for use against the 
issuance of bonds, as of the most recent practicable date, and (ii) 
whether the securities being issued are to be issued against such 
property, against the deposit of cash, or otherwise.
    (c) If securities described are to be offered pursuant to warrants, 
rights, or convertible securities, state briefly:
    (1) the amount of securities issuable upon the exercise or 
conversion of such warrants, convertible securities or rights;
    (2) the period during which and the price at which the warrants, 
convertible securities or rights are exercisable;
    (3) the amounts of warrants, convertible securities or rights 
outstanding; and
    (4) any other material terms of such securities.
    (d) In the case of any other kind of securities, include a brief 
description with comparable information to that required in (a), (b) 
and (c) of Item 14.

Part F/S

(a) General Rules

    (1) The appropriate financial statements set forth below of the 
issuer, or the issuer and its predecessors or any businesses to which 
the issuer is a successor must be filed as part of the offering 
statement and included in the offering circular that is distributed to 
investors.
    (2) Unless the issuer is a Canadian company, financial statements 
must be prepared in accordance with generally accepted accounting 
principles in the United States (US GAAP). If the issuer is a Canadian 
company, such financial statements must be prepared in accordance with 
either US GAAP or International Financial Reporting Standards (IFRS) as 
issued by the International Accounting Standards Board (IASB). If the 
financial statements comply with IFRS, such compliance must be 
explicitly and unreservedly stated in the notes to the financial 
statements and if the financial statements are audited, the auditor's 
report must include an opinion on whether the financial statements 
comply with IFRS as issued by the IASB.
    (3) The issuer may elect to delay complying with any new or revised 
financial accounting standard until the date that a company that is not 
an issuer (as defined under section 2(a) of the Sarbanes-Oxley Act of 
2002 (15 U.S.C. 7201(a)) is required to comply with such new or revised 
accounting standard, if such standard also applies to companies that 
are not issuers. Issuers electing such extension of time accommodation 
must disclose it at the time the issuer files its offering statement 
and apply the election to all standards. Issuers electing not to use 
this accommodation must forgo this accommodation for all financial 
accounting standards and may not elect to rely on this accommodation in 
any future filings.

(b) Financial Statements for Tier 1 Offerings

    (1) The financial statements prepared pursuant to this paragraph 
(b), including (b)(7), need not be prepared in accordance with 
Regulation S-X.
    (2) The financial statements prepared pursuant to paragraph (b), 
including (b)(7), need not be audited. If the financial statements are 
not audited, they shall be labeled as ``unaudited''. However, if an 
audit of these financial statements is obtained for other purposes and 
that audit was performed in accordance with either U.S. generally 
accepted auditing standards or the Standards of the Public Company 
Accounting Oversight Board by an auditor that is independent pursuant 
to either the independence standards of the American Institute of 
Certified Public Accountants (AICPA) or Rule 2-01 of Regulation S-X, 
those audited financial statements must be filed, and an audit opinion 
complying with Rule 2-02 of Regulation S-X must be filed along with 
such financial statements. The auditor may, but need not, be registered 
with the Public Company Accounting Oversight Board.
    (3) Consolidated Balance Sheets. Age of balance sheets at filing 
and at qualification:
    (A) If the filing is made, or the offering statement is qualified, 
more than three months but no more than nine months after the most 
recently completed fiscal year end, include a balance sheet as of the 
two most recently completed fiscal year ends.
    (B) If the filing is made, or the offering statement is qualified, 
more than nine months after the most recently completed fiscal year 
end, include a balance sheet as of the two most

[[Page 21913]]

recently completed fiscal year ends and an interim balance sheet as of 
a date no earlier than six months after the most recently completed 
fiscal year end.
    (C) If the filing is made, or the offering statement is qualified, 
within three months after the most recently completed fiscal year end, 
include a balance sheet as of the two fiscal year ends preceding the 
most recently completed fiscal year end and an interim balance sheet as 
of a date no earlier than six months after the date of the most recent 
fiscal year end balance sheet that is required.
    (D) If the filing is made, or the offering statement is qualified, 
during the period from inception until three months after reaching the 
annual balance sheet date for the first time, include a balance sheet 
as of a date within nine months of filing or qualification.
    (4) Statements of comprehensive income, cash flows, and changes in 
stockholders' equity. File consolidated statements of income, cash 
flows, and changes in stockholders' equity for each of the two fiscal 
years preceding the date of the most recent balance sheet being filed 
or such shorter period as the issuer has been in existence. If a 
consolidated interim balance sheet is required by (b)(3) above, 
consolidated interim statements of income and cash flows shall be 
provided and must cover at least the first six months of the issuer's 
fiscal year and the corresponding period of the preceding fiscal year.
    (5) Interim financial statements. Interim financial statements may 
be condensed as described in Rule 8-03(a) of Regulation S-X. The 
interim income statements must be accompanied by a statement that in 
the opinion of management all adjustments necessary in order to make 
the interim financial statements not misleading have been included.
    (6) Oil and Gas Producing Activities. Issuers engaged in oil and 
gas producing activities must follow the financial accounting and 
reporting standards specified in Rule 4-10 of Regulation S-X.
    (7) Financial Statements of Other Entities. The circumstances 
described below may require you to file financial statements of other 
entities in the offering statement. The financial statements of other 
entities must be presented for the same periods as if the other entity 
was the issuer as described above in paragraphs (b)(3) and (b)(4) 
unless a shorter period is specified by the rules below. The financial 
statement of other entities shall follow the same audit requirement as 
paragraph (b)(2) of this Part F/S.
    (i) Financial Statements of Guarantors and Issuers of Guaranteed 
Securities. Financial statements of a subsidiary that issues securities 
guaranteed by the parent or guarantees securities issued by the parent 
must be presented as required by Rule 3-10 of Regulation S-X.
    (ii) Financial Statements of Affiliates Whose Securities 
Collateralize an Issuance. Financial statements for an issuer's 
affiliates whose securities constitute a substantial portion of the 
collateral for any class of securities being offered must be presented 
as required by Rule 3-16 of Regulation S-X.
    (iii) Financial Statements of Businesses Acquired or to be 
Acquired. File the financial statements required by Rule 8-04 of 
Regulation S-X.
    (iv) Pro Forma Financial Information. If financial statements are 
presented under paragraph (b)(7)(iii) above, file pro forma information 
showing the effects of the acquisition as described in Rule 8-05 of 
Regulation S-X.
    (v) Real Estate Operations Acquired or to be Acquired. File the 
financial information required by Rule 8-06 of Regulation S-X.
    Instructions to paragraph (b) in Part F/S:
    1. Issuers should refer to Rule 257(b)(2) to determine whether a 
special financial report will be required after qualification of the 
offering statement.
    2. If the last day that the financial statements included in the 
offering statement can be accepted, according to the age requirements 
of this item falls on a Saturday, Sunday, or holiday, such offering 
statement may be filed on the first business day following the last day 
of the specified period.
    3. As an alternative, an issuer may--but need not--elect to comply 
with the provisions of paragraph (c).

(c) Financial Statement Requirements for Tier 2 Offerings

    (1) In addition to the general rules in paragraph (a), provide the 
financial statements required by paragraph (b) of this Part F/S, except 
the following rules should be followed in the preparation of the 
financial statements:
    (i) The issuer and, when applicable, other entities for which 
financial statements are required, must comply with Article 8 of 
Regulation S-X, as if it was conducting a registered offering on Form 
S-1, except the age of interim financial statements may follow 
paragraphs (b)(3)-(4) of this Part F/S.
    (ii) Audited financial statements are required for Tier 2 offerings 
for the issuer and, when applicable, for financial statements of other 
entities. However, interim financial statements may be unaudited.
    (iii) The audit must be conducted in accordance with either U.S. 
Generally Accepted Auditing Standards or the standards of the Public 
Company Accounting Oversight Board (United States) and the report and 
qualifications of the independent accountant shall comply with the 
requirements of Article 2 of Regulation S-X. Accounting firms 
conducting audits for the financial statements included in the offering 
circular may, but need not, be registered with the Public Company 
Accounting Oversight Board.

PART III--EXHIBITS

Item 16. Index to Exhibits

    (a) An exhibits index must be presented at the beginning of Part 
III.
    (b) Each exhibit must be listed in the exhibit index according to 
the number assigned to it under Item 17 below.
    (c) For incorporation by reference, please refer to General 
Instruction III of this Form.

Item 17. Description of Exhibits

    As appropriate, the following documents must be filed as exhibits 
to the offering statement.
    1. Underwriting agreement--Each underwriting contract or agreement 
with a principal underwriter or letter pursuant to which the securities 
are to be distributed; where the terms have yet to be finalized, 
proposed formats may be provided.
    2. Charter and bylaws--The charter and bylaws of the issuer or 
instruments corresponding thereto as currently in effect and any 
amendments thereto.
    3. Instruments defining the rights of securityholders--
    (a) All instruments defining the rights of any holder of the 
issuer's securities, including but not limited to (i) holders of equity 
or debt securities being issued; (ii) holders of long-term debt of the 
issuer, and of all subsidiaries for which consolidated or 
unconsolidated financial statements are required to be filed.
    (b) The following instruments need not be filed if the issuer 
agrees to file them with the Commission upon request: (i) instruments 
defining the rights of holders of long-term debt of the issuer and all 
of its subsidiaries for which consolidated financial statements are 
required to be filed if such debt is not being issued pursuant to this 
Regulation A offering and the total amount of such authorized issuance 
does not exceed 5% of the total assets of the issuer and its 
subsidiaries on a consolidated basis; (ii) any instrument

[[Page 21914]]

with respect to a class of securities that is to be retired or redeemed 
before the issuance or upon delivery of the securities being issued 
pursuant to this Regulation A offering and appropriate steps have been 
taken to assure such retirement or redemption; and (iii) copies of 
instruments evidencing scrip certificates or fractions of shares.
    4. Subscription agreement--The form of any subscription agreement 
to be used in connection with the purchase of securities in this 
offering.
    5. Voting trust agreement--Any voting trust agreements and 
amendments.
    6. Material contracts
    (a) Every contract not made in the ordinary course of business that 
is material to the issuer and is to be performed in whole or in part at 
or after the filing of the offering statement or was entered into not 
more than two years before such filing. Only contracts need be filed as 
to which the issuer or subsidiary of the issuer is a party or has 
succeeded to a party by assumption or assignment or in which the issuer 
or such subsidiary has a beneficial interest. Schedules (or similar 
attachments) to material contracts may be excluded if not material to 
an investment decision or if the material information contained in such 
schedules is otherwise disclosed in the agreement or the offering 
statement. The material contract filed must contain a list briefly 
identifying the contents of all omitted schedules, together with an 
agreement to furnish supplementally a copy of any omitted schedule to 
the Commission upon request.
    (b) If the contract is such as ordinarily accompanies the kind of 
business conducted by the issuer and its subsidiaries, it is made in 
the ordinary course of business and need not be filed unless it falls 
within one or more of the following categories, in which case it must 
be filed except where immaterial in amount or significance: (i) any 
contract to which directors, officers, promoters, voting trustees, 
securityholders named in the offering statement, or underwriters are 
parties, except where the contract merely involves the purchase or sale 
of current assets having a determinable market price, at such market 
price; (ii) any contract upon which the issuer's business is 
substantially dependent, as in the case of continuing contracts to sell 
the major part of the issuer's products or services or to purchase the 
major part of the issuer's requirements of goods, services or raw 
materials or any franchise or license or other agreement to use a 
patent, formula, trade secret, process or trade name upon which the 
issuer's business depends to a material extent; (iii) any contract 
calling for the acquisition or sale of any property, plant or equipment 
for a consideration exceeding 15% of such fixed assets of the issuer on 
a consolidated basis; or (iv) any material lease under which a part of 
the property described in the offering statement is held by the issuer.
    (c) Any management contract or any compensatory plan, contract or 
arrangement including, but not limited to, plans relating to options, 
warrants or rights, pension, retirement or deferred compensation or 
bonus, incentive or profit sharing (or if not set forth in any formal 
document, a written description) is deemed material and must be filed 
except for the following: (i) ordinary purchase and sales agency 
agreements; (ii) agreements with managers of stores in a chain 
organization or similar organization; (iii) contracts providing for 
labor or salesperson's bonuses or payments to a class of 
securityholders, as such; (iv) any compensatory plan, contract or 
arrangement that pursuant to its terms is available to employees 
generally and that in operation provides for the same method of 
allocation of benefits between management and non-management 
participants.
    7. Plan of acquisition, reorganization, arrangement, liquidation, 
or succession--Any material plan of acquisition, disposition, 
reorganization, readjustment, succession, liquidation or arrangement 
and any amendments thereto described in the offering statement. 
Schedules (or similar attachments) to these exhibits must not be filed 
unless such schedules contain information that is material to an 
investment decision and that is not otherwise disclosed in the 
agreement or the offering statement. The plan filed must contain a list 
briefly identifying the contents of all omitted schedules, together 
with an agreement to furnish supplementally a copy of any omitted 
schedule to the Commission upon request.
    8. Escrow agreements--Any escrow agreement or similar arrangement 
which has been executed in connection with the Regulation A offering.
    9. Letter re change in certifying accountant--A letter from the 
issuer's former independent accountant regarding its concurrence or 
disagreement with the statements made by the issuer in the current 
report concerning the resignation or dismissal as the issuer's 
principal accountant.
    10. Power of attorney--If any name is signed to the offering 
statement pursuant to a power of attorney, signed copies of the power 
of attorney must be filed. Where the power of attorney is contained 
elsewhere in the offering statement or documents filed therewith, a 
reference must be made in the index to the part of the offering 
statement or document containing such power of attorney. In addition, 
if the name of any officer signing on behalf of the issuer is signed 
pursuant to a power of attorney, certified copies of a resolution of 
the issuer's board of directors authorizing such signature must also be 
filed. A power of attorney that is filed with the Commission must 
relate to a specific filing or an amendment thereto. A power of 
attorney that confers general authority may not be filed with the 
Commission.
    11. Consents--
    (a) Experts: The written consent of (i) any accountant, counsel, 
engineer, geologist, appraiser or any persons whose profession gives 
authority to a statement made by them and who is named in the offering 
statement as having prepared or certified any part of the document or 
is named as having prepared or certified a report or evaluation whether 
or not for use in connection with the offering statement; (ii) the 
expert that authored any portion of a report quoted or summarized as 
such in the offering statement, expressly stating their consent to the 
use of such quotation or summary; (iii) any persons who are referenced 
as having reviewed or passed upon any information in the offering 
statement, and that such information is being included on the basis of 
their authority or in reliance upon their status as experts.
    (b) All written consents must be dated and signed.
    12. Opinion re legality--An opinion of counsel as to the legality 
of the securities covered by the Offering Statement, indicating whether 
they will when sold, be legally issued, fully paid and non-assessable, 
and if debt securities, whether they will be binding obligations of the 
issuer.
    13. ``Testing the waters'' materials--Any written communication or 
broadcast script used under the authorization of Rule 255. Such 
materials need not be filed if they are substantively the same as 
materials previously filed with the offering statement.
    14. Appointment of agent for service of process--A Canadian issuer 
must file Form F-X.
    15. Additional exhibits--
    (a) Any non-public, draft offering statement previously submitted 
pursuant to Rule 252(d) and any related, non-public correspondence 
submitted by or on behalf of the issuer.

[[Page 21915]]

    (b) Any additional exhibits which the issuer may wish to file, 
which must be so marked as to indicate clearly the subject matters to 
which they refer.

SIGNATURES

    Pursuant to the requirements of Regulation A, the issuer certifies 
that it has reasonable grounds to believe that it meets all of the 
requirements for filing on Form 1-A and has duly caused this offering 
statement to be signed on its behalf by the undersigned, thereunto duly 
authorized, in the City of ____, State of ____, on ____ (date).

(Exact name of issuer as specified in its charter)_______--------------

By (Signature and Title)_______

    This offering statement has been signed by the following persons 
in the capacities and on the dates indicated.

(Signature)_______-----------------------------------------------------

(Title)_______---------------------------------------------------------

(Date)_______----------------------------------------------------------

    Instructions to Signatures:
    1. The offering statement must be signed by 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. If a signature is by a person on 
behalf of any other person, evidence of authority to sign must be filed 
with the offering statement, except where an executive officer signs on 
behalf of the issuer.
    2. The offering statement must be signed using a typed signature. 
Each signatory to the filing must also manually sign a signature page 
or other document authenticating, acknowledging or otherwise adopting 
his or her signature that appears in the filing. Such document must be 
executed before or at the time the filing is made and must be retained 
by the issuer for a period of five years. Upon request, the issuer must 
furnish to the Commission or its staff a copy of any or all documents 
retained pursuant to this section.
    3. The name and title of each person signing the offering statement 
must be typed or printed beneath the signature.

    Note:  The text of Form 1-A will not appear in the Code of 
Federal Regulations.


0
11. 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).

0
12. Add Form 1-K (referenced in Sec.  239.91) to read as follows:

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 1-K

GENERAL INSTRUCTIONS

A. Rules as to Use of Form 1-K.

    (1) This Form shall be used for annual reports pursuant to Rule 
257(b)(1) of Regulation A (Sec. Sec.  230.251-230.263).
    (2) Annual reports on this Form shall be filed within 120 calendar 
days after the end of the fiscal year covered by the report.
    (3) This Form also shall be used for special financial reports 
filed pursuant to Rule 257(b)(2)(i)(A) of Regulation A. Such special 
financial reports shall be filed and signed in the manner set forth in 
this Form, but otherwise need only provide Part I and the financial 
statements required by Rule 257(b)(2)(i)(A). Special financial reports 
filed using this Form shall be filed within 120 calendar days after the 
qualification date of the offering statement.

B. Preparation of Report.

    (1) Regulation A contains certain general requirements that are 
applicable to reports on any form, including amendments to reports. 
These general requirements should be carefully read and observed in the 
preparation and filing of reports on this Form.
    (2) This Form is not to be used as a blank form to be filled in, 
but only as a guide in the preparation of the report.
    (3) Except where information is required to be given for the fiscal 
year or as of a specified date, it shall be given as of the latest date 
reasonably practicable.
    (4) References in this Form to the items in Form 1-A are to the 
items set forth in Part II and Part III of Form 1-A, not Part I.
    (5) In addition to the information expressly required to be 
included in this Form, there shall be added such further material 
information, if any, as may be necessary to make the required 
statements, in light of the circumstances under which they are made, 
not misleading.

C. Signature and Filing of Report.

    (1) The report 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).
    (2) The report must be signed by the issuer, its principal 
executive officer, principal financial officer, principal accounting 
officer, and at least a majority of the members of its board of 
directors or other governing body. If a signature is by a person on 
behalf of any other person, evidence of authority to sign must be filed 
with the report, except where an executive officer signs on behalf of 
the issuer.
    (3) The report must be signed using a typed signature. Each 
signatory to the filing must also manually sign a signature page or 
other document authenticating, acknowledging or otherwise adopting his 
or her signature that appears in the filing. Such document must be 
executed before or at the time the filing is made and must be retained 
by the issuer for a period of five years. Upon request, the issuer must 
furnish to the Commission or its staff a copy of any or all documents 
retained pursuant to this paragraph.

D. Incorporation by Reference and Cross-Referencing.

    (1) An issuer may incorporate by reference to other documents 
previously submitted or filed on EDGAR. Cross-referencing within the 
report is also encouraged to avoid repetition of information. For 
example, you may respond to an item of this Form by providing a cross-
reference to the location of the information in the financial 
statements, instead of repeating such information. Descriptions of 
where the information incorporated by reference or cross-referenced can 
be found must be specific and must clearly identify the relevant 
document and portion thereof where such information can be found. For 
exhibits incorporated by reference, this description must be noted in 
the exhibits index for each relevant exhibit. All descriptions of where 
information incorporated by reference can be found must be accompanied 
by a separate hyperlink to the incorporated document on EDGAR. A 
hyperlink need not remain active after the filing of the report, except 
that amendments to the report must update any hyperlinks referred to in 
the amendment that are inactive.
    (2) Reference may not be made to any document if the portion of 
such document containing the pertinent information includes an 
incorporation by reference to another document. Incorporation by 
reference to documents not available on EDGAR is not permitted. 
Information shall not be incorporated by reference or cross-referenced 
in any case where such incorporation would render the statement or 
report incomplete, unclear, or confusing. Incorporating information

[[Page 21916]]

into the financial statements from elsewhere is not permitted.
    (3) If any substantive modification has occurred in the text of any 
document incorporated by reference since such document was filed, the 
issuer must file with the reference a statement containing the text and 
date of such modification.

PART I

NOTIFICATION

    The following information must be provided in the XML-based portion 
of Form 1-K available through the EDGAR portal and must be completed or 
updated before uploading each offering statement or amendment thereto. 
The format of Part I shown below may differ from the electronic version 
available on EDGAR. The electronic version of Part I will allow issuers 
to attach Part II for filing by means of EDGAR. All items must be 
addressed, unless otherwise indicated.
* * * * *
This Form 1-K is to provide an [ballot] Annual Report OR [ballot] 
Special Financial Report for the fiscal year ended______

Exact name of issuer as specified in the issuer's charter:______

Jurisdiction of incorporation/organization:______

I.R.S. Employer Identification Number:______

Address of Principal Executive Offices:

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

Phone: (_)-------------------------------------------------------------

Title of each class of securities issued pursuant to Regulation A:-----
-----------------------------------------------------------------------

Summary Information Regarding Prior Offerings and Proceeds

    The following information must be provided for any Regulation A 
offering that has terminated or completed prior to the filing of this 
Form 1-K, unless such information has been previously reported in a 
manner permissible under Rule 257. If such information has been 
previously reported, check this box [ballot]and leave the rest of Part 
I blank.

Commission File Number of the offering statement:______

Date of qualification of the offering statement:______

Date of commencement of the offering:______

Amount of securities qualified to be sold in the offering:______

Amount of securities sold in the offering:______

Price per security: $______

The portion of aggregate sales attributable to securities sold on 
behalf of the issuer: $_______

The portion of aggregate sales attributable to securities sold on 
behalf of selling securityholders: $_______

    Fees in connection with this offering and names of service 
providers:

 
                                                        Name of Service Provider                Fees
 
Underwriters:.......................................                  ____________                 $____________
Sales Commissions:..................................                  ____________                 $____________
Finders' Fees:......................................                  ____________                 $____________
Audit:..............................................                  ____________                 $____________
Legal:..............................................                  ____________                 $____________
Promoters:..........................................                  ____________                 $____________
Blue Sky Compliance:................................                  ____________                 $____________
 


CRD Number of any broker or dealer listed:______

Net proceeds to the issuer: $______

Clarification of responses (if necessary):______

PART II

INFORMATION TO BE INCLUDED IN REPORT

Item 1. Business

    Set forth the information required by Item 7 of Form 1-A.

Item 2. Management's Discussion and Analysis of Financial Condition and 
Results of Operations

    Set forth the information required by Item 9(a), (b) and (d) of 
Form 1-A for the most recent two completed fiscal years.

Item 3. Directors and Officers

    Set forth the information required by Items 10 and 11 of Form 1-A.

Item 4. Security Ownership of Management and Certain Securityholders

    Set forth the information required by Item 12 of Form 1-A.

Item 5. Interest of Management and Others in Certain Transactions

    Set forth the information required by Item 13 of Form 1-A.

Item 6. Other Information

    Set forth any information required to be disclosed in a report on 
Form 1-U during the last six months of the fiscal year covered by this 
Form 1-K, but not reported, whether or not otherwise required by this 
Form 1-K. If disclosure of such information is made under this item, it 
need not be repeated in a report on Form 1-U that would otherwise be 
required to be filed with respect to such information or in a 
subsequent report on Form 1-U.

Item 7. Financial Statements

    (a) The appropriate audited financial statements set forth below of 
the issuer, or the issuer and its predecessors or any businesses to 
which the issuer is a successor must be filed as part of the Form 1-K.
    (b) Unless the issuer is a Canadian company, financial statements 
must be prepared in accordance with generally accepted accounting 
principles in the United States (US GAAP). If the issuer is a Canadian 
company, such financial statements must be prepared in accordance with 
either US GAAP or International Financial Reporting Standards (IFRS) as 
issued by the International Accounting Standards Board (IASB). If the 
financial statements comply with IFRS, such compliance must be 
explicitly and unreservedly 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.
    (c) The audit of the financial statements must be conducted in 
accordance with either U.S. Generally Accepted Auditing Standards or 
the standards of the Public Company Accounting Oversight Board (United 
States) and the report and qualifications of the independent accountant 
shall comply with the requirements of Article 2 of Regulation S-X. 
Accounting firms conducting audits for the financial statements may, 
but need not, be registered with the Public Company Accounting 
Oversight Board.
    (d) Balance Sheet. There shall be filed an audited consolidated 
balance sheet as of the end of each of the most recent two fiscal 
years.

[[Page 21917]]

    (e) Statements of income, cash flows, and changes in stockholders' 
equity. File audited consolidated statements of income, cash flows, and 
changes in stockholders' equity for each of the two fiscal years 
preceding the date of the most recent balance sheet being filed or such 
shorter period as the issuer has been in existence.
    (f) Oil and Gas Producing Activities. Issuers engaged in oil and 
gas producing activities must follow the financial accounting and 
reporting standards specified in Rule 4-10 of Regulation S-X.
    (g) Financial Statements of Other Entities. The circumstances 
described below may require you to file financial statements of other 
entities. The financial statements of other entities must be presented 
for the same periods as the issuer's financial statements described 
above in paragraphs (d) and (e) unless a shorter period is specified by 
the rules below.
    (1) Financial Statements of Guarantors and Issuers of Guaranteed 
Securities. Financial statements of a subsidiary that issues securities 
guaranteed by the parent or guarantees securities issued by the parent 
must be presented as required by Rule 3-10 of Regulation S-X.
    (2) Financial Statements of Affiliates Whose Securities 
Collateralize an Issuance. Financial statements for an issuer's 
affiliates whose securities constitute a substantial portion of the 
collateral for any class of securities being offered must be presented 
as required by Rule 3-16 of Regulation S-X.

Item 8. Exhibits

    (a) An exhibits index must be presented immediately preceding the 
first signature page of the report.
    (b) File, as exhibits to this Form, the exhibits required by Form 
1-A, except for the exhibits required by paragraphs 1, 12, and 13 of 
Item 17.

SIGNATURES

    Pursuant to the requirements of Regulation A, the issuer has duly 
caused this report to be signed on its behalf by the undersigned, 
thereunto duly authorized.

(Exact name of issuer as specified in its charter)---------------------
-----------------------------------------------------------------------

By (Signature and Title)-----------------------------------------------

Date-------------------------------------------------------------------

    Pursuant to the requirements of Regulation A, this report has 
been signed below by the following persons on behalf of the issuer 
and in the capacities and on the dates indicated.

By (Signature and Title)-----------------------------------------------

Date-------------------------------------------------------------------

By (Signature and Title)-----------------------------------------------

Date-------------------------------------------------------------------


    Note:  The text of Form 1-K will not appear in the Code of 
Federal Regulations.


0
13. Add Sec.  239.92 to read as follows:


Sec.  239.92  Form 1-SA.

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

0
14. Add Form 1-SA (referenced in Sec.  239.92) to read as follows:

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 1-SA

[ ] SEMIANNUAL REPORT PURSUANT TO REGULATION A or

[ ] SPECIAL FINANCIAL REPORT PURSUANT TO REGULATION A

For the fiscal semiannual period ended---------------------------------
-----------------------------------------------------------------------
(Exact name of issuer as specified in its charter)
State or other jurisdiction of incorporation or organization-----------

(I.R.S. Employer Identification No.)-----------------------------------

(Full mailing address of principal executive offices)------------------

(Issuer's telephone number, including area code)-----------------------

GENERAL INSTRUCTIONS

A. Rules as to Use of Form 1-SA.

    (1) This Form shall be used for semiannual reports pursuant to Rule 
257(b)(3) of Regulation A (Sec. Sec.  230.251-230.263).
    (2) Semiannual reports on this Form shall be filed within 90 
calendar days after the end of the semiannual period covered by the 
report.
    (3) This Form also shall be used for special financial reports 
filed pursuant to Rule 257(b)(2)(i)(B) of Regulation A. Such special 
financial reports shall be filed and signed in the manner set forth in 
this Form, but otherwise need only provide the cover page and financial 
statements required by Rule 257(b)(2)(i)(B). Special financial reports 
filed using this Form shall be filed within 90 calendar days after the 
qualification date of the offering statement.

B. Preparation of Report.

    (1) Regulation A contains certain general requirements that are 
applicable to reports on any form, including amendments to reports. 
These general requirements should be carefully read and observed in the 
preparation and filing of reports on this Form.
    (2) This Form is not to be used as a blank form to be filled in, 
but only as a guide in the preparation of the report.
    (3) In addition to the information expressly required to be 
included in this Form, there shall be added such further material 
information, if any, as may be necessary to make the required 
statements, in light of the circumstances under which they are made, 
not misleading.

C. Signature and Filing of Report.

    (1) The report 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).
    (2) The report must be signed by the issuer, its principal 
executive officer, principal financial officer and principal accounting 
officer. If a signature is by a person on behalf of any other person, 
evidence of authority to sign must be filed with the report, except 
where an executive officer signs on behalf of the issuer.
    (3) The report must be signed using a typed signature. Each 
signatory to the filing must also manually sign a signature page or 
other document authenticating, acknowledging or otherwise adopting his 
or her signature that appears in the filing. Such document must be 
executed before or at the time the filing is made and must be retained 
by the issuer for a period of five years. Upon request, the issuer must 
furnish to the Commission or its staff a copy of any or all documents 
retained pursuant to this paragraph.

D. Incorporation by Reference and Cross-Referencing.

    (1) An issuer may incorporate by reference to other documents 
previously submitted or filed on EDGAR. Cross-referencing within the 
report is also encouraged to avoid repetition of information. For 
example, you may respond to an item of this Form by providing a cross-
reference to the location of the information in the financial 
statements, instead of repeating such information. Descriptions of 
where the information incorporated by reference or cross-referenced can 
be found must be specific and must clearly identify the relevant 
document and portion thereof where such information can be found. For 
exhibits incorporated by reference, this description must be noted in 
the exhibits index for each relevant exhibit. All such descriptions of 
where information incorporated by reference can be found must be 
accompanied by

[[Page 21918]]

a separate hyperlink to the incorporated document on EDGAR. A hyperlink 
need not remain active after the filing of the report, except that 
amendments to the report must update any hyperlinks referred to in the 
amendment that are inactive.
    (2) Reference may not be made to any document if the portion of 
such document containing the pertinent information includes an 
incorporation by reference to another document. Incorporation by 
reference to documents not available on EDGAR is not permitted. 
Information shall not be incorporated by reference or cross-referenced 
in any case where such incorporation would render the statement or 
report incomplete, unclear, or confusing. Incorporating information 
into the financial statements from elsewhere is not permitted.
    (3) If any substantive modification has occurred in the text of any 
document incorporated by reference since such document was filed, the 
issuer must file with the reference a statement containing the text and 
date of such modification.

INFORMATION TO BE INCLUDED IN REPORT

Item 1. Management's Discussion and Analysis of Financial Condition and 
Results of Operations

    Set forth the information required by Item 9(a), (b), and (d) of 
Form 1-A for the interim period for which financial statements are 
required by Item 3 below.

Item 2. Other Information

    Set forth any information required to be disclosed in a report on 
Form 1-U during the semiannual period covered by this Form 1-SA, but 
not reported, whether or not otherwise required by this Form 1-SA. If 
disclosure of such information is made under this item, it need not be 
repeated in a report on Form 1-U that would otherwise be required to be 
filed with respect to such information or in a subsequent report on 
Form 1-U.

Item 3. Financial Statements

    The appropriate financial statements set forth below of the issuer, 
or the issuer and its predecessors or any businesses to which the 
issuer is a successor must be filed as part of the Form 1-SA.
    Unless the issuer is a Canadian company, financial statements must 
be prepared on a consolidated basis in accordance with generally 
accepted accounting principles in the United States (US GAAP). If the 
issuer is a Canadian company, such financial statements must be 
prepared in accordance with either US GAAP or International Financial 
Reporting Standards (IFRS) as issued by the International Accounting 
Standards Board (IASB). If the financial statements comply with IFRS as 
issued by the IASB, such compliance must be explicitly and unreservedly 
stated in the notes to the financial statements.
    The financial statements included pursuant to this item may be 
condensed, unaudited, and are not required to be reviewed. For 
additional guidance on presentation of the financial statements refer 
to Rule 8-03(a) of Regulation S-X. The financial statements must 
include the following:
    (a) An interim consolidated balance sheet as of the end of the six 
month period covered by this report and a balance sheet as of the end 
of the preceding fiscal year. An interim balance sheet as of the end of 
the corresponding six month interim period of the preceding fiscal year 
need not be provided unless necessary for an understanding of the 
impact of seasonal fluctuations on the issuer's financial condition.
    (b) Interim consolidated statements of income must be provided for 
the six month interim period covered by this report and for the 
corresponding period of the preceding fiscal year. Income statements 
must be accompanied by a statement that in the opinion of management 
all adjustments necessary in order to make the interim financial 
statements not misleading have been included.
    (c) Interim statements of cash flows must be provided for the six 
month interim period covered by this report and for the corresponding 
period of the preceding fiscal year.
    (d) Footnote and other disclosures should be provided as needed for 
fair presentation and to ensure that the financial statements are not 
misleading. Refer to Rule 8-03(b) of Regulation S-X for examples of 
disclosures that may be needed.
    (e) Financial Statements of Guarantors and Issuers of Guaranteed 
Securities. Financial statements of a subsidiary that issues securities 
guaranteed by the parent or guarantees securities issued by the parent 
must be presented as required by Rule 3-10 of Regulation S-X, except 
that the periods presented are those required by this item and the 
financial statements need not be audited.

Item 4. Exhibits

    (a) An exhibits index must be presented immediately preceding the 
first signature page of the report.
    (b) File, as exhibits to this Form, the exhibits required by Form 
1-A, except for the exhibits required by paragraphs 1, 12, and 13 of 
Item 17.

SIGNATURES

    Pursuant to the requirements of Regulation A, the issuer has duly 
caused this report to be signed on its behalf by the undersigned, 
thereunto duly authorized.

(Exact name of issuer as specified in its charter)---------------------

By (Signature and Title)-----------------------------------------------

Date-------------------------------------------------------------------

    Pursuant to the requirements of Regulation A, this report has 
been signed below by the following persons on behalf of the issuer 
and in the capacities and on the dates indicated.

By (Signature and Title)-----------------------------------------------

Date-------------------------------------------------------------------

By (Signature and Title)-----------------------------------------------

Date-------------------------------------------------------------------


    Note:  The text of Form 1-SA will not appear in the Code of 
Federal Regulations.


0
15. Add Sec.  239.93 to read as follows:


Sec.  239.93  Form 1-U.

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

0
16. Add Form 1-U (referenced in Sec.  239.92) to read as follows:

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 1-U

CURRENT REPORT PURSUANT TO REGULATION A

Date of Report (Date of earliest event reported)-----------------------

(Exact name of issuer as specified in its charter)---------------------

State or other jurisdiction of incorporation or organization-----------

(I.R.S. Employer Identification No.)-----------------------------------

(Full mailing address of principal executive offices)------------------

(Issuer's telephone number, including area code)-----------------------

Title of each class of securities issued pursuant to Regulation A:-----
-----------------------------------------------------------------------

GENERAL INSTRUCTIONS

A. Rules as to Use of Form 1-U.

    (1) This Form shall be used for current reports pursuant to Rule 
257(b)(4) of Regulation A (Sec. Sec.  230.251-230.263).
    (2) A report on this Form is required to be filed, as applicable, 
upon the occurrence of any one or more of the events specified in Items 
1--9 of this Form. Unless otherwise specified, a

[[Page 21919]]

report is to be filed within four business days after occurrence of the 
event. If the event occurs on a Saturday, Sunday, or holiday on which 
the Commission is not open for business, then the four business day 
period shall begin to run on, and include, the first business day 
thereafter.
    (3) If the issuer previously has provided substantially the same 
information as required by this Form in a report required by Rule 
257(b) of Regulation A, the issuer need not make an additional report 
of the information on this Form. To the extent that an item calls for 
disclosure of developments concerning a previously reported event or 
transaction, any information required in the new report or amendment 
about the previously reported event or transaction may be provided by 
incorporation by reference to the previously filed report, if a 
hyperlink to such report as filed with the Commission is included.
    (4) Copies of agreements, amendments or other documents or 
instruments are not required to be filed as exhibits to the Form 1-U 
unless specifically required by the applicable item. This instruction 
does not affect the requirement to otherwise file such agreements, 
amendments or other documents or instruments, including as exhibits to 
offering statements and periodic reports pursuant to the requirements 
of Regulation A.

B. Preparation of Report.

    (1) Regulation A contains certain general requirements which are 
applicable to reports on any form, including amendments to reports. 
These general requirements should be carefully read and observed in the 
preparation and filing of reports on this Form.
    (2) This Form is not to be used as a blank form to be filled in, 
but only as a guide in the preparation of the report. Nevertheless, the 
report shall contain the number and caption of each applicable item, 
but the text of such item may be omitted. All items that are not 
required to be answered in a particular report may be omitted and no 
reference thereto need be made in the report. All instructions should 
also be omitted.
    (3) In addition to the information expressly required to be 
included in this Form, there shall be added such further material 
information, if any, as may be necessary to make the required 
statements, in light of the circumstances under which they are made, 
not misleading.

C. Signature and Filing of Report.

    (1) The report 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).
    (2) The report must be signed by an officer duly authorized to sign 
on behalf of the issuer. The report must be signed using a typed 
signature. The signatory to the filing must also manually sign a 
signature page or other document authenticating, acknowledging or 
otherwise adopting his or her signature that appears in the filing. 
Such document must be executed before or at the time the filing is made 
and must be retained by the issuer for a period of five years. Upon 
request, the issuer must furnish to the Commission or its staff a copy 
of any or all documents retained pursuant to this paragraph.

D. Incorporation by Reference and Cross-Referencing.

    (1) An issuer may incorporate by reference to other documents 
previously submitted or filed on EDGAR. Cross-referencing within the 
report is also encouraged to avoid repetition of information. For 
example, you may respond to an item of this Form by providing a cross-
reference to the location of the information in another item, instead 
of repeating such information. Descriptions of where the information 
incorporated by reference or cross-referenced can be found must be 
specific and must clearly identify the relevant document and portion 
thereof where such information can be found. For exhibits incorporated 
by reference, this description must be noted in the exhibits index for 
each relevant exhibit. All such descriptions of where information 
incorporated by reference can be found must be accompanied by a 
separate hyperlink to the incorporated document on EDGAR. A hyperlink 
need not remain active after the filing of the report, except that 
amendments to the report must update any hyperlinks referred to in the 
amendment that are inactive.
    (2) Reference may not be made to any document if the portion of 
such document containing the pertinent information includes an 
incorporation by reference to another document. Incorporation by 
reference to documents not available on EDGAR is not permitted. 
Information shall not be incorporated by reference or cross-referenced 
in any case where such incorporation would render the statement or 
report incomplete, unclear, or confusing. Incorporating information 
into any financial statements from elsewhere is not permitted.
    (3) If any substantive modification has occurred in the text of any 
document incorporated by reference since such document was filed, the 
issuer must file with the reference a statement containing the text and 
date of such modification.

INFORMATION TO BE INCLUDED IN THE REPORT

Item 1. Fundamental Changes

    (a) If the issuer has entered into or terminated a material 
definitive agreement that has resulted in or would reasonably be 
expected to result in a fundamental change to the nature of its 
business or plan of operations, disclose the following information to 
the extent applicable:
    (1) the date on which the agreement was entered into, amended, or 
terminated, the identity of the parties to the agreement or amendment, 
and a brief description of any material relationship between the issuer 
or its affiliates and any of the parties (other than the relationship 
created by the material definitive agreement or amendment);
    (2) a brief description of the material terms and conditions of the 
agreement;
    (3) a brief description of the material circumstances surrounding 
the termination; and
    (4) any material early termination penalties incurred by the issuer 
due to a termination.
    (b) For purposes of this item, a material definitive agreement 
means an agreement that provides for obligations that are material to 
and enforceable against the issuer, or rights that are material to the 
issuer and enforceable by the issuer against one or more other parties 
to the agreement, in each case whether or not subject to conditions.
    (c) File any material definitive agreement disclosed pursuant to 
this item as an exhibit to the report on this Form.
    Instructions to Item 1:
    1. A material definitive agreement that is not made in the ordinary 
course of business is not necessarily required to be disclosed under 
this item if it does not result in, and would not reasonably be 
expected to result in, a fundamental change to the nature of the 
issuer's business or plan of operations.
    2. Without limiting the generality of the foregoing and solely for 
the purposes of this Item 1, a material definitive agreement is deemed 
to result in a fundamental change if it involves any of the following:

[[Page 21920]]

    a. An acquisition transaction for which the purchase price, as 
defined by U.S. GAAP or IFRS, exceeds fifty-percent of the total 
consolidated assets of the issuer as of the end of the most recently 
completed fiscal year. If the acquirer transferred assets to the 
acquiree than the carrying value of those assets should be excluded 
from the purchase price;
    b. A merger, consolidation, acquisition or similar transaction that 
requires approval by the issuer's securityholders; or
    c. Any contract upon which the issuer's business is substantially 
dependent, as in the case of continuing contracts to sell the major 
part of the issuer's products or services or to purchase the major part 
of the issuer's requirements of goods, services or raw materials or any 
franchise or license or other agreement to use a patent, formula, trade 
secret, process or trade name upon which the issuer's business is 
substantially dependent.
    3. An issuer must provide disclosure under this item if the issuer 
succeeds as a party to the agreement or amendment to the agreement by 
assumption or assignment (other than in connection with a merger or 
acquisition or similar transaction that is otherwise reported pursuant 
to this item).
    4. No disclosure under this item is required regarding the 
termination of a material definitive agreement if:
    a. The agreement terminated on its stated termination date, or as a 
result of all parties completing their obligations under such 
agreement.
    b. Only negotiations or discussions regarding termination of a 
material definitive agreement are being conducted and the agreement has 
not been terminated.
    c. The issuer believes in good faith that the material definitive 
agreement has not been terminated, unless the issuer has received a 
notice of termination pursuant to the terms of agreement.

Item 2. Bankruptcy or Receivership

    (a) If a receiver, fiscal agent or similar officer has been 
appointed for an issuer or its parent, in a proceeding under the U.S. 
Bankruptcy Code or in any other proceeding under state, federal, or 
Canadian laws, in which a court or governmental authority has assumed 
jurisdiction over substantially all of the assets or business of the 
issuer or its parent, or if such jurisdiction has been assumed by 
leaving the existing directors and officers in possession but subject 
to the supervision and orders of a court or governmental authority, 
disclose the following information:
    (1) the name or other identification of the proceeding;
    (2) the identity of the court or governmental authority;
    (3) the date that jurisdiction was assumed; and
    (4) the identity of the receiver, fiscal agent or similar officer 
and the date of his or her appointment.
    (b) If an order confirming a plan of reorganization, arrangement or 
liquidation has been entered by a court or governmental authority 
having supervision or jurisdiction over substantially all of the assets 
or business of the issuer or its parent, disclose the following:
    (1) the identity of the court or governmental authority;
    (2) the date that the order confirming the plan was entered by the 
court or governmental authority;
    (3) a summary of the material features of the plan;
    (4) the number of shares or other units of the issuer or its parent 
issued and outstanding, the number reserved for future issuance in 
respect of claims and interests filed and allowed under the plan, and 
the aggregate total of such numbers; and
    (5) information as to the assets and liabilities of the issuer or 
its parent as of the date that the order confirming the plan was 
entered, or a date as close thereto as practicable.
    Instruction to Item 2:
    The information called for in paragraph (b)(5) of this item may be 
presented in the form in which it was furnished to the court or 
governmental authority.

Item 3. Material Modification to Rights of Securityholders

    (a) If the constituent instruments defining the rights of the 
holders of any class of securities of the issuer that were issued 
pursuant to Regulation A have been materially modified, disclose the 
date of the modification, the title of the class of securities involved 
and briefly describe the general effect of such modification upon the 
rights of holders of such securities.
    (b) If the rights or benefits evidenced by any class of securities 
issued pursuant to Regulation A have been materially limited or 
qualified by the issuance or modification of any other class of 
securities by the issuer, briefly disclose the date of the issuance or 
modification, the general effect of the issuance or modification of 
such other class of securities upon the rights or benefits of the 
holders of the securities issued pursuant to Regulation A.
    Instruction to Item 3:
    Working capital restrictions and other limitations upon the payment 
of dividends must be reported pursuant to this item.

Item 4. Changes in Issuer's Certifying Accountant

    (a) If an independent accountant who was previously engaged as the 
principal accountant to audit the issuer's financial statements, or an 
independent accountant upon whom the principal accountant expressed 
reliance in its report regarding a significant subsidiary, resigns (or 
indicates that it declines to stand for re-appointment after completion 
of the current audit) or is dismissed, disclose the information that 
would be required under Item 304(a)(1) of Regulation S-K (17 CFR 
229.304(a)(1)), including compliance with Item 304(a)(3) of Regulation 
S-K (17 CFR 229.304(a)(3)) if the issuer were a ``registrant.''
    (b) If a new independent accountant has been engaged as either the 
principal accountant to audit the issuer's financial statements or as 
an independent accountant on whom the principal accountant is expected 
to express reliance in its report regarding a significant subsidiary, 
the issuer must disclose the information that would be required by Item 
304(a)(2) of Regulation S-K (17 CFR 229.304(a)(2)) if the issuer were a 
``registrant.''
    Instructions to Item 4:
    1. Information under this Item 4 is only required if the issuer's 
most recent qualified offering statement on Form 1-A or report on Form 
1-K, whichever is most recent, contains audited financial statements.
    2. The resignation or dismissal of an independent accountant, or 
its refusal to stand for re-appointment, is a reportable event separate 
from the engagement of a new independent accountant. On some occasions, 
two reports on Form 1-U are required for a single change in 
accountants, the first on the resignation (or refusal to stand for re-
appointment) or dismissal of the former accountant and the second when 
the new accountant is engaged. Information required in the second Form 
1-U filing in such situations need not be provided to the extent that 
it has been reported previously in the first Form 1-U filing.

Item 5. Non-reliance on Previously Issued Financial Statements or a 
Related Audit Report or Completed Interim Review

    (a) If the issuer's board of directors, a committee of the board of 
directors or the officer or officers of the issuer authorized to take 
such action if board action is not required, concludes that any 
previously issued financial

[[Page 21921]]

statements, covering one or more years or interim periods for which the 
issuer is required to provide financial statements under Regulation A, 
including Form 1-A, should no longer be relied upon because of an error 
in such financial statements as addressed in FASB Accounting Standards 
Codification Topic 250 or IAS 8, as may be modified, supplemented or 
succeeded, disclose the following information:
    (1) the date of the conclusion regarding the non-reliance and an 
identification of the financial statements and years or periods covered 
that should no longer be relied upon;
    (2) a brief description of the facts underlying the conclusion to 
the extent known to the issuer at the time of filing; and
    (3) a statement of whether the audit committee, or the board of 
directors in the absence of an audit committee, or authorized officer 
or officers, discussed with the issuer's independent accountant the 
matters disclosed in the filing pursuant to this paragraph (a).
    (b) If the issuer is advised by, or receives notice from, its 
independent accountant that disclosure should be made or action should 
be taken to prevent future reliance on a previously issued audit report 
or completed interim review related to previously issued financial 
statements, disclose the following information:
    (1) the date on which the issuer was so advised or notified;
    (2) identification of the financial statements that should no 
longer be relied upon;
    (3) a brief description of the information provided by the 
accountant; and
    (4) a statement of whether the audit committee, or the board of 
directors in the absence of an audit committee, or authorized officer 
or officers, discussed with the independent accountant the matters 
disclosed in the filing pursuant to paragraph (b) of this item.
    (c) If the issuer receives advisement or notice from its 
independent accountant requiring disclosure under paragraph (b) of this 
item, the issuer must:
    (1) provide the independent accountant with a copy of the 
disclosures the issuer is making in response to this item and the 
independent accountant shall receive a copy no later than the day that 
the disclosures are filed with the Commission;
    (2) request the independent accountant to furnish to the issuer as 
promptly as possible a letter addressed to the Commission stating 
whether the independent accountant agrees with the statements made by 
the issuer in response to this item and, if not, stating the respects 
in which it does not agree; and
    (3) amend the issuer's previously filed Form 1-U by filing the 
independent accountant's letter as an exhibit to the filed Form 1-U no 
later than two business days after the issuer's receipt of the letter.

Item 6. Changes in Control of Issuer

    (a) If, to the knowledge of the issuer's board of directors, a 
committee of the board of directors, governing body similar to a board 
of directors, or authorized officer or officers of the issuer, a change 
in control of the issuer has occurred, furnish the following 
information:
    (1) the identity of the persons who acquired such control;
    (2) the date and a description of the transactions which resulted 
in the change in control;
    (3) the basis of the control, including the percentage of voting 
securities of the issuer now beneficially owned directly or indirectly 
by the persons who acquired control;
    (4) the amount of the consideration used by such persons;
    (5) the sources of funds used by the persons, unless all or any 
part of the consideration used is a loan made in the ordinary course of 
business by a bank as defined by Section 3(a)(6) of the Securities 
Exchange Act of 1934.
    (6) the identity of the persons from whom control was assumed; and
    (7) any arrangements or understandings among members of both the 
former and new control groups and their associates with respect to 
election of directors or other matters.
    (b) Describe any arrangements, known to the issuer, including any 
pledge by any person of securities of the issuer or any of its parents, 
the operation of which may at a subsequent date result in a change in 
control of the issuer. It is not necessary to describe ordinary default 
provisions contained in the charter, trust indentures, or other 
governing instruments relating to securities of the issuer in response 
to this paragraph.

Item 7. Departure of Certain Officers

    If the issuer's principal executive officer, principal financial 
officer, principal accounting officer, or any person performing similar 
functions, retires, resigns or is terminated from that position, 
disclose the fact that the event has occurred and the date of the 
event.
    Instruction to Item 7:
    The disclosure requirements of this item do not apply to an issuer 
that is a wholly-owned subsidiary of an issuer with a class of 
securities registered under Section 12 of the Exchange Act (15 U.S.C. 
78l), or that is required to file reports under Section 15(d) of the 
Exchange Act (15 U.S.C. 78o(d)) or under Regulation A.

Item 8. Certain Unregistered Sales of Equity Securities

    (a) If the issuer sells equity securities in a transaction that is 
not registered under the Securities Act or qualified under Regulation 
A, furnish the information set forth in Item 6 of Part I of Form 1-A. 
For purposes of determining the required filing date for the Form 1-U 
under this item, the issuer has no obligation to disclose information 
under this item until the issuer enters into an agreement enforceable 
against the issuer, whether or not subject to conditions, under which 
the equity securities are to be sold. If there is no such agreement, 
the issuer must provide the disclosure within four business days after 
the occurrence of the closing or settlement of the transaction or 
arrangement under which the equity securities are to be sold.
    (b) No report need be filed if the equity securities sold, in the 
aggregate since its last report filed under this item or its last 
periodic report containing such disclosure, whichever is more recent, 
constitute less than 10% of the number of shares outstanding of the 
class of equity securities sold.
    Instructions to Item 8:
    1. For purposes of this item, ``the number of shares outstanding'' 
refers to the actual number of shares of equity securities of the class 
outstanding and does not include outstanding securities convertible 
into or exchangeable for such equity securities.
    2. It is not necessary to follow the format of Item 6 of Part I of 
Form 1-A when providing the information required by this item.

Item 9. Other Events

    The issuer may, at its option, disclose under this item any events 
or information, the disclosure of which is not otherwise called for by 
this Form, that the issuer deems of importance to securityholders.

SIGNATURES

    Pursuant to the requirements of Regulation A, the issuer has duly 
caused this report to be signed on its behalf by the undersigned, 
thereunto duly authorized.

(Exact name of issuer as specified in its charter)---------------------

By (Signature and Title)-----------------------------------------------


[[Page 21922]]

-----------------------------------------------------------------------
Date______

    Note:  The text of Form 1-U will not appear in the Code of 
Federal Regulations.


0
17. Add Sec.  239.94 to read as follows:


Sec.  239.94  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).

0
18. Add Form 1-Z (referenced in Sec.  239.94) to read as follows:

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 1-Z

EXIT REPORT UNDER REGULATION A

GENERAL INSTRUCTIONS

    (1) The following information must be provided in the XML-based 
Form 1-Z available through the EDGAR portal. The format shown below may 
differ from the electronic version available on EDGAR.
    (2) An issuer filing this Form pursuant to Rule 257(a) must only 
complete the Preliminary Information and Part I.
    (3) An issuer filing this Form to suspend its duty to file reports 
under Rule 257(d) must complete the Preliminary Information and Part 
II. Such issuer must also provide Part I if it has not previously 
provided the Part I information in a Form 1-K filing.
* * * * *

PRELIMINARY INFORMATION

Exact name of issuer as specified in the issuer's charter:______
Address of Principal Executive Offices:______
Phone: (_)
Commission File Number(s):______

PART I

Summary Information Regarding the Offering and Proceeds

Date of qualification of the offering statement:______

Date of commencement of the offering:______

Amount of securities qualified to be sold in the offering:______

Amount of securities sold in the offering:______

Price per security: $______
The portion of aggregate sales attributable to securities sold on 
behalf of the issuer:
$ _______

The portion of aggregate sales attributable to securities sold on 
behalf of selling securityholders:
$_______
    Fees in connection with this offering and names of service 
providers:

 
                                                        Name of Service Provider                Fees
 
Underwriters:.......................................                 ________ ____                $________ ____
Sales Commissions:..................................                 ________ ____                $________ ____
Finders' Fees:......................................                 ________ ____                $________ ____
Audit:..............................................                 ________ ____                $________ ____
Legal:..............................................                 ________ ____                $________ ____
Promoters:..........................................                 ________ ____                $________ ____
Blue Sky Compliance:................................                 ________ ____                 ________ ____
 

CRD Number of any broker or dealer listed:______
Net proceeds to the issuer: $______
Clarification of responses (if necessary):______

PART II

Certification of Suspension of Duty to File Reports

Title of each class of securities covered by this Form-----------------

Commission File Number(s)----------------------------------------------

Approximate number of holders of record as of the certification date:--

Pursuant to the requirements of Regulation A, _____ (Name of issuer 
as specified in charter) certifies that it meets all of the 
conditions for termination of Regulation A reporting specified in 
Rule 257(d) and that there are no classes of securities other than 
those that are the subject of this Form 1-Z regarding which the 
issuer has Regulation A reporting obligations. _____ (Name of issuer 
as specified in charter) has caused this certification to be signed 
on its behalf by the undersigned duly authorized person.

By: _____ Date: _____

Title: _____

Instruction: This Part II of Form 1-Z is required by Rule 257(d) of 
Regulation A. An officer of the issuer or any other duly authorized 
person may sign, and must do so by typed signature. The name and 
title of the person signing the form must be typed or printed under 
the signature. The signatory to the filing must also manually sign a 
signature page or other document authenticating, acknowledging or 
otherwise adopting his or her signature that appears in the filing. 
Such document must be executed before or at the time the filing is 
made and must be retained by the issuer for a period of five years. 
Upon request, the issuer must furnish to the Commission or its staff 
a copy of any or all documents retained pursuant to this 
instruction.

    Note:  The text of Form 1-Z will not appear in the Code of 
Federal Regulations.

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

0
19. The authority citation for part 240 continues to read in part 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.
* * * * *

0
20. Section 240.12g5-1 is amended by adding paragraph (a)(7) to read as 
follows:


Sec.  240.12g5-1  Definition of securities ``held of record''.

    (a) * * *
    (7) Other than when determining compliance with Rule 257(d)(2) of 
Regulation A (Sec.  230.257(d)(2) of this chapter), the definition of 
``held of record'' shall not include securities issued in a Tier 2 
offering pursuant to Regulation A by an issuer that:
    (i) Is required to file reports pursuant to Rule 257(b) of 
Regulation A (Sec.  230.257(b) of this chapter);
    (ii) Is current in filing annual, semiannual and special financial 
reports pursuant to such rule as of its most recently completed fiscal 
year end;
    (iii) Has engaged a transfer agent registered pursuant to Section 
17A(c) of the Act to perform the function of a transfer agent with 
respect to such securities; and
    (iv) Had a public float of less than $75 million as of the last 
business day of its most recently completed semiannual period, computed 
by multiplying the aggregate worldwide number of shares of its common 
equity securities held by non-affiliates by the price at which such 
securities were last sold (or the average

[[Page 21923]]

bid and asked prices of such securities) in the principal market for 
such securities or, in the event the result of such public float 
calculation was zero, had annual revenues of less than $50 million as 
of its most recently completed fiscal year. An issuer that would be 
required to register a class of securities under Section 12(g) of the 
Act as a result of exceeding the applicable threshold in this paragraph 
(a)(7)(iv), may continue to exclude the relevant securities from the 
definition of ``held of record'' for a transition period ending on the 
penultimate day of the fiscal year two years after the date it became 
ineligible. The transition period terminates immediately upon the 
failure of an issuer to timely file any periodic report due pursuant to 
Rule 257 (Sec.  230.257 of this chapter) at which time the issuer must 
file a registration statement that registers that class of securities 
under the Act within 120 days.
* * * * *
0
21. Section 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 through 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 information in paragraph (a) of this section pursuant 
to the applicable rule of the Financial Industry Regulatory Authority, 
Inc. or its successor organization; and
* * * * *

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

0
22. The authority citation for part 249 continues to read in part as 
follows:

    Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C. 
5461 et seq.; and 18 U.S.C. 1350, unless otherwise noted.
* * * * *

0
23. Section 249.208 is amended by:
0
a. Revising paragraph (a); and
0
b. Adding paragraph (e).
    The revision and addition read as follows:


Sec.  249.208a  Form 8-A, for registration of certain classes of 
securities pursuant to section 12 (b) or (g) of the Securities Exchange 
Act of 1934.

    (a) Subject to paragraph (b) of this section, this form may be used 
for registration pursuant to section 12(b) or (g) of the Securities 
Exchange Act of 1934 of any class of securities of any issuer which:
    (1) Is required to file reports pursuant to sections 13 and 15(d) 
of that Act;
    (2) Is concurrently qualifying a Tier 2 offering statement relating 
to that class of securities using the Form S-1 or Form S-11 disclosure 
models; or
    (3) Pursuant to an order exempting the exchange on which the issuer 
has securities listed from registration as a national securities 
exchange.
* * * * *
    (e) Notwithstanding the foregoing in paragraphs (c) and (d) of this 
section, if the form is used for registration of a class of securities 
being offered under Regulation A, it shall become effective:
    (1) For the registration of a class of securities under Section 
12(b), upon the latest of the filing of the form with the Commission, 
the qualification of the Regulation A offering statement or the receipt 
by the Commission of certification from the national securities 
exchange listed on the form; or
    (2) For the registration of a class of securities under Section 
12(g), upon the later of the filing of the form and qualification of 
that Regulation A offering statement.
0
24. Amend Form 8-A (referenced in Sec.  249.208a) by revising it to 
read as follows:

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-A

FOR REGISTRATION OF CERTAIN CLASSES OF SECURITIES PURSUANT TO SECTION 
12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 GENERAL 
INSTRUCTIONS

A. Rule as to Use of Form 8-A.

    (a) Subject to paragraph (b) below, this form may be used for 
registration pursuant to Section 12(b) or (g) of the Securities 
Exchange Act of 1934 of any class of securities of any issuer which is 
(1) required to file reports pursuant to Section 13 or 15(d) of that 
Act, (2) is concurrently qualifying a Tier 2 offering statement 
relating to that class of securities using the Form S-1 or Form S-11 
disclosure models that includes financial statements that are audited 
in accordance with the standards of, and by an accounting firm that is 
registered with, the Public Company Accounting Oversight Board (United 
States), or (3) pursuant to an order exempting the exchange on which 
the issuer has securities listed from registration as a national 
securities exchange.
    (b) If the registrant would be required to file an annual report 
pursuant to Section 15(d) of the Act for its last fiscal year, except 
for the fact that the registration statement on this form will become 
effective before such report is required to be filed, an annual report 
for such fiscal year shall nevertheless be filed within the period 
specified in the appropriate annual report form.

[[Page 21924]]

    (c) If this form is used for the registration of a class of 
securities under Section 12(b), it shall become effective:
    (1) If a class of securities is not concurrently being registered 
under the Securities Act of 1933 (15 U.S.C. 77a et seq.) (``Securities 
Act''), upon the later of receipt by the Commission of certification 
from the national securities exchange listed on this form or the filing 
of the Form 8-A with the Commission; or
    (2) If a class of securities is concurrently being registered under 
the Securities Act, upon the latest of the filing of the Form 8-A with 
the Commission, receipt by the Commission of certification from the 
national securities exchange listed on this form or effectiveness of 
the Securities Act registration statement relating to the class of 
securities.
    (d) If this form is used for the registration of a class of 
securities under Section 12(g), it shall become effective:
    (1) If a class of securities is not concurrently being registered 
under the Securities Act, upon the filing of the Form 8-A with the 
Commission; or
    (2) If class of securities is concurrently being registered under 
the Securities Act, upon the later of the filing of the Form 8-A with 
the Commission or the effectiveness of the Securities Act registration 
statement relating to the class of securities.
    (e) Notwithstanding the foregoing in paragraphs (c) and (d) of this 
form, if this form is used for registration of a class of securities 
being offered under Regulation A, it shall become effective:
    (1) For the registration of a class of securities under Section 
12(b), upon the latest of the filing of the Form 8-A with the 
Commission, the qualification of the Regulation A offering statement or 
the receipt by the Commission of certification from the national 
securities exchange listed on this form; or
    (2) For the registration of a class of securities under Section 
12(g), upon the later of the filing of the Form 8-A and qualification 
of the Regulation A offering statement.
    (Note: Registration pursuant to paragraph (e) of this form is not 
permitted if the filing of the Form 8-A and, where applicable, the 
receipt by the Commission of certification from the national securities 
exchange listed on this form occurs more than five calendar days after 
the qualification of the Regulation A offering statement)

B. Application of General Rules and Regulations.

    (a) The General Rules and Regulations under the Act contain certain 
general requirements which are applicable to registration on any form. 
These general requirements should be carefully read and observed in the 
preparation and filing of registration statements on this form.
    (b) Particular attention is directed to Regulation 12B which 
contains general requirements regarding matters such as the kind and 
size of paper to be used, legibility, information to be given whenever 
the title of securities is required to be stated, incorporation by 
reference and the filing of the registration statement. The definitions 
contained in Rule 12b-2 should be especially noted.

C. Preparation of Registration Statement.

    This form is not to be used as a blank form to be filled in, but 
only as a guide in the preparation of the registration statement on 
paper meeting the requirements of Rule 12b-12. The registration 
statement shall contain the item numbers and captions, but the text of 
the items may be omitted. The answers to the items shall be prepared in 
the manner specified in Rule 12b-13.

D. Signature and Filing of Registration Statement.

    Eight complete copies of the registration statement, including all 
papers and documents filed as a part thereof (other than exhibits) 
shall be filed with the Commission and at least one such copy shall be 
filed with each exchange on which the securities are to be registered. 
Exhibits shall be filed with the Commission and with any exchange in 
accordance with the Instructions as to Exhibits. At least one copy of 
the registration statement filed with the Commission and one filed with 
each exchange shall be manually signed. Unsigned copies shall be 
conformed.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-A

FOR REGISTRATION OF CERTAIN CLASSES OF SECURITIES PURSUANT TO SECTION 
12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

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    (Exact name of registrant as specified in its charter)

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    (State or other jurisdiction of incorporation or organization)

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    (Address of principal executive offices)

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    (I.R.S. Employer Identification No.)

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    (Zip Code)

    Securities to be registered pursuant to Section 12(b) of the 
Act:

Title of each class to be so registered
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Name of each exchange on which each class is to be registered
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    If this form relates to the registration of a class of securities 
pursuant to Section 12(b) of the Exchange Act and is effective pursuant 
to General Instruction A.(c) or (e), check the following box. [ballot]
    If this form relates to the registration of a class of securities 
pursuant to Section 12(g) of the Exchange Act and is effective pursuant 
to General Instruction A.(d) or (e), check the following box. [ballot]
    If this form relates to the registration of a class of securities 
concurrently with a Regulation A offering, check the following box. 
[ballot]
    Securities Act registration statement or Regulation A offering 
statement file number to which this form relates:____ (if applicable)
    Securities to be registered pursuant to Section 12(g) of the Act:
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    (Title of class)

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    (Title of class)

INFORMATION REQUIRED IN REGISTRATION STATEMENT

Item 1. Description of Registrant's Securities to be Registered.

    Furnish the information required by Item 202 of Regulation S-K 
(Sec.  229.202 of this chapter), as applicable.
    Instruction. If a description of the securities comparable to that 
required here is contained in any prior filing with the Commission, 
such description may be incorporated by reference to such other filing 
in answer to this item. If such description will be included in a form 
of prospectus or an offering circular subsequently filed by the 
registrant pursuant to Rule 424(b) under the Securities Act (Sec.  
230.424(b) of this chapter) or Rule 253(g) of Regulation A (Sec.  
230.253(g) of this chapter), this registration statement shall state 
that such prospectus or offering circular shall be deemed to be 
incorporated by reference into the registration statement. If the 
securities are to be registered on a national securities exchange and 
the description has not previously been filed with such exchange, 
copies of the description shall be filed with copies of the application 
filed with the exchange.

[[Page 21925]]

Item 2. Exhibits.

    List below all exhibits filed as a part of the registration 
statement:
    Instruction. See the instructions as to exhibits, set forth below.
SIGNATURE
    Pursuant to the requirements of Section l2 of the Securities 
Exchange Act of 1934, the registrant has duly caused this registration 
statement to be signed on its behalf by the undersigned, thereto duly 
authorized.
(Registrant)
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Date
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By
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    *Print the name and title of the signing officer under such 
officer's signature.
INSTRUCTIONS AS TO EXHIBITS
    If the securities to be registered on this form are to be 
registered on an exchange on which other securities of the registrant 
are registered, or are to be registered pursuant to Section 12(g) of 
the Act, copies of all constituent instruments defining the rights of 
the holders of each class of such securities, including any contracts 
or other documents which limit or qualify the rights of such holders, 
shall be filed as exhibits with each copy of the registration statement 
filed with the Commission or with an exchange, subject to Rule 12b-32 
regarding incorporation of exhibits by reference.

    Note: The text of Form 8-A will not appear in the Code of 
Federal Regulations.

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

0
25. The authority citation for part 260 is revised to read as follows:

    Authority:  15 U.S.C. 77c, 77ddd, 77eee, 77ggg, 77nnn, 77sss, 
78ll (d), 80b-3, 80b-4, and 80b-11, unless otherwise noted.

0
26. Section 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.

    By the Commission.
    Dated: March 25, 2015.
Brent J. Fields,
Secretary.
[FR Doc. 2015-07305 Filed 4-17-15; 8:45 am]
 BILLING CODE 8011-01-P
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