Concept Release on Harmonization of Securities Offering Exemptions, 30460-30522 [2019-13255]

Download as PDF 30460 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 210, 227, 230, 239, 240, 249, 270, 274, and 275 [Release Nos. 33–10649; 34–86129; IA– 5256; IC–33512; File No. S7–08–19] RIN 3235–AM27 Concept Release on Harmonization of Securities Offering Exemptions Securities and Exchange Commission. ACTION: Concept release; request for comment. AGENCY: The Securities and Exchange Commission is publishing this release to solicit comment on several exemptions from registration under the Securities Act of 1933 that facilitate capital raising. Over the years, and particularly since the Jumpstart Our Business Startups Act of 2012, several exemptions from registration have been introduced, expanded, or otherwise revised. As a result, the overall framework for exempt offerings has changed significantly. We believe our capital markets would benefit from a comprehensive review of the design and scope of our framework for offerings that are exempt from registration. More specifically, we also believe that issuers and investors could benefit from a framework that is more consistent and addresses gaps and complexities. Therefore, we seek comment on possible ways to simplify, harmonize, and improve the exempt offering framework to promote capital formation and expand investment opportunities while maintaining appropriate investor protections. DATES: Comments should be received on or before September 24, 2019. ADDRESSES: Comments may be submitted by any of the following methods: SUMMARY: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/concept.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number S7– 08–19 on the subject line. jbell on DSK3GLQ082PROD with PROPOSALS3 Paper Comments • Send paper comments to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number S7–08–19. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 please use only one method. The Commission will post all comments on the Commission’s website (https:// www.sec.gov/rules/concept.shtml). Comments are also available for website viewing and copying in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. FOR FURTHER INFORMATION CONTACT: Jennifer Riegel or Amy Reischauer, Office of Small Business Policy, Division of Corporation Finance, at (202) 551–3460; Timothy White or Geeta Dhingra, Division of Trading and Markets, at (202) 551–5550; or Mark T. Uyeda, Division of Investment Management, at (202) 551–6792, U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–3628. SUPPLEMENTARY INFORMATION: Table of Contents I. Introduction II. Current Exempt Offering Framework Request for Comment A. Accredited Investor Definition 1. Background 2. Implications Outside of the Regulation D Context 3. Accredited Investor Staff Report 4. Comments on the Accredited Investor Staff Report 5. Request for Comment B. Private Placement Exemption and Rule 506 of Regulation D 1. Section 4(a)(2) of the Securities Act 2. Rule 506 of Regulation D 3. Request for Comment C. Regulation A 1. Scope of the Exemption 2. Disclosure Requirements 3. Solicitation of Interest 4. Relationship With State Securities Laws 5. Analysis of Regulation A in the Exempt Market 6. Request for Comment D. Limited Offerings—Rule 504 of Regulation D 1. Scope of the Exemption 2. Filing Requirements and Relationship With State Securities Laws 3. Analysis of Rule 504 in the Exempt Market 4. Request for Comment E. Intrastate Offerings 1. Section 3(a)(11) of the Securities Act 2. Securities Act Rules 147 and 147A 3. Request for Comment F. Regulation Crowdfunding 1. Scope of the Exemption 2. Disclosure Requirements PO 00000 Frm 00002 Fmt 4701 Sfmt 4702 3. Relationship With State Securities Laws 4. Analysis of Regulation Crowdfunding in the Exempt Market 5. Request for Comment G. Potential Gaps in the Current Exempt Offering Framework 1. Micro-Offerings 2. Request for Comment III. Integration A. Facts and Circumstances Analysis B. Safe Harbors 1. Regulation D 2. Rule 152 3. Abandoned Offerings: Rule 155 4. Regulation A, Rules 147 and 147A, and Regulation Crowdfunding 5. Other Integration Provisions C. Request for Comment IV. Pooled Investment Funds A. Background 1. Interval Funds and Tender Offer Funds 2. Private Funds B. Pooled Investment Funds as Accredited Investors C. Retail Investor Access to Pooled Investment Funds That Invest in Exempt Offerings D. Request for Comment V. Secondary Trading of Certain Securities A. Resale Exemptions 1. Section 4(a)(1) and Rule 144 2. Rule 144A 3. Section 4(a)(3) 4. Section 4(a)(4) 5. Section 4(a)(7) B. Relationship With State Law 1. Section 18: Federal Preemption for Secondary Offerings 2. State Exemptions for Secondary Sales C. Request for Comment VI. Conclusion I. Introduction The Securities Act of 1933 1 (the ‘‘Securities Act’’) requires that every offer 2 and sale of securities be registered with the Securities and Exchange Commission (the ‘‘Commission’’), unless an exemption is available. The purpose of registration is to provide investors with full and fair disclosure of material information so that they are able to make their own informed investment and voting decisions.3 Congress recognized, however, that in certain situations there is no practical need for registration or the public benefits from registration are too remote.4 Accordingly, the Securities Act contains a number of exemptions from its registration requirements and authorizes the Commission to adopt 1 15 U.S.C. 77a et seq. 15 U.S.C. 77b(a)(3) (noting that an offer includes every attempt to dispose of a security or interest in a security, for value; or any solicitation of an offer to buy a security or interest in a security). 3 See, e.g., Commissioner Francis M. Wheat, Disclosure to Investors—A Reappraisal of Federal Administrative Policies under the ’33 and ’34 Acts (Mar. 1969) (often referred to as the ‘‘Wheat Report’’). 4 H.R. Rep. No. 73–85, at 5 (1933). 2 See E:\FR\FM\26JNP3.SGM 26JNP3 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules jbell on DSK3GLQ082PROD with PROPOSALS3 additional exemptions. As described in more detail below, the scope of exempt offerings has evolved over time through Commission rules and legislative changes. Significantly, the Jumpstart Our Business Startups Act of 2012 (‘‘JOBS Act’’) greatly expanded the options to raise capital in exempt offerings.5 Since then, the Fixing America’s Surface Transportation Act of 2015 (the ‘‘FAST Act’’) 6 and the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (the ‘‘Economic Growth Act’’) 7 resulted in further revisions to our exemptions.8 As a result, the current exempt offering framework is complex and made up of differing requirements and conditions, which may be difficult for issuers, who bear the burden of demonstrating the availability of any exemption,9 to navigate. Smaller companies with more limited resources, which may be more likely to need to rely on these exemptions given the costs associated with conducting a registered offering and becoming a reporting company, may find it particularly difficult to manage this complexity. Market participants have conveyed concerns about the complexity of the exempt offering framework and have recommended that the Commission undertake a comprehensive review of the available exemptions.10 For 5 Public Law 112–106, 126 Stat. 306 (2012). The JOBS Act, among other things: Directed the Commission to revise 17 CFR 230.506 (‘‘Rule 506’’) to eliminate the prohibition against general solicitation or general advertising for offers and sales of securities to accredited investors (see Section II.B.2.b); added Section 4(a)(6) [15 U.S.C. 77d(a)(6)] and Section 4A [15 U.S.C. 77d–1(b)] to the Securities Act and directed the Commission to issue rules to permit certain crowdfunding offerings (see Section II.F); and directed the Commission to expand Regulation A [17 CFR 230.250 et seq.] (see Section II.C). 6 Public Law 114–94, 129 Stat. 1312 (2015). 7 Public Law 115–174, 132 Stat. 1296 (2018). 8 The FAST Act added Section 4(a)(7) to the Securities Act [15 U.S.C. 77d(a)(7)], providing a new exemption for private resales of securities. See Section V.A.5. Among other changes, the Economic Growth Act required the Commission to amend Regulation A to permit entities subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act to use the exemption. See Section II.C. 9 See SEC v. Ralston Purina Co., 346 U.S. 119, 126 (1953) (‘‘Keeping in mind the broadly remedial purposes of federal securities legislation, imposition of the burden of proof on an issuer who would plead the exemption seems to us fair and reasonable.’’). 10 Given the impact of the JOBS Act on the exempt offering framework, generally, this release references comments and recommendations provided by various market participants, including any relevant recommendations from the advisory committees to the Commission and the SEC Government-Business Forums on Small Business Capital Formation (each, a ‘‘Small Business Forum’’), received since the adoption of the JOBS Act in 2012 or, if later, the adoption of the relevant VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 example, the 2012 Small Business Forum recommended that the Commission initiate a top-to-bottom review of the exempt offering landscape to ensure a rational regulatory scheme, including providing greater guidance regarding integration of the new, as well as existing, exemptions from registration.11 In addition, the 2018 Small Business Forum recommended that the Commission rationalize, harmonize, simplify, consolidate, and prioritize the regulatory regime for exempt offerings, including communications restrictions, issuer eligibility, size of the offering, type of investors, disclosure, and other conditions of exemption.12 In this concept release, we undertake a broad review of available exemptions to the registration requirements of the federal securities laws that facilitate capital raising and seek input in order to assess whether our exempt offering framework, as a whole, is consistent, accessible, and effective for both issuers and investors or whether we should consider changes to simplify, improve, or harmonize the exempt offering framework. In this regard, we seek to explore whether overlapping exemptions may create confusion for issuers trying to determine and navigate the most efficient path to raise capital. At the same time, we seek to identify gaps in our framework that may make it difficult, especially for smaller issuers, to rely on an exemption from registration to raise capital at key stages of their business cycle. We also consider whether the limitations on who can invest in certain exempt offerings, or the amount they can invest, provide an appropriate level of investor protection rule or the most recent amendment or request for comment. 11 See Final Report of the 2012 SEC GovernmentBusiness Forum on Small Business Capital Formation (Apr. 2013) available at https:// www.sec.gov/info/smallbus/gbfor31.pdf (‘‘2012 Forum Report’’). The Small Business Investment Incentive Act of 1980 directed the Commission to conduct an annual government-business forum to undertake an ongoing review of the financing problems of small businesses. 15 U.S.C. 80c–1. The Small Business Forum has met annually since 1982 to provide a platform to highlight perceived unnecessary impediments to small business capital formation and address whether they can be eliminated or reduced. Each forum seeks to develop recommendations for government and private action to improve the environment for small business capital formation, consistent with other public policy goals, including investor protection. Information about the Small Business Forum is available at https://www.sec.gov/corpfin/infosmall bussbforum-2shtml. 12 See Final Report of the 2018 SEC GovernmentBusiness Forum on Small Business Capital Formation (Jun. 2019) available at https:// www.sec.gov/info/smallbus/gbfor37.pdf (‘‘2018 Forum Report’’). PO 00000 Frm 00003 Fmt 4701 Sfmt 4702 30461 (i.e., whether the current levels of investor protection are insufficient, appropriate, or excessive) or pose an undue obstacle to capital formation or investor access to investment opportunities. For example, we explore whether we should revise our investor eligibility limitations to focus more particularly on the sophistication of the investor, the amount of the investment, or other criteria rather than just the income or wealth of the individual investor. In addition, this release looks at whether we can and should do more to allow issuers to transition from one exempt offering to another and, ultimately, to a registered public offering, if desired, without undue friction or delay. We also examine whether we should take steps to expand issuers’ ability to raise capital through pooled investment funds, and whether retail investors should be allowed greater exposure to growth-stage issuers through pooled investment funds in light of the potential advantages of investing through such funds, including the ability to have an interest in a diversified portfolio. Finally, we look at secondary trading of securities initially issued in exempt offerings and consider whether we should revise our rules governing exemptions for resales of securities to facilitate capital formation and to promote investor protection by improving secondary market liquidity. Each section of this release can be read, and commented on, independently. We welcome all feedback and encourage interested parties to submit comments on any or all topics of interest and to respond to one, multiple, or all questions asked in this release. In responding to comments, it would be most helpful if commenters provide an explanation why we should or should not take a particular action or approach, as appropriate. II. Current Exempt Offering Framework The Securities Act contains a number of exemptions to its registration requirements and authorizes the Commission to adopt additional exemptions. Section 3 of the Securities Act generally identifies certain classes of securities that are exempt from the registration requirements of the Securities Act.13 Most of these exemptions are based on characteristics of the securities themselves, though some exempted securities are identified based on the transaction in which they are offered or sold.14 Section 4 of the 13 15 U.S.C. 77c. example, Section 3(b)(1) of the Securities Act authorizes the Commission to exempt certain 14 For E:\FR\FM\26JNP3.SGM Continued 26JNP3 30462 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules Securities Act identifies a number of transactions that are exempt from the registration requirements.15 In addition, Section 28 of the Securities Act, which was added by the National Securities Markets Improvement Act of 1996 (‘‘NSMIA’’),16 authorizes the Commission to exempt other persons, securities, or transactions to the extent ‘‘necessary or appropriate in the public interest [and] consistent with the protection of investors.’’ 17 The statutory exemptions and those established by the Commission’s rules and regulations include a variety of requirements, investor protections, and other conditions. For example, some exemptions limit the amount of securities that may be offered or sold. Some exemptions limit the manner in which the offering can be conducted, such as by prohibiting the use of general solicitation or general advertising to solicit investors. Some offerings are exempt if they restrict sales to certain sophisticated or ‘‘accredited’’ investors that are presumed to possess sufficient financial sophistication and ability to sustain the risk of loss of their investment or to fend for themselves to render the protections of the Securities Act’s registration process unnecessary.18 In addition, some exemptions specify disclosures required to be included in prescribed forms to be filed with the Commission or otherwise provided to all or a subset of prospective investors. Many exemptions exclude certain types of issuers, such as non-U.S. issuers, issuers subject to the reporting requirements of the Securities Exchange Act of 1934 (the ‘‘Exchange Act’’),19 or investment companies, or specifically disqualify offerings involving certain ‘‘bad actors’’ from relying on the exemption. Table 1 summarizes some of the characteristics of the most commonly used exemptions 20 from registration.21 jbell on DSK3GLQ082PROD with PROPOSALS3 TABLE 1—OVERVIEW OF CAPITAL-RAISING EXEMPTIONS Type of offering Offering limit within 12-month period General solicitation Issuer requirements Investor requirements SEC filing requirements Section 4(a)(2) ...... None ................... No ................................... None ............................... None ............................... Yes. Restricted securities. No. Rule 506(b) of Regulation D 23. None ................... No ................................... ‘‘Bad actor’’ disqualifications apply. Form D 24 ....................... Yes. Restricted securities. Yes. Rule 506(c) of Regulation D. None ................... Yes ................................. ‘‘Bad actor’’ disqualifications apply. Form D ........................... Yes. Restricted securities. Yes. Regulation A: Tier 1. $20 million .......... Permitted; before qualification, testing the waters permitted before and after the offering statement is filed. Form 1–A, including two years of financial statements. Exit report. No ....................... No. Regulation A: Tier 2. $50 million .......... ......................................... U.S. or Canadian issuers. Excludes blank check companies,25 registered investment companies, business development companies, issuers of certain securities, and certain issuers subject to a Section 12(j) order. ‘‘Bad actor’’ disqualifications apply. No asset-backed securities. ......................................... Transactions by an issuer not involving any public offering. See SEC v. Ralston Purina Co.22 Unlimited accredited investors. Up to 35 sophisticated but non-accredited investors. Unlimited accredited investors; Issuer must take reasonable steps to verify that all purchasers are accredited investors. None ............................... Non-accredited investors are subject to investment limits based on annual income and net worth, unless securities will be listed on a national securities exchange. Form 1–A, including two years of audited financial statements. Annual, semi-annual, current, and exit reports. No ....................... Yes. issues of securities where the aggregate amount offered does not exceed $5 million to the extent that ‘‘the enforcement of this title with respect to such securities is not necessary in the public interest and for the protection of investors by reason of the small amount involved or the limited character of the public offering.’’ 15 U.S.C. 77c(b)(1). 15 15 U.S.C. 77d. 16 Public Law 104–290, 110 Stat. 3416 (Oct. 11, 1996). 17 15 U.S.C. 77z–3. 18 See Regulation D Revisions; Exemption for Certain Employee Benefit Plans, Release No. 33– 6683 (Jan. 16, 1987) [52 FR 3015] (the ‘‘Regulation D Revisions Proposing Release’’). 19 15 U.S.C. 78a et seq. 20 Commission rules also provide exemptions for certain offerings where the purpose of the offering is other than to raise capital. For example, 17 CFR 230.701 (‘‘Rule 701’’) exempts certain sales of securities made to compensate employees, consultants, and advisors. See note 512 for a brief discussion of Rule 701. VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 21 Generally, Table 1 is organized by typical offering size from largest to smallest. Certain regulatory exemptions from registration are based on statutory provisions, but provide specific frameworks or safe harbors to comply with the statutory exemptions. For example, as discussed in more detail in Section II.B.2.a, Rule 506(b) provides a safe harbor to comply with the exemption under Section 4(a)(2) [15 U.S.C. 77d(a)(2)], or, as discussed in Section II.E.2, Rule 147 provides a safe harbor under Section 3(a)(11) [15 U.S.C. 77c(a)(11)]. An issuer may choose not to avail itself of one of these specific regulatory exemptions and instead conduct an offering pursuant to the statutory exemption itself, such as Section 4(a)(2), following principles-based requirements that have been developed over time. 22 346 U.S. 119, 126 (1953). 23 Regulation D [17 CFR 230.501 et seq.] relates to transactions exempted from the registration requirements of Section 5 of the Securities Act under 17 CFR 230.504 (‘‘Rule 504’’), Rule 506(b) and Rule 506(c). Rule 504 provides an exemption PO 00000 Frm 00004 Fmt 4701 Sfmt 4702 Restrictions on resale Preemption of state registration and qualification for the public offer and sale of up to $5 million of securities in a 12-month period. General solicitation and general advertising are permitted if the offering is registered in a state requiring the use of a substantive disclosure document or sold exclusively to accredited investors under a corresponding state exemption. See Section II.D for a discussion of Rule 504. 24 While it is not a filing requirement, offerings relying on Rule 506(b) require additional information to be provided to non-accredited investors purchasing in the offering. 25 While the exemptions identified here as excluding blank check companies do not use the term ‘‘blank check company,’’ they exclude development stage issuers 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, which is substantially similar to the definition of blank check company in Securities Act Rule 419, used elsewhere in Commission rules. See 17 CFR 230.419. E:\FR\FM\26JNP3.SGM 26JNP3 30463 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules TABLE 1—OVERVIEW OF CAPITAL-RAISING EXEMPTIONS—Continued Type of offering Investor requirements SEC filing requirements Restrictions on resale Excludes blank check companies, Exchange Act reporting companies, and investment companies. ‘‘Bad actor’’ disqualifications apply. In-state residents ‘‘doing business’’ and incorporated in-state; excludes registered investment companies. None ............................... Form D ........................... Yes. Restricted securities except in limited circumstances. No. Offerees and purchasers must be in-state residents. None ............................... Securities must come to rest with in-state residents. No. Offerees must be in-state residents. In-state residents ‘‘doing business’’ and incorporated in-state; excludes registered investment companies. Offerees and purchasers must be in-state residents. None ............................... Yes. Resales must be within state for six months. No. Yes ................................. In-state residents and ‘‘doing business’’ instate; excludes registered investment companies. Purchasers must be instate residents. None ............................... Yes. Resales must be within state for six months. No. Permitted with limits on advertising after Form C is filed. Offering must be conducted on an internet platform through a registered intermediary. Excludes non-U.S. issuers, blank check companies, Exchange Act reporting companies, and investment companies. ‘‘Bad actor’’ disqualifications apply. Investment limits based on annual income and net worth. Form C, including two years of financial statements that are certified, reviewed or audited, as required. Progress and annual reports. 12-month resale limitations. Yes. $5 million ............ Permitted in limited circumstances. Intrastate: Section 3(a)(11). No federal limit (generally, individual state limits between $1 and $5 million). No federal limit (generally, individual state limits between $1 and $5 million). No federal limit (generally, individual state limits between $1 and $5 million). $1.07 million ....... Offerees must be in-state residents. Intrastate: Rule 147A. Regulation Crowdfunding; Section 4(a)(6). As Table 1 illustrates, the current exemptions impose a variety of conditions designed to protect investors. Exemptions tend to incorporate more investor protection measures where non-accredited or less sophisticated investors are permitted to participate in the offering. This focus on the characteristics of the investors involved in a particular offering is articulated in the context of the Section 4(a)(2) exemption in the leading case interpreting that provision, SEC v. Ralston Purina.26 In that case, the Supreme Court set forth the position that the availability of the Section 4(a)(2) exemption ‘‘should turn on whether the particular class of persons affected needs the protection of the Act. An offering to those who are shown to be able to fend for themselves is a transaction ‘not involving any public offering.’ ’’ 27 The emphasis on the characteristics of the investors extends throughout the current exempt offering framework, in which the fewest conditions apply to an offering under an exemption where sales are restricted to accredited investors, while offerings that permit less wealthy or sophisticated investors to participate are subject to an assortment of disclosure requirements, offering and investment limits, and other conditions meant to mitigate the risk of not having the traditional 26 346 27 Id. U.S. 119 (1953). at 125. VerDate Sep<11>2014 22:40 Jun 25, 2019 Preemption of state registration and qualification Issuer requirements General solicitation Rule 504 of Regulation D. Intrastate: Rule 147. jbell on DSK3GLQ082PROD with PROPOSALS3 Offering limit within 12-month period Jkt 247001 protections of registration under the Securities Act. As discussed below, we seek comment on how an investor’s characteristics should be considered in determining whether an investor is able to participate in a particular type of exempt offering. In addition, we seek comment throughout this concept release on specific conditions of each of the current capital-raising exemptions from registration and whether the investment protections of those exemptions are appropriately structured to encourage capital formation, while mitigating the risk of not having the traditional investor protections of registration. We also seek input on the framework as a whole, in light of the many changes implemented over the years. The current exemptions were not adopted as part of one cohesive regulatory scheme but rather developed and evolved over time through Commission rules and legislative changes. In addition to the JOBS Act and the adoption over time of each of the exemptions from registration discussed in this concept release, the evolution of the existing framework and exempt offering market has been significantly affected by other legislative developments over the years. For example, as noted above, NSMIA added Section 28 to the Securities Act, providing the Commission with significant flexibility to tailor the exempt offering framework by giving the Commission authority to exempt PO 00000 Frm 00005 Fmt 4701 Sfmt 4702 persons, securities, and transactions, or classes thereof, from the Securities Act. NSMIA also preempted the state registration and review of transactions involving ‘‘covered securities’’ and amended Section 18 of the Securities Act to establish classes of covered securities, including securities offered or sold to ‘‘qualified purchasers.’’ 28 The authority granted to the Commission under Section 18(b)(3) to adopt rules that define a ‘‘qualified purchaser’’ is another significant source of flexibility for the Commission with respect to the exempt offering framework.29 Over time, Congress and the Commission have made changes to the federal securities laws and Commission 28 Public Law 104–290, 110 Stat. 3416 (Oct. 11, 1996). 29 In 2015, the Commission used this authority to define ‘‘qualified purchaser’’ to include any person to whom securities are offered or sold in a Regulation A Tier 2 offering. See 17 CFR 230.256. In 2001, the Commission proposed a definition of ‘‘qualified purchaser’’ that mirrored the definition of accredited investor in Regulation D in an effort to identify well-established categories of persons it had previously determined to be financially sophisticated and therefore not in need of the protection of state registration when they were offered or sold securities. The Commission intended the definition to facilitate capital formation, especially for small businesses, to impose uniformity in the regulation of transactions to these financially sophisticated persons, and to reduce burdens on capital formation. See Defining the Term ‘‘Qualified Purchaser’’ under the Securities Act of 1933, Release No. 33–8041 (Dec. 19, 2001) [66 FR 66839 (Dec. 27, 2001)]. Although the Commission solicited comment from interested parties, it took no further action on the proposal. E:\FR\FM\26JNP3.SGM 26JNP3 30464 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules rules that may enable issuers to remain private longer than in the past. For example, the JOBS Act and the FAST Act revised the thresholds for registration under Section 12(g) of the Exchange Act, with the result that an issuer that is not a bank, bank holding company, or savings and loan holding company is required to register a class of equity securities under the Exchange Act if it has more than $10 million of total assets and the securities are ‘‘held of record’’ by either 2,000 persons or 500 persons who are not accredited investors.30 The Commission also has taken steps to address uncertainties with respect to the integration of one exempt offering with another exempt offering or with a registered offering, as discussed in detail in Section III below, by providing some guidance to issuers as to their ability to transition from one offering to another. The exempt markets have also been affected by Commission rule changes jbell on DSK3GLQ082PROD with PROPOSALS3 30 15 U.S.C. 78l(g)(1); 17 CFR 240.12g-1. An issuer that is a bank, bank holding company, or savings and loan holding company is required to register a class of equity securities if it has more than $10 million of total assets and the securities are ‘‘held of record’’ by 2,000 or more persons. Prior to the JOBS Act, Section 12(g) of the Exchange Act required an issuer to register a class of its equity securities if, at the end of the issuer’s fiscal year, the securities were ‘‘held of record’’ by 500 or more persons and the issuer had total assets exceeding $1 million. Securities are deemed to be ‘‘held of record’’ by each person identified as the owner of such securities on the records maintained by or on behalf of the issuer, subject to certain conditions and exceptions. See 17 CFR 240.12g5–1. For securities issued in an offering under Regulation A, Regulation Crowdfunding [17 CFR 230.227 et seq.], or Rule 701, there is a conditional exemption from the mandatory registration provisions of Section 12(g) if certain conditions are met. See Sections II.C.1.d and II.F.1.g. See also 17 CFR 240.12h–1. VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 and market developments that provide for some measure of liquidity for securities in exempt offerings. Secondary market liquidity is a key concern of investors and may have a significant impact on an issuer’s choices with respect to capital raising. In other words, an investor’s willingness to participate in an exempt offering and the price he or she would be willing to pay may depend on the investor’s assessment of whether, when, and on what terms the security can be resold. With regard to secondary market resales of securities initially sold pursuant to an exemption from registration, the Commission adopted 17 CFR 230.144 (‘‘Rule 144’’) in 1972, providing a nonexclusive safe harbor for resales of securities acquired in transactions not involving a public offering.31 In 1990, the Commission created a safe harbor for resales of securities by persons other than issuers to ‘‘qualified institutional buyers’’ (‘‘QIBs’’) in 17 CFR 230.144A (‘‘Rule 144A’’).32 In 2015, the FAST Act added Section 4(a)(7) to the Securities Act, which exempts certain private resales of securities to accredited investors.33 Further, in recent years, markets have developed that facilitate the resale of securities of non-reporting companies.34 However, resales of securities originally purchased in a transaction exempt from registration raise a variety of issues, including whether the primary and secondary sales should be considered part of the same distribution of securities and whether secondary sales have an impact on the availability of the exemption from registration relied on for the primary offering.35 While the primary focus in this concept release is on the harmonization of the exemptions from registration for primary offerings, we also seek public input on whether we should consider rule changes that in certain cases would allow for more or less flexibility with regard to resales.36 Separate and apart from these regulatory changes, the exempt markets have been influenced by changes over the years in information and communications technologies. Given the rise of social media and other forms of communication, as well as online trading platforms for unregistered securities, information about exempt securities offerings is far more readily available to potential investors and to the general public and at a lower cost than at the time many of the exemptions were promulgated. 31 See Release No. 33–5223 (Jan. 11, 1972) [37 FR 591] (‘‘Rule 144 Adopting Release’’). For a discussion of Rule 144, see Section V.A.1. 32 See Resale of Restricted Securities; Changes to Method of Determining Holding Period of Restricted Securities under Rules 144 and 145, Release No. 33–6862 (Apr. 23, 1990) [55 FR 17933 (Apr. 30, 1990)] (‘‘Rule 144A Adopting Release’’). For a discussion of Rule 144A, see Section V.A.2. 33 Public Law 114–94, 129 Stat. 1312 (2015). See Section V.A.5. 34 See, e.g., David F. Larcker, Brian Tayan, and Edward Watts, Cashing it in: Private-Company Exchanges and Employee Stock Sales Prior to IPO, Stanford Closer Look Series (Sep. 12, 2018). 35 Persons reselling securities must consider whether they could be an ‘‘underwriter’’ if they acquired the securities with a view to ‘‘distribution’’ or if they are participating in a ‘‘distribution.’’ See Section 2(a)(11) of the Securities Act [15 U.S.C. 77b(a)(11)] (defining the term ‘‘underwriter’’). The Section 4(a)(1) [15 U.S.C. 77d(a)(1)] exemption, discussed in Section IV, is not available to a seller that is deemed to be an underwriter, and the resale by such an underwriter may be considered part of the primary offering by the issuer of the securities, calling into question the availability of the exemption for the original offering. 36 See Section IV. PO 00000 Frm 00006 Fmt 4701 Sfmt 4702 E:\FR\FM\26JNP3.SGM 26JNP3 30465 As the regulatory and operational framework for exempt offerings has evolved, the amount raised in exempt markets has increased both absolutely and relative to the public registered markets. In 2018, registered offerings accounted for $1.4 trillion of new capital compared to approximately $2.9 trillion that we estimate was raised through exempt offering channels.37 Figure 1 shows registered and exempt offerings over the period 2009–2018.38 The data shows that exempt offerings have accounted for significantly larger amounts of new capital compared to registered offerings during the period under consideration. Both markets exhibit an upward trend, which is consistent with the favorable macroeconomic environment during this period. Although the magnitudes of exempt capital and registered capital raised vary over time, the amount reported raised in exempt offerings is always larger than the amount raised in registered offerings during this time period. 37 Unless otherwise indicated, information in this release on Regulation D offerings, including offerings under Rule 504 and Rule 506, is based on analysis by staff in the Commission’s Division of Economic Risk and Analysis (‘‘DERA’’) of data collected from Form D [17 CFR 239.500] filings on the Commission’s Electronic Data Gathering, Analysis and Retrieval system (‘‘EDGAR’’) from January 2009 through December 2018. DERA staff determined the amount raised based on the amounts reported as ‘‘Total amount sold’’ in all Form D filings (new filings and amendments) on EDGAR. Subsequent amendments to a new filing were treated as incremental fundraising and recorded in the calendar year in which the amendment was filed. It is likely that the reported data on Regulation D offerings underestimates the actual amount raised through these offerings. First, as discussed in Section II.B.2, 17 CFR 230.503 (‘‘Rule 503’’) of Regulation D requires issuers to file a Form D no later than 15 days after the first sale of securities, but a failure to file the notice does not invalidate the exemption. Accordingly, it is possible that some issuers do not file Forms D for offerings relying on Regulation D. Second, underreporting could also occur because a Form D may be filed prior to completion of the offering, and our rules do not require issuers to amend a Form D to report the total amount sold on completion of the offering or to reflect additional amounts offered if the aggregate offering amount does not exceed the original offering size by more than 10%. Data on Regulation A offerings was collected from Form 1–Z [17 CFR 239.94] and 1–K [17 CFR 239.91] filings on EDGAR from May 2015 through December 2018. DERA staff supplemented information from Forms 1–Z and 1–K by manually reviewing semi-annual reports on Form 1–SA [17 CFR 239.92], available current reports on Form 1– U [17 CFR 239.93], and offering circular supplements filed during the sample period, and for issuers whose securities have become exchangelisted, information from other public sources. However, data on amounts raised may remain incomplete, and discrepancies in classification may arise. Estimates are based on available reports filed during this period and represent a lower bound on the amounts raised given: (1) The time frames for reporting proceeds following completed or terminated offerings; and (2) that offerings qualified during the report period may be ongoing. As discussed in Section II.C.2.b, Regulation A requires issuers in Tier 1 offerings to report sales and to update certain issuer information by filing a Form 1–Z exit report with the Commission not later than 30 calendar days after termination or completion of an offering. Tier 2 issuers are required to report sales in their first annual report on Form 1–K after termination or completion of a qualified offering, or in their exit report on Form 1–Z. Therefore, some issuers that have completed offerings during the sample period might not have reported proceeds during this period. Accordingly, amounts provided for these offerings likely underestimate the actual amount of capital raised during the period. Data on Regulation Crowdfunding offerings was collected from Form C [17 CFR 239.900] filings on EDGAR from May 2015 through December 2018. For offerings that have been amended, the data reflects information reported in the latest amendment as of the end of the considered period. As discussed in Section II.F, Regulation Crowdfunding requires an issuer to file a progress update on Form C–U within 5 business days after reaching 100% of its target offering amount. The data on Regulation Crowdfunding excludes 107 withdrawn offerings (involving a Form C–W filing or an intermediary that has withdrawn its registration as of the report date). Some withdrawn offerings may be failed offerings. Amounts raised may be lower than the target or maximum amounts sought. See note 41 for a discussion of the data on other exempt offerings, which includes Section 4(a)(2), Regulation S [17 CFR 230.901 et seq.], and Rule 144A offerings. See also Scott Bauguess, Rachita Gullapalli and Vladimir Ivanov, Capital Raising in the U.S.: An Analysis of the Market for Unregistered Securities Offerings, 2009–2017 (Aug. 2018) (the ‘‘Unregistered Offerings White Paper’’), available at https://www.sec.gov/files/DERA%20white %20paper_Regulation%20D_082018.pdf. The methodology DERA staff used to analyze data in this release is consistent with the methodology described in more detail in the Unregistered Offerings White Paper. We do not have data available on, and are unable to estimate, amounts raised under the intrastate exemptions under Securities Act Section 3(a)(11) or Rule 147 or 147A. See Section 70. 38 The sample period begins in 2009 due to data availability: Form D, from which we obtain data on exempt offerings under Regulation D, was required to be filed electronically starting in 2009. We note that, as a result, the sample period excludes the years of the 2007–2008 financial crisis. The sample period ends in 2018, which is the last full year of data on offerings. VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 PO 00000 Frm 00007 Fmt 4701 Sfmt 4725 E:\FR\FM\26JNP3.SGM 26JNP3 EP26JN19.000</GPH> jbell on DSK3GLQ082PROD with PROPOSALS3 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules Of the approximately $2.9 trillion estimated as raised in exempt offerings in 2018, Table 2 shows the amounts that we estimate were raised under each of the identified exemptions in 2018. The amounts estimated as raised in other exempt offerings include estimated amounts raised in offerings under Rule 144A and Regulation S. Rule 144A is a non-exclusive safe harbor for resales of certain restricted securities. TABLE 2—OVERVIEW OF AMOUNTS However, Rule 144A is typically used RAISED IN THE EXEMPT MARKET IN by market participants to facilitate 2018 capital raising by issuers by means of a two-step process in which the first step Amounts is a primary offering on an exempt basis reported or to one or more financial intermediaries, Exemption estimated as raised in 2018 and the second step is a resale to QIBs (billion) in reliance on Rule 144A.42 Regulation S provides a safe harbor for offers and Rule 506(b) of Regulation D $1,500 Rule 506(c) of Regulation D 211 sales of securities outside the United 39 0.061 States so long as the securities are sold Regulation A: Tier 1 ............. 40 0.675 Regulation A: Tier 2 ............. in an offshore transaction and there are Rule 504 of Regulation D ..... 2 no ‘‘directed selling efforts’’ in the Regulation Crowdfunding; United States.43 Although Rule 144A Section 4(a)(6) .................. 0.055 and Regulation S transactions account Other exempt offerings 41 ..... 1,200 for a significant proportion of the 39 See Table 8. id. 41 ‘‘Other exempt offerings’’ includes Section 4(a)(2), Regulation S, and Rule 144A offerings. The data used to estimate the amounts raised in 2018 for other exempt offerings includes: Offerings under Section 4(a)(2) of the Securities Act that were collected from Thomson Financial’s SDC Platinum, which uses information from underwriters, issuer websites, and issuer SEC filings to compile its Private Issues database; offerings under Regulation jbell on DSK3GLQ082PROD with PROPOSALS3 40 See VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 S that were collected from Thomson Financial’s SDC Platinum service; and resale offerings under Rule 144A that were collected from Thomson Financial SDC New Issues database, Dealogic, the Mergent database, and the Asset-Backed Alert and Commercial Mortgage Alert publications, to further estimate the exempt offerings under Section 4(a)(2) and Regulation S. We include amounts sold in Rule 144A resale offerings because, as discussed below, those securities are typically issued initially in a transaction under Section 4(a)(2) or Regulation S but generally are not included in the Section 4(a)(2) PO 00000 Frm 00008 Fmt 4701 Sfmt 4725 transaction activity in the exempt markets, we have opted to focus this concept release on other commonly used safe harbors and exemptions from registration for primary offerings. Figures 2 and 3 show the trends in capital raising under various offering exemptions during the period 2009– 2018. The amounts raised in Rule 506(b), Rule 506(c), other exempt offerings, Regulation A, and Regulation Crowdfunding show an upward trend over the period under consideration, while the amounts raised in Rule 504 offerings have fluctuated significantly; however, as discussed in Section D.3, we believe that the increase in Rule 504 offerings starting in 2016 is largely due to the repeal of 17 CFR 230.505 (‘‘Rule 505’’). or Regulation S data identified above. See Section V.A.2 for a discussion of the two-step process typically used by market participants in Rule 144A offerings. These numbers are accurate only to the extent that these databases are able to collect such information and may understate the actual amount of capital raised under these offerings if issuers and underwriters do not make this data available. 42 See Section V.A.2. 43 17 CFR 230.901 et seq. E:\FR\FM\26JNP3.SGM 26JNP3 EP26JN19.001</GPH> 30466 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules 44 Due to data limitations, Regulation A totals reflect amounts reported raised annually under Regulation A after the 2015 amendments. 45 See, e.g., Solicitations of Interest Prior to a Registered Public Offering, Release No. 33–10607 (Feb. 19, 2019) [84 FR 6713 (Feb. 28, 2019)]; Disclosure Update and Simplification, Release No. 33–10532 (Aug. 17, 2018) [83 FR 50148 (Oct. 4, 2018)]; Amendments to Smaller Reporting Company Definition, Release No. 33–10513 (Jun. 28, 2018) [83 FR 31992 (Jul. 10, 2018)]; FAST Act Modernization and Simplification of Regulation S– K, Release No. 33–10618 (Mar. 20, 2019) [84 FR 12674 (Apr. 2, 2019)]. See also Division of Corporation Finance, Draft Registration Statement Processing Procedures Expanded (Jun. 29, 2017; supplemented Aug. 17, 2017), available at https:// www.sec.gov/corpfin/announcement/draftregistration-statement-processing-proceduresexpanded. VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 many issuers, including early-stage and smaller issuers, may find that they need alternative access to capital in order to build their businesses and grow to become public reporting companies. For such issuers, an exempt offering market that allows for efficient access to capital may make it more likely that they achieve this growth. In addition, it may be argued that the increased amount raised in exempt offerings relative to registered offerings leaves certain types of investors with fewer investment opportunities than might have been available to them if the public markets were used more frequently. The current framework permits non-accredited investors some limited access to unregistered offerings. Based on available data,46 nonaccredited investors participate primarily 47 in offerings under Regulation A,48 Rule 504, and Regulation Crowdfunding.49 In 2018, however, aggregate investments in exempt offerings in which non46 We do not have data on, and are unable to estimate, amounts raised under the intrastate exemptions under Securities Act Section 3(a)(11) or Rule 147 or 147A. See Section 70. 47 While Rule 506(b) offerings can have up to 35 non-accredited but sophisticated investors, issuers reported non-accredited investors as participating in only six percent of Rule 506(b) offerings in each of 2015, 2016, 2017, and 2018, which offerings reported raising between two and three percent of the total capital raised under Rule 506(b) in each of 2015, 2016, 2017, and 2018. See Unregistered Offerings White Paper at Table 12. See also Sections II.B.2 and II.B.2.f for a discussion of the requirements for Rules 506(b) and 506(c). 48 17 CFR 230.251 et seq. 49 17 CFR 227.100 et seq. PO 00000 Frm 00009 Fmt 4701 Sfmt 4702 accredited investors participated 50 represented less than one percent of investment in all exempt offerings, and approximately two percent of all exempt offerings, excluding other exempt offerings.51 A significant number of attractive investment opportunities in the exempt market, including access to many growth-stage issuers, may be available only to investors with certain characteristics, such as accredited investors who, if natural persons, must meet an income or net worth test. For example, the amount of capital raised in Rule 506(b) offerings to accredited investors is greater than amounts raised in registered offerings, and significantly greater than the amounts raised in the types of exempt offerings that are more broadly accessible to non-accredited investors.52 Accordingly, while a nonaccredited investor may be able to invest in multiple offerings across the exempt market, such an investor would likely not have the same level of access to the full range of investment opportunities in the exempt market as an accredited investor would. We seek comment below on whether it would be consistent with capital formation and investor protection for us to consider steps to make a broader range of investment opportunities available to 50 This data includes offerings under Rule 506(b) but is limited to those offerings where issuers reported one or more participating non-accredited investor. 51 See note 41 for a discussion of the data on other exempt offerings. 52 See Section II.B.2.f. E:\FR\FM\26JNP3.SGM 26JNP3 EP26JN19.002</GPH> jbell on DSK3GLQ082PROD with PROPOSALS3 There are many possible reasons why the amount of capital raised in exempt offerings exceeds the amount raised in registered offerings. However, the focus of this concept release is to seek input on whether, in light of the increased activity in the exempt markets, the current exempt offering framework is working effectively to provide access to capital for a variety of issuers, particularly smaller issuers, and access to investment opportunities for a variety of investors while maintaining investor protections. Historically, a retail investor’s primary investment option was registered offerings, and encouraging registered offerings and facilitating investor access to such investment opportunities continues to be a Commission priority, as demonstrated by recent rule changes, proposals, guidance, and other initiatives facilitating capital raising through registered offerings.45 However, 30467 30468 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules those investors currently considered non-accredited. All securities offerings are (1) registered with the Commission, (2) exempt from registration, or (3) conducted in violation of the federal securities laws as a result of a failure to register when an exemption is not available. The distinction between fraudulent exempt offerings and illegal offerings as a result of a failure to register is an important one. A failure to comply with the registration provisions of Section 5 of the Securities Act is distinct from a violation of the antifraud provisions of the federal securities laws. Due to data limitations, it is difficult to draw rigorous conclusions about the extent of fraud in exempt securities offerings. Accordingly, we seek data about fraudulent activity in the exempt markets. In particular, we seek quantitative data on fraudulent activity in the context of securities offerings conducted pursuant to a valid exemption from registration, as opposed to illegal securities offerings that fail to comply with the registration provisions of Section 5. Such data may assist us in considering the incidence of fraud in these markets. Due to data limitations, it is also difficult to draw rigorous conclusions about the average magnitude of investor gains and losses in exempt securities offerings.53 Accordingly, we also seek data about the performance of investments in exempt markets. We also seek public input on the review of the exempt offering framework as a whole, and whether and how to best achieve our goal of improving and harmonizing the framework. Because the responses to the following requests for comment may overlap with responses to the more specific requests for comment elsewhere in this release, commenters may wish to consider these broader themes in the context of their responses to those more specific requests for comment. jbell on DSK3GLQ082PROD with PROPOSALS3 Request for Comment 1. Does the existing exempt offering framework provide appropriate options for different types of issuers to raise 53 It is difficult to perform a comprehensive market-wide analysis of investor gains and losses in exempt offerings given the significant limitations on the availability of data about the performance of these investments. Where partial data is available for some types of investments in exempt offerings, it does not lend itself to a comprehensive estimate of investment performance and risks across the entire market of exempt offerings. A typical startup issuer may require a long period of time to experience a liquidity event or close its business, and we lack comprehensive data on such events and associated investor gains and losses. The lack of a secondary trading market for many securities issued in exempt offerings further limits our ability to examine investor gains and losses. VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 capital at key stages of their business cycle? For example, are there capitalraising needs specific to any of the following that are not being met by the current exemptions: Small issuers; startup issuers; issuers in a particular industry, such as technology, biotechnology, manufacturing, or consumer products; issuers in different geographic regions, including those in rural areas or those affected by natural disasters; or issuers led by minorities, women, or veterans? What types of changes should we consider to address any such gaps in the exempt offering framework? Would legislative changes be necessary or beneficial to address any such gaps? 2. Do the existing exemptions from registration appropriately address capital formation and investor protection considerations? If so, should we retain our current exempt offering framework as it is? Are there burdens imposed by the rules that can be lifted while still providing adequate investor protection? 3. Is the existing exempt offering framework too complex? Should we reduce or simplify the number of exemptions available? If so, should we focus on having a limited number of exemptions based on the amount of capital sought (for example, a micro exemption, an exemption for offerings up to $75 million, and an unlimited offering exemption)? Or should we focus our exemptions on the type of investor allowed to participate? Would legislative changes be necessary or beneficial if we were to replace the current exempt offering framework with a simpler offering framework? 4. Are the exemptions themselves too complex? Can issuers understand their options and effectively choose the one best suited to their needs? Do any exemptions present pitfalls for small businesses, especially for issuers that may be unfamiliar with the general concepts underlying the federal securities laws? 5. In light of the fact that some exemptions impose limited or no restrictions at the time of the offer, should we revise our exemptions across the board to focus consistently on investor protections at the time of sale rather than at the time of offer? If our exemptions focused on investor protections at the time of sale rather than at the time of offer, should offers be deregulated altogether? How would that affect capital formation in the exempt market and what investor protections would be necessary or beneficial in such a framework? Would legislative changes be necessary or beneficial if we were to focus on the sale PO 00000 Frm 00010 Fmt 4701 Sfmt 4702 of a security, rather than the offer and sale? 6. What metrics should we consider in evaluating the impact of our exemptions on efficiency, competition, capital formation, and investor protection? In particular: • How should we evaluate whether our existing exemptions appropriately promote efficiency, competition, and capital formation? For example, in evaluating our exempt offering market, should we consider whether investors have more opportunities to participate in exempt offerings? To appropriately evaluate the market, should we consider the cost of capital for a variety of issuers? What other indicators should we consider? • How should we evaluate whether our exemptions provide adequate investor protection? For example, is there quantitative data available that shows an increased incidence of fraud in particular types of exempt offerings or in the exempt market as a whole? If so, what are the causes or explanations and what should we do to address it? What other factors should we consider in assessing investor protection? 7. How has technology affected an issuer’s ability to communicate with its potential and current investors? Do our exempt offering rules limit an issuer’s ability to provide disclosure promptly to its potential and current investors? Are there technologies or means of communication (e.g., online chat or message boards) that would effectively provide updated disclosure to potential and current investors that are currently not being used due to provisions in our rules or regulations? If so, what rules are limiting this disclosure and what changes should we consider? Given the transformation of information dissemination that has occurred since our rules were adopted and particularly over the last two decades, should we consider any rule changes to enhance an issuer’s ability to communicate with investors throughout the exempt offering framework? How would such changes affect capital formation in the exempt market and what investor protections would be necessary or beneficial in such a framework? Would legislative changes be necessary or beneficial to make such changes? 8. Are there rule changes we should consider to ease issuers’ transition from one exempt offering to another as their businesses develop and grow? 9. Would rule changes that simplify, harmonize, and improve the exempt offering framework have an effect on the registered public markets? For example, would a more streamlined exempt market encourage more issuers to E:\FR\FM\26JNP3.SGM 26JNP3 jbell on DSK3GLQ082PROD with PROPOSALS3 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules remain private longer or forgo registered offerings, and result in less capital being raised in the registered market over time? Are there changes to the current exempt offering framework that we should consider to help issuers transition to a registered public offering without undue friction or delay? Are there changes to the exempt offering framework that we should consider to encourage more issuers to enter the registered public markets? Would these changes increase the costs to issuers? Would these changes benefit investors or particular classes of investors? Would legislative changes be necessary or beneficial to address any such changes? 10. Which conditions or requirements are most or least effective at protecting investors in exempt offerings? Are there changes to these investor protections or additional measures we should implement to provide more effective investor protection in exempt offerings? Are there investor protection conditions that we should eliminate or modify because they are ineffective or unnecessary? Would legislative changes be necessary or beneficial to address any changes to investor protection conditions? 11. In light of the increased amount of capital raised through the exempt offering framework, should we consider rule changes that will help make exempt offerings more accessible to a broader group of retail investors than those who currently qualify as accredited investors? If so, what types of changes should we consider? For example, should we expand the definition of accredited investor to take into account characteristics other than an individual’s wealth? Should we allow investors, after receiving disclosure about the risks, to opt into accredited status? Should we amend the existing exemptions or adopt new exemptions to accommodate some form of nonaccredited investor participation such that these exemptions may be more attractive to, or more widely used by, issuers? 12. When the current exemptions from registration include offering limits or limits on the amount an individual investor may invest, what should we take into account to determine whether the limits and amounts are appropriate? Should the amounts of all offering limits or investment limits be subject to periodic inflation adjustments? If so, what inflation measure should we use for such adjustments and how often should the adjustments occur? Should we use dollar limits, or some other measure? For example, should individual investment limits be based on a percentage of the investor’s income VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 or investment portfolio? Do these limits impose any particular challenges, for example, by having different effects in different parts of the country due to regional differences? 54 Should any investors be limited in how much they can invest? 13. Many of the existing exemptions from registration require issuers to provide specified disclosure to investors at the time of the offering and, in some cases, on an ongoing basis following the offering. The type of information required to be provided, and the frequency with which the disclosures are required, vary from exemption to exemption. Should we harmonize the disclosure requirements of the various exemptions? If so, how? Should we focus on making the requirements more uniform or more scaled to the characteristics of the issuer or of the offering? Could changes to the various disclosure requirements of the exemptions help to facilitate issuers’ transition from one exempt offering to another or to a registered offering? Would legislative changes be necessary or beneficial if we were to replace the current exempt offering framework with such a framework? 14. Should the availability of any exemptions be conditioned on the involvement of a registered intermediary, such as the registered funding portal or broker-dealer in crowdfunding offerings, particularly where the offering is open to retail investors who may not currently qualify as accredited investors? 55 15. Should the availability of any exemptions be conditioned on particular characteristics of the issuer or lead investor(s)? For example, in an offering to non-accredited investors where there is one or more lead investors, should we require that the lead investor(s) hold a minimum amount of the same security type (or a junior security) sold to the nonaccredited investors? 16. Should we consider a more unified approach to the exempt offering framework that focuses on the types of investors permitted to invest in the offering and the size of the offering, tailoring the additional investor protections and conditions to be applied based on those characteristics? For example, should we consider changes to the requirements for any or all of the 54 See, e.g., Table 4. status of persons that provide introductions or otherwise solicit potential investors for an issuer (generally, ‘‘finders’’) is not discussed within this release. The Division of Trading and Markets is reviewing the status of finders for purposes of Section 15(a) of the Exchange Act [15 U.S.C. 78o(a)]. 55 The PO 00000 Frm 00011 Fmt 4701 Sfmt 4702 30469 existing exemptions from registration so that specific requirements (such as disclosure requirements or individual investment limits) will not apply if participation in the offering is limited to accredited investors? Would legislative changes be necessary or beneficial if we were to replace the current exempt offering framework with a more unified approach? 17. Should we consider rule changes that would allow non-accredited investors to participate in exempt offerings of all types, subject to conditions such as a limit on the size of the offering, a limit on the amount each non-accredited investor could invest in each offering, across all offerings, or across all offerings of a certain type, a decision by the investor—after receiving disclosure about the risks—to opt into the offering, and/or specific disclosure requirements? If so, should we scale the type and amount of information required to be disclosed to nonaccredited investors based on the characteristics of the investors or the offering, such as the net worth or sophistication of the non-accredited investors, or whether the offering amount is capped, individual investment limits apply, or an intermediary is involved in the offering? What benefits would be conferred by such an approach? What would be the investor protection concerns? Would legislative changes be necessary or beneficial if we were to replace the current exempt offering framework with such an approach? 18. Should we move one or more current exemptions into a single regulation, such as currently provided by Regulation D with respect to the exemptions under Rules 506(b), 506(c), and 504? What, if any, current exemptions should be included in a single set of regulations? Would a new single set of exemptions be overly complicated and obscure any possible benefits of coordination and harmonization? 19. Are we effectively communicating information about the exempt offering framework, including the requirements of each exemption, to the issuers seeking to raise capital and investors seeking investment opportunities in this market? What types of communications have worked best? How can we improve our communications to issuers and investors about the exempt offering framework? Are there additional technologies or means of communication that we should use to convey information about exempt offerings to issuers and investors? * * * * * E:\FR\FM\26JNP3.SGM 26JNP3 30470 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules The remainder of this concept release discusses the requirements for each of the capital-raising exemptions from registration that make up our current exempt offering framework. As indicated in the requests for comment set forth following the discussion of each exemption, we are seeking feedback from issuers, investors, and other market participants on whether any changes to Commission rules or the underlying statutes are needed or desired to improve the utility of the exemptions or the entire exempt offering framework consistent with investor protection. This release also discusses other broad topics that are relevant to the entire, or a significant portion of, the framework, including the definition of ‘‘accredited investor,’’ the integration analyses applied in the context of exempt offerings, exempt offerings by pooled investment funds,56 and the current regulatory landscape affecting the secondary trading market for securities originally sold in exempt offerings. A. Accredited Investor Definition 57 jbell on DSK3GLQ082PROD with PROPOSALS3 1. Background The ‘‘accredited investor’’ definition is set forth in 17 CFR 230.501(a) (‘‘Rule 501(a)’’) of Regulation D 58 and is ‘‘intended to encompass those persons whose financial sophistication and ability to sustain the risk of loss of investment or ability to fend for 56 We refer in this release to ‘‘pooled investment funds’’ because that term is used in Form D. 57 Section 413(b)(2)(A) of the Dodd-Frank Wall Street Reform and Consumer Protection Act [Pub. L. 111–203, 124 Stat. 1376 (2010)] (the ‘‘Dodd-Frank Act’’) directed the Commission to review the accredited investor definition as it relates to natural persons every four years to determine whether the definition should be modified or adjusted for the protection of investors, in the public interest, and in light of the economy. We intend the discussion in this Section II.A to satisfy that requirement. See Report on the Review of the Definition of ‘‘Accredited Investor’’ (Dec. 18, 2015) (‘‘Accredited Investor Staff Report’’), available at https:// www.sec.gov/corpfin/reportspubs/special-studies/ review-definition-of-accredited-investor-12-182015.pdf. See also Section II.A.3 for a discussion of the Accredited Investor Staff Report, which was prepared in connection with the first review in 2015. 58 In addition, Securities Act Section 2(a)(15) [15 U.S.C. 77b(a)(15)] and 17 CFR 230.215 (‘‘Rule 215’’) under the Securities Act define accredited investor for purposes of Securities Act Section 4(a)(5) [15 U.S.C. 77d(a)(5)]. Section 4(a)(5) exempts nonpublic offers and sales of up to $5 million made solely to accredited investors. However, based on DERA staff’s review of Form D filings from January 1, 2009 through December 31, 2018, no issuer has reported relying on the Section 4(a)(5) exemption. The definition of accredited investor in Section 2(a)(15) enumerates certain categories of persons and authorizes the Commission to prescribe additional categories. Pursuant to this authority, the Commission has prescribed additional categories in Rule 215. The definition contained in Rule 215 is substantially similar to Rule 501(a). VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 themselves render the protections of the Securities Act’s registration process unnecessary.’’ 59 The definition is a central component of several exemptions from registration, including Rules 506(b) and 506(c) of Regulation D.60 Accredited investors may, under Commission rules, participate in investment opportunities that are generally not available to nonaccredited investors, such as investments in many private issuers and offerings by hedge funds, private equity funds, and venture capital funds.61 The Rule 506 market has become a large and vibrant market for raising capital, especially for small business capital formation.62 Rule 506 offerings to accredited investors occur with greater frequency than any other type of offering surveyed by the staff.63 Issuers in those offerings are not required to provide any substantive disclosure and are permitted to sell securities to an unlimited number of accredited investors with no limit on the amount of money that can be raised from each investor or in total.64 Under the Regulation D accredited investor definition, natural persons are accredited investors if: • Their income exceeds $200,000 in each of the two most recent years (or 59 See, e.g., Regulation D Revisions Proposing Release; see also Amendments for Small and Additional Issues Exemptions under the Securities Act (Regulation A), Release No. 33–9741 (March 25, 2015) [80 FR 21805 (April 20, 2015)] (‘‘2015 Regulation A Release’’) at note 146. 60 See Section II.B for a discussion of Rule 506. 61 Purchasers in Rule 506(c) offerings are limited to accredited investors. See note 47 for data reflecting non-accredited investors’ participation in Rule 506(b) offerings. See Sections II.B.2 and II.B.2.f for a discussion of the requirements for Rules 506(b) and 506(c). See Section IV.A.2 for a discussion of private funds. Recent research has examined the importance of the pool of accredited investors for the entry of new businesses and employment. In their working paper, Lindsey and Stein (2019) examine the effects on angel finance stemming from Dodd-Frank Act’s elimination of the value of the primary residence in the determination of net worth for purposes of accredited investor status. See note 66 and accompanying text. Lindsey and Stein find that geographic areas experiencing a larger reduction in the number of potential accredited investors experienced negative effects on new firm entry and employment levels at small entrants. See Laura Lindsey and Luke C.D. Stein (2019) Angels, Entrepreneurship, and Employment Dynamics: Evidence from Investor Accreditation Rules, Working paper. 62 The aggregate amount of capital raised through Rule 506(b) and (c) offerings is large, but the median size of offerings by non-financial issuers is less than $1 million, indicating a large number of small offerings, consistent with the original regulatory objective to target the capital formation needs of small businesses. See Unregistered Offerings White Paper. 63 See Unregistered Offerings White Paper. 64 See 17 CFR 230.506(b) and 17 CFR 230.506(c). PO 00000 Frm 00012 Fmt 4701 Sfmt 4702 $300,000 in joint income with a person’s spouse) and they reasonably expect to reach the same income level in the current year; 65 or • Their net worth exceeds $1 million (individually or jointly with a spouse), excluding the value of their primary residence.66 In addition, directors, executive officers, and general partners of the issuer selling the securities are accredited investors for purposes of that issuer.67 Certain enumerated entities with over $5 million in assets qualify as accredited investors,68 while others, including regulated entities such as banks and registered investment companies, are not subject to the assets test.69 The definition of an accredited investor includes, among others, the following entities: • A bank, registered broker-dealer, insurance company, registered investment company, business development company (‘‘BDC’’) as defined in the Investment Company Act of 1940 (‘‘Investment Company Act’’),70 or small business investment company (‘‘SBIC’’); 71 • A private business development company as defined in the Investment Advisers Act of 1940 (‘‘Advisers Act’’); 72 • An employee benefit plan (within the meaning of the Employee Retirement Income Security Act 65 17 CFR 230.501(a)(6). CFR 230.501(a)(5). Section 413(a) of the Dodd-Frank Act excluded the value of a person’s primary residence from the net worth calculation and directed the Commission to adjust similarly any accredited investor net worth standard in its Securities Act rules. In 2011, the Commission revised Rules 215 and 501 to exclude any positive equity that individuals have in their primary residences. See Net Worth Standard for Accredited Investors, Release No. 33–9287 (Dec. 21, 2011) [76 FR 81793 (Dec. 29, 2011)] (‘‘Primary Residence Adopting Release’’). The revised calculation requires that any excess of indebtedness secured by the primary residence over the estimated fair market value of the residence be considered a liability for purposes of determining accredited investor status on the basis of net worth. The Commission also added a 60-day look-back period to prevent investors from artificially inflating their net worth by incurring incremental indebtedness secured by their primary residence, thereby effectively converting their home equity into cash or other assets that would be included in the net worth calculation. 67 17 CFR 230.501(a)(4). In addition, directors, executive officers, and general partners of a general partner of the issuer are accredited investors for purposes of the issuer. 17 CFR 230.501(a)(4). 68 17 CFR 230.501(a)(1), (3), and (7). 69 17 CFR 230.501(a)(1), (2), and (8). 70 15 U.S.C. 80a–2(a)(48). In this release, unless otherwise specified, we use the term ‘‘BDC’’ to refer to a business development company as defined in the Investment Company Act. See note 526 for a description of a BDC. 71 17 CFR 230.501(a)(1). See Section IV for a discussion of pooled investment funds. 72 15 U.S.C. 80b–2(a)(22). 66 17 E:\FR\FM\26JNP3.SGM 26JNP3 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules (‘‘ERISA’’) 73) if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million; 74 • A tax exempt charitable organization, corporation, or partnership with assets in excess of $5 million; 75 • An enterprise in which all the equity owners are accredited investors; 76 and • A trust with assets of at least $5 million, not formed only to acquire the securities offered, and the purchases of which are directed by a person who meets the legal standard of having sufficient knowledge and experience in financial and business matters to be 30471 capable of evaluating the merits and risks of the prospective investment.77 An entity that is not covered specifically by one of the enumerated categories is generally not an accredited investor under the rule. Below we estimate the number of U.S. households that qualify as accredited investors under the existing criteria.78 TABLE 3—HOUSEHOLDS QUALIFYING UNDER EXISTING ACCREDITED INVESTOR CRITERIA Criterion Number of qualifying households (Standard errors are in parentheses) Individual income 79 threshold ($200,000) ..................................................................... Joint income 80 threshold ($300,000) ............................................................................ Net worth 81 ($1,000,000) .............................................................................................. Overall number of qualifying households 82 .................................................................. 11.2 million (0.3 million) ..... 5.8 million (0.2 million) ....... 11.8 million (0.3 million) ..... 16.0 million (0.3 million) ..... The data above provides an estimate of the overall pool of qualifying households in the United States. It does not, however, represent the actual number of accredited investors that do or would invest in the Regulation D market or in other exempt offerings.83 Below we also present information on median and mean income and net worth of U.S. households in major U.S. geographic regions. The data shows that Qualifying households as % of U.S. households (Standard errors are in parentheses) 8.9% (0.2%). 4.6% (0.2%). 9.4% (0.2%). 13.0% (0.2%). household income and net worth tend to be much higher in the Northeast and West regions. This indicates that households that would qualify as accredited investors are more likely to be located in these two regions. TABLE 4—U.S. HOUSEHOLD INCOME AND NET WORTH, BY REGION 84 ($ thousands) Northeast Mean household income (before-tax) .............................................................. Median household income (before-tax) ........................................................... Mean household net worth .............................................................................. Median household net worth ........................................................................... 73 Public Law 93–406, 88 Stat. 829 (1974). CFR 230.501(a)(1). 75 17 CFR 230.501(a)(3). 76 17 CFR 230.501(a)(8). 77 17 CFR 230.501(a)(7). 78 For this analysis, we use the same methodology and variable definitions as the 2015 Accredited Investor Staff Report. The underlying household data for this analysis was obtained from the Federal Reserve Board’s Survey of Consumer Finances (the ‘‘SCF’’) for 2016, available at https://www.federal reserve.gov/econresdata/scf/scfindex.htm. The SCF is a triennial survey that provides insights into household income and net worth, where the household is considered to be the primary economic unit within a family. As of the date of this release, the most recent SCF data is from the 2016 survey. The SCF employs weights to make the data representative of the U.S. population. The 2015 Accredited Investor Staff Report used the definitions from Jesse Bricker, Lisa J. Dettling, Alice Henriques, Joanne W. Hsu, Kevin B. Moore, John Sabelhaus, Jeffrey Thompson, and Richard A. Windle, Changes in U.S. Family Finances from 2010 to 2013: Evidence from the Survey of Consumer Finances, Federal Reserve Bulletin, Vol. 100, No. 4 (2014). We estimate households and not individuals due to data limitations because the database underlying our analysis measures wealth and income at the household level. It should be noted that in the SCF database, income is reported at the household level. Similar to the 2015 Accredited Investor Staff Report, we do not attempt to differentiate income jbell on DSK3GLQ082PROD with PROPOSALS3 74 17 VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 136.5 64.4 851.3 154.5 based on marital status of the household because data on individual income from all sources is not publicly available in the database. As a result, accredited investor (household) estimates based on individual income thresholds are likely to be overestimated and would represent upper bounds. A household can have multiple family members with independent sources of income that qualify them as accredited investors based on income. We count them as one accredited investor for each household, which implies we are also likely underestimating the actual pool of accredited investors when we provide household estimates. Consequently, the household estimates we derive using the joint income threshold would represent a lower bound for individuals qualifying on the basis of income. The actual number of individuals that qualify as accredited investors on an income basis (individual or joint) would, in all likelihood, lie between the estimates that we derive for the individual income threshold and the joint income threshold. 79 For purposes of this analysis, income is defined to include wage income, business income, rent income, interest and dividend income, pension income, social security income, income from retirement accounts, transfers, and other income. According to the SCF documentation, income data is collected for the year prior to the year of the SCF while family balance sheet data covers the status of the family at the time of the interview. Thus, we use income data inflation-adjusted to 2016. Further, for comparability, income data is adjusted for inflation by a factor of 1.05914411 from 2016 dollars to March 2019 dollars using Consumer Price PO 00000 Frm 00013 Fmt 4701 Sfmt 4702 Midwest 102.0 54.7 658.8 103.2 South 100.0 51.5 636.9 87.0 West 108.5 57.5 873.7 114.3 Index (‘‘CPI’’) data from the U.S Department of Labor Bureau of Labor Statistics (‘‘BLS’’). 80 See note 79. 81 For purposes of this analysis, net worth is defined as the difference between household assets and household debt. Assets include all financial assets (stocks, bonds, mutual funds, cash and cash management accounts, retirement assets, life insurance, managed assets like trusts and annuities, and other financial assets like deferred compensation, royalties, futures, etc.) and nonfinancial assets. Debt includes mortgage and home equity loans, lines of credit, credit card debt, installment loans including vehicle loans, margin loans, pension loans, and other debt (e.g., loans against insurance). We exclude the value of the household’s principal residence and any outstanding mortgages associated with the principal residence. Further, for comparability, net worth data is adjusted for inflation by a factor of 1.05914411 from 2016 dollars to March 2019 dollars using BLS CPI data. 82 The number of households qualifying under either the income or net worth criterion is smaller than the sum of the number of households qualifying under the income and the number of households qualifying under the net worth criterion because some households may qualify under both criteria. 83 Form D data and other data available to us on private placements do not allow us to estimate the number of unique accredited investors participating in the exempt offerings. E:\FR\FM\26JNP3.SGM 26JNP3 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules Below we also provide an overview of the educational attainment level of the estimated accredited investor pool, based on the existing criteria. As can be seen below, accredited investors tend to be more highly educated relative to the general population. We lack data to generate a comprehensive estimate of the overall number of institutional accredited investors because disclosure of accredited investor status across all institutional investors is not required and because, while we have information to estimate the number of some categories of institutional accredited investors, we lack comprehensive data that will allow us to estimate the unique number of investors across all categories of institutional accredited investors under Rule 501.86 2. Implications Outside of the Regulation D Context The Regulation D accredited investor definition plays an important role in other federal securities law contexts. For example: • Regulation A limits the amount of securities non-accredited investors can purchase in certain of those offerings to no more than 10% of the greater of their annual income or their net worth.87 Accredited investors are not subject to investment limits under Regulation A. • Under Section 12(g) of the Exchange Act,88 an issuer that is not a bank, bank holding company or savings and loan holding company is required to register a class of equity securities under the Exchange Act if it has more than $10 million of total assets and the securities are ‘‘held of record’’ by either 2,000 persons, or 500 persons who are not accredited investors.89 As a result, issuers seeking to rely on these thresholds must differentiate between record holders who are accredited investors and non-accredited investors. • Under Section 5(d) of the Securities Act, an emerging growth company 90 is permitted to ‘‘test the waters’’ 91 with potential investors that are QIBs 92 or advisers) or institutional accredited investors that do not retain services of a Form ADV filer. Further, Form D filings do not provide a breakdown of investors by type—institutions or natural persons— that invested in an offering. 87 17 CFR 230.251(d)(2)(i)(C). See Section II.C.1.c. 88 15 U.S.C. 78l(g). 89 See id.; see also 17 CFR 240.12g–1 (‘‘Rule 12g– 1’’) (clarifying that accredited investor status for this purpose is determined as of the last day of its most recent fiscal year rather than at the time of the sale of the securities); Changes to Exchange Act Registration Requirements to Implement Title V and Title VI of the JOBS Act, Release No. 33–10075 (May 3, 2016) [84 FR 6713 (Feb. 28, 2019)] (‘‘Changes to Exchange Act Registration Requirements Release’’) at Section II.B. (‘‘Under amended Rule 12g–1, an issuer will need to determine, based on facts and circumstances, whether prior information provides a basis for a reasonable belief that the security holder continues to be an accredited investor as of the last day of the fiscal year.’’). 90 An emerging growth company refers to an issuer that had total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year and, as of December 8, 2011, had not sold common equity securities under a registration statement. That issuer continues to be an emerging growth company for the first five fiscal years after the date of the first sale of its common equity securities pursuant to an effective registration statement, unless one of the following occurs: Its total annual gross revenues are $1.07 billion or more; it has issued more than $1 billion in non-convertible debt in the past three years; or it becomes a ‘‘large accelerated filer,’’ as defined in 17 CFR 240.12b–2 (‘‘Rule 12b–2’’) under the Exchange Act. See 17 CFR 230.405 (‘‘Rule 405’’) and Rule 12b–2 (defining ‘‘emerging growth company’’). 91 Communications between an issuer and potential investors for the purpose of assessing investor interest before having to commit the time and expense necessary to carry out a contemplated securities offering are often referred to as ‘‘testing the waters.’’ 92 See Section V.A.2 for a discussion of the definition of a QIB. 84 The Federal Reserve Board’s 2016 SCF Chartbook, available at https:// www.federalreserve.gov/econres/files/ BulletinCharts.pdf, at 28, 29, 64, 65. The public version of the SCF database does not provide information regarding geographical location of households. As a result, we are unable to identify in which states households that qualify as accredited investors are likely to be concentrated. Unlike Table 3, in which we exclude the value of the primary residence from net worth, Table 4 does not exclude the value of the primary residence from the net worth of households. The figures were adjusted for inflation to March 2019 dollars using BLS CPI data. 85 The data underlying these charts was obtained from the 2016 SCF, adjusted for inflation to March 2019 dollars. 86 For example, Form ADV filers report information about the number of clients of different types, such as pooled investment vehicles, banking institutions, corporations, charities, pension plans, etc., some of which are potential institutional accredited investors. However, the data available to us does not allow identification of unique clients (to account for cases where a client has multiple VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 PO 00000 Frm 00014 Fmt 4701 Sfmt 4702 E:\FR\FM\26JNP3.SGM 26JNP3 EP26JN19.003</GPH> jbell on DSK3GLQ082PROD with PROPOSALS3 30472 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules jbell on DSK3GLQ082PROD with PROPOSALS3 institutional accredited investors 93 before or after filing a registration statement to gauge such investors’ interest in a contemplated securities offering. In February 2019, the Commission proposed expanding this testing the waters accommodation to all issuers, including registered investment companies and BDCs.94 In addition, some states use the accredited investor definition to determine whether investment advisers to certain private funds are required to be registered.95 States also incorporate the definition in a variety of other contexts. For example, the definition is used in government finance,96 finance lending,97 mortgage lending,98 insurance,99 and financial institution regulation.100 The accredited investor definition also served as a model for an exemption under the Uniform Securities Act of 2002.101 FINRA Rule 5123 uses the accredited investor definition to provide an exemption from the general requirement that each member firm that sells an issuer’s securities in a private placement file with FINRA a copy of any private placement memorandum, term sheet, or other offering document the firm used within 15 calendar days of the date of the sale, or indicate that it did not use any such offering documents.102 The exemption applies to offerings sold to, among other persons, accredited investors described in Rule 501(a)(1), (2), (3), or (7). The rule does not 93 An institutional accredited investor refers to any institutional investor who is also an accredited investor. 94 See Solicitations of Interest Prior to a Registered Public Offering, Release No. 33–10607 (Feb. 19, 2019) [84 FR 6713 (Feb. 28, 2019)]. 95 See, e.g., Final Order Granting Exemption From the Registration Requirements for Investment Advisers to Private Funds and Their Investment Adviser Representatives, Wisconsin Department of Financial Institutions, Division of Securities (Feb. 17, 2012); Certificate Exemption for Investment Advisers to Private Funds, Cal. Code Regs. Title 10 § 260.204.9; Sixth Transition Order administering the Michigan Uniform Securities Act, State of Michigan Department of Energy, Labor & Economic Growth, Office of Financial and Insurance Regulation (Mar. 11, 2011). 96 See, e.g., Cal. Gov’t Code § 64111. 97 See, e.g., Cal. Fin. Code § 22064. 98 See, e.g., Fla. Stat. §§ 494.001 and 494.00115. 99 See, e.g., Tex. Ins. Code § 1111A.002. 100 See, e.g., Conn. Gen. Stat. § 36a–2 (2014). 101 Uniform Securities Act of 2002 §§ 102(11)(F) through 102(11)(K), 102(11)(O) and 202(13), National Conference of Commissioners on Uniform State Laws (also known as the Uniform Law Commission). The Uniform Law Commission provides states with model legislation in areas of state statutory law when uniformity is desired and practicable. The Uniform Securities Act of 2002 is a model state securities law available at https:// www.uniformlaws.org/committees/communityhome?communitykey=8c3c2581-0fea-4e91-8a5027eee58da1cf&tab=groupdetails. 102 FINRA Rule 5123(b)(1)(J). VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 incorporate the entire accredited investor definition and in particular excludes the net worth and income criteria set forth in Rule 501(a)(5) and (6) respectively.103 3. Accredited Investor Staff Report In December 2015, the Commission issued a staff report on the accredited investor definition.104 The report examined the history of the accredited investor definition 105 and considered comments on the definition received from a variety of sources, including public commenters, the Commission’s Investor Advisory Committee,106 the Commission’s Advisory Committee on Small and Emerging Companies,107 and the 2014 Small Business Forum.108 The report considered alternative approaches to defining ‘‘accredited investor,’’ provided staff recommendations for potential updates and modifications to the existing definition, and analyzed the impact potential approaches may have on the pool of accredited investors. The report noted that any change to the accredited investor definition would have to consider both the impact the change could have on investors and the supply 103 The Commission release approving FINRA’s adoption of this rule noted the following rationale: ‘‘Several commenters requested additional exemptions from coverage under Rule 5123. [One commenter], for example, requested an exemption for all accredited investors. FINRA stated that it does not believe that the exemption should extend to offers to accredited investors under Rule 501(a)(4), (5), or (6) of Regulation D. In particular, FINRA stated that it believes that the criteria used to measure whether a person meets the accredited investor standard do not necessarily reflect a sufficiently high level of sophistication to justify exemption from the proposed rule.’’ Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Amendments No. 2 and No. 3 and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendments No. 1, No. 2, and No. 3 to Adopt FINRA Rule 5123 (Private Placements of Securities) in the Consolidated FINRA Rulebook, Release No. 34–67157 (June 7, 2012) [77 FR 35457 (June 13, 2012)]. 104 See Accredited Investor Staff Report. The report focused on the accredited investor definition as used in Regulation D, with the understanding that any revisions to the definition should be made to the Rule 215 definition as well. 105 See id at Section II. 106 See Recommendation of the Investor Advisory Committee: Accredited Investor Definition (Oct. 9, 2014) available at http://www.sec.gov/spotlight/ investor-advisory-committee-2012/accreditedinvestor-definition-recommendation.pdf. 107 See Advisory Committee on Small and Emerging Companies: Recommendations Regarding the Accredited Investor Definition (Feb. 17, 2015) available at http://www.sec.gov/info/smallbus/ acsec/acsec-accredited-investor-definitionrecommendation-030415.pdf. 108 See Final Report of the 2014 SEC GovernmentBusiness Forum on Small Business Capital Formation (May 2015) available at http:// www.sec.gov/info/smallbus/gbfor33.pdf (‘‘2014 Forum Report’’). PO 00000 Frm 00015 Fmt 4701 Sfmt 4702 30473 of capital to the Regulation D market. The report acknowledged the tradeoff between using a principles-based accredited investor definition and the need for bright-line standards that investors, issuers, and their advisors can understand and apply easily. In the report, the staff recommended that the Commission consider any one or more of the methods of revising the accredited investor definition described in Table 5 below. In addition to the staff recommendations described in Table 5 below, the report also discussed whether individuals with certain professional degrees or licenses or financial experience, or who are advised by professionals, should be considered accredited investors. The report, however, did not include any staff recommendations about whether individuals with certain professional degrees or licenses or financial experience, or who are advised by professionals, should be considered accredited investors. 4. Comments on the Accredited Investor Staff Report Following the release of the Accredited Investor Staff Report, the Commission has continued to receive recommendations about revisions to the accredited investor definition from the Advisory Committee on Small and Emerging Companies and the annual Small Business Forum. In July 2016, the Advisory Committee on Small and Emerging Companies recommended, among other things, that the Commission: • Not change the current financial thresholds in the accredited investor definition except to adjust on a goingforward basis to reflect inflation; • Expand the pool of accredited investors to include individuals who have passed examinations that test their knowledge and understanding in the areas of securities and investing, including the Series 7, Series 65, Series 82, and CFA Examinations and equivalent examinations; and • Explore ways to allow participation by potential investors with specific industry or issuer knowledge or expertise who would not otherwise be considered accredited investors.109 The recommendation also noted that the Committee would support expanding the definition to take into account measures of non-financial 109 See Advisory Committee on Small and Emerging Companies: Recommendations Regarding the Accredited Investor Definition (July 20, 2016) available at https://www.sec.gov/info/smallbus/ acsec/acsec-recommendations-accreditedinvestor.pdf. E:\FR\FM\26JNP3.SGM 26JNP3 30474 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules sophistication, regardless of income or net worth, thereby expanding rather than contracting the pool of accredited investors; however, the recommendations cautioned that any non-financial criteria should be able to be ascertained with certainty as ‘‘simplicity and certainty are vital to the utility of any expanded definition of accredited investor.’’ 110 The Committee also recommended that the Commission continue to gather data for ongoing analysis of what ‘‘attributes best encompass those persons 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.’’ 111 The 2016, 2017, and 2018 Forum Reports all included a recommendation that, consistent with the recommendations of the Advisory Committee on Small and Emerging Companies, the Commission should: (a) Maintain the monetary thresholds for accredited investors; and (b) expand the categories of qualification for accredited investor status based on various types of sophistication, such as education, experience, and training, including without limitation persons holding FINRA licenses or CPA or CFA designations, passing a test that demonstrates sophistication, or status as managerial or key employees affiliated with the issuer.112 110 Id. 111 Id. jbell on DSK3GLQ082PROD with PROPOSALS3 112 See Final Report of the 2016 SEC GovernmentBusiness Forum on Small Business Capital Formation (Mar. 2017) available at https:// www.sec.gov/info/smallbus/gbfor35.pdf (‘‘2016 Forum Report’’); Final Report of the 2017 SEC Government-Business Forum on Small Business Capital Formation (Mar. 2018) available at https:// www.sec.gov/files/gbfor36.pdf (‘‘2017 Forum Report’’); and 2018 Forum Report. VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 In October 2017, the U.S. Department of the Treasury prepared a report that included recommendations to, among other things, revise the accredited investor definition.113 The 2017 Treasury Report recommended that the Commission undertake amendments to the accredited investor definition with the objective of expanding the eligible pool of sophisticated investors. The 2017 Treasury Report stated that the definition could be broadened to include: (a) Any investor who is advised on the merits of making a Regulation D investment by a fiduciary, such as an SEC- or state-registered investment adviser; and (b) financial professionals, such as registered representatives and investment adviser representatives, who are considered qualified to recommend Regulation D investments to others.114 In addition, the Commission received over 50 comment letters on the Accredited Investor Staff Report.115 While a few commenters opposed changes to the definition,116 most commenters generally supported at least 113 See A Financial System That Creates Economic Opportunities Capital Markets, U.S. Dept. of the Treasury (Oct. 2017 (‘‘2017 Treasury Report’’), available at https://www.treasury.gov/ press-center/press-releases/documents/a-financialsystem-capital-markets-final-final.pdf, at p. 44. 114 See 2017 Treasury Report, at p. 44. 115 The comment letters received in response to the Accredited Investor Staff Report are available at https://www.sec.gov/comments/4-692/4-692.shtml. 116 See, e.g., Letter from Jillian Sidoti dated Jan. 25, 2016 available at https://www.sec.gov/ comments/4-692/4692-10.htm (raising concerns about increasing the financial thresholds to ‘‘higher, and perhaps unbearable, thresholds’’) (‘‘Sidoti Letter’’); Letter from Michael John Sewell dated Dec. 23, 2015 available at https://www.sec.gov/ comments/4-692/4692-2.htm (‘‘Sewell Letter’’) (raising concerns about increasing the complexity of defining an accredited investor); and Letter from Robert Kent dated May 4, 2016 available at https:// www.sec.gov/comments/4-692/4692-1736913151030.htm. PO 00000 Frm 00016 Fmt 4701 Sfmt 4702 one of the staff’s recommended changes to the definition.117 In addition, some commenters advocated for lower thresholds or an elimination of the need for the accredited investor definition altogether.118 117 See Table 3 for a summary of the responses from commenters on each staff recommendation. 118 See, e.g., Letter from Ryan Carpel dated May 12, 2016 available at https://www.sec.gov/ comments/4-692/4692-30.htm; Letter from Nader Rahelan dated Apr. 23, 2016 available at https:// www.sec.gov/comments/4-692/4692-25.htm; Letter from Darrell J. Leamon dated Apr. 29, 2016 available at https://www.sec.gov/comments/4-692/ 4692-27.htm; Letter from Andrew Thompson, J.D. dated Feb. 9, 2016 available at https://www.sec.gov/ comments/4-692/4692-12.htm (‘‘Thompson Letter’’); Letter from Caroline B. Austin dated Jan. 30, 2016 available at https://www.sec.gov/ comments/4-692/4692-11.htm; Letter from Public Startup Company, Inc. dated Feb. 16, 2016 available at https://www.sec.gov/comments/4-692/469213.pdf (‘‘PSC Letter’’); Letter from Roger Q. Doctor dated Jun. 14, 2016 available at https:// www.sec.gov/comments/4-692/4692-36.htm; Letter from Karl T. Muth, Lecturer, Northwestern University dated May 17, 2016 available at https:// www.sec.gov/comments/265-27/26527-58.htm (‘‘Muth Letter’’); Anonymous Letter dated Jul. 5, 2016 available at https://www.sec.gov/comments/4692/4692-39.pdf (‘‘Anon 2 Letter’’); Letter from Martha J. Escudero Acosta dated Oct 15, 2016 available at https://www.sec.gov/comments/4-692/ 4692-45.htm (‘‘Escudero Letter’’); Letter from The TAN2000 International Regulatory Corporation dated Dec. 10, 2016 available at https:// www.sec.gov/comments/4-692/4692-46.pdf (‘‘TAN2000 Letter’’); Letter from Cole Hyland dated Jan. 27, 2017 available at https://www.sec.gov/ comments/4-692/4692-1536599-131180.htm; Letter from Charles A. Gokas dated Jul. 7, 2017 available at https://www.sec.gov/comments/4-692/46921840627-154975.htm; Letter from David Kinsfather dated Aug. 5, 2017 available at https:// www.sec.gov/comments/4-692/4692-2185513159906.htm; Michael K. Smith dated Jan. 23, 2018 available at https://www.sec.gov/comments/4-692/ 4692-2945318-161851.htm; and Letter from Anonymous Lawyer dated Aug. 2, 2016 available at https://www.sec.gov/comments/4-692/4692-41.htm (‘‘Anon 3 Letter’’) (recommending that there should be different and lower thresholds for service providers of the issuer to be deemed an accredited investor). E:\FR\FM\26JNP3.SGM 26JNP3 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules Of the staff’s recommended changes, commenters were overwhelmingly supportive of the creation of additional methods of accreditation other than financial criteria.119 Many commenters expressed that financial thresholds are not effective in defining a population of sophisticated investors and that one or more of the alternative methods of accreditation may be more indicative of sophistication than income and net worth alone.120 A few commenters 30475 recommended investment limits 121 or an additional financial net worth qualification for these investors.122 Table 5 provides an overview of the feedback provided by commenters about each of the specific recommendations. TABLE 5—RESPONSES TO STAFF RECOMMENDATIONS ON THE ACCREDITED INVESTOR DEFINITION Staff recommendation Responses from commenters Leave the current income and net worth thresholds in place, subject to investment limits. —A few commenters generally supported the recommendation; 123 —Several commenters supported leaving the current income and net worth thresholds in place; 124 —Several commenters were either opposed to, or raised concerns about, adding investment limits to investors that met these thresholds; 125 and —One commenter was opposed both to leaving the current income and net worth threshold in place and to adding investment limits on those investors.126 A few commenters stated that the structure would add costs and complexity to the capitalraising process.127 Some commenters supported the recommendation,128 and some opposed raising the income and net worth thresholds.129 While one commenter stated that there should be some sophistication qualification, in addition to the net worth or income thresholds,130 another commenter stated that this qualification should remain independent from any investment limits or qualitative restrictions.131 A few commenters supported this recommendation,132 and no commenters specifically opposed this recommendation. All of the commenters who expressed a view about this recommendation generally supported this recommendation.133 Some of these commenters, however, supported the recommendation with the following limitations and conditions: —Some commenters believed that a minimum amount of professional experience should also be a part of this qualification.134 —One commenter believed that the professional experience should be with early stage financing.135 —One commenter supported investment limits for these investors.136 Several commenters stated that qualifying credentials should include one or more of the following: Passing the Series 7, Series 65, Series 66, or Series 82 examinations, being a certified public accountant (CPA), certified financial analyst (CFA), certified management accountant (CMA), registered investment advisor (RIA) or registered representative (RR), having an MBA from an accredited educational institution or having a certified investment management analyst (CIMA) certification, or having been in the securities industry as a broker, lawyer, or accountant.137 Other commenters had more general views on the sophistication necessary to qualify an investor as accredited.138 Most of the commenters who expressed a view about this recommendation supported the recommendation,139 while one commenter opposed it.140 Several commenters supported the recommendation,142 while one commenter opposed it.143 Add new inflation-adjusted income and net worth thresholds that are not subject to investment limits. Permit individuals with a minimum amount of investments to qualify as accredited investors. Permit individuals with certain professional credentials to qualify as accredited investors. Permit individuals with experience investing in exempt offerings to qualify as accredited investors. Permit knowledgeable employees 141 of private funds to qualify as accredited investors for investments in their employer’s funds. jbell on DSK3GLQ082PROD with PROPOSALS3 Index all financial thresholds in the definition for inflation on a goingforward basis. Permit spousal equivalents to pool their finances for the purpose of qualifying as accredited investors. Permit all entities with investments in excess of $5 million to qualify as accredited investors. 119 See, e.g., Letter from Consumer Federation of America and Americans for Financial Reform dated Apr. 27, 2016 available at https://www.sec.gov/ comments/4-692/4692-26.pdf (‘‘CFA/AFR Letter’’); Letter from Crowdfund Intermediary Regulatory Advocates dated Jan. 14, 2016 available at https:// www.sec.gov/comments/4-692/4692-6.pdf (‘‘CFIRA Letter’’); Letter from Biotechnology Innovation Organization dated Apr.8, 2016 available at https:// www.sec.gov/comments/4-692/4692-21.pdf (‘‘BIO Letter’’); Letter from National Small Business Association dated Mar. 29, 2016 available at https://www.sec.gov/comments/4-692/4692-18.pdf (‘‘NSBA Letter’’); Letter from North American Securities Administrators Association, Inc. (‘‘NASAA’’) dated May 25, 2016 available at https://www.sec.gov/comments/4-692/4692-34.pdf (‘‘NASAA Letter’’); Letter from Engine dated Mar. 14, 2016 available at https://www.sec.gov/ comments/4-692/4692-17.pdf (‘‘ENGINE Letter’’); Letter from Investment Management Consultants Association dated Mar. 29, 2016 available at https://www.sec.gov/comments/4-692/4692-19.pdf (‘‘IMCA Letter’’); Letter from Dar’shun Kendrick, Kendrick Law Practice dated May 1, 2016 available at https://www.sec.gov/comments/4-692/4692- VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 A few commenters stated that the recommendation is unlikely to have any significant impact.144 Most of the commenters who expressed a view about this recommendation supported the recommendation,145 while a few commenters opposed it.146 Responses were mixed, with a few commenters that generally supported the recommendation 147 and one commenter that opposed it.148 Responses were mixed, with a few commenters that supported the recommendation 149 and a few commenters that opposed it.150 29.htm (‘‘Kendrick Letter’’); Letter from Anonymous Investment Banker dated Apr. 13, 2016 available at https://www.sec.gov/comments/4-692/4692-22.htm (‘‘Banker Letter’’); Letter from Keith J. Johnson, JD dated Mar. 6, 2016 available at https:// www.sec.gov/comments/4-692/4692-16.pdf (‘‘Johnson Letter’’); Letter from Cornell Securities Law Clinic dated Apr. 30, 2016 available at https:// www.sec.gov/comments/4-692/4692-28.pdf (‘‘Cornell Law Clinic Letter’’); Letter from the Small Business Investor Alliance dated Mar. 7, 2016 available at https://www.sec.gov/comments/4-692/ 4692-15.pdf (‘‘SBIA Letter’’); PSC Letter; Letter from Leonard A. Grover, Founder/CEO, FinToolbox/ Screener.co dated Jun. 13, 2016 available at https:// www.sec.gov/comments/4-692/4692-35.pdf (‘‘Grover Letter’’); Letter from Investment Adviser Association dated Jun. 29, 2016 available at https:// www.sec.gov/comments/4-692/4692-38.pdf (‘‘IAA Letter’’); Anon 2 Letter; Letter from Tom C.W. Lin, Associate Professor of Law, Temple University Beasley School of Law dated Jul. 14, 2016 available at https://www.sec.gov/comments/4-692/469240.pdf (‘‘Lin Letter’’); Escudero Letter; Letter from Jeff Carlsen, CPA dated Jan. 17, 2017 available at https://www.sec.gov/comments/4-692/4692- PO 00000 Frm 00017 Fmt 4701 Sfmt 4702 1497754-130754.htm (‘‘Carlsen Letter’’); Letter from Kyle Beagle dated Jan. 13, 2016 available at https:// www.sec.gov/comments/4-692/4692-4.htm (‘‘Beagle Letter’’); Letter from Ava Badiee dated May 10, 2016 available at https://www.sec.gov/comments/4-692/ 4692-31.pdf (‘‘Badiee Letter’’); Letter from Chase R. Morello, Esq. dated Jan. 13, 2016 available at https://www.sec.gov/comments/4-692/4692-5.pdf (‘‘Morello Letter’’); Mark R. Maisonneuve, CFA dated Apr. 26, 2017 available at https:// www.sec.gov/comments/4-692/4692-1722772150627.htm (‘‘Maisonneuve Letter’’); TAN2000 Letter; Letter from Managed Funds Association dated Jun. 16, 2016 available at https:// www.sec.gov/comments/4-692/4692-37.pdf (‘‘MFA– 1 Letter’’); and Letter from Managed Funds Association dated May 18, 2017 available at https:// www.sec.gov/comments/s7-07-16/s70716-1761663152156.pdf (‘‘MFA–2 Letter’’). 120 See, e.g., CFA/AFR Letter; CFIRA Letter; Banker Letter; Cornell Law Clinic Letter; Grover Letter; Anon 2 Letter; Carlsen Letter; and Maisonneuve Letter. 121 See, e.g., Badiee Letter. 122 See, e.g., NASAA Letter. E:\FR\FM\26JNP3.SGM 26JNP3 30476 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules TABLE 5—RESPONSES TO STAFF RECOMMENDATIONS ON THE ACCREDITED INVESTOR DEFINITION—Continued Staff recommendation Responses from commenters Permit an issuer’s investors that meet and continue to meet the current accredited investor definition to be grandfathered with respect to future offerings of the issuer’s securities. Permit individuals who pass an accredited investor examination to qualify as accredited investors. Most of the commenters who expressed a view about this recommendation supported the recommendation,151 while one commenter opposed it.152 jbell on DSK3GLQ082PROD with PROPOSALS3 In addition, multiple commenters recommended changes to the accredited 123 See, e.g., CFA/AFR Letter; NASAA Letter; and Johnson Letter. 124 See, e.g., SBIA Letter; CFIRA Letter; ENGINE Letter (‘‘Any increase in the financial thresholds should be justified based on the goals of the definition, and there is no evidence that the current definition is failing to adequately protect investors.’’); and BIO Letter (‘‘Completely removing a substantial portion of current investors from the accredited pool could have an immediate, drastic, and potentially devastating impact on capital availability for emerging companies.’’). 125 See, e.g., NSBA Letter (‘‘Creating a middleground or a lower tier will only increase the regulatory burdens and make it more difficult for small businesses to comply with the regulations’’); SBIA Letter (stating that the recommendations relating to restricting the pool of accredited investors would ‘‘significantly harm the pool of available capital for small business investment’’); CFIRA Letter (raising concerns that the recommendation would shrink the pool of available capital for small business investments); ENGINE Letter (stating that adding investment limitations on the pool of existing accredited investors would ‘‘effectively create a second tier of accredited investor, diminishing the total pool of capital available to startups’’); and BIO Letter (raising concerns about investment limitations, including that such limitations would ‘‘entirely foreclose participation by conditional accredited investors in certain offerings’’). 126 See, e.g., Cornell Law Clinic Letter (stating that the Commission should focus on ‘‘overhauling the current threshold, rather than simply mitigating it with investment limitations’’). 127 See, e.g., NSBA Letter (stating that obtaining information about prior investments to assess the investment limit would be ‘‘difficult information for small business or even the broker to obtain, and needlessly complicates the process’’); Cornell Law Clinic Letter (‘‘Adding investment limitations may not only fail to address issues of capital formation and identifying sophisticated investors, but also add administrative costs and complexity that may then restrict otherwise qualified investors.’’); and BIO Letter. 128 See, e.g., Letter from Public Investors Arbitration Bar Association dated May 17, 2016 available at https://www.sec.gov/comments/4-692/ 4692-33.pdf (‘‘PIABA Letter’’) (‘‘the current accredited investor standard, in creating a comparatively large pool of investors qualified to be offered Reg. D securities, makes it a particularly attractive tool to promote fraudulent schemes’’); NASAA Letter; Badiee Letter; Johnson Letter; Cornell Law Clinic Letter (‘‘[T]he Clinic supports inflation adjustments because it would more accurately qualify financially sophisticated investors than the current income and net asset thresholds.’’); MFA–1 Letter; and MFA–2 Letter (stating that the adjustments would ‘‘help to ensure that the thresholds have not been diluted over time’’). 129 See, e.g., NSBA Letter; ENGINE Letter (stating that there is no evidence that the current definition VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 Most of the commenters who expressed a view about this recommendation supported the recommendation.153 A few of these commenters, however, noted workability concerns, administration costs and the inability of a test to properly measure financial sophistication and account for industry and investment experience.154 One commenter stated that a more thorough analysis of the level of financial sophistication required was needed.155 has harmed individuals who would be excluded under an inflation adjusted threshold); SBIA Letter (stating that the recommendations relating to restricting the pool of accredited investors would ‘‘significantly harm the pool of available capital for small business investment’’); TAN2000 Letter; Sidoti Letter (requesting that the Commission ‘‘consider smaller companies and investors prior to updating the parameters to higher, and perhaps unbearable, thresholds’’); and BIO Letter. 130 See, e.g., PIABA Letter (‘‘Because of the speculative nature of private placements, it is important that investors have the financial means necessary to withstand the risks inherent in these securities.’’). 131 See, e.g., MFA–1 Letter and MFA–2 Letter (noting the importance of retaining the certainty that this bright line rule provides for issuers). 132 See, e.g., CFA/AFR Letter (‘‘We agree with the staff study that, ‘Investments may in some cases be a more meaningful measure of individuals’ experience with and exposure to the financial and investing markets than income or net worth.’ ’’); and Cornell Law Clinic Letter (‘‘Allowing individuals to qualify as accredited investors through a minimum amount of investments aligns with the Commission’s goal to determine which individuals are exempt from public securities law requirements due to financial sophistication.’’). 133 See, e.g., CFA/AFR Letter; Kendrick Letter; NSBA Letter; NASAA Letter; Beagle Letter; Badiee Letter; Morello Letter; Johnson Letter; Cornell Law Clinic Letter; IMCA Letter; Banker Letter; Grover Letter; TAN2000 Letter; Carlsen Letter; MFA–1 Letter; MFA–2 Letter; Maisonneuve Letter; and CFIRA Letter. 134 See, e.g., Kendrick Letter; Cornell Law Clinic Letter; NASAA Letter; and TAN2000 Letter. 135 See, e.g., TAN2000 Letter. 136 See, e.g., Beagle Letter. 137 See, e.g., CFA/AFR Letter (‘‘. . . the Series 7, Series 65, and Series 82 examinations likely ‘provide demonstrable evidence of relevant investor sophistication because of the subject matter their examinations cover.’ ’’); NASAA Letter (recommending qualifying credentials to include passing the Series 7, Series 65, or Series 66, provided that there is also a requisite minimum amount of professional experience); MFA–1 Letter and MFA–2 Letter (recommending qualifying credentials would include being a CPA or CFA or having a MBA from an accredited educational institution); Maisonneuve Letter (recommending qualifying credentials would include being a CFA); IMCA Letter (recommending qualifying credentials would include having a CIMA certification); CFIRA Letter (recommending qualifying credentials would include being a CPA, CFA, CMA, RIA, RR or securities attorney); and Kendrick Letter (recommending qualifying credentials would include having been in the securities industry as a broker, lawyer or accountant). 138 See., e.g., NSBA Letter (‘‘. . . if someone is sophisticated enough to advise others on investing in these types of offerings, for example, they should themselves be qualified to invest in them’’); Cornell Law Clinic Letter (credentials required should be substantially high to cause financial sophistication PO 00000 Frm 00018 Fmt 4701 Sfmt 4702 to make up for the loss in ability to sustain financial losses); Grover Letter (experts in industries historically passed over by angel investors should be allowed to qualify as accredited investors); and Carlsen Letter (individuals with business related college degrees). 139 See, e.g., CFA/AFR Letter (‘‘a better measurement of relevant expertise than mere investment experience’’); NSBA Letter (‘‘[this recommendation addresses] those who previously qualified as an accredited investor . . . however subsequently failed to qualify as an accredited investor’’); Beagle Letter (stating that the recommendation should limit the amount individuals who qualify under it can invest); Johnson Letter (‘‘the exact individuals that should be accredited investors’’); and Cornell Law Clinic Letter (‘‘[the] quintessential sign of sophistication is experience in the field’’). 140 See, e.g., NASAA Letter (noting that such investors were already likely to qualify as accredited and it would be ‘‘difficult to objectively assess that an individual’s experience investing in an exempt offering has given rise to financial sophistication’’). 141 The staff recommendation stated that the Commission could use the definition of the term knowledgeable employee in 17 CFR 270.3c–5 (‘‘Rule 3c–5’’) under the Investment Company Act (‘‘knowledgeable employee’’). 142 See, e.g., CFA/AFR Letter (‘‘. . . such individuals ‘likely have significant investing experience and sufficient access to the information necessary to make informed decisions about investments in their employer’s funds’ ’’); NSBA Letter; Cornell Law Clinic Letter (‘‘Knowledgeable employees of private funds are likely some of the highest levels of financial sophistication among potential investors.’’); MFA–1 Letter; and MFA–2 Letter (‘‘. . . such knowledgeable employees have meaningful investing experience and sufficient access to information necessary to make informed investment decisions about the private fund’s offerings. In addition, investments by knowledgeable employees are beneficial for private fund investors in that they further align investor interests of adviser employees and fund investors.’’). 143 See, e.g., NASAA Letter (‘‘Such an approach could raise suitability issues, may be difficult to verify, and ultimately has a negligible impact in improving capital formation efforts.’’). 144 See, e.g., CFA/AFR Letter; and NASAA Letter. 145 See, e.g., PIABA Letter; CFA/AFR Letter (stating that periodic adjustments would help avoid the type of shock to the system that the current recommendations are likely to have); NASAA Letter; Johnson Letter; Cornell Law Clinic Letter (stating that indexing financial thresholds for inflation would ‘‘keep these financial thresholds current with the market and thus more accurately qualify financially sophisticated investors’’); MFA– 1 Letter; and MFA–2 Letter. 146 See, e.g., ENGINE Letter (stating that there is not enough evidence that such adjustments are necessary to protect investors); and SBIA Letter (stating that the recommendations relating to restricting the pool of accredited investors would E:\FR\FM\26JNP3.SGM 26JNP3 jbell on DSK3GLQ082PROD with PROPOSALS3 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules ‘‘significantly harm the pool of available capital for small business investment’’); see also NSBA Letter (‘‘Indexing the thresholds levels for the accredited investor definition may complicate compliance as the thresholds will change’’). 147 See, e.g., CFA/AFR Letter (stating that this recommended change ‘‘helps to bring the securities laws up to date with modern values and expectations’’); NSBA Letter (noting that this recommended change would ‘‘expand opportunities to invest in small businesses to more households’’); and SBIA Letter. 148 See, e.g., Cornell Law Clinic Letter (‘‘. . . the Commission does not provide a clear rationale behind why civil unions and domestic partnerships should be given equal regulatory treatments as marriages other than that such treatment would provide consistency across Commission rules such as the family office rule, accountant independence standards, and crowdfunding rules’’). 149 See, e.g., SBIA Letter; NSBA Letter (stating that this recommendation recognizes that ‘‘those with such significant assets invested are both very likely to be sophisticated enough to protect themselves from the risks of the investment and also secure enough to withstand the potential loss of a particular investment’’); and NASAA Letter (‘‘An investments test is a better gauge of financial sophistication than simply analyzing net worth or income.’’). See also SBIA Letter (‘‘However a $5 million threshold is very high and will severely limit investment by 529 Plans and other similar plans.’’). 150 See, e.g., Beagle Letter (stating that an assetbased test as well as the knowledge of the representatives making the investment should be used in determining an entity’s accredited investor status); Cornell Law Clinic Letter (stating that the amount of an entity’s investments is not a reliable indicator of financial sophistication) and Reardon Letter (stating that a change from ‘‘assets’’ to ‘‘investments’’ would be ‘‘ill-advised, and would exclude many prospective investors, particularly outside of large urban areas where the financial support of local companies is crucial to the local economy’’). 151 See, e.g., BIO Letter; NSBA Letter (stating that this recommendation is ‘‘incredibly important to the small business community’’); Johnson Letter; SBIA Letter; MFA–1 Letter and MFA–2 Letter (stating that to provide investors with the ability to prevent investment dilution, current investors who are no longer accredited investors should be able to purchase securities by the issuer or any whollyowned subsidiaries of the issuer). 152 See, e.g., Cornell Law Clinic Letter (‘‘The future offerings of the issuer’s securities may not necessarily have the same level of financial risk as the issuer’s former offerings. The investor may be exposed to greater financial risk and, therefore, should also meet the new accredited investor definition for future offerings, regardless of the issuer or existing investments.’’). 153 See, e.g., SBIA Letter; CFIRA Letter (stating that investors who pass a standardized test covering the specificities of private placements should also be considered able to ‘‘fend for themselves,’’ having demonstrated their understanding of the risks involved in investment in these securities by passing the requisite examination); NSBA Letter (suggesting that the private sector be involved in the development and administration of the test); Beagle Letter (supporting the recommendation only if it was accompanied by limits on the amount an investor could invest in private offerings); Cornell Law Clinic Letter (‘‘. . . having an accredited investor examination would increase the number of informed investors in the market because passing a rigorous test is a bright-line rule that shows an advanced level of financial sophistication and indicates that the investor is able to fend for themselves.’’); IMCA Letter (stating that there should be continuing education requirements to VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 investor definition that were not contemplated in the staff recommendations. These recommendations were: • Allow individuals to self-certify their status as accredited investors; 156 • Allow otherwise non-accredited investors to retain professionals to advise them in order to qualify as accredited investors without limitation; 157 • Allow any individual to invest in early growth issuers if such individual invests less than 10% of his or her income or is advised by sophisticated professionals; 158 • Conduct a study of the United Kingdom’s approach to qualifying investors as sophisticated enough to take part in certain investments; 159 • Harmonize the definitions of ‘‘qualified purchasers’’ in Section 2(a)(51) of the Investment Company Act 160 and ‘‘qualified client’’ under the Investment Advisers Act 161 to include accredited investors.162 Another commenter suggested harmonizing the definition of ‘‘family’’ across the Securities Act, Investment Company Act, and the Investment Advisors Act to allow a family office and its family clients to be accredited investors for purposes of Regulation D and Sections 3(c)(1) and 3(c)(7) of the Investment Company Act; 163 • Clarify that having a broker’s client meet the ‘‘accredited investor’’ meet this criterion and suggesting that the private sector be involved in the development and administration of the test); NASAA Letter (suggesting that there also be a five year experience requirement); PSC Letter (suggesting an internetbased test); Grover Letter; Badiee Letter; and TAN2000 Letter (suggesting the test be reflective of knowledge of early stage financing). 154 See, e.g., NASAA Letter; and Badiee Letter. 155 See, e.g., CFA/AFR Letter. 156 See, e.g., NSBA Letter; Thompson Letter; and PSC Letter. 157 See, e.g., NSBA Letter; IMCA Letter; IAA Letter; and CFA/AFR Letter (conditioned on individuals acting as a professional having no personal financial stake in the issuer). But see Muth Letter (expressing concern whether investors would be sufficiently protected by relying on the guidance of outside advisors with respect to unusual or complex investments). 158 See, e.g., Morello Letter. 159 See, e.g., ENGINE Letter. See also Badiee Letter (describing the UK’s approach). 160 See Section IV.A.2.b for a discussion of qualified purchasers. 161 See Section IV.A.2.c for a discussion of qualified clients. 162 See, e.g., MFA–1 Letter and MFA–2 Letter (‘‘These changes would simplify the existing mismatch in standards for private fund investors without raising investor protection concerns. In particular, these changes would maintain existing financial thresholds and continue to ensure that only sophisticated investors are able to invest in private funds.’’). See Section IV. 163 See, e.g., Letter from Martin E. Lybecker, Perkins Coie LLP dated Aug. 8, 2016 available at https://www.sec.gov/comments/4-692/4692-42.pdf. PO 00000 Frm 00019 Fmt 4701 Sfmt 4702 30477 definition does not relieve a broker from its obligation to make only suitable recommendations; 164 • Create an accredited investor designation for algorithmic investors; 165 • Add a limit on the spousal pooling allowance; 166 • Expand the accredited investor standard in Rule 501(a)(8) to include existing or newly formed entities in which: (a) The investment decisions are made exclusively by accredited investors; and (b) accredited investors have provided a supermajority of the capital to be invested (e.g., 75–80%); 167 and • Consider additional changes to address the geographic disparity in the number of accredited investors among the different regions of the country.168 One commenter also made a recommendation that the Commission develop an approach to third-party verification of accredited investor status that actively encourages the availability of such services while ensuring the independence and reliability of such providers.169 5. Request for Comment For additional requests for comment related to the accredited investor definition as it applies to pooled investment funds, see Section IV.D. 20. Should we change the definition of accredited investor or retain the current definition? If we make changes to the definition, should the changes be consistent with any of the recommendations contained in the Accredited Investor Staff Report? 170 Have there been any relevant developments since the 2015 issuance of the Accredited Investor Staff Report, such as changes to the size or attributes of the pool of persons that may qualify as accredited investors; developments in the market or industry that may assist in potentially identifying new categories of individuals that may qualify as accredited investors; 171 or changes in the risk profile, incidence of fraud, or other investor protection concerns in offerings involving accredited investors that we should consider? How do those 164 See, e.g., PIABA Letter. e.g., Lin Letter. 166 See, e.g., Cornell Law Clinic Letter. 167 See, e.g., Reardon Letter. 168 See, e.g., NSBA Letter. 169 See, e.g., CFA/AFR Letter. 170 See discussion of the Accredited Investor Staff Report at Section II.A.3. 171 See, e.g., the revised qualifying exams administered by FINRA to become registered securities professionals, including a new introductory-level exam that precedes a qualification exam: https://www.finra.org/industry/ qualification-exams. 165 See, E:\FR\FM\26JNP3.SGM 26JNP3 jbell on DSK3GLQ082PROD with PROPOSALS3 30478 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules changes affect investors, issuers, and other market participants? 21. Should we revise the financial thresholds requirements for natural persons to qualify as accredited investors and the list-based approach for entities to qualify as accredited investors? If so, should we consider any of the following approaches to address concerns about how the current definition identifies accredited investor natural persons and entities: • Leave the current income and net worth thresholds in place, subject to investment limits; • Create new, additional inflationadjusted income and net worth thresholds that are not subject to investment limits; • As recommended by the Advisory Committee on Small and Emerging Companies in 2016, index all financial thresholds for inflation on a goingforward basis; • Permit spousal equivalents to pool their finances for purposes of qualifying as accredited investors; • Revise the definition as it applies to entities with total assets in excess of $5 million by replacing the $5 million assets test with a $5 million investments test and including all entities rather than specifically enumerated types of entities; and • Grandfather issuers’ existing investors that are accredited investors under the current definition with respect to future offerings of their securities. 22. As recommended by the Advisory Committee on Small and Emerging Companies in 2016, the 2016, 2017, and 2018 Small Business Forums, and the 2017 Treasury Report, should we revise the accredited investor definition to allow individuals to qualify as accredited investors based on other measures of sophistication? If so, should we consider any of the following approaches to identify individuals who could qualify as accredited investors based on criteria other than income and net worth: • Permit individuals with a minimum amount of investments to qualify as accredited investors; • Permit individuals with certain professional credentials to qualify as accredited investors; • Permit individuals with experience investing in exempt offerings to qualify as accredited investors; • Permit knowledgeable employees of private funds to qualify as accredited investors for investments in their employer’s funds; • Permit individuals who pass an accredited investor examination to qualify as accredited investors; and VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 • Permit individuals, after receiving disclosure about the risks, to opt into being accredited investors. 23. Under the current definition, a natural person just above the income or net worth thresholds would be able to invest without any limits, but a person just below the thresholds cannot invest at all as an accredited investor. Should we revise this aspect of the definition? If so, how? 24. What are the advantages and disadvantages to issuers and investors of changing—by either narrowing or expanding—the accredited investor definition? 25. Are there other changes to the definition that we should consider when harmonizing our exempt offering rules? For example, should we amend Rule 501(a)(3) to expand the types of entities that may qualify as accredited investors? If so, what types of entities should be included? Should we consider amendments to apply an investments-owned standard, or other alternative standard, for entities to qualify as accredited investors? 26. Many foreign jurisdictions provide exemptions from registration or disclosure requirements for offers and sales of securities to sophisticated or accredited investors.172 These jurisdictions use a variety of methods to identify sophisticated or accredited investors. In addition to criteria based on income, net worth, total assets, or investment amounts, certain regulatory regimes rely on certification or verification by financial professionals. Are there experiences in other jurisdictions that should inform our approach? 27. Should we, as recommended by the 2017 Treasury Report, revise the accredited investor definition to expand the eligible pool of sophisticated investors? If so, should we permit an investor, whether a natural person or an entity, that is advised by a registered financial professional to be considered an accredited investor? Being advised by a financial professional has not historically been a complete substitute for the protections of the Securities Act registration requirements and, if applicable, the Investment Company Act. If we were to permit an investor advised by a registered financial professional to be considered an accredited investor, should we consider any other investor protections in these circumstances? For example, should we require educational or other qualifications for a financial professional advising such an investor 172 See Section III.I. of the Accredited Investor Staff Report. PO 00000 Frm 00020 Fmt 4701 Sfmt 4702 and, if so, what type of qualifications? What additional disclosure, if any, should the financial professional be required to provide to the investor in connection with an investment available only to accredited investors? Should the financial professional be required to assess the appropriateness of the investment in an exempt offering on a transaction-by-transaction basis, or would it be appropriate to make the assessment looking at the investor’s investment portfolio as a whole? 28. If we were to permit an investor advised by a registered financial professional to be considered an accredited investor, should we specify or limit the types or amounts of investments that such an investor can make in exempt offerings? For example, should we allow investors that are not accredited investors under the current definition to invest in pooled investment funds, such as private funds under Section 3(c)(1) under the Investment Company Act,173 if these investors are: (1) Subject to limits on the amounts of investments in such pooled investment funds, such as a dollar amount or percentage of investments; and/or (2) limited to making the investment out of retirement or other similarly federally-regulated accounts (i.e., accounts that are more likely to be invested for the long term)? Would such a change substantially eliminate current distinctions between registered funds and private funds? Are there provisions of the Investment Company Act that should apply to such funds, such as diversification requirements, redemption requirements, and/or restrictions on leverage and affiliated transactions? Are there different disclosures that such funds should have to provide investors? Should the type of private fund be limited to a qualifying venture capital fund or otherwise have a limit on the fund’s size? 174 Should there be restrictions or requirements on the class or classes of interests in such funds available to investors advised by a registered financial professional? Should there be any restrictions or requirements regarding fees and expenses for such investors relative to the fees and expenses for other investors in the fund? What other conditions or limitations are appropriate, if any? 29. If an investment limit is implemented for investors considered to be accredited investors because they are advised by registered financial professionals, what should we take into 173 15 U.S.C. 80a–3(c)(1). See Section IV.A.2 for a discussion of Section 3(c)(1) funds. 174 See Section IV.A.2.a for a discussion of qualifying venture capital funds. E:\FR\FM\26JNP3.SGM 26JNP3 jbell on DSK3GLQ082PROD with PROPOSALS3 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules consideration in setting the amount of the limit? Should the limit vary depending on the particular exemption relied on for the offering or be consistent for all exempt offerings? Should the limit vary depending on the type of issuer conducting the exempt offering (e.g., whether the issuer is an operating company or a pooled investment fund, whether the issuer has a class of securities registered under the Exchange Act, or whether the issuer is subject to any on-going disclosure requirements)? Would varying limits increase complexity for issuers and investors? Should the limit be applied on a per-offering basis or some other basis? Should the limit be determined on an aggregate basis for all securities purchased in exempt offerings over the course of a year or some other time period? 30. If we were to expand the definition of an accredited investor and/ or limit the types or amounts of investments by accredited investors in exempt offerings, what challenges would exist in the application and enforcement of the revised criteria? 31. Are there other regulatory regimes, such as ERISA, that may affect the ability of certain classes of investors to invest in exempt offerings? 32. Under Rule 12g–1, to calculate the number of holders of record that were not accredited investors as of the last day of its most recent fiscal year, an issuer needs to determine, based on facts and circumstances, whether prior information provides a basis for a reasonable belief that the security holder continues to be an accredited investor as of the last day of the fiscal year. If such prior information does not provide a reasonable basis, is it difficult for an issuer to calculate the number of holders of record that were not accredited investors as of the last day of its most recent fiscal year pursuant to Rule 12g–1? If so, should we consider changes to Rule 12g–1? For example, should we revise Rule 12g–1 to permit issuers to determine accredited investor status at the time of the last sale of securities to the respective purchaser, rather than the last day of its most recent fiscal year? Would such a change raise concerns about the use of outdated information that may no longer be reliable? 175 175 See Changes to Exchange Act Registration Requirements Release at Section II.B. VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 B. Private Placement Exemption and Rule 506 of Regulation D 1. Section 4(a)(2) of the Securities Act Section 4(a)(2) 176 of the Securities Act exempts from registration requirements ‘‘transactions by an issuer not involving any public offering.’’ The Securities Act does not define the phrase ‘‘transactions by an issuer not involving any public offering.’’ Accordingly, it has been left to court decisions and Commission interpretations to define the scope of the exemption. a. Scope of Exemption In SEC v. Ralston Purina Co.,177 the Supreme Court established the basic criteria for determining the availability of Section 4(a)(2).178 To qualify for this exemption, which is sometimes referred to as the ‘‘private placement’’ exemption, the persons in the offering must: • Be shown to be able to fend for themselves and, accordingly, do not need the protection afforded by the Securities Act; 179 and • Have access to the type of information normally provided in a prospectus for a registered securities offering.180 The precise limits of the statutory private placement exemption are not defined by rule. Whether a transaction is one not involving any public offering is essentially a question of fact and necessitates a consideration of all surrounding circumstances, including such factors as the relationship between the offerees and the issuer, and the nature, scope, size, type, and manner of the offering.181 If an issuer offers 176 15 U.S.C. 77d(a)(2). U.S. 119 (1953). 178 See Section IV.A.2 for a discussion of restrictions under Sections 3(c)(1) and 3(c)(7) of the Investment Company Act on certain funds’ ability to make a public offering of its securities. 179 See SEC v. Ralston Purina Co., 346 U.S. 119 (1953) (‘‘The focus of inquiry should be on the need of the offerees for the protections afforded by registration. The employees here were not shown to have access to the kind of information which registration would disclose. The obvious opportunities for pressure and imposition make it advisable that they be entitled to compliance with § 5.’’). 180 See id. 181 See Non-Public Offering Exemption, Release No. 33–4552 (Nov. 6, 1962) [27 FR 11316 (Nov. 16, 1962)] (‘‘Non-Public Offering Exemption Release’’). Section 4(a)(2) was traditionally viewed as a way to provide ‘‘an exemption from registration for bank loans, private placements of securities with institutions, and the promotion of a business venture by a few closely related persons.’’ In 1962, prompted by increased use of the exemption for speculative offerings to unrelated and uninformed persons, the Commission clarified limitations on the exemption’s availability. See Non-Public Offering Exemption Release. 177 346 PO 00000 Frm 00021 Fmt 4701 Sfmt 4702 30479 securities to even one person who does not meet the necessary conditions, the exemption may be lost, and the entire offering may be in violation of the Securities Act. An issuer relying on Section 4(a)(2) is restricted in its ability to make public communications to attract investors to its offering because public advertising is incompatible with a claim of exemption under Section 4(a)(2).182 Section 4(a)(2) does not specify limits on the amount that an issuer can raise or the amount an investor can invest in an offering. b. Issuance of Restricted Securities Purchasers in a Section 4(a)(2) offering receive ‘‘restricted securities.’’ 183 ‘‘Restricted securities’’ are securities that were issued in certain exempt transactions. Rule 144(a)(3) identifies the types of offerings that result in the acquisition of restricted securities. Security holders can only resell restricted securities into the market by registering the resale transaction or relying on a valid exemption from registration for the resale, such as Section 4(a)(1), available to ‘‘transactions by any person other than an issuer, underwriter, or dealer.’’ For the resale of restricted securities, most holders rely on Rule 144, which provides a safe harbor from being considered an ‘‘underwriter’’ under, and therefore ineligible to rely on the exemption from registration in, Section 4(a)(1).184 c. Filing Requirements and Relationship With State Securities Laws An issuer conducting an offering pursuant to Section 4(a)(2) is not required to file any information with, or pay any fees to, the Commission. Such issuer, however, must comply with state securities laws and regulations in each state in which securities are offered or sold, also known as ‘‘blue sky’’ laws. 182 See Non-Public Offering Exemption Release. 17 CFR 230.144(a)(3)(i). See also Rule 144 Adopting Release (‘‘Rule 144, together with the other related rules and amendments, is designed to provide full and fair disclosure of the character of securities sold in trading transactions and to create greater certainty and predictability in the application of the registration provisions of the [Securities] Act by replacing subjective standards with more objective ones.’’). 184 For a discussion of Rule 144 and other resale exemptions, see Section V.A. See also Rule 144 Adopting Release (‘‘persons who offer or sell restricted securities without complying with Rule 144 are hereby put on notice by the Commission that in view of the broad remedial purposes of the [Securities] Act and of public policy which strongly supports registration, they will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales and that such persons and the brokers and other persons who participate in the transactions do so at their risk’’). 183 See E:\FR\FM\26JNP3.SGM 26JNP3 30480 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules Each state’s securities laws or regulations have their own registration or qualification requirements and exemptions from such requirements. 2. Rule 506 of Regulation D Regulation D originated as an effort to facilitate capital formation, consistent with the protection of investors.185 It simplified and clarified existing rules and regulations, eliminated unnecessary restrictions those rules and regulations placed on issuers, particularly small businesses, and harmonized federal and state exemptions.186 The Commission adopted Rule 506 of Regulation D as a non-exclusive ‘‘safe harbor’’ under Section 4(a)(2), providing objective standards on which an issuer could rely to meet the requirements of the Section 4(a)(2) exemption.187 In 2012, Section 201(a) of the JOBS Act required the Commission to eliminate the prohibition on using general solicitation under Rule 506 where all purchasers of the securities are accredited investors and the issuer takes reasonable steps to verify that the purchasers are accredited investors.188 To implement Section 201(a), the Commission adopted paragraph (c) of Rule 506, and retained the prior Rule 506 safe harbor as Rule 506(b).189 Offerings under both Rule 506(b) and Rule 506(c) must satisfy the conditions of: • 17 CFR 230.501 (‘‘Rule 501’’) (definitions for the terms used in Regulation D); • 17 CFR 230.502(a) (‘‘Rule 502(a)’’) (integration); 190 • 17 CFR 230.502(d) (‘‘Rule 502(d)’’) (limitations on resale); and jbell on DSK3GLQ082PROD with PROPOSALS3 185 See Revision of Certain Exemptions From Registration for Transactions Involving Limited Offers and Sales, Release No. 33–6389 (Mar. 8, 1982) [47 FR 11251 (Mar. 16, 1982)] (the ‘‘Regulation D Adopting Release’’). 186 See id. 187 See Regulation D Adopting Release. Rule 506 of Regulation D replaced former 17 CFR 230.146. Attempted compliance with any rule in Regulation D does not preclude an issuer from claiming the availability of another applicable exemption. For example, an issuer’s failure to satisfy all the terms and conditions of Rule 506(b) does not raise a presumption that the exemption provided by Section 4(a)(2) is not available. See 17 CFR 230.500(c) (‘‘Rule 500(c)’’). 188 Public Law 112–106, sec. 201(a), 126 Stat. 306, 313 (Apr. 5, 2012). 189 See Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings, Release No. 33– 9415 (Jul. 10, 2013) [78 FR 44771 (Jul. 24, 2013)] (‘‘Rule 506(c) Adopting Release’’). Note that as a result of Congress’ directive in Section 201(a) of the JOBS Act, Rule 506 continues to be treated as a regulation issued under Section 4(a)(2) of the Securities Act, notwithstanding the ability of an issuer to make public communications to solicit investors for its offering under Rule 506(c). 190 See Section III. VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 • Rule 506(d) (‘‘bad actor’’ disqualification). Offerings under Rule 506(b) must also satisfy the conditions of: • 17 CFR 230.502(b) (‘‘Rule 502(b)’’) (type of information to be furnished); 191 and • 17 CFR 230.502(c) (‘‘Rule 502(c)’’) (limitations on the manner of offering).192 In addition, Rule 503, which requires the filing of a notice of sales on Form D, applies to all Rule 506 offerings. We summarize below first the terms and conditions specific to each of Rule 506(b) and Rule 506(c) offerings, and then the rule requirements that apply to all Rule 506 offerings. a. Rule 506(b) Safe Harbor Issuers conducting an offering under Rule 506(b) can sell securities to an unlimited number of accredited investors with no limit on the amount of money that can be raised from each investor or in total. An offering under Rule 506(b), however, is subject to the following requirements: • No general solicitation or advertising to market the securities 193 is permitted; and • Securities may not be sold to more than 35 non-accredited investors that, either alone or with a purchaser representative, must have sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment.194 (1) Prohibition on General Solicitation and General Advertising As discussed above, public or general advertising of the offering and general solicitation of investors are incompatible with the private placement exemption. Although the terms ‘‘general solicitation’’ and ‘‘general advertising’’ are not defined in Regulation D, Rule 502(c) does provide examples of general solicitation and general advertising, including advertisements published in newspapers and magazines, communications broadcast over television and radio, and seminars where attendees have been invited by general solicitation or general advertising.195 The Commission has stated that other uses of publicly available media, such as unrestricted websites, also constitute general 191 See Section II.B.2.a(2). Section II.B.2.a(1). 193 See 17 CFR 230.502(c). 194 See 17 CFR 230.506(b). See also Section II.A. 195 See 17 CFR 230.502(c). 192 See PO 00000 Frm 00022 Fmt 4701 Sfmt 4702 solicitation and general advertising.196 In determining whether an advertisement or other communication would constitute a general solicitation of securities, the Commission has historically interpreted the term ‘‘offer’’ broadly, and has explained that ‘‘the publication of information and publicity efforts, made in advance of a proposed financing which have the effect of conditioning the public mind or arousing public interest in the issuer or in its securities constitutes an offer.’’ 197 In this release, we refer to both general solicitation and general advertising as they relate to an ‘‘offer’’ of securities as ‘‘general solicitation.’’ (2) Disclosure Requirements for NonAccredited Investors If non-accredited investors are participating in an offering under Rule 506(b), the issuer conducting the offering must furnish to non-accredited investors the information required by Rule 502(b) 198 a reasonable time prior to the sale of securities and provide non-accredited investors with the opportunity to ask questions and receive answers about the offering.199 Further, if the issuer provides additional information to accredited investors, it must make this information available to the non-accredited investors as well.200 If an issuer limits purchasers in its Rule 506(b) offering to accredited investors, Rule 506(b) does not require the issuer to provide substantive disclosure to those accredited investors. Nevertheless, issuers and funds conducting private accredited investor-only offerings often provide prospective purchasers with information about the issuer. An issuer that provides information to nonaccredited investors may choose to provide the information to accredited investors as well, in view of the antifraud provisions of the federal securities laws.201 196 See Use of Electronic Media for Delivery Purposes, Release No. 33–7233 (Oct. 6, 1995) [60 FR 53458, 53463–64 (Oct. 13, 1995)]; Use of Electronic Media, Release No. 33–7856 (Apr. 28, 2000) [65 FR 25843, 25851–52 (May 4, 2000)]. 197 Securities Offering Reform, Release No. 33– 8591 (July 19, 2005) [70 FR 44722 (Aug. 3, 2005)] (‘‘Securities Offering Reform Release’’) at note 88 (‘‘The term ‘offer’ has been interpreted broadly and goes beyond the common law concept of an offer.’’) (citing Diskin v. Lomasney & Co., 452 F.2d 871 (2d. Cir. 1971); SEC v. Cavanaugh, 1 F. Supp. 2d 337 (S.D.N.Y. 1998)). See also Securities Act Section 2(a)(3) (noting that an offer includes every attempt to dispose of a security or interest in a security, for value; or any solicitation of an offer to buy a security or interest in a security). 198 See 17 CFR 230.502(b)(2)(i) through (vii). 199 See 17 CFR 230.502(b)(2)(v). 200 See 17 CFR 230.502(b)(2)(iv). 201 See Note to 17 CFR 230.502(b). E:\FR\FM\26JNP3.SGM 26JNP3 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules The type of information to be furnished to non-accredited investors varies depending on the size of the offering and the nature of the issuer; however, the disclosure generally contains the same type of information as provided in a Regulation A offering or in a registered offering, including financial statement information, certain portions of which are required to be audited or certified.202 Specifically, if the issuer is not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the issuer must furnish certain nonfinancial statement information and financial statement information. The issuer is required to provide this information only to the extent it is material to an understanding of the issuer, its business, and the securities being offered.203 Regarding nonfinancial statement information, the issuer must provide the information required by Part II of Form 1–A 204 (if the issuer is eligible to use Regulation A 205) or Part I of a Securities Act registration statement on a form that the issuer would be entitled to use (if the issuer is not eligible to use Regulation A).206 The required financial statement information for issuers not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act varies depending on the size of the offering.207 The issuer must furnish the following information to the extent material to an understanding of the issuer, its business, and the securities being offered: • For offerings up to $2 million, the information required in Article 8 of Regulation S–X,208 except that only the issuer’s balance sheet, which shall be dated within 120 days of the start of the offering, must be audited; 209 • For offerings up to $7.5 million, the financial statement information required in Form S–1 210 for smaller reporting companies. If an issuer, other than a limited partnership,211 cannot obtain audited financial statements without 202 See 17 CFR 230.502(b)(2)(i) through (vii). 17 CFR 230.502(b)(2). 204 17 CFR 239.90. 205 See Section II.C.1.a for a discussion of the Regulation A eligibility requirements. 206 See 17 CFR 230.502(b)(2)(i)(A). 207 See 17 CFR 230.502(b)(2)(i)(B). 208 17 CFR 210.8. 209 17 CFR 230.502(b)(2)(i)(B)(1). 210 17 CFR 239.10. 211 If the issuer is a limited partnership and cannot obtain the required financial statements without unreasonable effort or expense, it may furnish financial statements that have been prepared on the basis of federal income tax requirements and examined and reported on in accordance with generally accepted auditing standards by an independent public or certified accountant. jbell on DSK3GLQ082PROD with PROPOSALS3 203 See VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 unreasonable effort or expense, then only the issuer’s balance sheet, which shall be dated within 120 days of the start of the offering, must be audited; 212 or • For offerings over $7.5 million, the financial statement information as would be required in a registration statement filed under the Securities Act on the form that the issuer would be entitled to use. If an issuer, other than a limited partnership,213 cannot obtain audited financial statements without unreasonable effort or expense, then only the issuer’s balance sheet, which shall be dated within 120 days of the start of the offering, must be audited.214 If the issuer is not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act and is a foreign private issuer 215 eligible to use Form 20–F,216 it must disclose the same kind of information required to be included in an Exchange Act registration statement on a form that the issuer would be entitled to use.217 The financial statements need to be certified only to the extent that such information would be required to be audited under Rule 502(b) for issuers not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act.218 On the other hand, if the issuer is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, at a reasonable time prior to the sale of securities the issuer must furnish to investors either: • Its annual report to shareholders for the most recent fiscal year 219 and the definitive proxy statement filed in connection with that annual report; 220 or 212 17 CFR 230.502(b)(2)(i)(B)(2). note 211. 214 17 CFR 230.502(b)(2)(i)(B)(3). 215 A foreign issuer, other than a foreign government, will qualify as a ‘‘foreign private issuer’’ if 50% or less of its outstanding voting securities are held by U.S. residents; or if more than 50% of its outstanding voting securities are held by U.S. residents and none of the following three circumstances applies: The majority of its executive officers or directors are U.S. citizens or residents; more than 50% of the issuer’s assets are located in the United States; or the issuer’s business is administered principally in the United States. See 17 CFR 240.12b–2; 17 CFR 230.405. 216 17 CFR 249.220f. 217 17 CFR 230.502(b)(2)(i)(C). 218 See 17 CFR 230.502(b)(2)(i)(C). The audited financial statement requirements for issuers not subject to the reporting requirements of section 13 or 15(d) of the Exchange Act are contained in 17 CFR 230.502(b)(2)(i)(B) and discussed in the immediately preceding paragraph. 219 The annual report must meet the requirements of Rules 14a–3 or 14c–3 under the Exchange Act (17 CFR 240.14a–3 or 17 CFR 240.14c–3). 220 See 17 CFR 230.502(b)(2)(ii)(A). If requested by the purchaser in writing, the issuer must also provide a copy of the issuer’s most recent Form 10– K (17 CFR 249.310) under the Exchange Act. 213 See PO 00000 Frm 00023 Fmt 4701 Sfmt 4702 30481 • The most recently filed of the following: • Annual report on Form 10–K; 221 • Registration statement on Form S– 1; 222 • Registration statement on Form S– 11; 223 or • Registration statement on Form 10.224 In addition, the issuer must provide any reports or documents required to be filed by the issuer under Sections 13(a), 14(a), 14(c), and 15(d) of the Exchange Act since the distribution or filing of the report or registration statement furnished above and a brief description of the securities being offered, the use of the proceeds from the offering, and any material changes in the issuer’s affairs that are not disclosed in the documents furnished.225 If the issuer is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act and is a foreign private issuer, the issuer may instead provide the information contained in its most recent Form 20–F 226 or Form F– 1 227 filing.228 For business combinations or exchange offers, in addition to information required by Form S–4,229 the issuer must provide to each purchaser at the time the plan is submitted to security holders, or, with an exchange, during the course of the transaction and prior to sale, written information about any terms or arrangements of the proposed transactions that are materially different from those for all other security holders.230 221 17 CFR 249.310. CFR 239.11. 223 17 CFR 239.18. 224 17 CFR 249.10; see 17 CFR 230.502(b)(2)(ii)(B). Exhibits required to be filed with the Commission as part of a registration statement or report, other than an annual report to shareholders or parts of that report incorporated by reference in a Form 10– K report, need not be furnished if the contents of material exhibits are identified and such exhibits are made available to a purchaser, upon his or her written request, a reasonable time before his or her purchase. See 17 CFR 230.502(b)(2)(iii). 225 See 17 CFR 230.502(b)(2)(ii)(C). 226 17 CFR 249.220f. 227 17 CFR 239.31. 228 See 17 CFR 230.502(b)(2)(ii)(D). 229 17 CFR 239.25. 230 See 17 CFR 230.502(b)(2)(vi). If an issuer is not subject to the reporting requirements of section 13 or 15(d) of the Exchange Act, it may satisfy the requirements of Part I.B. or C. of Form S–4 by providing the same kind of information as would be required in Part II of Form 1–A (if the issuer is eligible to use Regulation A) or Part I of a registration statement filed under the Securities Act on the form that the issuer would be entitled to use (if the issuer is not eligible to use Regulation A). 222 17 E:\FR\FM\26JNP3.SGM 26JNP3 30482 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules b. Rule 506(c) jbell on DSK3GLQ082PROD with PROPOSALS3 Rule 506(c) permits issuers to broadly solicit and generally advertise an offering, provided that: • All purchasers in the offering are accredited investors, • The issuer takes reasonable steps to verify purchasers’ accredited investor status, and • Certain other conditions in Regulation D are satisfied.231 Issuers conducting an offering under Rule 506(c) can sell securities to an unlimited number of accredited investors with no limit on the amount of money that can be raised from each investor or in total. If an issuer seeks to conduct an offering using general solicitation under Rule 506(c), but does not comply with the conditions of the exemption, the issuer would need to find another available exemption for the offering.232 Rule 506(c) provides a principlesbased method for verification of accredited investor status as well as a non-exclusive list of verification methods. The principles-based method of verification requires an objective determination by the issuer (or those acting on its behalf) 233 as to whether the steps taken are ‘‘reasonable’’ in the context of the particular facts and circumstances of each purchaser and transaction. Among the factors that an issuer should consider under this principles-based method are: • The nature of the purchaser and the type of accredited investor that the purchaser claims to be; • The amount and type of information that the issuer has about the purchaser; and • The nature of the offering, such as the manner in which the purchaser was 231 See 17 CFR 230.501 (Definitions and terms used in Regulation D) and 17 CFR 230.502(a) (Integration) and (d) (Limitations on Resales). 232 The issuer may be able to claim the availability of another exemption. See 17 CFR 230.500(c). In general, however, an issuer may be precluded from relying on Section 4(a)(2) if it used public communications to solicit investors for its offering. See Rule 506(c) Adopting Release at text accompanying note 42 (‘‘[A]n issuer relying on Section 4(a)(2) outside of the Rule 506(c) exemption will be restricted in its ability to make public communications to solicit investors for its offering because public advertising will continue to be incompatible with a claim of exemption under Section 4(a)(2).’’). 233 See Rule 506(c) Adopting Release at note 113 (‘‘[I]n the future, services may develop that verify a person’s accredited investor status for purposes of new Rule 506(c) and permit issuers to check the accredited investor status of possible investors, particularly for web-based Rule 506 offering portals that include offerings for multiple issuers. This third-party service, as opposed to the issuer itself, could obtain appropriate documentation or otherwise take reasonable steps to verify accredited investor status.’’). VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 solicited to participate in the offering, and the terms of the offering, such as a minimum investment amount.234 The principles-based method is intended to provide issuers with significant flexibility in deciding the steps needed to verify a person’s accredited investor status and to avoid requiring them to follow uniform verification methods that may be illsuited or unnecessary to a particular offering or purchaser in light of the facts and circumstances.235 In the Rule 506(c) Adopting Release, the Commission discussed a number of factors an issuer could consider in determining the potential documentation that an issuer may need to verify a person’s accredited investor status.236 In adopting the principles-based method of verification, the Commission also envisioned a role for third parties that may wish to enter into the business of verifying the accredited investor status of investors on behalf of issuers, by indicating that an issuer should also be entitled to rely on a third party that has verified a person’s status as an accredited investor, provided that the issuer has a reasonable basis to rely on such third-party verification.237 However, an issuer will not be considered to have taken reasonable steps to verify accredited investor status if it, or those acting on its behalf, required only that a person check a box in a questionnaire or sign a form, absent 234 See id at Section II.B.3.a. id. 236 See id. In that release, the Commission stated that ‘‘[a]fter consideration of the facts and circumstances of the purchaser and of the transaction, the more likely it appears that a purchaser qualifies as an accredited investor, the fewer steps the issuer would have to take to verify accredited investor status, and vice versa. For example, if the terms of the offering require a high minimum investment amount and a purchaser is able to meet those terms, then the likelihood of that purchaser satisfying the definition of accredited investor may be sufficiently high such that, absent any facts that indicate that the purchaser is not an accredited investor, it may be reasonable for the issuer to take fewer steps to verify or, in certain cases, no additional steps to verify accredited investor status other than to confirm that the purchaser’s cash investment is not being financed by a third party.’’ In addition, the Commission stated that the means through which the issuer publicly solicits purchasers may be relevant in determining the reasonableness of the steps taken to verify accredited investor status. For example, ‘‘[a]n issuer that solicits new investors through a website accessible to the general public, through a widely disseminated email or social media solicitation, or through print media, such as a newspaper, will likely be obligated to take greater measures to verify accredited investor status than an issuer that solicits new investors from a database of pre-screened accredited investors created and maintained by a reasonably reliable third party.’’ 237 See Rule 506(c) Adopting Release at text accompanying note 113. 235 See PO 00000 Frm 00024 Fmt 4701 Sfmt 4702 other information about the purchaser indicating accredited investor status.238 In addition to this flexible, principlesbased method, Rule 506(c) includes a non-exclusive list of verification methods that issuers may use, but are not required to use, when seeking to satisfy the verification requirement with respect to natural person purchasers.239 This non-exclusive list of verification methods consists of: • Verification based on income, by reviewing copies of any Internal Revenue Service form that reports income, such as Form W–2, Form 1099, Schedule K–1 of Form 1065, or a filed Form 1040; • Verification of net worth, by reviewing specific types of documentation dated within the prior three months, such as bank statements, brokerage statements, certificates of deposit, tax assessments, or a credit report from at least one of the nationwide consumer reporting agencies, and obtaining a written representation from the investor; • A written confirmation from a registered broker-dealer, a registered investment adviser, a licensed attorney, or a certified public accountant stating that such person or entity has taken reasonable steps to verify that the purchaser is an accredited investor within the last three months and has determined that such purchaser is an accredited investor; and • For a person who had invested in the issuer’s Rule 506(b) offering as an accredited investor before September 23, 2013, and remains an investor of the issuer, a certification by such person at the time of sale that he or she qualifies as an accredited investor.240 The Commission included this nonexclusive list of verification methods for natural persons in Rule 506(c) in response to commenters requesting more certainty, but expressly stated that issuers are not required to use any of the specified methods and may rely on the principles-based approach to comply with the verification requirement.241 However, despite the ability to use the 238 See Rule 506(c) Adopting Release at Section II.B.3.a. 239 See 15 CFR 230.506(c)(2)(ii). The rule does not set forth a non-exclusive list of methods for the verification of investors that are not natural persons. The Commission indicated in the adopting release its view that the potential for uncertainty and the risk of participation by non-accredited investors is highest in offerings involving natural persons as investors. See Rule 506(c) Adopting Release at Section II.B.3. 240 See 17 CFR 230.506(c)(ii)(A) through (D); see also Rule 506(c) Adopting Release at Section II.B.3.b. 241 See Rule 506(c) Adopting Release at Section II.B.3. E:\FR\FM\26JNP3.SGM 26JNP3 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules principles-based approach, market participants have communicated to the staff that many issuers rely primarily on the listed verification methods.242 c. Limitations on Resale Purchasers in either a Rule 506(b) or a Rule 506(c) offering receive restricted securities and therefore are subject to limitations on the resale of the securities acquired in the transaction.243 The issuer relying on Rule 506(b) or 506(c) must exercise reasonable care to ensure that the purchasers of the securities are not underwriters within the meaning of Securities Act Section 2(a)(11).244 Reasonable care may be demonstrated by the following: (1) Reasonable inquiry to determine if the purchaser is acquiring the securities for such purchaser’s own use or for other persons; (2) written disclosure to each purchaser prior to the sale that the securities have not been registered and, therefore, cannot be resold unless they are registered under the Securities Act or an exemption from registration is available; and (3) placement of a legend on the certificate or other document that evidences the securities stating that the securities have not been registered under the Securities Act and setting forth or referring to the restrictions on transferability and sale of the securities.245 In addition, the issuer in a Rule 506(b) offering is required to disclose the resale limitations to any non-accredited investors.246 As discussed above, the holders of the restricted securities can only resell the securities by registering the resale transaction or relying on a valid exemption, such as Section 4(a)(1) or the non-exclusive safe harbor in Rule 144.247 jbell on DSK3GLQ082PROD with PROPOSALS3 d. Filing Requirements and Relationship With State Securities Laws An issuer conducting an offering under either Rule 506(b) or Rule 506(c) is required to file a notice with the Commission on Form D within 15 days after the first sale of securities in the 242 See also N. Peter Rasmussen, Rule 506(c)’s General Solicitation Remains Generally Disappointing (May 26, 2017), available at https:// www.bna.com/rule-506cs-general-b73014451604/. 243 See 17 CFR 230.502(d). The definition of ‘‘restricted securities’’ in Rule 144(a)(3) specifically includes securities acquired from the issuer that are subject to the resale limitations of Rule 502(d). See 17 CFR 230.144(a)(3)(ii). 244 See 17 CFR 230.502(d). 245 See 17 CFR 230.502(d). While taking these actions will establish the requisite reasonable care, they are not the exclusive method to demonstrate such care. Other actions by the issuer may satisfy this provision. 246 See 17 CFR 230.502(b)(2)(vii). 247 See Section II.B.1.b. For a discussion of Rule 144 and other resale exemptions, see Section IV. VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 offering.248 An issuer must file an amendment to a previously filed notice for an offering: To correct a material mistake of fact or error in the previously filed notice; to reflect a change in the information provided in the previously filed notice, except as provided in the General Instructions to Form D; 249 and annually, on or before the first anniversary of the most recent previously filed notice, if the offering is continuing at that time.250 The Commission does not charge any fee to file or amend a Form D. If an issuer’s offering meets the conditions of either Rule 506(b) or Rule 506(c), the issuer is not required to register or qualify the offering with state securities regulators.251 Section 18 of the Securities Act generally provides for preemption of state law registration and qualification requirements for certain categories of securities, defined as ‘‘covered securities.’’ 252 Section 18(b)(4)(F) of the Securities Act provides covered security status to all securities sold in transactions exempt from registration under Commission rules promulgated under Section 4(a)(2), which includes Rules 506(b) and 506(c) of Regulation D.253 An offering by such an issuer, however, remains subject to state law enforcement and antifraud authority. Additionally, issuers may be subject to filing fees in the states in which they intend to offer or sell securities and be required to comply 248 See 17 CFR 230.503. Filing a Form D notice is required, but a failure to file the notice does not invalidate the exemption. 249 The General Instructions to Form D provide that an issuer is not required to file an amendment to a previously filed notice to reflect a change that occurs after the offering terminates or a change that occurs solely in the following information: The address or relationship to the issuer of a related person identified in response to Item 3; an issuer’s revenues or aggregate net asset value; the minimum investment amount, if the change is an increase, or if the change, together with all other changes in that amount since the previously filed notice, does not result in a decrease of more than 10%; any address or state(s) of solicitation shown in response to Item 12; the total offering amount, if the change is a decrease, or if the change, together with all other changes in that amount since the previously filed notice, does not result in an increase of more than 10%; the amount of securities sold in the offering or the amount remaining to be sold; the number of non-accredited investors who have invested in the offering, as long as the change does not increase the number to more than 35; the total number of investors who have invested in the offering; and the amount of sales commissions, finders’ fees or use of proceeds for payments to executive officers, directors or promoters, if the change is a decrease, or if the change, together with all other changes in that amount since the previously filed notice, does not result in an increase of more than 10%. 17 CFR 239.500. 250 See General Instructions to Form D. 17 CFR 239.500. 251 See 17 U.S.C. 77r(b)(4)(F). 252 See 15 U.S.C. 77r(c). 253 See 17 CFR 230.506(a). See also note 189. PO 00000 Frm 00025 Fmt 4701 Sfmt 4702 30483 with state notice filing requirements. The failure to file, or pay filing fees related to, any such materials may cause state securities regulators to suspend the offer or sale of securities within their jurisdiction. e. Bad Actor Disqualification Offerings under Rule 506 are subject to the disqualification provisions found in Rule 506(d) of Regulation D. The ‘‘bad actor’’ disqualification provisions disqualify offerings from relying on Rule 506(b) or 506(c) if the issuer or other ‘‘covered persons’’ 254 have experienced a disqualifying event, such as being convicted of, or sanctioned for, securities fraud or other violations of specified laws.255 Many of these events are disqualifying only if they occurred during a specified look-back period (for example, a court injunction that was issued within the last five years or a regulatory order that was issued within the last ten years). The look-back period is measured by counting back from the date of sale of securities in the relevant offering to the date of the potentially disqualifying event—for example, the issuance of the injunction or regulatory order and not the date of the underlying conduct that led to the disqualifying event. The disqualification provisions do not apply to events occurring before the effective date of the provisions.256 Instead, Rule 506(d) requires the issuer to disclose to each purchaser those events that would have been disqualifying but for the fact that they occurred prior to the effective date.257 The rule provides an exception from disqualification when the issuer is able to demonstrate that it did not know and, in the exercise of reasonable care, could not have known that a covered person with a disqualifying event participated in the offering.258 254 ‘‘Covered persons’’ include: The issuer, including its predecessors and affiliated issuers; directors, officers, general partners, or managing members of the issuer; beneficial owners of 20% or more of the issuer’s outstanding voting equity securities, calculated on the basis of voting power; promoters connected with the issuer in any capacity at the time of sale; and persons compensated for soliciting investors, including the general partners, directors, officers, or managing members of any such solicitor. See 17 CFR 230.506(d)(1). 255 See 17 CFR 230.506(d)(1)(i) through (viii) for the list of disqualifying events. 256 17 CFR 230.506(d)(2)(i). 257 17 CFR 230.506(e). 258 17 CFR 230.506(d)(2)(iv). The specific steps an issuer should take to exercise reasonable care will vary according to particular facts and circumstances. The instruction to Rule 506(d)(2)(iv) states that an issuer will not be able to establish that it has exercised reasonable care unless it has made, in light of the circumstances, a factual inquiry into whether any disqualifications exist. E:\FR\FM\26JNP3.SGM 26JNP3 30484 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules In addition, disqualification under Rule 506(d) will not arise if, before any sales are made in the offering, the court or regulatory authority that entered the relevant order, judgment or decree advises in writing—whether in the relevant judgment, order or decree or separately to the Commission or its staff—that disqualification under the rule should not arise as a consequence of such order, judgment, or decree.259 The rule also provides for the ability to seek waivers from disqualification from the Commission based on a showing of good cause that it is not necessary under the circumstances that the exemption be denied.260 f. Analysis of Rule 506 in the Exempt Market As reflected in Table 6 below, Rule 506(b) continues to dominate the market for exempt securities offerings and even exceed amounts raised in the registered market. In 2018, the amount raised by Rule 506(b) offerings, $1.5 trillion, was larger than the $1.4 trillion raised in registered offerings.261 TABLE 6—OFFERINGS UNDER RULE 506, SEPTEMBER 23, 2013–DECEMBER 31, 2018 Rule 506(b) Number of Issuers ......................................................................................................... Number of Offerings ...................................................................................................... Percentage of Offerings under Regulation D ................................................................ Amount Reported Raised .............................................................................................. Percentage of Amount Raised under Regulation D ...................................................... As discussed above in Section II.A, while offerings under Rule 506(b) can have up to 35 non-accredited but sophisticated investors, non-accredited investors were reported as participating in only approximately 6% of Rule 506(b) offerings in each of 2015, 2016, 2017, and 2018, which offerings reported raising between two and three percent of the total capital raised under Rule 506(b) in each of 2015, 2016, 2017, and 2018.264 The information requirement is the principal difference between a Rule 506(b) offering that includes non-accredited investors and one that is limited to accredited investors. Accordingly, it appears that the vast majority of issuers either are able to meet their capital needs through offerings to accredited investors only or, alternatively, may be limiting their Rule 259 17 CFR 230.506(d)(2)(iii). CFR 230.506(d)(2)(ii). 261 See note 37 and accompanying text. 262 This amount includes an incremental amount of approximately $3,200 billion reported raised in amendments to initial filings. 263 This amount includes an incremental amount of approximately $81 billion reported raised in amendments to initial filings, some of which were initiated as Rule 506(b) offerings. 264 As a comparison point, during the same fouryear period, non-accredited investors were reported as participating in over 60% of the Rule 504 offerings. Rule 504 permits issuers to raise up to $5 million in a 12-month period from an unlimited number of investors (without regard to whether or not those investors are accredited). Issuers conducting a Rule 504 offering are not subject to the information requirements in Rule 502(c), but must register the offering or have a state exemption from registration in every state in which the issuer is offering and selling securities. See Section II.D for a discussion of Rule 504. 265 See 17 CFR 230.502(b)(2). See also William K. Jr. Sjostrom, PIPEs, 2 Entrepreneurial Bus. L.J. 381 (2007), at n.72 and accompanying text. (stating, in the context of private investments in public equity, that ‘‘[t]ypically, PIPE deals are marketed only to accredited investors so that the issuer does not have jbell on DSK3GLQ082PROD with PROPOSALS3 260 17 VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 97,164 ................................ 112,193 .............................. 89% .................................... $7,300 billion 262 ................. 94% .................................... Rule 506(c) 8,025. 9,358. 11%. $466.4 billion 263. 6%. 506(b) offerings to accredited investors to avoid these disclosure requirements, which are generally similar to the nonfinancial disclosure requirements of a Regulation A offering and the financial statement requirements of a Form S–1 registration statement with reduced audit requirements.265 If issuers are limiting their offerings to accredited investors to avoid the disclosure requirements, it is not possible to conclude if those issuers are successfully able to meet their capital needs though Rule 506(b) offerings. The vast majority of Regulation D issuers continue to raise capital through Rule 506(b) offerings. Rule 506(b) offerings account for a larger amount of capital raised than Rule 506(c) offerings both in the aggregate across all offerings and for the average offering. One reason why Rule 506(b) continues to dominate the Regulation D market may be that issuers with pre-existing sources of financing and/or intermediation channels are accustomed to relying on Rule 506(b) and do not need the flexibility provided by Rule 506(c). Other issuers may become more comfortable with Rule 506(c) market practices as they develop over time.266 Some issuers may be reluctant to use general solicitation because they do not wish to share information publicly (through advertising materials) for competitive and general business reasons.267 There may also be concerns about the added burden or appropriate levels of verification of the accredited investor status of all purchasers and to contend with meeting these disclosure and sophistication requirements’’). 266 See, generally, comments of Jean Peters, Board member, Angel Capital Association, at the 33rd Securities and Exchange Commission Government-Business Forum on Small Business Capital Formation, November 20, 2014, transcript available at https://www.sec.gov/info/smallbus/ sbforum112014-final-transcript.pdf (‘‘Peters Comments’’). 267 See, e.g., N. Peter Rasmussen, Rule 506(c)’s General Solicitation Remains Generally Disappointing (May 26, 2017), available at https:// www.bna.com/rule-506cs-general-b73014451604/. See also, Peters Comments. See also Manning G. Warren (2017) The Regulatory Vortex for Private Placements, Securities Regulation Law Journal, Vol. 45, Issue 9 (‘‘Warren 2017 Study’’) (summarizing discussions with securities counsel and the results of a survey of counsel specializing in private placements of securities regarding the reasons for reluctance to rely on Rule 506(c), including the ‘‘highly practicable and reliable’’ Rule 506(b) model; preference to recruit investors ‘‘with whom [issuers] have preexisting personal and business relationships’’ in lieu of ‘‘accredited strangers’’; issuer preference to ‘‘preserve the confidentiality of their private securities offerings and related business plans’’ from ‘‘potential competitors but also from state and federal regulators’’; as well as a reluctance to ‘‘engage in an independent verification process in order to objectively determine the accredited investor status of each accredited investor in Rule 506(c) offerings.’’ With respect to the last concern, this study states that ‘‘[m]ost securities lawyers have not yet developed a comfort level with the necessary ‘reasonable steps to verify. ’. . . Moreover, this compliance requirement could chill the interests of many significant investors who have understandable reluctance to share their tax returns, brokerage statements and other confidential financial information with issuers’ management and attorneys . . . [S]ome two-thirds of the respondents expressed concerns over compliance with the verification requirement . . . The possibilities that accredited investors will walk away from Rule 506(c) offerings based on privacy concerns clearly [contribute] to issuer reluctance to use Rule 506(c) and to a corollary preference to use Rule 506(b) as the exemption from registration.’’). See also Larissa Lee (2014) The Ban Has Lifted: Now Is the Time to Change the Accredited-Investor Standard, Utah Law Review, Vol. 2014, Issue 2; Elan W. Silver (2015) Reaching the Right Investors: Comparing Investor Solicitation in the Private-Placement Regimes of the United States and the European Union, Tulane Law Review, Vol. 89; Dale A. Oesterle (2015) Intermediaries in internet Offerings: The Future Is Here, Wake Forest Law Review, Vol. 50. PO 00000 Frm 00026 Fmt 4701 Sfmt 4702 E:\FR\FM\26JNP3.SGM 26JNP3 30485 possible investor privacy concerns.268 Regulatory uncertainty has also been previously identified as a possible explanation for the relatively low level of the Rule 506(c) offerings.269 While Rule 500(c) of Regulation D makes clear that an issuer’s failure to satisfy all the terms and conditions of Rule 506(b) does not preclude the issuer’s ability to rely on the exemption provided by Section 4(a)(2), an issuer relying on Section 4(a)(2) outside of the Rule 506(c) exemption, including because of an inadvertent failure to comply with the requirements of Rule 506(c), could be precluded from relying on Section 4(a)(2) if, as discussed above, it used public communications to solicit investors for its offering because public advertising is incompatible with a claim of exemption under Section 4(a)(2).270 Geographically, offerings under Rule 506 were relatively concentrated, both in terms of number and proceeds. Maps of offering activity under Rule 506 during 2009–2018 by issuer location (covering 48 U.S. states) are shown below: 3. Request for Comment pooled investment funds, see Section IV.D. 33. Should we consider any changes to Rule 506(b) or 506(c)? Do the requirements of Rules 506(b) and 506(c) appropriately address capital formation and investor protection considerations? Enthusiasts Ready for Storm of Advertising (April 2014), Dealflow.com, available at https:// web.archive.org/web/20150430200100/https:// dealflow.com/whitepapers/Dealflow_White_Paper_ Q1_2014.pdf; Unregistered Offerings White Paper; Warren 2017 Study. 270 See Section II.B.1.a. For additional requests for comment related to exempt transactions under Section 4(a)(2) or Rule 506 involving 268 See note 267. e.g., Online Deal Marketing Outlook for Q1 2014: Regulators Rain on Parade as Rule 506(c) 269 See, VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 PO 00000 Frm 00027 Fmt 4701 Sfmt 4702 E:\FR\FM\26JNP3.SGM 26JNP3 EP26JN19.004</GPH> jbell on DSK3GLQ082PROD with PROPOSALS3 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules jbell on DSK3GLQ082PROD with PROPOSALS3 30486 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules Alternatively, should we retain Rules 506(b) and 506(c) as they are? 34. Should we combine the requirements for Rule 506(b) and Rule 506(c) offerings in one exemption? If so, what aspects of each rule should be retained in the combined exemption and why? Would legislative changes be necessary or beneficial to make such changes? 35. Is it important to continue to allow non-accredited investors to participate in Rule 506(b) offerings? Are the information requirements having an impact on the willingness of issuers to allow non-accredited investors to participate? 36. Are the current information requirements in Rule 506(b) appropriate or should they be modified? Should we revise the information requirements contained in Rule 502(b) to align those requirements with those of another type of exempt offering, such as Regulation Crowdfunding, Tier 1 of Regulation A, Tier 2 of Regulation A, or Rule 701? 271 How would such changes affect capital raising under Rule 506(b)? Should we consider eliminating or scaling the information requirements depending on the characteristics of the non-accredited investors participating in the offering, such as if all non-accredited investors are advised by a financial professional or a purchaser representative? Should the information requirements vary if the non-accredited investors can only invest a limited amount or if they invest alongside a lead accredited investor on the same terms as the lead investor? Would there be investor protection concerns regarding any reduction in information required to be provided to non-accredited investors? 37. Should we amend Regulation D to clarify or define ‘‘general solicitation’’ or ‘‘general advertising’’? Does the current definition pose any particular challenges? Alternatively, should we expand the list of examples provided in Rule 502(c)? Should we consider amending the definition or adding an example clarifying whether participation in a ‘‘demo-day’’ or similar event would be considered general solicitation? 38. If we reduce the information requirements in Rule 506(b), should we include investment limits for nonaccredited investors? If so, what limits are appropriate and why? Should accredited investors be subject to investment limits? 39. Should information requirements apply to accredited investors in offerings under either Rule 506(b) or 506(c)? If so, what type of information 271 See note 512 for a brief discussion of Rule 701. VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 requirements would be appropriate? Should any such information requirements apply to all accredited investors, whether natural persons or entities? 40. Are issuers hesitant to rely on Rule 506(c), as suggested by the data on amounts raised under that exemption as compared to other exemptions? If so, why? Has the adoption of Rule 506(c) enabled issuers to reach a greater number of potential investors and/or increased their access to sources of capital? Are there changes we should consider to encourage capital formation under Rule 506(c), consistent with the protection of investors? 41. Are there data available that show an increase or decrease in fraudulent activity in the Rule 506 market as a result of the adoption of Rule 506(c)? If so, what are the causes or explanations and what should we do to address them? 42. Is the requirement to take reasonable steps to verify accredited investor status having an impact on the willingness of issuers to use Rule 506(c)? Are there additional or alternative verification methods that we should include in the non-exclusive list of reasonable verification methods that would make issuers more willing to use Rule 506(c) or would better address investor protections? 43. If we do not revise or expand the verification methods in Rule 506(c), but we expand the ‘‘accredited investor’’ categories (e.g., to include investors that are financially sophisticated or advised by a financial professional), how would an issuer verify accredited investor status under these new categories? 44. Should we consider rule changes to allow non-accredited investors to purchase securities in an offering that involves general solicitation? If so, what types of investor protection conditions should apply? For example, should we allow non-accredited investors to participate in such an offering only if: (1) Such non-accredited investors had a pre-existing substantive relationship with the issuer or were not made aware of the offering through the general solicitation; (2) the offering is done through a registered intermediary; or (3) a minimum percentage of the offering is sold to institutional accredited investors that have experience in exempt offerings and the terms of the securities are the same as those sold to the non-accredited investors? How would such changes affect capital formation and investor protection? Would legislative changes be necessary or beneficial to make such changes? 45. What other changes to Rule 506 should we consider when harmonizing PO 00000 Frm 00028 Fmt 4701 Sfmt 4702 our exempt offering rules? For example, should we amend Rule 503 to provide a deadline to file the Form D other than the current requirement to file the Form D no later than 15 calendar days after the first sale of securities in the offering? If so, what deadline would be more appropriate? Would a different deadline, or a deadline tied to the completion of the offering, facilitate issuers’ compliance with the Form D filing requirement? What impact would any such changes have on the utility of Form D for the Commission, investors, or state securities regulators? Is the Form D information useful to investors? Should we consider any changes to the information required in Form D? 46. How frequently are issuers relying on the Section 4(a)(2) exemption or otherwise conducting private offerings where no Form D is required to be filed? We request data on such offerings where no Form D is available. C. Regulation A Regulation A was originally adopted by the Commission in 1936 as an exemption for small issues under the authority of Section 3(b) of the Securities Act.272 Section 401 of the JOBS Act 273 amended Section 3(b) of the Securities Act by designating Section 3(b), the Commission’s exemptive authority for offerings of up to $5 million, as Section 3(b)(1), and adding new Sections 3(b)(2) through 3(b)(5) to the Securities Act.274 Section 3(b)(2) directed 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) through (5) specify mandatory terms and conditions for such exempt offerings and authorize the Commission to adopt other terms, conditions, or requirements as necessary in the public interest and for the protection of investors. On March 25, 2015, the Commission adopted final rules to implement Section 401 of the JOBS Act by creating two tiers of Regulation A offerings: Tier 1, for offerings of up to $20 million in a 12month period; and Tier 2, for offerings 272 See SEC Release No. 33–632 (Jan. 21, 1936). Prior to codification as such, Regulation A was a collection of individual rules issued by the Federal Trade Commission and the Commission during the period of 1933–1936. Each such rule exempted particular classes of securities from registration under the Securities Act. Regulation A’s initial annual offering limit was raised from $100,000 to $300,000 in 1945, $500,000 in 1970, $1.5 million in 1978, and to $5 million in 1992. 273 See Public Law 112–106, sec. 401(a), 126 Stat. 306, 313 (Apr. 5, 2012). 274 See 15 U.S.C. 77c(b)(2) through (5). E:\FR\FM\26JNP3.SGM 26JNP3 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules of up to $50 million in a 12-month period.275 In adopting the two-tiered structure, the Commission indicated that it expected the requirements for Tier 1 to result in securities offerings that would be more local in character, while Tier 2 offerings would likely be more national in character.276 Certain basic requirements are applicable to both tiers, but Tier 2 issuers are subject to significant additional requirements. For example, Tier 2 issuers are always required to include audited financial statements in their offering circulars 277 and 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.278 In consideration of these requirements, which are discussed in more detail below, and the likely more national nature of Tier 2 offerings, Commission rules preempt state securities law registration and qualification requirements for Tier 2 offerings, while Tier 1 offerings remain subject to those state requirements.279 An issuer of $20 million or less of securities can elect to proceed under either Tier 1 or Tier 2. In addition to expanding the Regulation A offering limit, the 2015 amendments sought to modernize the Regulation A filing process, 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 certain Regulation A issuers.280 On December 19, 2018, the Commission further amended the issuer eligibility and related provisions pursuant to the Economic Growth Act to allow issuers that are subject to the ongoing reporting requirements of Section 13 or 15(d) of the Exchange Act to use the exemption.281 The Commission is required by Section 3(b)(5) of the Securities Act to review the Tier 2 offering limit every two years. In addition to revisiting the Tier 2 offering limit, the Commission stated that the staff would undertake to 30487 review the Tier 1 offering limit at the same time.282 Following completion of the staff reviews of the offering limits in 2016 and 2018, the Commission determined not to propose to increase the offering limit for either Tier at that time. At the time of adoption of the 2015 amendments, the Commission also stated that the staff would study and submit a report to the Commission no later than five years following the adoption of the amendments on the impact of both Tier 1 and Tier 2 offerings on capital formation and investor protection.283 The Commission indicated in the 2015 Regulation A Release that, based on the information contained in the report, it may propose either to decrease or to increase the offering limit for Tier 1, as appropriate. 1. Scope of the Exemption In order to conduct offerings pursuant to Tier 1 or Tier 2 of Regulation A, issuers must meet certain requirements. Table 7 broadly summarizes the Commission requirements for each tier. TABLE 7—OVERVIEW OF REGULATION A REQUIREMENTS Tier 1 Issuer Requirements ............ U.S. or Canadian issuers; excludes blank check companies, registered investment companies, business development companies, issuers of certain securities, and certain issuers subject to a Section 12(j) order. Offering Limit within a 12month Period. $20 million ....................................................................... Offering Communications .... No limits .......................................................................... SEC Filing Requirements .... Form 1–A filed with the Commission, including two years of financial statements (which may be unaudited in most cases). No .................................................................................... Disqualification Provisions ... Preemption of State Registration and Qualification. No .................................................................................... 2015 Regulation A Release. id. 277 See Part F/S of Form 1–A. 278 See 17 CFR 230.257 (‘‘Rule 257’’). 279 See 2015 Regulation A Release. Based on the analysis of information from Part I of Form 1–A offering statements qualified between June 19, 2015 (the effective date of Regulation A amendments) and December 31, 2018, for Tier 1 offerings with qualified offering statements, the median number of U.S. jurisdictions in which the issuer (and if applicable, underwriters, dealers, or sales persons) intended to offer securities was six states, whereas among Tier 2 offerings with 276 See 22:40 Jun 25, 2019 Non-accredited investors are subject to investment limits based on annual income and net worth, unless securities will be listed on a national securities exchange. Form 1–A filed with the Commission, including two years of audited financial statements. No. Felons and bad actors disqualified in accordance with Rule 262. 275 See VerDate Sep<11>2014 $50 million. Testing the waters permitted before and after the offering statement is filed. Investor Limits ...................... Restrictions on Resale ......... jbell on DSK3GLQ082PROD with PROPOSALS3 Tier 2 Jkt 247001 Yes. qualified offering statements, the median was 51. These estimates include 50 U.S. states and the District of Columbia, but exclude U.S. territories, Canadian provinces, and foreign jurisdictions other than Canada (which has a minimal effect on these estimates). We recognize that this differential observed in the data may be related to the fact that, under the 2015 Regulation A amendments, state registration requirements apply to Tier 1 but not to Tier 2 offerings. 280 See id. 281 See Amendments to Regulation A, Release No. 33–10591 (Dec. 19, 2018) [84 FR 520 (Jan. 31, 2019)] (‘‘2018 Regulation A Release’’). PO 00000 Frm 00029 Fmt 4701 Sfmt 4702 282 See 2015 Regulation A Release at 21809. 2015 Regulation A Release. The 2015 Regulation A Release stated that the report would 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. 283 See E:\FR\FM\26JNP3.SGM 26JNP3 30488 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules TABLE 7—OVERVIEW OF REGULATION A REQUIREMENTS—Continued Ongoing Reporting ............... Tier 1 Tier 2 Exit report due within 30 calendar days after termination or completion of an offering. Annual report on Form 1–K due within 120 calendar days of issuer’s fiscal year end; Semi-annual report on Form 1–SA due within 90 calendar days of after the end of the first six months of issuer’s fiscal year; Current reports on Form 1–U due within four business days of one of the items specified in that form; and If applicable, an Exit report on Form 1–Z to terminate an issuer’s reporting obligations. a. Eligible Issuers and Securities; Offering Process Regulation A is available only to issuers organized in, and with their principal place of business in, the United States or Canada.284 It is, however, not available to: • Investment companies registered or required to be registered under the Investment Company Act or BDCs; • Blank check companies; 285 • 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; or • Issuers subject to ‘‘bad actor’’ disqualification under 15 CFR 230.262 (‘‘Rule 262’’).286 The types of securities eligible for sale under Regulation A are limited to the enumerated list in Section 3(b)(3) of the Securities Act, which includes equity securities, debt securities, and debt securities convertible or exchangeable to equity interests, including any guarantees of such securities.287 284 See 17 CFR 230.251(b). 17 CFR 230.251(b)(3). See also note 25. 286 Regulation A includes disqualification provisions that are substantially similar to those in Rule 506(d). See Section II.B.2.e. Disqualification will not arise as a result of disqualifying events relating to final orders of certain state and federal regulators or certain SEC cease-and-desist orders that occurred before June 19, 2015, the effective date of the Regulation A amendments. Matters that existed before the effective date of the rule and that would otherwise be disqualifying are, however, required to be disclosed in writing to investors in Part II of Form 1–A. 287 See 15 U.S.C. 77c(b)(3) jbell on DSK3GLQ082PROD with PROPOSALS3 285 See VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 Regulation A also specifically excludes asset-backed securities.288 Continuous or delayed offerings are permitted, although Regulation A limits the types of delayed offerings permitted under the exemption 289 and is not available for at-the-market offerings.290 Regulation A includes no specific limitations on, requirements for, or other provisions regarding the use of a registered broker-dealer or another intermediary to facilitate the offering. Since adoption of the 2015 amendments, we have received comments and recommendations from a variety of sources, including a number of the annual Small Business Forums. For example, the 2017 and 2018 Small Business Forums recommended that the Commission amend its rules to allow atthe-market offerings under Regulation 288 See 17 CFR 230.251. An asset-backed security generally means a security that is primarily serviced by the cash flows of a discrete pool of receivables or other financial assets, either fixed or revolving, that by their terms convert into cash within a finite time period, plus any rights or other assets designed to assure the servicing or timely distributions of proceeds to the security holders. See 17 CFR 229.1101(c). 289 See 17 CFR 230.251(d)(3)(i) (providing that continuous or delayed offerings may rely on Regulation A only if they pertain to securities (1) offered or sold by a person other than the issuer, (2) offered and sold pursuant to certain reinvestment or employee benefit plans, (3) issued on the exercise or conversion of certain other securities, (4) pledged as collateral, or (5) offered within two calendar days after qualification of the offering statement on a continuous basis in an amount that is reasonably expected to be offered and sold within two years from qualification and offered and sold no more than three years after qualification unless included on a subsequent offering statement). 290 See 17 CFR 230.251(d)(3)(ii) (defining at-themarket offering to mean an offering of equity securities into an existing trading market for outstanding shares of the same class at other than a fixed price). In the 2015 Regulation A Release, the Commission acknowledged that a market in Regulation A securities may develop that is capable of supporting primary and secondary at-the-market offerings, but rather than permit such offerings at the outset, the Commission stated that it would defer any determination as to whether Regulation A would be an appropriate method for such offerings. The Commission also noted that an offering at fluctuating market prices may not be appropriate under an exemption subject to a maximum offering size. See 2015 Regulation A Release. PO 00000 Frm 00030 Fmt 4701 Sfmt 4702 A.291 The 2017 and 2018 Small Business Forums requested guidance for brokerdealers, transfer agents, and clearing firms, regarding Regulation A securities and OTC securities.292 In addition, both those Forums recommended that the Commission require any portal that is conducting Regulation A offerings to be registered and subject to appropriate disclosure requirements.293 Prior Small Business Forums also recommended that BDCs 294 and SBICs 295 be eligible to use the exemption. In addition, one commenter to the 2018 Regulation A Release suggested ‘‘certain amendments to alleviate the paperwork and regulatory burdens of certain filing requirements and offering amount limitations on Tier 2 issuers filing under Regulation A.’’ 296 b. Offering Limits and Secondary Sales As noted above, issuers may elect to conduct a Regulation A offering pursuant to the requirements of either Tier 1 or Tier 2. Tier 1 is available for offerings of up to $20 million in a 12month period, including no more than $6 million on behalf of selling security holders that are affiliates of the issuer.297 Tier 2 is available for offerings of up to $50 million in a 12-month period, including no more than $15 million on behalf of selling security 291 See 2017 Forum Report; 2018 Forum Report. 2017 Forum Report; 2018 Forum Report. 293 See 2017 Forum Report; 2018 Forum Report. See Section II.F.1.d. for a discussion of Regulation Crowdfunding and the requirements for funding portals. 294 See 2014 Forum Report; 2015 Forum Report; 2016 Forum Report. 295 See 2015 Forum Report. 296 Letter from Mark Schonberger dated Mar. 4, 2019 available at https://www.sec.gov/comments/ s7-29-18/s72918-5007949-182974.pdf (‘‘Schonberger Letter’’). For example, this commenter recommended that Regulation A be amended to permit issuers to: Include in an annual amendment the ability to qualify an additional $50 million for the following 12-month period, provided such issuers may not sell more than $50 million in any 12- month period; permit a 180-day selling extension to apply after a post-qualification amendment is filed and prior to the qualification of that amendment; and forward incorporate periodic and current reports, including updated financial statements. 297 See 17 CFR 230.251(a)(1). 292 See E:\FR\FM\26JNP3.SGM 26JNP3 jbell on DSK3GLQ082PROD with PROPOSALS3 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules holders that are affiliates of the issuer.298 Additionally, sales by all selling security holders in a Regulation A offering are limited to no more than 30% of the aggregate offering price in an issuer’s first Regulation A offering and any subsequent Regulation A offerings in the following 12-month period.299 In the 2015 Regulation A Release, the Commission noted that some commenters suggested that the Commission raise the proposed $50 million Tier 2 offering limit to an amount above the statutory limit set forth in Section 3(b)(2); however, the Commission did not believe an increase was warranted at the time.300 The Commission explained that, while Regulation A had existed as an exemption from registration for some time, the 2015 amendments were significant. Accordingly, the Commission believed that the 2015 amendments would provide for a meaningful addition to the existing capital formation options of smaller issuers while maintaining important investor protections. The Commission expressed its concern, however, about expanding the offering limit of the exemption beyond the level directly contemplated in Section 3(b)(2) at the outset of the adoption of the rules. While the Commission determined to adopt the proposed $50 million offering limit for a Regulation A Tier 2 offering, it noted that it would revisit the limit in 2016 in its bi-annual review of the limit, as required by Securities Act Section 3(b)(5).301 The $50 million offering limit was reviewed in 2016 and 2018, and neither review resulted in a proposal to increase the $50 million offering limit. At the time of the 2018 review, approximately 80% of filers with qualified Regulation A offerings had not yet completed their offerings or reported amounts raised in completed offerings, so the staff determined that there was insufficient data to derive definitive conclusions as to the adequacy of the $50 million offering limit or to forecast the amount of capital that might be raised in Regulation A offerings in the future. Since that time, the staff has continued to monitor the Regulation A market and gather additional information about the use of Regulation A, to determine whether to recommend proposing to increase the Regulation A aggregate annual offering limit in advance of the next review required under Section 3(b)(5). The Commission 298 See 17 CFR 230.251(a)(2). 17 CFR 230.251(a)(3). 300 See 2015 Regulation A Release, at text accompanying note 93. 301 See id. 299 See VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 is required to review the limit in 2020; however, the Chairman has requested that the staff conduct the review in 2019. Since adoption of the 2015 amendments, the 2017 and 2018 Small Business Forums have recommended that the Commission increase the maximum offering amount under Tier 2 of Regulation A from $50 million to $75 million.302 The 2017 Treasury Report also recommended that the Tier 2 offering limit be increased to $75 million.303 One commenter has suggested, in connection with the 2018 Regulation A Release, that the offering limit be raised to $100 million.304 c. Investment Limits in Tier 2 Offerings Regulation A limits the amount of securities that an investor that 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).305 This limit does not, however, apply to purchases of securities that will be listed on a national securities exchange upon qualification.306 d. Conditional Exemption From Section 12(g) Section 12(g) of the Exchange Act requires, among other things, that an issuer with total assets exceeding $10 million 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.307 Regulation A, however, conditionally exempts securities issued in a Tier 2 offering from the mandatory registration provisions of Section 12(g) 308 if the issuer: 302 See 2018 Forum Report; 2017 Forum Report. 2017 Treasury Report. 304 See Schonberger Letter. 305 See 17 CFR 230.251(d)(2)(i)(C). 306 See id. Tier 2 issuers that seek to list their securities on a national securities exchange or otherwise register a class of Regulation A securities under the Exchange Act may do so by filing 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. See Form 8–A, General Instructions A(c) [17 CFR 249.208a]. Such issuers 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. 307 15 U.S.C. 78l. 308 See Section II.C.5 for an analysis of the limited available data related to this conditional exemption. 303 See PO 00000 Frm 00031 Fmt 4701 Sfmt 4702 30489 • Remains subject to, and is current (as of its fiscal year-end) in, its Regulation A periodic reporting obligations; • Engages the services of a transfer agent registered with the Commission pursuant to Section 17A of the Exchange Act; 309 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.310 One commenter responding to the 2018 Regulation A Release suggested that the Commission amend Rule 12g5– 1 to tie the revenue limit in the conditional exemption from Section 12(g) to the revenue threshold for smaller reporting companies.311 2. Disclosure Requirements a. Offering Statement All issuers that conduct offerings pursuant to Regulation A are required to file an offering statement on Form 1–A with the Commission. Issuers are only permitted to begin selling securities pursuant to Regulation A once the offering statement has been qualified by the Commission. The Commission does not charge any fee to file or amend a Form 1–A. Among other things, Form 1–A contains the primary disclosure document used in connection with the offering, called an ‘‘offering circular.’’ Consistent with similar delivery requirements for registered offerings, Regulation A provides that access equals delivery.312 Accordingly, where sales of Regulation A securities occur after qualification on the basis of offers made using a preliminary offering circular, issuers and intermediaries may satisfy their delivery requirements for the final offering circular by filing it on EDGAR.313 Issuers are, however, required to include a notice in any preliminary offering circular that will inform potential investors that the 309 15 U.S.C. 78q–1. 17 CFR 240.12g5–1(a)(7). An issuer that exceeds these thresholds is 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 during such period. 311 See Schonberger Letter. A smaller reporting company is defined in Securities Act Rule 405, Exchange Act Rule 12b–2, and Item 10 of Regulation S–K [15 CFR 229.10(f)] to include an issuer with (1) public float of less than $250 million or (2) revenues of less than $100 million and either no public float or a public float of less than $700 million. 312 See 2015 Regulation A Release. 313 See 17 CFR 230.251(d)(2)(ii). 310 See E:\FR\FM\26JNP3.SGM 26JNP3 30490 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules issuer may satisfy its delivery obligations for the final offering circular electronically.314 Issuers, underwriters, and dealers must provide purchasers with a copy of the final offering circular or a notice stating that the sale occurred pursuant to a qualified offering statement not later than two business days after completion of a sale.315 The notice must include the website address where the final offering circular, or the offering statement including the final offering circular, may be obtained on EDGAR. In the case of an electroniconly offering, the notice must include an active hyperlink to the final offering circular or to the offering statement.316 The 2018 Small Business Forum recommended that the Commission permit the use of quick response (‘‘QR’’) codes, which are machine-readable images that contain data and can direct the user to a website or application,317 in lieu of a hyperlink to an offering circular after qualification.318 Form 1–A requires financial disclosure as well as narrative disclosure in one of two formats: (a) The Offering Circular format or (b) a format that follows the requirements of Part I of Form S–1 or, in certain circumstances, Part I of Form S–11,319 which contains the narrative disclosure requirements for registration statements filed by issuers in registered offerings. Form 1–A requires issuers in both Tier 1 and Tier 2 offerings to file balance sheets and related financial statements for the issuers’ two previous fiscal year ends (or for such shorter time that they have been in existence). Financial statements in Form 1–A must be dated not more than nine months before the date of filing or qualification, with the most recent annual or interim balance sheet being not older than nine months. If interim financial statements are required, they must cover a period of at least six months. For Tier 1 offerings, Regulation A does not require issuers to provide audited financial statements unless the issuer has already 17 CFR 230.254(a). 17 CFR 230.251(d)(2)(ii). 316 See id. 317 QR Code Essentials (2011), Denso ADC, available at http://www.nacs.org/LinkClick.aspx? fileticket=D1FpVAvvJuo%3D&tabid= 1426&mid=4802. 318 See 2018 Forum Report. 319 While Form S–1 is generally available for all types of issuers and transactions, Form S–11 is only available for offerings of securities issued by (i) real estate investment trusts, or (ii) issuers whose business is primarily that of acquiring and holding for investment real estate or interests in real estate or interests in other issuers whose business is primarily that of acquiring and holding real estate or interest in real estate for investment. prepared them for other purposes.320 Issuers in Tier 2 offerings are required 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) (‘‘U.S. Generally Accepted Auditing Standards’’ or ‘‘U.S. GAAS’’) or the standards of the Public Company Accounting Oversight Board (‘‘PCAOB’’). Issuers whose securities previously have not been sold pursuant to a qualified offering statement under Regulation A or an effective registration statement under the Securities Act are allowed to submit to the Commission electronically through EDGAR a draft offering statement for non-public review by the staff.321 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 not less than 21 calendar days before qualification of the offering statement.322 For ongoing offerings, postqualification amendments must be filed: • 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 • To reflect any facts or events arising after the qualification date of the offering statement (or the most recent post-qualification amendment thereof) that, individually or in the aggregate, represent a fundamental change in the information set forth in the offering statement.323 b. Ongoing Reporting Issuers in Tier 1 offerings are required 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.324 314 See jbell on DSK3GLQ082PROD with PROPOSALS3 315 See VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 320 Offerings under Tier 1 of Regulation A must also comply with state qualification requirements. See Section II.C.4.a. Several jurisdictions may require Tier 1 issuers to include audited financial statements prior to qualifying the offering. See, e.g., Wash. Rev. Code 21.20.220 (1994) available at https://apps.leg.wa.gov/rcw/ default.aspx?Cite=21.20.210. See also Coordinated Review FAQs, available at http://www.nasaa.org/ industry-resources/corporation-finance/ coordinated-review/regulation-a-offerings/ coordinated-review-faqs/. 321 See 17 CFR 230.252(d). 322 See id. 323 17 CFR 230.252(f)(2). 324 See 17 CFR 230.257(a). PO 00000 Frm 00032 Fmt 4701 Sfmt 4702 Issuers in Tier 2 offerings are required to electronically file annual and semiannual reports, as well as current reports and, in certain circumstances, an exit report on Form 1–Z, with the Commission.325 Annual reports must include, among other things: Disclosure relating to the issuer’s business operations for the preceding three fiscal years (or, if in existence for less than three years, since inception); two years of audited financial statements; and management’s discussion and analysis (‘‘MD&A’’) of the issuer’s liquidity, capital resources, and results of operations. Semiannual reports require disclosure primarily relating to the issuer’s interim financial statements and MD&A. Issuers are required to file current reports on Form 1–U with the Commission within four business days of the occurrence of certain events. An issuer in a Tier 2 offering 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, may immediately suspend its ongoing reporting obligations 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.326 In the 2018 amendments to Regulation A, as directed by the Economic Growth Act, the Commission revised Rule 257 to provide that entities meeting the reporting requirements of Section 13 or 15(d) of the Exchange Act will be deemed to have met the reporting requirements of Regulation A.327 3. Solicitation of Interest Regulation A permits 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, provided that all solicitation materials include certain required legends and, 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 325 See 17 CFR 230.257(b). 17 CFR 230.257(d). 327 See 17 CFR 230.257(b); 2018 Regulation A Release. 326 See E:\FR\FM\26JNP3.SGM 26JNP3 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules preliminary offering circular can be obtained.328 Test-the-waters materials must be filed as exhibits if the issuer proceeds to file a Form 1–A.329 We note, however, that paragraph (a) of 17 CFR 230.255 (‘‘Rule 255’’) specifically provides that these solicitations of interest are deemed to be offers of a security for sale for purposes of the antifraud provisions of the federal securities laws. Accordingly, if these solicitations of interest fail to satisfy the conditions of Rule 255(b), the solicitations must either be registered under the Securities Act or rely on another exemption from registration.330 After adoption of the 2015 amendments, the 2016 Small Business Forum recommended that the Commission provide a clearer definition of what constitutes ‘‘testing the waters materials’’ and permissible media activities.331 4. Relationship With State Securities Laws a. Tier 1 Offerings In addition to qualifying a Regulation A offering with the Commission, issuers in Tier 1 offerings must register or qualify their offering in any state in which they seek to offer or sell securities pursuant to Regulation A.332 Registration or qualification of a Tier 1 offering in some jurisdictions may require additional disclosure to that required under Commission rules. For example, several jurisdictions require an issuer to provide audited financial statements prior to qualifying an offering in that jurisdiction.333 In addition, while Regulation A permits issuers to test the waters and make offers in the pre-qualification period at the federal level, given what the Commission anticipated to be the generally more local nature of Tier 1 offerings, the rules preserve the states’ oversight over how these offerings are conducted, including how solicitation materials are used.334 The Commission contemplated that issuers conducting Tier 1 offerings would be smaller companies whose businesses revolved around products and services, and whose customer base likely would be located within a single state or region or jbell on DSK3GLQ082PROD with PROPOSALS3 328 See 17 CFR 230.255. Instructions to Form 1–A. 330 See 17 CFR 230.255. 331 See 2016 Forum Report. 332 See information from NASAA about states’ coordinated review available at http:// www.coordinatedreview.org/regulation-a/. 333 See note 320. 334 See 2015 Regulation A Release, at text accompanying note 799. 329 See VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 a small number of states.335 The Commission did not expect Tier 1 issuers generally to seek or, on the basis of their business models, be able to: (a) Raise capital on a national scale; or (b) create a secondary trading market in their Regulation A securities.336 b. Tier 2 Offerings While issuers in Tier 2 offerings are required to qualify offerings with the Commission before sales can be made pursuant to Regulation A, they are not required to register or qualify their offerings with state securities regulators. Section 18 of the Securities Act generally provides for preemption of state law registration and qualification requirements for ‘‘covered securities.’’ 337 Section 18(b)(4)(D) of the Securities Act further provides that securities issued pursuant to Section 3(b)(2) of the Securities Act are covered securities if they are listed, or will be listed, on a national securities exchange or if they are offered or sold to a ‘‘qualified purchaser,’’ 338 which the Commission has defined to include any person to whom securities are offered or sold in a Tier 2 offering.339 As discussed above, given the significant additional requirements for Tier 2 issuers, including the requirement to provide audited financial statements, the ongoing reporting requirements, and the investment limits for non-accredited investors, the Commission expected Tier 2 offerings to be national rather than local in nature.340 Accordingly, the Commission determined that preemption of state securities law registration and qualification requirements is appropriate for purchasers in these offerings. 341 Tier 2 offerings remain subject to state law enforcement and antifraud authority. Additionally, issuers in Tier 2 offerings may be subject to filing fees in the states in which they intend to offer or sell securities and may be required to file with such states any materials that the issuer has filed with the Commission as part of the offering.342 Since adoption of the 2015 amendments, we have received 335 See 2015 Regulation A Release, at text accompanying note 830. 336 See id. 337 See 15 U.S.C. 77r(c). 338 See 15 U.S.C. 77r(b)(4)(D). 339 See 17 CFR 230.256. 340 See 2015 Regulation A Release, at text accompanying note 830. 341 See id, at text accompanying note 799. 342 See information from NASAA about states’ filing requirements available at http:// www.nasaa.org/industry-resources/corporationfinance/coordinated-review/regulation-a-offerings/ state-filing-requirements/. PO 00000 Frm 00033 Fmt 4701 Sfmt 4702 30491 comments and recommendations from the Commission’s Advisory Committee on Small and Emerging Companies,343 a number of the annual Small Business Forums, and the 2017 Treasury Report on the preemption of state requirements for Regulation A offerings. The 2016 Small Business Forum recommended that Commission adopt rules that preempt state registration requirements for all primary and secondary trading of securities sold in offerings registered with the Commission.344 Similarly, the 2017 and 2018 Small Business Forums recommended that the Commission provide for blue sky preemption for secondary trading of securities issued in Regulation A Tier 2 offerings.345 The 2017 Treasury Report also recommended that state securities regulators update their regulations to exempt from state registration and qualification requirements secondary trading of securities issued under Tier 2 of Regulation A or, alternatively, that the Commission use its authority to preempt state registration requirements for such transactions.346 The Commission’s Advisory Committee on Small and Emerging Companies and the 2014, 2015, and 2017 Small Business Forums all recommended preemption for secondary trading of securities of Regulation A Tier 2 issuers that are current in their ongoing reports.347 The 2017 and 2018 Small Business Forums also recommended that the Commission consider overriding advance notice requirements of state regulators in Regulation A offerings and limiting state filing fees for these offerings.348 5. Analysis of Regulation A in the Exempt Market Table 8 below summarizes offerings initiated and offering statement qualified under Regulation A. 343 See Advisory Committee on Small and Emerging Companies: Recommendations Regarding Secondary Market Liquidity for Regulation A, Tier 2 Securities (May 15, 2017) available at https:// www.sec.gov/info/smallbus/acsec/acsecrecommendation-051517-secondary-liquidityrecommendation.pdf (‘‘ACSEC Secondary Market Liquidity Recommendation’’). 344 See 2016 Forum Report. For a discussion of secondary trading of Regulation A and other exempt offering securities, see Section V. 345 See 2017 Forum Report; 2018 Forum Report. 346 See 2017 Treasury Report. 347 See ACSEC Secondary Market Liquidity Recommendation; 2014 Forum Report (recommending that the Commission define ‘‘qualified purchaser’’ under Section 18(b)(3) to include any purchaser of a class of security that has been offered and sold pursuant to Section 4(a)(1) or (3), provided that, the issuer files reports pursuant to Rule 257(b) in order to preempt state blue sky regulation of after-market resale trading of securities issued pursuant to Tier 2 Regulation A offerings); 2015 Forum Report; 2017 Forum Report. 348 See 2017 Forum Report; 2018 Forum Report. E:\FR\FM\26JNP3.SGM 26JNP3 30492 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules TABLE 8—OFFERINGS UNDER REGULATION A, JUNE 19, 2015–DECEMBER 31, 2018 Tier 2 119 .......................................... $1,014 million .......................... $8.5 million .............................. 86 ............................................ $742 million ............................. $8.6 million .............................. 27 ............................................ $186.5 million .......................... $6.9 million .............................. 240 .......................................... $6,732 million .......................... $28.0 million ............................ 191 .......................................... $5,139 million .......................... $26.9 million ............................ 105 .......................................... $1,218 million .......................... $11.6 million ............................ Tiers 1 and 2 359. $7,746 million. $21.6 million. 277. $5,881 million. $21.2 million. 132. $1,404 million. $10.6 million. Based on staff analysis of Form 1–A filings, approximately 60% of issuers with Regulation A offering statements qualified during the sample period had undertaken another exempt offering in the prior year, most of them in reliance on Section 4(a)(2) or Regulation D, suggesting that most issuers in the Regulation A market tend to engage in more than one type of exempt offering. While the average amount reported raised by Regulation A issuers is higher than the average amount reported raised by Regulation D issuers during this period, significantly more capital was reported raised in the aggregate across all Regulation D offerings because Regulation D offerings are much more common. Compared to Regulation A offerings, over the same period (from June 19, 2016 to December 31, 2018), approximately 36,900 issuers, other than pooled investment funds, each reported raising up to $50 million in reliance on Regulation D, totaling approximately $181 billion, with the average reported proceeds of approximately $4.9 million per issuer. The typical Regulation A issuer was relatively small and early-stage. Regulation A issuers reported median total assets of approximately $0.4 million and average total assets of approximately $38 million. The median issuer reported no revenues (just over half of the offerings were by issuers with no revenues) and was incorporated 3.0 years earlier (compared to an average of 6.5 years for all Regulation A issuers). Approximately 20% of Regulation A offerings were by issuers that had attained profitability in the most recent fiscal year prior to the offering. There was significant industry and geographic concentration among issuers. Based on primary Standard Industry Classification codes disclosed in Form 1–A filings, approximately 36% of qualified Regulation A offering statements during this period were by issuers in the financial sector, and approximately 15% were by issuers in business services (including software). Approximately 24% of issuers were located in California, 10% in Florida, and 8% in New York. Figure 7 reflects the geographic concentration of offerings based on the number of qualified offering statements by issuer location. 349 Unique offerings were identified based on CIK and file number; offerings that were withdrawn or abandoned were excluded; and offerings identified as duplicates were consolidated. Amendments are consolidated with the original offering statement for purposes of the number of offering statements. These estimates exclude post-qualification amendments. Rounding affects totals. 350 If an issuer reported proceeds from both a Tier 1 and a Tier 2 offering, that issuer is counted twice (once under Tier 1 and once under Tier 2). 351 Average amounts are among offerings that reported proceeds. The distribution of reported proceeds has a right tail, so average proceeds are larger than median proceeds. Median reported proceeds were approximately $4.9 million for Tier 1 issuers and approximately $3.9 million for Tier 2 issuers. Tier 1 issuers only report proceeds upon offering completion. Many Tier 2 issuers report proceeds in ongoing offerings, which are subsequently revised upward. Thus, proceeds reported by Tier 1 and Tier 2 issuers are not directly comparable. VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 PO 00000 Frm 00034 Fmt 4701 Sfmt 4725 E:\FR\FM\26JNP3.SGM 26JNP3 EP26JN19.005</GPH> jbell on DSK3GLQ082PROD with PROPOSALS3 Offering statements filed ............................................... Aggregate dollar amount sought ........................... Average amount sought ........................................ Offering statements qualified 349 ................................... Aggregate amount sought ..................................... Average amount sought ........................................ Issuers reporting proceeds 350 ...................................... Aggregate amount reported raised ........................ Average amount reported raised 351 ..................... Tier 1 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules jbell on DSK3GLQ082PROD with PROPOSALS3 Based on staff analysis of information provided in Form 1–A filings as of December 31, 2018, we estimate that approximately 48 issuers, 28 of which are Tier 2 issuers, with qualified offering statements under Regulation A reported assets greater than $10 million and have not filed a Securities Act registration statement, reports under Section 13 or 15(d) of the Exchange Act, or, for Tier 2 issuers, an exit report on Form 1–Z. A portion of these Regulation A issuers may have, or may be approaching, the number of holders of record that would require registration under the Exchange Act, and a portion of the Tier 2 issuers may be relying on the conditional exemption in Rule 12g5–1. However, we do not have sufficient data available to estimate the number of holders of record or the public float for these issuers, so we cannot provide a more accurate estimate of the number of Tier 2 issuers that may be using the conditional exemption from Section 12(g). 6. Request for Comment 47. Do the requirements of Regulation A appropriately address capital formation and investor protection considerations? Is the process for qualifying Regulation A offerings appropriately tailored to the needs of investor protection? Is there anything about the process that is unduly burdensome? Do the costs associated with conducting a Regulation A offering dissuade issuers from relying on the exemption? If so, can we alleviate burdens in our rules or reduce costs for issuers while still providing adequate investor protection? Alternatively, should we retain Regulation A as it is? 48. Should we increase the $50 million Tier 2 offering limit? Should we increase the $20 million Tier 1 offering limit? If so, what limits would be appropriate? For example, as recommended by the 2017 Treasury Report and by the 2017 and 2018 Small Business Forums, should we increase the Tier 2 offering limit to $75 million? Alternatively, as suggested by one commenter, should we increase the Tier 2 offering limit to $100 million? Would another higher limit be appropriate? What are the appropriate considerations in determining a maximum offering size? In connection with an increase in either or both of the limits, should we consider additional investor protections—for example, aligning standards for when an amendment is required in an ongoing Regulation A offering with registered offering standards? Should we periodically adjust the offering limits for inflation? If so, how often should the adjustment be VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 made? Would increasing the maximum offering size encourage issuers to undertake the cost of conducting a Regulation A offering? 49. Should we extend eligibility to rely on Regulation A to additional categories of issuers, such as those organized and with a principal place of business outside of the United States and Canada, investment companies, or blank check companies? Should we, as recommended by the 2014, 2015, and 2016 Small Business Forums, allow BDCs to be eligible to rely on Regulation A? Should we, as recommended by the 2015 Small Business Forum, allow SBICs to be eligible to rely on Regulation A? Should we allow rural business investment companies (‘‘RBICs’’) to be eligible to rely on Regulation A? 352 Should we exclude any additional categories of issuers from Regulation A eligibility? What changes, if any, would need to be made to the offering statement disclosure requirements to accommodate these additional categories of issuers? What would be the effect on investors of permitting these additional categories of issuers? 50. Should we expand the types of eligible securities issuable under Regulation A? If so, what additional types of securities would be appropriate? What would be the effect on issuers, investors, and the market of permitting these additional categories of securities? Would legislative changes be necessary or beneficial in order to expand the types of eligible securities issuable under Regulation A? 51. Should we eliminate or change the individual investment limits for nonaccredited investors in Tier 2 offerings? If we change the investment limits, what limits would be appropriate? 52. Are there any data available that show an increase or decrease in fraudulent activity in the Regulation A market as a result of the 2015 or 2018 amendments? If so, is any change the direct result of an increase in the number of offerings since the amendments? If there has been an increase in fraud but the cause is not attributable to the overall increase of offerings, what are the causes or explanations and what should we do to address them? 53. Should we, as recommended by the 2018 Small Business Forum, permit the use of QR codes in lieu of a hyperlink to the most recent offering circular? Are there other technological solutions that we should consider, such as use of the issuer’s website address, other URL addresses, or other methods 352 See PO 00000 note 555 for a discussion of RBICs. Frm 00035 Fmt 4701 Sfmt 4702 30493 or technologies that would facilitate access to such information? Should we define permissible delivery methods more broadly so as to allow subsequently developed delivery technologies that become generally accepted elsewhere in the marketplace to be used in lieu of a hyperlink to a qualified offering circular? If so, how should we define permissible delivery methods? 54. Are the ongoing reporting requirements of Rule 257 appropriate from the perspective of issuers and investors? Should we consider changes to these requirements? If so, what changes should we consider? 55. Are the financial statement requirements in Form 1–A for each tier appropriate? Should we consider different financial statement requirements for Exchange Act reporting companies filing Forms 1–A? If so, what requirements should we consider? 56. Should we, as recommended by the 2018 Small Business Forum, amend Regulation A to permit at-the-market offerings? 353 57. Should we amend Regulation A to allow incorporation by reference of the issuer’s financial statements in the Form 1–A? 58. Should we, as recommended by the 2016 Small Business Forum, provide additional guidance on what constitutes testing the waters materials and permissible media activities? If so, what materials should be covered? 59. Are there other changes that should be considered specifically with respect to the use of Regulation A by Exchange Act reporting companies, in light of the recent amendments to allow such issuers to rely on the exemption? If so, what changes should we consider? 60. For Tier 1 issuers, how is the dual Commission staff and state review process working? If issuers find the Tier 1 dual review process burdensome, should we eliminate the staff’s review and qualification of Tier 1 offering statements given the concurrent state review and qualification of the same offering statement? If the Commission staff does not review and qualify the offering, should we replace the requirement to file a Tier 1 offering statement with a requirement to comply with the appropriate state filing requirements and file only a notice with the Commission? Alternatively, should we use such an approach only if the issuer is required to register or qualify the offering based on a substantive disclosure document in at least one state, and not where the issuer is relying 353 See note 290 and accompanying text for a discussion of at-the-market offerings. E:\FR\FM\26JNP3.SGM 26JNP3 30494 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules exclusively on state exemptions from registration or qualification that do not require state review of a substantive disclosure document? 61. Do issuers find state advance notice and filing fee requirements burdensome? If so, are there changes it would be possible and appropriate for us to consider to alleviate such burdens or would legislative changes be necessary or beneficial in order to do so? 62. Should the conditional Section 12(g) exemption for Regulation A Tier 2 securities be modified? If so, in what way? For example, should we increase the thresholds in Exchange Act Rule 12g5–1(a)(7)? Should we, as recommended by one commenter, amend Rule 12g5–1 to tie the thresholds to those in the smaller reporting company definition? If we were to broaden the Section 12(g) exemption or make it permanent, would potential issuers be more likely to use Regulation A? What investor protection concerns could arise from such a change? 63. Should we, as recommended by the 2017 and 2018 Small Business Forums, require any intermediary that is in the business of facilitating Regulation A offerings to register as a broker-dealer and comply with requirements similar to the requirements for intermediaries under Regulation Crowdfunding, such as required disclosure of compensation and the amount thereof? 64. Should we, as recommended by the 2017 and 2018 Small Business Forums, provide any additional guidance for broker-dealers, transfer agents, clearing firms, or intermediaries regarding Regulation A securities? If so, in which areas and why? jbell on DSK3GLQ082PROD with PROPOSALS3 D. Limited Offerings—Rule 504 of Regulation D Rule 504 of Regulation D provides an exemption from registration under the Securities Act of 1933 for the offer and sale of up to $5 million of securities in a 12-month period.354 Rule 504 was adopted pursuant to the Commission’s authority under Section 3(b)(1) of the Securities Act.355 Prior to rule changes adopted by the Commission in 2016, the aggregate amount of securities that could be offered and sold in a 12-month period under Rule 504 was $1 million. At the time Rule 504 was amended to increase this offering limit, the 354 17 CFR 230.504. U.S.C. 77c(b)(1). Section 3(b)(1) gives the Commission authority to adopt an exemption for offerings not exceeding $5 million where the Commission believes registration under the Securities Act is not necessary by reason of the small amount involved or the limited character of the public offering. 355 15 VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 Commission also repealed the Rule 505 exemption from registration.356 Rule 505 was an exemption from Securities Act registration that had been available to both non-reporting and reporting companies so long as the aggregate offering amount did not exceed $5 million in a 12-month period and certain other conditions were met. 1. Scope of the Exemption a. Eligible Issuers The following categories of issuers are not eligible to use the Rule 504 exemption: • Issuers that are required to file reports under Exchange Act Section 13(a) or 15(d); 357 • Investment companies; 358 • Blank check companies; 359 and • Issuers that are disqualified under Rule 504’s ‘‘bad actor’’ disqualification provisions.360 b. Offering and Investment Limits As noted above, in 2016, the Commission amended Rule 504 to raise the aggregate amount of securities an issuer may offer and sell in any 12month period from $1 million to $5 million, which is the maximum statutorily allowed under Section 3(b)(1).361 As discussed in the adopting release for that rule change, while a few commenters 362 and the 2015 Small Business Forum 363 recommended that the Commission increase the Rule 504 offering limit to $10 million, the Commission determined not to use its exemptive authority under Section 28 of the Securities Act to raise the maximum offering amount above $5 million. There are no limits on the amount an investor can invest in an offering under Rule 504. 356 See Exemptions to Facilitate Intrastate and Regional Securities Offerings, Release No. 33–10238 (Oct. 26, 2016) [81 FR 83494 (Nov. 21, 2016)] (‘‘Intrastate and Regional Offerings Release’’). The removal of Rule 505 was effective on May 22, 2017. 357 See 17 CFR 230.504(a)(1). 358 See 17 CFR 230.504(a)(2). 359 See 17 CFR 230.504(a)(3). See also note 25. 360 17 CFR 230.504(b)(3). Generally, offerings under Rule 504 are subject to the disqualification provisions found in Rule 506(d) of Regulation D. See Section II.B.2.e. Disqualification under Rule 504, however, will not arise as a result of disqualifying events relating to any conviction, order, judgment, decree, suspension, expulsion or bar that occurred before January 20, 2017, the effective date of the Rule 504 amendment that added the disqualification provisions. Events that occurred prior to January 20, 2017 that are within the relevant look-back period and would otherwise be disqualifying are, however, required to be disclosed in writing to each purchaser. 361 See Intrastate and Regional Offerings Release. See also note 355. 362 See Intrastate and Regional Offerings Release at n. 272. 363 See 2015 Forum Report. PO 00000 Frm 00036 Fmt 4701 Sfmt 4702 c. General Prohibition on General Solicitation and Limitations on Resale In general, issuers relying on Rule 504 may not use general solicitation or advertising to market the securities, and purchasers in a Rule 504 offering will receive ‘‘restricted securities’’ subject to the limitations in Rule 502(d) on the resale of the securities acquired in the transaction.364 However, general solicitation and advertising is permitted and there are no resale limitations on the securities acquired in the transaction 365 if the issuer offers and sells the securities: • Exclusively under one or more state laws that require registration and the public filing and delivery to investors of a substantive disclosure document before sale; • In one or more states that do not have a provision requiring registration or the public filing and delivery of a disclosure document before sale, so long as: • The securities have been registered in at least one other state that provides for such registration, public filing, and delivery before sale; • The issuer offers and sells securities in that other state under those provisions; • And the issuer delivers to all purchasers in any state the disclosure documents mandated by the state in which it registered the securities; or • Exclusively in a state according to an exemption in such state that permits general solicitation and advertising, so long as sales are made only to ‘‘accredited investors.’’ 366 364 See 17 CFR 230.502(d); 17 CFR 230.144(a)(3)(ii). See Section II.B.1.b for a discussion of restricted securities and the resale limitations of Rule 502(d). 365 An investor who wishes to sell securities that are not restricted must either register the transaction or have an exemption for the transaction. See Section IV. 366 17 CFR 230.504(b)(1). State exemptions of this nature include those based on the ‘‘Model Accredited Investor Exemption,’’ which was adopted by NASAA in 1997. See CCH NASAA Reporter Para. 361. Generally, the model rule exempts offers and sales of securities from state registration requirements if, among other matters, the securities are sold only to persons who are, or are reasonably believed to be, ‘‘accredited investors’’ as defined in Rule 501(a) of Regulation D. 17 CFR 230.501(a). The model rule restricts transfer of the securities for 12 months after issuance except to other accredited investors or if registered. General solicitations by any means under that provision are generally limited to a type of ‘‘tombstone’’ ad. See Model Accredited Investor Exemption, available at http://www.nasaa.org/wpcontent/uploads/2011/07/24-Model_Accredited_ Investor_Exemption.pdf. See Section II.A for a discussion of the definition ‘‘accredited investor.’’ E:\FR\FM\26JNP3.SGM 26JNP3 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules 2. Filing Requirements and Relationship With State Securities Laws An issuer conducting an offering under Rule 504 is required to file a notice with the Commission on Form D within 15 days after the first sale of securities in the offering.367 The Commission does not charge any fee to file or amend a Form D. Offerings conducted pursuant to Rule 504 must be registered in each state in which they are offered or sold unless an exemption to state registration is available under state securities laws.368 Each state has its own registration requirements and exemptions to registration requirements. The vast majority of states have adopted a uniform registration form for offerings relying on Rule 504.369 At least one state, however, has adopted a form of state-based crowdfunding that permits the use of general solicitation but has provided for an abbreviated state registration procedure where, in addition to following various statespecific requirements for registration, an issuer also complies with Rule 504 of Regulation D.370 3. Analysis of Rule 504 in the Exempt Market From 2009–2018, two percent of the capital raised in Regulation D offerings under $5 million by non-investment companies was offered under Rule 504 30495 (and under Rule 505, prior to its repeal), and 98% of the capital raised was offered under Rule 506.371 As illustrated in Table 9, in 2018, there were 85 additional new offerings that claimed a Rule 504 exemption as compared to 2017; 372 however, the increased number of Rule 504 filings generally aligns with the decrease in the number of Rule 505 offerings over the same period (83 offerings). In repealing Rule 505, the Commission noted that it believed that, due to the increase in Rule 504’s aggregate offering amount, almost all of the offerings that were conducted under Rule 505 would qualify for an exemption under amended Rule 504.373 TABLE 9—NUMBER OF NEW OFFERINGS UNDER RULES 504 AND 505 Change from 2016 to 2017 2016 Rule 504 ............................................................................... Rule 505 ............................................................................... Rules 504 and 505 .............................................................. 443 173 616 Change from 2017 to 2018 2017 93 ¥90 3 536 83 619 85 ¥83 2 2018 621 0 621 jbell on DSK3GLQ082PROD with PROPOSALS3 BILLING CODE 8011–01–P 367 See 17 CFR 230.503. Filing a Form D notice is required, but a failure to file the notice does not invalidate the Rule 504 exemption. 368 Securities issued pursuant to Rule 504 are not covered securities as this exemption is adopted pursuant to the Commission’s authority under Section 3(b)(1) of the Securities Act. 369 See CCH Blue Sky Law Reporter, Blue Sky Finding Lists, Small Corporate Offering Registration Program and Form U–7, ¶ 6461 (2016). As of 2016, 43 states, the District of Columbia, and the Commonwealth of Puerto Rico have adopted some form of the SCOR program or recognize the filing of Form U–7 (also referred to as uniform limited offering registration (‘‘ULOR’’)). Id. SCOR and Form U–7 were developed by NASAA as a registration format for issuers registering securities under state securities laws when relying on an exemption from Securities Act registration, including Rule 504. An issuer may not use the SCOR Form to offer and sell its securities if the issuer or any of its officers, VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 directors, principal stockholders, or promoters are disqualified because of prior violations of the securities laws. An issuer also may not use salespersons who are disqualified because of prior violations of the securities laws. See information from NASAA about SCOR and states’ coordinated review available at http://www.nasaa.org/industryresources/corporation-finance/scor-overview/ and http://www.coordinatedreview.org/cr-scor/. 370 Based on the ‘‘Intrastate Crowdfunding Legislation’’ summary prepared by NASAA, dated Jan. 2, 2018 available at http://www.nasaa.org/wpcontent/uploads/2018/01/NASAA-CrowdfundingIndex-1-2-2018.pdf, of the 35 jurisdictions that adopted intrastate crowdfunding provisions, as of Jan. 2, 2018, Maine allows an issuer to rely on Rule 504 of Regulation D when the issuer complies with an abbreviated registration procedure. See Me. Rev. Stat. tit. 32, § 16304(6–A)(D) (2013) available at https://www.maine.gov/pfr/securities/documents/ title32sec16304.pdf. PO 00000 Frm 00037 Fmt 4701 Sfmt 4702 371 See note 37 and accompanying text. The Commission repealed Rule 505 in the Intrastate and Regional Offerings Release, effective on May 22, 2017. 372 Rule 504 offerings had declined by 16% from 2016 to 2017 and by 4% from 2015 to 2016. See Unregistered Offerings White Paper at Table 6. 373 See Intrastate and Regional Offerings Release at the text accompanying n. 432 (‘‘[I]f issuers switch [from Rule 505 offerings] to offerings under amended Rule 504, they could replicate most characteristics of an offering under existing Rule 505 and receive some additional benefits, such as access to an unlimited number of non-accredited investors and the ability to engage in general solicitation in certain situations. However, reporting companies, albeit a small proportion of all Rule 505 issuers, are not permitted to use the Rule 504 exemption.’’). E:\FR\FM\26JNP3.SGM 26JNP3 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules BILLING CODE 8011–01–C jbell on DSK3GLQ082PROD with PROPOSALS3 4. Request for Comment 65. Should we consider any changes to the Rule 504 exemption? Do the requirements of Rule 504 appropriately address capital formation and investor protection considerations? Is the Rule 504 exemption useful to help issuers meet their capital-raising needs? Alternatively, should we retain Rule 504 as it is? 66. Are there any data available that show an increase or decrease in fraudulent activity in the Rule 504 market as a result of recent amendments? If so, what are the causes VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 or explanations and what should we do to address them? 67. Should we increase the $5 million offering limit? If so, what limit is appropriate? For example, as recommended by the 2015 Small Business Forum prior to the Commission’s 2016 amendments, should we increase the Rule 504 offering limit to $10 million? What are the appropriate considerations in determining a maximum offering size? In connection with any increase in the limit, should we consider imposing additional investor protections, such as individual investment limits? PO 00000 Frm 00038 Fmt 4701 Sfmt 4702 68. Should we extend eligibility to rely on Rule 504 to additional categories of issuers, such as Exchange Act reporting companies or investment companies? Should we exclude any additional categories of issuers from Rule 504 eligibility? 69. Is the offering exemption under Rule 504 duplicative of Regulation A Tier 1? If we were to eliminate the staff’s review and qualification of Regulation A Tier 1 offerings in light of the concurrent state-level review and qualification of the offering (as described in Question 60 above), should we also eliminate Rule 504? Would Rule E:\FR\FM\26JNP3.SGM 26JNP3 EP26JN19.006</GPH> 30496 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules 504 continue to have utility in such a circumstance? 70. Are there any regulatory or legislative changes that are necessary or beneficial to encourage regional offerings across two or more jurisdictions? E. Intrastate Offerings 1. Section 3(a)(11) of the Securities Act jbell on DSK3GLQ082PROD with PROPOSALS3 Section 3(a)(11) of the Securities Act is generally known as the ‘‘intrastate offering exemption.’’ 374 To qualify for the intrastate offering exemption, an issuer 375 must: • Be organized in the state where it is offering the securities; • Carry out a significant amount of its business in that state; 376 and • Make offers and sales only to residents of that state. The Commission has stated that the ‘‘legislative history of the Securities Act shows that this exemption was designed to apply only to local financing that may practicably be consummated in its entirety within the state or territory in which the issuer is both incorporated and doing business.’’ 377 Section 3(a)(11) does not limit the size of the offering or the number of investors, so long as ‘‘the entire issue of securities [is] offered and sold exclusively to residents of the state in question.’’ 378 However, the Commission has noted that ‘‘[a]n offering may be so large that its success as a local offering appears doubtful from the outset.’’ 379 An issuer must determine the residence of each offeree 374 15 U.S.C. 77c(a)(11) (providing an exemption from registration under the Securities Act for ‘‘[a]ny security which 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’’). 375 Issuers registered or required to be registered under the Investment Company Act are not eligible to conduct offerings pursuant to Section 3(a)(11). Under Section 24(d) of the Investment Company Act [15 U.S.C. 80a–24(d)], the Section 3(a)(11) exemption is not available for an investment company registered or required to be registered under the Investment Company Act. See Section 3(a)(11) Exemption for Local Offerings, Release No. 33–4434 (Dec. 6, 1961) [26 FR 11896 (Dec. 13, 1961)] (‘‘Section 3(a)(11) Release’’), at note 1; see also Intrastate and Regional Offerings Release at text accompanying note 240. 376 See Section 3(a)(11) Release at 2 (‘‘In view of the local character of the Section 3(a)(11) exemption, the requirement that the issuer be doing business in the state can only be satisfied by the performance of substantial operational activities in the state of incorporation. The doing business requirement is not met by functions in the particular state such as bookkeeping, stock record and similar activities or by offering securities in the state.’’). 377 Section 3(a)(11) Release at 1. 378 Id (emphasis in original). 379 Id at 3. VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 and purchaser. If the issuer offers or sells any of the securities to even one out-of-state person, the exemption may be lost. Without the exemption, the issuer would be in violation of the Securities Act if the offering does not qualify for another exemption and was not registered under the Securities Act. a. Restrictions on Resales Although Section 3(a)(11) does not have explicit resale restrictions, the Commission has explained that ‘‘to give effect to the fundamental purpose of the exemption, it is necessary that the entire issue of securities shall be offered and sold to, and come to rest only in the hands of residents within the state.’’ 380 State securities laws also may have specific resale restrictions. In addition, like any securities transaction, persons reselling the securities nonetheless will need to register the resale transaction with the Commission or have an exemption from registration under federal law.381 b. Filing Requirements and Relationship With State Securities Laws Issuers conducting an offering pursuant to Section 3(a)(11) are not required to file any information with or pay any fees to the Commission. Offerings conducted pursuant to Section 3(a)(11) must be registered in the state in which the securities are offered or sold unless an exemption to state registration is available under the state’s securities laws.382 2. Securities Act Rules 147 and 147A 17 CFR 230.147 (‘‘Rule 147’’) is considered a ‘‘safe harbor’’ under Section 3(a)(11) of the Securities Act, providing objective standards that an issuer can rely on to meet the requirements of that exemption.383 The Rule 147 safe harbor was intended to provide assurances that the intrastate offering exemption would be used for the purpose Congress intended in 380 Id at 4. Section V.A. 382 A security issued pursuant to Section 3(a)(11) is not a ‘‘covered security’’ under Section 18. The intrastate exemptions provide the states with ‘‘the flexibility to adopt requirements that are consistent with their respective interests in facilitating capital formation and protecting their resident investors in intrastate securities offerings, including the authority to impose additional disclosure requirements regarding offers and sales made to persons within their state or territory, or the authority to limit the ability of certain bad actors from relying on applicable state exemptions.’’ See Intrastate and Regional Offerings Release at Section I. 383 See SEC Release No. 33–5450 (Jan. 7, 1974) [39 FR 2353 (Jan. 21, 1974)] (‘‘Rule 147 Adopting Release’’). See also SEC Release No. 33–5349 (Jan. 8, 1973) [38 FR 2468 (Jan. 26, 1973)] (‘‘Rule 147 Proposing Release’’). 381 See PO 00000 Frm 00039 Fmt 4701 Sfmt 4702 30497 enacting Section 3(a)(11), namely the local financing of issuers by investors within the issuer’s state or territory.384 Under Rule 147, states retain the flexibility to adopt requirements that are consistent with their respective interests in facilitating capital formation and protecting their resident investors in intrastate securities offerings, including the authority to impose additional disclosure requirements for offers and sales made to persons within their state or territory, and the authority to limit the ability of certain bad actors to rely on applicable state exemptions. 17 CFR 230.147A (‘‘Rule 147A’’) is a new intrastate offering exemption adopted by the Commission in 2016 that seeks to accommodate modern business practices and communications technology and provide an alternative means for smaller issuers to raise capital locally, including through offerings relying on intrastate crowdfunding provisions.385 Rule 147A was adopted pursuant to the Commission’s general exemptive authority under Section 28 of the Securities Act, and therefore, Rule 147A is not subject to the statutory limitations of Section 3(a)(11). Accordingly, Rule 147A has no restriction on offers, but requires that all sales be made only to residents of the issuer’s state or territory to ensure the intrastate nature of the exemption. Rule 147A also does not require issuers to be incorporated or organized in the same state or territory where the offering occurs so long as issuers can demonstrate the in-state nature of their business. Consistent with Rule 147, states retain the flexibility to adopt requirements that are consistent with their respective interests in facilitating capital formation and protecting their resident investors in intrastate securities offerings, including the authority to impose additional disclosure requirements for offers and sales made to persons within their state or territory, or the authority to limit the ability of certain bad actors to rely on applicable state exemptions. In order to conduct offerings pursuant to Rule 147 or Rule 147A, issuers 386 must meet certain requirements. Table 10 broadly summarizes the Commission requirements for each rule. We refer to ‘‘in-state’’ as the state or territory in which the issuer is resident and doing 384 See Rule 147 Adopting Release. See also H.R. Rep. No. 73–85, at 6–7 (1933), H.R. Rep. No. 73– 1838, at 40–41 (1934) (Conf. Rep.) and Section 3(a)(11) Release. 385 See Intrastate and Regional Offerings Release. 386 As with Section 3(a)(11) and Rule 147, issuers registered or required to be registered under the Investment Company Act are not eligible to conduct offerings pursuant to Rule 147A. E:\FR\FM\26JNP3.SGM 26JNP3 30498 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules business at the time of the sale of the security. TABLE 10—OVERVIEW OF RULE 147 AND RULE 147A REQUIREMENTS The issuer is organized in-state.387 ......................................................................................................................... The officers, partners, or managers of the issuer primarily direct, control and coordinate the issuer’s activities (‘‘principal place of business’’) in-state.388 .......................................................................................................... The issuer satisfies at least one of the ‘‘doing business’’ requirements described below.389 ............................... Offers are limited to in-state residents390 or persons who the issuer reasonably believes are in-state residents.391 ............................................................................................................................................................... Sales are limited to in-state residents or persons who the issuer reasonably believes are in-state residents.392 The issuer obtains a written representation from each purchaser as to residency.393 .......................................... a. ‘‘Doing Business’’ In-State b. Restrictions on Resales Issuers conducting an offering pursuant to Rule 147 or Rule 147A must satisfy at least one of the following requirements in order to be considered ‘‘doing business’’ in-state: • The issuer derived at least 80% of its consolidated gross revenues from the operation of a business or of real property located in-state or from the rendering of services in-state; • The issuer had at least 80% of its consolidated assets located in-state; 394 • The issuer intends to use and uses at least 80% of the net proceeds from the offering towards the operation of a business or of real property in-state, the purchase of real property located instate, or the rendering of services instate; or • A majority of the issuer’s employees are based in-state.395 For a period of six months from the date of the sale by the issuer to the purchaser, securities purchased in an offering pursuant to Rule 147 or Rule 147A may only be resold to persons residing in-state.396 Issuers must disclose these limitations on resale to offerees and purchasers and include appropriate legends on the certificate or document evidencing the security.397 Although securities purchased in an offering pursuant to Rule 147 or Rule 147A are not considered ‘‘restricted securities,’’ persons reselling the securities nonetheless will need to register the resale transactions with the Commission or rely on an exemption from registration under federal securities law. 387 See 17 CFR 230.147(c)(1)(i). 17 CFR 230.147(c)(1) and 17 CFR 230.147A(c)(1). 389 See 17 CFR 230.147(c)(2) and 17 CFR 230.147A(c)(2). 390 The residence of an offeree or purchaser that is a legal entity (e.g., corporation, partnership, or trust) is the location where, at the time of the sale, the entity has its principal place of business. However, if a legal entity was organized for the specific purpose of acquiring securities pursuant to Rule 147 or Rule 147A, all beneficial owners must be in-state residents for the entity to be considered an in-state resident. In addition, a trust that is not deemed to be a separate legal entity is a resident of each state or territory in which its trustee is, or trustees are, resident. If the purchaser is an individual, such person is deemed to be a resident of the state or territory if such person has, at the time of the offer and sale, his or her principal residence in the state or territory. 391 See 17 CFR 230.147(d). 392 See 17 CFR 230.147(d) and 17 CFR 230.147A(d). 393 See 17 CFR 230.147(f)(1)(iii) and 17 CFR 230.147A(f)(1)(iii). 394 This is measured at the end of its most recent semi-annual fiscal period prior to the first offer of securities pursuant to the exemption. 395 See 17 CFR 230.147(c)(2) and 17 CFR 230.147A(c)(2). jbell on DSK3GLQ082PROD with PROPOSALS3 388 See VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 c. Filing Requirements and Relationship With State Securities Laws Issuers conducting an offering pursuant to Rule 147 or Rule 147A are not required to file any information with or pay any fees to the Commission. Offerings conducted pursuant to Rule 147 or Rule 147A must be registered in the state in which they are offered or sold unless an exemption to state registration is available under the state’s securities laws.398 Each state has its own registration requirements and exemptions to registration requirements.399 396 See 17 CFR 230.147(e) and 17 CFR 230.147A(e). 397 See 17 CFR 230.147(f) and 17 CFR 230.147A(f). 398 A security issued pursuant to Section 3(a)(11) and its Rule 147 safe harbor or pursuant to Rule 147A is not a ‘‘covered security’’ under Section 18. See Intrastate and Regional Offerings Release at Section I. 399 See, e.g., information from NASAA about intrastate crowdfunding legislation and regulation available at http://www.nasaa.org/industryresources/corporation-finance/instrastatecrowdfunding-resource-center/. PO 00000 Frm 00040 Fmt 4701 Sfmt 4702 Requirements of Rule 147 (safe harbor under section 3(a)(11)) Requirements of Rule 147A ........................ ........................ ........................ ........................ ........................ ........................ ........................ ........................ ........................ ........................ ........................ ........................ 3. Request for Comment 71. To what extent are the intrastate exemptions being used? Do the requirements of the intrastate exemptions appropriately address capital formation and investor protection considerations? Are the intrastate exemptions useful to help issuers meet their capital-raising needs? We request data with respect to: (a) The use of Rule 147 and Rule 147A; (b) repeat use by the same issuers of Rule 147 or Rule 147A; (c) the use by issuers of alternative federal offering exemptions concurrently or close in time to an offer or sale under Rule 147 or Rule 147A; (d) fraud associated with, or issuer non-compliance with provisions of, Rule 147 or Rule 147A; (e) the role of intrastate broker-dealers and other intermediaries in offerings conducted pursuant to Rule 147 or Rule 147A; and (f) the application of state bad actor disqualification provisions in offerings conducted pursuant to Rule 147 or Rule 147A. 72. Are there any data available that show an increase or decrease in fraudulent activity in the intrastate offerings market as a result of recent amendments or the introduction of Rule 147A? If so, what are the causes or explanations and what should we do to address them? 73. Should we eliminate Rule 147 and retain Rule 147A? If we were to eliminate Rule 147 and Rule 504 (as described in Question 69 above), would issuers still rely on the intrastate exemption in Section 3(a)(11)? 74. Do the issuer requirements related to principal place of business and doing business appropriately capture the ‘‘intrastate’’ issuers for purposes of Rules 147 and 147A? If not, how should they be changed? 75. Does the requirement that an individual purchaser have his or her principal residence in a state or territory E:\FR\FM\26JNP3.SGM 26JNP3 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules in order to be deemed a resident of such state or territory appropriately capture the ‘‘intrastate’’ investors for purposes of Rules 147 and 147A? What impact does this have on potential purchasers who have more than one place of residence? Would it be appropriate to revise the definition of intrastate purchasers to include those purchasers in a state who would qualify as residents under that state’s laws and regulations regarding intrastate offers and sales of securities? What input should states have in determining whether an offering is intrastate? 76. For a legal entity that was organized for the specific purpose of acquiring securities pursuant to Rule 147 or Rule 147A to be considered an in-state resident, all beneficial owners must be in-state residents. Do issuers face challenges in determining whether an entity was organized for the specific purpose of acquiring securities? If so, should we provide guidance on such determination? 77. What regulatory or legislative changes are needed to allow regional offerings that are not limited to one jurisdiction? 78. Should we consider any changes to either Rule 147 or Rule 147A? What effects would such changes have on capital formation and investor protection? jbell on DSK3GLQ082PROD with PROPOSALS3 F. Regulation Crowdfunding Title III of the JOBS Act added Securities Act Section 4(a)(6), which provides an exemption from registration for certain crowdfunding transactions.400 To qualify for the exemption under Section 4(a)(6), transactions must meet a number of statutory requirements that are discussed in more detail below, including limits on the amount an issuer may raise, limits on the amount an individual may invest and a requirement that the transactions be conducted through an intermediary that is registered as either a broker-dealer or a ‘‘funding portal.’’ In addition, Title III added Section 4A to the Securities Act, which requires, among other things, that issuers and intermediaries that facilitate transactions under Section 4(a)(6) provide certain specified information to investors and the Commission. Title III 400 Crowdfunding generally refers to a method of capital raising in which an entity or individual raises funds via the internet from a large number of people typically making small individual contributions. Individuals interested in the crowdfunding campaign—members of the ‘‘crowd’’—may share information about the project, cause, idea, or business with each other and use the information to decide whether to fund the campaign based on the collective ‘‘wisdom of the crowd.’’ VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 also mandated that the Commission establish bad actor provisions disqualifying certain issuers from availing themselves of the Section 4(a)(6) exemption and adopt rules to exempt from the registration requirements of Section 12(g), either conditionally or unconditionally, securities acquired pursuant to an offering under Section 4(a)(6). In 2015, to implement the requirements of Title III, the Commission adopted Regulation Crowdfunding, which became effective on May 16, 2016.401 On March 31, 2017, the Commission adjusted for inflation certain thresholds in Regulation Crowdfunding, as required by Section 4A(h).402 In the Crowdfunding Adopting Release, the Commission stated that staff would undertake to study and submit a report to the Commission (the ‘‘Crowdfunding Study’’) no later than three years following the effective date of Regulation Crowdfunding on the impact of the regulation on capital formation and investor protection.403 In May 2019, the staff submitted the Crowdfunding Study to the Commission.404 We discuss certain relevant findings from the Crowdfunding Study later in this section. 1. Scope of the Exemption a. Eligible Issuers Certain issuers are not eligible to use the Regulation Crowdfunding exemption. Section 4A, as added by Title III, specifically excludes: • Non-U.S. issuers; 401 See Crowdfunding, Release No. 33–9974 (Oct. 30, 2015) [80 FR 71387 (Nov. 16, 2015)] (‘‘Crowdfunding Adopting Release’’). 402 Securities Act Section 4(a)(6) exempts offerings of up to $1 million in a 12-month period, subject to adjustment for inflation required by Section 4A(h) at least once every 5 years. See Inflation Adjustments and Other Technical Amendments under Titles I and III of the JOBS Act (Technical Amendments; Interpretation), Release No. 33–10332 (Mar. 31, 2017) [82 FR 17545 (Apr. 12, 2017)] (‘‘2017 Amendments’’). 403 See Crowdfunding Adopting Release, at 71390. The Adopting Release stated that the Crowdfunding Study will include, but not be limited to, a review of: (1) Issuer and intermediary compliance; (2) issuer offering limits and investor investment limits; (3) incidence of fraud, investor losses, and compliance with investor aggregates; (4) intermediary fee and compensation structures; (5) measures intermediaries have taken to reduce the risk of fraud, including reliance on issuer and investor representations; (6) the concept of a centralized database of investor contributions; (7) intermediary policies and procedures; (8) intermediary recordkeeping practices; and (9) secondary market trading practices. 404 See Report to the Commission on Regulation Crowdfunding (Jun. 18, 2019) available at www.sec.gov/smallbusiness/exemptofferings/ regcrowdfunding/2019Report. PO 00000 Frm 00041 Fmt 4701 Sfmt 4702 30499 • Issuers that are required to file reports under Exchange Act Section 13(a) or 15(d); • Certain investment companies; and • Other issuers that the Commission, by rule or regulation, determines appropriate.405 In addition, the Commission’s rules further exclude: • Issuers that are disqualified under Regulation Crowdfunding’s disqualification rules; 406 • Issuers that have failed to comply with the annual reporting requirements under Regulation Crowdfunding during the two years immediately preceding the filing of the offering statement; and • Blank check companies.407 As a result of the statutory investment company exclusion, special purpose vehicles or funds organized to invest in, or lend money to, a single company (‘‘SPVs’’) are not eligible to raise funds under Regulation Crowdfunding.408 Since the adoption of Regulation Crowdfunding, we have received comments and recommendations from a variety of sources, including certain of the annual Small Business Forums 409 and the 2017 Treasury Report,410 on the inability to use an SPV to conduct a crowdfunding offering. The 2017 Small Business Forum recommended that the Commission consider promoting simplification of the capitalization table of Regulation Crowdfunding issuers by allowing the use of SPVs to aggregate investors with appropriate conditions.411 Similarly, the 2017 Treasury Report recommended allowing the use of SPVs advised by a registered investment adviser, which may mitigate issuers’ concerns about vehicles having an unwieldy number of shareholders and tripping the registration thresholds 405 15 U.S.C. 77d–1. Crowdfunding includes disqualification provisions that are substantially similar to those in Rule 506(d). See Section II.B.2.e. Disqualification under Regulation Crowdfunding, however, will not arise as a result of disqualifying events relating to any conviction, order, judgment, decree, suspension, expulsion or bar that occurred before May 16, 2016, the effective date of Regulation Crowdfunding. Events that occurred prior to May 16, 2016 that are within the relevant look-back period and would otherwise be disqualifying are, however, required to be disclosed in writing to each purchaser. 407 See 17 CFR 227.100(b). See also note 25. 408 See 15 U.S.C. 77d–1(f)(3); 17 CFR 227.100(b)(3); and Crowdfunding Adopting Release at 71397. While a number of commenters raised concerns about the inability to use a SPV in a crowdfunding offering, the Commission retained the exclusion, citing the statutory exclusion of investment funds from eligibility to rely on Section 4(a)(6) and noting that investment fund issuers present considerations different from those for nonfund issuers. 409 See 2014 Forum Report; 2017 Forum Report. 410 See 2017 Treasury Report. 411 See 2017 Forum Report. 406 Regulation E:\FR\FM\26JNP3.SGM 26JNP3 30500 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules of Section 12(g).412 However, in light of what it cited as potential conflicts of interest between the issuer, lead investors, and other investors, including non-accredited investors, the 2017 Treasury Report recommended that any rulemaking in this area prioritize: (1) Alignment of interests between the lead investor and the other investors participating in the vehicle; (2) regular dissemination of information from the issuer; and (3) minority voting protections with respect to significant corporate actions.413 In addition, since the adoption of Regulation Crowdfunding, and most recently, in connection with the Crowdfunding Study, the staff has received feedback from market participants that certain issuer requirements under Regulation Crowdfunding may be preventing issuers from raising capital through the exemption. Some intermediaries have told the staff that many issuers have elected not to pursue an offering under Regulation Crowdfunding because without a SPV, a large number of investors on an issuer’s capitalization table can be unwieldy and potentially impede future financing. Similarly, some intermediaries have reported that issuers are hesitant to offer voting rights to investors in offerings under this exemption because the logistical challenges of seeking any required shareholder vote are too high a risk in the event of later financing and governance of the issuer. Market participants cited other potential investor protections that a SPV structure could provide, such as allowing small investors to invest alongside a sophisticated lead investor who may negotiate better terms, protect against dilution by negotiating during subsequent financings, mentor the issuer, and represent smaller investors on the board. jbell on DSK3GLQ082PROD with PROPOSALS3 b. Offering Limit An issuer is permitted to raise a maximum aggregate amount of $1.07 million in a 12-month period in reliance on Regulation Crowdfunding.414 In determining the amount that may be sold in a particular offering, an issuer should count: • The amount it has already sold (including amounts sold by entities controlled by, or under common control with, the issuer, as well as any amounts sold by any predecessor of the issuer) in reliance on Regulation Crowdfunding 412 See 2017 Treasury Report. id. 414 See 17 CFR 227.100(a)(1). See also note 402. 413 See VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 during the 12-month period preceding the expected date of sale, plus • The amount the issuer intends to raise in reliance on Regulation Crowdfunding in its current offering. We have received feedback from several market participants on the issuer offering limits. The 2017 Small Business Forum, the 2017 Treasury Report, and other market participants in connection with the Crowdfunding Study have stated that the offering limit should be higher, recommending limits from $5 million to $20 million.415 On the other hand, one intermediary stated that the current $1.07 million offering limit is appropriate, noting that most offerings are well below that level. Another intermediary stated that very few potential issuers expressed interest in raising over $107,000. Some of the intermediaries that recommended an increased offering limit stated their view that while few offerings reach the current limit, many issuers choose not to rely on the crowdfunding exemption because the limit is too low. According to some of these intermediaries, some issuers choose to raise funds needed in excess of the offering limit through a separate offering, which they consider to be a less optimal experience for investors and a more costly and potentially riskier approach for issuers. Another market participant noted that many early-stage issuers require more than $1.07 million and that, but for the offering limit, Regulation Crowdfunding would provide a better solution than other available exemptions. Some of these market participants stated that the existing offering limit may deter some ‘‘high-quality,’’ high-growth issuers with substantial financing needs from relying on Regulation Crowdfunding, thereby lowering the average quality of issuers in the Regulation Crowdfunding market. One intermediary stated that raising the offering limit could attract more issuers and expand opportunities for non-accredited investors. Another intermediary stated that the few issuers that had raised the maximum offering amount through its platform would have sought to raise additional capital had they been permitted to do so, and that high-quality issuers may have significant upfront capital needs that exceed the existing limit. c. Investment Limits Individual investors are limited in the amounts they are allowed to invest in all Regulation Crowdfunding offerings over the course of a 12-month period, as follows: • If either of an investor’s annual income or net worth is less than $107,000, then the investor’s investment limit is the greater of: Æ $2,200 or Æ 5% of the lesser of the investor’s annual income or net worth. • If both annual income and net worth are equal to or more than $107,000, then the investor’s limit is 10% of the lesser of his or her annual income or net worth. • During the 12-month period, the aggregate amount of securities sold to an investor through all Regulation Crowdfunding offerings may not exceed $107,000, regardless of the investor’s annual income or net worth.416 Spouses are allowed to calculate their net worth and annual income jointly. A number of market participants have expressed concerns about the investment limits.417 The 2018 Small Business Forum recommended that the Commission increase the investment limit for all investors, suggesting that doing so would help the market grow as it would allow more individual investments into the marketplace.418 The 2017 and 2018 Small Business Forums and the 2017 Treasury Report along with other market participants also recommended that the investment limits not apply to accredited investors, who face no such limits under other exemptions.419 The 2018 Small Business Forum stated that removing the individual accredited investor limits would make crowdfunding offerings more attractive to accredited investors and make it easier for offerings to reach their maximum offering goals.420 In conjunction with removing the investment limits for individual accredited investors, the 2018 Small Business Forum recommended verification of accredited investor status.421 Similarly, some intermediaries recommended that intermediaries be required to verify accredited investor status, income, or net worth for certain larger investments, such as those over $25,000 in a 12-month period. In addition, some intermediaries stated 416 See 415 See, e.g., 2017 Treasury Report, at 41 (recommending ‘‘increasing the limit on how much can be raised over a 12-month period from $1 million to $5 million, as it will potentially allow companies to lower the offering costs per dollar raised’’) and 2017 Forum Report, at 18 (recommending a $5 million limit). PO 00000 Frm 00042 Fmt 4701 Sfmt 4702 17 CFR 227.100(a)(2). e.g., 2017 Treasury Report, 2018 Forum 417 See, Report. 418 See 2018 Forum Report. 419 See 2017 Forum Report; 2018 Forum Report; and 2017 Treasury Report. 420 See 2018 Forum Report. 421 See id. E:\FR\FM\26JNP3.SGM 26JNP3 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules that conducting a separate Regulation D offering to allow accredited investors to invest greater amounts was unnecessarily confusing to investors and more costly to issuers. The 2017 Small Business Forum and some intermediaries in connection with the Crowdfunding Study also recommended that the investment limits should apply on a per-investment basis rather than across all crowdfunding offerings in a 12-month period.422 The 2017 Small Business Forum also recommended rationalizing the investment limit as it applies to entities by basing the limit on entity type rather than income.423 The 2015 Small Business Forum, the 2017 Treasury Report, and several market participants recommended basing the 5% or 10% limit on the greater of the investor’s net worth or income rather than the lesser of those two amounts.424 Some stated that allowing investors to invest the higher 10% amount only if both their net worth and income exceed the $107,000 threshold is inconsistent with the accredited investor definition, which requires the investor only to meet either the net worth or the income standard.425 The 2017 Treasury Report stated that the current rules unnecessarily limit investors who have a high net worth relative to annual income, or vice versa, which it noted is inconsistent with the approach taken for Regulation A Tier 2 offerings. One market participant noted that requiring that both net worth and income meet the $107,000 threshold could result in an accredited investor being subject to the lower 5% investment limit. d. Transactions Conducted Through an Intermediary and Intermediary Requirements Each Regulation Crowdfunding offering must be exclusively conducted through an online platform. The intermediary operating the platform must be a broker-dealer or a funding portal 426 that is registered with the Commission and a member of a registered national securities 422 See 2017 Forum Report. id. 424 See 2017 Treasury Report, at 41; 2015 Small Business Forum. 425 See, e.g., 2017 Treasury Report, at 41; 2018 Forum Report; 2017 Forum Report, at 17. See also 2015 Forum Report (recommending increasing the investment limit for accredited investors). 426 A funding portal is a crowdfunding intermediary that, in accordance with Section 304(b) of the JOBS Act and Exchange Act Section 3(a)(80), can engage only in limited activities. jbell on DSK3GLQ082PROD with PROPOSALS3 423 See VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 association.427 Under Regulation Crowdfunding, intermediaries, whether registered broker-dealers or funding portals, are required, among other things: • To provide investors with educational materials; 428 • To take measures to reduce the risk of fraud; 429 • To make available information about the issuer and the offering; 430 • To provide communication channels to permit investors to communicate with each other and with representatives of the issuer about offerings on the platform; 431 and • To facilitate the offer and sale of crowdfunding securities.432 An intermediary is prohibited from engaging in certain activities under the rules, including but not limited to: • Providing access to its platform to an issuer if the intermediary has a reasonable basis for believing that the issuer or any of its officers, directors (or any person occupying a similar status or performing a similar function), or beneficial owners of 20% or more of the issuer’s outstanding voting equity securities, calculated on the basis of voting power, is subject to a disqualification; • Providing access to its platforms to any issuer that the intermediary has a reasonable basis for believing presents the potential for fraud or raises other investor protection concerns; • Taking a financial interest in an issuer that is offering or selling securities on its platform unless: Æ The intermediary receives the financial interest as compensation for the services provided to or for the benefit of the issuer in connection with the offer or sale of securities in a crowdfunding offering; and Æ The financial interest consists of securities of the same class and having the same terms, conditions, and rights as the securities being offered or sold in the crowdfunding offering through the intermediary’s platform; • Compensating any person for providing the intermediary with personally identifiable information of any investor or potential investor; and • Participating in the communication channel on its platform, other than to establish guidelines for communication 427 See 15 U.S.C. 77d(a)(6)(C); 15 U.S.C. 77d– 1(a)(1)–(2). FINRA is currently the only registered national securities association. 428 See 17 CFR 227.302(b). 429 See 17 CFR 227.301. 430 See 17 CFR 227.303(a). 431 See 17 CFR 227.303(c). 432 See generally 17 CFR 227.303–304. See also Crowdfunding Adopting Release at 71390. PO 00000 Frm 00043 Fmt 4701 Sfmt 4702 30501 and to remove abusive or potentially fraudulent communications.433 In addition, Regulation Crowdfunding specifically prohibits funding portals (as opposed to broker-dealers) from: (a) Offering investment advice or recommendations; (b) soliciting purchases, sales, or offers to buy securities offered or displayed on its platform; (c) compensating employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its platform; or (d) holding, managing, possessing, or otherwise handling investor funds or securities.434 The rules provide a non-exclusive conditional safe harbor under which funding portals can engage in certain activities, consistent with these restrictions.435 Issuers may rely on the efforts of the intermediary to determine that the aggregate amount of securities purchased by an investor does not cause the investor to exceed the investment limits, so long as the issuer does not have knowledge that the investor would exceed the investment limits as a result of purchasing securities in the issuer’s offering.436 The 2017 and 2018 Small Business Forums recommended that the Commission allow intermediaries to receive as compensation securities of the issuer having different terms than those received by investors in the offering and to co-invest in the offerings they list.437 Some intermediaries have stated that they generally have not experienced significant challenges complying with Regulation Crowdfunding requirements. However, some also have stated that compliance with the current rules, including FINRA requirements and examinations, can be costly. One of those respondents stated that ‘‘the most expensive requirement is keeping up with the . . . volume of FINRA communications, which requires a fulltime employee to communicate with them, and a dedicated engineering resource,’’ which are costs passed on to issuers in the form of higher fees. Another intermediary stated that the prohibition against funding portals handling investor funds significantly increased costs for funding portals, as well as for issuers and investors, while reducing the quality and timeliness of the investment and fund transfer process, with what it viewed as only limited investor protection benefits. 433 See generally 17 CFR 227.300–305. 17 CFR 227.300(c)(2). 435 See 17 CFR 227.402. 436 See 17 CFR 303(b)(1). 437 See 2017 Forum Report; 2018 Forum Report. 434 See E:\FR\FM\26JNP3.SGM 26JNP3 30502 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules jbell on DSK3GLQ082PROD with PROPOSALS3 e. Limits on Advertising and Promoters An issuer may not advertise the terms of a Regulation Crowdfunding offering except in a notice that directs investors to the intermediary’s platform and includes no more than the following information: • A statement that the issuer is conducting an offering pursuant to Section 4(a)(6) of the Securities Act, the name of the intermediary through which the offering is being conducted, and a link directing the potential investor to the intermediary’s platform; • The terms of the offering, which means the amount of securities offered, the nature of the securities, the price of the securities, and the closing date of the offering period; and • Factual information about the legal identity and business location of the issuer, limited to the name of the issuer of the security, the address, phone number, and website of the issuer, the email address of a representative of the issuer, and a brief description of the business of the issuer.438 Although advertising the terms of the offering other than through the intermediary’s platform is limited to a brief notice, an issuer may communicate with investors and potential investors about the terms of the offering through communication channels provided on the intermediary’s platform. An issuer must identify itself as the issuer, and persons acting on behalf of the issuer must identify their affiliation with the issuer, in all communications on the intermediary’s platform.439 An issuer is allowed to compensate any person to promote its crowdfunding offerings through communication channels provided by an intermediary, but only if the issuer takes reasonable steps to ensure that the promoter clearly discloses the compensation with each communication.440 The 2018 Small Business Forum recommended loosening the advertising restrictions to allow issuers to market their projects more effectively, suggesting that the rules are difficult to understand and ‘‘run counter to the intent of the law: To promote the democratization of investing.’’ 441 In connection with the Crowdfunding Study, some market participants recommended that the Commission ease the restrictions on advertising crowdfunding offerings to allow issuers to communicate in person with 17 CFR 227.204. 17 CFR 227.204(c). 440 See 17 CFR 227.205. 441 2018 Forum Report. investors and to engage with local media on their offerings. f. Restrictions on Resale Securities purchased in a crowdfunding transaction generally cannot be resold for a period of one year, unless the securities are transferred: • To the issuer of the securities; • To an accredited investor; • As part of an offering registered with the Commission; or • To a member of the family of the purchaser or the equivalent, to a trust controlled by the purchaser, to a trust created for the benefit of a member of the family of the purchaser or the equivalent, or in connection with the death or divorce of the purchaser or other similar circumstance.442 g. Conditional Exemption From Section 12(g) Section 12(g) of the Exchange Act requires an issuer with total assets of more than $10 million and a class of securities held of record by either 2,000 persons, or 500 persons who are not accredited investors, to register that class of securities with the Commission. However, securities issued pursuant to Regulation Crowdfunding are conditionally exempted from the record holder count under Section 12(g) if the following conditions are met: • The issuer is current in its ongoing annual reports required pursuant to Regulation Crowdfunding; • Has total assets as of the end of its most recently completed fiscal year of $25 million or less; and • Has engaged the services of a transfer agent registered with the Commission.443 As a result, Section 12(g) registration is required if an issuer has, on the last day of its fiscal year, total assets greater than $25 million and the class of equity securities is held by more than 2,000 persons, or 500 persons who are not accredited investors. In that circumstance, our rules provide the issuer with a two-year transition period before it is required to register its class of securities pursuant to Section 12(g), so long as it timely files all of the annual reports required by Regulation Crowdfunding during such period.444 An issuer seeking to exclude a person from the record holder count of Section 12(g) is responsible for demonstrating that the securities held by the person were initially issued in an offering made under Section 4(a)(6).445 2. Disclosure Requirements a. Offering Statement Any issuer conducting a Regulation Crowdfunding offering must electronically file its offering statement on Form C 447 with the Commission and provide it to the intermediary facilitating the crowdfunding offering prior to commencing its offering. The Commission does not charge any fee to file or amend a Form C. No offers may be made until the offering statement has been filed with the Commission and provided to the intermediary. Unlike Regulation A, issuers are not permitted to ‘‘test the waters,’’ or solicit interest in the offering, before filing their Form C. In addition, the information in the offering statement must be publicly available for at least 21 days before any securities may be sold, although the intermediary may accept investment commitments during that time.448 The 2017 Small Business Forum recommended that the Commission amend Regulation Crowdfunding to permit an issuer to test-the-waters or solicit interest in an offering prior to filing its Form C,449 allowing issuers to determine the potential market interest in their securities prior to expending the 438 See 442 See 446 See 439 See 443 See 447 17 VerDate Sep<11>2014 22:40 Jun 25, 2019 17 CFR 227.501. 17 CFR 240.12g–6. 444 See id. 445 See Crowdfunding Adopting Release at 71476. The 2017 Treasury Report recommended that the Commission modify the conditional exemption from Section 12(g) to raise the maximum revenue requirement from $25 million to $100 million to allow crowdfunded issuers to stay private longer, stating that these issuers likely lack the necessary size to be a reporting company and should not be forced to register as a reporting company until reaching higher revenues.446 In connection with the Crowdfunding Study, several intermediaries expressed concern that a large number of shareholders would result in the issuer becoming required to register its securities under Section 12(g) of the Exchange Act once it failed to meet the conditional exemption under Regulation Crowdfunding. Several intermediaries reported that, because of the risk of mandatory registration under Section 12(g), coupled with the governance concerns discussed above, issuers are often reluctant to accept more than 500 investors in a crowdfunding offering or they retain repurchase rights to the securities offered. A number of market participants have recommended expanding Regulation Crowdfunding’s exemption from Section 12(g). Jkt 247001 PO 00000 Frm 00044 Fmt 4701 Sfmt 4702 2017 Treasury Report. CFR 239.900. 448 See 17 CFR 227.303(a). 449 See 2017 Forum Report at 18. E:\FR\FM\26JNP3.SGM 26JNP3 jbell on DSK3GLQ082PROD with PROPOSALS3 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules time and cost required to fully comply with the regulations. Similarly, in connection with the Crowdfunding Study, several market participants recommended that the Commission permit Regulation Crowdfunding issuers to test the waters, similar to Regulation A offerings. Market participants also have expressed concerns about the burden to issuers of complying with the requirement that 21 days elapse before a security can be sold, particularly for issuers that need funds quickly. The offering statement must include the following disclosure: • Information about officers, directors, and owners of 20% or more of the issuer; • A description of the issuer’s business and the use of proceeds from the offering; • The price to the public of the securities or the method for determining the price, • The target offering amount and the deadline to reach the target offering amount, • Whether the issuer will accept investments in excess of the target offering amount; • Certain related-party transactions; and • A discussion of the issuer’s financial condition and financial statements.450 The financial statements requirements are based on the amount offered and sold in reliance on Regulation Crowdfunding within the preceding 12month period: • For issuers offering $107,000 or less: Financial statements of the issuer and certain information from the issuer’s federal income tax returns, both certified by the principal executive officer. If, however, financial statements of the issuer are available that have either been reviewed or audited by a public accountant that is independent of the issuer, the issuer must provide those financial statements instead and will not need to include the information reported on the federal income tax returns or the certification of the principal executive officer. • Issuers offering more than $107,000 but not more than $535,000: Financial statements reviewed by a public accountant that is independent of the issuer. If, however, financial statements of the issuer are available that have been audited by a public accountant that is independent of the issuer, the issuer must provide those financial statements instead and will not need to include the reviewed financial statements. • Issuers offering more than $535,000: 450 See 17 CFR 227.201. VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 Æ For first-time Regulation Crowdfunding issuers: Financial statements reviewed by a public accountant that is independent of the issuer, unless financial statements of the issuer are available that have been audited by an independent auditor. Æ For issuers that have previously sold securities in reliance on Regulation Crowdfunding: Financial statements audited by a public accountant that is independent of the issuer.451 Some studies and market participants have expressed concern about the cost and complexity of relying on Regulation Crowdfunding.452 Market participants have stated that many issuers face significant challenges due to the time and cost required of issuers to comply with the regulations, including complying with U.S. generally accepted accounting principles (‘‘U.S. GAAP’’) financial statement requirements, obtaining a review report, and preparing a Form C, and that many new issuers are not able to bear those costs given the uncertainty regarding whether they would raise capital successfully. To help reduce issuer cost and complexity, market participants have recommended several revisions to the rules. For example, the 2015 Small Business Forum recommended permitting crowdfunding issuers to provide reviewed rather than audited financial statements in subsequent offerings unless audited financial statements of the issuer that have been audited by an independent auditor are available. A few market participants also have raised concerns about the requirements for issuers seeking to raise smaller amounts in compliance with Regulation Crowdfunding. For example, the 2017 and 2018 Small Business Forums recommended easing the requirements for smaller or debt-only crowdfunding offerings under $250,000, including limiting the ongoing reporting 451 See 17 CFR 227.201(t). e.g., 2017 Treasury Report, at 40 (stating that ‘‘market participants have expressed concerns about the cost and complexity of using crowdfunding compared to private placement offerings’’); 2018 Forum Report; Statement of the U.S. Chamber of Commerce to HFSC, March 22, 2017, https://docs.house.gov/meetings/BA/BA16/ 20170322/105717/HHRG-115-BA16-WstateQuaadmanT-20170322.pdf, at 12–13; Lindsay M. Abate (2016) One Year of Equity Crowdfunding: Initial Market Developments and Trends, U.S. Small Business Administration Office of Advocacy Economic Research Series, https://www.sba.gov/ sites/default/files/advocacy/Crowdfunding_Issue_ Brief_2018.pdf (‘‘SBA Study’’), at 12 (suggesting that ‘‘exempting businesses seeking very small amounts of capital from certain requirements may make crowdfunding a more attractive and worthwhile option for small and young firms that are otherwise a good fit for this capital raising method’’). 452 See, PO 00000 Frm 00045 Fmt 4701 Sfmt 4702 30503 obligations to actual investors (rather than to the general public) 453 and scaling regulation to reduce relatively inelastic accounting, legal, and other costs.454 Another intermediary stated that smaller issuers that do not have reviewed or audited financial statements may find it difficult to prepare a statement of changes of equity, because the typical accounting software does not print it automatically. This intermediary stated that these issuers also often have trouble accurately preparing a cash flow statement or accounting for stock issuances or issuances of stock options and warrants. Another intermediary similarly stated that many issuers are unfamiliar with the statement of stockholders’ equity. Yet another intermediary stated that the issuer requirements of Regulation Crowdfunding are more appropriate for larger equity offerings and recommended scaling them for smaller (below $107,000) offerings, particularly for small debt offerings, to avoid what it described as unnecessary complexity. b. Amendments to Offering Statements For any offering that has not yet been completed or terminated, an issuer can file an amendment to its offering statement on Form C/A to disclose changes, additions, or updates to information. An amendment is required for changes, additions, or updates that are material, and the issuer must reconfirm outstanding investment commitments within 5 business days after it files the amendment or the investor’s commitment will be considered cancelled.455 c. Progress Updates An issuer must provide an update on its progress toward meeting the target offering amount within five business days after reaching 50% and 100% of its target offering amount.456 These updates are filed on Form C–U.457 If the issuer will accept proceeds over the target offering amount, it also must file a final Form C–U reflecting the total amount of securities sold in the offering. If, however, the intermediary provides frequent updates on its platform regarding the progress of the issuer in meeting the target offering amount, then 453 In addition, one intermediary expressed concerns about the high cost of annual reports as well as the risk of disclosing proprietary information because of the requirement to file annual reports publicly on EDGAR. 454 See, e.g., 2017 Forum Report; 2018 Forum Report. 455 See 17 CFR 227.304. 456 See 17 CFR 227.203(a)(3). 457 See id. E:\FR\FM\26JNP3.SGM 26JNP3 30504 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules the issuer will need to file only a final Form C–U to disclose the total amount of securities sold in the offering.458 d. Annual Reports An issuer that sold securities in a Regulation Crowdfunding offering is required to provide an annual report on Form C–AR no later than 120 days after its fiscal year-end.459 The report must be filed with the Commission and posted on the issuer’s website. The annual report requires information similar to what is required in the offering statement, although neither an audit nor a review of the financial statements is required.460 Issuers must comply with the annual reporting requirement until one of the following occurs: (1) The issuer is required to file reports under Exchange Act Section 13(a) or 15(d); (2) the issuer has filed at least one annual 17 CFR 227.203(a)(3)(iii). 17 CFR 227.202(a); 17 CFR 227.203(b). 460 See id. report and has fewer than 300 holders of record; (3) the issuer has filed at least three annual reports and has total assets that do not exceed $10 million; (4) the issuer or another party purchases or repurchases all of the securities issued pursuant to Regulation Crowdfunding, including any payment in full of debt securities or any complete redemption of redeemable securities; or (5) the issuer liquidates or dissolves in accordance with state law.461 Any issuer terminating its annual reporting obligations is required to file notice on Form C–TR reporting that it will no longer provide annual reports pursuant to the requirements of Regulation Crowdfunding.462 3. Relationship With State Securities Laws Securities issued in a Regulation Crowdfunding offering are ‘‘covered securities’’ for purposes of Section 18(b)(4)(C), and the issuer is not required to register or qualify the offering with state securities regulators.463 Offerings by such issuers, however, remain subject to state law enforcement and antifraud authority. Additionally, issuers may be subject to filing fees in the states in which they intend to offer or sell securities and may be required to comply with state notice filing requirements. The failure to file, or pay filing fees in connection with, any such materials may cause state securities regulators to suspend the offer or sale of securities within their jurisdiction. 4. Analysis of Regulation Crowdfunding in the Exempt Market Table 11 summarizes amounts sought and reported raised in offerings under Regulation Crowdfunding. 458 See jbell on DSK3GLQ082PROD with PROPOSALS3 459 See VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 461 See 462 See PO 00000 17 CFR 227.202(b). 17 CFR 227.203(b)(3). Frm 00046 Fmt 4701 Sfmt 4702 463 See 15 U.S.C. 77r(b)(4)(C). See also Section II.B.2.b. E:\FR\FM\26JNP3.SGM 26JNP3 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules 30505 TABLE 11—OFFERING AMOUNTS AND REPORTED PROCEEDS, MAY 16, 2016–DECEMBER 31, 2018 jbell on DSK3GLQ082PROD with PROPOSALS3 Target amount sought in initiated offerings ...................................................................................... Maximum amount sought in initiated offerings 464 ............................................................................ Amounts reported as raised in completed offerings ......................................................................... Average 1,351 1,351 519 $69,800 602,200 208,400 Median $25,000 500,000 107,367 Aggregate (million) $94.3 775.9 108.2 In comparison, over the same period (from May 16, 2016 to December 31, 2018), approximately 12,700 issuers other than pooled investment funds each reported raising up to $1.07 million in funds in reliance on Regulation D, totaling approximately $4.5 billion, with average reported proceeds of approximately $0.4 million per issuer. Given the offering limits, crowdfunding is used primarily by relatively small issuers. Based on information in offering statement filings, the median crowdfunding offering was by an issuer that was incorporated approximately two years prior to the offering and employed about three people. The median issuer had total assets of approximately $30,000 and no revenues (just over half of the offerings were by issuers with no revenues). Approximately 10% of offerings were by issuers that had attained profitability in the most recent fiscal year prior to the offering. Offerings were geographically concentrated, with just under a third of the offerings made by issuers located in California (approximately 32%), followed by New York (approximately 11%) and Texas (approximately 7%). Figure 10 reflects the geographic concentration of offerings based on the number of offering statement filings by issuer location. Unlike issuers conducting Regulation A offerings, a minority of Regulation Crowdfunding issuers have reported conducting an offering under Regulation D in the past—about 14% undertook a Regulation D offering prior to the Regulation Crowdfunding offering— suggesting that Regulation Crowdfunding, at least based on data as of December 31, 2018, tends to bring new issuers to the exempt offering market rather than encouraging current issuers to switch between offering exemptions. We estimate that only 188 Regulation Crowdfunding issuers had filed at least one Form D prior to undertaking their first crowdfunding offering; however, we are not able to observe if these Regulation Crowdfunding issuers used other offering exemptions for which we do not have data, such as Section 4(a)(2), Rule 147, or Rule 147A. the disclosure requirements for issuers in small offerings under Regulation Crowdfunding? For example, as recommended by the 2017 and 2018 Small Business Forums, for offerings under $250,000, should we limit the ongoing reporting obligations to actual investors (rather than the general public) and scale the disclosure requirements to reduce costs? Alternatively, as recommended by the 2016 Small Business Forum, should we allow issuers to provide reviewed rather than audited financial statements in subsequent offerings unless audited financial statements are available? How would such changes affect capital formation and investor protection? How 5. Request for Comment 79. Do the requirements of Regulation Crowdfunding appropriately address capital formation and investor protection considerations? Do the costs associated with conducting a Regulation Crowdfunding offering dissuade issuers from relying on the exemption? If so, can we alleviate burdens in the rules or reduce costs for issuers while still providing adequate investor protection? For example, should we simplify any of 464 This amount is capped at the offering limit for issuers undertaking multiple offerings in a 12month period. VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 PO 00000 Frm 00047 Fmt 4701 Sfmt 4702 E:\FR\FM\26JNP3.SGM 26JNP3 EP26JN19.007</GPH> Number jbell on DSK3GLQ082PROD with PROPOSALS3 30506 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules would changes to the requirements affect issuer interest in the exemption and investor demand for securities offered under Regulation Crowdfunding? Would legislative changes be necessary or beneficial to make such changes? 80. Should we retain Regulation Crowdfunding as it is? 81. Are there any data available that show fraudulent activity in connection with offerings under Regulation Crowdfunding? If so, what are the causes or explanations and what should we do to address them? 82. Should we increase the $1.07 million offering limit? If so, what limit is appropriate? For example, should we, as recommended by the 2017 Small Business Forum and the 2017 Treasury Report, consider increasing the offering limit to $5 million? What are the appropriate considerations for a maximum offering size? Should additional investor protections and/or disclosure requirements depend on the size of the offering? If the individual investment limits are preserved as they currently exist, will there be adequate investor demand to justify an increase in the offering limit, or would an increase in the individual investment limits also be required? Would legislative changes be necessary or beneficial to increase the offering limit? 83. If we were to increase the offering limit, would Regulation Crowdfunding overlap with Rule 504 of Regulation D or with Regulation A? If there is overlap, should we still retain the overlapping exemptions? How could we rationalize and streamline these offering exemptions? 84. Should we modify the eligibility requirements for issuers or securities offered under Regulation Crowdfunding? Should we extend the eligibility for Regulation Crowdfunding to Canadian issuers or all foreign issuers? Should the eligibility requirements for Regulation Crowdfunding mirror the Regulation A eligibility requirements? For example, should we exclude issuers subject to a Section 12(j) order? Should we amend the types of securities eligible under Regulation Crowdfunding? Should we extend the eligibility for Regulation Crowdfunding to issuers subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act? Are there other eligibility limitations we should consider? Would legislative changes be necessary or beneficial to make such changes? 85. Should we, as recommended by prior Small Business Forums, permit issuers to offer securities through SPVs under Regulation Crowdfunding? If so, VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 are there additional requirements that would be appropriate to ensure investor protection? Would legislative changes be necessary or beneficial to make such changes? Are there other ways we should modify our regulations to allow investors to invest in pooled crowdfunding vehicles that are advised by a registered investment adviser? 86. Should we revise the rules that require issuers to provide reviewed or audited financial statements? If so, how? At what level should issuers be required to provide reviewed or audited financial statements? For example, if we were to increase the offering limit, should reviewed financial statements only be required for offerings over $1 million and audited financial statements only be required for offerings over another higher limit, such as the Regulation A Tier 1 limit? Would legislative changes be necessary or beneficial to make such changes? 87. As generally recommended by the 2015, 2017, and 2018 Small Business Forums and the 2017 Treasury Report,465 should we eliminate, increase, or otherwise amend the individual investment limits? If we should change the investment limits, what limits are appropriate and why? Should we require verification of income or net worth for larger investments, such as $25,000 and higher? Should certain investors be subject to higher limits or exempt from the limits altogether? For example, should accredited investors be exempt from the investment limits or should accredited investors be subject to higher limits? If accredited investors are subject to higher investment limits or exempt from investment limits, should we require verification of accredited investor status? Should we make changes to rationalize the investment limits for entities by entity type, not income? If investment limits are raised to allow an offering to be successful with fewer investors, would such a change have an effect on the use of the exemption? Would legislative changes be necessary or beneficial to make such changes? 88. As generally recommended by the 2016 466 and 2017 Small Business 465 The 2017 Treasury Report and the 2015 Small Business Forum recommended basing investment limits on the greater of an investor’s annual income or net worth rather than the lesser, to increase the amount that individual investors are permitted to invest. See 2017 Treasury Report; 2015 Forum Report. 466 The 2016 Forum Report recommended that we harmonize the Regulation Crowdfunding advertising rules to avoid difficulties where an issuer advertises or engages in a general solicitation in a Regulation A or Rule 506(c) offering and then PO 00000 Frm 00048 Fmt 4701 Sfmt 4702 Forums, should we allow issuers to test the waters or engage in general solicitation and advertising prior to filing a Form C? If so, should we impose any limitations on such communications to ensure adequate investor protection? Would legislative changes be necessary or beneficial to make such changes? 89. As recommended by the 2018 Small Business Forum, should we allow for more communication about the offering outside of the funding portal’s platform channels? If so, what would be the benefits of allowing more communications? Would there be investor protection concerns? Are there limitations we should impose on those communications? 90. Should the Section 12(g) exemption for securities issued in reliance on Regulation Crowdfunding be modified? For example, should it be revised to follow the Section 12(g) exemption for Regulation A Tier 2 securities? 91. Do the costs associated with facilitating offerings under Regulation Crowdfunding or operating as a Crowdfunding intermediary dissuade intermediaries from facilitating offerings under the exemption? If so, should we modify the requirements to alleviate burdens or reduce costs for crowdfunding intermediaries while still providing adequate investor protection? If so, which ones and how? Should we modify any of the requirements regarding crowdfunding intermediaries to better meet the needs of issuers and investors? If so, which ones and how? For example, as recommended by the 2017 and 2018 Small Business Forums, should we allow intermediaries: • To receive as compensation securities of the issuer having different terms than the securities of the issuer received by investors in the offering; or • To co-invest in the offerings they facilitate? In addition, as recommended by the 2018 Small Business Forum, should we clarify the ability of funding portals to participate in Regulation A and Rule 506 offerings? Would legislative changes be necessary or beneficial to make such changes? 92. To the extent not already addressed in the questions above, would legislative changes be necessary or beneficial to address any recommended changes to Regulation Crowdfunding? Alternatively, should we consider using our exemptive authority under Section wishes to convert to a Regulation Crowdfunding offering. E:\FR\FM\26JNP3.SGM 26JNP3 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules 28 467 of the Securities Act to adopt an alternative exemption for crowdfunding offerings to complement Section 4(a)(6)? If so, how should we structure the exemption to facilitate capital formation while still ensuring adequate investor protection? Is there anything else we should do to reduce the accounting, legal, and other inelastic costs associated with Regulation Crowdfunding? G. Potential Gaps in the Current Exempt Offering Framework As discussed in this release, Congress and the SEC have taken a number of steps to expand the options that small businesses have to raise capital. While the options to raise capital in exempt offerings have grown significantly since the JOBS Act, concerns persist that smaller issuers continue to face difficulties accessing capital. 1. Micro-Offerings One area where staff has heard concerns about accessing capital is with respect to issuers that may be too small, or may be seeking too small an amount of capital, to realistically or costeffectively conduct an exempt offering under the existing exemptions. For example, according to the U.S. Small Business Administration, 25% of startups report having no startup capital and 20% of startups cite insufficient capital access as a primary constraint to their business health and growth.468 According to a recent study based on a 2014 survey of entrepreneurs, approximately 64% of startup firms used personal or family savings of the owner, with business loans from a bank or a financial institution being the next most common source of startup capital (18% of all firms).469 For reference, based on data available to us on exempt offerings, in 2018, approximately 3,080 issuers each reported raising $250,000 or less in reliance on Regulation D, totaling approximately $330 million (averaging approximately $100,000 per offering). Since the effective date of the 2015 Regulation A amendments, fewer than 10% of Regulation A issuers reporting proceeds reported proceeds of $250,000 or less. In contrast, approximately 75% of Regulation jbell on DSK3GLQ082PROD with PROPOSALS3 467 See text accompanying notes 16 and 17 for a discussion of our exemptive authority under Section 28. 468 Michelle Schimpp, U.S. Small Business Administration, discussion at SEC–NYU Dialogue on Securities Crowdfunding, February 28, 2017, at https://www.sec.gov/files/Highlights%20from %20the%20SEC-NYU%20Dialogue%20on %20Securities-Based%20Crowdfunding.pdf. 469 See Alicia Robb (2018) Financing Patterns and Credit Market Experiences: A Comparison by Race and Ethnicity for U.S. Employer Firms. VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 Crowdfunding issuers reporting proceeds reported proceeds of $250,000 or less, consistent with a lower offering limit under Regulation Crowdfunding. Most of these were non-debt offerings. Alongside securities offerings of this size, various marketplace lending alternatives have gained traction.470 Some market participants have called for a ‘‘micro-offering’’ or ‘‘micro-loan’’ exemption to assist small businesses that have insufficient capital access. For example, the 2012 Small Business Forum recommended that the Commission consider adopting a ‘‘micro-offering’’ exemption for nonreporting companies with only minimal conditions. For example, it recommended an exemption for offerings only to ‘‘friends and family’’ well below the $1 million crowdfunding offering limit.471 In addition, as discussed above, the 2017 and 2018 Small Business Forums recommended that the Commission rationalize Regulation Crowdfunding requirements for debt offerings and small offerings under $250,000. For example, they recommended limiting the ongoing reporting obligations to actual investors (rather than the general public) and scaling Regulation Crowdfunding to reduce accounting, legal, and other costs that currently are relatively inelastic, regardless of the size of the offering.472 2. Request for Comment 93. Should we add a micro-offering or micro-loan exemption? If so, please describe the parameters of such a potential exemption. In suggesting parameters, consider how the small offering size should affect the potential requirements. 94. Should there be limits on the types of securities that may be offered under such an exemption? For example, should the exemption be limited to debt securities? Are there inherent differences in debt offerings, such as the general liquidation preference of debt holders, which would protect investors in these types of offerings? Does the inclusion of equity or other types of securities in this type of offering raise concerns for investors or does it expand 470 See, e.g., David W. Perkins (2018) Marketplace Lending: Fintech in Consumer and Small-Business Lending, Congressional Research Service; Adair Morse (2015) Peer-to-Peer Crowdfunding: Information and the Potential for Disruption in Consumer Lending, Annual Review of Finance and Economics 7: 463–482; Rajkamal Iyer, Asim Khwaja, Erzo Luttmer, and Kelly Shue (2015) Screening Peers Softly: Inferring the Quality of Small Borrowers, Management Science 62: 1554– 1577. 471 See 2012 Forum Report. 472 See 2017 Forum Report; 2018 Forum Report. PO 00000 Frm 00049 Fmt 4701 Sfmt 4702 30507 investor options in a way that would benefit them? 95. What would be the appropriate aggregate offering limit for such an exemption? For example, would $250,000 or $500,000 in a 12-month period be appropriate? Would another limit be appropriate? What are the appropriate considerations for the offering limit? 96. What type of investor protections should be required? For example, should investors be limited on how much they can invest in any one offering? If so, what should the limit be? Are there other protections we should consider? Should there be investor requirements, such as a financial sophistication requirement? 97. Should the issuer be prohibited from engaging in general solicitation or advertising to market the securities? 98. Should there be disclosure requirements or notice filing requirements? 99. Should we require the offering to take place through a registered intermediary, such as broker-dealer or funding portal? 100. Should the securities issued under the exemption contain resale restrictions? If so, what resale restrictions are appropriate? Should the securities be deemed ‘‘restricted securities’’ under Rule 144(a)(3) (similar to securities acquired from the issuer that are subject to the resale limitations of Rule 502(d)) or have a 12-month resale restriction (similar to Regulation Crowdfunding)? 101. Should the securities sold in the transaction be considered a ‘‘covered security’’ such that the issuer would not be required to register or qualify the offering with state securities regulators? 102. Should there be issuer eligibility requirements, such as bad actor disqualification provisions or exclusion of investment companies or non-U.S. issuers? 103. Are there other perceived gaps in the current exempt offering framework that we should address? If so, why are the existing exemptions from registration inadequate? For example, are the existing exemptions unavailable due to the nature of the securities being offered or characteristics of the issuer? Or are the existing exemptions not feasible or attractive to issuers due to compliance costs or similar concerns? Are regulatory changes needed in light of the geographic concentration of certain types of offerings? III. Integration The integration doctrine provides an analytical framework for determining whether multiple securities transactions E:\FR\FM\26JNP3.SGM 26JNP3 30508 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules should be considered part of the same offering. This analysis helps to determine whether registration under Section 5 of the Securities Act is required or an exemption is available for the entire offering. In other words, the integration doctrine seeks to prevent an issuer from improperly avoiding Securities Act registration by artificially dividing a single offering into separate offerings such that exemptions would apply to the separate offerings that would not be available for the combined offering. The integration analysis generally is dependent on considering the facts and circumstances of each offering. In order to simplify the analysis in particular cases, however, the Commission has created a number of safe harbors from integration. jbell on DSK3GLQ082PROD with PROPOSALS3 A. Facts and Circumstances Analysis The integration concept was first articulated in 1933 and was further developed in two interpretive releases issued in the 1960s.473 The interpretive releases stated that determining whether a particular securities offering should be integrated with another offering requires an analysis of the specific facts and circumstances of the offerings. The Commission identified five factors to consider in making the determination of whether the offerings should be integrated.474 The five factors are whether: (1) The different offerings are part of a single plan of financing, (2) the offerings involve issuance of the same class of security, (3) the offerings are made at or about the same time, (4) the same type of consideration is to be received, and (5) the offerings are made for the same general purpose.475 More recently, the Commission has provided additional guidance to help issuers evaluate whether two offerings should be integrated. In 2007, the Commission set forth a framework for analyzing how an issuer can conduct simultaneous registered and private offerings.476 The Commission noted that the determination as to whether the filing of a registration statement should be considered to be a general solicitation or general advertising that would affect the availability of the Section 4(a)(2) exemption for a concurrent private placement should be 473 See SEC Release No. 33–97 (Dec. 28, 1933); Section 3(a)(11) Release; Non-Public Offering Exemption Release. 474 See Non-Public Offering Exemption Release. See also 17 CFR 230.502(a). 475 See Non-Public Offering Exemption Release; 17 CFR 230.502(a). See also Section 3(a)(11) Release. See also note 497. 476 See Revisions of Limited Offering Exemptions in Regulation D, Release No. 33–8828 (Aug. 3, 2007) [72 FR 45116 (Aug. 10, 2007)] (‘‘2007 Regulation D Proposing Release’’). VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 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 not foreclose the availability of the Section 4(a)(2) exemption.477 Issuers should analyze whether the offering is exempt under Section 4(a)(2) on its own, including whether securities were offered and sold to the private placement investors through the means of a general solicitation in the form of the registration statement.478 The Commission also noted that this guidance did not affect the ability of issuers to continue to rely on the views expressed by the staff of the Division of Corporation Finance in interpretive letters that, under specified circumstances, issuers may continue to conduct concurrent private placements without those offerings necessarily being integrated with the ongoing registered offering.479 In 2015 and 2016, the Commission further modernized and expanded the facts and circumstances analysis in the context of concurrent exempt offerings involving Regulation A, Regulation Crowdfunding, Rule 147, or Rule 147A, including situations where one offering permits general solicitation and the other does not.480 Essentially, whether concurrent or subsequent offers and 477 Id. 478 Id. The Commission provided the following examples: If an issuer files a registration statement and then seeks to offer and sell securities without registration to an investor who became interested in the purportedly private placement offering by means of the registration statement, then the Section 4(a)(2) exemption would not be available for that offering. If the prospective private placement investor became interested in the concurrent private placement through some means other than the registration statement that was consistent with Section 4(a)(2), such as through a substantive, pre-existing relationship with the issuer or direct contact by the issuer or its agents outside of the public offering effort, then the filing of the registration statement generally would not impact the potential availability of the Section 4(a)(2) exemption for that private placement and the private placement could be conducted while the registration statement for the public offering was on file with the Commission. Similarly, if the issuer is able to solicit interest in a concurrent private placement by contacting prospective investors who (1) were not identified or contacted through the marketing of the public offering and (2) did not independently contact the issuer as a result of the general solicitation by means of the registration statement, then the private placement could be conducted in accordance with Section 4(a)(2) while the registration statement for a separate public offering was pending. 479 See 2007 Regulation D Proposing Release citing as examples Division of Corporation Finance no-action letters to Black Box Incorporated (June 26, 1990) and Squadron Ellenoff, Pleasant & Lehrer (Feb. 28, 1992). 480 See 2015 Regulation A Release at Section II.B.5, Regulation Crowdfunding Adopting Release at Section II.A.1.c and Intrastate and Regional Offerings Release at Section II.B.5. PO 00000 Frm 00050 Fmt 4701 Sfmt 4702 sales of securities will be integrated with any offering conducted under Regulation A, Regulation Crowdfunding, Rule 147, or Rule 147A will depend on the particular facts and circumstances, including whether each offering complies with the requirements of the exemption that is being relied on for the particular offering.481 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 an offering made in reliance on Regulation A, Regulation Crowdfunding, Rule 147, or Rule 147A.482 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, Regulation Crowdfunding, or Rule 147A offering, unless that advertisement also included the necessary legends for, and otherwise complied with, the respective exemption, as well as any additional restrictions on the general solicitation required by the other exemption concurrently being relied on by the issuer.483 Market participants have requested that the Commission clarify the relationship between exempt offerings in which general solicitation is not permitted—such as Section 4(a)(2) and Rule 506(b) offerings—and exempt offerings in which general solicitation is permitted—such as Rule 506(c) offerings. The 2016, 2017, and 2018 Small Business Forums each recommended that the Commission clarify that the facts and circumstances integration analysis the Commission 481 See id. a concurrent offering under Rule 506(b), purchasers in the Rule 506(b) offering could not be solicited by means of a general solicitation under Regulation A (including any ‘‘testing the waters’’ communications), Regulation Crowdfunding, or Rule 147 or 147A. The issuer would need an alternative means of establishing how purchasers in the Rule 506(b) offering were solicited. For example, the issuer may have had a preexisting substantive relationship with such purchasers. Otherwise, the solicitation conducted in connection with the Regulation A (including any ‘‘testing the waters’’ communications), Regulation Crowdfunding, or Rule 147 or 147A offering would very likely preclude reliance on Rule 506(b). See 2015 Regulation A Release at Section II.B.5, Regulation Crowdfunding Adopting Release at Section II.A.1.c and Intrastate and Regional Offerings Release at Section II.B.5. See also 2007 Regulation D Proposing Release. 483 For example, the limitations imposed on advertising the terms of the offering pursuant to Rule 204 of Regulation Crowdfunding would limit the issuer’s general solicitation in a concurrent offering made pursuant to Regulation A, Rule 506(c), or Rule 147A. 482 For E:\FR\FM\26JNP3.SGM 26JNP3 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules applies to the integration of concurrent private and registered offerings 484 would also apply to concurrent exempt offerings where one prohibits general solicitation and the other permits it.485 Specifically, the Small Business Forums sought clarification that an issuer could avoid integration of concurrent offerings under Rule 506(b) and Rule 506(c) if it could show that the investors in the Rule 506(b) offering were not solicited by means of the general solicitation used in connection with the Rule 506(c) offering, regardless of whether the Rule 506(c) offering was completed, abandoned, or ongoing.486 B. Safe Harbors Commission rules contain several integration safe harbors that provide objective standards on which an issuer can rely so that two or more offerings will not be integrated into one combined offering. For transactions that fall within the scope of the respective safe harbor, issuers do not have to conduct any further integration analysis to determine whether the two offerings would be treated as one for purposes of qualifying for either exemption. The issuer will, however, need to comply with the requirements of each exemption on which it is relying.487 1. Regulation D Rule 502(a) of Regulation D provides for a safe harbor from integration for all offers and sales that take place at least six months before the start of, or six months after the termination of, the Regulation D offering, so long as there are no offers and sales of the same securities 488 within either of these sixmonth periods. Over the years, market participants have expressed concern that such a long delay could inhibit issuers, particularly smaller issuers, from meeting their 484 See 2007 Regulation D Proposing Release. Forum Report; 2017 Forum Report; and 2018 Forum Report. 486 2016 Forum Report; 2017 Forum Report; and 2018 Forum Report. 487 For example, an offering made pursuant to Rule 506(b) will not be integrated with a subsequent offering pursuant to Regulation A (see Section III.B.4), but the issuer will need to comply with the requirements of each rule, including the limitation on general solicitation for offers made pursuant to Rule 506(b). 488 Rule 502(a) specifically excludes offers or sales of securities under an employee benefit plan as defined in Rule 405. In addition, generally, transactions otherwise meeting the requirements of an exemption will not be integrated with simultaneous offers and sales of securities being made outside the United States in compliance with Regulation S. 17 CFR 230.901 et seq. See 17 CFR 230.500(g) (‘‘Rule 500(g)’’) and Note to 17 CFR 230.502(a); see also Section III.B.5 for a discussion of the Regulation S integration safe harbor. jbell on DSK3GLQ082PROD with PROPOSALS3 485 2016 VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 capital needs.489 In 2006, the Advisory Committee on Smaller Public Companies advised that the six-month safe harbor period provided in Rule 502(a) of Regulation D ‘‘represents an unnecessary restriction on companies that may very well be subject to changing financial circumstances, and weighs too heavily in favor of investor protection, at the expense of capital formation.’’ 490 The Committee supported ‘‘clearer guidance concerning the circumstances under which two or more apparently separate offerings will or will not be integrated.’’ 491 The Advisory Committee acknowledged the difficulty, however, of modifying the five-factor test contained in Rule 502(a) and concluded that the issue could be addressed more readily by shortening the six-month period. Based on its analysis of the issue, the Advisory Committee recommended that the Commission shorten the integration safe harbor from six months to 30 days.492 In 2007, the Commission proposed, but ultimately never adopted, amendments to shorten the integration safe harbor in Rule 502(a) from six months to 90 days.493 In proposing 90 days, the Commission stated that it believed 90 days was appropriate, as it would provide additional flexibility to issuers, permitting an issuer to rely on the safe harbor once every fiscal quarter, while still requiring issuers to wait a sufficient period of time before initiating a substantially similar offering in reliance on the safe harbor.494 2. Rule 152 In 1935, the Commission adopted 17 CFR 230.152 (‘‘Rule 152’’),495 which provides a safe harbor from integration 489 See 2007 Regulation D Proposing Release; Final Report of the Advisory Committee on Smaller Public Companies to the United States Securities and Exchange Commission (April 23, 2006) (‘‘2006 Advisory Committee Report’’), available at http:// www.sec.gov/info/smallbus/acspc/acspcfinalreport.pdf. 490 2006 Advisory Committee Report at 96. See also 2007 Regulation D Proposing Release, at text accompanying n. 116. 491 2006 Advisory Committee Report at 95. 492 See id at 94. 493 See 2007 Regulation D Proposing Release. In that release, the Commission declined to propose a period shorter than the 90 days because ‘‘an inappropriately short time frame could allow issuers to undertake serial Rule 506-exempt offerings each month to up to 35 non-accredited investors in reliance on the safe harbor, resulting in unregistered sales to hundreds of non-accredited investors in a year.’’ Id. But cf. 2006 Advisory Committee Report (recommending shortening the integration safe harbor to 30 days). 494 See 2007 Regulation D Proposing Release (‘‘For issuers that provide quarterly reports, the 90day requirement would provide time and transparency for investors and the market to take into account the offering and its results.’’). 495 See SEC Release No. 33–305 (Mar. 2, 1935). PO 00000 Frm 00051 Fmt 4701 Sfmt 4702 30509 when an issuer conducts a private placement offering pursuant to Securities Act Section 4(a)(2) and, following the completion of that offering, makes a public offering and/or files a registration statement. Rule 152 states that Section 4(a)(2) shall be deemed to apply to transactions that did not involve any public offering at the time of the private placement offering 496 even though the issuer decides subsequently to make a public offering 497 and/or file a registration statement.498 In 2007, the Commission clarified that an issuer’s contemplation of filing a Securities Act registration statement at the same time that it is conducting an exempt private placement under Section 4(a)(2) would not cause the Section 4(a)(2) exemption to be unavailable for that private placement.499 So long as all of the applicable requirements of the private placement exemption were met for offers and sales that occurred prior to the general solicitation, those offers and sales would be exempt from registration. Once the public offering is commenced or the registration statement is filed, the issuer must satisfy all of the applicable requirements for that subsequent offering. As noted above, market participants have requested that the Commission provide additional clarity about the integration of exempt offerings in which general solicitation is permitted—such as Rule 506(c) offerings. The 2016, 2017, and 2018 Small Business Forums recommended that the Commission clarify that Rule 152 applies to a Rule 506(c) offering so that an issuer using Rule 506(c) may subsequently engage in a registered public offering without adversely affecting the Rule 506(c) 496 The private placement offering can include convertible securities or warrants, so long as the offering of those securities is completed before the filing of the public offering or registration statement. See 1998 Proposing Release. 497 A securities transaction that at the time involves a private offering will not lose that status even if the issuer subsequently decides to make a public offering. Therefore, offers and sales of securities made in reliance on Rule 506(b) prior to a general solicitation would not be integrated with subsequent offers and sales of securities pursuant to Rule 506(c). So long as all of the applicable requirements of Rule 506(b) were met for offers and sales that occurred prior to the general solicitation, those offers and sales would be exempt from registration and the issuer would be able to make offers and sales pursuant to Rule 506(c). However, the issuer would have to satisfy all of the applicable requirements of Rule 506(c) for the subsequent offers and sales, including that it take reasonable steps to verify the accredited investor status of all subsequent purchasers. 498 17 CFR 230.152. 499 See 2007 Regulation D Proposing Release. E:\FR\FM\26JNP3.SGM 26JNP3 30510 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules offering exemption.500 Because the current language of Rule 152 does not provide an integration safe harbor for an issuer that conducts a Rule 506(c) offering and then subsequently engages in a registered offering, the Commission would need to amend Rule 152 to provide the recommended integration safe harbor. jbell on DSK3GLQ082PROD with PROPOSALS3 3. Abandoned Offerings: Rule 155 In 2001, the Commission adopted 17 CFR 230.155 (‘‘Rule 155’’) to provide a non-exclusive integration safe harbor for abandoned offerings—that is, a registered offering following an abandoned private offering 501 or a private offering following an abandoned registered offering 502—without integrating the registered and private offerings in either case.503 Rule 155 was intended to enhance an issuer’s ability to switch from a private offering to a registered offering, or vice-versa, in response to changing market conditions.504 ‘‘Private offerings’’ for purposes of Rule 155 is defined as offerings exempt under Section 4(a)(2) or 4(a)(5), or Rule 506.505 A preliminary note to the rule provides that the safe harbors are not available if they are used as part of a plan or scheme to evade registration.506 In addition, in adopting Rule 155, the Commission specifically noted that the safe harbors address only registration requirements under the Securities Act and are not intended to affect antifraud provisions.507 Rule 155(b) states that a private offering of securities will not be considered part of an offering for which the issuer later files a registration statement if: (1) No securities were sold in the private offering; (2) the issuer and any person acting on its behalf terminate all offering activity in the private offering before the issuer files the registration statement; (3) the preliminary and final prospectuses used 500 2016 Forum Report; 2017 Forum Report; and 2018 Forum Report. 501 See 17 CFR 230.155(b). 502 See 17 CFR 230.155(c). 503 See Integration of Abandoned Offerings, Release No. 33–7943 (Jan. 26, 2001) [66 FR 8887 (Feb. 5, 2001)] (‘‘Rule 155 Adopting Release’’). 504 Id. 505 See 17 CFR 230.155(a). 506 See Preliminary Note to Rule 155. See also Rule 155 Adopting Release at text accompanying note 55 (‘‘At the time the private offering is made, in order to establish the availability of a private offering exemption, the issuer or any person acting on its behalf must be able to demonstrate that the private offering does not involve a general solicitation or advertising. Use of the registered offering to generate publicity for the purpose of soliciting purchasers for the private offering would be considered a plan or scheme to evade the registration requirements of the Securities Act.’’). 507 See Rule 155 Adopting Release at note 12. VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 in the registered offering disclose specified information about the abandoned private offering; 508 and (4) the issuer does not file the registration statement until at least 30 calendar days after termination of all offering activity in the private offering, unless the issuer and any person acting on its behalf offered securities in the private offering only to persons who were (or who the issuer reasonably believes were) sophisticated or accredited investors. Rule 155(c) states that an offering for which the issuer filed a registration statement will not be considered part of a later commenced private offering if: (1) No securities were sold in the registered offering; (2) the issuer withdraws the registration statement under 17 CFR 230.477 (‘‘Rule 477’’); (3) neither the issuer nor any person acting on the issuer’s behalf commences the private offering earlier than 30 calendar days after the effective date of withdrawal of the registration statement under Rule 477; (4) the issuer provides specified information about the private offering to each offeree in the private offering; 509 and (5) any disclosure document used in the private offering discloses any changes in the issuer’s business or financial condition that occurred after the issuer filed the registration statement that are material to the investment decision in the private offering. 4. Regulation A, Rules 147 and 147A, and Regulation Crowdfunding In recent rulemakings, the Commission’s approach to integration has evolved to articulate further the principles underlying the integration doctrine in light of current offering practices and developments in information and communication technology.510 This new approach to integration for offerings under Regulation A, Rules 147 and 147A, and Regulation Crowdfunding provides issuers with greater certainty as to the 508 This information includes: The size and nature of the private offering; the date on which the issuer abandoned the private offering; that any offers to buy or indications of interest given in the private offering were rejected or otherwise not accepted; and that the prospectus delivered in the registered offering supersedes any offering materials used in the private offering. 509 This information includes: The fact that the offering is not registered under the Securities Act; the securities will be ‘‘restricted securities’’ and may not be resold unless they are registered under the Securities Act or an exemption from registration is available; purchasers in the private offering do not have the protection of Securities Act Section 11 [15 U.S.C. 77k]; and a registration statement for the abandoned offering was filed and withdrawn, specifying the effective date of the withdrawal. 510 See 2015 Regulation A Release, Intrastate and Regional Offerings Release and Regulation Crowdfunding Adopting Release. PO 00000 Frm 00052 Fmt 4701 Sfmt 4702 availability of an exemption for a given offering and increased consistency in the application of the integration doctrine among the exempt offering rules available to smaller issuers, while preserving important investor protections provided in each exemption.511 This new integration approach provides that for offerings conducted under Regulation A or Rules 147 and 147A, the offering will not be integrated with: • Prior offers or sales of securities; or • Subsequent offers or sales of securities that are: Æ Registered under the Securities Act, except as provided in Rule 255(c); Æ Made pursuant to Rule 701 under the Securities Act; 512 Æ Made pursuant to an employee benefit plan; Æ Made pursuant to Regulation S; 513 Æ Made pursuant to Regulation Crowdfunding; Æ Made pursuant to Regulation A; Æ Made pursuant to Rules 147 or 147A; or Æ Made more than six months after completion of the respective offering.514 As discussed above, for transactions that fall within the scope of the safe harbor, issuers will not have to conduct 511 See Intrastate and Regional Offerings Release. See also 17 CFR 230.251(c); 17 CFR 230.701; and Regulation Crowdfunding Adopting Release. Each exemption is designed based on a particular type of offer and investor, with corresponding requirements that must be satisfied. 512 Rule 701 exempts from Securities Act registration requirements certain sales of securities made to compensate employees, consultants, and advisors. This exemption is not available to issuers that already are required to file reports under Exchange Act Section 13(a) or 15(d). An issuer can sell at least $1 million of securities under this exemption, regardless of its size. An issuer can sell a higher amount if it satisfies certain formulas based on its assets or on the number of its outstanding securities. If an issuer sells more than $10 million in securities in a 12-month period, it is required to provide certain financial and other disclosure to the persons that received securities in that period. Securities issued under Rule 701 are ‘‘restricted securities.’’ Compensatory Benefit Plans and Contracts, Release No. 33–6768 (Apr. 14, 1988) [53 FR 12918 (Apr. 20, 1988)] (‘‘Rule 701 Adopting Release’’). See also Concept Release on Compensatory Securities Offerings and Sales, Release No. 33–10521 (Jul. 18, 2018) [83 FR 34958 (Jul. 24, 2018)] (soliciting comment on possible ways to modernize rules related to compensatory arrangements in light of the significant evolution in both the types of compensatory offerings and the composition of the workforce since the Commission last substantively amended these rules in 1999). 513 17 CFR 230.901 et seq. Regulation S provides a safe harbor for offers and sales of securities outside the United States so long as the securities are sold in an offshore transaction and there are no ‘‘directed selling efforts’’ in the United States. See Offshore Offers and Sales, Release No. 33–6863 (Apr. 24, 1990) [55 FR 18306 (May 2, 1990)] (‘‘Regulation S Adopting Release’’). 514 See 17 CFR 230.251(c); 17 CFR 230.147(g); 17 CFR 230.147A(g). E:\FR\FM\26JNP3.SGM 26JNP3 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules any further integration analysis to determine whether the two offerings would be treated as one for purposes of qualifying for either exemption.515 Unlike Regulation A and Rules 147 and 147A, Regulation Crowdfunding does not include the same enumerated list. However, Securities Act Section 4A(g) provides that ‘‘[n]othing in the exemption shall be construed as preventing an issuer from raising capital through means other than [S]ection 4[(a)](6).’’ Given this statutory language, the Commission provided guidance in the Regulation Crowdfunding Adopting Release that an offering made in reliance on Section 4(a)(6) is not required to be integrated with another exempt offering made by the issuer to the extent that each offering complies with the requirements of the applicable exemption that is being relied on for that particular offering.516 We believe Section 4A(g) and this guidance is generally consistent with, but broader than, the approach to integration in Regulation A and Rule 147 and 147A. 5. Other Integration Provisions jbell on DSK3GLQ082PROD with PROPOSALS3 Other Commission rules provide clarity with respect to integration in specific types of transactions. For example, offshore transactions made in compliance with Regulation S will not be integrated with registered domestic offerings or domestic offerings that satisfy the requirements for an exemption from registration under the Securities Act.517 In 2013, the Commission clarified that concurrent offshore offerings that are conducted in compliance with Regulation S will not be integrated with domestic unregistered offerings that are conducted in compliance with Rule 506(c) or Rule 144A,518 consistent with the historical treatment of concurrent Regulation S and Rule 144A/Rule 506 515 The issuer will, however, need to comply with the requirements of each exemption on which it is relying. For example, an offering made pursuant to Rule 506(b) will not be integrated with a subsequent offering pursuant to Rule 147A, but the issuer will need to comply with the requirements of each rule, including the limitation on general solicitation for offers made pursuant to Rule 506(b). 516 See Regulation Crowdfunding Adopting Release at text accompanying notes 1343–1344. 517 17 CFR 230.901 et seq. See Regulation S Adopting Release. See also Note to Rule 502(a) (‘‘Generally, transactions otherwise meeting the requirements of an exemption will not be integrated with simultaneous offerings being made outside the United States in compliance with Regulation S.’’). See also Rule 500(g) (‘‘Regulation S may be relied upon for such offers and sales even if coincident offers and sales are made in accordance with Regulation D inside the United States.’’). 518 See Section V.A.2 for a discussion of Rule 144A. VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 offerings.519 Similarly, offers and sales of securities that comply with the Rule 144A non-exclusive safe harbor exemption will not affect the availability of any exemption or safe harbor relating to any previous or subsequent offer or sale of such securities by the issuer or any prior or subsequent holder of the securities.520 When the Commission adopted Rule 144A, it specifically noted that each transaction will be assessed under Rule 144A individually and that the availability of the non-exclusive safe harbor exemption for an offer and sale complying with Rule 144A will be unaffected by transactions by other sellers.521 In addition, Rule 701, which provides a limited exemption from registration for certain compensatory securities transactions,522 specifically provides that offers and sales that are exempt under Rule 701 are deemed to be a part of a single, discrete offering and are not subject to integration with any other offers or sales, whether registered under the Securities Act or otherwise exempt from the registration requirements of the Securities Act.523 C. Request for Comment 104. Should we articulate one integration doctrine that would apply to all exempt offerings? If so, what should that integration doctrine be? For example, should we articulate that two or more exemptions, or an exemption and a registered offering, will not be deemed to be part of the same offering if the issuer is able to satisfy the requirements of the exemption(s) at the time of sale? If so, should we still aggregate the total number of nonaccredited investors for purposes of multiple Rule 506(b) offerings that occur less than six months apart? Would one consistent integration doctrine make it easier for issuers to transition from one exemption to another and, ultimately, to a registered offering? Would there be any investor protection concerns if we were to articulate one integration doctrine for all exempt offerings? 519 Rule 506(c) Adopting Release. An issuer, however, seeking to conduct concurrent offerings using general solicitation under Rule 506(c) to U.S. investors and under Regulation S to offshore investors could not solicit both U.S. and offshore investors with the same offering materials, as the Regulation S materials would then include activity undertaken for the purpose of conditioning the market in the U.S. 520 See Resale of Restricted Securities; Rule 144A Adopting Release. See also Section V.A.2 for a discussion of Rule 144A. 521 See id. 522 See note 512. 523 17 CFR 230.701(f). PO 00000 Frm 00053 Fmt 4701 Sfmt 4702 30511 105. Throughout the Securities Act rules, where a safe harbor does not apply, should we replace the five-factor test with the new analysis articulated in connection with Regulation A and Rules 147 and 147A (i.e., whether each offering complies with the requirements of the exemption that is being relied on for the particular offering), consistent with the 2016, 2017, and 2018 Small Business Forum recommendations? Are there other integration analyses that we should consider? Should we consider whether other categories of transactions clearly do not need to be integrated into other offerings, similar to the treatment of offerings conducted in accordance with Regulation S, Rule 144A, and Rule 701? 106. Should we shorten the six-month integration safe harbor in Rule 502(a) of Regulation D? If so, what time period is appropriate? 90 days? 30 days? What are the appropriate considerations for an alternate time period? 107. Consistent with Regulation A and Rules 147 and 147A, for issuers relying on an exemption that permits general solicitation and advertising, such as the exemption under Rule 506(c), should we provide an integration safe harbor for offers and sales of securities prior to the commencement of that offering? 108. Should we specifically revise Rule 152 to clarify that offers and sales that do not involve any form of general solicitation or advertising prior to the completion of those transactions would not be integrated with subsequent offers and sales of securities that involve general solicitation or advertising? Consistent with the 2016, 2017, and 2018 Small Business Forum recommendations, should we revise Rule 152 to provide an integration safe harbor for an issuer that conducts a Rule 506(c) offering and then subsequently engages in a registered public offering? 109. Should we revise Rule 155? For example, should we define a private offering as an exempt offering that does not involve any form of general solicitation or advertising? In addition, should we expand Rule 155(c) to include an abandoned offering that involved general solicitation followed by a private offering? 110. Should we consider other integration safe harbors? If so, please describe the parameters of such potential safe harbors. For example, as recommended by the 2015 Small Business Forum, should we provide additional guidance about concurrent offerings under Regulation Crowdfunding and Rule 506(c)? If so, should we provide guidance regarding issues that may arise when an E:\FR\FM\26JNP3.SGM 26JNP3 30512 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules intermediary seeks to host concurrent offerings? Conversely, should we eliminate any of the existing integration safe harbors? How would such changes affect capital formation and investor protection? IV. Pooled Investment Funds jbell on DSK3GLQ082PROD with PROPOSALS3 A. Background For issuers, particularly issuers seeking to raise growth-stage capital, pooled investment funds can serve as an important source of funding. For purposes of this discussion, pooled investment funds include investment companies, such as a mutual fund or exchange-traded fund (‘‘ETF’’), registered under the Investment Company Act, a BDC, or a private fund that operates pursuant to an exemption or exclusion from the Investment Company Act. For retail investors seeking exposure to growth-stage issuers, there are potential advantages to investing through a pooled investment fund, including the ability to have an interest in a diversified portfolio that can reduce risk relative to the risk of holding a security of a single issuer.524 Retail investors who seek a broadly diversified investment portfolio could benefit from the exposure to issuers making exempt offerings, as these securities may have returns that are less correlated to the public markets. In addition, investing through a pooled investment vehicle would be consistent with retail investor trends over the past several decades, which have seen an increasing number of investors investing through mutual funds and ETFs.525 While retail investors can obtain some exposure to exempt offerings indirectly through investment companies registered under the Investment Company Act and BDCs,526 we 524 See, e.g., Harry Markowitz, Portfolio Selection, 7 J. of Finance 77 (1952). 525 Investment Company Institute, 2019 Investment Company Fact Book (April 2019), at 142 (‘‘ICI Fact Book’’) (showing that the percentage of U.S. households owning mutual funds increased to 43.9% in 2017 from 14.7% in 1985). 526 BDCs are a category of closed-end investment companies that do not register under the Investment Company Act, but rather elect to be subject to the provisions of sections 55 through 65 of that act. See 15 U.S.C. 80a-2(a)(48). Congress established BDCs for the purpose of making capital more readily available to small, developing and financially troubled companies that do not have ready access to the public capital markets or other forms of conventional financing. See H.R. Rep. No. 1341, 96th Cong., 2d Sess 21 (1980). The Commission recently proposed rules that would, among other things, extend to closed-end funds and BDCs offering reforms currently available to operating company issuers by expanding the definition of ‘‘well-known seasoned issuer’’ to allow these funds and BDCs to qualify, streamlining the registration process for these funds and BDCs, including the process for shelf registration, permitting these funds VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 understand that those opportunities may be limited. Open-end funds, which provide investors with the ability to redeem their interests in the fund on a daily basis, have liquidity restrictions and valuation requirements that present challenges to holding significant amounts of securities issued in exempt offerings.527 The potential limited effects on overall return 528 may also constrain larger registered funds from investing in exempt offerings by smaller issuers.529 Some types of registered investment companies, such as closedend funds, are better suited to holding less liquid securities obtained in exempt offerings because they are not redeemable and therefore are not subject to the same rules on liquidity risk management as open-end funds. 1. Interval Funds and Tender Offer Funds An interval fund is a type of registered closed-end fund that makes periodic repurchase offers pursuant to 17 CFR 270.23c–3 (‘‘Rule 23c–3’’) under the Investment Company Act.530 Unlike many traditional registered closed-end funds, interval funds generally have not chosen to list their shares on an exchange.531 Instead, the shares are subject to periodic repurchase offers by and BDCs to satisfy their final prospectus delivery requirements by filing the prospectus with the Commission, and permitting additional communications by and about these funds and BDCs during a registered public offering. See Securities Offering Reform for Closed-End Investment Companies, Release No. 33–10619 (Mar. 20, 2019) [84 FR 14448 (Apr. 10, 2019)] (‘‘ClosedEnd and BDC Securities Offering Reform Release’’). 527 See, e.g., 17 CFR 270.22e–4 (liquidity risk management programs); 15 U.S.C. 80a–2(a)(41) (defining ‘‘value’’). 528 See, e.g., Robert P. Bartlett III, Paul Rose, and Steven Davidoff Solomon, The Small IPO and the Investing Preferences of Mutual Funds, 47 J. of Finance 151 (2017) (providing an example that if a $1 billion fund, which in 2014 represented the median fund in the fourth size quartile, purchased 10% of a $50 million offering, or $5 million, the investment would have to triple in value in order to produce a 1% gross return); Jeffrey M. Solomon, Presentation to the SEC Investor Advisory Committee (June 22, 2017), available at https:// www.sec.gov/spotlight/investor-advisorycommittee-2012/jeffrey-solomon-presentation.pdf. Although both are in the context of smaller initial public offerings, the impact on overall fund performance for a comparably-sized exempt offerings would be similar. 529 See Katie Rushkewicz, Morningstar, Unicorn Hunting: Large-Cap Funds That Dabble in Private Companies (June 4, 2018) (finding that ‘‘while fund managers have greater inclination in investing in private firm equity over the past few years, the impact for most fund investors is minimal’’). 530 17 CFR 270.23c–3. Although BDCs may also use Rule 23c–3, in this release our references to interval funds generally refer to registered closedend funds. We are not aware of any BDCs that are currently making periodic repurchase offers under Rule 23c–3. 531 Only one interval fund is currently exchangetraded. PO 00000 Frm 00054 Fmt 4701 Sfmt 4702 the interval fund at a price based on net asset value. An interval fund is permitted to offer its shares continuously at a price based on the fund’s net asset value.532 An interval fund will make periodic repurchase offers to its shareholders, generally every three, six, or twelve months, as disclosed in its prospectus and annual report.533 The repurchase offer amount cannot be less than 5% or more than 25% of the common stock outstanding on a repurchase request deadline. An interval fund must maintain liquid assets equal to at least 100% of the amount of the mandatory repurchase offer.534 An interval fund also may make a discretionary repurchase offer not more than once every two years.535 Commission rules require that certain aspects of the interval fund’s repurchases, including the periodic interval between repurchase request deadlines, are fundamental policies that can be changed only by a majority vote of the outstanding voting securities.536 As compared to open-end funds, interval funds can employ strategies that involve less liquid assets, such as securities obtained in exempt offerings, or strategies where the predictability of potential inflows and outflows to the fund is more important. An interval fund differs from traditional closed-end funds in that it has a fundamental policy to provide investors with some degree of liquidity at net asset value on a periodic basis through the repurchase offer. While investors in traditional closed-end funds may be able to obtain liquidity for their shares through trading on an exchange, such transactions may occur at prices that are at a discount to net asset value. Unlike private funds, 532 Interval funds are generally required under the Securities Act to pay a registration fee to the Commission at the time of filing a registration statement. See 15 U.S.C. 77f(b)(1). This means that they pay registration fees at the time they register the securities, regardless of when or if they sell them. In March 2019, the Commission proposed amendments to its rules that would permit interval funds to pay their registration fees to the Commission in the same manner as open-end funds (by computing registration fees due on an annual net basis) as they routinely repurchase shares at net asset value and are required to periodically offer to repurchase their shares. See Closed-End and BDC Securities Offering Reform Release. Specifically, open-end funds pay fees on a net basis, based upon the sales price for securities sold during the fiscal year and reduced based on the price of shares redeemed or repurchased that year. See 15 U.S.C. 80a–24(f)(2). 533 The Commission also has issued exemptive orders to interval funds that permit them to conduct repurchase offers on a monthly basis, subject to conditions. See, e.g., In the Matter of Weiss Strategic Interval Fund, Release No. IC–33124 (June 18, 2018). 534 17 CFR 270.23c–3(b)(10). 535 17 CFR 270.23c–3(c). 536 17 CFR 270.23c–3(b)(2)(i). E:\FR\FM\26JNP3.SGM 26JNP3 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules interval funds are registered investment companies, may be open to nonaccredited investors,537 are not subject to the ‘‘plan assets’’ rule under ERISA,538 and are eligible for tax treatment under Subchapter M of the Internal Revenue Code of 1986, as amended (‘‘Internal Revenue Code’’) if the conditions of that regulation are satisfied.539 Based on a review of filings with the Commission, the number of new interval funds that have been introduced over the past several years has increased, from nine in 2016 to 19 in 2018, and over half of all active interval funds are less than five years old. However, interval funds remain a relatively small component of all registered investment companies, consisting of 57 interval funds with about $29.7 billion in assets under management as of December 31, 2018.540 Current interval funds employ a wide variety of investment strategies, including insurance-linked securities, real estate and real estate debt, credit, and derivatives. The 2017 Treasury Report recommended that the Commission review its rules regarding interval funds to determine whether more flexible provisions might encourage the creation of registered closed-end funds that invest in offerings of smaller public companies and private companies whose shares have limited or no liquidity.541 Some registered closed-end funds operate as tender offer funds. Tender offer funds repurchase securities under Section 23(c)(2) of the Investment Company Act,542 which permits the fund to repurchase tendered shares after providing a reasonable opportunity to all shareholders to submit tenders. As a jbell on DSK3GLQ082PROD with PROPOSALS3 537 Some interval funds limit their distribution to high net worth clients, institutional investors, or qualified clients under the Advisers Act. Other interval funds may sell to retail investors, but may require a minimum investment amount. 538 See 29 CFR 2510.3–101. When a plan subject to ERISA invests in an equity interest of an entity that is neither a publicly-offered security nor a security issued by a registered investment company, the ERISA plan’s assets include both the equity interest and an undivided interest in each of the underlying assets of the entity unless the entity is an operating company or equity participation in the entity by benefit plan investors is ‘‘not significant.’’ Thus, private funds sometimes limit the amount of interests purchased by investors subject to ERISA in order to prevent the private fund itself from being deemed to be a ‘‘plan asset’’ subject to ERISA. 539 See 26 U.S.C. 851 et seq. Under Subchapter M, a qualifying fund may avoid corporate-level taxation on dividends and capital gains passed through to fund investors. 540 By comparison, at the end of 2018, total net assets were $250 billion for closed-end funds, $17.7 trillion for mutual funds, and $3.4 trillion for exchange traded funds. See ICI Fact Book, at 32. 541 See 2017 Treasury Report, at 37. 542 15 U.S.C. 80a–23(c)(2). VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 result, tender offer funds have greater flexibility with respect to the amount and timing of the repurchase offers, relative to interval funds, as there is no requirement for a tender offer fund to conduct such offers at specific intervals or any minimum or maximum repurchase amount. However, tender offers must comply with the tender offer rules under the Exchange Act, including 17 CFR 240.13e–4 (‘‘Rule 13e–4’’).543 2. Private Funds Private funds, such as venture capital funds, private equity funds, and angel funds,544 are pooled investment funds that must comply with the terms of an appropriate exemption from the registration requirements of the Securities Act as well as an exemption or exclusion from registration under the Investment Company Act. When a private fund makes an offering, it typically relies on Section 4(a)(2) and Rule 506 under the Securities Act to offer and sell its interests without registration under the Securities Act.545 Private funds generally rely on one of two exclusions from the definition of ‘‘investment company’’ under the Investment Company Act—Section 3(c)(1) or Section 3(c)(7) 546—which exclude them from substantially all regulatory provisions of that act.547 Both Sections 3(c)(1) and 3(c)(7) have conditions that the fund does not make a public offering of its securities. Notwithstanding these conditions, the Commission has previously concluded that Section 201(b) of the JOBS Act permits private funds to engage in 543 Rule 13e–4 imposes filing, disclosure, and dissemination requirements on the issuer, or an affiliate of the issuer, that is making a tender offer, including the filing of Schedule TO [17 CFR 240.14d–100] with the Commission. Rule 13e–4 also imposes certain requirements on the manner of making a tender offer. Rule 13e–4 does not apply to repurchase offers by interval funds conducted under Rule 23c–3. Repurchase offers conducted under Rule 23c–3 may be less costly than under the Commission’s tender offer rules. 544 Angel investors are usually accredited investors who invest their own money in early-stage companies with high growth potential. According to the Angel Capital Association, in 2013, the median angel round size was $600,000 in funding. See Presentation to the SEC Advisory Committee on Small and Emerging Companies, Dec. 17, 2014, available at https://www.sec.gov/spotlight/acsec/ sec-small-biz-committee-aca-12-17-14-final.pdf. Some angel funds are structured as pooled investment vehicles, while other angel investors may form an ‘‘angel group’’ that collectively conducts due diligence on a potential investment but allows each angel investor to make an individual decision to participate in an exempt offering. 545 See Section II.B for a discussion of these exemptions. See also Rule 506(c) Adopting Release at Section II.E. 546 15 U.S.C. 80a–3(c)(1) and (c)(7). 547 See Rule 506(c) Adopting Release at Section II.E. PO 00000 Frm 00055 Fmt 4701 Sfmt 4702 30513 general solicitation in compliance with Rule 506(c) of Regulation D without losing either of the exclusions under the Investment Company Act.548 Therefore, a private fund may offer its securities under Rule 506(c) of Regulation D without violating the conditions of Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act. a. Qualifying Venture Capital Funds Under the Investment Company Act Section 3(c)(1) excludes any fund that is beneficially owned by not more than 100 persons and that is not making and does not presently propose to make a public offering of its securities. Section 504 of the Economic Growth Act amended Section 3(c)(1) to increase the limit to 250 persons in the case of a ‘‘qualifying venture capital fund,’’ which is defined as a venture capital fund 549 with not more than $10 million in aggregate capital contributions and uncalled committed capital.550 Under the Advisers Act,551 a ‘‘venture capital fund’’ includes any private fund that: • Represents that it pursues a venture capital strategy; • Holds no more than 20% of the fund’s aggregate capital contributions and uncalled committed capital in assets (other than short-term holdings) that are not qualifying investments; 552 • Does not borrow, issue debt obligations, provide guarantees, or otherwise incur leverage, in excess of 15% of the private fund’s aggregate capital contributions and uncalled committed capital; • Only issues securities the terms of which do not provide a holder with any right, except in extraordinary circumstances, to withdraw, redeem, or 548 See id. provision references the definition of ‘‘venture capital fund’’ in 17 CFR 275.203(l)–1. 550 The $10 million amount is required to be indexed for inflation once every five years by the Commission, rounded to the nearest million. 15 U.S.C. 80a–3(c)(1). 551 15 U.S.C. 80b–1 et seq. 552 A ‘‘qualifying investment’’ generally means an equity security issued by a qualifying portfolio company that has been acquired directly by the private fund from the qualifying portfolio company. See 17 CFR 275.203(l)–1(c)(3). A ‘‘qualifying portfolio company’’ means any company that: (i) At the time of any investment by the private fund, is not reporting or foreign traded and does not control, is not controlled by or under common control with another company, directly or indirectly, that is reporting or foreign traded; (ii) does not borrow or issue debt obligations in connection with the private fund’s investment in such company and distribute to the private fund the proceeds of such borrowing or issuance in exchange for the private fund’s investment; and (iii) is not an investment company, a private fund, an issuer that would be an investment company but for the exemption provided by 17 CFR 270.3a–7 (‘‘Rule 3a–7’’) under the Investment Company Act, or a commodity pool. See 17 CFR 275.203(l)–1(c)(4). 549 The E:\FR\FM\26JNP3.SGM 26JNP3 30514 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules require the repurchase of such securities but may entitle holders to receive distributions made to all holders pro rata; and • Is not a registered investment company or a BDC.553 A venture capital fund also includes SBICs licensed by the U.S. Small Business Administration 554 and rural business investment companies.555 b. Qualified Purchasers Under the Investment Company Act Section 3(c)(7) excepts from the definition of investment company any fund the outstanding securities of which are owned exclusively by persons who, at the time of acquisition of such securities, are ‘‘qualified purchasers,’’ and which is not making and does not at that time propose to make a public offering of its securities. The following are qualified purchasers: • Natural persons who own not less than $5 million in investments; 556 • Family-owned companies that own not less than $5 million in investments; • Certain trusts; and • Persons, acting for their own accounts or the accounts of other qualified purchasers, who in the aggregate own and invest on a discretionary basis, not less than $25 million in investments (e.g., institutional investors).557 c. Qualified Client Under the Advisers Act Subject to certain exemptions, Section 205(a) of the Advisers Act 558 prohibits 553 17 CFR 275.203(l)–1. CFR 230.501(a)(1) and (2). An SBIC is any company that is licensed as a small business investment company under the Small Business Investment Act of 1958 or that has received the preliminary approval of the U.S. Small Business Administration and has been notified by the Administration that it may submit a license application. See General Instruction A to Form N– 5 [17 CFR 239.24; 17 CFR 274.5]. 555 See Public Law 115–417 (2019). A ‘‘rural business investment company’’ is defined in Section 384A of the Consolidated Farm and Rural Development Act [7 U.S.C. 2009cc] as a company that is approved by the Secretary of Agriculture and that has entered into a participation agreement with the Secretary. To be eligible to participate as an RBIC, the company must be a newly formed forprofit entity or a newly formed for-profit subsidiary of such an entity, have a management team with experience in community development financing or relevant venture capital financing, and invest in enterprises that will create wealth and job opportunities in rural areas, with an emphasis on smaller enterprises. See 7 U.S.C. 2009cc–3(a). 556 For purposes of the qualified purchaser definition, the Commission defined ‘‘investments’’ to include interests held for investment purposes, physical commodities held for investment purposes, financial contracts entered into for investment purposes, and cash and cash equivalents held for investment purposes. 17 CFR 270.2a51–1(b). 557 15 U.S.C. 80a–2(a)(51)(A). 558 15 U.S.C. 80b–5(a). jbell on DSK3GLQ082PROD with PROPOSALS3 554 17 VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 investment advisers registered or required to be registered with the Commission from charging performance fees to clients, which are commonly used by investment advisers to private equity and venture capital funds. Rule 205–3 under the Advisers Act 559 provides an exemption from the prohibition when a client meets the definition of ‘‘qualified client.’’ A ‘‘qualified client’’ is a natural person who, or a company that: 560 • Has at least $1 million in assets under management with the adviser immediately after entering into an investment advisory contract with the adviser; • The adviser reasonably believes has a net worth (together with assets held jointly with a spouse) of more than $2.1 million exclusive of the value of a person’s primary residence immediately prior to entering into an advisory contract; • The adviser reasonably believes is a ‘‘qualified purchaser’’ as defined in Section 2(a)(51)(A) of the Investment Company Act at the time an advisory contract is entered into; • Is an executive officer, director, trustee, general partner, or person serving in a similar capacity, of the adviser; or • Is an employee of the adviser who participates in the investment activities of the adviser, and has performed investment activities for at least 12 months. A Section 3(c)(1) fund, a registered investment company, or a BDC, may only charge performance fees if each equity owner of such entity is a qualified client.561 A separate statutory provision provides an exemption from Section 205(a) for performance fees charged to Section 3(c)(7) funds 562 and, subject to certain conditions, for contracts involving BDCs.563 Section 203(l) of the Advisers Act 564 provides that an investment adviser that solely advises ‘‘venture capital funds’’ is 559 17 CFR 275.205–3. amounts below reflect the most recent inflation adjustments to the assets under management and net worth tests. See Order Approving Adjustment for Inflation of the Dollar Amount Tests in Rule 205–3 under the Investment Advisers Act of 1940, Release No. IA–4421 (June 14, 2016) [81 FR 39985 (June 20, 2016)]. 561 See 17 CFR 275.205–3(b). For registered investment companies, the Advisers Act provides an exemption from Section 205(a) for fulcrum fees. A fulcrum fee generally involves averaging the adviser’s fee over a specified period and increasing or decreasing the fee proportionately with the investment performance of the company or fund in relation to the investment record of an appropriate index of securities prices. See 15 U.S.C. 80b–5(b)(2). 562 15 U.S.C. 80b–5(b)(4). 563 15 U.S.C. 80b–5(b)(3). 564 15 U.S.C. 80b–3(l). 560 The PO 00000 Frm 00056 Fmt 4701 Sfmt 4702 exempt from registration under the Advisers Act.565 Section 203(m) of the Advisers Act 566 and 17 CFR 275.203(m)–1 (‘‘Rule 203(m)–1’’) 567 thereunder provide an exemption from registration for any investment adviser that solely advises private funds if the adviser has assets under management in the United States of less than $150 million. The Commission has previously referred to investment advisers relying on either exemption as ‘‘exempt reporting advisers’’ because Sections 203(l) and 203(m) provide that the Commission shall require such advisers to maintain such records and to submit such reports as the Commission determines necessary or appropriate in the public interest or for the protection of investors. Because exempt reporting advisers are not registered with the Commission, the prohibition on performance fees contained in Section 205(a) of the Advisers Act does not apply. B. Pooled Investment Funds as Accredited Investors Certain pooled investment funds are deemed to be accredited investors without being subject to holding a minimum amount of assets or other qualifications.568 These include registered investment companies, BDCs, and SBICs.569 Private funds otherwise are not accredited investors unless they qualify under another provision of Rule 501(a). A private fund could qualify as an accredited investor if it holds total assets in excess of $5 million and is a corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered.570 A private fund may also be able to qualify as a trust, with total assets in excess of $5 million, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person.571 Alternatively, a private fund could be an accredited investor if all of the fund’s equity owners are accredited investors.572 Small private funds with assets of $5 million or less may not qualify as 565 See note 553 and accompanying text. U.S.C. 80b–3(m). 567 17 CFR 275.203(m)–1. 568 See Section II.A for a discussion of the definition of accredited investor. 569 17 CFR 230.501(a)(1) and (2). 570 17 CFR 230.501(a)(3). Other entities, such as limited liability companies, that have assets in excess of $5 million may qualify as accredited investors. See note 70. 571 17 CFR 230.501(a)(7). ‘‘Sophisticated purchaser’’ is a person described in Rule 506(b)(2)(ii). 572 17 CFR 230.501(a)(8). 566 15 E:\FR\FM\26JNP3.SGM 26JNP3 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules accredited investors and could be excluded from participating in certain exempt offerings under Rule 506 unless each equity owner of the fund is an accredited investor. If a ‘‘knowledgeable employee’’ 573 of the private fund or the fund’s general partner does not otherwise satisfy the accredited investor standard, then the private fund will not qualify as an accredited investor under Rule 501(a)(8), which requires all equity owners of the investor to be accredited investors. jbell on DSK3GLQ082PROD with PROPOSALS3 C. Retail Investor Access to Pooled Investment Funds That Invest in Exempt Offerings For retail investors who are not currently accredited investors, the ability to obtain exposure to exempt offerings through a pooled investment fund is limited to exposure through registered investment companies and BDCs. Registered investment companies and BDCs are subject to extensive disclosure requirements under the Securities Act, the Exchange Act, and the Investment Company Act; registered investment companies are also subject to substantive regulation under the Investment Company Act and BDCs are subject to selected provisions of the Investment Company Act. Retail investors can also invest through a SBIC 574 that is publicly offered, but there are currently no SBICs with a public offering. However, it may be difficult for retail investors in practice to obtain exposure to exempt offerings through these vehicles. Liquidity and daily valuation requirements for mutual funds and ETFs present challenges to their ability to invest in a significant number of exempt offerings.575 The need for economies of scale regarding portfolio investments by registered investment companies may make it impractical for these funds to invest in relatively smaller exempt offerings.576 We recognize that certain types of registered investment companies primarily intended for persons saving for retirement may be designed for investors to hold for a long period of time. For example, target date retirement funds are designed to make it easier for investors to save for retirement and hold a diversified portfolio of securities that is rebalanced automatically among asset classes over time without the need for each investor to rebalance his or her portfolio 573 See note 141. in SBICs may also be offered and sold in exempt offerings. 575 See note 528 and accompanying text. 576 See note 529 and accompanying text. 574 Interests VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 repeatedly.577 For funds with target dates significantly far into the future, the intended holding period may be better aligned with the limited liquidity of securities from exempt offerings relative to other types of open-end funds where the intended investor holding period may be shorter. However, nearly all target date retirement funds are registered as open-end funds, which give investors the ability to redeem their interests in the fund. As a result, target date retirement funds generally invest in other open-end funds, including ETFs, to obtain exposures to different types of asset classes while retaining appropriate liquidity. By investing only in other open-end funds, target date retirement funds may forgo exposure to issuers making exempt offerings. We also recognize that, in recent years, investment advisory services have become more broadly available to retirement investors. Such services include digital investment advisory programs, or ‘‘robo-advisers,’’ which provide automated services through algorithmic-based programs. Based on information obtained about the client, such as an expected retirement date and life expectancy, these advisory services provide a recommended portfolio for the client and subsequently manage the client’s account. In recent years, these advisory services have been offered to retail investors with minimal account balances and can be appealing to younger persons who have recently entered the workforce,578 as starting retirement savings early can increase the long-term probability of accumulating sufficient financial resources to fund retirement. Many of the asset allocation exposures recommended by the advisory services are achieved through low-cost funds such as ETFs. These solutions may be able to provide a more customized retirement solution for investors.579 However, the current ability to allocate a small portion of a portfolio to investments in exempt offerings through an advisory service would be subject to the same purchaser eligibility requirements, such as 577 See Investment Company Advertising: Target Date Retirement Fund Names and Marketing, Release No. IC–29301 (June 16, 2010) [75 FR 35919 (June 23, 2010)]. 578 See, e.g., Michael Blanding, Harvard Business School, Why Millennials Flock to Fintech for Personal Investing (Dec. 7, 2016), available at https://hbswk.hbs.edu/item/why-millennials-flockto-fintech-firms-for-personal-investing?cid=wk-smfb-sf51284263&sf51284263=1. 579 But see Office of Investor Education and Advocacy, Investor Bulletin: Robo-Advisers (Feb. 23, 2017), available at https://www.sec.gov/oiea/ investor-alerts-bulletins/ib_robo-advisers.html (discussing considerations for investors in determining whether to use a robo-adviser). PO 00000 Frm 00057 Fmt 4701 Sfmt 4702 30515 accredited investor status and, if applicable, qualified purchaser status. Closed-end funds, including BDCs, do not have the liquidity and valuationrelated constraints on their ability to invest in exempt offerings that open-end funds have. However, there can be challenges for investors in closed-end funds and BDCs to convert any profits from successful growth-stage exempt issuers held in a fund or BDC’s portfolio. Unlike private venture capital funds that return contributed capital and profits directly to fund investors upon a liquidity event of a portfolio company, closed-end funds and BDCs generally retain such proceeds, which would be reflected in the net asset value of the fund. While investors in a closedend fund or BDC could convert their interests in the fund to cash by selling on the secondary market, to the extent one exists, such sales could occur at prices that are at a discount to net asset value.580 Interval funds and tender offer funds are types of closed-end funds that can provide investors with an ability to participate directly in returns based on an increase in the value of their investments. Unlike exchange-listed closed-end funds, both of these funds have mechanisms that allow them to repurchase fund interests from investors from time to time, but we do not believe these funds currently are used extensively as a means to provide capital to smaller issuers in exempt offerings based on staff review of filings with the Commission. For retail investors, the ability to participate directly in private fund offerings from a regulatory perspective 581 will largely depend on the investor’s status as an accredited investor, qualified purchaser, and qualified client. Retail investors who are accredited investors, but not qualified purchasers or qualified clients, can participate in private funds offered pursuant to Section 3(c)(1) of the Investment Company Act. Such a fund would be limited to 100 beneficial owners, or 250 beneficial owners for a qualifying venture capital fund. Closed-end funds, including BDCs, would be considered qualified purchasers for purposes of investment in private funds, including hedge funds and private equity funds, offered pursuant to Section 3(c)(7) of the 580 See Section V for a discussion of other potential limitations on the secondary market for securities issued in exempt offerings. 581 In addition, a private fund may have contractual provisions and other conditions, such as a minimum investment level, that effectively preclude the ability of a typical retail investor from investing in the private fund. E:\FR\FM\26JNP3.SGM 26JNP3 30516 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules jbell on DSK3GLQ082PROD with PROPOSALS3 Investment Company Act. However, the possibility of offering closed-end funds that make significant investments in private funds to retail investors has historically raised staff concerns under the Investment Company Act, insofar as these investors could not invest directly in private funds.582 Currently, our understanding is that all closed-end funds that invest primarily in private funds are offered only to investors who meet certain wealth requirements (e.g., the tests for accredited investor), and require significant minimum initial investments. D. Request for Comment For general questions related to the accredited investor definition and exempt transactions under Section 4(a)(2) or Rule 506, see Sections II.A.5 and II.B.3 for additional requests for comment. 111. To what extent do issuers view pooled investment funds as an important source of capital for exempt offerings? Do certain types of pooled investment funds facilitate capital formation more efficiently than others? For example, do private equity and venture capital funds provide more capital to issuers than registered investment companies and BDCs? From an issuer’s perspective, are there benefits to raising capital from a pooled investment fund rather than from individual investors? 112. For small issuers, particularly those that seek to raise capital in microofferings, to what extent are angel funds an important source of capital? 113. How have recent market trends affected retail investor access to growthstage issuers that do not seek to raise capital in the public markets? To the extent that issuers are more likely to seek capital through exempt offerings, do existing regulations make investor access to this market through a pooled investment vehicle difficult? 114. Are there any regulatory provisions or practices, including those promulgated or engaged in by the Commission, that discourage or have the effect of discouraging participation by registered investment companies and BDCs in exempt offerings? For closedend funds and BDCs, are there any existing regulatory provisions or practices that discourage the introduction of investment products that focus on issuers seeking capital at key stages of their growth cycle? If so, 582 See Staff Report to the United States Securities and Exchange Commission, Implications of the Growth of Hedge Funds (Sept. 2003), at 80–83 (discussing concerns about the ‘‘retailization’’ of private funds), available at https://www.sec.gov/ news/studies/hedgefunds0903.pdf. VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 how do these regulatory provisions or practices create barriers? 115. What restrictions should there be, if any, on the ability of closed-end funds, including BDCs, to invest in private funds, including private equity funds and hedge funds, and to offer their shares to retail investors? For example, should there be a maximum percentage of assets that closed-end funds and BDCs can invest in private funds? Should such closed-end funds be required to diversify their investments across a minimum number of private funds, if they are not restricting their offerings to accredited investors? 116. Should we consider making any changes to our rules regarding interval funds? If so, what types of changes? Should we modify the periodic intervals from the current three, six, or twelve months? Should a fund have flexibility to determine the length of its periodic interval? If so, should there be a maximum permitted periodic interval? Should we create a mechanism for investors to vote to determine the periodic interval? Should we amend or eliminate the minimum and/or maximum repurchase offer amount? 117. Should we shorten the minimum time at which an interval fund and other eligible funds can make a discretionary repurchase offer from the current period of two years after its last discretionary repurchase offer? 583 Should we amend the conditions under which a majority of the interval fund’s directors, including a majority of the fund’s directors who are not interested persons of the fund, can suspend or postpone a repurchase offer? 584 Should we allow interval funds to have more flexibility before a repurchase offer must commence, such as a five-year investment period with periodic repurchase offers thereafter? 585 583 See 17 CFR 270.23c–3(c). 17 CFR 270.23c–3(b)(3). Existing conditions include if the suspension or postponement would result in the loss of status as a regulated investment company under Subchapter M of the Internal Revenue Code, if the suspension or postponement would result in the delisting of the fund from a national securities exchange, any period during which its principal securities market is closed (other than customary week-end and holiday closings) or trading on which is suspended, any period during which an emergency exists as a result of which disposal by the fund of securities owned by it is not reasonably practicable or during which it is not reasonably practicable for the fund fairly to determine the value of its net assets, or by order of the Commission for the protection of security holders of the fund. 585 17 CFR 270.23c–3(a)(7) allows an interval fund to delay its first repurchase request deadline up to an additional interval after the effective date of its registration statement (e.g., if its periodic interval is six months, it may schedule its first repurchase request deadline up to 12 months after the effective date). 584 See PO 00000 Frm 00058 Fmt 4701 Sfmt 4702 118. Should we make any modifications as to which elements of an interval fund’s repurchase policy should be fundamental and changeable only by a majority vote of the outstanding voting securities? 586 What elements of a repurchase policy should be determined by a majority of the board or a majority of the non-interested directors? If the periods between repurchase offers become longer or less predictable, what measures, if any, should we take to facilitate sales of interval funds shares on the secondary market for investors who may need liquidity? If we were to permit interval funds to engage in repurchase offers less frequently and/or with less predictability than under our current rule, should we limit the purchase of such interval funds to sophisticated investors such as accredited investors or qualified purchasers? 119. Are there other measures that can be taken to decrease the compliance costs associated with the interval fund structure? Are there any changes that we should make to our rules to increase the efficiency of the repurchase offer notification and tender process, such as facilitating electronic or other notification? Should we have rules that permit interval funds to have multiple share classes? 587 Should we have rules that permit interval funds to utilize the series and trust structure used by openend funds to set up new interval funds? Would a series and trust structure make it easier to establish follow-on funds for new investments, rather than for the original fund to remain in a continuous offering? 120. Should we provide a transitory exemption from the diversification requirements in Section 5(b)(1) of the Investment Company Act during the initial stages of an interval fund so that the advisor has sufficient time to identify and invest in appropriate portfolio companies? 588 If so, would two years be a sufficient duration? 586 See 17 CFR 270.23c–3(b)(2)(i). have issued exemptive orders to interval funds that permit them to have multiple share classes, subject to conditions. See, e.g., In the Matter of SharesPost 100 Fund, Release No. IC– 32799 (Aug. 28, 2017). 588 Section 5(b)(1) of the Investment Company Act [15 U.S.C. 80a–5(b)(1)] provides that a ‘‘diversified company’’ holds at least 75% of the value of its total assets in cash and cash items, Government securities, securities of other investment companies, and other securities limited in respect of any one issuer to an amount not greater in value than 5% of the value of its total assets and to not more than 10% of the outstanding voting securities of such issuer. Our staff has engaged in outreach efforts with existing sponsors of interval funds, who have indicated that these diversification requirements can pose challenges to making investments in the start-up phase of the fund. 587 We E:\FR\FM\26JNP3.SGM 26JNP3 jbell on DSK3GLQ082PROD with PROPOSALS3 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules Would similar changes need to be implemented to the diversification requirements under subchapter M of the Internal Revenue Code in order to make any changes under the Investment Company Act meaningful? To the extent an interval fund pursues a private equity or venture capital strategy that may result in the control of a portfolio company, what types of relief under the Investment Company Act, if any, should be provided for affiliated transactions and subject to what conditions? Would an interval fund need other types of relief and, if so, what conditions should apply? 121. Should we consider making any changes to our rules regarding tender offer funds? If so, what type of changes? To what extent would any changes to the interval fund rule lessen the need for tender offer funds? Should we permit tender offer funds to use the conditions described in Rule 23c3– 3(c) 589 in place of the Exchange Act tender offer rules, if investors in those tender offer funds are limited to accredited investors or qualified purchasers? 122. If a target date retirement fund were to seek a limited amount of exposure to exempt offerings in its portfolio, what measures, if any, should we consider taking to enable this? Similarly, if investment advisory services, including robo-advisers, that are focused on retirement savings seek to include a limited amount of exposure to securities from exempt offerings as part of a diversified retirement portfolio that they recommend to retail investors, should we consider making any changes to our rules to enable this? If so, what types of changes? 123. How do the restrictions on performance fees under the Advisers Act affect the offering of venture strategies by registered investment companies and BDCs? Should we make changes to the restrictions on performance fees? 124. What changes, if any, should be made to the regulatory regime with respect to SBICs and/or RBICs? 125. Certain pooled investment funds, such as registered investment companies, BDCs, and SBICs, specifically qualify as accredited investors without satisfying any quantitative criteria such as a total assets or investments threshold. Should 589 Paragraph (c) of the interval fund rule permits any registered closed-end fund or a BDC to repurchase common stock of which it is the issuer pursuant to a repurchase offer that is not made pursuant to a fundamental policy and that is made to all holders of the stock if a similar offer has not been made in the prior two years. See 17 CFR 270.23c–3(c). VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 other types of pooled investment funds be similarly treated? For example, should we include Section 3(c)(7) funds? Should we include any venture capital fund as defined by Rule 203(l)– 1 under the Advisers Act? Should we include any qualifying venture capital fund, as recently added by the Economic Growth Act? Should we include RBICs? 126. The definition of ‘‘qualified client’’ under the Advisers Act specifically includes a ‘‘qualified purchaser’’ as defined by the Investment Company Act. Should we similarly define an ‘‘accredited investor’’ under Regulation D to specifically include a ‘‘qualified purchaser’’? Would that be a less costly approach for regulating offerings of Section 3(c)(7) funds? 127. The rules implementing the accredited investor and qualified client definitions have provisions for periodic reassessment of the quantitative thresholds, but the qualified purchaser definition does not. Should we consider a similar periodic reassessment for the qualified purchaser definition? If so, should the periodic reassessment for the three definitions occur at the same time? 128. Does the issue of secondary market liquidity have a significant effect on investors’ decision-making with respect to whether to invest in pooled investment vehicles, particularly with respect to closed-end funds and BDCs? 129. Should we consider any changes to our rules to encourage the establishment or improvement of secondary trading opportunities for closed-end funds or BDCs? If so, what changes should we consider? V. Secondary Trading of Certain Securities The expansion of our exempt offering framework through the implementation of the JOBS Act and other recent Commission initiatives has sought to provide additional avenues for smalland medium-sized businesses to raise capital.590 Section II of this release has focused on the framework of exemptions available for primary offerings by an issuer. Secondary market liquidity for investors in these issuers is integral to capital formation in the primary offering market.591 While restricted and otherwise illiquid securities can yield a more stable shareholder base with less investor turnover, small businesses report struggling to attract capital in their 590 See, e.g., Public Law 112–106, 126 Stat. 306 (2012); Crowdfunding Adopting Release; Rule 147 Adopting Release. 591 See, e.g., 2017 Treasury Report (‘‘Robust secondary markets are critical to supporting capital formation, and in turn, economic growth.’’). PO 00000 Frm 00059 Fmt 4701 Sfmt 4702 30517 primary offerings because potential investors are reluctant to invest unless they are confident there will be an exit opportunity.592 Those issuers that are able to attract investors may incur a higher cost of capital or bear an illiquidity discount if the securities lack secondary market liquidity.593 In addition, limited secondary market liquidity and a lack of an active trading market may impair investors’ ability to diversify their portfolios over time because their capital may be locked up longer than they would like.594 In turn, an investor’s inability to divest prior investments due to illiquidity may prevent the investor from reallocating capital to the next investment opportunity, thereby limiting the capital available to the next business.595 While factors affecting secondary market liquidity for securities are numerous and complex,596 we are soliciting comment on possible ways to revise our rules governing exemptions for resales of securities to facilitate capital formation and to promote investor protection by improving secondary market liquidity. A. Resale Exemptions As discussed above, several offering exemptions result in the issuance of restricted securities or securities that are otherwise subject to resale limitations. Even without resale restrictions, an investor who wishes to sell securities must either register (or have the issuer register) the transaction or have an exemption for the transaction. Several exemptions, including the exemptions under Section 4(a)(2) and Regulation D, are available only for offers and sales by an issuer of securities to initial purchasers and are not available to an affiliate of the issuer or to another person for resales of the securities.597 592 See ACSEC Secondary Market Liquidity Recommendation. 593 See id. 594 See id. 595 See id. 596 See, e.g., Report to Congress: Access to Capital and Market Liquidity (Aug. 2017) available at https://www.sec.gov/files/access-to-capital-andmarket-liquidity-study-dera-2017.pdf. 597 For additional information pertinent to secondary market sales and restricted securities, see also the discussion of Commission regulation of transfer agents and the removal of restrictive legends in Advanced Notice of Proposed Rulemaking, Concept Release and Request for Comment on Transfer Agent Regulations, Release No. 34–76743 at 127–135 (Dec. 22, 2015) [80 FR 81947 (Dec. 31, 2015)], available at https:// www.sec.gov/rules/concept/2015/34-76743.pdf and Transcript of Equity Market Structure Roundtable, Roundtable on Combating Retail Investor Fraud at 142–172 (Sept. 26, 2018), available at https:// www.sec.gov/spotlight/equity-market-structureroundtables/retail-fraud-round-roundtable-092618transcript.pdf. E:\FR\FM\26JNP3.SGM 26JNP3 jbell on DSK3GLQ082PROD with PROPOSALS3 30518 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules 1. Section 4(a)(1) and Rule 144 Investors seeking to resell their securities frequently rely on the exemption provided by Section 4(a)(1) of the Securities Act, which is available to any person other than an issuer, underwriter, or dealer. A dealer is any person who engages, directly or indirectly, in the business of offering, buying, selling or otherwise dealing or trading in securities issued by another person and includes a person acting for his or her own account (i.e., a dealer or principal) or for the accounts of others (i.e., a broker or agent).598 The term ‘‘underwriter’’ is defined broadly in Section 2(a)(11) of the Securities Act to mean ‘‘any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates, or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking.’’ 599 The interpretation of this definition traditionally has focused on whether the purchaser ‘‘purchased from an issuer with a view to . . . distribution.’’ 600 While an investment banking firm arranging an issuer’s public sale of securities is clearly an underwriter, individual investors who are not securities professionals also may be underwriters if they ‘‘act as links in a chain of transactions through which securities move from an issuer to the public.’’ 601 Rule 144 is a non-exclusive safe harbor from the Section 2(a)(11) definition of underwriter that establishes specific criteria for determining whether a person is engaged in a distribution. A person satisfying the applicable conditions of Rule 144 is deemed not to be engaged in a distribution of the securities and therefore not an underwriter when determining whether a sale is eligible for the Section 4(a)(1) exemption. In addition, the purchaser in the transaction will receive securities that are not restricted securities.602 Rule 144 provides a safe harbor for the resale of restricted securities if a number of conditions are met, including holding the securities for six months or one year, depending on whether the issuer has been filing reports under the Exchange Act.603 Specified current 598 15 U.S.C. 77b(a)(12). U.S.C. 77b(a)(11). See also Preliminary Note 2 to 17 CFR 230.144. 600 Preliminary Note 2 to 17 CFR 230.144. 601 Id. 602 See id. 603 See 17 CFR 230.144(d). 599 15 VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 information concerning the issuer must be publicly available.604 A reporting company satisfies this information requirement if it has been subject to the reporting requirements of Section 13 or Section 15(d) of the Exchange Act for at least 90 days and has filed all reports required during the 12 months prior to the sale.605 A non-reporting company satisfies the information requirement by making publicly available certain information, similar to the information required to be included in an annual report to shareholders.606 In addition, if a selling security holder is an affiliate of the issuer,607 additional conditions in Rule 144 apply.608 The 2016 Small Business Forum and several of its predecessors have recommended that the Commission reduce the holding periods for reporting companies under Rule 144(d)(1)(i) from six months to three months and for nonreporting companies under Rule 144(d)(1)(ii) from one year to six months.609 The Advisory Committee on Small and Emerging Companies stated that there are situations under which certain security holders may not be able to meet the conditions of Rule 144, and that these security holders incur transaction expenses to sell outside of the Rule 144 safe harbor that can be significant.610 To address these concerns, the Advisory Committee recommended that the Commission adopt an additional exemption ‘‘to mimic existing . . . practice for resales of privately-issued securities by shareholders who are not able to rely on Securities Act Rule 144.’’ 611 The 2013, 2014, and 2015 Small Business Forums recommended that the Commission ‘‘propose a new federal exemption governing the private resale of restricted securities under Section 4(a)(1)’’ based on common market practices.612 604 See 17 CFR 230.144(c). 605 See 17 CFR 230.144(c)(1). 606 See 17 CFR 230.144(c)(2). 607 An affiliate of an issuer is a person who, directly, or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, the issuer. 17 CFR 230.144(a)(1). 608 See 17 CFR 230.144(b)(2). 609 See 2016 Forum Report. See also, e.g., 2014 Forum Report and 2012 Forum Report. 610 See Advisory Committee on Small and Emerging Companies: Recommendations Regarding the ‘‘4(11⁄2) Exemption’’ (June 11, 2015) available at https://www.sec.gov/info/smallbus/acsec/acsesc-4aone-and-a-half-recommendation.pdf. 611 Id. 612 2013 Forum Report (stating that based on changes resulting from the JOBS Act, private companies have much more flexibility to remain private longer, and that, as a result, the need for a specific federal exemption for private secondary transactions for shareholders who cannot satisfy PO 00000 Frm 00060 Fmt 4701 Sfmt 4702 2. Rule 144A Rule 144A provides a non-exclusive safe harbor for unregistered resales of certain restricted securities 613 to QIBs.614 When the Commission adopted Rule 144A, it viewed it as a step toward achieving a more liquid and efficient institutional resale market for unregistered securities.615 The term ‘‘qualified institutional buyer’’ is defined in Rule 144A(a)(1) to include specified institutions that, in the aggregate, own and invest on a discretionary basis at least $100 million in securities of issuers that are not affiliated with such institution. Banks and other specified financial institutions must also have a net worth of at least $25 million. A registered broker-dealer qualifies as a QIB if it, in the aggregate, owns and invests on a discretionary basis at least $10 million in securities of issuers that are not affiliated with the broker-dealer. In the case of persons other than an issuer or a dealer, any person who offers and sells securities in accordance with Rule 144A will be deemed not to be engaged in a distribution and therefore not to be an underwriter within the meaning of Section 2(a)(11) of the Securities Act. Such person therefore may rely on the exemption from registration provided by Section 4(a)(1).616 In 2013, the Commission amended Rule 144A to permit the use of general solicitation under Rule 144A, as long as the purchasers are limited to QIBs or to purchasers that the seller and any person acting on behalf of the seller reasonably believe are QIBs.617 As discussed in Section III.B.5, a selling security holder can conduct a Rule 144A offering using general solicitation after purchasing the securities in a private placement or other exempt Rule 144 has become critical); 2014 Forum Report; and 2015 Forum Report. 613 When issued, the restricted securities cannot be of the same class as securities listed on a national securities exchange registered under Section 6 of the Exchange Act or quoted in an automated interdealer quotation system. See 17 CFR 230.144A(d)(3)(i). 614 See Rule 144A Adopting Release. 615 See id. 616 As discussed in Section V.A.3, dealers have the benefit of an exemption from registration under Section 4(a)(3) of the Securities Act [15 U.S.C. 77d(a)(3)], except when they are participants in a distribution or within a specified period after the securities have been offered to the public. If the conditions of Rule 144A are met, a dealer will be deemed not to be a participant in a distribution of securities within the meaning of Section 4(a)(3)(C) or an underwriter of such securities within the meaning of Section 2(a)(11), and the securities will be deemed not to have been offered to the public within the meaning of Section 4(a)(3)(A). Id. 617 17 CFR 230.144A(d). See Rule 506(c) Adopting Release. E:\FR\FM\26JNP3.SGM 26JNP3 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules offering. As a result, while Rule 144A is available solely for resale transactions, market participants use it to facilitate capital-raising by issuers by means of a two-step process, in which the first step is a primary offering on an exempt basis, often in reliance on Section 4(a)(2), to one or more financial intermediaries, and the second step is a resale to QIBs pursuant to Rule 144A.618 3. Section 4(a)(3) While Section 4(a)(1) specifically excludes offerings by dealers, Section 4(a)(3) of Securities Act generally exempts transactions by dealers not acting as underwriters. Section 4(a)(3) is not available to a dealer to the extent it is acting as an underwriter, including any person who purchased the securities from the issuer with a view to distributing them.619 Section 4(a)(3) also is not available for resales of restricted securities or ‘‘control securities,’’ which are securities held by an affiliate of the issuer.620 The 2014 Small Business Forum recommended that the Commission preempt state registration requirements for offers and sales pursuant to Section 4(a)(1) or (3) through a registered brokerdealer.621 jbell on DSK3GLQ082PROD with PROPOSALS3 4. Section 4(a)(4) Section 4(a)(4) provides a limited exemption for certain transactions not covered by Section 4(a)(3). Specifically, Section 4(a)(4) exempts brokers’ transactions executed on unsolicited customers’ orders on any exchange or in the over-the-counter market. Section 4(a)(4) only exempts the broker’s part of a broker’s transaction. It does not extend to the customer selling the securities, who must rely on his or her own exemption or register the transaction.622 If the customer can comply with the Rule 144 safe harbor requirements for its resale, Rule 144(g) provides additional guidance on what constitutes a broker’s 618 See Rule 506(c) Adopting Release (‘‘By its terms, Rule 144A is available solely for resale transactions; however, since its adoption by the Commission in 1990, market participants have used Rule 144A to facilitate capital-raising by issuers.’’). 619 15 U.S.C. 77b(a)(11). In addition, Section 4(a)(3) specifically excludes offers and sales of securities within the 40 days following the first date the securities were offered to the public by an underwriter (or 90 days from such date in the event of an initial public offering). See Section V.A.2. for a discussion of the safe harbor available for dealers under Rule 144A. 620 See Revisions to Rules 144 and 145, Release No. 33–8869 (Dec. 6, 2007) [72 FR 71546 (Dec. 17, 2007)] (‘‘Although it is not a term defined in Rule 144, ‘control securities’ is used commonly to refer to securities held by an affiliate of the issuer, regardless of how the affiliate acquired the securities.’’). 621 See 2014 Forum Report. 622 See SEC Release No. 131 (March 13, 1934). VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 transaction under Section 4(a)(4), including that in any such transaction, the broker-dealer must: • Function as an agent; • Receive no more than the usual and customary commission for services; • Not solicit customers’ orders; and • Not have any reason to believe that the customer is engaged in an unlawful distribution of the securities. 5. Section 4(a)(7) In 2015, the FAST Act introduced a new registration exemption for private resales of securities by adding new Section 4(a)(7) to the Securities Act. A sale of securities by other than the issuer or its subsidiary is exempt under Section 4(a)(7) if the following conditions are met: • The purchaser is an ‘‘accredited investor;’’ • Neither the seller, nor any person acting on its behalf, uses any form of general solicitation or advertising; • Neither the seller nor any person who has been or will be paid for its participation in the transaction is a ‘‘bad actor’’ under Rule 506(d); • The issuer is engaged in business, not in the organizational stage or in bankruptcy or receivership, and is not a blank check, blind pool, or shell company that has no specific business plan or purpose and has not indicated that its primary business plan is to engage in a merger with an unidentified person; • The transaction does not relate to an unsold allotment to, or a subscription or participation by, a broker or dealer as an underwriter of the securities; • The securities have been authorized and outstanding for at least 90 days; and • If the issuer of the securities is not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, a variety of specified information must be provided to prospective purchasers, including the issuer’s most recent balance sheet and statement of profit and loss and similar financial statements for the two preceding fiscal years, prepared in accordance with U.S. GAAP or, in the case of a foreign private issuer, International Financial Reporting Standards (‘‘IFRS’’). Securities acquired under Section 4(a)(7) are ‘‘restricted securities’’ and cannot be further transferred except pursuant to registration or another exemption from registration.623 623 See Section II.B.1.b for a discussion of restricted securities. PO 00000 Frm 00061 Fmt 4701 Sfmt 4702 30519 B. Relationship With State Law 1. Section 18: Federal Preemption for Secondary Offerings In addition to having an exemption from federal registration requirements, an investor seeking to resell securities must also consider whether state securities registration or other requirements apply. Federal securities laws currently preempt state securities law registration and qualification requirements for secondary offers or sales of securities: • Pursuant to Sections 4(a)(1) and 4(a)(3), if the issuer files reports with the Commission pursuant to Exchange Act Section 13 or 15(d); 624 • Pursuant to Section 4(a)(4) 625 or Section 4(a)(7); 626 and • If such security is listed, or authorized for listing, on a national securities exchange.627 For all other resale transactions, a selling security holder would be required either to register the transaction with the state securities regulator in each state where an offer or sale occurs or to rely on an exemption to state registration requirements under the relevant state law in each state in which its offers or sells the securities. For example, an investor seeking to sell to a non-accredited investor securities that such investor purchased in a Regulation A offering by a non-reporting issuer whose securities are not listed on a national securities exchange must either have the issuer register the resale transaction under the Securities Act and with the state securities regulator in each state in which it offers or sells the securities, or rely on a Securities Act exemption and an exemption from state registration requirements under the relevant state law in each state in which it offers or sells the securities. Similarly, an investor seeking to sell to a nonaccredited investor restricted securities under Rule 144 that it purchased from a non-reporting company still would have to register the resale with the state securities regulator or rely on an exemption from state registration requirements under the relevant state law in each state in which it offers or sells those securities. The 2017 and 2018 Small Business Forums recommended that the Commission provide blue sky preemption for secondary trading of securities issued under Tier 2 of Regulation A.628 The 2016 Small 624 See 15 U.S.C. 77r(b)(4)(A). 15 U.S.C. 77r(b)(4)(B). 626 See 15 U.S.C. 77r(b)(4)(G). 627 See 15 U.S.C. 77r(b)(1). 628 See 2016 Forum Report; 2018 Forum Report. 625 See E:\FR\FM\26JNP3.SGM 26JNP3 30520 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules Business Forum recommended that Commission adopt rules that preempt state registration requirements for all primary and secondary trading of securities sold in offerings registered with the Commission.629 The 2017 Treasury Report also recommended that state securities regulators update their regulations to exempt from state registration and qualification requirements secondary trading of securities issued under Tier 2 of Regulation A or, alternatively, that the Commission use its authority to preempt state registration requirements for such transactions.630 The Commission’s Advisory Committee on Small and Emerging Companies and the 2014, 2015, and 2017 Small Business Forums all recommended preemption for secondary trading of securities of Regulation A Tier 2 issuers that are current in their ongoing reports.631 The 2015 and 2016 Small Business Forums further recommended that Commission adopt rules that preempt state registration requirements for all securities sold in offerings registered with the Commission.632 The 2014 Small Business Forum also recommended that the Commission expand the definition of ‘‘qualified purchaser’’ under Section 18(b)(3) to include any purchaser of a security that has been offered and sold pursuant to Section 4(a)(1) or (3) through a registered broker-dealer.633 2. State Exemptions for Secondary Sales State exemptions vary substantively. Many state exemptions are based on the Uniform Securities Act of 2002 or its pre-NSMIA predecessor, the Uniform Securities Act of 1956. However, notwithstanding states’ adoption of one or more model exemptions under these acts, state laws are not uniform. Market participants report that this lack of uniformity inhibits the development of jbell on DSK3GLQ082PROD with PROPOSALS3 629 See 2016 Forum Report. 630 See 2017 Treasury Report. 631 See ACSEC Secondary Market Liquidity Recommendation; 2014 Forum Report (recommending that the Commission define ‘‘qualified purchaser’’ under Section 18(b)(3) to include any purchaser of a class of security that has been offered and sold pursuant to Section 4(a)(1) or (3), provided that, the issuer files reports pursuant to Rule 257(b) in order to preempt state blue sky regulation of after-market resale trading of securities issued pursuant to Tier 2 Regulation A offerings); 2015 Forum Report; 2017 Forum Report. 632 See 2016 Forum Report; 2015 Forum Report (recommending that exemption from state law, rule, regulation, order, or other administrative action should be afforded to all primary and secondary registered public offerings of securities on Form S– 1 (including rights offerings) by defining ‘‘qualified purchaser’’ to mean all original and subsequent purchasers of such security). 633 See 2014 Forum Report. VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 a national secondary trading market.634 We describe some state exemptions below that market participants have noted are generally applicable to secondary transactions.635 a. Isolated Non-Issuer Transaction Exemption Most states offer a narrow exemption from registration for isolated sales by a seller other than the issuer.636 A form of the isolated non-issuer transaction exemption is contained in the Uniform Securities Acts for ‘‘any isolated nonissuer transaction, whether effected through a broker-dealer or not.’’ 637 The model acts do not define the term isolated transaction, but the exemption generally is intended to cover occasional sales by a person and not multiple, successive, or frequent transactions of a similar character by a person or a group.638 Specific requirements are left to the states to develop. Historically, there has been somewhat varied case law development of the term ‘‘isolated transaction,’’ and states vary on, and frequently do not specify, how many such non-issuer offers and sales may be made and still considered isolated.639 Market participants have indicated that this inconsistency creates confusion and makes it difficult to create an efficient interstate market for these transactions.640 b. Institutional Investor Exemption Most states provide an exemption for offers and sales to certain financial or other institutional investors and brokerdealers.641 While many states’ definitions of institutional investor 642 634 See, e.g., ACSEC Secondary Market Liquidity Recommendation. 635 See, e.g., comments of Annemarie Tierney, Executive Vice President, Legal Affairs and General Counsel SecondMarket, at the 32nd Securities and Exchange Commission Government-Business Forum on Small Business Capital Formation, November 21, 2013, transcript available at https:// www.sec.gov/info/smallbus/sbforumtrans112113.pdf (‘‘Tierney Comments’’); see also ‘‘Secondary Trading Developments’’ slides as presented by Annemarie Tierney, contained as Attachment B to the Minutes of the March 4, 2015 ACSEC Meeting available at https://www.sec.gov/ info/smallbus/acsec/acsec-minutes-030415.pdf (‘‘Tierney Slides’’). 636 1 Blue Sky Regulation § 9.03. 637 1956 Uniform Securities Act § 402(b)(1); see also 2002 Uniform Securities Act § 202(1). 638 See Official Comments, 2002 Uniform Securities Act Section 202(1) through (8). 639 1 Blue Sky Regulation § 9.03. 640 See, e.g., Tierney Comments. 641 See 1 Blue Sky Regulation § 9.03. Most of these state exemptions are modeled after the 2002 Uniform Securities Act § 202(13) or 1956 Uniform Securities Act § 402(b)(8), though some states have adopted a non-standard version. 642 See, e.g., 6 Del. Code Ann. § 7309(b)(8); Wash. Rev. Code § 21–20.320(8). PO 00000 Frm 00062 Fmt 4701 Sfmt 4702 are based on the 2002 Uniform Securities Act definition, which includes various categories based on the definition in Rule 501(a) of Regulation D, state requirements nonetheless differ. For example, some states adopt broader definitions or extend the exemption to sales to other sophisticated investors,643 while others exclude certain categories of purchasers.644 c. Manual Exemption Another common type of state exemption for secondary offers and sales is the ‘‘manual exemption,’’ which is currently available in 39 of the 54 U.S. jurisdictions.645 These exemptions generally exempt secondary offers and sales by non-issuers if certain financial and other information about the issuer is published in a designated securities manual. Some states further restrict the exemption, for example, to sales through a broker-dealer or at a price reasonably related to the current market price.646 The exemption is based on the public availability in a designated securities manual of current information about an issuer that enables parties on both sides of the trade to make an educated investment decision.647 Historically, states typically recognized three manuals for purposes of the manual exemption: Standard & Poor’s Corporation Records; Fitch Investors Service; and Mergent’s Investor Service (formerly known as Moody’s).648 In 2016, however, Standard & Poor’s discontinued the publication of its manual. Because many issuers quoted on the OTC Markets, Inc. (‘‘OTC Markets’’) website had relied on their listing in the Standard & Poor’s Corporation Records for purposes of the manual exemption, OTC Markets began seeking recognition of its website as a source of the requisite information for purposes of the manual exemption.649 As of March 2019, 34 jurisdictions 643 See, e.g., Wis. Dept. Fin. Inst. R. § 202(4). e.g., Tex. Rev. Civ. Stat. art. 581–5(H) (specifying that the exemption is applicable only if the broker-dealer is actively engaged in business). 645 See ACSEC Secondary Market Liquidity Recommendation. 646 See Notice of Request for Public Comments Regarding a Proposed Model Rule to Designate Nationally Recognized Securities Manuals for Purpose of the Manual Exemption and a Proposed Model Rule to Exempt Secondary Trading in Securities Issued by Regulation A –Tier 2 Issuers (Jul. 19, 2018) (‘‘NASAA Proposal’’), available at http://www.nasaa.org/wp-content/uploads/2018/ 07/NASAA-Secondary-Trading-Proposal-PublicComment-Request.pdf, citing Uniform Securities Act of 1956, Draftsmen’s Commentary to § 305(i), § 305(j) and Related Sections Referring to NonIssuer Distributions. 647 See ACSEC Secondary Market Liquidity Recommendation. 648 See NASAA Proposal. 649 See id. 644 See, E:\FR\FM\26JNP3.SGM 26JNP3 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules jbell on DSK3GLQ082PROD with PROPOSALS3 recognized the OTCQX market for purposes of the manual exemption, while 31 jurisdictions recognized the OTCQB market for purposes of the manual exemption.650 However, there remains no centralized information portal accepted by all jurisdictions where investors can find issuer information.651 In addition, complying with the manual exemption can be costly for issuers because they must pay to disseminate their information in the various recognized manuals.652 In July 2018, the North American Securities Administrators Association, Inc. (‘‘NASAA’’) requested public comments on two proposed model rules that would facilitate secondary trading in securities of issuers where certain information about the issuer is publicly available.653 NASAA’s first proposed model rule would eliminate the outdated Standard & Poor’s Corporation Records manual and designate as nationally recognized securities manuals or their electronic equivalent for purposes of the manual exemption under state law: Fitch Investors Service, Mergent’s Investor Service, and the OTC Markets website with respect to securities that are included in the OTCQX and OTCQB markets.654 Not all states have adopted a manual exemption, and some states’ manual exemptions do not recognize EDGAR as a source of the required publicly available information. In those states, investors who want to trade securities of issuers that have sold securities under Tier 2 of Regulation A, even where those issuers remain current in their ongoing reporting requirements, may not have a readily available state exemption from registration to effect such trades.655 NASAA’s second proposed model rule is designed to facilitate secondary trading in certain securities issued under Tier 2 of Regulation A and would provide two alternative options for an exemption for secondary trading in securities of certain issuers subject to the ongoing reporting requirements of Regulation A. The first option would exempt from registration secondary sales of securities of issuers that at the time of the sale are current in their 650 See https://www.otcmarkets.com/corporateservices/products/blue-sky. 651 See ACSEC Secondary Market Liquidity Recommendation. 652 See id. 653 See NASAA Proposal. 654 See id. The proposed model rule would not provide any relief with respect to securities of issuers included in the Pink Tier of the OTC Markets. 655 See id. VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 ongoing reporting requirements under Tier 2 of Regulation A, provided that the transaction otherwise complies with the terms of the manual exemption. The second option is a narrowly tailored version of the manual exemption specifically for securities of issuers that are current in their ongoing reporting requirements. Comments on the proposed model rules were due by August 20, 2018.656 d. Broker-Dealer Exemptions There are a number of types of state exemptions for transactions through a broker-dealer that are not within the scope of Securities Act Section 4(a)(4).657 For example, market participants have indicated that most state laws include an exemption for offers and sales if the distribution is effected through a registered brokerdealer that does not solicit orders or offers to buy.658 In an effort to ensure that the exemption is narrowly tailored only to unsolicited transactions, some states require purchasers to confirm that the order was unsolicited.659 C. Request for Comment 130. Do concerns about secondary market liquidity have a significant effect on issuers’ decision-making with respect to primary capital-raising options? Does secondary market liquidity affect the decision-making of individual investors? In considering which exemption may be best suited to a particular offering, do issuers take into account whether the securities issued in the transaction will be restricted securities and/or subject to other resale restrictions? 131. Issuers that are not currently subject to Exchange Act registration may prefer that their securities have restrictions on resale, due to concerns that trading in the securities could lead to a high number of record holders, which could trigger Section 12(g) registration. What effect would an exemption from Section 12(g) registration for certain exempt offerings, if introduced, extended, or made permanent, have on issuers’ access to capital or secondary market liquidity? For example, should we, as recommended by the 2014 Small Business Forum, exempt purchasers and 656 See id. discussed in Section V.A.4, Section 18 of the Securities Act preempts state registration and qualification requirements for transactions under Section 4(a)(4) of the Securities Act [15 U.S.C. 77d(a)(4)]. 658 See Tierney Slides. See also 1 Blue Sky Regulation § 9.06. 659 See 1 Blue Sky Regulation § 9.06; Tierney Slides. 657 As PO 00000 Frm 00063 Fmt 4701 Sfmt 4702 30521 transferees of securities issued pursuant to Regulation A from the calculation of the number of registered holders under Section 12(g)? Would these types of changes provide benefits that could outweigh a decline in the rate at which issuers may become reporting companies? 132. Should we revise the Rule 144 non-exclusive safe harbor? If so, how should we revise Rule 144? For example, should we, as recommended by the 2012 and 2016 Small Business Forums, reduce the Rule 144 holding period for securities of issuers meeting the current public information requirement from six months to three months? Should we, as recommended by the 2012 Small Business Forum, reduce the Rule 144 holding period for securities of issuers not subject to the current information requirements from 12 months to six months? 133. Should we, as recommended by the Advisory Committee on Small and Emerging Companies and the 2013, 2014, and 2015 Small Business Forums, expand the safe harbors for secondary sales under Section 4(a)(1) for security holders that are not able to rely on Rule 144? If so, please describe the parameters of such potential safe harbors. How would the adoption of such additional safe harbors under Section 4(a)(1) affect capital formation, investor protection, and current market practices? 134. Investors who purchase in secondary transactions may not have access to current information about the issuer and its securities. Particularly if we expand the population of investors who may qualify as accredited investors, should we impose some type of issuer disclosure requirement in connection with resales? If so, should we consider a requirement similar to that required by Section 4(a)(7) or one similar to the manual exemption available in many states? What alternatives should we consider? 135. Are market participants using the Section 4(a)(7) resale exemption? We request data with respect to the use of the Section 4(a)(7) exemption. 136. In addition to Section 4(a)(7), secondary sales of securities may rely on other resale exemptions, such as those contained in Section 4(a)(1) and the related safe harbors under Rule 144 and Rule 144A, Section 4(a)(3), and Section 4(a)(4). Would additional resale exemptions or safe harbors be appropriate? If so, what other resale transactions should be exempt from the provisions of Section 5? 137. Should we extend federal preemption to additional offers and sales of securities, for example, by E:\FR\FM\26JNP3.SGM 26JNP3 30522 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Proposed Rules jbell on DSK3GLQ082PROD with PROPOSALS3 expanding the definition of ‘‘qualified purchaser’’? For example, should we preempt state securities registration or other requirements applicable to secondary sales of securities: • Offered or sold pursuant to Section 4(a)(1) or 4(a)(3), if the issuer of such security is a Tier 2 Regulation A issuer and remains current in its ongoing reporting required under the rules, as recommended by the 2014 and 2015 Small Business Forums; • Initially issued in a Tier 2 Regulation A offering, as recommended by the 2014–2018 Small Business Forums and the 2017 Treasury Report; or • Initially issued in an offering registered under the Securities Act, as VerDate Sep<11>2014 22:40 Jun 25, 2019 Jkt 247001 recommended by the 2015 Small Business Forum? 138. What other steps should we consider to improve secondary trading liquidity of securities exempt from registration? For example, should we consider permitting securities that were exempt from registration to trade on venture exchanges? If so, how should we define a venture exchange and under what circumstances should we permit trading on the venture exchange? Will allowing such securities to trade on venture exchanges prior to being fully seasoned have an effect on companies issuing such securities through exempt offerings? If so, what effect? PO 00000 Frm 00064 Fmt 4701 Sfmt 9990 VI. Conclusion We are interested in the public’s views regarding the matters discussed in this concept release. We encourage all interested parties to submit comments on these topics. In addition, we solicit comment on any other aspect of the exempt offering framework that commenters believe may be improved. By the Commission. Dated: June 18, 2019. Vanessa A. Countryman, Acting Secretary. [FR Doc. 2019–13255 Filed 6–25–19; 8:45 am] BILLING CODE 8011–01–P E:\FR\FM\26JNP3.SGM 26JNP3

Agencies

[Federal Register Volume 84, Number 123 (Wednesday, June 26, 2019)]
[Proposed Rules]
[Pages 30460-30522]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-13255]



[[Page 30459]]

Vol. 84

Wednesday,

No. 123

June 26, 2019

Part III





Securities and Exchange Commission





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17 CFR Parts 210, 227, 230, et al.





Concept Release on Harmonization of Securities Offering Exemptions; 
Proposed Rule

Federal Register / Vol. 84 , No. 123 / Wednesday, June 26, 2019 / 
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 227, 230, 239, 240, 249, 270, 274, and 275

[Release Nos. 33-10649; 34-86129; IA-5256; IC-33512; File No. S7-08-19]
RIN 3235-AM27


Concept Release on Harmonization of Securities Offering 
Exemptions

AGENCY: Securities and Exchange Commission.

ACTION: Concept release; request for comment.

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SUMMARY: The Securities and Exchange Commission is publishing this 
release to solicit comment on several exemptions from registration 
under the Securities Act of 1933 that facilitate capital raising. Over 
the years, and particularly since the Jumpstart Our Business Startups 
Act of 2012, several exemptions from registration have been introduced, 
expanded, or otherwise revised. As a result, the overall framework for 
exempt offerings has changed significantly. We believe our capital 
markets would benefit from a comprehensive review of the design and 
scope of our framework for offerings that are exempt from registration. 
More specifically, we also believe that issuers and investors could 
benefit from a framework that is more consistent and addresses gaps and 
complexities. Therefore, we seek comment on possible ways to simplify, 
harmonize, and improve the exempt offering framework to promote capital 
formation and expand investment opportunities while maintaining 
appropriate investor protections.

DATES: Comments should be received on or before September 24, 2019.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/concept.shtml); or
     Send an email to [email protected]. Please include 
File Number S7-08-19 on the subject line.

Paper Comments

     Send paper comments to Secretary, Securities and Exchange 
Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-08-19. This file number 
should be included on the subject line if email is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
website (https://www.sec.gov/rules/concept.shtml). Comments are also 
available for website viewing and copying in the Commission's Public 
Reference Room, 100 F Street NE, Washington, DC 20549, on official 
business days between the hours of 10:00 a.m. and 3:00 p.m. All 
comments received will be posted without change. Persons submitting 
comments are cautioned that we do not redact or edit personal 
identifying information from comment submissions. You should submit 
only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Jennifer Riegel or Amy Reischauer, 
Office of Small Business Policy, Division of Corporation Finance, at 
(202) 551-3460; Timothy White or Geeta Dhingra, Division of Trading and 
Markets, at (202) 551-5550; or Mark T. Uyeda, Division of Investment 
Management, at (202) 551-6792, U.S. Securities and Exchange Commission, 
100 F Street NE, Washington, DC 20549-3628.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
II. Current Exempt Offering Framework Request for Comment
    A. Accredited Investor Definition
    1. Background
    2. Implications Outside of the Regulation D Context
    3. Accredited Investor Staff Report
    4. Comments on the Accredited Investor Staff Report
    5. Request for Comment
    B. Private Placement Exemption and Rule 506 of Regulation D
    1. Section 4(a)(2) of the Securities Act
    2. Rule 506 of Regulation D
    3. Request for Comment
    C. Regulation A
    1. Scope of the Exemption
    2. Disclosure Requirements
    3. Solicitation of Interest
    4. Relationship With State Securities Laws
    5. Analysis of Regulation A in the Exempt Market
    6. Request for Comment
    D. Limited Offerings--Rule 504 of Regulation D
    1. Scope of the Exemption
    2. Filing Requirements and Relationship With State Securities 
Laws
    3. Analysis of Rule 504 in the Exempt Market
    4. Request for Comment
    E. Intrastate Offerings
    1. Section 3(a)(11) of the Securities Act
    2. Securities Act Rules 147 and 147A
    3. Request for Comment
    F. Regulation Crowdfunding
    1. Scope of the Exemption
    2. Disclosure Requirements
    3. Relationship With State Securities Laws
    4. Analysis of Regulation Crowdfunding in the Exempt Market
    5. Request for Comment
    G. Potential Gaps in the Current Exempt Offering Framework
    1. Micro-Offerings
    2. Request for Comment
III. Integration
    A. Facts and Circumstances Analysis
    B. Safe Harbors
    1. Regulation D
    2. Rule 152
    3. Abandoned Offerings: Rule 155
    4. Regulation A, Rules 147 and 147A, and Regulation Crowdfunding
    5. Other Integration Provisions
    C. Request for Comment
IV. Pooled Investment Funds
    A. Background
    1. Interval Funds and Tender Offer Funds
    2. Private Funds
    B. Pooled Investment Funds as Accredited Investors
    C. Retail Investor Access to Pooled Investment Funds That Invest 
in Exempt Offerings
    D. Request for Comment
V. Secondary Trading of Certain Securities
    A. Resale Exemptions
    1. Section 4(a)(1) and Rule 144
    2. Rule 144A
    3. Section 4(a)(3)
    4. Section 4(a)(4)
    5. Section 4(a)(7)
    B. Relationship With State Law
    1. Section 18: Federal Preemption for Secondary Offerings
    2. State Exemptions for Secondary Sales
    C. Request for Comment
VI. Conclusion

I. Introduction

    The Securities Act of 1933 \1\ (the ``Securities Act'') requires 
that every offer \2\ and sale of securities be registered with the 
Securities and Exchange Commission (the ``Commission''), unless an 
exemption is available. The purpose of registration is to provide 
investors with full and fair disclosure of material information so that 
they are able to make their own informed investment and voting 
decisions.\3\ Congress recognized, however, that in certain situations 
there is no practical need for registration or the public benefits from 
registration are too remote.\4\ Accordingly, the Securities Act 
contains a number of exemptions from its registration requirements and 
authorizes the Commission to adopt

[[Page 30461]]

additional exemptions. As described in more detail below, the scope of 
exempt offerings has evolved over time through Commission rules and 
legislative changes. Significantly, the Jumpstart Our Business Startups 
Act of 2012 (``JOBS Act'') greatly expanded the options to raise 
capital in exempt offerings.\5\ Since then, the Fixing America's 
Surface Transportation Act of 2015 (the ``FAST Act'') \6\ and the 
Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 
(the ``Economic Growth Act'') \7\ resulted in further revisions to our 
exemptions.\8\ As a result, the current exempt offering framework is 
complex and made up of differing requirements and conditions, which may 
be difficult for issuers, who bear the burden of demonstrating the 
availability of any exemption,\9\ to navigate. Smaller companies with 
more limited resources, which may be more likely to need to rely on 
these exemptions given the costs associated with conducting a 
registered offering and becoming a reporting company, may find it 
particularly difficult to manage this complexity.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 77a et seq.
    \2\ See 15 U.S.C. 77b(a)(3) (noting that an offer includes every 
attempt to dispose of a security or interest in a security, for 
value; or any solicitation of an offer to buy a security or interest 
in a security).
    \3\ See, e.g., Commissioner Francis M. Wheat, Disclosure to 
Investors--A Reappraisal of Federal Administrative Policies under 
the '33 and '34 Acts (Mar. 1969) (often referred to as the ``Wheat 
Report'').
    \4\ H.R. Rep. No. 73-85, at 5 (1933).
    \5\ Public Law 112-106, 126 Stat. 306 (2012). The JOBS Act, 
among other things: Directed the Commission to revise 17 CFR 230.506 
(``Rule 506'') to eliminate the prohibition against general 
solicitation or general advertising for offers and sales of 
securities to accredited investors (see Section II.B.2.b); added 
Section 4(a)(6) [15 U.S.C. 77d(a)(6)] and Section 4A [15 U.S.C. 77d-
1(b)] to the Securities Act and directed the Commission to issue 
rules to permit certain crowdfunding offerings (see Section II.F); 
and directed the Commission to expand Regulation A [17 CFR 230.250 
et seq.] (see Section II.C).
    \6\ Public Law 114-94, 129 Stat. 1312 (2015).
    \7\ Public Law 115-174, 132 Stat. 1296 (2018).
    \8\ The FAST Act added Section 4(a)(7) to the Securities Act [15 
U.S.C. 77d(a)(7)], providing a new exemption for private resales of 
securities. See Section V.A.5. Among other changes, the Economic 
Growth Act required the Commission to amend Regulation A to permit 
entities subject to the reporting requirements of Section 13 or 
15(d) of the Exchange Act to use the exemption. See Section II.C.
    \9\ See SEC v. Ralston Purina Co., 346 U.S. 119, 126 (1953) 
(``Keeping in mind the broadly remedial purposes of federal 
securities legislation, imposition of the burden of proof on an 
issuer who would plead the exemption seems to us fair and 
reasonable.'').
---------------------------------------------------------------------------

    Market participants have conveyed concerns about the complexity of 
the exempt offering framework and have recommended that the Commission 
undertake a comprehensive review of the available exemptions.\10\ For 
example, the 2012 Small Business Forum recommended that the Commission 
initiate a top-to-bottom review of the exempt offering landscape to 
ensure a rational regulatory scheme, including providing greater 
guidance regarding integration of the new, as well as existing, 
exemptions from registration.\11\ In addition, the 2018 Small Business 
Forum recommended that the Commission rationalize, harmonize, simplify, 
consolidate, and prioritize the regulatory regime for exempt offerings, 
including communications restrictions, issuer eligibility, size of the 
offering, type of investors, disclosure, and other conditions of 
exemption.\12\
---------------------------------------------------------------------------

    \10\ Given the impact of the JOBS Act on the exempt offering 
framework, generally, this release references comments and 
recommendations provided by various market participants, including 
any relevant recommendations from the advisory committees to the 
Commission and the SEC Government-Business Forums on Small Business 
Capital Formation (each, a ``Small Business Forum''), received since 
the adoption of the JOBS Act in 2012 or, if later, the adoption of 
the relevant rule or the most recent amendment or request for 
comment.
    \11\ See Final Report of the 2012 SEC Government-Business Forum 
on Small Business Capital Formation (Apr. 2013) available at https://www.sec.gov/info/smallbus/gbfor31.pdf (``2012 Forum Report'').
     The Small Business Investment Incentive Act of 1980 directed 
the Commission to conduct an annual government-business forum to 
undertake an ongoing review of the financing problems of small 
businesses. 15 U.S.C. 80c-1. The Small Business Forum has met 
annually since 1982 to provide a platform to highlight perceived 
unnecessary impediments to small business capital formation and 
address whether they can be eliminated or reduced. Each forum seeks 
to develop recommendations for government and private action to 
improve the environment for small business capital formation, 
consistent with other public policy goals, including investor 
protection. Information about the Small Business Forum is available 
at https://www.sec.gov/corpfin/infosmallbussbforum-2shtml.
    \12\ See Final Report of the 2018 SEC Government-Business Forum 
on Small Business Capital Formation (Jun. 2019) available at https://www.sec.gov/info/smallbus/gbfor37.pdf (``2018 Forum Report'').
---------------------------------------------------------------------------

    In this concept release, we undertake a broad review of available 
exemptions to the registration requirements of the federal securities 
laws that facilitate capital raising and seek input in order to assess 
whether our exempt offering framework, as a whole, is consistent, 
accessible, and effective for both issuers and investors or whether we 
should consider changes to simplify, improve, or harmonize the exempt 
offering framework. In this regard, we seek to explore whether 
overlapping exemptions may create confusion for issuers trying to 
determine and navigate the most efficient path to raise capital. At the 
same time, we seek to identify gaps in our framework that may make it 
difficult, especially for smaller issuers, to rely on an exemption from 
registration to raise capital at key stages of their business cycle. We 
also consider whether the limitations on who can invest in certain 
exempt offerings, or the amount they can invest, provide an appropriate 
level of investor protection (i.e., whether the current levels of 
investor protection are insufficient, appropriate, or excessive) or 
pose an undue obstacle to capital formation or investor access to 
investment opportunities. For example, we explore whether we should 
revise our investor eligibility limitations to focus more particularly 
on the sophistication of the investor, the amount of the investment, or 
other criteria rather than just the income or wealth of the individual 
investor. In addition, this release looks at whether we can and should 
do more to allow issuers to transition from one exempt offering to 
another and, ultimately, to a registered public offering, if desired, 
without undue friction or delay. We also examine whether we should take 
steps to expand issuers' ability to raise capital through pooled 
investment funds, and whether retail investors should be allowed 
greater exposure to growth-stage issuers through pooled investment 
funds in light of the potential advantages of investing through such 
funds, including the ability to have an interest in a diversified 
portfolio. Finally, we look at secondary trading of securities 
initially issued in exempt offerings and consider whether we should 
revise our rules governing exemptions for resales of securities to 
facilitate capital formation and to promote investor protection by 
improving secondary market liquidity.
    Each section of this release can be read, and commented on, 
independently. We welcome all feedback and encourage interested parties 
to submit comments on any or all topics of interest and to respond to 
one, multiple, or all questions asked in this release. In responding to 
comments, it would be most helpful if commenters provide an explanation 
why we should or should not take a particular action or approach, as 
appropriate.

II. Current Exempt Offering Framework

    The Securities Act contains a number of exemptions to its 
registration requirements and authorizes the Commission to adopt 
additional exemptions. Section 3 of the Securities Act generally 
identifies certain classes of securities that are exempt from the 
registration requirements of the Securities Act.\13\ Most of these 
exemptions are based on characteristics of the securities themselves, 
though some exempted securities are identified based on the transaction 
in which they are offered or sold.\14\ Section 4 of the

[[Page 30462]]

Securities Act identifies a number of transactions that are exempt from 
the registration requirements.\15\ In addition, Section 28 of the 
Securities Act, which was added by the National Securities Markets 
Improvement Act of 1996 (``NSMIA''),\16\ authorizes the Commission to 
exempt other persons, securities, or transactions to the extent 
``necessary or appropriate in the public interest [and] consistent with 
the protection of investors.'' \17\
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 77c.
    \14\ For example, Section 3(b)(1) of the Securities Act 
authorizes the Commission to exempt certain issues of securities 
where the aggregate amount offered does not exceed $5 million to the 
extent that ``the enforcement of this title with respect to such 
securities is not necessary in the public interest and for the 
protection of investors by reason of the small amount involved or 
the limited character of the public offering.'' 15 U.S.C. 77c(b)(1).
    \15\ 15 U.S.C. 77d.
    \16\ Public Law 104-290, 110 Stat. 3416 (Oct. 11, 1996).
    \17\ 15 U.S.C. 77z-3.
---------------------------------------------------------------------------

    The statutory exemptions and those established by the Commission's 
rules and regulations include a variety of requirements, investor 
protections, and other conditions. For example, some exemptions limit 
the amount of securities that may be offered or sold. Some exemptions 
limit the manner in which the offering can be conducted, such as by 
prohibiting the use of general solicitation or general advertising to 
solicit investors. Some offerings are exempt if they restrict sales to 
certain sophisticated or ``accredited'' investors that are presumed to 
possess sufficient financial sophistication and ability to sustain the 
risk of loss of their investment or to fend for themselves to render 
the protections of the Securities Act's registration process 
unnecessary.\18\ In addition, some exemptions specify disclosures 
required to be included in prescribed forms to be filed with the 
Commission or otherwise provided to all or a subset of prospective 
investors. Many exemptions exclude certain types of issuers, such as 
non-U.S. issuers, issuers subject to the reporting requirements of the 
Securities Exchange Act of 1934 (the ``Exchange Act''),\19\ or 
investment companies, or specifically disqualify offerings involving 
certain ``bad actors'' from relying on the exemption.
---------------------------------------------------------------------------

    \18\ See Regulation D Revisions; Exemption for Certain Employee 
Benefit Plans, Release No. 33-6683 (Jan. 16, 1987) [52 FR 3015] (the 
``Regulation D Revisions Proposing Release'').
    \19\ 15 U.S.C. 78a et seq.
---------------------------------------------------------------------------

    Table 1 summarizes some of the characteristics of the most commonly 
used exemptions \20\ from registration.\21\
---------------------------------------------------------------------------

    \20\ Commission rules also provide exemptions for certain 
offerings where the purpose of the offering is other than to raise 
capital. For example, 17 CFR 230.701 (``Rule 701'') exempts certain 
sales of securities made to compensate employees, consultants, and 
advisors. See note 512 for a brief discussion of Rule 701.
    \21\ Generally, Table 1 is organized by typical offering size 
from largest to smallest. Certain regulatory exemptions from 
registration are based on statutory provisions, but provide specific 
frameworks or safe harbors to comply with the statutory exemptions. 
For example, as discussed in more detail in Section II.B.2.a, Rule 
506(b) provides a safe harbor to comply with the exemption under 
Section 4(a)(2) [15 U.S.C. 77d(a)(2)], or, as discussed in Section 
II.E.2, Rule 147 provides a safe harbor under Section 3(a)(11) [15 
U.S.C. 77c(a)(11)]. An issuer may choose not to avail itself of one 
of these specific regulatory exemptions and instead conduct an 
offering pursuant to the statutory exemption itself, such as Section 
4(a)(2), following principles-based requirements that have been 
developed over time.
    \22\ 346 U.S. 119, 126 (1953).
    \23\ Regulation D [17 CFR 230.501 et seq.] relates to 
transactions exempted from the registration requirements of Section 
5 of the Securities Act under 17 CFR 230.504 (``Rule 504''), Rule 
506(b) and Rule 506(c). Rule 504 provides an exemption for the 
public offer and sale of up to $5 million of securities in a 12-
month period. General solicitation and general advertising are 
permitted if the offering is registered in a state requiring the use 
of a substantive disclosure document or sold exclusively to 
accredited investors under a corresponding state exemption. See 
Section II.D for a discussion of Rule 504.
    \24\ While it is not a filing requirement, offerings relying on 
Rule 506(b) require additional information to be provided to non-
accredited investors purchasing in the offering.
    \25\ While the exemptions identified here as excluding blank 
check companies do not use the term ``blank check company,'' they 
exclude development stage issuers 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, which is substantially similar to the definition of blank 
check company in Securities Act Rule 419, used elsewhere in 
Commission rules. See 17 CFR 230.419.

                                                     Table 1--Overview of Capital-Raising Exemptions
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                Offering limit                                                                                           Preemption of
       Type of offering         within 12-month      General           Issuer          Investor        SEC filing    Restrictions on  state registration
                                    period         solicitation     requirements     requirements     requirements        resale       and qualification
--------------------------------------------------------------------------------------------------------------------------------------------------------
Section 4(a)(2)..............  None............  No.............  None...........  Transactions by  None...........  Yes. Restricted  No.
                                                                                    an issuer not                     securities.
                                                                                    involving any
                                                                                    public
                                                                                    offering. See
                                                                                    SEC v. Ralston
                                                                                    Purina Co.\22\
Rule 506(b) of Regulation D    None............  No.............  ``Bad actor''    Unlimited        Form D \24\....  Yes. Restricted  Yes.
 \23\.                                                             disqualificati   accredited                        securities.
                                                                   ons apply.       investors. Up
                                                                                    to 35
                                                                                    sophisticated
                                                                                    but non-
                                                                                    accredited
                                                                                    investors.
Rule 506(c) of Regulation D..  None............  Yes............  ``Bad actor''    Unlimited        Form D.........  Yes. Restricted  Yes.
                                                                   disqualificati   accredited                        securities.
                                                                   ons apply.       investors;
                                                                                    Issuer must
                                                                                    take
                                                                                    reasonable
                                                                                    steps to
                                                                                    verify that
                                                                                    all purchasers
                                                                                    are accredited
                                                                                    investors.
Regulation A: Tier 1.........  $20 million.....  Permitted;       U.S. or          None...........  Form 1-A,        No.............  No.
                                                  before           Canadian                          including two
                                                  qualification,   issuers.                          years of
                                                  testing the      Excludes blank                    financial
                                                  waters           check                             statements.
                                                  permitted        companies,\25\                    Exit report.
                                                  before and       registered
                                                  after the        investment
                                                  offering         companies,
                                                  statement is     business
                                                  filed.           development
                                                                   companies,
                                                                   issuers of
                                                                   certain
                                                                   securities,
                                                                   and certain
                                                                   issuers
                                                                   subject to a
                                                                   Section 12(j)
                                                                   order. ``Bad
                                                                   actor''
                                                                   disqualificati
                                                                   ons apply. No
                                                                   asset-backed
                                                                   securities.
Regulation A: Tier 2.........  $50 million.....  ...............  ...............  Non-accredited   Form 1-A,        No.............  Yes.
                                                                                    investors are    including two
                                                                                    subject to       years of
                                                                                    investment       audited
                                                                                    limits based     financial
                                                                                    on annual        statements.
                                                                                    income and net   Annual, semi-
                                                                                    worth, unless    annual,
                                                                                    securities       current, and
                                                                                    will be listed   exit reports.
                                                                                    on a national
                                                                                    securities
                                                                                    exchange.

[[Page 30463]]

 
Rule 504 of Regulation D.....  $5 million......  Permitted in     Excludes blank   None...........  Form D.........  Yes. Restricted  No.
                                                  limited          check                                              securities
                                                  circumstances.   companies,                                         except in
                                                                   Exchange Act                                       limited
                                                                   reporting                                          circumstances.
                                                                   companies, and
                                                                   investment
                                                                   companies.
                                                                   ``Bad actor''
                                                                   disqualificati
                                                                   ons apply.
Intrastate: Section 3(a)(11).  No federal limit  Offerees must    In-state         Offerees and     None...........  Securities must  No.
                                (generally,       be in-state      residents        purchasers                        come to rest
                                individual        residents.       ``doing          must be in-                       with in-state
                                state limits                       business'' and   state                             residents.
                                between $1 and                     incorporated     residents.
                                $5 million).                       in-state;
                                                                   excludes
                                                                   registered
                                                                   investment
                                                                   companies.
Intrastate: Rule 147.........  No federal limit  Offerees must    In-state         Offerees and     None...........  Yes. Resales     No.
                                (generally,       be in-state      residents        purchasers                        must be within
                                individual        residents.       ``doing          must be in-                       state for six
                                state limits                       business'' and   state                             months.
                                between $1 and                     incorporated     residents.
                                $5 million).                       in-state;
                                                                   excludes
                                                                   registered
                                                                   investment
                                                                   companies.
Intrastate: Rule 147A........  No federal limit  Yes............  In-state         Purchasers must  None...........  Yes. Resales     No.
                                (generally,                        residents and    be in-state                       must be within
                                individual                         ``doing          residents.                        state for six
                                state limits                       business'' in-                                     months.
                                between $1 and                     state;
                                $5 million).                       excludes
                                                                   registered
                                                                   investment
                                                                   companies.
Regulation Crowdfunding;       $1.07 million...  Permitted with   Excludes non-    Investment       Form C,          12-month resale  Yes.
 Section 4(a)(6).                                 limits on        U.S. issuers,    limits based     including two    limitations.
                                                  advertising      blank check      on annual        years of
                                                  after Form C     companies,       income and net   financial
                                                  is filed.        Exchange Act     worth.           statements
                                                  Offering must    reporting                         that are
                                                  be conducted     companies, and                    certified,
                                                  on an internet   investment                        reviewed or
                                                  platform         companies.                        audited, as
                                                  through a        ``Bad actor''                     required.
                                                  registered       disqualificati                    Progress and
                                                  intermediary.    ons apply.                        annual reports.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    As Table 1 illustrates, the current exemptions impose a variety of 
conditions designed to protect investors. Exemptions tend to 
incorporate more investor protection measures where non-accredited or 
less sophisticated investors are permitted to participate in the 
offering. This focus on the characteristics of the investors involved 
in a particular offering is articulated in the context of the Section 
4(a)(2) exemption in the leading case interpreting that provision, SEC 
v. Ralston Purina.\26\ In that case, the Supreme Court set forth the 
position that the availability of the Section 4(a)(2) exemption 
``should turn on whether the particular class of persons affected needs 
the protection of the Act. An offering to those who are shown to be 
able to fend for themselves is a transaction `not involving any public 
offering.' '' \27\ The emphasis on the characteristics of the investors 
extends throughout the current exempt offering framework, in which the 
fewest conditions apply to an offering under an exemption where sales 
are restricted to accredited investors, while offerings that permit 
less wealthy or sophisticated investors to participate are subject to 
an assortment of disclosure requirements, offering and investment 
limits, and other conditions meant to mitigate the risk of not having 
the traditional protections of registration under the Securities Act.
---------------------------------------------------------------------------

    \26\ 346 U.S. 119 (1953).
    \27\ Id. at 125.
---------------------------------------------------------------------------

    As discussed below, we seek comment on how an investor's 
characteristics should be considered in determining whether an investor 
is able to participate in a particular type of exempt offering. In 
addition, we seek comment throughout this concept release on specific 
conditions of each of the current capital-raising exemptions from 
registration and whether the investment protections of those exemptions 
are appropriately structured to encourage capital formation, while 
mitigating the risk of not having the traditional investor protections 
of registration.
    We also seek input on the framework as a whole, in light of the 
many changes implemented over the years. The current exemptions were 
not adopted as part of one cohesive regulatory scheme but rather 
developed and evolved over time through Commission rules and 
legislative changes. In addition to the JOBS Act and the adoption over 
time of each of the exemptions from registration discussed in this 
concept release, the evolution of the existing framework and exempt 
offering market has been significantly affected by other legislative 
developments over the years. For example, as noted above, NSMIA added 
Section 28 to the Securities Act, providing the Commission with 
significant flexibility to tailor the exempt offering framework by 
giving the Commission authority to exempt persons, securities, and 
transactions, or classes thereof, from the Securities Act. NSMIA also 
preempted the state registration and review of transactions involving 
``covered securities'' and amended Section 18 of the Securities Act to 
establish classes of covered securities, including securities offered 
or sold to ``qualified purchasers.'' \28\ The authority granted to the 
Commission under Section 18(b)(3) to adopt rules that define a 
``qualified purchaser'' is another significant source of flexibility 
for the Commission with respect to the exempt offering framework.\29\
---------------------------------------------------------------------------

    \28\ Public Law 104-290, 110 Stat. 3416 (Oct. 11, 1996).
    \29\ In 2015, the Commission used this authority to define 
``qualified purchaser'' to include any person to whom securities are 
offered or sold in a Regulation A Tier 2 offering. See 17 CFR 
230.256.
    In 2001, the Commission proposed a definition of ``qualified 
purchaser'' that mirrored the definition of accredited investor in 
Regulation D in an effort to identify well-established categories of 
persons it had previously determined to be financially sophisticated 
and therefore not in need of the protection of state registration 
when they were offered or sold securities. The Commission intended 
the definition to facilitate capital formation, especially for small 
businesses, to impose uniformity in the regulation of transactions 
to these financially sophisticated persons, and to reduce burdens on 
capital formation. See Defining the Term ``Qualified Purchaser'' 
under the Securities Act of 1933, Release No. 33-8041 (Dec. 19, 
2001) [66 FR 66839 (Dec. 27, 2001)]. Although the Commission 
solicited comment from interested parties, it took no further action 
on the proposal.
---------------------------------------------------------------------------

    Over time, Congress and the Commission have made changes to the 
federal securities laws and Commission

[[Page 30464]]

rules that may enable issuers to remain private longer than in the 
past. For example, the JOBS Act and the FAST Act revised the thresholds 
for registration under Section 12(g) of the Exchange Act, with the 
result that an issuer that is not a bank, bank holding company, or 
savings and loan holding company is required to register a class of 
equity securities under the Exchange Act if it has more than $10 
million of total assets and the securities are ``held of record'' by 
either 2,000 persons or 500 persons who are not accredited 
investors.\30\
---------------------------------------------------------------------------

    \30\ 15 U.S.C. 78l(g)(1); 17 CFR 240.12g-1. An issuer that is a 
bank, bank holding company, or savings and loan holding company is 
required to register a class of equity securities if it has more 
than $10 million of total assets and the securities are ``held of 
record'' by 2,000 or more persons. Prior to the JOBS Act, Section 
12(g) of the Exchange Act required an issuer to register a class of 
its equity securities if, at the end of the issuer's fiscal year, 
the securities were ``held of record'' by 500 or more persons and 
the issuer had total assets exceeding $1 million.
     Securities are deemed to be ``held of record'' by each person 
identified as the owner of such securities on the records maintained 
by or on behalf of the issuer, subject to certain conditions and 
exceptions. See 17 CFR 240.12g5-1.
    For securities issued in an offering under Regulation A, 
Regulation Crowdfunding [17 CFR 230.227 et seq.], or Rule 701, there 
is a conditional exemption from the mandatory registration 
provisions of Section 12(g) if certain conditions are met. See 
Sections II.C.1.d and II.F.1.g. See also 17 CFR 240.12h-1.
---------------------------------------------------------------------------

    The Commission also has taken steps to address uncertainties with 
respect to the integration of one exempt offering with another exempt 
offering or with a registered offering, as discussed in detail in 
Section III below, by providing some guidance to issuers as to their 
ability to transition from one offering to another.
    The exempt markets have also been affected by Commission rule 
changes and market developments that provide for some measure of 
liquidity for securities in exempt offerings. Secondary market 
liquidity is a key concern of investors and may have a significant 
impact on an issuer's choices with respect to capital raising. In other 
words, an investor's willingness to participate in an exempt offering 
and the price he or she would be willing to pay may depend on the 
investor's assessment of whether, when, and on what terms the security 
can be resold. With regard to secondary market resales of securities 
initially sold pursuant to an exemption from registration, the 
Commission adopted 17 CFR 230.144 (``Rule 144'') in 1972, providing a 
non-exclusive safe harbor for resales of securities acquired in 
transactions not involving a public offering.\31\ In 1990, the 
Commission created a safe harbor for resales of securities by persons 
other than issuers to ``qualified institutional buyers'' (``QIBs'') in 
17 CFR 230.144A (``Rule 144A'').\32\ In 2015, the FAST Act added 
Section 4(a)(7) to the Securities Act, which exempts certain private 
resales of securities to accredited investors.\33\ Further, in recent 
years, markets have developed that facilitate the resale of securities 
of non-reporting companies.\34\ However, resales of securities 
originally purchased in a transaction exempt from registration raise a 
variety of issues, including whether the primary and secondary sales 
should be considered part of the same distribution of securities and 
whether secondary sales have an impact on the availability of the 
exemption from registration relied on for the primary offering.\35\ 
While the primary focus in this concept release is on the harmonization 
of the exemptions from registration for primary offerings, we also seek 
public input on whether we should consider rule changes that in certain 
cases would allow for more or less flexibility with regard to 
resales.\36\
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    \31\ See Release No. 33-5223 (Jan. 11, 1972) [37 FR 591] (``Rule 
144 Adopting Release''). For a discussion of Rule 144, see Section 
V.A.1.
    \32\ See Resale of Restricted Securities; Changes to Method of 
Determining Holding Period of Restricted Securities under Rules 144 
and 145, Release No. 33-6862 (Apr. 23, 1990) [55 FR 17933 (Apr. 30, 
1990)] (``Rule 144A Adopting Release''). For a discussion of Rule 
144A, see Section V.A.2.
    \33\ Public Law 114-94, 129 Stat. 1312 (2015). See Section 
V.A.5.
    \34\ See, e.g., David F. Larcker, Brian Tayan, and Edward Watts, 
Cashing it in: Private-Company Exchanges and Employee Stock Sales 
Prior to IPO, Stanford Closer Look Series (Sep. 12, 2018).
    \35\ Persons reselling securities must consider whether they 
could be an ``underwriter'' if they acquired the securities with a 
view to ``distribution'' or if they are participating in a 
``distribution.'' See Section 2(a)(11) of the Securities Act [15 
U.S.C. 77b(a)(11)] (defining the term ``underwriter''). The Section 
4(a)(1) [15 U.S.C. 77d(a)(1)] exemption, discussed in Section IV, is 
not available to a seller that is deemed to be an underwriter, and 
the resale by such an underwriter may be considered part of the 
primary offering by the issuer of the securities, calling into 
question the availability of the exemption for the original 
offering.
    \36\ See Section IV.
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    Separate and apart from these regulatory changes, the exempt 
markets have been influenced by changes over the years in information 
and communications technologies. Given the rise of social media and 
other forms of communication, as well as online trading platforms for 
unregistered securities, information about exempt securities offerings 
is far more readily available to potential investors and to the general 
public and at a lower cost than at the time many of the exemptions were 
promulgated.

[[Page 30465]]

    As the regulatory and operational framework for exempt offerings 
has evolved, the amount raised in exempt markets has increased both 
absolutely and relative to the public registered markets. In 2018, 
registered offerings accounted for $1.4 trillion of new capital 
compared to approximately $2.9 trillion that we estimate was raised 
through exempt offering channels.\37\
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    \37\ Unless otherwise indicated, information in this release on 
Regulation D offerings, including offerings under Rule 504 and Rule 
506, is based on analysis by staff in the Commission's Division of 
Economic Risk and Analysis (``DERA'') of data collected from Form D 
[17 CFR 239.500] filings on the Commission's Electronic Data 
Gathering, Analysis and Retrieval system (``EDGAR'') from January 
2009 through December 2018. DERA staff determined the amount raised 
based on the amounts reported as ``Total amount sold'' in all Form D 
filings (new filings and amendments) on EDGAR. Subsequent amendments 
to a new filing were treated as incremental fundraising and recorded 
in the calendar year in which the amendment was filed. It is likely 
that the reported data on Regulation D offerings underestimates the 
actual amount raised through these offerings. First, as discussed in 
Section II.B.2, 17 CFR 230.503 (``Rule 503'') of Regulation D 
requires issuers to file a Form D no later than 15 days after the 
first sale of securities, but a failure to file the notice does not 
invalidate the exemption. Accordingly, it is possible that some 
issuers do not file Forms D for offerings relying on Regulation D. 
Second, underreporting could also occur because a Form D may be 
filed prior to completion of the offering, and our rules do not 
require issuers to amend a Form D to report the total amount sold on 
completion of the offering or to reflect additional amounts offered 
if the aggregate offering amount does not exceed the original 
offering size by more than 10%.
    Data on Regulation A offerings was collected from Form 1-Z [17 
CFR 239.94] and 1-K [17 CFR 239.91] filings on EDGAR from May 2015 
through December 2018. DERA staff supplemented information from 
Forms 1-Z and 1-K by manually reviewing semi-annual reports on Form 
1-SA [17 CFR 239.92], available current reports on Form 1-U [17 CFR 
239.93], and offering circular supplements filed during the sample 
period, and for issuers whose securities have become exchange-
listed, information from other public sources. However, data on 
amounts raised may remain incomplete, and discrepancies in 
classification may arise. Estimates are based on available reports 
filed during this period and represent a lower bound on the amounts 
raised given: (1) The time frames for reporting proceeds following 
completed or terminated offerings; and (2) that offerings qualified 
during the report period may be ongoing. As discussed in Section 
II.C.2.b, Regulation A requires issuers in Tier 1 offerings to 
report sales and to update certain issuer information by filing a 
Form 1-Z exit report with the Commission not later than 30 calendar 
days after termination or completion of an offering. Tier 2 issuers 
are required to report sales in their first annual report on Form 1-
K after termination or completion of a qualified offering, or in 
their exit report on Form 1-Z. Therefore, some issuers that have 
completed offerings during the sample period might not have reported 
proceeds during this period. Accordingly, amounts provided for these 
offerings likely underestimate the actual amount of capital raised 
during the period.
    Data on Regulation Crowdfunding offerings was collected from 
Form C [17 CFR 239.900] filings on EDGAR from May 2015 through 
December 2018. For offerings that have been amended, the data 
reflects information reported in the latest amendment as of the end 
of the considered period. As discussed in Section II.F, Regulation 
Crowdfunding requires an issuer to file a progress update on Form C-
U within 5 business days after reaching 100% of its target offering 
amount. The data on Regulation Crowdfunding excludes 107 withdrawn 
offerings (involving a Form C-W filing or an intermediary that has 
withdrawn its registration as of the report date). Some withdrawn 
offerings may be failed offerings. Amounts raised may be lower than 
the target or maximum amounts sought.
    See note 41 for a discussion of the data on other exempt 
offerings, which includes Section 4(a)(2), Regulation S [17 CFR 
230.901 et seq.], and Rule 144A offerings.
    See also Scott Bauguess, Rachita Gullapalli and Vladimir Ivanov, 
Capital Raising in the U.S.: An Analysis of the Market for 
Unregistered Securities Offerings, 2009-2017 (Aug. 2018) (the 
``Unregistered Offerings White Paper''), available at https://www.sec.gov/files/DERA%20white%20paper_Regulation%20D_082018.pdf. 
The methodology DERA staff used to analyze data in this release is 
consistent with the methodology described in more detail in the 
Unregistered Offerings White Paper.
    We do not have data available on, and are unable to estimate, 
amounts raised under the intrastate exemptions under Securities Act 
Section 3(a)(11) or Rule 147 or 147A. See Section 70.
---------------------------------------------------------------------------

    Figure 1 shows registered and exempt offerings over the period 
2009-2018.\38\ The data shows that exempt offerings have accounted for 
significantly larger amounts of new capital compared to registered 
offerings during the period under consideration. Both markets exhibit 
an upward trend, which is consistent with the favorable macroeconomic 
environment during this period. Although the magnitudes of exempt 
capital and registered capital raised vary over time, the amount 
reported raised in exempt offerings is always larger than the amount 
raised in registered offerings during this time period.
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    \38\ The sample period begins in 2009 due to data availability: 
Form D, from which we obtain data on exempt offerings under 
Regulation D, was required to be filed electronically starting in 
2009. We note that, as a result, the sample period excludes the 
years of the 2007-2008 financial crisis. The sample period ends in 
2018, which is the last full year of data on offerings.
[GRAPHIC] [TIFF OMITTED] TP26JN19.000


[[Page 30466]]


    Of the approximately $2.9 trillion estimated as raised in exempt 
offerings in 2018, Table 2 shows the amounts that we estimate were 
raised under each of the identified exemptions in 2018.

    Table 2--Overview of Amounts Raised in the Exempt Market in 2018
------------------------------------------------------------------------
                                                              Amounts
                                                            reported or
                        Exemption                          estimated as
                                                          raised in 2018
                                                             (billion)
------------------------------------------------------------------------
Rule 506(b) of Regulation D.............................          $1,500
Rule 506(c) of Regulation D.............................             211
Regulation A: Tier 1....................................      \39\ 0.061
Regulation A: Tier 2....................................      \40\ 0.675
Rule 504 of Regulation D................................               2
Regulation Crowdfunding; Section 4(a)(6)................           0.055
Other exempt offerings \41\.............................           1,200
------------------------------------------------------------------------

    The amounts estimated as raised in other exempt offerings include 
estimated amounts raised in offerings under Rule 144A and Regulation S. 
Rule 144A is a non-exclusive safe harbor for resales of certain 
restricted securities. However, Rule 144A is typically used by market 
participants to facilitate capital raising by issuers by means of a 
two-step process in which the first step is a primary offering on an 
exempt basis to one or more financial intermediaries, and the second 
step is a resale to QIBs in reliance on Rule 144A.\42\ Regulation S 
provides a safe harbor for offers and sales of securities outside the 
United States so long as the securities are sold in an offshore 
transaction and there are no ``directed selling efforts'' in the United 
States.\43\ Although Rule 144A and Regulation S transactions account 
for a significant proportion of the transaction activity in the exempt 
markets, we have opted to focus this concept release on other commonly 
used safe harbors and exemptions from registration for primary 
offerings.
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    \39\ See Table 8.
    \40\ See id.
    \41\ ``Other exempt offerings'' includes Section 4(a)(2), 
Regulation S, and Rule 144A offerings. The data used to estimate the 
amounts raised in 2018 for other exempt offerings includes: 
Offerings under Section 4(a)(2) of the Securities Act that were 
collected from Thomson Financial's SDC Platinum, which uses 
information from underwriters, issuer websites, and issuer SEC 
filings to compile its Private Issues database; offerings under 
Regulation S that were collected from Thomson Financial's SDC 
Platinum service; and resale offerings under Rule 144A that were 
collected from Thomson Financial SDC New Issues database, Dealogic, 
the Mergent database, and the Asset[hyphen]Backed Alert and 
Commercial Mortgage Alert publications, to further estimate the 
exempt offerings under Section 4(a)(2) and Regulation S. We include 
amounts sold in Rule 144A resale offerings because, as discussed 
below, those securities are typically issued initially in a 
transaction under Section 4(a)(2) or Regulation S but generally are 
not included in the Section 4(a)(2) or Regulation S data identified 
above. See Section V.A.2 for a discussion of the two-step process 
typically used by market participants in Rule 144A offerings.
    These numbers are accurate only to the extent that these 
databases are able to collect such information and may understate 
the actual amount of capital raised under these offerings if issuers 
and underwriters do not make this data available.
    \42\ See Section V.A.2.
    \43\ 17 CFR 230.901 et seq.
---------------------------------------------------------------------------

    Figures 2 and 3 show the trends in capital raising under various 
offering exemptions during the period 2009-2018. The amounts raised in 
Rule 506(b), Rule 506(c), other exempt offerings, Regulation A, and 
Regulation Crowdfunding show an upward trend over the period under 
consideration, while the amounts raised in Rule 504 offerings have 
fluctuated significantly; however, as discussed in Section D.3, we 
believe that the increase in Rule 504 offerings starting in 2016 is 
largely due to the repeal of 17 CFR 230.505 (``Rule 505'').
[GRAPHIC] [TIFF OMITTED] TP26JN19.001


[[Page 30467]]


[GRAPHIC] [TIFF OMITTED] TP26JN19.002

    There are many possible reasons why the amount of capital raised in 
exempt offerings exceeds the amount raised in registered offerings. 
However, the focus of this concept release is to seek input on whether, 
in light of the increased activity in the exempt markets, the current 
exempt offering framework is working effectively to provide access to 
capital for a variety of issuers, particularly smaller issuers, and 
access to investment opportunities for a variety of investors while 
maintaining investor protections. Historically, a retail investor's 
primary investment option was registered offerings, and encouraging 
registered offerings and facilitating investor access to such 
investment opportunities continues to be a Commission priority, as 
demonstrated by recent rule changes, proposals, guidance, and other 
initiatives facilitating capital raising through registered 
offerings.\45\ However, many issuers, including early-stage and smaller 
issuers, may find that they need alternative access to capital in order 
to build their businesses and grow to become public reporting 
companies. For such issuers, an exempt offering market that allows for 
efficient access to capital may make it more likely that they achieve 
this growth.
---------------------------------------------------------------------------

    \44\ Due to data limitations, Regulation A totals reflect 
amounts reported raised annually under Regulation A after the 2015 
amendments.
    \45\ See, e.g., Solicitations of Interest Prior to a Registered 
Public Offering, Release No. 33-10607 (Feb. 19, 2019) [84 FR 6713 
(Feb. 28, 2019)]; Disclosure Update and Simplification, Release No. 
33-10532 (Aug. 17, 2018) [83 FR 50148 (Oct. 4, 2018)]; Amendments to 
Smaller Reporting Company Definition, Release No. 33-10513 (Jun. 28, 
2018) [83 FR 31992 (Jul. 10, 2018)]; FAST Act Modernization and 
Simplification of Regulation S-K, Release No. 33-10618 (Mar. 20, 
2019) [84 FR 12674 (Apr. 2, 2019)]. See also Division of Corporation 
Finance, Draft Registration Statement Processing Procedures Expanded 
(Jun. 29, 2017; supplemented Aug. 17, 2017), available at https://www.sec.gov/corpfin/announcement/draft-registration-statement-processing-procedures-expanded.
---------------------------------------------------------------------------

    In addition, it may be argued that the increased amount raised in 
exempt offerings relative to registered offerings leaves certain types 
of investors with fewer investment opportunities than might have been 
available to them if the public markets were used more frequently. The 
current framework permits non-accredited investors some limited access 
to unregistered offerings. Based on available data,\46\ non-accredited 
investors participate primarily \47\ in offerings under Regulation 
A,\48\ Rule 504, and Regulation Crowdfunding.\49\ In 2018, however, 
aggregate investments in exempt offerings in which non-accredited 
investors participated \50\ represented less than one percent of 
investment in all exempt offerings, and approximately two percent of 
all exempt offerings, excluding other exempt offerings.\51\
---------------------------------------------------------------------------

    \46\ We do not have data on, and are unable to estimate, amounts 
raised under the intrastate exemptions under Securities Act Section 
3(a)(11) or Rule 147 or 147A. See Section 70.
    \47\ While Rule 506(b) offerings can have up to 35 non-
accredited but sophisticated investors, issuers reported non-
accredited investors as participating in only six percent of Rule 
506(b) offerings in each of 2015, 2016, 2017, and 2018, which 
offerings reported raising between two and three percent of the 
total capital raised under Rule 506(b) in each of 2015, 2016, 2017, 
and 2018. See Unregistered Offerings White Paper at Table 12. See 
also Sections II.B.2 and II.B.2.f for a discussion of the 
requirements for Rules 506(b) and 506(c).
    \48\ 17 CFR 230.251 et seq.
    \49\ 17 CFR 227.100 et seq.
    \50\ This data includes offerings under Rule 506(b) but is 
limited to those offerings where issuers reported one or more 
participating non-accredited investor.
    \51\ See note 41 for a discussion of the data on other exempt 
offerings.
---------------------------------------------------------------------------

    A significant number of attractive investment opportunities in the 
exempt market, including access to many growth-stage issuers, may be 
available only to investors with certain characteristics, such as 
accredited investors who, if natural persons, must meet an income or 
net worth test. For example, the amount of capital raised in Rule 
506(b) offerings to accredited investors is greater than amounts raised 
in registered offerings, and significantly greater than the amounts 
raised in the types of exempt offerings that are more broadly 
accessible to non-accredited investors.\52\ Accordingly, while a non-
accredited investor may be able to invest in multiple offerings across 
the exempt market, such an investor would likely not have the same 
level of access to the full range of investment opportunities in the 
exempt market as an accredited investor would. We seek comment below on 
whether it would be consistent with capital formation and investor 
protection for us to consider steps to make a broader range of 
investment opportunities available to

[[Page 30468]]

those investors currently considered non-accredited.
---------------------------------------------------------------------------

    \52\ See Section II.B.2.f.
---------------------------------------------------------------------------

    All securities offerings are (1) registered with the Commission, 
(2) exempt from registration, or (3) conducted in violation of the 
federal securities laws as a result of a failure to register when an 
exemption is not available. The distinction between fraudulent exempt 
offerings and illegal offerings as a result of a failure to register is 
an important one. A failure to comply with the registration provisions 
of Section 5 of the Securities Act is distinct from a violation of the 
antifraud provisions of the federal securities laws. Due to data 
limitations, it is difficult to draw rigorous conclusions about the 
extent of fraud in exempt securities offerings. Accordingly, we seek 
data about fraudulent activity in the exempt markets. In particular, we 
seek quantitative data on fraudulent activity in the context of 
securities offerings conducted pursuant to a valid exemption from 
registration, as opposed to illegal securities offerings that fail to 
comply with the registration provisions of Section 5. Such data may 
assist us in considering the incidence of fraud in these markets.
    Due to data limitations, it is also difficult to draw rigorous 
conclusions about the average magnitude of investor gains and losses in 
exempt securities offerings.\53\ Accordingly, we also seek data about 
the performance of investments in exempt markets. We also seek public 
input on the review of the exempt offering framework as a whole, and 
whether and how to best achieve our goal of improving and harmonizing 
the framework. Because the responses to the following requests for 
comment may overlap with responses to the more specific requests for 
comment elsewhere in this release, commenters may wish to consider 
these broader themes in the context of their responses to those more 
specific requests for comment.
---------------------------------------------------------------------------

    \53\ It is difficult to perform a comprehensive market-wide 
analysis of investor gains and losses in exempt offerings given the 
significant limitations on the availability of data about the 
performance of these investments. Where partial data is available 
for some types of investments in exempt offerings, it does not lend 
itself to a comprehensive estimate of investment performance and 
risks across the entire market of exempt offerings. A typical 
startup issuer may require a long period of time to experience a 
liquidity event or close its business, and we lack comprehensive 
data on such events and associated investor gains and losses. The 
lack of a secondary trading market for many securities issued in 
exempt offerings further limits our ability to examine investor 
gains and losses.
---------------------------------------------------------------------------

Request for Comment

    1. Does the existing exempt offering framework provide appropriate 
options for different types of issuers to raise capital at key stages 
of their business cycle? For example, are there capital-raising needs 
specific to any of the following that are not being met by the current 
exemptions: Small issuers; start-up issuers; issuers in a particular 
industry, such as technology, biotechnology, manufacturing, or consumer 
products; issuers in different geographic regions, including those in 
rural areas or those affected by natural disasters; or issuers led by 
minorities, women, or veterans? What types of changes should we 
consider to address any such gaps in the exempt offering framework? 
Would legislative changes be necessary or beneficial to address any 
such gaps?
    2. Do the existing exemptions from registration appropriately 
address capital formation and investor protection considerations? If 
so, should we retain our current exempt offering framework as it is? 
Are there burdens imposed by the rules that can be lifted while still 
providing adequate investor protection?
    3. Is the existing exempt offering framework too complex? Should we 
reduce or simplify the number of exemptions available? If so, should we 
focus on having a limited number of exemptions based on the amount of 
capital sought (for example, a micro exemption, an exemption for 
offerings up to $75 million, and an unlimited offering exemption)? Or 
should we focus our exemptions on the type of investor allowed to 
participate? Would legislative changes be necessary or beneficial if we 
were to replace the current exempt offering framework with a simpler 
offering framework?
    4. Are the exemptions themselves too complex? Can issuers 
understand their options and effectively choose the one best suited to 
their needs? Do any exemptions present pitfalls for small businesses, 
especially for issuers that may be unfamiliar with the general concepts 
underlying the federal securities laws?
    5. In light of the fact that some exemptions impose limited or no 
restrictions at the time of the offer, should we revise our exemptions 
across the board to focus consistently on investor protections at the 
time of sale rather than at the time of offer? If our exemptions 
focused on investor protections at the time of sale rather than at the 
time of offer, should offers be deregulated altogether? How would that 
affect capital formation in the exempt market and what investor 
protections would be necessary or beneficial in such a framework? Would 
legislative changes be necessary or beneficial if we were to focus on 
the sale of a security, rather than the offer and sale?
    6. What metrics should we consider in evaluating the impact of our 
exemptions on efficiency, competition, capital formation, and investor 
protection? In particular:
     How should we evaluate whether our existing exemptions 
appropriately promote efficiency, competition, and capital formation? 
For example, in evaluating our exempt offering market, should we 
consider whether investors have more opportunities to participate in 
exempt offerings? To appropriately evaluate the market, should we 
consider the cost of capital for a variety of issuers? What other 
indicators should we consider?
     How should we evaluate whether our exemptions provide 
adequate investor protection? For example, is there quantitative data 
available that shows an increased incidence of fraud in particular 
types of exempt offerings or in the exempt market as a whole? If so, 
what are the causes or explanations and what should we do to address 
it? What other factors should we consider in assessing investor 
protection?
    7. How has technology affected an issuer's ability to communicate 
with its potential and current investors? Do our exempt offering rules 
limit an issuer's ability to provide disclosure promptly to its 
potential and current investors? Are there technologies or means of 
communication (e.g., online chat or message boards) that would 
effectively provide updated disclosure to potential and current 
investors that are currently not being used due to provisions in our 
rules or regulations? If so, what rules are limiting this disclosure 
and what changes should we consider? Given the transformation of 
information dissemination that has occurred since our rules were 
adopted and particularly over the last two decades, should we consider 
any rule changes to enhance an issuer's ability to communicate with 
investors throughout the exempt offering framework? How would such 
changes affect capital formation in the exempt market and what investor 
protections would be necessary or beneficial in such a framework? Would 
legislative changes be necessary or beneficial to make such changes?
    8. Are there rule changes we should consider to ease issuers' 
transition from one exempt offering to another as their businesses 
develop and grow?
    9. Would rule changes that simplify, harmonize, and improve the 
exempt offering framework have an effect on the registered public 
markets? For example, would a more streamlined exempt market encourage 
more issuers to

[[Page 30469]]

remain private longer or forgo registered offerings, and result in less 
capital being raised in the registered market over time? Are there 
changes to the current exempt offering framework that we should 
consider to help issuers transition to a registered public offering 
without undue friction or delay? Are there changes to the exempt 
offering framework that we should consider to encourage more issuers to 
enter the registered public markets? Would these changes increase the 
costs to issuers? Would these changes benefit investors or particular 
classes of investors? Would legislative changes be necessary or 
beneficial to address any such changes?
    10. Which conditions or requirements are most or least effective at 
protecting investors in exempt offerings? Are there changes to these 
investor protections or additional measures we should implement to 
provide more effective investor protection in exempt offerings? Are 
there investor protection conditions that we should eliminate or modify 
because they are ineffective or unnecessary? Would legislative changes 
be necessary or beneficial to address any changes to investor 
protection conditions?
    11. In light of the increased amount of capital raised through the 
exempt offering framework, should we consider rule changes that will 
help make exempt offerings more accessible to a broader group of retail 
investors than those who currently qualify as accredited investors? If 
so, what types of changes should we consider? For example, should we 
expand the definition of accredited investor to take into account 
characteristics other than an individual's wealth? Should we allow 
investors, after receiving disclosure about the risks, to opt into 
accredited status? Should we amend the existing exemptions or adopt new 
exemptions to accommodate some form of non-accredited investor 
participation such that these exemptions may be more attractive to, or 
more widely used by, issuers?
    12. When the current exemptions from registration include offering 
limits or limits on the amount an individual investor may invest, what 
should we take into account to determine whether the limits and amounts 
are appropriate? Should the amounts of all offering limits or 
investment limits be subject to periodic inflation adjustments? If so, 
what inflation measure should we use for such adjustments and how often 
should the adjustments occur? Should we use dollar limits, or some 
other measure? For example, should individual investment limits be 
based on a percentage of the investor's income or investment portfolio? 
Do these limits impose any particular challenges, for example, by 
having different effects in different parts of the country due to 
regional differences? \54\ Should any investors be limited in how much 
they can invest?
---------------------------------------------------------------------------

    \54\ See, e.g., Table 4.
---------------------------------------------------------------------------

    13. Many of the existing exemptions from registration require 
issuers to provide specified disclosure to investors at the time of the 
offering and, in some cases, on an ongoing basis following the 
offering. The type of information required to be provided, and the 
frequency with which the disclosures are required, vary from exemption 
to exemption. Should we harmonize the disclosure requirements of the 
various exemptions? If so, how? Should we focus on making the 
requirements more uniform or more scaled to the characteristics of the 
issuer or of the offering? Could changes to the various disclosure 
requirements of the exemptions help to facilitate issuers' transition 
from one exempt offering to another or to a registered offering? Would 
legislative changes be necessary or beneficial if we were to replace 
the current exempt offering framework with such a framework?
    14. Should the availability of any exemptions be conditioned on the 
involvement of a registered intermediary, such as the registered 
funding portal or broker-dealer in crowdfunding offerings, particularly 
where the offering is open to retail investors who may not currently 
qualify as accredited investors? \55\
---------------------------------------------------------------------------

    \55\ The status of persons that provide introductions or 
otherwise solicit potential investors for an issuer (generally, 
``finders'') is not discussed within this release. The Division of 
Trading and Markets is reviewing the status of finders for purposes 
of Section 15(a) of the Exchange Act [15 U.S.C. 78o(a)].
---------------------------------------------------------------------------

    15. Should the availability of any exemptions be conditioned on 
particular characteristics of the issuer or lead investor(s)? For 
example, in an offering to non-accredited investors where there is one 
or more lead investors, should we require that the lead investor(s) 
hold a minimum amount of the same security type (or a junior security) 
sold to the non-accredited investors?
    16. Should we consider a more unified approach to the exempt 
offering framework that focuses on the types of investors permitted to 
invest in the offering and the size of the offering, tailoring the 
additional investor protections and conditions to be applied based on 
those characteristics? For example, should we consider changes to the 
requirements for any or all of the existing exemptions from 
registration so that specific requirements (such as disclosure 
requirements or individual investment limits) will not apply if 
participation in the offering is limited to accredited investors? Would 
legislative changes be necessary or beneficial if we were to replace 
the current exempt offering framework with a more unified approach?
    17. Should we consider rule changes that would allow non-accredited 
investors to participate in exempt offerings of all types, subject to 
conditions such as a limit on the size of the offering, a limit on the 
amount each non-accredited investor could invest in each offering, 
across all offerings, or across all offerings of a certain type, a 
decision by the investor--after receiving disclosure about the risks--
to opt into the offering, and/or specific disclosure requirements? If 
so, should we scale the type and amount of information required to be 
disclosed to non-accredited investors based on the characteristics of 
the investors or the offering, such as the net worth or sophistication 
of the non-accredited investors, or whether the offering amount is 
capped, individual investment limits apply, or an intermediary is 
involved in the offering? What benefits would be conferred by such an 
approach? What would be the investor protection concerns? Would 
legislative changes be necessary or beneficial if we were to replace 
the current exempt offering framework with such an approach?
    18. Should we move one or more current exemptions into a single 
regulation, such as currently provided by Regulation D with respect to 
the exemptions under Rules 506(b), 506(c), and 504? What, if any, 
current exemptions should be included in a single set of regulations? 
Would a new single set of exemptions be overly complicated and obscure 
any possible benefits of coordination and harmonization?
    19. Are we effectively communicating information about the exempt 
offering framework, including the requirements of each exemption, to 
the issuers seeking to raise capital and investors seeking investment 
opportunities in this market? What types of communications have worked 
best? How can we improve our communications to issuers and investors 
about the exempt offering framework? Are there additional technologies 
or means of communication that we should use to convey information 
about exempt offerings to issuers and investors?
* * * * *

[[Page 30470]]

    The remainder of this concept release discusses the requirements 
for each of the capital-raising exemptions from registration that make 
up our current exempt offering framework. As indicated in the requests 
for comment set forth following the discussion of each exemption, we 
are seeking feedback from issuers, investors, and other market 
participants on whether any changes to Commission rules or the 
underlying statutes are needed or desired to improve the utility of the 
exemptions or the entire exempt offering framework consistent with 
investor protection. This release also discusses other broad topics 
that are relevant to the entire, or a significant portion of, the 
framework, including the definition of ``accredited investor,'' the 
integration analyses applied in the context of exempt offerings, exempt 
offerings by pooled investment funds,\56\ and the current regulatory 
landscape affecting the secondary trading market for securities 
originally sold in exempt offerings.
---------------------------------------------------------------------------

    \56\ We refer in this release to ``pooled investment funds'' 
because that term is used in Form D.
---------------------------------------------------------------------------

A. Accredited Investor Definition \57\
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    \57\ Section 413(b)(2)(A) of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act [Pub. L. 111-203, 124 Stat. 1376 (2010)] 
(the ``Dodd-Frank Act'') directed the Commission to review the 
accredited investor definition as it relates to natural persons 
every four years to determine whether the definition should be 
modified or adjusted for the protection of investors, in the public 
interest, and in light of the economy. We intend the discussion in 
this Section II.A to satisfy that requirement. See Report on the 
Review of the Definition of ``Accredited Investor'' (Dec. 18, 2015) 
(``Accredited Investor Staff Report''), available at https://www.sec.gov/corpfin/reportspubs/special-studies/review-definition-of-accredited-investor-12-18-2015.pdf. See also Section II.A.3 for a 
discussion of the Accredited Investor Staff Report, which was 
prepared in connection with the first review in 2015.
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1. Background
    The ``accredited investor'' definition is set forth in 17 CFR 
230.501(a) (``Rule 501(a)'') of Regulation D \58\ and is ``intended to 
encompass those persons 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.'' \59\ The definition is a central component of 
several exemptions from registration, including Rules 506(b) and 506(c) 
of Regulation D.\60\
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    \58\ In addition, Securities Act Section 2(a)(15) [15 U.S.C. 
77b(a)(15)] and 17 CFR 230.215 (``Rule 215'') under the Securities 
Act define accredited investor for purposes of Securities Act 
Section 4(a)(5) [15 U.S.C. 77d(a)(5)]. Section 4(a)(5) exempts non-
public offers and sales of up to $5 million made solely to 
accredited investors. However, based on DERA staff's review of Form 
D filings from January 1, 2009 through December 31, 2018, no issuer 
has reported relying on the Section 4(a)(5) exemption. The 
definition of accredited investor in Section 2(a)(15) enumerates 
certain categories of persons and authorizes the Commission to 
prescribe additional categories. Pursuant to this authority, the 
Commission has prescribed additional categories in Rule 215. The 
definition contained in Rule 215 is substantially similar to Rule 
501(a).
    \59\ See, e.g., Regulation D Revisions Proposing Release; see 
also Amendments for Small and Additional Issues Exemptions under the 
Securities Act (Regulation A), Release No. 33-9741 (March 25, 2015) 
[80 FR 21805 (April 20, 2015)] (``2015 Regulation A Release'') at 
note 146.
    \60\ See Section II.B for a discussion of Rule 506.
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    Accredited investors may, under Commission rules, participate in 
investment opportunities that are generally not available to non-
accredited investors, such as investments in many private issuers and 
offerings by hedge funds, private equity funds, and venture capital 
funds.\61\ The Rule 506 market has become a large and vibrant market 
for raising capital, especially for small business capital 
formation.\62\ Rule 506 offerings to accredited investors occur with 
greater frequency than any other type of offering surveyed by the 
staff.\63\ Issuers in those offerings are not required to provide any 
substantive disclosure and are permitted to sell securities to an 
unlimited number of accredited investors with no limit on the amount of 
money that can be raised from each investor or in total.\64\
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    \61\ Purchasers in Rule 506(c) offerings are limited to 
accredited investors. See note 47 for data reflecting non-accredited 
investors' participation in Rule 506(b) offerings. See Sections 
II.B.2 and II.B.2.f for a discussion of the requirements for Rules 
506(b) and 506(c). See Section IV.A.2 for a discussion of private 
funds.
    Recent research has examined the importance of the pool of 
accredited investors for the entry of new businesses and employment. 
In their working paper, Lindsey and Stein (2019) examine the effects 
on angel finance stemming from Dodd-Frank Act's elimination of the 
value of the primary residence in the determination of net worth for 
purposes of accredited investor status. See note 66 and accompanying 
text. Lindsey and Stein find that geographic areas experiencing a 
larger reduction in the number of potential accredited investors 
experienced negative effects on new firm entry and employment levels 
at small entrants. See Laura Lindsey and Luke C.D. Stein (2019) 
Angels, Entrepreneurship, and Employment Dynamics: Evidence from 
Investor Accreditation Rules, Working paper.
    \62\ The aggregate amount of capital raised through Rule 506(b) 
and (c) offerings is large, but the median size of offerings by 
non[hyphen]financial issuers is less than $1 million, indicating a 
large number of small offerings, consistent with the original 
regulatory objective to target the capital formation needs of small 
businesses. See Unregistered Offerings White Paper.
    \63\ See Unregistered Offerings White Paper.
    \64\ See 17 CFR 230.506(b) and 17 CFR 230.506(c).
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    Under the Regulation D accredited investor definition, natural 
persons are accredited investors if:
     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; \65\ or
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    \65\ 17 CFR 230.501(a)(6).
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     Their net worth exceeds $1 million (individually or 
jointly with a spouse), excluding the value of their primary 
residence.\66\
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    \66\ 17 CFR 230.501(a)(5). Section 413(a) of the Dodd-Frank Act 
excluded the value of a person's primary residence from the net 
worth calculation and directed the Commission to adjust similarly 
any accredited investor net worth standard in its Securities Act 
rules. In 2011, the Commission revised Rules 215 and 501 to exclude 
any positive equity that individuals have in their primary 
residences. See Net Worth Standard for Accredited Investors, Release 
No. 33-9287 (Dec. 21, 2011) [76 FR 81793 (Dec. 29, 2011)] (``Primary 
Residence Adopting Release''). The revised calculation requires that 
any excess of indebtedness secured by the primary residence over the 
estimated fair market value of the residence be considered a 
liability for purposes of determining accredited investor status on 
the basis of net worth. The Commission also added a 60-day look-back 
period to prevent investors from artificially inflating their net 
worth by incurring incremental indebtedness secured by their primary 
residence, thereby effectively converting their home equity into 
cash or other assets that would be included in the net worth 
calculation.
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    In addition, directors, executive officers, and general partners of 
the issuer selling the securities are accredited investors for purposes 
of that issuer.\67\ Certain enumerated entities with over $5 million in 
assets qualify as accredited investors,\68\ while others, including 
regulated entities such as banks and registered investment companies, 
are not subject to the assets test.\69\ The definition of an accredited 
investor includes, among others, the following entities:
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    \67\ 17 CFR 230.501(a)(4). In addition, directors, executive 
officers, and general partners of a general partner of the issuer 
are accredited investors for purposes of the issuer. 17 CFR 
230.501(a)(4).
    \68\ 17 CFR 230.501(a)(1), (3), and (7).
    \69\ 17 CFR 230.501(a)(1), (2), and (8).
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     A bank, registered broker-dealer, insurance company, 
registered investment company, business development company (``BDC'') 
as defined in the Investment Company Act of 1940 (``Investment Company 
Act''),\70\ or small business investment company (``SBIC''); \71\
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    \70\ 15 U.S.C. 80a-2(a)(48). In this release, unless otherwise 
specified, we use the term ``BDC'' to refer to a business 
development company as defined in the Investment Company Act. See 
note 526 for a description of a BDC.
    \71\ 17 CFR 230.501(a)(1). See Section IV for a discussion of 
pooled investment funds.
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     A private business development company as defined in the 
Investment Advisers Act of 1940 (``Advisers Act''); \72\
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    \72\ 15 U.S.C. 80b-2(a)(22).
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     An employee benefit plan (within the meaning of the 
Employee Retirement Income Security Act

[[Page 30471]]

(``ERISA'') \73\) if a bank, insurance company, or registered 
investment adviser makes the investment decisions, or if the plan has 
total assets in excess of $5 million; \74\
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    \73\ Public Law 93-406, 88 Stat. 829 (1974).
    \74\ 17 CFR 230.501(a)(1).
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     A tax exempt charitable organization, corporation, or 
partnership with assets in excess of $5 million; \75\
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    \75\ 17 CFR 230.501(a)(3).
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     An enterprise in which all the equity owners are 
accredited investors; \76\ and
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    \76\ 17 CFR 230.501(a)(8).
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     A trust with assets of at least $5 million, not formed 
only to acquire the securities offered, and the purchases of which are 
directed by a person who meets the legal standard of having sufficient 
knowledge and experience in financial and business matters to be 
capable of evaluating the merits and risks of the prospective 
investment.\77\
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    \77\ 17 CFR 230.501(a)(7).
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    An entity that is not covered specifically by one of the enumerated 
categories is generally not an accredited investor under the rule.
    Below we estimate the number of U.S. households that qualify as 
accredited investors under the existing criteria.\78\
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    \78\ For this analysis, we use the same methodology and variable 
definitions as the 2015 Accredited Investor Staff Report. The 
underlying household data for this analysis was obtained from the 
Federal Reserve Board's Survey of Consumer Finances (the ``SCF'') 
for 2016, available at https://www.federalreserve.gov/econresdata/scf/scfindex.htm. The SCF is a triennial survey that provides 
insights into household income and net worth, where the household is 
considered to be the primary economic unit within a family. As of 
the date of this release, the most recent SCF data is from the 2016 
survey. The SCF employs weights to make the data representative of 
the U.S. population.
     The 2015 Accredited Investor Staff Report used the definitions 
from Jesse Bricker, Lisa J. Dettling, Alice Henriques, Joanne W. 
Hsu, Kevin B. Moore, John Sabelhaus, Jeffrey Thompson, and Richard 
A. Windle, Changes in U.S. Family Finances from 2010 to 2013: 
Evidence from the Survey of Consumer Finances, Federal Reserve 
Bulletin, Vol. 100, No. 4 (2014).
    We estimate households and not individuals due to data 
limitations because the database underlying our analysis measures 
wealth and income at the household level. It should be noted that in 
the SCF database, income is reported at the household level. Similar 
to the 2015 Accredited Investor Staff Report, we do not attempt to 
differentiate income based on marital status of the household 
because data on individual income from all sources is not publicly 
available in the database. As a result, accredited investor 
(household) estimates based on individual income thresholds are 
likely to be overestimated and would represent upper bounds. A 
household can have multiple family members with independent sources 
of income that qualify them as accredited investors based on income. 
We count them as one accredited investor for each household, which 
implies we are also likely underestimating the actual pool of 
accredited investors when we provide household estimates. 
Consequently, the household estimates we derive using the joint 
income threshold would represent a lower bound for individuals 
qualifying on the basis of income. The actual number of individuals 
that qualify as accredited investors on an income basis (individual 
or joint) would, in all likelihood, lie between the estimates that 
we derive for the individual income threshold and the joint income 
threshold.

    Table 3--Households Qualifying Under Existing Accredited Investor
                                Criteria
------------------------------------------------------------------------
                                                           Qualifying
                                        Number of       households as %
                                       qualifying           of U.S.
            Criterion                  households          households
                                    (Standard errors    (Standard errors
                                         are in              are in
                                      parentheses)        parentheses)
------------------------------------------------------------------------
Individual income \79\ threshold   11.2 million (0.3   8.9% (0.2%).
 ($200,000).                        million).
Joint income \80\ threshold        5.8 million (0.2    4.6% (0.2%).
 ($300,000).                        million).
Net worth \81\ ($1,000,000)......  11.8 million (0.3   9.4% (0.2%).
                                    million).
Overall number of qualifying       16.0 million (0.3   13.0% (0.2%).
 households \82\.                   million).
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    The data above provides an estimate of the overall pool of 
qualifying households in the United States. It does not, however, 
represent the actual number of accredited investors that do or would 
invest in the Regulation D market or in other exempt offerings.\83\
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    \79\ For purposes of this analysis, income is defined to include 
wage income, business income, rent income, interest and dividend 
income, pension income, social security income, income from 
retirement accounts, transfers, and other income. According to the 
SCF documentation, income data is collected for the year prior to 
the year of the SCF while family balance sheet data covers the 
status of the family at the time of the interview. Thus, we use 
income data inflation-adjusted to 2016. Further, for comparability, 
income data is adjusted for inflation by a factor of 1.05914411 from 
2016 dollars to March 2019 dollars using Consumer Price Index 
(``CPI'') data from the U.S Department of Labor Bureau of Labor 
Statistics (``BLS'').
    \80\ See note 79.
    \81\ For purposes of this analysis, net worth is defined as the 
difference between household assets and household debt. Assets 
include all financial assets (stocks, bonds, mutual funds, cash and 
cash management accounts, retirement assets, life insurance, managed 
assets like trusts and annuities, and other financial assets like 
deferred compensation, royalties, futures, etc.) and non-financial 
assets. Debt includes mortgage and home equity loans, lines of 
credit, credit card debt, installment loans including vehicle loans, 
margin loans, pension loans, and other debt (e.g., loans against 
insurance). We exclude the value of the household's principal 
residence and any outstanding mortgages associated with the 
principal residence. Further, for comparability, net worth data is 
adjusted for inflation by a factor of 1.05914411 from 2016 dollars 
to March 2019 dollars using BLS CPI data.
    \82\ The number of households qualifying under either the income 
or net worth criterion is smaller than the sum of the number of 
households qualifying under the income and the number of households 
qualifying under the net worth criterion because some households may 
qualify under both criteria.
    \83\ Form D data and other data available to us on private 
placements do not allow us to estimate the number of unique 
accredited investors participating in the exempt offerings.
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    Below we also present information on median and mean income and net 
worth of U.S. households in major U.S. geographic regions. The data 
shows that household income and net worth tend to be much higher in the 
Northeast and West regions. This indicates that households that would 
qualify as accredited investors are more likely to be located in these 
two regions.

                          Table 4--U.S. Household Income and Net Worth, by Region \84\
----------------------------------------------------------------------------------------------------------------
                  ($ thousands)                      Northeast        Midwest          South           West
----------------------------------------------------------------------------------------------------------------
Mean household income (before-tax)..............           136.5           102.0           100.0           108.5
Median household income (before-tax)............            64.4            54.7            51.5            57.5
Mean household net worth........................           851.3           658.8           636.9           873.7
Median household net worth......................           154.5           103.2            87.0           114.3
----------------------------------------------------------------------------------------------------------------


[[Page 30472]]

    Below we also provide an overview of the educational attainment 
level of the estimated accredited investor pool, based on the existing 
criteria. As can be seen below, accredited investors tend to be more 
highly educated relative to the general population.
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    \84\ The Federal Reserve Board's 2016 SCF Chartbook, available 
at https://www.federalreserve.gov/econres/files/BulletinCharts.pdf, 
at 28, 29, 64, 65. The public version of the SCF database does not 
provide information regarding geographical location of households. 
As a result, we are unable to identify in which states households 
that qualify as accredited investors are likely to be concentrated. 
Unlike Table 3, in which we exclude the value of the primary 
residence from net worth, Table 4 does not exclude the value of the 
primary residence from the net worth of households. The figures were 
adjusted for inflation to March 2019 dollars using BLS CPI data.
[GRAPHIC] [TIFF OMITTED] TP26JN19.003

    We lack data to generate a comprehensive estimate of the overall 
number of institutional accredited investors because disclosure of 
accredited investor status across all institutional investors is not 
required and because, while we have information to estimate the number 
of some categories of institutional accredited investors, we lack 
comprehensive data that will allow us to estimate the unique number of 
investors across all categories of institutional accredited investors 
under Rule 501.86
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    \85\ The data underlying these charts was obtained from the 2016 
SCF, adjusted for inflation to March 2019 dollars.
    \86\ For example, Form ADV filers report information about the 
number of clients of different types, such as pooled investment 
vehicles, banking institutions, corporations, charities, pension 
plans, etc., some of which are potential institutional accredited 
investors. However, the data available to us does not allow 
identification of unique clients (to account for cases where a 
client has multiple advisers) or institutional accredited investors 
that do not retain services of a Form ADV filer. Further, Form D 
filings do not provide a breakdown of investors by type--
institutions or natural persons--that invested in an offering.
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2. Implications Outside of the Regulation D Context
    The Regulation D accredited investor definition plays an important 
role in other federal securities law contexts. For example:
     Regulation A limits the amount of securities non-
accredited investors can purchase in certain of those offerings to no 
more than 10% of the greater of their annual income or their net 
worth.\87\ Accredited investors are not subject to investment limits 
under Regulation A.
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    \87\ 17 CFR 230.251(d)(2)(i)(C). See Section II.C.1.c.
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     Under Section 12(g) of the Exchange Act,\88\ an issuer 
that is not a bank, bank holding company or savings and loan holding 
company is required to register a class of equity securities under the 
Exchange Act if it has more than $10 million of total assets and the 
securities are ``held of record'' by either 2,000 persons, or 500 
persons who are not accredited investors.\89\ As a result, issuers 
seeking to rely on these thresholds must differentiate between record 
holders who are accredited investors and non-accredited investors.
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    \88\ 15 U.S.C. 78l(g).
    \89\ See id.; see also 17 CFR 240.12g-1 (``Rule 12g-1'') 
(clarifying that accredited investor status for this purpose is 
determined as of the last day of its most recent fiscal year rather 
than at the time of the sale of the securities); Changes to Exchange 
Act Registration Requirements to Implement Title V and Title VI of 
the JOBS Act, Release No. 33-10075 (May 3, 2016) [84 FR 6713 (Feb. 
28, 2019)] (``Changes to Exchange Act Registration Requirements 
Release'') at Section II.B. (``Under amended Rule 12g-1, an issuer 
will need to determine, based on facts and circumstances, whether 
prior information provides a basis for a reasonable belief that the 
security holder continues to be an accredited investor as of the 
last day of the fiscal year.'').
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     Under Section 5(d) of the Securities Act, an emerging 
growth company \90\ is permitted to ``test the waters'' \91\ with 
potential investors that are QIBs \92\ or

[[Page 30473]]

institutional accredited investors \93\ before or after filing a 
registration statement to gauge such investors' interest in a 
contemplated securities offering. In February 2019, the Commission 
proposed expanding this testing the waters accommodation to all 
issuers, including registered investment companies and BDCs.\94\
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    \90\ An emerging growth company refers to an issuer that had 
total annual gross revenues of less than $1.07 billion during its 
most recently completed fiscal year and, as of December 8, 2011, had 
not sold common equity securities under a registration statement. 
That issuer continues to be an emerging growth company for the first 
five fiscal years after the date of the first sale of its common 
equity securities pursuant to an effective registration statement, 
unless one of the following occurs: Its total annual gross revenues 
are $1.07 billion or more; it has issued more than $1 billion in 
non-convertible debt in the past three years; or it becomes a 
``large accelerated filer,'' as defined in 17 CFR 240.12b-2 (``Rule 
12b-2'') under the Exchange Act. See 17 CFR 230.405 (``Rule 405'') 
and Rule 12b-2 (defining ``emerging growth company'').
    \91\ Communications between an issuer and potential investors 
for the purpose of assessing investor interest before having to 
commit the time and expense necessary to carry out a contemplated 
securities offering are often referred to as ``testing the waters.''
    \92\ See Section V.A.2 for a discussion of the definition of a 
QIB.
    \93\ An institutional accredited investor refers to any 
institutional investor who is also an accredited investor.
    \94\ See Solicitations of Interest Prior to a Registered Public 
Offering, Release No. 33-10607 (Feb. 19, 2019) [84 FR 6713 (Feb. 28, 
2019)].
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    In addition, some states use the accredited investor definition to 
determine whether investment advisers to certain private funds are 
required to be registered.\95\ States also incorporate the definition 
in a variety of other contexts. For example, the definition is used in 
government finance,\96\ finance lending,\97\ mortgage lending,\98\ 
insurance,\99\ and financial institution regulation.\100\ The 
accredited investor definition also served as a model for an exemption 
under the Uniform Securities Act of 2002.\101\
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    \95\ See, e.g., Final Order Granting Exemption From the 
Registration Requirements for Investment Advisers to Private Funds 
and Their Investment Adviser Representatives, Wisconsin Department 
of Financial Institutions, Division of Securities (Feb. 17, 2012); 
Certificate Exemption for Investment Advisers to Private Funds, Cal. 
Code Regs. Title 10 Sec.  260.204.9; Sixth Transition Order 
administering the Michigan Uniform Securities Act, State of Michigan 
Department of Energy, Labor & Economic Growth, Office of Financial 
and Insurance Regulation (Mar. 11, 2011).
    \96\ See, e.g., Cal. Gov't Code Sec.  64111.
    \97\ See, e.g., Cal. Fin. Code Sec.  22064.
    \98\ See, e.g., Fla. Stat. Sec. Sec.  494.001 and 494.00115.
    \99\ See, e.g., Tex. Ins. Code Sec.  1111A.002.
    \100\ See, e.g., Conn. Gen. Stat. Sec.  36a-2 (2014).
    \101\ Uniform Securities Act of 2002 Sec. Sec.  102(11)(F) 
through 102(11)(K), 102(11)(O) and 202(13), National Conference of 
Commissioners on Uniform State Laws (also known as the Uniform Law 
Commission). The Uniform Law Commission provides states with model 
legislation in areas of state statutory law when uniformity is 
desired and practicable. The Uniform Securities Act of 2002 is a 
model state securities law available at https://www.uniformlaws.org/committees/community-home?communitykey=8c3c2581-0fea-4e91-8a50-27eee58da1cf&tab=groupdetails.
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    FINRA Rule 5123 uses the accredited investor definition to provide 
an exemption from the general requirement that each member firm that 
sells an issuer's securities in a private placement file with FINRA a 
copy of any private placement memorandum, term sheet, or other offering 
document the firm used within 15 calendar days of the date of the sale, 
or indicate that it did not use any such offering documents.\102\ The 
exemption applies to offerings sold to, among other persons, accredited 
investors described in Rule 501(a)(1), (2), (3), or (7). The rule does 
not incorporate the entire accredited investor definition and in 
particular excludes the net worth and income criteria set forth in Rule 
501(a)(5) and (6) respectively.\103\
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    \102\ FINRA Rule 5123(b)(1)(J).
    \103\ The Commission release approving FINRA's adoption of this 
rule noted the following rationale:
    ``Several commenters requested additional exemptions from 
coverage under Rule 5123. [One commenter], for example, requested an 
exemption for all accredited investors. FINRA stated that it does 
not believe that the exemption should extend to offers to accredited 
investors under Rule 501(a)(4), (5), or (6) of Regulation D. In 
particular, FINRA stated that it believes that the criteria used to 
measure whether a person meets the accredited investor standard do 
not necessarily reflect a sufficiently high level of sophistication 
to justify exemption from the proposed rule.''
    Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Amendments No. 2 and No. 3 and 
Order Granting Accelerated Approval of Proposed Rule Change, as 
Modified by Amendments No. 1, No. 2, and No. 3 to Adopt FINRA Rule 
5123 (Private Placements of Securities) in the Consolidated FINRA 
Rulebook, Release No. 34-67157 (June 7, 2012) [77 FR 35457 (June 13, 
2012)].
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3. Accredited Investor Staff Report
    In December 2015, the Commission issued a staff report on the 
accredited investor definition.\104\ The report examined the history of 
the accredited investor definition \105\ and considered comments on the 
definition received from a variety of sources, including public 
commenters, the Commission's Investor Advisory Committee,\106\ the 
Commission's Advisory Committee on Small and Emerging Companies,\107\ 
and the 2014 Small Business Forum.\108\ The report considered 
alternative approaches to defining ``accredited investor,'' provided 
staff recommendations for potential updates and modifications to the 
existing definition, and analyzed the impact potential approaches may 
have on the pool of accredited investors. The report noted that any 
change to the accredited investor definition would have to consider 
both the impact the change could have on investors and the supply of 
capital to the Regulation D market. The report acknowledged the 
tradeoff between using a principles-based accredited investor 
definition and the need for bright-line standards that investors, 
issuers, and their advisors can understand and apply easily. In the 
report, the staff recommended that the Commission consider any one or 
more of the methods of revising the accredited investor definition 
described in Table 5 below.
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    \104\ See Accredited Investor Staff Report. The report focused 
on the accredited investor definition as used in Regulation D, with 
the understanding that any revisions to the definition should be 
made to the Rule 215 definition as well.
    \105\ See id at Section II.
    \106\ See Recommendation of the Investor Advisory Committee: 
Accredited Investor Definition (Oct. 9, 2014) available at http://www.sec.gov/spotlight/investor-advisory-committee-2012/accredited-investor-definition-recommendation.pdf.
    \107\ See Advisory Committee on Small and Emerging Companies: 
Recommendations Regarding the Accredited Investor Definition (Feb. 
17, 2015) available at http://www.sec.gov/info/smallbus/acsec/acsec-accredited-investor-definition-recommendation-030415.pdf.
    \108\ See Final Report of the 2014 SEC Government-Business Forum 
on Small Business Capital Formation (May 2015) available at http://www.sec.gov/info/smallbus/gbfor33.pdf (``2014 Forum Report'').
---------------------------------------------------------------------------

    In addition to the staff recommendations described in Table 5 
below, the report also discussed whether individuals with certain 
professional degrees or licenses or financial experience, or who are 
advised by professionals, should be considered accredited investors. 
The report, however, did not include any staff recommendations about 
whether individuals with certain professional degrees or licenses or 
financial experience, or who are advised by professionals, should be 
considered accredited investors.
4. Comments on the Accredited Investor Staff Report
    Following the release of the Accredited Investor Staff Report, the 
Commission has continued to receive recommendations about revisions to 
the accredited investor definition from the Advisory Committee on Small 
and Emerging Companies and the annual Small Business Forum.
    In July 2016, the Advisory Committee on Small and Emerging 
Companies recommended, among other things, that the Commission:
     Not change the current financial thresholds in the 
accredited investor definition except to adjust on a going-forward 
basis to reflect inflation;
     Expand the pool of accredited investors to include 
individuals who have passed examinations that test their knowledge and 
understanding in the areas of securities and investing, including the 
Series 7, Series 65, Series 82, and CFA Examinations and equivalent 
examinations; and
     Explore ways to allow participation by potential investors 
with specific industry or issuer knowledge or expertise who would not 
otherwise be considered accredited investors.\109\
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    \109\ See Advisory Committee on Small and Emerging Companies: 
Recommendations Regarding the Accredited Investor Definition (July 
20, 2016) available at https://www.sec.gov/info/smallbus/acsec/acsec-recommendations-accredited-investor.pdf.
---------------------------------------------------------------------------

    The recommendation also noted that the Committee would support 
expanding the definition to take into account measures of non-financial

[[Page 30474]]

sophistication, regardless of income or net worth, thereby expanding 
rather than contracting the pool of accredited investors; however, the 
recommendations cautioned that any non-financial criteria should be 
able to be ascertained with certainty as ``simplicity and certainty are 
vital to the utility of any expanded definition of accredited 
investor.'' \110\ The Committee also recommended that the Commission 
continue to gather data for ongoing analysis of what ``attributes best 
encompass those persons 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.'' \111\
---------------------------------------------------------------------------

    \110\ Id.
    \111\ Id.
---------------------------------------------------------------------------

    The 2016, 2017, and 2018 Forum Reports all included a 
recommendation that, consistent with the recommendations of the 
Advisory Committee on Small and Emerging Companies, the Commission 
should: (a) Maintain the monetary thresholds for accredited investors; 
and (b) expand the categories of qualification for accredited investor 
status based on various types of sophistication, such as education, 
experience, and training, including without limitation persons holding 
FINRA licenses or CPA or CFA designations, passing a test that 
demonstrates sophistication, or status as managerial or key employees 
affiliated with the issuer.\112\
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    \112\ See Final Report of the 2016 SEC Government-Business Forum 
on Small Business Capital Formation (Mar. 2017) available at https://www.sec.gov/info/smallbus/gbfor35.pdf (``2016 Forum Report''); 
Final Report of the 2017 SEC Government-Business Forum on Small 
Business Capital Formation (Mar. 2018) available at https://www.sec.gov/files/gbfor36.pdf (``2017 Forum Report''); and 2018 
Forum Report.
---------------------------------------------------------------------------

    In October 2017, the U.S. Department of the Treasury prepared a 
report that included recommendations to, among other things, revise the 
accredited investor definition.\113\ The 2017 Treasury Report 
recommended that the Commission undertake amendments to the accredited 
investor definition with the objective of expanding the eligible pool 
of sophisticated investors. The 2017 Treasury Report stated that the 
definition could be broadened to include: (a) Any investor who is 
advised on the merits of making a Regulation D investment by a 
fiduciary, such as an SEC- or state-registered investment adviser; and 
(b) financial professionals, such as registered representatives and 
investment adviser representatives, who are considered qualified to 
recommend Regulation D investments to others.\114\
---------------------------------------------------------------------------

    \113\ See A Financial System That Creates Economic Opportunities 
Capital Markets, U.S. Dept. of the Treasury (Oct. 2017 (``2017 
Treasury Report''), available at https://www.treasury.gov/press-center/press-releases/documents/a-financial-system-capital-markets-final-final.pdf, at p. 44.
    \114\ See 2017 Treasury Report, at p. 44.
---------------------------------------------------------------------------

    In addition, the Commission received over 50 comment letters on the 
Accredited Investor Staff Report.\115\ While a few commenters opposed 
changes to the definition,\116\ most commenters generally supported at 
least one of the staff's recommended changes to the definition.\117\ In 
addition, some commenters advocated for lower thresholds or an 
elimination of the need for the accredited investor definition 
altogether.\118\
---------------------------------------------------------------------------

    \115\ The comment letters received in response to the Accredited 
Investor Staff Report are available at https://www.sec.gov/comments/4-692/4-692.shtml.
    \116\ See, e.g., Letter from Jillian Sidoti dated Jan. 25, 2016 
available at https://www.sec.gov/comments/4-692/4692-10.htm (raising 
concerns about increasing the financial thresholds to ``higher, and 
perhaps unbearable, thresholds'') (``Sidoti Letter''); Letter from 
Michael John Sewell dated Dec. 23, 2015 available at https://www.sec.gov/comments/4-692/4692-2.htm (``Sewell Letter'') (raising 
concerns about increasing the complexity of defining an accredited 
investor); and Letter from Robert Kent dated May 4, 2016 available 
at https://www.sec.gov/comments/4-692/4692-1736913-151030.htm.
    \117\ See Table 3 for a summary of the responses from commenters 
on each staff recommendation.
    \118\ See, e.g., Letter from Ryan Carpel dated May 12, 2016 
available at https://www.sec.gov/comments/4-692/4692-30.htm; Letter 
from Nader Rahelan dated Apr. 23, 2016 available at https://www.sec.gov/comments/4-692/4692-25.htm; Letter from Darrell J. 
Leamon dated Apr. 29, 2016 available at https://www.sec.gov/comments/4-692/4692-27.htm; Letter from Andrew Thompson, J.D. dated 
Feb. 9, 2016 available at https://www.sec.gov/comments/4-692/4692-12.htm (``Thompson Letter''); Letter from Caroline B. Austin dated 
Jan. 30, 2016 available at https://www.sec.gov/comments/4-692/4692-11.htm; Letter from Public Startup Company, Inc. dated Feb. 16, 2016 
available at https://www.sec.gov/comments/4-692/4692-13.pdf (``PSC 
Letter''); Letter from Roger Q. Doctor dated Jun. 14, 2016 available 
at https://www.sec.gov/comments/4-692/4692-36.htm; Letter from Karl 
T. Muth, Lecturer, Northwestern University dated May 17, 2016 
available at https://www.sec.gov/comments/265-27/26527-58.htm 
(``Muth Letter''); Anonymous Letter dated Jul. 5, 2016 available at 
https://www.sec.gov/comments/4-692/4692-39.pdf (``Anon 2 Letter''); 
Letter from Martha J. Escudero Acosta dated Oct 15, 2016 available 
at https://www.sec.gov/comments/4-692/4692-45.htm (``Escudero 
Letter''); Letter from The TAN2000 International Regulatory 
Corporation dated Dec. 10, 2016 available at https://www.sec.gov/comments/4-692/4692-46.pdf (``TAN2000 Letter''); Letter from Cole 
Hyland dated Jan. 27, 2017 available at https://www.sec.gov/comments/4-692/4692-1536599-131180.htm; Letter from Charles A. Gokas 
dated Jul. 7, 2017 available at https://www.sec.gov/comments/4-692/4692-1840627-154975.htm; Letter from David Kinsfather dated Aug. 5, 
2017 available at https://www.sec.gov/comments/4-692/4692-2185513-159906.htm; Michael K. Smith dated Jan. 23, 2018 available at 
https://www.sec.gov/comments/4-692/4692-2945318-161851.htm; and 
Letter from Anonymous Lawyer dated Aug. 2, 2016 available at https://www.sec.gov/comments/4-692/4692-41.htm (``Anon 3 Letter'') 
(recommending that there should be different and lower thresholds 
for service providers of the issuer to be deemed an accredited 
investor).

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

[[Page 30475]]

    Of the staff's recommended changes, commenters were overwhelmingly 
supportive of the creation of additional methods of accreditation other 
than financial criteria.\119\ Many commenters expressed that financial 
thresholds are not effective in defining a population of sophisticated 
investors and that one or more of the alternative methods of 
accreditation may be more indicative of sophistication than income and 
net worth alone.\120\ A few commenters recommended investment limits 
\121\ or an additional financial net worth qualification for these 
investors.\122\
    Table 5 provides an overview of the feedback provided by commenters 
about each of the specific recommendations.
---------------------------------------------------------------------------

    \119\ See, e.g., Letter from Consumer Federation of America and 
Americans for Financial Reform dated Apr. 27, 2016 available at 
https://www.sec.gov/comments/4-692/4692-26.pdf (``CFA/AFR Letter''); 
Letter from Crowdfund Intermediary Regulatory Advocates dated Jan. 
14, 2016 available at https://www.sec.gov/comments/4-692/4692-6.pdf 
(``CFIRA Letter''); Letter from Biotechnology Innovation 
Organization dated Apr.8, 2016 available at https://www.sec.gov/comments/4-692/4692-21.pdf (``BIO Letter''); Letter from National 
Small Business Association dated Mar. 29, 2016 available at https://www.sec.gov/comments/4-692/4692-18.pdf (``NSBA Letter''); Letter 
from North American Securities Administrators Association, Inc. 
(``NASAA'') dated May 25, 2016 available at https://www.sec.gov/comments/4-692/4692-34.pdf (``NASAA Letter''); Letter from Engine 
dated Mar. 14, 2016 available at https://www.sec.gov/comments/4-692/4692-17.pdf (``ENGINE Letter''); Letter from Investment Management 
Consultants Association dated Mar. 29, 2016 available at https://www.sec.gov/comments/4-692/4692-19.pdf (``IMCA Letter''); Letter 
from Dar'shun Kendrick, Kendrick Law Practice dated May 1, 2016 
available at https://www.sec.gov/comments/4-692/4692-29.htm 
(``Kendrick Letter''); Letter from Anonymous Investment Banker dated 
Apr. 13, 2016 available at https://www.sec.gov/comments/4-692/4692-22.htm (``Banker Letter''); Letter from Keith J. Johnson, JD dated 
Mar. 6, 2016 available at https://www.sec.gov/comments/4-692/4692-16.pdf (``Johnson Letter''); Letter from Cornell Securities Law 
Clinic dated Apr. 30, 2016 available at https://www.sec.gov/comments/4-692/4692-28.pdf (``Cornell Law Clinic Letter''); Letter 
from the Small Business Investor Alliance dated Mar. 7, 2016 
available at https://www.sec.gov/comments/4-692/4692-15.pdf (``SBIA 
Letter''); PSC Letter; Letter from Leonard A. Grover, Founder/CEO, 
FinToolbox/Screener.co dated Jun. 13, 2016 available at https://www.sec.gov/comments/4-692/4692-35.pdf (``Grover Letter''); Letter 
from Investment Adviser Association dated Jun. 29, 2016 available at 
https://www.sec.gov/comments/4-692/4692-38.pdf (``IAA Letter''); 
Anon 2 Letter; Letter from Tom C.W. Lin, Associate Professor of Law, 
Temple University Beasley School of Law dated Jul. 14, 2016 
available at https://www.sec.gov/comments/4-692/4692-40.pdf (``Lin 
Letter''); Escudero Letter; Letter from Jeff Carlsen, CPA dated Jan. 
17, 2017 available at https://www.sec.gov/comments/4-692/4692-1497754-130754.htm (``Carlsen Letter''); Letter from Kyle Beagle 
dated Jan. 13, 2016 available at https://www.sec.gov/comments/4-692/4692-4.htm (``Beagle Letter''); Letter from Ava Badiee dated May 10, 
2016 available at https://www.sec.gov/comments/4-692/4692-31.pdf 
(``Badiee Letter''); Letter from Chase R. Morello, Esq. dated Jan. 
13, 2016 available at https://www.sec.gov/comments/4-692/4692-5.pdf 
(``Morello Letter''); Mark R. Maisonneuve, CFA dated Apr. 26, 2017 
available at https://www.sec.gov/comments/4-692/4692-1722772-150627.htm (``Maisonneuve Letter''); TAN2000 Letter; Letter from 
Managed Funds Association dated Jun. 16, 2016 available at https://www.sec.gov/comments/4-692/4692-37.pdf (``MFA-1 Letter''); and 
Letter from Managed Funds Association dated May 18, 2017 available 
at https://www.sec.gov/comments/s7-07-16/s70716-1761663-152156.pdf 
(``MFA-2 Letter'').
    \120\ See, e.g., CFA/AFR Letter; CFIRA Letter; Banker Letter; 
Cornell Law Clinic Letter; Grover Letter; Anon 2 Letter; Carlsen 
Letter; and Maisonneuve Letter.
    \121\ See, e.g., Badiee Letter.
    \122\ See, e.g., NASAA Letter.

 Table 5--Responses to Staff Recommendations on the Accredited Investor
                               Definition
------------------------------------------------------------------------
          Staff recommendation              Responses from commenters
------------------------------------------------------------------------
Leave the current income and net worth   --A few commenters generally
 thresholds in place, subject to          supported the recommendation;
 investment limits.                       \123\
                                         --Several commenters supported
                                          leaving the current income and
                                          net worth thresholds in place;
                                          \124\
                                         --Several commenters were
                                          either opposed to, or raised
                                          concerns about, adding
                                          investment limits to investors
                                          that met these thresholds;
                                          \125\ and
                                         --One commenter was opposed
                                          both to leaving the current
                                          income and net worth threshold
                                          in place and to adding
                                          investment limits on those
                                          investors.\126\
                                         A few commenters stated that
                                          the structure would add costs
                                          and complexity to the capital-
                                          raising process.\127\
Add new inflation-adjusted income and    Some commenters supported the
 net worth thresholds that are not        recommendation,\128\ and some
 subject to investment limits.            opposed raising the income and
                                          net worth thresholds.\129\
                                         While one commenter stated that
                                          there should be some
                                          sophistication qualification,
                                          in addition to the net worth
                                          or income thresholds,\130\
                                          another commenter stated that
                                          this qualification should
                                          remain independent from any
                                          investment limits or
                                          qualitative restrictions.\131\
Permit individuals with a minimum        A few commenters supported this
 amount of investments to qualify as      recommendation,\132\ and no
 accredited investors.                    commenters specifically
                                          opposed this recommendation.
Permit individuals with certain          All of the commenters who
 professional credentials to qualify as   expressed a view about this
 accredited investors.                    recommendation generally
                                          supported this
                                          recommendation.\133\ Some of
                                          these commenters, however,
                                          supported the recommendation
                                          with the following limitations
                                          and conditions:
                                         --Some commenters believed that
                                          a minimum amount of
                                          professional experience should
                                          also be a part of this
                                          qualification.\134\
                                         --One commenter believed that
                                          the professional experience
                                          should be with early stage
                                          financing.\135\
                                         --One commenter supported
                                          investment limits for these
                                          investors.\136\
                                         Several commenters stated that
                                          qualifying credentials should
                                          include one or more of the
                                          following: Passing the Series
                                          7, Series 65, Series 66, or
                                          Series 82 examinations, being
                                          a certified public accountant
                                          (CPA), certified financial
                                          analyst (CFA), certified
                                          management accountant (CMA),
                                          registered investment advisor
                                          (RIA) or registered
                                          representative (RR), having an
                                          MBA from an accredited
                                          educational institution or
                                          having a certified investment
                                          management analyst (CIMA)
                                          certification, or having been
                                          in the securities industry as
                                          a broker, lawyer, or
                                          accountant.\137\ Other
                                          commenters had more general
                                          views on the sophistication
                                          necessary to qualify an
                                          investor as accredited.\138\
Permit individuals with experience       Most of the commenters who
 investing in exempt offerings to         expressed a view about this
 qualify as accredited investors.         recommendation supported the
                                          recommendation,\139\ while one
                                          commenter opposed it.\140\
Permit knowledgeable employees \141\ of  Several commenters supported
 private funds to qualify as accredited   the recommendation,\142\ while
 investors for investments in their       one commenter opposed it.\143\
 employer's funds.
                                         A few commenters stated that
                                          the recommendation is unlikely
                                          to have any significant
                                          impact.\144\
Index all financial thresholds in the    Most of the commenters who
 definition for inflation on a going-     expressed a view about this
 forward basis.                           recommendation supported the
                                          recommendation,\145\ while a
                                          few commenters opposed
                                          it.\146\
Permit spousal equivalents to pool       Responses were mixed, with a
 their finances for the purpose of        few commenters that generally
 qualifying as accredited investors.      supported the recommendation
                                          \147\ and one commenter that
                                          opposed it.\148\
Permit all entities with investments in  Responses were mixed, with a
 excess of $5 million to qualify as       few commenters that supported
 accredited investors.                    the recommendation \149\ and a
                                          few commenters that opposed
                                          it.\150\

[[Page 30476]]

 
Permit an issuer's investors that meet   Most of the commenters who
 and continue to meet the current         expressed a view about this
 accredited investor definition to be     recommendation supported the
 grandfathered with respect to future     recommendation,\151\ while one
 offerings of the issuer's securities.    commenter opposed it.\152\
Permit individuals who pass an           Most of the commenters who
 accredited investor examination to       expressed a view about this
 qualify as accredited investors.         recommendation supported the
                                          recommendation.\153\ A few of
                                          these commenters, however,
                                          noted workability concerns,
                                          administration costs and the
                                          inability of a test to
                                          properly measure financial
                                          sophistication and account for
                                          industry and investment
                                          experience.\154\ One commenter
                                          stated that a more thorough
                                          analysis of the level of
                                          financial sophistication
                                          required was needed.\155\
------------------------------------------------------------------------

    In addition, multiple commenters recommended changes to the 
accredited

[[Page 30477]]

investor definition that were not contemplated in the staff 
recommendations. These recommendations were:
---------------------------------------------------------------------------

    \123\ See, e.g., CFA/AFR Letter; NASAA Letter; and Johnson 
Letter.
    \124\ See, e.g., SBIA Letter; CFIRA Letter; ENGINE Letter (``Any 
increase in the financial thresholds should be justified based on 
the goals of the definition, and there is no evidence that the 
current definition is failing to adequately protect investors.''); 
and BIO Letter (``Completely removing a substantial portion of 
current investors from the accredited pool could have an immediate, 
drastic, and potentially devastating impact on capital availability 
for emerging companies.'').
    \125\ See, e.g., NSBA Letter (``Creating a middle-ground or a 
lower tier will only increase the regulatory burdens and make it 
more difficult for small businesses to comply with the 
regulations''); SBIA Letter (stating that the recommendations 
relating to restricting the pool of accredited investors would 
``significantly harm the pool of available capital for small 
business investment''); CFIRA Letter (raising concerns that the 
recommendation would shrink the pool of available capital for small 
business investments); ENGINE Letter (stating that adding investment 
limitations on the pool of existing accredited investors would 
``effectively create a second tier of accredited investor, 
diminishing the total pool of capital available to startups''); and 
BIO Letter (raising concerns about investment limitations, including 
that such limitations would ``entirely foreclose participation by 
conditional accredited investors in certain offerings'').
    \126\ See, e.g., Cornell Law Clinic Letter (stating that the 
Commission should focus on ``overhauling the current threshold, 
rather than simply mitigating it with investment limitations'').
    \127\ See, e.g., NSBA Letter (stating that obtaining information 
about prior investments to assess the investment limit would be 
``difficult information for small business or even the broker to 
obtain, and needlessly complicates the process''); Cornell Law 
Clinic Letter (``Adding investment limitations may not only fail to 
address issues of capital formation and identifying sophisticated 
investors, but also add administrative costs and complexity that may 
then restrict otherwise qualified investors.''); and BIO Letter.
    \128\ See, e.g., Letter from Public Investors Arbitration Bar 
Association dated May 17, 2016 available at https://www.sec.gov/comments/4-692/4692-33.pdf (``PIABA Letter'') (``the current 
accredited investor standard, in creating a comparatively large pool 
of investors qualified to be offered Reg. D securities, makes it a 
particularly attractive tool to promote fraudulent schemes''); NASAA 
Letter; Badiee Letter; Johnson Letter; Cornell Law Clinic Letter 
(``[T]he Clinic supports inflation adjustments because it would more 
accurately qualify financially sophisticated investors than the 
current income and net asset thresholds.''); MFA-1 Letter; and MFA-2 
Letter (stating that the adjustments would ``help to ensure that the 
thresholds have not been diluted over time'').
    \129\ See, e.g., NSBA Letter; ENGINE Letter (stating that there 
is no evidence that the current definition has harmed individuals 
who would be excluded under an inflation adjusted threshold); SBIA 
Letter (stating that the recommendations relating to restricting the 
pool of accredited investors would ``significantly harm the pool of 
available capital for small business investment''); TAN2000 Letter; 
Sidoti Letter (requesting that the Commission ``consider smaller 
companies and investors prior to updating the parameters to higher, 
and perhaps unbearable, thresholds''); and BIO Letter.
    \130\ See, e.g., PIABA Letter (``Because of the speculative 
nature of private placements, it is important that investors have 
the financial means necessary to withstand the risks inherent in 
these securities.'').
    \131\ See, e.g., MFA-1 Letter and MFA-2 Letter (noting the 
importance of retaining the certainty that this bright line rule 
provides for issuers).
    \132\ See, e.g., CFA/AFR Letter (``We agree with the staff study 
that, `Investments may in some cases be a more meaningful measure of 
individuals' experience with and exposure to the financial and 
investing markets than income or net worth.' ''); and Cornell Law 
Clinic Letter (``Allowing individuals to qualify as accredited 
investors through a minimum amount of investments aligns with the 
Commission's goal to determine which individuals are exempt from 
public securities law requirements due to financial 
sophistication.'').
    \133\ See, e.g., CFA/AFR Letter; Kendrick Letter; NSBA Letter; 
NASAA Letter; Beagle Letter; Badiee Letter; Morello Letter; Johnson 
Letter; Cornell Law Clinic Letter; IMCA Letter; Banker Letter; 
Grover Letter; TAN2000 Letter; Carlsen Letter; MFA-1 Letter; MFA-2 
Letter; Maisonneuve Letter; and CFIRA Letter.
    \134\ See, e.g., Kendrick Letter; Cornell Law Clinic Letter; 
NASAA Letter; and TAN2000 Letter.
    \135\ See, e.g., TAN2000 Letter.
    \136\ See, e.g., Beagle Letter.
    \137\ See, e.g., CFA/AFR Letter (``. . . the Series 7, Series 
65, and Series 82 examinations likely `provide demonstrable evidence 
of relevant investor sophistication because of the subject matter 
their examinations cover.' ''); NASAA Letter (recommending 
qualifying credentials to include passing the Series 7, Series 65, 
or Series 66, provided that there is also a requisite minimum amount 
of professional experience); MFA-1 Letter and MFA-2 Letter 
(recommending qualifying credentials would include being a CPA or 
CFA or having a MBA from an accredited educational institution); 
Maisonneuve Letter (recommending qualifying credentials would 
include being a CFA); IMCA Letter (recommending qualifying 
credentials would include having a CIMA certification); CFIRA Letter 
(recommending qualifying credentials would include being a CPA, CFA, 
CMA, RIA, RR or securities attorney); and Kendrick Letter 
(recommending qualifying credentials would include having been in 
the securities industry as a broker, lawyer or accountant).
    \138\ See., e.g., NSBA Letter (``. . . if someone is 
sophisticated enough to advise others on investing in these types of 
offerings, for example, they should themselves be qualified to 
invest in them''); Cornell Law Clinic Letter (credentials required 
should be substantially high to cause financial sophistication to 
make up for the loss in ability to sustain financial losses); Grover 
Letter (experts in industries historically passed over by angel 
investors should be allowed to qualify as accredited investors); and 
Carlsen Letter (individuals with business related college degrees).
    \139\ See, e.g., CFA/AFR Letter (``a better measurement of 
relevant expertise than mere investment experience''); NSBA Letter 
(``[this recommendation addresses] those who previously qualified as 
an accredited investor . . . however subsequently failed to qualify 
as an accredited investor''); Beagle Letter (stating that the 
recommendation should limit the amount individuals who qualify under 
it can invest); Johnson Letter (``the exact individuals that should 
be accredited investors''); and Cornell Law Clinic Letter (``[the] 
quintessential sign of sophistication is experience in the field'').
    \140\ See, e.g., NASAA Letter (noting that such investors were 
already likely to qualify as accredited and it would be ``difficult 
to objectively assess that an individual's experience investing in 
an exempt offering has given rise to financial sophistication'').
    \141\ The staff recommendation stated that the Commission could 
use the definition of the term knowledgeable employee in 17 CFR 
270.3c-5 (``Rule 3c-5'') under the Investment Company Act 
(``knowledgeable employee'').
    \142\ See, e.g., CFA/AFR Letter (``. . . such individuals 
`likely have significant investing experience and sufficient access 
to the information necessary to make informed decisions about 
investments in their employer's funds' ''); NSBA Letter; Cornell Law 
Clinic Letter (``Knowledgeable employees of private funds are likely 
some of the highest levels of financial sophistication among 
potential investors.''); MFA-1 Letter; and MFA-2 Letter (``. . . 
such knowledgeable employees have meaningful investing experience 
and sufficient access to information necessary to make informed 
investment decisions about the private fund's offerings. In 
addition, investments by knowledgeable employees are beneficial for 
private fund investors in that they further align investor interests 
of adviser employees and fund investors.'').
    \143\ See, e.g., NASAA Letter (``Such an approach could raise 
suitability issues, may be difficult to verify, and ultimately has a 
negligible impact in improving capital formation efforts.'').
    \144\ See, e.g., CFA/AFR Letter; and NASAA Letter.
    \145\ See, e.g., PIABA Letter; CFA/AFR Letter (stating that 
periodic adjustments would help avoid the type of shock to the 
system that the current recommendations are likely to have); NASAA 
Letter; Johnson Letter; Cornell Law Clinic Letter (stating that 
indexing financial thresholds for inflation would ``keep these 
financial thresholds current with the market and thus more 
accurately qualify financially sophisticated investors''); MFA-1 
Letter; and MFA-2 Letter.
    \146\ See, e.g., ENGINE Letter (stating that there is not enough 
evidence that such adjustments are necessary to protect investors); 
and SBIA Letter (stating that the recommendations relating to 
restricting the pool of accredited investors would ``significantly 
harm the pool of available capital for small business investment''); 
see also NSBA Letter (``Indexing the thresholds levels for the 
accredited investor definition may complicate compliance as the 
thresholds will change'').
    \147\ See, e.g., CFA/AFR Letter (stating that this recommended 
change ``helps to bring the securities laws up to date with modern 
values and expectations''); NSBA Letter (noting that this 
recommended change would ``expand opportunities to invest in small 
businesses to more households''); and SBIA Letter.
    \148\ See, e.g., Cornell Law Clinic Letter (``. . . the 
Commission does not provide a clear rationale behind why civil 
unions and domestic partnerships should be given equal regulatory 
treatments as marriages other than that such treatment would provide 
consistency across Commission rules such as the family office rule, 
accountant independence standards, and crowdfunding rules'').
    \149\ See, e.g., SBIA Letter; NSBA Letter (stating that this 
recommendation recognizes that ``those with such significant assets 
invested are both very likely to be sophisticated enough to protect 
themselves from the risks of the investment and also secure enough 
to withstand the potential loss of a particular investment''); and 
NASAA Letter (``An investments test is a better gauge of financial 
sophistication than simply analyzing net worth or income.''). See 
also SBIA Letter (``However a $5 million threshold is very high and 
will severely limit investment by 529 Plans and other similar 
plans.'').
    \150\ See, e.g., Beagle Letter (stating that an asset-based test 
as well as the knowledge of the representatives making the 
investment should be used in determining an entity's accredited 
investor status); Cornell Law Clinic Letter (stating that the amount 
of an entity's investments is not a reliable indicator of financial 
sophistication) and Reardon Letter (stating that a change from 
``assets'' to ``investments'' would be ``ill-advised, and would 
exclude many prospective investors, particularly outside of large 
urban areas where the financial support of local companies is 
crucial to the local economy'').
    \151\ See, e.g., BIO Letter; NSBA Letter (stating that this 
recommendation is ``incredibly important to the small business 
community''); Johnson Letter; SBIA Letter; MFA-1 Letter and MFA-2 
Letter (stating that to provide investors with the ability to 
prevent investment dilution, current investors who are no longer 
accredited investors should be able to purchase securities by the 
issuer or any wholly-owned subsidiaries of the issuer).
    \152\ See, e.g., Cornell Law Clinic Letter (``The future 
offerings of the issuer's securities may not necessarily have the 
same level of financial risk as the issuer's former offerings. The 
investor may be exposed to greater financial risk and, therefore, 
should also meet the new accredited investor definition for future 
offerings, regardless of the issuer or existing investments.'').
    \153\ See, e.g., SBIA Letter; CFIRA Letter (stating that 
investors who pass a standardized test covering the specificities of 
private placements should also be considered able to ``fend for 
themselves,'' having demonstrated their understanding of the risks 
involved in investment in these securities by passing the requisite 
examination); NSBA Letter (suggesting that the private sector be 
involved in the development and administration of the test); Beagle 
Letter (supporting the recommendation only if it was accompanied by 
limits on the amount an investor could invest in private offerings); 
Cornell Law Clinic Letter (``. . . having an accredited investor 
examination would increase the number of informed investors in the 
market because passing a rigorous test is a bright-line rule that 
shows an advanced level of financial sophistication and indicates 
that the investor is able to fend for themselves.''); IMCA Letter 
(stating that there should be continuing education requirements to 
meet this criterion and suggesting that the private sector be 
involved in the development and administration of the test); NASAA 
Letter (suggesting that there also be a five year experience 
requirement); PSC Letter (suggesting an internet-based test); Grover 
Letter; Badiee Letter; and TAN2000 Letter (suggesting the test be 
reflective of knowledge of early stage financing).
    \154\ See, e.g., NASAA Letter; and Badiee Letter.
    \155\ See, e.g., CFA/AFR Letter.
---------------------------------------------------------------------------

     Allow individuals to self-certify their status as 
accredited investors; \156\
---------------------------------------------------------------------------

    \156\ See, e.g., NSBA Letter; Thompson Letter; and PSC Letter.
---------------------------------------------------------------------------

     Allow otherwise non-accredited investors to retain 
professionals to advise them in order to qualify as accredited 
investors without limitation; \157\
---------------------------------------------------------------------------

    \157\ See, e.g., NSBA Letter; IMCA Letter; IAA Letter; and CFA/
AFR Letter (conditioned on individuals acting as a professional 
having no personal financial stake in the issuer). But see Muth 
Letter (expressing concern whether investors would be sufficiently 
protected by relying on the guidance of outside advisors with 
respect to unusual or complex investments).
---------------------------------------------------------------------------

     Allow any individual to invest in early growth issuers if 
such individual invests less than 10% of his or her income or is 
advised by sophisticated professionals; \158\
---------------------------------------------------------------------------

    \158\ See, e.g., Morello Letter.
---------------------------------------------------------------------------

     Conduct a study of the United Kingdom's approach to 
qualifying investors as sophisticated enough to take part in certain 
investments; \159\
---------------------------------------------------------------------------

    \159\ See, e.g., ENGINE Letter. See also Badiee Letter 
(describing the UK's approach).
---------------------------------------------------------------------------

     Harmonize the definitions of ``qualified purchasers'' in 
Section 2(a)(51) of the Investment Company Act \160\ and ``qualified 
client'' under the Investment Advisers Act \161\ to include accredited 
investors.\162\ Another commenter suggested harmonizing the definition 
of ``family'' across the Securities Act, Investment Company Act, and 
the Investment Advisors Act to allow a family office and its family 
clients to be accredited investors for purposes of Regulation D and 
Sections 3(c)(1) and 3(c)(7) of the Investment Company Act; \163\
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    \160\ See Section IV.A.2.b for a discussion of qualified 
purchasers.
    \161\ See Section IV.A.2.c for a discussion of qualified 
clients.
    \162\ See, e.g., MFA-1 Letter and MFA-2 Letter (``These changes 
would simplify the existing mismatch in standards for private fund 
investors without raising investor protection concerns. In 
particular, these changes would maintain existing financial 
thresholds and continue to ensure that only sophisticated investors 
are able to invest in private funds.''). See Section IV.
    \163\ See, e.g., Letter from Martin E. Lybecker, Perkins Coie 
LLP dated Aug. 8, 2016 available at https://www.sec.gov/comments/4-692/4692-42.pdf.
---------------------------------------------------------------------------

     Clarify that having a broker's client meet the 
``accredited investor'' definition does not relieve a broker from its 
obligation to make only suitable recommendations; \164\
---------------------------------------------------------------------------

    \164\ See, e.g., PIABA Letter.
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     Create an accredited investor designation for algorithmic 
investors; \165\
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    \165\ See, e.g., Lin Letter.
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     Add a limit on the spousal pooling allowance; \166\
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    \166\ See, e.g., Cornell Law Clinic Letter.
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     Expand the accredited investor standard in Rule 501(a)(8) 
to include existing or newly formed entities in which: (a) The 
investment decisions are made exclusively by accredited investors; and 
(b) accredited investors have provided a supermajority of the capital 
to be invested (e.g., 75-80%); \167\ and
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    \167\ See, e.g., Reardon Letter.
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     Consider additional changes to address the geographic 
disparity in the number of accredited investors among the different 
regions of the country.\168\
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    \168\ See, e.g., NSBA Letter.
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    One commenter also made a recommendation that the Commission 
develop an approach to third-party verification of accredited investor 
status that actively encourages the availability of such services while 
ensuring the independence and reliability of such providers.\169\
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    \169\ See, e.g., CFA/AFR Letter.
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5. Request for Comment
    For additional requests for comment related to the accredited 
investor definition as it applies to pooled investment funds, see 
Section IV.D.
    20. Should we change the definition of accredited investor or 
retain the current definition? If we make changes to the definition, 
should the changes be consistent with any of the recommendations 
contained in the Accredited Investor Staff Report? \170\ Have there 
been any relevant developments since the 2015 issuance of the 
Accredited Investor Staff Report, such as changes to the size or 
attributes of the pool of persons that may qualify as accredited 
investors; developments in the market or industry that may assist in 
potentially identifying new categories of individuals that may qualify 
as accredited investors; \171\ or changes in the risk profile, 
incidence of fraud, or other investor protection concerns in offerings 
involving accredited investors that we should consider? How do those

[[Page 30478]]

changes affect investors, issuers, and other market participants?
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    \170\ See discussion of the Accredited Investor Staff Report at 
Section II.A.3.
    \171\ See, e.g., the revised qualifying exams administered by 
FINRA to become registered securities professionals, including a new 
introductory-level exam that precedes a qualification exam: https://www.finra.org/industry/qualification-exams.
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    21. Should we revise the financial thresholds requirements for 
natural persons to qualify as accredited investors and the list-based 
approach for entities to qualify as accredited investors? If so, should 
we consider any of the following approaches to address concerns about 
how the current definition identifies accredited investor natural 
persons and entities:
     Leave the current income and net worth thresholds in 
place, subject to investment limits;
     Create new, additional inflation-adjusted income and net 
worth thresholds that are not subject to investment limits;
     As recommended by the Advisory Committee on Small and 
Emerging Companies in 2016, index all financial thresholds for 
inflation on a going-forward basis;
     Permit spousal equivalents to pool their finances for 
purposes of qualifying as accredited investors;
     Revise the definition as it applies to entities with total 
assets in excess of $5 million by replacing the $5 million assets test 
with a $5 million investments test and including all entities rather 
than specifically enumerated types of entities; and
     Grandfather issuers' existing investors that are 
accredited investors under the current definition with respect to 
future offerings of their securities.
    22. As recommended by the Advisory Committee on Small and Emerging 
Companies in 2016, the 2016, 2017, and 2018 Small Business Forums, and 
the 2017 Treasury Report, should we revise the accredited investor 
definition to allow individuals to qualify as accredited investors 
based on other measures of sophistication? If so, should we consider 
any of the following approaches to identify individuals who could 
qualify as accredited investors based on criteria other than income and 
net worth:
     Permit individuals with a minimum amount of investments to 
qualify as accredited investors;
     Permit individuals with certain professional credentials 
to qualify as accredited investors;
     Permit individuals with experience investing in exempt 
offerings to qualify as accredited investors;
     Permit knowledgeable employees of private funds to qualify 
as accredited investors for investments in their employer's funds;
     Permit individuals who pass an accredited investor 
examination to qualify as accredited investors; and
     Permit individuals, after receiving disclosure about the 
risks, to opt into being accredited investors.
    23. Under the current definition, a natural person just above the 
income or net worth thresholds would be able to invest without any 
limits, but a person just below the thresholds cannot invest at all as 
an accredited investor. Should we revise this aspect of the definition? 
If so, how?
    24. What are the advantages and disadvantages to issuers and 
investors of changing--by either narrowing or expanding--the accredited 
investor definition?
    25. Are there other changes to the definition that we should 
consider when harmonizing our exempt offering rules? For example, 
should we amend Rule 501(a)(3) to expand the types of entities that may 
qualify as accredited investors? If so, what types of entities should 
be included? Should we consider amendments to apply an investments-
owned standard, or other alternative standard, for entities to qualify 
as accredited investors?
    26. Many foreign jurisdictions provide exemptions from registration 
or disclosure requirements for offers and sales of securities to 
sophisticated or accredited investors.\172\ These jurisdictions use a 
variety of methods to identify sophisticated or accredited investors. 
In addition to criteria based on income, net worth, total assets, or 
investment amounts, certain regulatory regimes rely on certification or 
verification by financial professionals. Are there experiences in other 
jurisdictions that should inform our approach?
---------------------------------------------------------------------------

    \172\ See Section III.I. of the Accredited Investor Staff 
Report.
---------------------------------------------------------------------------

    27. Should we, as recommended by the 2017 Treasury Report, revise 
the accredited investor definition to expand the eligible pool of 
sophisticated investors? If so, should we permit an investor, whether a 
natural person or an entity, that is advised by a registered financial 
professional to be considered an accredited investor? Being advised by 
a financial professional has not historically been a complete 
substitute for the protections of the Securities Act registration 
requirements and, if applicable, the Investment Company Act. If we were 
to permit an investor advised by a registered financial professional to 
be considered an accredited investor, should we consider any other 
investor protections in these circumstances? For example, should we 
require educational or other qualifications for a financial 
professional advising such an investor and, if so, what type of 
qualifications? What additional disclosure, if any, should the 
financial professional be required to provide to the investor in 
connection with an investment available only to accredited investors? 
Should the financial professional be required to assess the 
appropriateness of the investment in an exempt offering on a 
transaction-by-transaction basis, or would it be appropriate to make 
the assessment looking at the investor's investment portfolio as a 
whole?
    28. If we were to permit an investor advised by a registered 
financial professional to be considered an accredited investor, should 
we specify or limit the types or amounts of investments that such an 
investor can make in exempt offerings? For example, should we allow 
investors that are not accredited investors under the current 
definition to invest in pooled investment funds, such as private funds 
under Section 3(c)(1) under the Investment Company Act,\173\ if these 
investors are: (1) Subject to limits on the amounts of investments in 
such pooled investment funds, such as a dollar amount or percentage of 
investments; and/or (2) limited to making the investment out of 
retirement or other similarly federally-regulated accounts (i.e., 
accounts that are more likely to be invested for the long term)? Would 
such a change substantially eliminate current distinctions between 
registered funds and private funds? Are there provisions of the 
Investment Company Act that should apply to such funds, such as 
diversification requirements, redemption requirements, and/or 
restrictions on leverage and affiliated transactions? Are there 
different disclosures that such funds should have to provide investors? 
Should the type of private fund be limited to a qualifying venture 
capital fund or otherwise have a limit on the fund's size? \174\ Should 
there be restrictions or requirements on the class or classes of 
interests in such funds available to investors advised by a registered 
financial professional? Should there be any restrictions or 
requirements regarding fees and expenses for such investors relative to 
the fees and expenses for other investors in the fund? What other 
conditions or limitations are appropriate, if any?
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    \173\ 15 U.S.C. 80a-3(c)(1). See Section IV.A.2 for a discussion 
of Section 3(c)(1) funds.
    \174\ See Section IV.A.2.a for a discussion of qualifying 
venture capital funds.
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    29. If an investment limit is implemented for investors considered 
to be accredited investors because they are advised by registered 
financial professionals, what should we take into

[[Page 30479]]

consideration in setting the amount of the limit? Should the limit vary 
depending on the particular exemption relied on for the offering or be 
consistent for all exempt offerings? Should the limit vary depending on 
the type of issuer conducting the exempt offering (e.g., whether the 
issuer is an operating company or a pooled investment fund, whether the 
issuer has a class of securities registered under the Exchange Act, or 
whether the issuer is subject to any on-going disclosure requirements)? 
Would varying limits increase complexity for issuers and investors? 
Should the limit be applied on a per-offering basis or some other 
basis? Should the limit be determined on an aggregate basis for all 
securities purchased in exempt offerings over the course of a year or 
some other time period?
    30. If we were to expand the definition of an accredited investor 
and/or limit the types or amounts of investments by accredited 
investors in exempt offerings, what challenges would exist in the 
application and enforcement of the revised criteria?
    31. Are there other regulatory regimes, such as ERISA, that may 
affect the ability of certain classes of investors to invest in exempt 
offerings?
    32. Under Rule 12g-1, to calculate the number of holders of record 
that were not accredited investors as of the last day of its most 
recent fiscal year, an issuer needs to determine, based on facts and 
circumstances, whether prior information provides a basis for a 
reasonable belief that the security holder continues to be an 
accredited investor as of the last day of the fiscal year. If such 
prior information does not provide a reasonable basis, is it difficult 
for an issuer to calculate the number of holders of record that were 
not accredited investors as of the last day of its most recent fiscal 
year pursuant to Rule 12g-1? If so, should we consider changes to Rule 
12g-1? For example, should we revise Rule 12g-1 to permit issuers to 
determine accredited investor status at the time of the last sale of 
securities to the respective purchaser, rather than the last day of its 
most recent fiscal year? Would such a change raise concerns about the 
use of outdated information that may no longer be reliable? \175\
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    \175\ See Changes to Exchange Act Registration Requirements 
Release at Section II.B.
---------------------------------------------------------------------------

B. Private Placement Exemption and Rule 506 of Regulation D

1. Section 4(a)(2) of the Securities Act
    Section 4(a)(2) \176\ of the Securities Act exempts from 
registration requirements ``transactions by an issuer not involving any 
public offering.'' The Securities Act does not define the phrase 
``transactions by an issuer not involving any public offering.'' 
Accordingly, it has been left to court decisions and Commission 
interpretations to define the scope of the exemption.
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    \176\ 15 U.S.C. 77d(a)(2).
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a. Scope of Exemption
    In SEC v. Ralston Purina Co.,\177\ the Supreme Court established 
the basic criteria for determining the availability of Section 
4(a)(2).\178\ To qualify for this exemption, which is sometimes 
referred to as the ``private placement'' exemption, the persons in the 
offering must:
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    \177\ 346 U.S. 119 (1953).
    \178\ See Section IV.A.2 for a discussion of restrictions under 
Sections 3(c)(1) and 3(c)(7) of the Investment Company Act on 
certain funds' ability to make a public offering of its securities.
---------------------------------------------------------------------------

     Be shown to be able to fend for themselves and, 
accordingly, do not need the protection afforded by the Securities Act; 
\179\ and
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    \179\ See SEC v. Ralston Purina Co., 346 U.S. 119 (1953) (``The 
focus of inquiry should be on the need of the offerees for the 
protections afforded by registration. The employees here were not 
shown to have access to the kind of information which registration 
would disclose. The obvious opportunities for pressure and 
imposition make it advisable that they be entitled to compliance 
with Sec.  5.'').
---------------------------------------------------------------------------

     Have access to the type of information normally provided 
in a prospectus for a registered securities offering.\180\
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    \180\ See id.
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    The precise limits of the statutory private placement exemption are 
not defined by rule. Whether a transaction is one not involving any 
public offering is essentially a question of fact and necessitates a 
consideration of all surrounding circumstances, including such factors 
as the relationship between the offerees and the issuer, and the 
nature, scope, size, type, and manner of the offering.\181\ If an 
issuer offers securities to even one person who does not meet the 
necessary conditions, the exemption may be lost, and the entire 
offering may be in violation of the Securities Act. An issuer relying 
on Section 4(a)(2) is restricted in its ability to make public 
communications to attract investors to its offering because public 
advertising is incompatible with a claim of exemption under Section 
4(a)(2).\182\ Section 4(a)(2) does not specify limits on the amount 
that an issuer can raise or the amount an investor can invest in an 
offering.
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    \181\ See Non-Public Offering Exemption, Release No. 33-4552 
(Nov. 6, 1962) [27 FR 11316 (Nov. 16, 1962)] (``Non-Public Offering 
Exemption Release''). Section 4(a)(2) was traditionally viewed as a 
way to provide ``an exemption from registration for bank loans, 
private placements of securities with institutions, and the 
promotion of a business venture by a few closely related persons.'' 
In 1962, prompted by increased use of the exemption for speculative 
offerings to unrelated and uninformed persons, the Commission 
clarified limitations on the exemption's availability. See Non-
Public Offering Exemption Release.
    \182\ See Non-Public Offering Exemption Release.
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b. Issuance of Restricted Securities
    Purchasers in a Section 4(a)(2) offering receive ``restricted 
securities.'' \183\ ``Restricted securities'' are securities that were 
issued in certain exempt transactions. Rule 144(a)(3) identifies the 
types of offerings that result in the acquisition of restricted 
securities. Security holders can only resell restricted securities into 
the market by registering the resale transaction or relying on a valid 
exemption from registration for the resale, such as Section 4(a)(1), 
available to ``transactions by any person other than an issuer, 
underwriter, or dealer.'' For the resale of restricted securities, most 
holders rely on Rule 144, which provides a safe harbor from being 
considered an ``underwriter'' under, and therefore ineligible to rely 
on the exemption from registration in, Section 4(a)(1).\184\
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    \183\ See 17 CFR 230.144(a)(3)(i). See also Rule 144 Adopting 
Release (``Rule 144, together with the other related rules and 
amendments, is designed to provide full and fair disclosure of the 
character of securities sold in trading transactions and to create 
greater certainty and predictability in the application of the 
registration provisions of the [Securities] Act by replacing 
subjective standards with more objective ones.'').
    \184\ For a discussion of Rule 144 and other resale exemptions, 
see Section V.A. See also Rule 144 Adopting Release (``persons who 
offer or sell restricted securities without complying with Rule 144 
are hereby put on notice by the Commission that in view of the broad 
remedial purposes of the [Securities] Act and of public policy which 
strongly supports registration, they will have a substantial burden 
of proof in establishing that an exemption from registration is 
available for such offers or sales and that such persons and the 
brokers and other persons who participate in the transactions do so 
at their risk'').
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c. Filing Requirements and Relationship With State Securities Laws
    An issuer conducting an offering pursuant to Section 4(a)(2) is not 
required to file any information with, or pay any fees to, the 
Commission. Such issuer, however, must comply with state securities 
laws and regulations in each state in which securities are offered or 
sold, also known as ``blue sky'' laws.

[[Page 30480]]

Each state's securities laws or regulations have their own registration 
or qualification requirements and exemptions from such requirements.
2. Rule 506 of Regulation D
    Regulation D originated as an effort to facilitate capital 
formation, consistent with the protection of investors.\185\ It 
simplified and clarified existing rules and regulations, eliminated 
unnecessary restrictions those rules and regulations placed on issuers, 
particularly small businesses, and harmonized federal and state 
exemptions.\186\
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    \185\ See Revision of Certain Exemptions From Registration for 
Transactions Involving Limited Offers and Sales, Release No. 33-6389 
(Mar. 8, 1982) [47 FR 11251 (Mar. 16, 1982)] (the ``Regulation D 
Adopting Release'').
    \186\ See id.
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    The Commission adopted Rule 506 of Regulation D as a non-exclusive 
``safe harbor'' under Section 4(a)(2), providing objective standards on 
which an issuer could rely to meet the requirements of the Section 
4(a)(2) exemption.\187\ In 2012, Section 201(a) of the JOBS Act 
required the Commission to eliminate the prohibition on using general 
solicitation under Rule 506 where all purchasers of the securities are 
accredited investors and the issuer takes reasonable steps to verify 
that the purchasers are accredited investors.\188\ To implement Section 
201(a), the Commission adopted paragraph (c) of Rule 506, and retained 
the prior Rule 506 safe harbor as Rule 506(b).\189\ Offerings under 
both Rule 506(b) and Rule 506(c) must satisfy the conditions of:
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    \187\ See Regulation D Adopting Release. Rule 506 of Regulation 
D replaced former 17 CFR 230.146. Attempted compliance with any rule 
in Regulation D does not preclude an issuer from claiming the 
availability of another applicable exemption. For example, an 
issuer's failure to satisfy all the terms and conditions of Rule 
506(b) does not raise a presumption that the exemption provided by 
Section 4(a)(2) is not available. See 17 CFR 230.500(c) (``Rule 
500(c)'').
    \188\ Public Law 112-106, sec. 201(a), 126 Stat. 306, 313 (Apr. 
5, 2012).
    \189\ See Eliminating the Prohibition Against General 
Solicitation and General Advertising in Rule 506 and Rule 144A 
Offerings, Release No. 33-9415 (Jul. 10, 2013) [78 FR 44771 (Jul. 
24, 2013)] (``Rule 506(c) Adopting Release''). Note that as a result 
of Congress' directive in Section 201(a) of the JOBS Act, Rule 506 
continues to be treated as a regulation issued under Section 4(a)(2) 
of the Securities Act, notwithstanding the ability of an issuer to 
make public communications to solicit investors for its offering 
under Rule 506(c).
---------------------------------------------------------------------------

     17 CFR 230.501 (``Rule 501'') (definitions for the terms 
used in Regulation D);
     17 CFR 230.502(a) (``Rule 502(a)'') (integration); \190\
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    \190\ See Section III.
---------------------------------------------------------------------------

     17 CFR 230.502(d) (``Rule 502(d)'') (limitations on 
resale); and
     Rule 506(d) (``bad actor'' disqualification).
    Offerings under Rule 506(b) must also satisfy the conditions of:
     17 CFR 230.502(b) (``Rule 502(b)'') (type of information 
to be furnished); \191\ and
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    \191\ See Section II.B.2.a(2).
---------------------------------------------------------------------------

     17 CFR 230.502(c) (``Rule 502(c)'') (limitations on the 
manner of offering).\192\
---------------------------------------------------------------------------

    \192\ See Section II.B.2.a(1).
---------------------------------------------------------------------------

    In addition, Rule 503, which requires the filing of a notice of 
sales on Form D, applies to all Rule 506 offerings. We summarize below 
first the terms and conditions specific to each of Rule 506(b) and Rule 
506(c) offerings, and then the rule requirements that apply to all Rule 
506 offerings.
a. Rule 506(b) Safe Harbor
    Issuers conducting an offering under Rule 506(b) can sell 
securities to an unlimited number of accredited investors with no limit 
on the amount of money that can be raised from each investor or in 
total. An offering under Rule 506(b), however, is subject to the 
following requirements:
     No general solicitation or advertising to market the 
securities \193\ is permitted; and
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    \193\ See 17 CFR 230.502(c).
---------------------------------------------------------------------------

     Securities may not be sold to more than 35 non-accredited 
investors that, either alone or with a purchaser representative, must 
have sufficient knowledge and experience in financial and business 
matters to be capable of evaluating the merits and risks of the 
prospective investment.\194\
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    \194\ See 17 CFR 230.506(b). See also Section II.A.
---------------------------------------------------------------------------

(1) Prohibition on General Solicitation and General Advertising
    As discussed above, public or general advertising of the offering 
and general solicitation of investors are incompatible with the private 
placement exemption. Although the terms ``general solicitation'' and 
``general advertising'' are not defined in Regulation D, Rule 502(c) 
does provide examples of general solicitation and general advertising, 
including advertisements published in newspapers and magazines, 
communications broadcast over television and radio, and seminars where 
attendees have been invited by general solicitation or general 
advertising.\195\ The Commission has stated that other uses of publicly 
available media, such as unrestricted websites, also constitute general 
solicitation and general advertising.\196\ In determining whether an 
advertisement or other communication would constitute a general 
solicitation of securities, the Commission has historically interpreted 
the term ``offer'' broadly, and has explained that ``the publication of 
information and publicity efforts, made in advance of a proposed 
financing which have the effect of conditioning the public mind or 
arousing public interest in the issuer or in its securities constitutes 
an offer.'' \197\ In this release, we refer to both general 
solicitation and general advertising as they relate to an ``offer'' of 
securities as ``general solicitation.''
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    \195\ See 17 CFR 230.502(c).
    \196\ See Use of Electronic Media for Delivery Purposes, Release 
No. 33-7233 (Oct. 6, 1995) [60 FR 53458, 53463-64 (Oct. 13, 1995)]; 
Use of Electronic Media, Release No. 33-7856 (Apr. 28, 2000) [65 FR 
25843, 25851-52 (May 4, 2000)].
    \197\ Securities Offering Reform, Release No. 33-8591 (July 19, 
2005) [70 FR 44722 (Aug. 3, 2005)] (``Securities Offering Reform 
Release'') at note 88 (``The term `offer' has been interpreted 
broadly and goes beyond the common law concept of an offer.'') 
(citing Diskin v. Lomasney & Co., 452 F.2d 871 (2d. Cir. 1971); SEC 
v. Cavanaugh, 1 F. Supp. 2d 337 (S.D.N.Y. 1998)). See also 
Securities Act Section 2(a)(3) (noting that an offer includes every 
attempt to dispose of a security or interest in a security, for 
value; or any solicitation of an offer to buy a security or interest 
in a security).
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(2) Disclosure Requirements for Non-Accredited Investors
    If non-accredited investors are participating in an offering under 
Rule 506(b), the issuer conducting the offering must furnish to non-
accredited investors the information required by Rule 502(b) \198\ a 
reasonable time prior to the sale of securities and provide non-
accredited investors with the opportunity to ask questions and receive 
answers about the offering.\199\ Further, if the issuer provides 
additional information to accredited investors, it must make this 
information available to the non-accredited investors as well.\200\ If 
an issuer limits purchasers in its Rule 506(b) offering to accredited 
investors, Rule 506(b) does not require the issuer to provide 
substantive disclosure to those accredited investors. Nevertheless, 
issuers and funds conducting private accredited investor-only offerings 
often provide prospective purchasers with information about the issuer. 
An issuer that provides information to non-accredited investors may 
choose to provide the information to accredited investors as well, in 
view of the antifraud provisions of the federal securities laws.\201\
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    \198\ See 17 CFR 230.502(b)(2)(i) through (vii).
    \199\ See 17 CFR 230.502(b)(2)(v).
    \200\ See 17 CFR 230.502(b)(2)(iv).
    \201\ See Note to 17 CFR 230.502(b).

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[[Page 30481]]

    The type of information to be furnished to non-accredited investors 
varies depending on the size of the offering and the nature of the 
issuer; however, the disclosure generally contains the same type of 
information as provided in a Regulation A offering or in a registered 
offering, including financial statement information, certain portions 
of which are required to be audited or certified.\202\
---------------------------------------------------------------------------

    \202\ See 17 CFR 230.502(b)(2)(i) through (vii).
---------------------------------------------------------------------------

    Specifically, if the issuer is not subject to the reporting 
requirements of Section 13 or 15(d) of the Exchange Act, the issuer 
must furnish certain non-financial statement information and financial 
statement information. The issuer is required to provide this 
information only to the extent it is material to an understanding of 
the issuer, its business, and the securities being offered.\203\ 
Regarding non-financial statement information, the issuer must provide 
the information required by Part II of Form 1-A \204\ (if the issuer is 
eligible to use Regulation A \205\) or Part I of a Securities Act 
registration statement on a form that the issuer would be entitled to 
use (if the issuer is not eligible to use Regulation A).\206\ The 
required financial statement information for issuers not subject to the 
reporting requirements of Section 13 or 15(d) of the Exchange Act 
varies depending on the size of the offering.\207\ The issuer must 
furnish the following information to the extent material to an 
understanding of the issuer, its business, and the securities being 
offered:
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    \203\ See 17 CFR 230.502(b)(2).
    \204\ 17 CFR 239.90.
    \205\ See Section II.C.1.a for a discussion of the Regulation A 
eligibility requirements.
    \206\ See 17 CFR 230.502(b)(2)(i)(A).
    \207\ See 17 CFR 230.502(b)(2)(i)(B).
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     For offerings up to $2 million, the information required 
in Article 8 of Regulation S-X,\208\ except that only the issuer's 
balance sheet, which shall be dated within 120 days of the start of the 
offering, must be audited; \209\
---------------------------------------------------------------------------

    \208\ 17 CFR 210.8.
    \209\ 17 CFR 230.502(b)(2)(i)(B)(1).
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     For offerings up to $7.5 million, the financial statement 
information required in Form S-1 \210\ for smaller reporting companies. 
If an issuer, other than a limited partnership,\211\ cannot obtain 
audited financial statements without unreasonable effort or expense, 
then only the issuer's balance sheet, which shall be dated within 120 
days of the start of the offering, must be audited; \212\ or
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    \210\ 17 CFR 239.10.
    \211\ If the issuer is a limited partnership and cannot obtain 
the required financial statements without unreasonable effort or 
expense, it may furnish financial statements that have been prepared 
on the basis of federal income tax requirements and examined and 
reported on in accordance with generally accepted auditing standards 
by an independent public or certified accountant.
    \212\ 17 CFR 230.502(b)(2)(i)(B)(2).
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     For offerings over $7.5 million, the financial statement 
information as would be required in a registration statement filed 
under the Securities Act on the form that the issuer would be entitled 
to use. If an issuer, other than a limited partnership,\213\ cannot 
obtain audited financial statements without unreasonable effort or 
expense, then only the issuer's balance sheet, which shall be dated 
within 120 days of the start of the offering, must be audited.\214\
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    \213\ See note 211.
    \214\ 17 CFR 230.502(b)(2)(i)(B)(3).
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    If the issuer is not subject to the reporting requirements of 
Section 13 or 15(d) of the Exchange Act and is a foreign private issuer 
\215\ eligible to use Form 20-F,\216\ it must disclose the same kind of 
information required to be included in an Exchange Act registration 
statement on a form that the issuer would be entitled to use.\217\ The 
financial statements need to be certified only to the extent that such 
information would be required to be audited under Rule 502(b) for 
issuers not subject to the reporting requirements of Section 13 or 
15(d) of the Exchange Act.\218\
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    \215\ A foreign issuer, other than a foreign government, will 
qualify as a ``foreign private issuer'' if 50% or less of its 
outstanding voting securities are held by U.S. residents; or if more 
than 50% of its outstanding voting securities are held by U.S. 
residents and none of the following three circumstances applies: The 
majority of its executive officers or directors are U.S. citizens or 
residents; more than 50% of the issuer's assets are located in the 
United States; or the issuer's business is administered principally 
in the United States. See 17 CFR 240.12b-2; 17 CFR 230.405.
    \216\ 17 CFR 249.220f.
    \217\ 17 CFR 230.502(b)(2)(i)(C).
    \218\ See 17 CFR 230.502(b)(2)(i)(C). The audited financial 
statement requirements for issuers not subject to the reporting 
requirements of section 13 or 15(d) of the Exchange Act are 
contained in 17 CFR 230.502(b)(2)(i)(B) and discussed in the 
immediately preceding paragraph.
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    On the other hand, if the issuer is subject to the reporting 
requirements of Section 13 or 15(d) of the Exchange Act, at a 
reasonable time prior to the sale of securities the issuer must furnish 
to investors either:
     Its annual report to shareholders for the most recent 
fiscal year \219\ and the definitive proxy statement filed in 
connection with that annual report; \220\ or
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    \219\ The annual report must meet the requirements of Rules 14a-
3 or 14c-3 under the Exchange Act (17 CFR 240.14a-3 or 17 CFR 
240.14c-3).
    \220\ See 17 CFR 230.502(b)(2)(ii)(A). If requested by the 
purchaser in writing, the issuer must also provide a copy of the 
issuer's most recent Form 10-K (17 CFR 249.310) under the Exchange 
Act.
---------------------------------------------------------------------------

     The most recently filed of the following:
     Annual report on Form 10-K; \221\
---------------------------------------------------------------------------

    \221\ 17 CFR 249.310.
---------------------------------------------------------------------------

     Registration statement on Form S-1; \222\
---------------------------------------------------------------------------

    \222\ 17 CFR 239.11.
---------------------------------------------------------------------------

     Registration statement on Form S-11; \223\ or
---------------------------------------------------------------------------

    \223\ 17 CFR 239.18.
---------------------------------------------------------------------------

     Registration statement on Form 10.\224\
---------------------------------------------------------------------------

    \224\ 17 CFR 249.10; see 17 CFR 230.502(b)(2)(ii)(B). Exhibits 
required to be filed with the Commission as part of a registration 
statement or report, other than an annual report to shareholders or 
parts of that report incorporated by reference in a Form 10-K 
report, need not be furnished if the contents of material exhibits 
are identified and such exhibits are made available to a purchaser, 
upon his or her written request, a reasonable time before his or her 
purchase. See 17 CFR 230.502(b)(2)(iii).
---------------------------------------------------------------------------

    In addition, the issuer must provide any reports or documents 
required to be filed by the issuer under Sections 13(a), 14(a), 14(c), 
and 15(d) of the Exchange Act since the distribution or filing of the 
report or registration statement furnished above and a brief 
description of the securities being offered, the use of the proceeds 
from the offering, and any material changes in the issuer's affairs 
that are not disclosed in the documents furnished.\225\
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    \225\ See 17 CFR 230.502(b)(2)(ii)(C).
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    If the issuer is subject to the reporting requirements of Section 
13 or 15(d) of the Exchange Act and is a foreign private issuer, the 
issuer may instead provide the information contained in its most recent 
Form 20-F \226\ or Form F-1 \227\ filing.\228\
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    \226\ 17 CFR 249.220f.
    \227\ 17 CFR 239.31.
    \228\ See 17 CFR 230.502(b)(2)(ii)(D).
---------------------------------------------------------------------------

    For business combinations or exchange offers, in addition to 
information required by Form S-4,\229\ the issuer must provide to each 
purchaser at the time the plan is submitted to security holders, or, 
with an exchange, during the course of the transaction and prior to 
sale, written information about any terms or arrangements of the 
proposed transactions that are materially different from those for all 
other security holders.\230\
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    \229\ 17 CFR 239.25.
    \230\ See 17 CFR 230.502(b)(2)(vi). If an issuer is not subject 
to the reporting requirements of section 13 or 15(d) of the Exchange 
Act, it may satisfy the requirements of Part I.B. or C. of Form S-4 
by providing the same kind of information as would be required in 
Part II of Form 1-A (if the issuer is eligible to use Regulation A) 
or Part I of a registration statement filed under the Securities Act 
on the form that the issuer would be entitled to use (if the issuer 
is not eligible to use Regulation A).

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[[Page 30482]]

b. Rule 506(c)
    Rule 506(c) permits issuers to broadly solicit and generally 
advertise an offering, provided that:
     All purchasers in the offering are accredited investors,
     The issuer takes reasonable steps to verify purchasers' 
accredited investor status, and
     Certain other conditions in Regulation D are 
satisfied.\231\
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    \231\ See 17 CFR 230.501 (Definitions and terms used in 
Regulation D) and 17 CFR 230.502(a) (Integration) and (d) 
(Limitations on Resales).
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    Issuers conducting an offering under Rule 506(c) can sell 
securities to an unlimited number of accredited investors with no limit 
on the amount of money that can be raised from each investor or in 
total. If an issuer seeks to conduct an offering using general 
solicitation under Rule 506(c), but does not comply with the conditions 
of the exemption, the issuer would need to find another available 
exemption for the offering.\232\
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    \232\ The issuer may be able to claim the availability of 
another exemption. See 17 CFR 230.500(c). In general, however, an 
issuer may be precluded from relying on Section 4(a)(2) if it used 
public communications to solicit investors for its offering. See 
Rule 506(c) Adopting Release at text accompanying note 42 (``[A]n 
issuer relying on Section 4(a)(2) outside of the Rule 506(c) 
exemption will be restricted in its ability to make public 
communications to solicit investors for its offering because public 
advertising will continue to be incompatible with a claim of 
exemption under Section 4(a)(2).'').
---------------------------------------------------------------------------

    Rule 506(c) provides a principles-based method for verification of 
accredited investor status as well as a non-exclusive list of 
verification methods. The principles-based method of verification 
requires an objective determination by the issuer (or those acting on 
its behalf) \233\ as to whether the steps taken are ``reasonable'' in 
the context of the particular facts and circumstances of each purchaser 
and transaction. Among the factors that an issuer should consider under 
this principles-based method are:
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    \233\ See Rule 506(c) Adopting Release at note 113 (``[I]n the 
future, services may develop that verify a person's accredited 
investor status for purposes of new Rule 506(c) and permit issuers 
to check the accredited investor status of possible investors, 
particularly for web-based Rule 506 offering portals that include 
offerings for multiple issuers. This third-party service, as opposed 
to the issuer itself, could obtain appropriate documentation or 
otherwise take reasonable steps to verify accredited investor 
status.'').
---------------------------------------------------------------------------

     The nature of the purchaser and the type of accredited 
investor that the purchaser claims to be;
     The amount and type of information that the issuer has 
about the purchaser; and
     The nature of the offering, such as the manner in which 
the purchaser was solicited to participate in the offering, and the 
terms of the offering, such as a minimum investment amount.\234\
---------------------------------------------------------------------------

    \234\ See id at Section II.B.3.a.
---------------------------------------------------------------------------

    The principles-based method is intended to provide issuers with 
significant flexibility in deciding the steps needed to verify a 
person's accredited investor status and to avoid requiring them to 
follow uniform verification methods that may be ill-suited or 
unnecessary to a particular offering or purchaser in light of the facts 
and circumstances.\235\ In the Rule 506(c) Adopting Release, the 
Commission discussed a number of factors an issuer could consider in 
determining the potential documentation that an issuer may need to 
verify a person's accredited investor status.\236\
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    \235\ See id.
    \236\ See id. In that release, the Commission stated that 
``[a]fter consideration of the facts and circumstances of the 
purchaser and of the transaction, the more likely it appears that a 
purchaser qualifies as an accredited investor, the fewer steps the 
issuer would have to take to verify accredited investor status, and 
vice versa. For example, if the terms of the offering require a high 
minimum investment amount and a purchaser is able to meet those 
terms, then the likelihood of that purchaser satisfying the 
definition of accredited investor may be sufficiently high such 
that, absent any facts that indicate that the purchaser is not an 
accredited investor, it may be reasonable for the issuer to take 
fewer steps to verify or, in certain cases, no additional steps to 
verify accredited investor status other than to confirm that the 
purchaser's cash investment is not being financed by a third 
party.'' In addition, the Commission stated that the means through 
which the issuer publicly solicits purchasers may be relevant in 
determining the reasonableness of the steps taken to verify 
accredited investor status. For example, ``[a]n issuer that solicits 
new investors through a website accessible to the general public, 
through a widely disseminated email or social media solicitation, or 
through print media, such as a newspaper, will likely be obligated 
to take greater measures to verify accredited investor status than 
an issuer that solicits new investors from a database of pre-
screened accredited investors created and maintained by a reasonably 
reliable third party.''
---------------------------------------------------------------------------

    In adopting the principles-based method of verification, the 
Commission also envisioned a role for third parties that may wish to 
enter into the business of verifying the accredited investor status of 
investors on behalf of issuers, by indicating that an issuer should 
also be entitled to rely on a third party that has verified a person's 
status as an accredited investor, provided that the issuer has a 
reasonable basis to rely on such third-party verification.\237\ 
However, an issuer will not be considered to have taken reasonable 
steps to verify accredited investor status if it, or those acting on 
its behalf, required only that a person check a box in a questionnaire 
or sign a form, absent other information about the purchaser indicating 
accredited investor status.\238\
---------------------------------------------------------------------------

    \237\ See Rule 506(c) Adopting Release at text accompanying note 
113.
    \238\ See Rule 506(c) Adopting Release at Section II.B.3.a.
---------------------------------------------------------------------------

    In addition to this flexible, principles-based method, Rule 506(c) 
includes a non-exclusive list of verification methods that issuers may 
use, but are not required to use, when seeking to satisfy the 
verification requirement with respect to natural person 
purchasers.\239\ This non-exclusive list of verification methods 
consists of:
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    \239\ See 15 CFR 230.506(c)(2)(ii). The rule does not set forth 
a non-exclusive list of methods for the verification of investors 
that are not natural persons. The Commission indicated in the 
adopting release its view that the potential for uncertainty and the 
risk of participation by non-accredited investors is highest in 
offerings involving natural persons as investors. See Rule 506(c) 
Adopting Release at Section II.B.3.
---------------------------------------------------------------------------

     Verification based on income, by reviewing copies of any 
Internal Revenue Service form that reports income, such as Form W-2, 
Form 1099, Schedule K-1 of Form 1065, or a filed Form 1040;
     Verification of net worth, by reviewing specific types of 
documentation dated within the prior three months, such as bank 
statements, brokerage statements, certificates of deposit, tax 
assessments, or a credit report from at least one of the nationwide 
consumer reporting agencies, and obtaining a written representation 
from the investor;
     A written confirmation from a registered broker-dealer, a 
registered investment adviser, a licensed attorney, or a certified 
public accountant stating that such person or entity has taken 
reasonable steps to verify that the purchaser is an accredited investor 
within the last three months and has determined that such purchaser is 
an accredited investor; and
     For a person who had invested in the issuer's Rule 506(b) 
offering as an accredited investor before September 23, 2013, and 
remains an investor of the issuer, a certification by such person at 
the time of sale that he or she qualifies as an accredited 
investor.\240\
---------------------------------------------------------------------------

    \240\ See 17 CFR 230.506(c)(ii)(A) through (D); see also Rule 
506(c) Adopting Release at Section II.B.3.b.
---------------------------------------------------------------------------

    The Commission included this non-exclusive list of verification 
methods for natural persons in Rule 506(c) in response to commenters 
requesting more certainty, but expressly stated that issuers are not 
required to use any of the specified methods and may rely on the 
principles-based approach to comply with the verification 
requirement.\241\ However, despite the ability to use the

[[Page 30483]]

principles-based approach, market participants have communicated to the 
staff that many issuers rely primarily on the listed verification 
methods.\242\
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    \241\ See Rule 506(c) Adopting Release at Section II.B.3.
    \242\ See also N. Peter Rasmussen, Rule 506(c)'s General 
Solicitation Remains Generally Disappointing (May 26, 2017), 
available at https://www.bna.com/rule-506cs-general-b73014451604/.
---------------------------------------------------------------------------

c. Limitations on Resale
    Purchasers in either a Rule 506(b) or a Rule 506(c) offering 
receive restricted securities and therefore are subject to limitations 
on the resale of the securities acquired in the transaction.\243\ The 
issuer relying on Rule 506(b) or 506(c) must exercise reasonable care 
to ensure that the purchasers of the securities are not underwriters 
within the meaning of Securities Act Section 2(a)(11).\244\ Reasonable 
care may be demonstrated by the following: (1) Reasonable inquiry to 
determine if the purchaser is acquiring the securities for such 
purchaser's own use or for other persons; (2) written disclosure to 
each purchaser prior to the sale that the securities have not been 
registered and, therefore, cannot be resold unless they are registered 
under the Securities Act or an exemption from registration is 
available; and (3) placement of a legend on the certificate or other 
document that evidences the securities stating that the securities have 
not been registered under the Securities Act and setting forth or 
referring to the restrictions on transferability and sale of the 
securities.\245\ In addition, the issuer in a Rule 506(b) offering is 
required to disclose the resale limitations to any non-accredited 
investors.\246\
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    \243\ See 17 CFR 230.502(d). The definition of ``restricted 
securities'' in Rule 144(a)(3) specifically includes securities 
acquired from the issuer that are subject to the resale limitations 
of Rule 502(d). See 17 CFR 230.144(a)(3)(ii).
    \244\ See 17 CFR 230.502(d).
    \245\ See 17 CFR 230.502(d). While taking these actions will 
establish the requisite reasonable care, they are not the exclusive 
method to demonstrate such care. Other actions by the issuer may 
satisfy this provision.
    \246\ See 17 CFR 230.502(b)(2)(vii).
---------------------------------------------------------------------------

    As discussed above, the holders of the restricted securities can 
only resell the securities by registering the resale transaction or 
relying on a valid exemption, such as Section 4(a)(1) or the non-
exclusive safe harbor in Rule 144.\247\
---------------------------------------------------------------------------

    \247\ See Section II.B.1.b. For a discussion of Rule 144 and 
other resale exemptions, see Section IV.
---------------------------------------------------------------------------

d. Filing Requirements and Relationship With State Securities Laws
    An issuer conducting an offering under either Rule 506(b) or Rule 
506(c) is required to file a notice with the Commission on Form D 
within 15 days after the first sale of securities in the offering.\248\ 
An issuer must file an amendment to a previously filed notice for an 
offering: To correct a material mistake of fact or error in the 
previously filed notice; to reflect a change in the information 
provided in the previously filed notice, except as provided in the 
General Instructions to Form D; \249\ and annually, on or before the 
first anniversary of the most recent previously filed notice, if the 
offering is continuing at that time.\250\ The Commission does not 
charge any fee to file or amend a Form D.
---------------------------------------------------------------------------

    \248\ See 17 CFR 230.503. Filing a Form D notice is required, 
but a failure to file the notice does not invalidate the exemption.
    \249\ The General Instructions to Form D provide that an issuer 
is not required to file an amendment to a previously filed notice to 
reflect a change that occurs after the offering terminates or a 
change that occurs solely in the following information: The address 
or relationship to the issuer of a related person identified in 
response to Item 3; an issuer's revenues or aggregate net asset 
value; the minimum investment amount, if the change is an increase, 
or if the change, together with all other changes in that amount 
since the previously filed notice, does not result in a decrease of 
more than 10%; any address or state(s) of solicitation shown in 
response to Item 12; the total offering amount, if the change is a 
decrease, or if the change, together with all other changes in that 
amount since the previously filed notice, does not result in an 
increase of more than 10%; the amount of securities sold in the 
offering or the amount remaining to be sold; the number of non-
accredited investors who have invested in the offering, as long as 
the change does not increase the number to more than 35; the total 
number of investors who have invested in the offering; and the 
amount of sales commissions, finders' fees or use of proceeds for 
payments to executive officers, directors or promoters, if the 
change is a decrease, or if the change, together with all other 
changes in that amount since the previously filed notice, does not 
result in an increase of more than 10%. 17 CFR 239.500.
    \250\ See General Instructions to Form D. 17 CFR 239.500.
---------------------------------------------------------------------------

    If an issuer's offering meets the conditions of either Rule 506(b) 
or Rule 506(c), the issuer is not required to register or qualify the 
offering with state securities regulators.\251\ Section 18 of the 
Securities Act generally provides for preemption of state law 
registration and qualification requirements for certain categories of 
securities, defined as ``covered securities.'' \252\ Section 
18(b)(4)(F) of the Securities Act provides covered security status to 
all securities sold in transactions exempt from registration under 
Commission rules promulgated under Section 4(a)(2), which includes 
Rules 506(b) and 506(c) of Regulation D.\253\ An offering by such an 
issuer, however, remains subject to state law enforcement and antifraud 
authority. Additionally, issuers may be subject to filing fees in the 
states in which they intend to offer or sell securities and be required 
to comply with state notice filing requirements. The failure to file, 
or pay filing fees related to, any such materials may cause state 
securities regulators to suspend the offer or sale of securities within 
their jurisdiction.
---------------------------------------------------------------------------

    \251\ See 17 U.S.C. 77r(b)(4)(F).
    \252\ See 15 U.S.C. 77r(c).
    \253\ See 17 CFR 230.506(a). See also note 189.
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e. Bad Actor Disqualification
    Offerings under Rule 506 are subject to the disqualification 
provisions found in Rule 506(d) of Regulation D. The ``bad actor'' 
disqualification provisions disqualify offerings from relying on Rule 
506(b) or 506(c) if the issuer or other ``covered persons'' \254\ have 
experienced a disqualifying event, such as being convicted of, or 
sanctioned for, securities fraud or other violations of specified 
laws.\255\
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    \254\ ``Covered persons'' include: The issuer, including its 
predecessors and affiliated issuers; directors, officers, general 
partners, or managing members of the issuer; beneficial owners of 
20% or more of the issuer's outstanding voting equity securities, 
calculated on the basis of voting power; promoters connected with 
the issuer in any capacity at the time of sale; and persons 
compensated for soliciting investors, including the general 
partners, directors, officers, or managing members of any such 
solicitor. See 17 CFR 230.506(d)(1).
    \255\ See 17 CFR 230.506(d)(1)(i) through (viii) for the list of 
disqualifying events.
---------------------------------------------------------------------------

    Many of these events are disqualifying only if they occurred during 
a specified look-back period (for example, a court injunction that was 
issued within the last five years or a regulatory order that was issued 
within the last ten years). The look-back period is measured by 
counting back from the date of sale of securities in the relevant 
offering to the date of the potentially disqualifying event--for 
example, the issuance of the injunction or regulatory order and not the 
date of the underlying conduct that led to the disqualifying event.
    The disqualification provisions do not apply to events occurring 
before the effective date of the provisions.\256\ Instead, Rule 506(d) 
requires the issuer to disclose to each purchaser those events that 
would have been disqualifying but for the fact that they occurred prior 
to the effective date.\257\
---------------------------------------------------------------------------

    \256\ 17 CFR 230.506(d)(2)(i).
    \257\ 17 CFR 230.506(e).
---------------------------------------------------------------------------

    The rule provides an exception from disqualification when the 
issuer is able to demonstrate that it did not know and, in the exercise 
of reasonable care, could not have known that a covered person with a 
disqualifying event participated in the offering.\258\
---------------------------------------------------------------------------

    \258\ 17 CFR 230.506(d)(2)(iv). The specific steps an issuer 
should take to exercise reasonable care will vary according to 
particular facts and circumstances. The instruction to Rule 
506(d)(2)(iv) states that an issuer will not be able to establish 
that it has exercised reasonable care unless it has made, in light 
of the circumstances, a factual inquiry into whether any 
disqualifications exist.

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[[Page 30484]]

    In addition, disqualification under Rule 506(d) will not arise if, 
before any sales are made in the offering, the court or regulatory 
authority that entered the relevant order, judgment or decree advises 
in writing--whether in the relevant judgment, order or decree or 
separately to the Commission or its staff--that disqualification under 
the rule should not arise as a consequence of such order, judgment, or 
decree.\259\ The rule also provides for the ability to seek waivers 
from disqualification from the Commission based on a showing of good 
cause that it is not necessary under the circumstances that the 
exemption be denied.\260\
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    \259\ 17 CFR 230.506(d)(2)(iii).
    \260\ 17 CFR 230.506(d)(2)(ii).
---------------------------------------------------------------------------

f. Analysis of Rule 506 in the Exempt Market
    As reflected in Table 6 below, Rule 506(b) continues to dominate 
the market for exempt securities offerings and even exceed amounts 
raised in the registered market. In 2018, the amount raised by Rule 
506(b) offerings, $1.5 trillion, was larger than the $1.4 trillion 
raised in registered offerings.\261\
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    \261\ See note 37 and accompanying text.

 Table 6--Offerings Under Rule 506, September 23, 2013-December 31, 2018
------------------------------------------------------------------------
                                       Rule 506(b)        Rule 506(c)
------------------------------------------------------------------------
Number of Issuers................  97,164............  8,025.
Number of Offerings..............  112,193...........  9,358.
Percentage of Offerings under      89%...............  11%.
 Regulation D.
Amount Reported Raised...........  $7,300 billion      $466.4 billion
                                    \262\.              \263\.
Percentage of Amount Raised under  94%...............  6%.
 Regulation D.
------------------------------------------------------------------------

    As discussed above in Section II.A, while offerings under Rule 
506(b) can have up to 35 non-accredited but sophisticated investors, 
non-accredited investors were reported as participating in only 
approximately 6% of Rule 506(b) offerings in each of 2015, 2016, 2017, 
and 2018, which offerings reported raising between two and three 
percent of the total capital raised under Rule 506(b) in each of 2015, 
2016, 2017, and 2018.\264\ The information requirement is the principal 
difference between a Rule 506(b) offering that includes non-accredited 
investors and one that is limited to accredited investors. Accordingly, 
it appears that the vast majority of issuers either are able to meet 
their capital needs through offerings to accredited investors only or, 
alternatively, may be limiting their Rule 506(b) offerings to 
accredited investors to avoid these disclosure requirements, which are 
generally similar to the non-financial disclosure requirements of a 
Regulation A offering and the financial statement requirements of a 
Form S-1 registration statement with reduced audit requirements.\265\ 
If issuers are limiting their offerings to accredited investors to 
avoid the disclosure requirements, it is not possible to conclude if 
those issuers are successfully able to meet their capital needs though 
Rule 506(b) offerings.
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    \262\ This amount includes an incremental amount of 
approximately $3,200 billion reported raised in amendments to 
initial filings.
    \263\ This amount includes an incremental amount of 
approximately $81 billion reported raised in amendments to initial 
filings, some of which were initiated as Rule 506(b) offerings.
    \264\ As a comparison point, during the same four-year period, 
non-accredited investors were reported as participating in over 60% 
of the Rule 504 offerings. Rule 504 permits issuers to raise up to 
$5 million in a 12-month period from an unlimited number of 
investors (without regard to whether or not those investors are 
accredited). Issuers conducting a Rule 504 offering are not subject 
to the information requirements in Rule 502(c), but must register 
the offering or have a state exemption from registration in every 
state in which the issuer is offering and selling securities. See 
Section II.D for a discussion of Rule 504.
    \265\ See 17 CFR 230.502(b)(2). See also William K. Jr. 
Sjostrom, PIPEs, 2 Entrepreneurial Bus. L.J. 381 (2007), at n.72 and 
accompanying text. (stating, in the context of private investments 
in public equity, that ``[t]ypically, PIPE deals are marketed only 
to accredited investors so that the issuer does not have to contend 
with meeting these disclosure and sophistication requirements'').
---------------------------------------------------------------------------

    The vast majority of Regulation D issuers continue to raise capital 
through Rule 506(b) offerings. Rule 506(b) offerings account for a 
larger amount of capital raised than Rule 506(c) offerings both in the 
aggregate across all offerings and for the average offering. One reason 
why Rule 506(b) continues to dominate the Regulation D market may be 
that issuers with pre[hyphen]existing sources of financing and/or 
intermediation channels are accustomed to relying on Rule 506(b) and do 
not need the flexibility provided by Rule 506(c). Other issuers may 
become more comfortable with Rule 506(c) market practices as they 
develop over time.\266\ Some issuers may be reluctant to use general 
solicitation because they do not wish to share information publicly 
(through advertising materials) for competitive and general business 
reasons.\267\ There may also be concerns about the added burden or 
appropriate levels of verification of the accredited investor status of 
all purchasers and

[[Page 30485]]

possible investor privacy concerns.\268\ Regulatory uncertainty has 
also been previously identified as a possible explanation for the 
relatively low level of the Rule 506(c) offerings.\269\ While Rule 
500(c) of Regulation D makes clear that an issuer's failure to satisfy 
all the terms and conditions of Rule 506(b) does not preclude the 
issuer's ability to rely on the exemption provided by Section 4(a)(2), 
an issuer relying on Section 4(a)(2) outside of the Rule 506(c) 
exemption, including because of an inadvertent failure to comply with 
the requirements of Rule 506(c), could be precluded from relying on 
Section 4(a)(2) if, as discussed above, it used public communications 
to solicit investors for its offering because public advertising is 
incompatible with a claim of exemption under Section 4(a)(2).\270\
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    \266\ See, generally, comments of Jean Peters, Board member, 
Angel Capital Association, at the 33rd Securities and Exchange 
Commission Government[hyphen]Business Forum on Small Business 
Capital Formation, November 20, 2014, transcript available at 
https://www.sec.gov/info/smallbus/sbforum112014-final-transcript.pdf 
(``Peters Comments'').
    \267\ See, e.g., N. Peter Rasmussen, Rule 506(c)'s General 
Solicitation Remains Generally Disappointing (May 26, 2017), 
available at https://www.bna.com/rule-506cs-general-b73014451604/. 
See also, Peters Comments.
     See also Manning G. Warren (2017) The Regulatory Vortex for 
Private Placements, Securities Regulation Law Journal, Vol. 45, 
Issue 9 (``Warren 2017 Study'') (summarizing discussions with 
securities counsel and the results of a survey of counsel 
specializing in private placements of securities regarding the 
reasons for reluctance to rely on Rule 506(c), including the 
``highly practicable and reliable'' Rule 506(b) model; preference to 
recruit investors ``with whom [issuers] have preexisting personal 
and business relationships'' in lieu of ``accredited strangers''; 
issuer preference to ``preserve the confidentiality of their private 
securities offerings and related business plans'' from ``potential 
competitors but also from state and federal regulators''; as well as 
a reluctance to ``engage in an independent verification process in 
order to objectively determine the accredited investor status of 
each accredited investor in Rule 506(c) offerings.'' With respect to 
the last concern, this study states that ``[m]ost securities lawyers 
have not yet developed a comfort level with the necessary 
`reasonable steps to verify. '. . . Moreover, this compliance 
requirement could chill the interests of many significant investors 
who have understandable reluctance to share their tax returns, 
brokerage statements and other confidential financial information 
with issuers' management and attorneys . . . [S]ome two-thirds of 
the respondents expressed concerns over compliance with the 
verification requirement . . . The possibilities that accredited 
investors will walk away from Rule 506(c) offerings based on privacy 
concerns clearly [contribute] to issuer reluctance to use Rule 
506(c) and to a corollary preference to use Rule 506(b) as the 
exemption from registration.''). See also Larissa Lee (2014) The Ban 
Has Lifted: Now Is the Time to Change the Accredited-Investor 
Standard, Utah Law Review, Vol. 2014, Issue 2; Elan W. Silver (2015) 
Reaching the Right Investors: Comparing Investor Solicitation in the 
Private-Placement Regimes of the United States and the European 
Union, Tulane Law Review, Vol. 89; Dale A. Oesterle (2015) 
Intermediaries in internet Offerings: The Future Is Here, Wake 
Forest Law Review, Vol. 50.
    \268\ See note 267.
    \269\ See, e.g., Online Deal Marketing Outlook for Q1 2014: 
Regulators Rain on Parade as Rule 506(c) Enthusiasts Ready for Storm 
of Advertising (April 2014), Dealflow.com, available at https://web.archive.org/web/20150430200100/https://dealflow.com/whitepapers/Dealflow_White_Paper_Q1_2014.pdf; Unregistered Offerings White 
Paper; Warren 2017 Study.
    \270\ See Section II.B.1.a.
---------------------------------------------------------------------------

    Geographically, offerings under Rule 506 were relatively 
concentrated, both in terms of number and proceeds. Maps of offering 
activity under Rule 506 during 2009-2018 by issuer location (covering 
48 U.S. states) are shown below:
[GRAPHIC] [TIFF OMITTED] TP26JN19.004

3. Request for Comment
    For additional requests for comment related to exempt transactions 
under Section 4(a)(2) or Rule 506 involving pooled investment funds, 
see Section IV.D.
    33. Should we consider any changes to Rule 506(b) or 506(c)? Do the 
requirements of Rules 506(b) and 506(c) appropriately address capital 
formation and investor protection considerations?

[[Page 30486]]

Alternatively, should we retain Rules 506(b) and 506(c) as they are?
    34. Should we combine the requirements for Rule 506(b) and Rule 
506(c) offerings in one exemption? If so, what aspects of each rule 
should be retained in the combined exemption and why? Would legislative 
changes be necessary or beneficial to make such changes?
    35. Is it important to continue to allow non-accredited investors 
to participate in Rule 506(b) offerings? Are the information 
requirements having an impact on the willingness of issuers to allow 
non-accredited investors to participate?
    36. Are the current information requirements in Rule 506(b) 
appropriate or should they be modified? Should we revise the 
information requirements contained in Rule 502(b) to align those 
requirements with those of another type of exempt offering, such as 
Regulation Crowdfunding, Tier 1 of Regulation A, Tier 2 of Regulation 
A, or Rule 701? \271\ How would such changes affect capital raising 
under Rule 506(b)? Should we consider eliminating or scaling the 
information requirements depending on the characteristics of the non-
accredited investors participating in the offering, such as if all non-
accredited investors are advised by a financial professional or a 
purchaser representative? Should the information requirements vary if 
the non-accredited investors can only invest a limited amount or if 
they invest alongside a lead accredited investor on the same terms as 
the lead investor? Would there be investor protection concerns 
regarding any reduction in information required to be provided to non-
accredited investors?
---------------------------------------------------------------------------

    \271\ See note 512 for a brief discussion of Rule 701.
---------------------------------------------------------------------------

    37. Should we amend Regulation D to clarify or define ``general 
solicitation'' or ``general advertising''? Does the current definition 
pose any particular challenges? Alternatively, should we expand the 
list of examples provided in Rule 502(c)? Should we consider amending 
the definition or adding an example clarifying whether participation in 
a ``demo-day'' or similar event would be considered general 
solicitation?
    38. If we reduce the information requirements in Rule 506(b), 
should we include investment limits for non-accredited investors? If 
so, what limits are appropriate and why? Should accredited investors be 
subject to investment limits?
    39. Should information requirements apply to accredited investors 
in offerings under either Rule 506(b) or 506(c)? If so, what type of 
information requirements would be appropriate? Should any such 
information requirements apply to all accredited investors, whether 
natural persons or entities?
    40. Are issuers hesitant to rely on Rule 506(c), as suggested by 
the data on amounts raised under that exemption as compared to other 
exemptions? If so, why? Has the adoption of Rule 506(c) enabled issuers 
to reach a greater number of potential investors and/or increased their 
access to sources of capital? Are there changes we should consider to 
encourage capital formation under Rule 506(c), consistent with the 
protection of investors?
    41. Are there data available that show an increase or decrease in 
fraudulent activity in the Rule 506 market as a result of the adoption 
of Rule 506(c)? If so, what are the causes or explanations and what 
should we do to address them?
    42. Is the requirement to take reasonable steps to verify 
accredited investor status having an impact on the willingness of 
issuers to use Rule 506(c)? Are there additional or alternative 
verification methods that we should include in the non-exclusive list 
of reasonable verification methods that would make issuers more willing 
to use Rule 506(c) or would better address investor protections?
    43. If we do not revise or expand the verification methods in Rule 
506(c), but we expand the ``accredited investor'' categories (e.g., to 
include investors that are financially sophisticated or advised by a 
financial professional), how would an issuer verify accredited investor 
status under these new categories?
    44. Should we consider rule changes to allow non-accredited 
investors to purchase securities in an offering that involves general 
solicitation? If so, what types of investor protection conditions 
should apply? For example, should we allow non-accredited investors to 
participate in such an offering only if: (1) Such non-accredited 
investors had a pre-existing substantive relationship with the issuer 
or were not made aware of the offering through the general 
solicitation; (2) the offering is done through a registered 
intermediary; or (3) a minimum percentage of the offering is sold to 
institutional accredited investors that have experience in exempt 
offerings and the terms of the securities are the same as those sold to 
the non-accredited investors? How would such changes affect capital 
formation and investor protection? Would legislative changes be 
necessary or beneficial to make such changes?
    45. What other changes to Rule 506 should we consider when 
harmonizing our exempt offering rules? For example, should we amend 
Rule 503 to provide a deadline to file the Form D other than the 
current requirement to file the Form D no later than 15 calendar days 
after the first sale of securities in the offering? If so, what 
deadline would be more appropriate? Would a different deadline, or a 
deadline tied to the completion of the offering, facilitate issuers' 
compliance with the Form D filing requirement? What impact would any 
such changes have on the utility of Form D for the Commission, 
investors, or state securities regulators? Is the Form D information 
useful to investors? Should we consider any changes to the information 
required in Form D?
    46. How frequently are issuers relying on the Section 4(a)(2) 
exemption or otherwise conducting private offerings where no Form D is 
required to be filed? We request data on such offerings where no Form D 
is available.

C. Regulation A

    Regulation A was originally adopted by the Commission in 1936 as an 
exemption for small issues under the authority of Section 3(b) of the 
Securities Act.\272\ Section 401 of the JOBS Act \273\ amended Section 
3(b) of the Securities Act by designating Section 3(b), the 
Commission's exemptive authority for offerings of up to $5 million, as 
Section 3(b)(1), and adding new Sections 3(b)(2) through 3(b)(5) to the 
Securities Act.\274\ Section 3(b)(2) directed 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) through (5) 
specify mandatory terms and conditions for such exempt offerings and 
authorize the Commission to adopt other terms, conditions, or 
requirements as necessary in the public interest and for the protection 
of investors. On March 25, 2015, the Commission adopted final rules to 
implement Section 401 of the JOBS Act by creating two tiers of 
Regulation A offerings: Tier 1, for offerings of up to $20 million in a 
12-month period; and Tier 2, for offerings

[[Page 30487]]

of up to $50 million in a 12-month period.\275\ In adopting the two-
tiered structure, the Commission indicated that it expected the 
requirements for Tier 1 to result in securities offerings that would be 
more local in character, while Tier 2 offerings would likely be more 
national in character.\276\ Certain basic requirements are applicable 
to both tiers, but Tier 2 issuers are subject to significant additional 
requirements. For example, Tier 2 issuers are always required to 
include audited financial statements in their offering circulars \277\ 
and 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.\278\ In 
consideration of these requirements, which are discussed in more detail 
below, and the likely more national nature of Tier 2 offerings, 
Commission rules preempt state securities law registration and 
qualification requirements for Tier 2 offerings, while Tier 1 offerings 
remain subject to those state requirements.\279\ An issuer of $20 
million or less of securities can elect to proceed under either Tier 1 
or Tier 2.
---------------------------------------------------------------------------

    \272\ See SEC Release No. 33-632 (Jan. 21, 1936). Prior to 
codification as such, Regulation A was a collection of individual 
rules issued by the Federal Trade Commission and the Commission 
during the period of 1933-1936. Each such rule exempted particular 
classes of securities from registration under the Securities Act. 
Regulation A's initial annual offering limit was raised from 
$100,000 to $300,000 in 1945, $500,000 in 1970, $1.5 million in 
1978, and to $5 million in 1992.
    \273\ See Public Law 112-106, sec. 401(a), 126 Stat. 306, 313 
(Apr. 5, 2012).
    \274\ See 15 U.S.C. 77c(b)(2) through (5).
    \275\ See 2015 Regulation A Release.
    \276\ See id.
    \277\ See Part F/S of Form 1-A.
    \278\ See 17 CFR 230.257 (``Rule 257'').
    \279\ See 2015 Regulation A Release.
     Based on the analysis of information from Part I of Form 1-A 
offering statements qualified between June 19, 2015 (the effective 
date of Regulation A amendments) and December 31, 2018, for Tier 1 
offerings with qualified offering statements, the median number of 
U.S. jurisdictions in which the issuer (and if applicable, 
underwriters, dealers, or sales persons) intended to offer 
securities was six states, whereas among Tier 2 offerings with 
qualified offering statements, the median was 51. These estimates 
include 50 U.S. states and the District of Columbia, but exclude 
U.S. territories, Canadian provinces, and foreign jurisdictions 
other than Canada (which has a minimal effect on these estimates). 
We recognize that this differential observed in the data may be 
related to the fact that, under the 2015 Regulation A amendments, 
state registration requirements apply to Tier 1 but not to Tier 2 
offerings.
---------------------------------------------------------------------------

    In addition to expanding the Regulation A offering limit, the 2015 
amendments sought to modernize the Regulation A filing process, 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 certain 
Regulation A issuers.\280\ On December 19, 2018, the Commission further 
amended the issuer eligibility and related provisions pursuant to the 
Economic Growth Act to allow issuers that are subject to the ongoing 
reporting requirements of Section 13 or 15(d) of the Exchange Act to 
use the exemption.\281\
---------------------------------------------------------------------------

    \280\ See id.
    \281\ See Amendments to Regulation A, Release No. 33-10591 (Dec. 
19, 2018) [84 FR 520 (Jan. 31, 2019)] (``2018 Regulation A 
Release'').
---------------------------------------------------------------------------

    The Commission is required by Section 3(b)(5) of the Securities Act 
to review the Tier 2 offering limit every two years. In addition to 
revisiting the Tier 2 offering limit, the Commission stated that the 
staff would undertake to review the Tier 1 offering limit at the same 
time.\282\ Following completion of the staff reviews of the offering 
limits in 2016 and 2018, the Commission determined not to propose to 
increase the offering limit for either Tier at that time. At the time 
of adoption of the 2015 amendments, the Commission also stated that the 
staff would study and submit a report to the Commission no later than 
five years following the adoption of the amendments on the impact of 
both Tier 1 and Tier 2 offerings on capital formation and investor 
protection.\283\ The Commission indicated in the 2015 Regulation A 
Release that, based on the information contained in the report, it may 
propose either to decrease or to increase the offering limit for Tier 
1, as appropriate.
---------------------------------------------------------------------------

    \282\ See 2015 Regulation A Release at 21809.
    \283\ See 2015 Regulation A Release. The 2015 Regulation A 
Release stated that the report would 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.
---------------------------------------------------------------------------

1. Scope of the Exemption
    In order to conduct offerings pursuant to Tier 1 or Tier 2 of 
Regulation A, issuers must meet certain requirements. Table 7 broadly 
summarizes the Commission requirements for each tier.

             Table 7--Overview of Regulation A Requirements
------------------------------------------------------------------------
                                     Tier 1                Tier 2
------------------------------------------------------------------------
Issuer Requirements.........   U.S. or Canadian issuers; excludes blank
                                 check companies, registered investment
                                    companies, business development
                               companies, issuers of certain securities,
                                and certain issuers subject to a Section
                                              12(j) order.
                             -------------------------------------------
Offering Limit within a 12-   $20 million.........  $50 million.
 month Period.
                             -------------------------------------------
Offering Communications.....    Testing the waters permitted before and
                                 after the offering statement is filed.
                             -------------------------------------------
Investor Limits.............  No limits...........  Non-accredited
                                                     investors are
                                                     subject to
                                                     investment limits
                                                     based on annual
                                                     income and net
                                                     worth, unless
                                                     securities will be
                                                     listed on a
                                                     national securities
                                                     exchange.
SEC Filing Requirements.....  Form 1-A filed with   Form 1-A filed with
                               the Commission,       the Commission,
                               including two years   including two years
                               of financial          of audited
                               statements (which     financial
                               may be unaudited in   statements.
                               most cases).
Restrictions on Resale......  No..................  No.
                             -------------------------------------------
Disqualification Provisions.     Felons and bad actors disqualified in
                                       accordance with Rule 262.
                             -------------------------------------------
Preemption of State           No..................  Yes.
 Registration and
 Qualification.

[[Page 30488]]

 
Ongoing Reporting...........  Exit report due       Annual report on
                               within 30 calendar    Form 1-K due within
                               days after            120 calendar days
                               termination or        of issuer's fiscal
                               completion of an      year end; Semi-
                               offering.             annual report on
                                                     Form 1-SA due
                                                     within 90 calendar
                                                     days of after the
                                                     end of the first
                                                     six months of
                                                     issuer's fiscal
                                                     year; Current
                                                     reports on Form 1-U
                                                     due within four
                                                     business days of
                                                     one of the items
                                                     specified in that
                                                     form; and If
                                                     applicable, an Exit
                                                     report on Form 1-Z
                                                     to terminate an
                                                     issuer's reporting
                                                     obligations.
------------------------------------------------------------------------

a. Eligible Issuers and Securities; Offering Process
    Regulation A is available only to issuers organized in, and with 
their principal place of business in, the United States or Canada.\284\
---------------------------------------------------------------------------

    \284\ See 17 CFR 230.251(b).
---------------------------------------------------------------------------

    It is, however, not available to:
     Investment companies registered or required to be 
registered under the Investment Company Act or BDCs;
     Blank check companies; \285\
---------------------------------------------------------------------------

    \285\ See 17 CFR 230.251(b)(3). See also note 25.
---------------------------------------------------------------------------

     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; 
or
     Issuers subject to ``bad actor'' disqualification under 15 
CFR 230.262 (``Rule 262'').\286\
---------------------------------------------------------------------------

    \286\ Regulation A includes disqualification provisions that are 
substantially similar to those in Rule 506(d). See Section II.B.2.e. 
Disqualification will not arise as a result of disqualifying events 
relating to final orders of certain state and federal regulators or 
certain SEC cease-and-desist orders that occurred before June 19, 
2015, the effective date of the Regulation A amendments. Matters 
that existed before the effective date of the rule and that would 
otherwise be disqualifying are, however, required to be disclosed in 
writing to investors in Part II of Form 1-A.
---------------------------------------------------------------------------

    The types of securities eligible for sale under Regulation A are 
limited to the enumerated list in Section 3(b)(3) of the Securities 
Act, which includes equity securities, debt securities, and debt 
securities convertible or exchangeable to equity interests, including 
any guarantees of such securities.\287\ Regulation A also specifically 
excludes asset-backed securities.\288\
---------------------------------------------------------------------------

    \287\ See 15 U.S.C. 77c(b)(3)
    \288\ See 17 CFR 230.251. An asset-backed security generally 
means a security that is primarily serviced by the cash flows of a 
discrete pool of receivables or other financial assets, either fixed 
or revolving, that by their terms convert into cash within a finite 
time period, plus any rights or other assets designed to assure the 
servicing or timely distributions of proceeds to the security 
holders. See 17 CFR 229.1101(c).
---------------------------------------------------------------------------

    Continuous or delayed offerings are permitted, although Regulation 
A limits the types of delayed offerings permitted under the exemption 
\289\ and is not available for at-the-market offerings.\290\ Regulation 
A includes no specific limitations on, requirements for, or other 
provisions regarding the use of a registered broker-dealer or another 
intermediary to facilitate the offering.
---------------------------------------------------------------------------

    \289\ See 17 CFR 230.251(d)(3)(i) (providing that continuous or 
delayed offerings may rely on Regulation A only if they pertain to 
securities (1) offered or sold by a person other than the issuer, 
(2) offered and sold pursuant to certain reinvestment or employee 
benefit plans, (3) issued on the exercise or conversion of certain 
other securities, (4) pledged as collateral, or (5) offered within 
two calendar days after qualification of the offering statement on a 
continuous basis in an amount that is reasonably expected to be 
offered and sold within two years from qualification and offered and 
sold no more than three years after qualification unless included on 
a subsequent offering statement).
    \290\ See 17 CFR 230.251(d)(3)(ii) (defining at-the-market 
offering to mean an offering of equity securities into an existing 
trading market for outstanding shares of the same class at other 
than a fixed price). In the 2015 Regulation A Release, the 
Commission acknowledged that a market in Regulation A securities may 
develop that is capable of supporting primary and secondary at-the-
market offerings, but rather than permit such offerings at the 
outset, the Commission stated that it would defer any determination 
as to whether Regulation A would be an appropriate method for such 
offerings. The Commission also noted that an offering at fluctuating 
market prices may not be appropriate under an exemption subject to a 
maximum offering size. See 2015 Regulation A Release.
---------------------------------------------------------------------------

    Since adoption of the 2015 amendments, we have received comments 
and recommendations from a variety of sources, including a number of 
the annual Small Business Forums. For example, the 2017 and 2018 Small 
Business Forums recommended that the Commission amend its rules to 
allow at-the-market offerings under Regulation A.\291\ The 2017 and 
2018 Small Business Forums requested guidance for broker-dealers, 
transfer agents, and clearing firms, regarding Regulation A securities 
and OTC securities.\292\ In addition, both those Forums recommended 
that the Commission require any portal that is conducting Regulation A 
offerings to be registered and subject to appropriate disclosure 
requirements.\293\ Prior Small Business Forums also recommended that 
BDCs \294\ and SBICs \295\ be eligible to use the exemption. In 
addition, one commenter to the 2018 Regulation A Release suggested 
``certain amendments to alleviate the paperwork and regulatory burdens 
of certain filing requirements and offering amount limitations on Tier 
2 issuers filing under Regulation A.'' \296\
---------------------------------------------------------------------------

    \291\ See 2017 Forum Report; 2018 Forum Report.
    \292\ See 2017 Forum Report; 2018 Forum Report.
    \293\ See 2017 Forum Report; 2018 Forum Report. See Section 
II.F.1.d. for a discussion of Regulation Crowdfunding and the 
requirements for funding portals.
    \294\ See 2014 Forum Report; 2015 Forum Report; 2016 Forum 
Report.
    \295\ See 2015 Forum Report.
    \296\ Letter from Mark Schonberger dated Mar. 4, 2019 available 
at https://www.sec.gov/comments/s7-29-18/s72918-5007949-182974.pdf 
(``Schonberger Letter''). For example, this commenter recommended 
that Regulation A be amended to permit issuers to: Include in an 
annual amendment the ability to qualify an additional $50 million 
for the following 12-month period, provided such issuers may not 
sell more than $50 million in any 12- month period; permit a 180-day 
selling extension to apply after a post-qualification amendment is 
filed and prior to the qualification of that amendment; and forward 
incorporate periodic and current reports, including updated 
financial statements.
---------------------------------------------------------------------------

b. Offering Limits and Secondary Sales
    As noted above, issuers may elect to conduct a Regulation A 
offering pursuant to the requirements of either Tier 1 or Tier 2. Tier 
1 is available for offerings of up to $20 million in a 12-month period, 
including no more than $6 million on behalf of selling security holders 
that are affiliates of the issuer.\297\ Tier 2 is available for 
offerings of up to $50 million in a 12-month period, including no more 
than $15 million on behalf of selling security

[[Page 30489]]

holders that are affiliates of the issuer.\298\ Additionally, sales by 
all selling security holders in a Regulation A offering are limited to 
no more than 30% of the aggregate offering price in an issuer's first 
Regulation A offering and any subsequent Regulation A offerings in the 
following 12-month period.\299\
---------------------------------------------------------------------------

    \297\ See 17 CFR 230.251(a)(1).
    \298\ See 17 CFR 230.251(a)(2).
    \299\ See 17 CFR 230.251(a)(3).
---------------------------------------------------------------------------

    In the 2015 Regulation A Release, the Commission noted that some 
commenters suggested that the Commission raise the proposed $50 million 
Tier 2 offering limit to an amount above the statutory limit set forth 
in Section 3(b)(2); however, the Commission did not believe an increase 
was warranted at the time.\300\ The Commission explained that, while 
Regulation A had existed as an exemption from registration for some 
time, the 2015 amendments were significant. Accordingly, the Commission 
believed that the 2015 amendments would provide for a meaningful 
addition to the existing capital formation options of smaller issuers 
while maintaining important investor protections. The Commission 
expressed its concern, however, about expanding the offering limit of 
the exemption beyond the level directly contemplated in Section 3(b)(2) 
at the outset of the adoption of the rules.
---------------------------------------------------------------------------

    \300\ See 2015 Regulation A Release, at text accompanying note 
93.
---------------------------------------------------------------------------

    While the Commission determined to adopt the proposed $50 million 
offering limit for a Regulation A Tier 2 offering, it noted that it 
would revisit the limit in 2016 in its bi-annual review of the limit, 
as required by Securities Act Section 3(b)(5).\301\ The $50 million 
offering limit was reviewed in 2016 and 2018, and neither review 
resulted in a proposal to increase the $50 million offering limit. At 
the time of the 2018 review, approximately 80% of filers with qualified 
Regulation A offerings had not yet completed their offerings or 
reported amounts raised in completed offerings, so the staff determined 
that there was insufficient data to derive definitive conclusions as to 
the adequacy of the $50 million offering limit or to forecast the 
amount of capital that might be raised in Regulation A offerings in the 
future. Since that time, the staff has continued to monitor the 
Regulation A market and gather additional information about the use of 
Regulation A, to determine whether to recommend proposing to increase 
the Regulation A aggregate annual offering limit in advance of the next 
review required under Section 3(b)(5). The Commission is required to 
review the limit in 2020; however, the Chairman has requested that the 
staff conduct the review in 2019.
---------------------------------------------------------------------------

    \301\ See id.
---------------------------------------------------------------------------

    Since adoption of the 2015 amendments, the 2017 and 2018 Small 
Business Forums have recommended that the Commission increase the 
maximum offering amount under Tier 2 of Regulation A from $50 million 
to $75 million.\302\ The 2017 Treasury Report also recommended that the 
Tier 2 offering limit be increased to $75 million.\303\ One commenter 
has suggested, in connection with the 2018 Regulation A Release, that 
the offering limit be raised to $100 million.\304\
---------------------------------------------------------------------------

    \302\ See 2018 Forum Report; 2017 Forum Report.
    \303\ See 2017 Treasury Report.
    \304\ See Schonberger Letter.
---------------------------------------------------------------------------

c. Investment Limits in Tier 2 Offerings
    Regulation A limits the amount of securities that an investor that 
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).\305\ This limit does not, however, apply to purchases 
of securities that will be listed on a national securities exchange 
upon qualification.\306\
---------------------------------------------------------------------------

    \305\ See 17 CFR 230.251(d)(2)(i)(C).
    \306\ See id. Tier 2 issuers that seek to list their securities 
on a national securities exchange or otherwise register a class of 
Regulation A securities under the Exchange Act may do so by filing 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. 
See Form 8-A, General Instructions A(c) [17 CFR 249.208a]. Such 
issuers 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.
---------------------------------------------------------------------------

d. Conditional Exemption From Section 12(g)
    Section 12(g) of the Exchange Act requires, among other things, 
that an issuer with total assets exceeding $10 million 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.\307\ Regulation A, however, 
conditionally exempts securities issued in a Tier 2 offering from the 
mandatory registration provisions of Section 12(g) \308\ if the issuer:
---------------------------------------------------------------------------

    \307\ 15 U.S.C. 78l.
    \308\ See Section II.C.5 for an analysis of the limited 
available data related to this conditional exemption.
---------------------------------------------------------------------------

     Remains subject to, and is current (as of its fiscal year-
end) in, its Regulation A periodic reporting obligations;
     Engages the services of a transfer agent registered with 
the Commission pursuant to Section 17A of the Exchange Act; \309\ and
---------------------------------------------------------------------------

    \309\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

     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.\310\
---------------------------------------------------------------------------

    \310\ See 17 CFR 240.12g5-1(a)(7). An issuer that exceeds these 
thresholds is 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 during such 
period.
---------------------------------------------------------------------------

    One commenter responding to the 2018 Regulation A Release suggested 
that the Commission amend Rule 12g5-1 to tie the revenue limit in the 
conditional exemption from Section 12(g) to the revenue threshold for 
smaller reporting companies.\311\
---------------------------------------------------------------------------

    \311\ See Schonberger Letter. A smaller reporting company is 
defined in Securities Act Rule 405, Exchange Act Rule 12b-2, and 
Item 10 of Regulation S-K [15 CFR 229.10(f)] to include an issuer 
with (1) public float of less than $250 million or (2) revenues of 
less than $100 million and either no public float or a public float 
of less than $700 million.
---------------------------------------------------------------------------

2. Disclosure Requirements
a. Offering Statement
    All issuers that conduct offerings pursuant to Regulation A are 
required to file an offering statement on Form 1-A with the Commission. 
Issuers are only permitted to begin selling securities pursuant to 
Regulation A once the offering statement has been qualified by the 
Commission. The Commission does not charge any fee to file or amend a 
Form 1-A.
    Among other things, Form 1-A contains the primary disclosure 
document used in connection with the offering, called an ``offering 
circular.'' Consistent with similar delivery requirements for 
registered offerings, Regulation A provides that access equals 
delivery.\312\ Accordingly, where sales of Regulation A securities 
occur after qualification on the basis of offers made using a 
preliminary offering circular, issuers and intermediaries may satisfy 
their delivery requirements for the final offering circular by filing 
it on EDGAR.\313\ Issuers are, however, required to include a notice in 
any preliminary offering circular that will inform potential investors 
that the

[[Page 30490]]

issuer may satisfy its delivery obligations for the final offering 
circular electronically.\314\ Issuers, underwriters, and dealers must 
provide purchasers with a copy of the final offering circular or a 
notice stating that the sale occurred pursuant to a qualified offering 
statement not later than two business days after completion of a 
sale.\315\ The notice must include the website address where the final 
offering circular, or the offering statement including the final 
offering circular, may be obtained on EDGAR. 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.\316\ The 
2018 Small Business Forum recommended that the Commission permit the 
use of quick response (``QR'') codes, which are machine-readable images 
that contain data and can direct the user to a website or 
application,\317\ in lieu of a hyperlink to an offering circular after 
qualification.\318\
---------------------------------------------------------------------------

    \312\ See 2015 Regulation A Release.
    \313\ See 17 CFR 230.251(d)(2)(ii).
    \314\ See 17 CFR 230.254(a).
    \315\ See 17 CFR 230.251(d)(2)(ii).
    \316\ See id.
    \317\ QR Code Essentials (2011), Denso ADC, available at http://www.nacs.org/LinkClick.aspx?fileticket=D1FpVAvvJuo%3D&tabid=1426&mid=4802.
    \318\ See 2018 Forum Report.
---------------------------------------------------------------------------

    Form 1-A requires financial disclosure as well as narrative 
disclosure in one of two formats: (a) The Offering Circular format or 
(b) a format that follows the requirements of Part I of Form S-1 or, in 
certain circumstances, Part I of Form S-11,\319\ which contains the 
narrative disclosure requirements for registration statements filed by 
issuers in registered offerings.
---------------------------------------------------------------------------

    \319\ While Form S-1 is generally available for all types of 
issuers and transactions, Form S-11 is only available for offerings 
of securities issued by (i) real estate investment trusts, or (ii) 
issuers whose business is primarily that of acquiring and holding 
for investment real estate or interests in real estate or interests 
in other issuers whose business is primarily that of acquiring and 
holding real estate or interest in real estate for investment.
---------------------------------------------------------------------------

    Form 1-A requires issuers in both Tier 1 and Tier 2 offerings to 
file balance sheets and related financial statements for the issuers' 
two previous fiscal year ends (or for such shorter time that they have 
been in existence). Financial statements in Form 1-A must be dated not 
more than nine months before the date of filing or qualification, with 
the most recent annual or interim balance sheet being not older than 
nine months. If interim financial statements are required, they must 
cover a period of at least six months. For Tier 1 offerings, Regulation 
A does not require issuers to provide audited financial statements 
unless the issuer has already prepared them for other purposes.\320\ 
Issuers in Tier 2 offerings are required 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) (``U.S. Generally Accepted 
Auditing Standards'' or ``U.S. GAAS'') or the standards of the Public 
Company Accounting Oversight Board (``PCAOB'').
---------------------------------------------------------------------------

    \320\ Offerings under Tier 1 of Regulation A must also comply 
with state qualification requirements. See Section II.C.4.a. Several 
jurisdictions may require Tier 1 issuers to include audited 
financial statements prior to qualifying the offering. See, e.g., 
Wash. Rev. Code 21.20.220 (1994) available at https://apps.leg.wa.gov/rcw/default.aspx?Cite=21.20.210. See also 
Coordinated Review FAQs, available at http://www.nasaa.org/industry-resources/corporation-finance/coordinated-review/regulation-a-offerings/coordinated-review-faqs/.
---------------------------------------------------------------------------

    Issuers whose securities previously have not been sold pursuant to 
a qualified offering statement under Regulation A or an effective 
registration statement under the Securities Act are allowed to submit 
to the Commission electronically through EDGAR a draft offering 
statement for non-public review by the staff.\321\ 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 not less than 21 calendar days before qualification 
of the offering statement.\322\
---------------------------------------------------------------------------

    \321\ See 17 CFR 230.252(d).
    \322\ See id.
---------------------------------------------------------------------------

    For ongoing offerings, post-qualification amendments must be filed:
     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
     To reflect any facts or events arising after the 
qualification date of the offering statement (or the most recent post-
qualification amendment thereof) that, individually or in the 
aggregate, represent a fundamental change in the information set forth 
in the offering statement.\323\
---------------------------------------------------------------------------

    \323\ 17 CFR 230.252(f)(2).
---------------------------------------------------------------------------

b. Ongoing Reporting
    Issuers in Tier 1 offerings are required 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.\324\
---------------------------------------------------------------------------

    \324\ See 17 CFR 230.257(a).
---------------------------------------------------------------------------

    Issuers in Tier 2 offerings are required to electronically file 
annual and semiannual reports, as well as current reports and, in 
certain circumstances, an exit report on Form 1-Z, with the 
Commission.\325\ Annual reports must include, among other things: 
Disclosure relating to the issuer's business operations for the 
preceding three fiscal years (or, if in existence for less than three 
years, since inception); two years of audited financial statements; and 
management's discussion and analysis (``MD&A'') of the issuer's 
liquidity, capital resources, and results of operations. Semiannual 
reports require disclosure primarily relating to the issuer's interim 
financial statements and MD&A. Issuers are required to file current 
reports on Form 1-U with the Commission within four business days of 
the occurrence of certain events.
---------------------------------------------------------------------------

    \325\ See 17 CFR 230.257(b).
---------------------------------------------------------------------------

    An issuer in a Tier 2 offering 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, may immediately suspend its ongoing 
reporting obligations 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.\326\
---------------------------------------------------------------------------

    \326\ See 17 CFR 230.257(d).
---------------------------------------------------------------------------

    In the 2018 amendments to Regulation A, as directed by the Economic 
Growth Act, the Commission revised Rule 257 to provide that entities 
meeting the reporting requirements of Section 13 or 15(d) of the 
Exchange Act will be deemed to have met the reporting requirements of 
Regulation A.\327\
---------------------------------------------------------------------------

    \327\ See 17 CFR 230.257(b); 2018 Regulation A Release.
---------------------------------------------------------------------------

3. Solicitation of Interest
    Regulation A permits 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, provided 
that all solicitation materials include certain required legends and, 
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

[[Page 30491]]

preliminary offering circular can be obtained.\328\ Test-the-waters 
materials must be filed as exhibits if the issuer proceeds to file a 
Form 1-A.\329\
---------------------------------------------------------------------------

    \328\ See 17 CFR 230.255.
    \329\ See Instructions to Form 1-A.
---------------------------------------------------------------------------

    We note, however, that paragraph (a) of 17 CFR 230.255 (``Rule 
255'') specifically provides that these solicitations of interest are 
deemed to be offers of a security for sale for purposes of the 
antifraud provisions of the federal securities laws. Accordingly, if 
these solicitations of interest fail to satisfy the conditions of Rule 
255(b), the solicitations must either be registered under the 
Securities Act or rely on another exemption from registration.\330\
---------------------------------------------------------------------------

    \330\ See 17 CFR 230.255.
---------------------------------------------------------------------------

    After adoption of the 2015 amendments, the 2016 Small Business 
Forum recommended that the Commission provide a clearer definition of 
what constitutes ``testing the waters materials'' and permissible media 
activities.\331\
---------------------------------------------------------------------------

    \331\ See 2016 Forum Report.
---------------------------------------------------------------------------

4. Relationship With State Securities Laws
a. Tier 1 Offerings
    In addition to qualifying a Regulation A offering with the 
Commission, issuers in Tier 1 offerings must register or qualify their 
offering in any state in which they seek to offer or sell securities 
pursuant to Regulation A.\332\ Registration or qualification of a Tier 
1 offering in some jurisdictions may require additional disclosure to 
that required under Commission rules. For example, several 
jurisdictions require an issuer to provide audited financial statements 
prior to qualifying an offering in that jurisdiction.\333\ In addition, 
while Regulation A permits issuers to test the waters and make offers 
in the pre-qualification period at the federal level, given what the 
Commission anticipated to be the generally more local nature of Tier 1 
offerings, the rules preserve the states' oversight over how these 
offerings are conducted, including how solicitation materials are 
used.\334\ The Commission contemplated that issuers conducting Tier 1 
offerings would be smaller companies whose businesses revolved around 
products and services, and whose customer base likely would be located 
within a single state or region or a small number of states.\335\ The 
Commission did not expect Tier 1 issuers generally to seek or, on the 
basis of their business models, be able to: (a) Raise capital on a 
national scale; or (b) create a secondary trading market in their 
Regulation A securities.\336\
---------------------------------------------------------------------------

    \332\ See information from NASAA about states' coordinated 
review available at http://www.coordinatedreview.org/regulation-a/.
    \333\ See note 320.
    \334\ See 2015 Regulation A Release, at text accompanying note 
799.
    \335\ See 2015 Regulation A Release, at text accompanying note 
830.
    \336\ See id.
---------------------------------------------------------------------------

b. Tier 2 Offerings
    While issuers in Tier 2 offerings are required to qualify offerings 
with the Commission before sales can be made pursuant to Regulation A, 
they are not required to register or qualify their offerings with state 
securities regulators. Section 18 of the Securities Act generally 
provides for preemption of state law registration and qualification 
requirements for ``covered securities.'' \337\ Section 18(b)(4)(D) of 
the Securities Act further provides that securities issued pursuant to 
Section 3(b)(2) of the Securities Act are covered securities if they 
are listed, or will be listed, on a national securities exchange or if 
they are offered or sold to a ``qualified purchaser,'' \338\ which the 
Commission has defined to include any person to whom securities are 
offered or sold in a Tier 2 offering.\339\
---------------------------------------------------------------------------

    \337\ See 15 U.S.C. 77r(c).
    \338\ See 15 U.S.C. 77r(b)(4)(D).
    \339\ See 17 CFR 230.256.
---------------------------------------------------------------------------

    As discussed above, given the significant additional requirements 
for Tier 2 issuers, including the requirement to provide audited 
financial statements, the ongoing reporting requirements, and the 
investment limits for non-accredited investors, the Commission expected 
Tier 2 offerings to be national rather than local in nature.\340\ 
Accordingly, the Commission determined that preemption of state 
securities law registration and qualification requirements is 
appropriate for purchasers in these offerings. \341\
---------------------------------------------------------------------------

    \340\ See 2015 Regulation A Release, at text accompanying note 
830.
    \341\ See id, at text accompanying note 799.
---------------------------------------------------------------------------

    Tier 2 offerings remain subject to state law enforcement and 
antifraud authority. Additionally, issuers in Tier 2 offerings may be 
subject to filing fees in the states in which they intend to offer or 
sell securities and may be required to file with such states any 
materials that the issuer has filed with the Commission as part of the 
offering.\342\
---------------------------------------------------------------------------

    \342\ See information from NASAA about states' filing 
requirements available at http://www.nasaa.org/industry-resources/corporation-finance/coordinated-review/regulation-a-offerings/state-filing-requirements/.
---------------------------------------------------------------------------

    Since adoption of the 2015 amendments, we have received comments 
and recommendations from the Commission's Advisory Committee on Small 
and Emerging Companies,\343\ a number of the annual Small Business 
Forums, and the 2017 Treasury Report on the preemption of state 
requirements for Regulation A offerings. The 2016 Small Business Forum 
recommended that Commission adopt rules that preempt state registration 
requirements for all primary and secondary trading of securities sold 
in offerings registered with the Commission.\344\ Similarly, the 2017 
and 2018 Small Business Forums recommended that the Commission provide 
for blue sky preemption for secondary trading of securities issued in 
Regulation A Tier 2 offerings.\345\ The 2017 Treasury Report also 
recommended that state securities regulators update their regulations 
to exempt from state registration and qualification requirements 
secondary trading of securities issued under Tier 2 of Regulation A or, 
alternatively, that the Commission use its authority to preempt state 
registration requirements for such transactions.\346\ The Commission's 
Advisory Committee on Small and Emerging Companies and the 2014, 2015, 
and 2017 Small Business Forums all recommended preemption for secondary 
trading of securities of Regulation A Tier 2 issuers that are current 
in their ongoing reports.\347\ The 2017 and 2018 Small Business Forums 
also recommended that the Commission consider overriding advance notice 
requirements of state regulators in Regulation A offerings and limiting 
state filing fees for these offerings.\348\
---------------------------------------------------------------------------

    \343\ See Advisory Committee on Small and Emerging Companies: 
Recommendations Regarding Secondary Market Liquidity for Regulation 
A, Tier 2 Securities (May 15, 2017) available at https://www.sec.gov/info/smallbus/acsec/acsec-recommendation-051517-secondary-liquidity-recommendation.pdf (``ACSEC Secondary Market 
Liquidity Recommendation'').
    \344\ See 2016 Forum Report. For a discussion of secondary 
trading of Regulation A and other exempt offering securities, see 
Section V.
    \345\ See 2017 Forum Report; 2018 Forum Report.
    \346\ See 2017 Treasury Report.
    \347\ See ACSEC Secondary Market Liquidity Recommendation; 2014 
Forum Report (recommending that the Commission define ``qualified 
purchaser'' under Section 18(b)(3) to include any purchaser of a 
class of security that has been offered and sold pursuant to Section 
4(a)(1) or (3), provided that, the issuer files reports pursuant to 
Rule 257(b) in order to preempt state blue sky regulation of after-
market resale trading of securities issued pursuant to Tier 2 
Regulation A offerings); 2015 Forum Report; 2017 Forum Report.
    \348\ See 2017 Forum Report; 2018 Forum Report.
---------------------------------------------------------------------------

5. Analysis of Regulation A in the Exempt Market
    Table 8 below summarizes offerings initiated and offering statement 
qualified under Regulation A.

[[Page 30492]]



                                         Table 8--Offerings Under Regulation A, June 19, 2015-December 31, 2018
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     Tier 1                                     Tier 2                            Tiers 1 and 2
--------------------------------------------------------------------------------------------------------------------------------------------------------
Offering statements filed........  119......................................  240......................................  359.
    Aggregate dollar amount        $1,014 million...........................  $6,732 million...........................  $7,746 million.
     sought.
    Average amount sought........  $8.5 million.............................  $28.0 million............................  $21.6 million.
Offering statements qualified      86.......................................  191......................................  277.
 \349\.
    Aggregate amount sought......  $742 million.............................  $5,139 million...........................  $5,881 million.
    Average amount sought........  $8.6 million.............................  $26.9 million............................  $21.2 million.
Issuers reporting proceeds \350\.  27.......................................  105......................................  132.
    Aggregate amount reported      $186.5 million...........................  $1,218 million...........................  $1,404 million.
     raised.
    Average amount reported        $6.9 million.............................  $11.6 million............................  $10.6 million.
     raised \351\.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Based on staff analysis of Form 1-A filings, approximately 60% of 
issuers with Regulation A offering statements qualified during the 
sample period had undertaken another exempt offering in the prior year, 
most of them in reliance on Section 4(a)(2) or Regulation D, suggesting 
that most issuers in the Regulation A market tend to engage in more 
than one type of exempt offering.
---------------------------------------------------------------------------

    \349\ Unique offerings were identified based on CIK and file 
number; offerings that were withdrawn or abandoned were excluded; 
and offerings identified as duplicates were consolidated. Amendments 
are consolidated with the original offering statement for purposes 
of the number of offering statements. These estimates exclude post-
qualification amendments. Rounding affects totals.
    \350\ If an issuer reported proceeds from both a Tier 1 and a 
Tier 2 offering, that issuer is counted twice (once under Tier 1 and 
once under Tier 2).
    \351\ Average amounts are among offerings that reported 
proceeds. The distribution of reported proceeds has a right tail, so 
average proceeds are larger than median proceeds. Median reported 
proceeds were approximately $4.9 million for Tier 1 issuers and 
approximately $3.9 million for Tier 2 issuers. Tier 1 issuers only 
report proceeds upon offering completion. Many Tier 2 issuers report 
proceeds in ongoing offerings, which are subsequently revised 
upward. Thus, proceeds reported by Tier 1 and Tier 2 issuers are not 
directly comparable.
---------------------------------------------------------------------------

    While the average amount reported raised by Regulation A issuers is 
higher than the average amount reported raised by Regulation D issuers 
during this period, significantly more capital was reported raised in 
the aggregate across all Regulation D offerings because Regulation D 
offerings are much more common. Compared to Regulation A offerings, 
over the same period (from June 19, 2016 to December 31, 2018), 
approximately 36,900 issuers, other than pooled investment funds, each 
reported raising up to $50 million in reliance on Regulation D, 
totaling approximately $181 billion, with the average reported proceeds 
of approximately $4.9 million per issuer.
    The typical Regulation A issuer was relatively small and early-
stage. Regulation A issuers reported median total assets of 
approximately $0.4 million and average total assets of approximately 
$38 million. The median issuer reported no revenues (just over half of 
the offerings were by issuers with no revenues) and was incorporated 
3.0 years earlier (compared to an average of 6.5 years for all 
Regulation A issuers). Approximately 20% of Regulation A offerings were 
by issuers that had attained profitability in the most recent fiscal 
year prior to the offering. There was significant industry and 
geographic concentration among issuers. Based on primary Standard 
Industry Classification codes disclosed in Form 1-A filings, 
approximately 36% of qualified Regulation A offering statements during 
this period were by issuers in the financial sector, and approximately 
15% were by issuers in business services (including software). 
Approximately 24% of issuers were located in California, 10% in 
Florida, and 8% in New York. Figure 7 reflects the geographic 
concentration of offerings based on the number of qualified offering 
statements by issuer location.
[GRAPHIC] [TIFF OMITTED] TP26JN19.005


[[Page 30493]]


    Based on staff analysis of information provided in Form 1-A filings 
as of December 31, 2018, we estimate that approximately 48 issuers, 28 
of which are Tier 2 issuers, with qualified offering statements under 
Regulation A reported assets greater than $10 million and have not 
filed a Securities Act registration statement, reports under Section 13 
or 15(d) of the Exchange Act, or, for Tier 2 issuers, an exit report on 
Form 1-Z. A portion of these Regulation A issuers may have, or may be 
approaching, the number of holders of record that would require 
registration under the Exchange Act, and a portion of the Tier 2 
issuers may be relying on the conditional exemption in Rule 12g5-1. 
However, we do not have sufficient data available to estimate the 
number of holders of record or the public float for these issuers, so 
we cannot provide a more accurate estimate of the number of Tier 2 
issuers that may be using the conditional exemption from Section 12(g).
6. Request for Comment
    47. Do the requirements of Regulation A appropriately address 
capital formation and investor protection considerations? Is the 
process for qualifying Regulation A offerings appropriately tailored to 
the needs of investor protection? Is there anything about the process 
that is unduly burdensome? Do the costs associated with conducting a 
Regulation A offering dissuade issuers from relying on the exemption? 
If so, can we alleviate burdens in our rules or reduce costs for 
issuers while still providing adequate investor protection? 
Alternatively, should we retain Regulation A as it is?
    48. Should we increase the $50 million Tier 2 offering limit? 
Should we increase the $20 million Tier 1 offering limit? If so, what 
limits would be appropriate? For example, as recommended by the 2017 
Treasury Report and by the 2017 and 2018 Small Business Forums, should 
we increase the Tier 2 offering limit to $75 million? Alternatively, as 
suggested by one commenter, should we increase the Tier 2 offering 
limit to $100 million? Would another higher limit be appropriate? What 
are the appropriate considerations in determining a maximum offering 
size? In connection with an increase in either or both of the limits, 
should we consider additional investor protections--for example, 
aligning standards for when an amendment is required in an ongoing 
Regulation A offering with registered offering standards? Should we 
periodically adjust the offering limits for inflation? If so, how often 
should the adjustment be made? Would increasing the maximum offering 
size encourage issuers to undertake the cost of conducting a Regulation 
A offering?
    49. Should we extend eligibility to rely on Regulation A to 
additional categories of issuers, such as those organized and with a 
principal place of business outside of the United States and Canada, 
investment companies, or blank check companies? Should we, as 
recommended by the 2014, 2015, and 2016 Small Business Forums, allow 
BDCs to be eligible to rely on Regulation A? Should we, as recommended 
by the 2015 Small Business Forum, allow SBICs to be eligible to rely on 
Regulation A? Should we allow rural business investment companies 
(``RBICs'') to be eligible to rely on Regulation A? \352\ Should we 
exclude any additional categories of issuers from Regulation A 
eligibility? What changes, if any, would need to be made to the 
offering statement disclosure requirements to accommodate these 
additional categories of issuers? What would be the effect on investors 
of permitting these additional categories of issuers?
---------------------------------------------------------------------------

    \352\ See note 555 for a discussion of RBICs.
---------------------------------------------------------------------------

    50. Should we expand the types of eligible securities issuable 
under Regulation A? If so, what additional types of securities would be 
appropriate? What would be the effect on issuers, investors, and the 
market of permitting these additional categories of securities? Would 
legislative changes be necessary or beneficial in order to expand the 
types of eligible securities issuable under Regulation A?
    51. Should we eliminate or change the individual investment limits 
for non-accredited investors in Tier 2 offerings? If we change the 
investment limits, what limits would be appropriate?
    52. Are there any data available that show an increase or decrease 
in fraudulent activity in the Regulation A market as a result of the 
2015 or 2018 amendments? If so, is any change the direct result of an 
increase in the number of offerings since the amendments? If there has 
been an increase in fraud but the cause is not attributable to the 
overall increase of offerings, what are the causes or explanations and 
what should we do to address them?
    53. Should we, as recommended by the 2018 Small Business Forum, 
permit the use of QR codes in lieu of a hyperlink to the most recent 
offering circular? Are there other technological solutions that we 
should consider, such as use of the issuer's website address, other URL 
addresses, or other methods or technologies that would facilitate 
access to such information? Should we define permissible delivery 
methods more broadly so as to allow subsequently developed delivery 
technologies that become generally accepted elsewhere in the 
marketplace to be used in lieu of a hyperlink to a qualified offering 
circular? If so, how should we define permissible delivery methods?
    54. Are the ongoing reporting requirements of Rule 257 appropriate 
from the perspective of issuers and investors? Should we consider 
changes to these requirements? If so, what changes should we consider?
    55. Are the financial statement requirements in Form 1-A for each 
tier appropriate? Should we consider different financial statement 
requirements for Exchange Act reporting companies filing Forms 1-A? If 
so, what requirements should we consider?
    56. Should we, as recommended by the 2018 Small Business Forum, 
amend Regulation A to permit at-the-market offerings? \353\
---------------------------------------------------------------------------

    \353\ See note 290 and accompanying text for a discussion of at-
the-market offerings.
---------------------------------------------------------------------------

    57. Should we amend Regulation A to allow incorporation by 
reference of the issuer's financial statements in the Form 1-A?
    58. Should we, as recommended by the 2016 Small Business Forum, 
provide additional guidance on what constitutes testing the waters 
materials and permissible media activities? If so, what materials 
should be covered?
    59. Are there other changes that should be considered specifically 
with respect to the use of Regulation A by Exchange Act reporting 
companies, in light of the recent amendments to allow such issuers to 
rely on the exemption? If so, what changes should we consider?
    60. For Tier 1 issuers, how is the dual Commission staff and state 
review process working? If issuers find the Tier 1 dual review process 
burdensome, should we eliminate the staff's review and qualification of 
Tier 1 offering statements given the concurrent state review and 
qualification of the same offering statement? If the Commission staff 
does not review and qualify the offering, should we replace the 
requirement to file a Tier 1 offering statement with a requirement to 
comply with the appropriate state filing requirements and file only a 
notice with the Commission? Alternatively, should we use such an 
approach only if the issuer is required to register or qualify the 
offering based on a substantive disclosure document in at least one 
state, and not where the issuer is relying

[[Page 30494]]

exclusively on state exemptions from registration or qualification that 
do not require state review of a substantive disclosure document?
    61. Do issuers find state advance notice and filing fee 
requirements burdensome? If so, are there changes it would be possible 
and appropriate for us to consider to alleviate such burdens or would 
legislative changes be necessary or beneficial in order to do so?
    62. Should the conditional Section 12(g) exemption for Regulation A 
Tier 2 securities be modified? If so, in what way? For example, should 
we increase the thresholds in Exchange Act Rule 12g5-1(a)(7)? Should 
we, as recommended by one commenter, amend Rule 12g5-1 to tie the 
thresholds to those in the smaller reporting company definition? If we 
were to broaden the Section 12(g) exemption or make it permanent, would 
potential issuers be more likely to use Regulation A? What investor 
protection concerns could arise from such a change?
    63. Should we, as recommended by the 2017 and 2018 Small Business 
Forums, require any intermediary that is in the business of 
facilitating Regulation A offerings to register as a broker-dealer and 
comply with requirements similar to the requirements for intermediaries 
under Regulation Crowdfunding, such as required disclosure of 
compensation and the amount thereof?
    64. Should we, as recommended by the 2017 and 2018 Small Business 
Forums, provide any additional guidance for broker-dealers, transfer 
agents, clearing firms, or intermediaries regarding Regulation A 
securities? If so, in which areas and why?

D. Limited Offerings--Rule 504 of Regulation D

    Rule 504 of Regulation D provides an exemption from registration 
under the Securities Act of 1933 for the offer and sale of up to $5 
million of securities in a 12-month period.\354\ Rule 504 was adopted 
pursuant to the Commission's authority under Section 3(b)(1) of the 
Securities Act.\355\ Prior to rule changes adopted by the Commission in 
2016, the aggregate amount of securities that could be offered and sold 
in a 12-month period under Rule 504 was $1 million. At the time Rule 
504 was amended to increase this offering limit, the Commission also 
repealed the Rule 505 exemption from registration.\356\ Rule 505 was an 
exemption from Securities Act registration that had been available to 
both non-reporting and reporting companies so long as the aggregate 
offering amount did not exceed $5 million in a 12-month period and 
certain other conditions were met.
---------------------------------------------------------------------------

    \354\ 17 CFR 230.504.
    \355\ 15 U.S.C. 77c(b)(1). Section 3(b)(1) gives the Commission 
authority to adopt an exemption for offerings not exceeding $5 
million where the Commission believes registration under the 
Securities Act is not necessary by reason of the small amount 
involved or the limited character of the public offering.
    \356\ See Exemptions to Facilitate Intrastate and Regional 
Securities Offerings, Release No. 33-10238 (Oct. 26, 2016) [81 FR 
83494 (Nov. 21, 2016)] (``Intrastate and Regional Offerings 
Release''). The removal of Rule 505 was effective on May 22, 2017.
---------------------------------------------------------------------------

1. Scope of the Exemption
a. Eligible Issuers
    The following categories of issuers are not eligible to use the 
Rule 504 exemption:
     Issuers that are required to file reports under Exchange 
Act Section 13(a) or 15(d); \357\
---------------------------------------------------------------------------

    \357\ See 17 CFR 230.504(a)(1).
---------------------------------------------------------------------------

     Investment companies; \358\
---------------------------------------------------------------------------

    \358\ See 17 CFR 230.504(a)(2).
---------------------------------------------------------------------------

     Blank check companies; \359\ and
---------------------------------------------------------------------------

    \359\ See 17 CFR 230.504(a)(3). See also note 25.
---------------------------------------------------------------------------

     Issuers that are disqualified under Rule 504's ``bad 
actor'' disqualification provisions.\360\
---------------------------------------------------------------------------

    \360\ 17 CFR 230.504(b)(3). Generally, offerings under Rule 504 
are subject to the disqualification provisions found in Rule 506(d) 
of Regulation D. See Section II.B.2.e. Disqualification under Rule 
504, however, will not arise as a result of disqualifying events 
relating to any conviction, order, judgment, decree, suspension, 
expulsion or bar that occurred before January 20, 2017, the 
effective date of the Rule 504 amendment that added the 
disqualification provisions. Events that occurred prior to January 
20, 2017 that are within the relevant look-back period and would 
otherwise be disqualifying are, however, required to be disclosed in 
writing to each purchaser.
---------------------------------------------------------------------------

b. Offering and Investment Limits
    As noted above, in 2016, the Commission amended Rule 504 to raise 
the aggregate amount of securities an issuer may offer and sell in any 
12-month period from $1 million to $5 million, which is the maximum 
statutorily allowed under Section 3(b)(1).\361\ As discussed in the 
adopting release for that rule change, while a few commenters \362\ and 
the 2015 Small Business Forum \363\ recommended that the Commission 
increase the Rule 504 offering limit to $10 million, the Commission 
determined not to use its exemptive authority under Section 28 of the 
Securities Act to raise the maximum offering amount above $5 million.
---------------------------------------------------------------------------

    \361\ See Intrastate and Regional Offerings Release. See also 
note 355.
    \362\ See Intrastate and Regional Offerings Release at n. 272.
    \363\ See 2015 Forum Report.
---------------------------------------------------------------------------

    There are no limits on the amount an investor can invest in an 
offering under Rule 504.
c. General Prohibition on General Solicitation and Limitations on 
Resale
    In general, issuers relying on Rule 504 may not use general 
solicitation or advertising to market the securities, and purchasers in 
a Rule 504 offering will receive ``restricted securities'' subject to 
the limitations in Rule 502(d) on the resale of the securities acquired 
in the transaction.\364\ However, general solicitation and advertising 
is permitted and there are no resale limitations on the securities 
acquired in the transaction \365\ if the issuer offers and sells the 
securities:
---------------------------------------------------------------------------

    \364\ See 17 CFR 230.502(d); 17 CFR 230.144(a)(3)(ii). See 
Section II.B.1.b for a discussion of restricted securities and the 
resale limitations of Rule 502(d).
    \365\ An investor who wishes to sell securities that are not 
restricted must either register the transaction or have an exemption 
for the transaction. See Section IV.
---------------------------------------------------------------------------

     Exclusively under one or more state laws that require 
registration and the public filing and delivery to investors of a 
substantive disclosure document before sale;
     In one or more states that do not have a provision 
requiring registration or the public filing and delivery of a 
disclosure document before sale, so long as:
     The securities have been registered in at least one other 
state that provides for such registration, public filing, and delivery 
before sale;
     The issuer offers and sells securities in that other state 
under those provisions;
     And the issuer delivers to all purchasers in any state the 
disclosure documents mandated by the state in which it registered the 
securities; or
     Exclusively in a state according to an exemption in such 
state that permits general solicitation and advertising, so long as 
sales are made only to ``accredited investors.'' \366\
---------------------------------------------------------------------------

    \366\ 17 CFR 230.504(b)(1). State exemptions of this nature 
include those based on the ``Model Accredited Investor Exemption,'' 
which was adopted by NASAA in 1997. See CCH NASAA Reporter Para. 
361. Generally, the model rule exempts offers and sales of 
securities from state registration requirements if, among other 
matters, the securities are sold only to persons who are, or are 
reasonably believed to be, ``accredited investors'' as defined in 
Rule 501(a) of Regulation D. 17 CFR 230.501(a). The model rule 
restricts transfer of the securities for 12 months after issuance 
except to other accredited investors or if registered. General 
solicitations by any means under that provision are generally 
limited to a type of ``tombstone'' ad. See Model Accredited Investor 
Exemption, available at http://www.nasaa.org/wp-content/uploads/2011/07/24-Model_Accredited_Investor_Exemption.pdf.
    See Section II.A for a discussion of the definition ``accredited 
investor.''

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[[Page 30495]]

2. Filing Requirements and Relationship With State Securities Laws
    An issuer conducting an offering under Rule 504 is required to file 
a notice with the Commission on Form D within 15 days after the first 
sale of securities in the offering.\367\ The Commission does not charge 
any fee to file or amend a Form D.
---------------------------------------------------------------------------

    \367\ See 17 CFR 230.503. Filing a Form D notice is required, 
but a failure to file the notice does not invalidate the Rule 504 
exemption.
---------------------------------------------------------------------------

    Offerings conducted pursuant to Rule 504 must be registered in each 
state in which they are offered or sold unless an exemption to state 
registration is available under state securities laws.\368\ Each state 
has its own registration requirements and exemptions to registration 
requirements. The vast majority of states have adopted a uniform 
registration form for offerings relying on Rule 504.\369\ At least one 
state, however, has adopted a form of state-based crowdfunding that 
permits the use of general solicitation but has provided for an 
abbreviated state registration procedure where, in addition to 
following various state-specific requirements for registration, an 
issuer also complies with Rule 504 of Regulation D.\370\
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    \368\ Securities issued pursuant to Rule 504 are not covered 
securities as this exemption is adopted pursuant to the Commission's 
authority under Section 3(b)(1) of the Securities Act.
    \369\ See CCH Blue Sky Law Reporter, Blue Sky Finding Lists, 
Small Corporate Offering Registration Program and Form U-7, ] 6461 
(2016). As of 2016, 43 states, the District of Columbia, and the 
Commonwealth of Puerto Rico have adopted some form of the SCOR 
program or recognize the filing of Form U-7 (also referred to as 
uniform limited offering registration (``ULOR'')). Id. SCOR and Form 
U-7 were developed by NASAA as a registration format for issuers 
registering securities under state securities laws when relying on 
an exemption from Securities Act registration, including Rule 504. 
An issuer may not use the SCOR Form to offer and sell its securities 
if the issuer or any of its officers, directors, principal 
stockholders, or promoters are disqualified because of prior 
violations of the securities laws. An issuer also may not use 
salespersons who are disqualified because of prior violations of the 
securities laws. See information from NASAA about SCOR and states' 
coordinated review available at http://www.nasaa.org/industry-resources/corporation-finance/scor-overview/ and http://www.coordinatedreview.org/cr-scor/.
    \370\ Based on the ``Intrastate Crowdfunding Legislation'' 
summary prepared by NASAA, dated Jan. 2, 2018 available at http://www.nasaa.org/wp-content/uploads/2018/01/NASAA-Crowdfunding-Index-1-2-2018.pdf, of the 35 jurisdictions that adopted intrastate 
crowdfunding provisions, as of Jan. 2, 2018, Maine allows an issuer 
to rely on Rule 504 of Regulation D when the issuer complies with an 
abbreviated registration procedure. See Me. Rev. Stat. tit. 32, 
Sec.  16304(6-A)(D) (2013) available at https://www.maine.gov/pfr/securities/documents/title32sec16304.pdf.
---------------------------------------------------------------------------

3. Analysis of Rule 504 in the Exempt Market
    From 2009-2018, two percent of the capital raised in Regulation D 
offerings under $5 million by non-investment companies was offered 
under Rule 504 (and under Rule 505, prior to its repeal), and 98% of 
the capital raised was offered under Rule 506.\371\ As illustrated in 
Table 9, in 2018, there were 85 additional new offerings that claimed a 
Rule 504 exemption as compared to 2017; \372\ however, the increased 
number of Rule 504 filings generally aligns with the decrease in the 
number of Rule 505 offerings over the same period (83 offerings). In 
repealing Rule 505, the Commission noted that it believed that, due to 
the increase in Rule 504's aggregate offering amount, almost all of the 
offerings that were conducted under Rule 505 would qualify for an 
exemption under amended Rule 504.\373\
---------------------------------------------------------------------------

    \371\ See note 37 and accompanying text. The Commission repealed 
Rule 505 in the Intrastate and Regional Offerings Release, effective 
on May 22, 2017.
    \372\ Rule 504 offerings had declined by 16% from 2016 to 2017 
and by 4% from 2015 to 2016. See Unregistered Offerings White Paper 
at Table 6.
    \373\ See Intrastate and Regional Offerings Release at the text 
accompanying n. 432 (``[I]f issuers switch [from Rule 505 offerings] 
to offerings under amended Rule 504, they could replicate most 
characteristics of an offering under existing Rule 505 and receive 
some additional benefits, such as access to an unlimited number of 
non-accredited investors and the ability to engage in general 
solicitation in certain situations. However, reporting companies, 
albeit a small proportion of all Rule 505 issuers, are not permitted 
to use the Rule 504 exemption.'').

                            Table 9--Number of New Offerings Under Rules 504 and 505
----------------------------------------------------------------------------------------------------------------
                                                    Change from                     Change from
                                       2016        2016 to 2017        2017        2017 to 2018        2018
----------------------------------------------------------------------------------------------------------------
Rule 504........................             443              93             536              85             621
Rule 505........................             173             -90              83             -83               0
Rules 504 and 505...............             616               3             619               2             621
----------------------------------------------------------------------------------------------------------------

BILLING CODE 8011-01-P

[[Page 30496]]

[GRAPHIC] [TIFF OMITTED] TP26JN19.006

BILLING CODE 8011-01-C
4. Request for Comment
    65. Should we consider any changes to the Rule 504 exemption? Do 
the requirements of Rule 504 appropriately address capital formation 
and investor protection considerations? Is the Rule 504 exemption 
useful to help issuers meet their capital-raising needs? Alternatively, 
should we retain Rule 504 as it is?
    66. Are there any data available that show an increase or decrease 
in fraudulent activity in the Rule 504 market as a result of recent 
amendments? If so, what are the causes or explanations and what should 
we do to address them?
    67. Should we increase the $5 million offering limit? If so, what 
limit is appropriate? For example, as recommended by the 2015 Small 
Business Forum prior to the Commission's 2016 amendments, should we 
increase the Rule 504 offering limit to $10 million? What are the 
appropriate considerations in determining a maximum offering size? In 
connection with any increase in the limit, should we consider imposing 
additional investor protections, such as individual investment limits?
    68. Should we extend eligibility to rely on Rule 504 to additional 
categories of issuers, such as Exchange Act reporting companies or 
investment companies? Should we exclude any additional categories of 
issuers from Rule 504 eligibility?
    69. Is the offering exemption under Rule 504 duplicative of 
Regulation A Tier 1? If we were to eliminate the staff's review and 
qualification of Regulation A Tier 1 offerings in light of the 
concurrent state-level review and qualification of the offering (as 
described in Question 60 above), should we also eliminate Rule 504? 
Would Rule

[[Page 30497]]

504 continue to have utility in such a circumstance?
    70. Are there any regulatory or legislative changes that are 
necessary or beneficial to encourage regional offerings across two or 
more jurisdictions?

E. Intrastate Offerings

1. Section 3(a)(11) of the Securities Act
    Section 3(a)(11) of the Securities Act is generally known as the 
``intrastate offering exemption.'' \374\ To qualify for the intrastate 
offering exemption, an issuer \375\ must:
---------------------------------------------------------------------------

    \374\ 15 U.S.C. 77c(a)(11) (providing an exemption from 
registration under the Securities Act for ``[a]ny security which 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'').
    \375\ Issuers registered or required to be registered under the 
Investment Company Act are not eligible to conduct offerings 
pursuant to Section 3(a)(11). Under Section 24(d) of the Investment 
Company Act [15 U.S.C. 80a-24(d)], the Section 3(a)(11) exemption is 
not available for an investment company registered or required to be 
registered under the Investment Company Act. See Section 3(a)(11) 
Exemption for Local Offerings, Release No. 33-4434 (Dec. 6, 1961) 
[26 FR 11896 (Dec. 13, 1961)] (``Section 3(a)(11) Release''), at 
note 1; see also Intrastate and Regional Offerings Release at text 
accompanying note 240.
---------------------------------------------------------------------------

     Be organized in the state where it is offering the 
securities;
     Carry out a significant amount of its business in that 
state; \376\ and
---------------------------------------------------------------------------

    \376\ See Section 3(a)(11) Release at 2 (``In view of the local 
character of the Section 3(a)(11) exemption, the requirement that 
the issuer be doing business in the state can only be satisfied by 
the performance of substantial operational activities in the state 
of incorporation. The doing business requirement is not met by 
functions in the particular state such as bookkeeping, stock record 
and similar activities or by offering securities in the state.'').
---------------------------------------------------------------------------

     Make offers and sales only to residents of that state.
    The Commission has stated that the ``legislative history of the 
Securities Act shows that this exemption was designed to apply only to 
local financing that may practicably be consummated in its entirety 
within the state or territory in which the issuer is both incorporated 
and doing business.'' \377\ Section 3(a)(11) does not limit the size of 
the offering or the number of investors, so long as ``the entire issue 
of securities [is] offered and sold exclusively to residents of the 
state in question.'' \378\ However, the Commission has noted that 
``[a]n offering may be so large that its success as a local offering 
appears doubtful from the outset.'' \379\ An issuer must determine the 
residence of each offeree and purchaser. If the issuer offers or sells 
any of the securities to even one out-of-state person, the exemption 
may be lost. Without the exemption, the issuer would be in violation of 
the Securities Act if the offering does not qualify for another 
exemption and was not registered under the Securities Act.
---------------------------------------------------------------------------

    \377\ Section 3(a)(11) Release at 1.
    \378\ Id (emphasis in original).
    \379\ Id at 3.
---------------------------------------------------------------------------

a. Restrictions on Resales
    Although Section 3(a)(11) does not have explicit resale 
restrictions, the Commission has explained that ``to give effect to the 
fundamental purpose of the exemption, it is necessary that the entire 
issue of securities shall be offered and sold to, and come to rest only 
in the hands of residents within the state.'' \380\ State securities 
laws also may have specific resale restrictions. In addition, like any 
securities transaction, persons reselling the securities nonetheless 
will need to register the resale transaction with the Commission or 
have an exemption from registration under federal law.\381\
---------------------------------------------------------------------------

    \380\ Id at 4.
    \381\ See Section V.A.
---------------------------------------------------------------------------

b. Filing Requirements and Relationship With State Securities Laws
    Issuers conducting an offering pursuant to Section 3(a)(11) are not 
required to file any information with or pay any fees to the 
Commission. Offerings conducted pursuant to Section 3(a)(11) must be 
registered in the state in which the securities are offered or sold 
unless an exemption to state registration is available under the 
state's securities laws.\382\
---------------------------------------------------------------------------

    \382\ A security issued pursuant to Section 3(a)(11) is not a 
``covered security'' under Section 18. The intrastate exemptions 
provide the states with ``the flexibility to adopt requirements that 
are consistent with their respective interests in facilitating 
capital formation and protecting their resident investors in 
intrastate securities offerings, including the authority to impose 
additional disclosure requirements regarding offers and sales made 
to persons within their state or territory, or the authority to 
limit the ability of certain bad actors from relying on applicable 
state exemptions.'' See Intrastate and Regional Offerings Release at 
Section I.
---------------------------------------------------------------------------

2. Securities Act Rules 147 and 147A
    17 CFR 230.147 (``Rule 147'') is considered a ``safe harbor'' under 
Section 3(a)(11) of the Securities Act, providing objective standards 
that an issuer can rely on to meet the requirements of that 
exemption.\383\ The Rule 147 safe harbor was intended to provide 
assurances that the intrastate offering exemption would be used for the 
purpose Congress intended in enacting Section 3(a)(11), namely the 
local financing of issuers by investors within the issuer's state or 
territory.\384\ Under Rule 147, states retain the flexibility to adopt 
requirements that are consistent with their respective interests in 
facilitating capital formation and protecting their resident investors 
in intrastate securities offerings, including the authority to impose 
additional disclosure requirements for offers and sales made to persons 
within their state or territory, and the authority to limit the ability 
of certain bad actors to rely on applicable state exemptions.
---------------------------------------------------------------------------

    \383\ See SEC Release No. 33-5450 (Jan. 7, 1974) [39 FR 2353 
(Jan. 21, 1974)] (``Rule 147 Adopting Release''). See also SEC 
Release No. 33-5349 (Jan. 8, 1973) [38 FR 2468 (Jan. 26, 1973)] 
(``Rule 147 Proposing Release'').
    \384\ See Rule 147 Adopting Release. See also H.R. Rep. No. 73-
85, at 6-7 (1933), H.R. Rep. No. 73-1838, at 40-41 (1934) (Conf. 
Rep.) and Section 3(a)(11) Release.
---------------------------------------------------------------------------

    17 CFR 230.147A (``Rule 147A'') is a new intrastate offering 
exemption adopted by the Commission in 2016 that seeks to accommodate 
modern business practices and communications technology and provide an 
alternative means for smaller issuers to raise capital locally, 
including through offerings relying on intrastate crowdfunding 
provisions.\385\ Rule 147A was adopted pursuant to the Commission's 
general exemptive authority under Section 28 of the Securities Act, and 
therefore, Rule 147A is not subject to the statutory limitations of 
Section 3(a)(11). Accordingly, Rule 147A has no restriction on offers, 
but requires that all sales be made only to residents of the issuer's 
state or territory to ensure the intrastate nature of the exemption. 
Rule 147A also does not require issuers to be incorporated or organized 
in the same state or territory where the offering occurs so long as 
issuers can demonstrate the in-state nature of their business. 
Consistent with Rule 147, states retain the flexibility to adopt 
requirements that are consistent with their respective interests in 
facilitating capital formation and protecting their resident investors 
in intrastate securities offerings, including the authority to impose 
additional disclosure requirements for offers and sales made to persons 
within their state or territory, or the authority to limit the ability 
of certain bad actors to rely on applicable state exemptions.
---------------------------------------------------------------------------

    \385\ See Intrastate and Regional Offerings Release.
---------------------------------------------------------------------------

    In order to conduct offerings pursuant to Rule 147 or Rule 147A, 
issuers \386\ must meet certain requirements. Table 10 broadly 
summarizes the Commission requirements for each rule. We refer to ``in-
state'' as the state or territory in which the issuer is resident and 
doing

[[Page 30498]]

business at the time of the sale of the security.
---------------------------------------------------------------------------

    \386\ As with Section 3(a)(11) and Rule 147, issuers registered 
or required to be registered under the Investment Company Act are 
not eligible to conduct offerings pursuant to Rule 147A.

        Table 10--Overview of Rule 147 and Rule 147A Requirements
------------------------------------------------------------------------
                                           Requirements
                                            of Rule 147
                                           (safe harbor    Requirements
                                           under section   of Rule 147A
                                             3(a)(11))
------------------------------------------------------------------------
The issuer is organized in-state.\387\..  ..............  ..............
The officers, partners, or managers of    ..............  ..............
 the issuer primarily direct, control
 and coordinate the issuer's activities
 (``principal place of business'') in-
 state.\388\............................
The issuer satisfies at least one of the  ..............  ..............
 ``doing business'' requirements
 described below.\389\..................
Offers are limited to in-state            ..............  ..............
 residents\390\ or persons who the
 issuer reasonably believes are in-state
 residents.\391\........................
Sales are limited to in-state residents   ..............  ..............
 or persons who the issuer reasonably
 believes are in-state residents.\392\..
The issuer obtains a written              ..............  ..............
 representation from each purchaser as
 to residency.\393\.....................
------------------------------------------------------------------------

a. ``Doing Business'' In-State
---------------------------------------------------------------------------

    \387\ See 17 CFR 230.147(c)(1)(i).
    \388\ See 17 CFR 230.147(c)(1) and 17 CFR 230.147A(c)(1).
    \389\ See 17 CFR 230.147(c)(2) and 17 CFR 230.147A(c)(2).
    \390\ The residence of an offeree or purchaser that is a legal 
entity (e.g., corporation, partnership, or trust) is the location 
where, at the time of the sale, the entity has its principal place 
of business. However, if a legal entity was organized for the 
specific purpose of acquiring securities pursuant to Rule 147 or 
Rule 147A, all beneficial owners must be in-state residents for the 
entity to be considered an in-state resident. In addition, a trust 
that is not deemed to be a separate legal entity is a resident of 
each state or territory in which its trustee is, or trustees are, 
resident. If the purchaser is an individual, such person is deemed 
to be a resident of the state or territory if such person has, at 
the time of the offer and sale, his or her principal residence in 
the state or territory.
    \391\ See 17 CFR 230.147(d).
    \392\ See 17 CFR 230.147(d) and 17 CFR 230.147A(d).
    \393\ See 17 CFR 230.147(f)(1)(iii) and 17 CFR 
230.147A(f)(1)(iii).
---------------------------------------------------------------------------

    Issuers conducting an offering pursuant to Rule 147 or Rule 147A 
must satisfy at least one of the following requirements in order to be 
considered ``doing business'' in-state:
     The issuer derived at least 80% of its consolidated gross 
revenues from the operation of a business or of real property located 
in-state or from the rendering of services in-state;
     The issuer had at least 80% of its consolidated assets 
located in-state; \394\
---------------------------------------------------------------------------

    \394\ This is measured at the end of its most recent semi-annual 
fiscal period prior to the first offer of securities pursuant to the 
exemption.
---------------------------------------------------------------------------

     The issuer intends to use and uses at least 80% of the net 
proceeds from the offering towards the operation of a business or of 
real property in-state, the purchase of real property located in-state, 
or the rendering of services in-state; or
     A majority of the issuer's employees are based in-
state.\395\
---------------------------------------------------------------------------

    \395\ See 17 CFR 230.147(c)(2) and 17 CFR 230.147A(c)(2).
---------------------------------------------------------------------------

b. Restrictions on Resales
    For a period of six months from the date of the sale by the issuer 
to the purchaser, securities purchased in an offering pursuant to Rule 
147 or Rule 147A may only be resold to persons residing in-state.\396\ 
Issuers must disclose these limitations on resale to offerees and 
purchasers and include appropriate legends on the certificate or 
document evidencing the security.\397\ Although securities purchased in 
an offering pursuant to Rule 147 or Rule 147A are not considered 
``restricted securities,'' persons reselling the securities nonetheless 
will need to register the resale transactions with the Commission or 
rely on an exemption from registration under federal securities law.
---------------------------------------------------------------------------

    \396\ See 17 CFR 230.147(e) and 17 CFR 230.147A(e).
    \397\ See 17 CFR 230.147(f) and 17 CFR 230.147A(f).
---------------------------------------------------------------------------

c. Filing Requirements and Relationship With State Securities Laws
    Issuers conducting an offering pursuant to Rule 147 or Rule 147A 
are not required to file any information with or pay any fees to the 
Commission. Offerings conducted pursuant to Rule 147 or Rule 147A must 
be registered in the state in which they are offered or sold unless an 
exemption to state registration is available under the state's 
securities laws.\398\ Each state has its own registration requirements 
and exemptions to registration requirements.\399\
---------------------------------------------------------------------------

    \398\ A security issued pursuant to Section 3(a)(11) and its 
Rule 147 safe harbor or pursuant to Rule 147A is not a ``covered 
security'' under Section 18. See Intrastate and Regional Offerings 
Release at Section I.
    \399\ See, e.g., information from NASAA about intrastate 
crowdfunding legislation and regulation available at http://www.nasaa.org/industry-resources/corporation-finance/instrastate-crowdfunding-resource-center/.
---------------------------------------------------------------------------

3. Request for Comment
    71. To what extent are the intrastate exemptions being used? Do the 
requirements of the intrastate exemptions appropriately address capital 
formation and investor protection considerations? Are the intrastate 
exemptions useful to help issuers meet their capital-raising needs? We 
request data with respect to: (a) The use of Rule 147 and Rule 147A; 
(b) repeat use by the same issuers of Rule 147 or Rule 147A; (c) the 
use by issuers of alternative federal offering exemptions concurrently 
or close in time to an offer or sale under Rule 147 or Rule 147A; (d) 
fraud associated with, or issuer non-compliance with provisions of, 
Rule 147 or Rule 147A; (e) the role of intrastate broker-dealers and 
other intermediaries in offerings conducted pursuant to Rule 147 or 
Rule 147A; and (f) the application of state bad actor disqualification 
provisions in offerings conducted pursuant to Rule 147 or Rule 147A.
    72. Are there any data available that show an increase or decrease 
in fraudulent activity in the intrastate offerings market as a result 
of recent amendments or the introduction of Rule 147A? If so, what are 
the causes or explanations and what should we do to address them?
    73. Should we eliminate Rule 147 and retain Rule 147A? If we were 
to eliminate Rule 147 and Rule 504 (as described in Question 69 above), 
would issuers still rely on the intrastate exemption in Section 
3(a)(11)?
    74. Do the issuer requirements related to principal place of 
business and doing business appropriately capture the ``intrastate'' 
issuers for purposes of Rules 147 and 147A? If not, how should they be 
changed?
    75. Does the requirement that an individual purchaser have his or 
her principal residence in a state or territory

[[Page 30499]]

in order to be deemed a resident of such state or territory 
appropriately capture the ``intrastate'' investors for purposes of 
Rules 147 and 147A? What impact does this have on potential purchasers 
who have more than one place of residence? Would it be appropriate to 
revise the definition of intrastate purchasers to include those 
purchasers in a state who would qualify as residents under that state's 
laws and regulations regarding intrastate offers and sales of 
securities? What input should states have in determining whether an 
offering is intrastate?
    76. For a legal entity that was organized for the specific purpose 
of acquiring securities pursuant to Rule 147 or Rule 147A to be 
considered an in-state resident, all beneficial owners must be in-state 
residents. Do issuers face challenges in determining whether an entity 
was organized for the specific purpose of acquiring securities? If so, 
should we provide guidance on such determination?
    77. What regulatory or legislative changes are needed to allow 
regional offerings that are not limited to one jurisdiction?
    78. Should we consider any changes to either Rule 147 or Rule 147A? 
What effects would such changes have on capital formation and investor 
protection?

F. Regulation Crowdfunding

    Title III of the JOBS Act added Securities Act Section 4(a)(6), 
which provides an exemption from registration for certain crowdfunding 
transactions.\400\ To qualify for the exemption under Section 4(a)(6), 
transactions must meet a number of statutory requirements that are 
discussed in more detail below, including limits on the amount an 
issuer may raise, limits on the amount an individual may invest and a 
requirement that the transactions be conducted through an intermediary 
that is registered as either a broker-dealer or a ``funding portal.'' 
In addition, Title III added Section 4A to the Securities Act, which 
requires, among other things, that issuers and intermediaries that 
facilitate transactions under Section 4(a)(6) provide certain specified 
information to investors and the Commission. Title III also mandated 
that the Commission establish bad actor provisions disqualifying 
certain issuers from availing themselves of the Section 4(a)(6) 
exemption and adopt rules to exempt from the registration requirements 
of Section 12(g), either conditionally or unconditionally, securities 
acquired pursuant to an offering under Section 4(a)(6).
---------------------------------------------------------------------------

    \400\ Crowdfunding generally refers to a method of capital 
raising in which an entity or individual raises funds via the 
internet from a large number of people typically making small 
individual contributions. Individuals interested in the crowdfunding 
campaign--members of the ``crowd''--may share information about the 
project, cause, idea, or business with each other and use the 
information to decide whether to fund the campaign based on the 
collective ``wisdom of the crowd.''
---------------------------------------------------------------------------

    In 2015, to implement the requirements of Title III, the Commission 
adopted Regulation Crowdfunding, which became effective on May 16, 
2016.\401\ On March 31, 2017, the Commission adjusted for inflation 
certain thresholds in Regulation Crowdfunding, as required by Section 
4A(h).\402\
---------------------------------------------------------------------------

    \401\ See Crowdfunding, Release No. 33-9974 (Oct. 30, 2015) [80 
FR 71387 (Nov. 16, 2015)] (``Crowdfunding Adopting Release'').
    \402\ Securities Act Section 4(a)(6) exempts offerings of up to 
$1 million in a 12-month period, subject to adjustment for inflation 
required by Section 4A(h) at least once every 5 years. See Inflation 
Adjustments and Other Technical Amendments under Titles I and III of 
the JOBS Act (Technical Amendments; Interpretation), Release No. 33-
10332 (Mar. 31, 2017) [82 FR 17545 (Apr. 12, 2017)] (``2017 
Amendments'').
---------------------------------------------------------------------------

    In the Crowdfunding Adopting Release, the Commission stated that 
staff would undertake to study and submit a report to the Commission 
(the ``Crowdfunding Study'') no later than three years following the 
effective date of Regulation Crowdfunding on the impact of the 
regulation on capital formation and investor protection.\403\ In May 
2019, the staff submitted the Crowdfunding Study to the 
Commission.\404\ We discuss certain relevant findings from the 
Crowdfunding Study later in this section.
---------------------------------------------------------------------------

    \403\ See Crowdfunding Adopting Release, at 71390. The Adopting 
Release stated that the Crowdfunding Study will include, but not be 
limited to, a review of: (1) Issuer and intermediary compliance; (2) 
issuer offering limits and investor investment limits; (3) incidence 
of fraud, investor losses, and compliance with investor aggregates; 
(4) intermediary fee and compensation structures; (5) measures 
intermediaries have taken to reduce the risk of fraud, including 
reliance on issuer and investor representations; (6) the concept of 
a centralized database of investor contributions; (7) intermediary 
policies and procedures; (8) intermediary recordkeeping practices; 
and (9) secondary market trading practices.
    \404\ See Report to the Commission on Regulation Crowdfunding 
(Jun. 18, 2019) available at www.sec.gov/smallbusiness/exemptofferings/regcrowdfunding/2019Report.
---------------------------------------------------------------------------

1. Scope of the Exemption
a. Eligible Issuers
    Certain issuers are not eligible to use the Regulation Crowdfunding 
exemption. Section 4A, as added by Title III, specifically excludes:
     Non-U.S. issuers;
     Issuers that are required to file reports under Exchange 
Act Section 13(a) or 15(d);
     Certain investment companies; and
     Other issuers that the Commission, by rule or regulation, 
determines appropriate.\405\
---------------------------------------------------------------------------

    \405\ 15 U.S.C. 77d-1.
---------------------------------------------------------------------------

    In addition, the Commission's rules further exclude:
     Issuers that are disqualified under Regulation 
Crowdfunding's disqualification rules; \406\
---------------------------------------------------------------------------

    \406\ Regulation Crowdfunding includes disqualification 
provisions that are substantially similar to those in Rule 506(d). 
See Section II.B.2.e. Disqualification under Regulation 
Crowdfunding, however, will not arise as a result of disqualifying 
events relating to any conviction, order, judgment, decree, 
suspension, expulsion or bar that occurred before May 16, 2016, the 
effective date of Regulation Crowdfunding. Events that occurred 
prior to May 16, 2016 that are within the relevant look-back period 
and would otherwise be disqualifying are, however, required to be 
disclosed in writing to each purchaser.
---------------------------------------------------------------------------

     Issuers that have failed to comply with the annual 
reporting requirements under Regulation Crowdfunding during the two 
years immediately preceding the filing of the offering statement; and
     Blank check companies.\407\
---------------------------------------------------------------------------

    \407\ See 17 CFR 227.100(b). See also note 25.
---------------------------------------------------------------------------

    As a result of the statutory investment company exclusion, special 
purpose vehicles or funds organized to invest in, or lend money to, a 
single company (``SPVs'') are not eligible to raise funds under 
Regulation Crowdfunding.\408\
---------------------------------------------------------------------------

    \408\ See 15 U.S.C. 77d-1(f)(3); 17 CFR 227.100(b)(3); and 
Crowdfunding Adopting Release at 71397. While a number of commenters 
raised concerns about the inability to use a SPV in a crowdfunding 
offering, the Commission retained the exclusion, citing the 
statutory exclusion of investment funds from eligibility to rely on 
Section 4(a)(6) and noting that investment fund issuers present 
considerations different from those for non-fund issuers.
---------------------------------------------------------------------------

    Since the adoption of Regulation Crowdfunding, we have received 
comments and recommendations from a variety of sources, including 
certain of the annual Small Business Forums \409\ and the 2017 Treasury 
Report,\410\ on the inability to use an SPV to conduct a crowdfunding 
offering. The 2017 Small Business Forum recommended that the Commission 
consider promoting simplification of the capitalization table of 
Regulation Crowdfunding issuers by allowing the use of SPVs to 
aggregate investors with appropriate conditions.\411\ Similarly, the 
2017 Treasury Report recommended allowing the use of SPVs advised by a 
registered investment adviser, which may mitigate issuers' concerns 
about vehicles having an unwieldy number of shareholders and tripping 
the registration thresholds

[[Page 30500]]

of Section 12(g).\412\ However, in light of what it cited as potential 
conflicts of interest between the issuer, lead investors, and other 
investors, including non-accredited investors, the 2017 Treasury Report 
recommended that any rulemaking in this area prioritize: (1) Alignment 
of interests between the lead investor and the other investors 
participating in the vehicle; (2) regular dissemination of information 
from the issuer; and (3) minority voting protections with respect to 
significant corporate actions.\413\
---------------------------------------------------------------------------

    \409\ See 2014 Forum Report; 2017 Forum Report.
    \410\ See 2017 Treasury Report.
    \411\ See 2017 Forum Report.
    \412\ See 2017 Treasury Report.
    \413\ See id.
---------------------------------------------------------------------------

    In addition, since the adoption of Regulation Crowdfunding, and 
most recently, in connection with the Crowdfunding Study, the staff has 
received feedback from market participants that certain issuer 
requirements under Regulation Crowdfunding may be preventing issuers 
from raising capital through the exemption. Some intermediaries have 
told the staff that many issuers have elected not to pursue an offering 
under Regulation Crowdfunding because without a SPV, a large number of 
investors on an issuer's capitalization table can be unwieldy and 
potentially impede future financing. Similarly, some intermediaries 
have reported that issuers are hesitant to offer voting rights to 
investors in offerings under this exemption because the logistical 
challenges of seeking any required shareholder vote are too high a risk 
in the event of later financing and governance of the issuer. Market 
participants cited other potential investor protections that a SPV 
structure could provide, such as allowing small investors to invest 
alongside a sophisticated lead investor who may negotiate better terms, 
protect against dilution by negotiating during subsequent financings, 
mentor the issuer, and represent smaller investors on the board.
b. Offering Limit
    An issuer is permitted to raise a maximum aggregate amount of $1.07 
million in a 12-month period in reliance on Regulation 
Crowdfunding.\414\ In determining the amount that may be sold in a 
particular offering, an issuer should count:
---------------------------------------------------------------------------

    \414\ See 17 CFR 227.100(a)(1). See also note 402.
---------------------------------------------------------------------------

     The amount it has already sold (including amounts sold by 
entities controlled by, or under common control with, the issuer, as 
well as any amounts sold by any predecessor of the issuer) in reliance 
on Regulation Crowdfunding during the 12-month period preceding the 
expected date of sale, plus
     The amount the issuer intends to raise in reliance on 
Regulation Crowdfunding in its current offering.
    We have received feedback from several market participants on the 
issuer offering limits. The 2017 Small Business Forum, the 2017 
Treasury Report, and other market participants in connection with the 
Crowdfunding Study have stated that the offering limit should be 
higher, recommending limits from $5 million to $20 million.\415\ On the 
other hand, one intermediary stated that the current $1.07 million 
offering limit is appropriate, noting that most offerings are well 
below that level. Another intermediary stated that very few potential 
issuers expressed interest in raising over $107,000. Some of the 
intermediaries that recommended an increased offering limit stated 
their view that while few offerings reach the current limit, many 
issuers choose not to rely on the crowdfunding exemption because the 
limit is too low. According to some of these intermediaries, some 
issuers choose to raise funds needed in excess of the offering limit 
through a separate offering, which they consider to be a less optimal 
experience for investors and a more costly and potentially riskier 
approach for issuers. Another market participant noted that many early-
stage issuers require more than $1.07 million and that, but for the 
offering limit, Regulation Crowdfunding would provide a better solution 
than other available exemptions. Some of these market participants 
stated that the existing offering limit may deter some ``high-
quality,'' high-growth issuers with substantial financing needs from 
relying on Regulation Crowdfunding, thereby lowering the average 
quality of issuers in the Regulation Crowdfunding market. One 
intermediary stated that raising the offering limit could attract more 
issuers and expand opportunities for non-accredited investors. Another 
intermediary stated that the few issuers that had raised the maximum 
offering amount through its platform would have sought to raise 
additional capital had they been permitted to do so, and that high-
quality issuers may have significant upfront capital needs that exceed 
the existing limit.
---------------------------------------------------------------------------

    \415\ See, e.g., 2017 Treasury Report, at 41 (recommending 
``increasing the limit on how much can be raised over a 12-month 
period from $1 million to $5 million, as it will potentially allow 
companies to lower the offering costs per dollar raised'') and 2017 
Forum Report, at 18 (recommending a $5 million limit).
---------------------------------------------------------------------------

c. Investment Limits
    Individual investors are limited in the amounts they are allowed to 
invest in all Regulation Crowdfunding offerings over the course of a 
12-month period, as follows:
     If either of an investor's annual income or net worth is 
less than $107,000, then the investor's investment limit is the greater 
of:
    [cir] $2,200 or
    [cir] 5% of the lesser of the investor's annual income or net 
worth.
     If both annual income and net worth are equal to or more 
than $107,000, then the investor's limit is 10% of the lesser of his or 
her annual income or net worth.
     During the 12-month period, the aggregate amount of 
securities sold to an investor through all Regulation Crowdfunding 
offerings may not exceed $107,000, regardless of the investor's annual 
income or net worth.\416\
---------------------------------------------------------------------------

    \416\ See 17 CFR 227.100(a)(2).
---------------------------------------------------------------------------

    Spouses are allowed to calculate their net worth and annual income 
jointly.
    A number of market participants have expressed concerns about the 
investment limits.\417\ The 2018 Small Business Forum recommended that 
the Commission increase the investment limit for all investors, 
suggesting that doing so would help the market grow as it would allow 
more individual investments into the marketplace.\418\
---------------------------------------------------------------------------

    \417\ See, e.g., 2017 Treasury Report, 2018 Forum Report.
    \418\ See 2018 Forum Report.
---------------------------------------------------------------------------

    The 2017 and 2018 Small Business Forums and the 2017 Treasury 
Report along with other market participants also recommended that the 
investment limits not apply to accredited investors, who face no such 
limits under other exemptions.\419\ The 2018 Small Business Forum 
stated that removing the individual accredited investor limits would 
make crowdfunding offerings more attractive to accredited investors and 
make it easier for offerings to reach their maximum offering 
goals.\420\ In conjunction with removing the investment limits for 
individual accredited investors, the 2018 Small Business Forum 
recommended verification of accredited investor status.\421\ Similarly, 
some intermediaries recommended that intermediaries be required to 
verify accredited investor status, income, or net worth for certain 
larger investments, such as those over $25,000 in a 12-month period. In 
addition, some intermediaries stated

[[Page 30501]]

that conducting a separate Regulation D offering to allow accredited 
investors to invest greater amounts was unnecessarily confusing to 
investors and more costly to issuers.
---------------------------------------------------------------------------

    \419\ See 2017 Forum Report; 2018 Forum Report; and 2017 
Treasury Report.
    \420\ See 2018 Forum Report.
    \421\ See id.
---------------------------------------------------------------------------

    The 2017 Small Business Forum and some intermediaries in connection 
with the Crowdfunding Study also recommended that the investment limits 
should apply on a per-investment basis rather than across all 
crowdfunding offerings in a 12-month period.\422\ The 2017 Small 
Business Forum also recommended rationalizing the investment limit as 
it applies to entities by basing the limit on entity type rather than 
income.\423\
---------------------------------------------------------------------------

    \422\ See 2017 Forum Report.
    \423\ See id.
---------------------------------------------------------------------------

    The 2015 Small Business Forum, the 2017 Treasury Report, and 
several market participants recommended basing the 5% or 10% limit on 
the greater of the investor's net worth or income rather than the 
lesser of those two amounts.\424\ Some stated that allowing investors 
to invest the higher 10% amount only if both their net worth and income 
exceed the $107,000 threshold is inconsistent with the accredited 
investor definition, which requires the investor only to meet either 
the net worth or the income standard.\425\ The 2017 Treasury Report 
stated that the current rules unnecessarily limit investors who have a 
high net worth relative to annual income, or vice versa, which it noted 
is inconsistent with the approach taken for Regulation A Tier 2 
offerings. One market participant noted that requiring that both net 
worth and income meet the $107,000 threshold could result in an 
accredited investor being subject to the lower 5% investment limit.
---------------------------------------------------------------------------

    \424\ See 2017 Treasury Report, at 41; 2015 Small Business 
Forum.
    \425\ See, e.g., 2017 Treasury Report, at 41; 2018 Forum Report; 
2017 Forum Report, at 17. See also 2015 Forum Report (recommending 
increasing the investment limit for accredited investors).
---------------------------------------------------------------------------

d. Transactions Conducted Through an Intermediary and Intermediary 
Requirements
    Each Regulation Crowdfunding offering must be exclusively conducted 
through an online platform. The intermediary operating the platform 
must be a broker-dealer or a funding portal \426\ that is registered 
with the Commission and a member of a registered national securities 
association.\427\ Under Regulation Crowdfunding, intermediaries, 
whether registered broker-dealers or funding portals, are required, 
among other things:
---------------------------------------------------------------------------

    \426\ A funding portal is a crowdfunding intermediary that, in 
accordance with Section 304(b) of the JOBS Act and Exchange Act 
Section 3(a)(80), can engage only in limited activities.
    \427\ See 15 U.S.C. 77d(a)(6)(C); 15 U.S.C. 77d-1(a)(1)-(2). 
FINRA is currently the only registered national securities 
association.
---------------------------------------------------------------------------

     To provide investors with educational materials; \428\
---------------------------------------------------------------------------

    \428\ See 17 CFR 227.302(b).
---------------------------------------------------------------------------

     To take measures to reduce the risk of fraud; \429\
---------------------------------------------------------------------------

    \429\ See 17 CFR 227.301.
---------------------------------------------------------------------------

     To make available information about the issuer and the 
offering; \430\
---------------------------------------------------------------------------

    \430\ See 17 CFR 227.303(a).
---------------------------------------------------------------------------

     To provide communication channels to permit investors to 
communicate with each other and with representatives of the issuer 
about offerings on the platform; \431\ and
---------------------------------------------------------------------------

    \431\ See 17 CFR 227.303(c).
---------------------------------------------------------------------------

     To facilitate the offer and sale of crowdfunding 
securities.\432\
---------------------------------------------------------------------------

    \432\ See generally 17 CFR 227.303-304. See also Crowdfunding 
Adopting Release at 71390.
---------------------------------------------------------------------------

    An intermediary is prohibited from engaging in certain activities 
under the rules, including but not limited to:
     Providing access to its platform to an issuer if the 
intermediary has a reasonable basis for believing that the issuer or 
any of its officers, directors (or any person occupying a similar 
status or performing a similar function), or beneficial owners of 20% 
or more of the issuer's outstanding voting equity securities, 
calculated on the basis of voting power, is subject to a 
disqualification;
     Providing access to its platforms to any issuer that the 
intermediary has a reasonable basis for believing presents the 
potential for fraud or raises other investor protection concerns;
     Taking a financial interest in an issuer that is offering 
or selling securities on its platform unless:
    [cir] The intermediary receives the financial interest as 
compensation for the services provided to or for the benefit of the 
issuer in connection with the offer or sale of securities in a 
crowdfunding offering; and
    [cir] The financial interest consists of securities of the same 
class and having the same terms, conditions, and rights as the 
securities being offered or sold in the crowdfunding offering through 
the intermediary's platform;
     Compensating any person for providing the intermediary 
with personally identifiable information of any investor or potential 
investor; and
     Participating in the communication channel on its 
platform, other than to establish guidelines for communication and to 
remove abusive or potentially fraudulent communications.\433\
---------------------------------------------------------------------------

    \433\ See generally 17 CFR 227.300-305.
---------------------------------------------------------------------------

    In addition, Regulation Crowdfunding specifically prohibits funding 
portals (as opposed to broker-dealers) from: (a) Offering investment 
advice or recommendations; (b) soliciting purchases, sales, or offers 
to buy securities offered or displayed on its platform; (c) 
compensating employees, agents, or other persons for such solicitation 
or based on the sale of securities displayed or referenced on its 
platform; or (d) holding, managing, possessing, or otherwise handling 
investor funds or securities.\434\ The rules provide a non-exclusive 
conditional safe harbor under which funding portals can engage in 
certain activities, consistent with these restrictions.\435\
---------------------------------------------------------------------------

    \434\ See 17 CFR 227.300(c)(2).
    \435\ See 17 CFR 227.402.
---------------------------------------------------------------------------

    Issuers may rely on the efforts of the intermediary to determine 
that the aggregate amount of securities purchased by an investor does 
not cause the investor to exceed the investment limits, so long as the 
issuer does not have knowledge that the investor would exceed the 
investment limits as a result of purchasing securities in the issuer's 
offering.\436\
---------------------------------------------------------------------------

    \436\ See 17 CFR 303(b)(1).
---------------------------------------------------------------------------

    The 2017 and 2018 Small Business Forums recommended that the 
Commission allow intermediaries to receive as compensation securities 
of the issuer having different terms than those received by investors 
in the offering and to co-invest in the offerings they list.\437\
---------------------------------------------------------------------------

    \437\ See 2017 Forum Report; 2018 Forum Report.
---------------------------------------------------------------------------

    Some intermediaries have stated that they generally have not 
experienced significant challenges complying with Regulation 
Crowdfunding requirements. However, some also have stated that 
compliance with the current rules, including FINRA requirements and 
examinations, can be costly. One of those respondents stated that ``the 
most expensive requirement is keeping up with the . . . volume of FINRA 
communications, which requires a full-time employee to communicate with 
them, and a dedicated engineering resource,'' which are costs passed on 
to issuers in the form of higher fees. Another intermediary stated that 
the prohibition against funding portals handling investor funds 
significantly increased costs for funding portals, as well as for 
issuers and investors, while reducing the quality and timeliness of the 
investment and fund transfer process, with what it viewed as only 
limited investor protection benefits.

[[Page 30502]]

e. Limits on Advertising and Promoters
    An issuer may not advertise the terms of a Regulation Crowdfunding 
offering except in a notice that directs investors to the 
intermediary's platform and includes no more than the following 
information:
     A statement that the issuer is conducting an offering 
pursuant to Section 4(a)(6) of the Securities Act, the name of the 
intermediary through which the offering is being conducted, and a link 
directing the potential investor to the intermediary's platform;
     The terms of the offering, which means the amount of 
securities offered, the nature of the securities, the price of the 
securities, and the closing date of the offering period; and
     Factual information about the legal identity and business 
location of the issuer, limited to the name of the issuer of the 
security, the address, phone number, and website of the issuer, the 
email address of a representative of the issuer, and a brief 
description of the business of the issuer.\438\
---------------------------------------------------------------------------

    \438\ See 17 CFR 227.204.
---------------------------------------------------------------------------

    Although advertising the terms of the offering other than through 
the intermediary's platform is limited to a brief notice, an issuer may 
communicate with investors and potential investors about the terms of 
the offering through communication channels provided on the 
intermediary's platform. An issuer must identify itself as the issuer, 
and persons acting on behalf of the issuer must identify their 
affiliation with the issuer, in all communications on the 
intermediary's platform.\439\
---------------------------------------------------------------------------

    \439\ See 17 CFR 227.204(c).
---------------------------------------------------------------------------

    An issuer is allowed to compensate any person to promote its 
crowdfunding offerings through communication channels provided by an 
intermediary, but only if the issuer takes reasonable steps to ensure 
that the promoter clearly discloses the compensation with each 
communication.\440\
---------------------------------------------------------------------------

    \440\ See 17 CFR 227.205.
---------------------------------------------------------------------------

    The 2018 Small Business Forum recommended loosening the advertising 
restrictions to allow issuers to market their projects more 
effectively, suggesting that the rules are difficult to understand and 
``run counter to the intent of the law: To promote the democratization 
of investing.'' \441\ In connection with the Crowdfunding Study, some 
market participants recommended that the Commission ease the 
restrictions on advertising crowdfunding offerings to allow issuers to 
communicate in person with investors and to engage with local media on 
their offerings.
---------------------------------------------------------------------------

    \441\ 2018 Forum Report.
---------------------------------------------------------------------------

f. Restrictions on Resale
    Securities purchased in a crowdfunding transaction generally cannot 
be resold for a period of one year, unless the securities are 
transferred:
     To the issuer of the securities;
     To an accredited investor;
     As part of an offering registered with the Commission; or
     To a member of the family of the purchaser or the 
equivalent, to a trust controlled by the purchaser, to a trust created 
for the benefit of a member of the family of the purchaser or the 
equivalent, or in connection with the death or divorce of the purchaser 
or other similar circumstance.\442\
---------------------------------------------------------------------------

    \442\ See 17 CFR 227.501.
---------------------------------------------------------------------------

g. Conditional Exemption From Section 12(g)
    Section 12(g) of the Exchange Act requires an issuer with total 
assets of more than $10 million and a class of securities held of 
record by either 2,000 persons, or 500 persons who are not accredited 
investors, to register that class of securities with the Commission. 
However, securities issued pursuant to Regulation Crowdfunding are 
conditionally exempted from the record holder count under Section 12(g) 
if the following conditions are met:
     The issuer is current in its ongoing annual reports 
required pursuant to Regulation Crowdfunding;
     Has total assets as of the end of its most recently 
completed fiscal year of $25 million or less; and
     Has engaged the services of a transfer agent registered 
with the Commission.\443\
---------------------------------------------------------------------------

    \443\ See 17 CFR 240.12g-6.
---------------------------------------------------------------------------

    As a result, Section 12(g) registration is required if an issuer 
has, on the last day of its fiscal year, total assets greater than $25 
million and the class of equity securities is held by more than 2,000 
persons, or 500 persons who are not accredited investors. In that 
circumstance, our rules provide the issuer with a two-year transition 
period before it is required to register its class of securities 
pursuant to Section 12(g), so long as it timely files all of the annual 
reports required by Regulation Crowdfunding during such period.\444\
---------------------------------------------------------------------------

    \444\ See id.
---------------------------------------------------------------------------

    An issuer seeking to exclude a person from the record holder count 
of Section 12(g) is responsible for demonstrating that the securities 
held by the person were initially issued in an offering made under 
Section 4(a)(6).\445\
---------------------------------------------------------------------------

    \445\ See Crowdfunding Adopting Release at 71476.
---------------------------------------------------------------------------

    The 2017 Treasury Report recommended that the Commission modify the 
conditional exemption from Section 12(g) to raise the maximum revenue 
requirement from $25 million to $100 million to allow crowdfunded 
issuers to stay private longer, stating that these issuers likely lack 
the necessary size to be a reporting company and should not be forced 
to register as a reporting company until reaching higher revenues.\446\
---------------------------------------------------------------------------

    \446\ See 2017 Treasury Report.
---------------------------------------------------------------------------

    In connection with the Crowdfunding Study, several intermediaries 
expressed concern that a large number of shareholders would result in 
the issuer becoming required to register its securities under Section 
12(g) of the Exchange Act once it failed to meet the conditional 
exemption under Regulation Crowdfunding. Several intermediaries 
reported that, because of the risk of mandatory registration under 
Section 12(g), coupled with the governance concerns discussed above, 
issuers are often reluctant to accept more than 500 investors in a 
crowdfunding offering or they retain repurchase rights to the 
securities offered. A number of market participants have recommended 
expanding Regulation Crowdfunding's exemption from Section 12(g).
2. Disclosure Requirements
a. Offering Statement
    Any issuer conducting a Regulation Crowdfunding offering must 
electronically file its offering statement on Form C \447\ with the 
Commission and provide it to the intermediary facilitating the 
crowdfunding offering prior to commencing its offering. The Commission 
does not charge any fee to file or amend a Form C. No offers may be 
made until the offering statement has been filed with the Commission 
and provided to the intermediary. Unlike Regulation A, issuers are not 
permitted to ``test the waters,'' or solicit interest in the offering, 
before filing their Form C. In addition, the information in the 
offering statement must be publicly available for at least 21 days 
before any securities may be sold, although the intermediary may accept 
investment commitments during that time.\448\
---------------------------------------------------------------------------

    \447\ 17 CFR 239.900.
    \448\ See 17 CFR 227.303(a).
---------------------------------------------------------------------------

    The 2017 Small Business Forum recommended that the Commission amend 
Regulation Crowdfunding to permit an issuer to test-the-waters or 
solicit interest in an offering prior to filing its Form C,\449\ 
allowing issuers to determine the potential market interest in their 
securities prior to expending the

[[Page 30503]]

time and cost required to fully comply with the regulations. Similarly, 
in connection with the Crowdfunding Study, several market participants 
recommended that the Commission permit Regulation Crowdfunding issuers 
to test the waters, similar to Regulation A offerings. Market 
participants also have expressed concerns about the burden to issuers 
of complying with the requirement that 21 days elapse before a security 
can be sold, particularly for issuers that need funds quickly.
---------------------------------------------------------------------------

    \449\ See 2017 Forum Report at 18.
---------------------------------------------------------------------------

    The offering statement must include the following disclosure:
     Information about officers, directors, and owners of 20% 
or more of the issuer;
     A description of the issuer's business and the use of 
proceeds from the offering;
     The price to the public of the securities or the method 
for determining the price,
     The target offering amount and the deadline to reach the 
target offering amount,
     Whether the issuer will accept investments in excess of 
the target offering amount;
     Certain related-party transactions; and
     A discussion of the issuer's financial condition and 
financial statements.\450\
---------------------------------------------------------------------------

    \450\ See 17 CFR 227.201.
---------------------------------------------------------------------------

    The financial statements requirements are based on the amount 
offered and sold in reliance on Regulation Crowdfunding within the 
preceding 12-month period:
     For issuers offering $107,000 or less: Financial 
statements of the issuer and certain information from the issuer's 
federal income tax returns, both certified by the principal executive 
officer. If, however, financial statements of the issuer are available 
that have either been reviewed or audited by a public accountant that 
is independent of the issuer, the issuer must provide those financial 
statements instead and will not need to include the information 
reported on the federal income tax returns or the certification of the 
principal executive officer.
     Issuers offering more than $107,000 but not more than 
$535,000: Financial statements reviewed by a public accountant that is 
independent of the issuer. If, however, financial statements of the 
issuer are available that have been audited by a public accountant that 
is independent of the issuer, the issuer must provide those financial 
statements instead and will not need to include the reviewed financial 
statements.
     Issuers offering more than $535,000:
    [cir] For first-time Regulation Crowdfunding issuers: Financial 
statements reviewed by a public accountant that is independent of the 
issuer, unless financial statements of the issuer are available that 
have been audited by an independent auditor.
    [cir] For issuers that have previously sold securities in reliance 
on Regulation Crowdfunding: Financial statements audited by a public 
accountant that is independent of the issuer.\451\
---------------------------------------------------------------------------

    \451\ See 17 CFR 227.201(t).
---------------------------------------------------------------------------

    Some studies and market participants have expressed concern about 
the cost and complexity of relying on Regulation Crowdfunding.\452\ 
Market participants have stated that many issuers face significant 
challenges due to the time and cost required of issuers to comply with 
the regulations, including complying with U.S. generally accepted 
accounting principles (``U.S. GAAP'') financial statement requirements, 
obtaining a review report, and preparing a Form C, and that many new 
issuers are not able to bear those costs given the uncertainty 
regarding whether they would raise capital successfully.
---------------------------------------------------------------------------

    \452\ See, e.g., 2017 Treasury Report, at 40 (stating that 
``market participants have expressed concerns about the cost and 
complexity of using crowdfunding compared to private placement 
offerings''); 2018 Forum Report; Statement of the U.S. Chamber of 
Commerce to HFSC, March 22, 2017, https://docs.house.gov/meetings/BA/BA16/20170322/105717/HHRG-115-BA16-Wstate-QuaadmanT-20170322.pdf, 
at 12-13; Lindsay M. Abate (2016) One Year of Equity Crowdfunding: 
Initial Market Developments and Trends, U.S. Small Business 
Administration Office of Advocacy Economic Research Series, https://www.sba.gov/sites/default/files/advocacy/Crowdfunding_Issue_Brief_2018.pdf (``SBA Study''), at 12 (suggesting 
that ``exempting businesses seeking very small amounts of capital 
from certain requirements may make crowdfunding a more attractive 
and worthwhile option for small and young firms that are otherwise a 
good fit for this capital raising method'').
---------------------------------------------------------------------------

    To help reduce issuer cost and complexity, market participants have 
recommended several revisions to the rules. For example, the 2015 Small 
Business Forum recommended permitting crowdfunding issuers to provide 
reviewed rather than audited financial statements in subsequent 
offerings unless audited financial statements of the issuer that have 
been audited by an independent auditor are available.
    A few market participants also have raised concerns about the 
requirements for issuers seeking to raise smaller amounts in compliance 
with Regulation Crowdfunding. For example, the 2017 and 2018 Small 
Business Forums recommended easing the requirements for smaller or 
debt-only crowdfunding offerings under $250,000, including limiting the 
ongoing reporting obligations to actual investors (rather than to the 
general public) \453\ and scaling regulation to reduce relatively 
inelastic accounting, legal, and other costs.\454\ Another intermediary 
stated that smaller issuers that do not have reviewed or audited 
financial statements may find it difficult to prepare a statement of 
changes of equity, because the typical accounting software does not 
print it automatically. This intermediary stated that these issuers 
also often have trouble accurately preparing a cash flow statement or 
accounting for stock issuances or issuances of stock options and 
warrants. Another intermediary similarly stated that many issuers are 
unfamiliar with the statement of stockholders' equity. Yet another 
intermediary stated that the issuer requirements of Regulation 
Crowdfunding are more appropriate for larger equity offerings and 
recommended scaling them for smaller (below $107,000) offerings, 
particularly for small debt offerings, to avoid what it described as 
unnecessary complexity.
---------------------------------------------------------------------------

    \453\ In addition, one intermediary expressed concerns about the 
high cost of annual reports as well as the risk of disclosing 
proprietary information because of the requirement to file annual 
reports publicly on EDGAR.
    \454\ See, e.g., 2017 Forum Report; 2018 Forum Report.
---------------------------------------------------------------------------

b. Amendments to Offering Statements
    For any offering that has not yet been completed or terminated, an 
issuer can file an amendment to its offering statement on Form C/A to 
disclose changes, additions, or updates to information. An amendment is 
required for changes, additions, or updates that are material, and the 
issuer must reconfirm outstanding investment commitments within 5 
business days after it files the amendment or the investor's commitment 
will be considered cancelled.\455\
---------------------------------------------------------------------------

    \455\ See 17 CFR 227.304.
---------------------------------------------------------------------------

c. Progress Updates
---------------------------------------------------------------------------

    \456\ See 17 CFR 227.203(a)(3).
    \457\ See id.
---------------------------------------------------------------------------

    An issuer must provide an update on its progress toward meeting the 
target offering amount within five business days after reaching 50% and 
100% of its target offering amount.\456\ These updates are filed on 
Form C-U.\457\ If the issuer will accept proceeds over the target 
offering amount, it also must file a final Form C-U reflecting the 
total amount of securities sold in the offering. If, however, the 
intermediary provides frequent updates on its platform regarding the 
progress of the issuer in meeting the target offering amount, then

[[Page 30504]]

the issuer will need to file only a final Form C-U to disclose the 
total amount of securities sold in the offering.\458\
---------------------------------------------------------------------------

    \458\ See 17 CFR 227.203(a)(3)(iii).
---------------------------------------------------------------------------

d. Annual Reports
    An issuer that sold securities in a Regulation Crowdfunding 
offering is required to provide an annual report on Form C-AR no later 
than 120 days after its fiscal year-end.\459\ The report must be filed 
with the Commission and posted on the issuer's website. The annual 
report requires information similar to what is required in the offering 
statement, although neither an audit nor a review of the financial 
statements is required.\460\ Issuers must comply with the annual 
reporting requirement until one of the following occurs: (1) The issuer 
is required to file reports under Exchange Act Section 13(a) or 15(d); 
(2) the issuer has filed at least one annual report and has fewer than 
300 holders of record; (3) the issuer has filed at least three annual 
reports and has total assets that do not exceed $10 million; (4) the 
issuer or another party purchases or repurchases all of the securities 
issued pursuant to Regulation Crowdfunding, including any payment in 
full of debt securities or any complete redemption of redeemable 
securities; or (5) the issuer liquidates or dissolves in accordance 
with state law.\461\
---------------------------------------------------------------------------

    \459\ See 17 CFR 227.202(a); 17 CFR 227.203(b).
    \460\ See id.
    \461\ See 17 CFR 227.202(b).
---------------------------------------------------------------------------

    Any issuer terminating its annual reporting obligations is required 
to file notice on Form C-TR reporting that it will no longer provide 
annual reports pursuant to the requirements of Regulation 
Crowdfunding.\462\
---------------------------------------------------------------------------

    \462\ See 17 CFR 227.203(b)(3).
---------------------------------------------------------------------------

3. Relationship With State Securities Laws
    Securities issued in a Regulation Crowdfunding offering are 
``covered securities'' for purposes of Section 18(b)(4)(C), and the 
issuer is not required to register or qualify the offering with state 
securities regulators.\463\ Offerings by such issuers, however, remain 
subject to state law enforcement and antifraud authority. Additionally, 
issuers may be subject to filing fees in the states in which they 
intend to offer or sell securities and may be required to comply with 
state notice filing requirements. The failure to file, or pay filing 
fees in connection with, any such materials may cause state securities 
regulators to suspend the offer or sale of securities within their 
jurisdiction.
---------------------------------------------------------------------------

    \463\ See 15 U.S.C. 77r(b)(4)(C). See also Section II.B.2.b.
---------------------------------------------------------------------------

4. Analysis of Regulation Crowdfunding in the Exempt Market
    Table 11 summarizes amounts sought and reported raised in offerings 
under Regulation Crowdfunding.

[[Page 30505]]



                Table 11--Offering Amounts and Reported Proceeds, May 16, 2016-December 31, 2018
----------------------------------------------------------------------------------------------------------------
                                                                                                     Aggregate
                                                      Number          Average         Median         (million)
----------------------------------------------------------------------------------------------------------------
Target amount sought in initiated offerings.....           1,351         $69,800         $25,000           $94.3
Maximum amount sought in initiated offerings               1,351         602,200         500,000           775.9
 \464\..........................................
Amounts reported as raised in completed                      519         208,400         107,367           108.2
 offerings......................................
----------------------------------------------------------------------------------------------------------------

    In comparison, over the same period (from May 16, 2016 to December 
31, 2018), approximately 12,700 issuers other than pooled investment 
funds each reported raising up to $1.07 million in funds in reliance on 
Regulation D, totaling approximately $4.5 billion, with average 
reported proceeds of approximately $0.4 million per issuer.
---------------------------------------------------------------------------

    \464\ This amount is capped at the offering limit for issuers 
undertaking multiple offerings in a 12-month period.
---------------------------------------------------------------------------

    Given the offering limits, crowdfunding is used primarily by 
relatively small issuers. Based on information in offering statement 
filings, the median crowdfunding offering was by an issuer that was 
incorporated approximately two years prior to the offering and employed 
about three people. The median issuer had total assets of approximately 
$30,000 and no revenues (just over half of the offerings were by 
issuers with no revenues). Approximately 10% of offerings were by 
issuers that had attained profitability in the most recent fiscal year 
prior to the offering.
    Offerings were geographically concentrated, with just under a third 
of the offerings made by issuers located in California (approximately 
32%), followed by New York (approximately 11%) and Texas (approximately 
7%). Figure 10 reflects the geographic concentration of offerings based 
on the number of offering statement filings by issuer location.
[GRAPHIC] [TIFF OMITTED] TP26JN19.007

    Unlike issuers conducting Regulation A offerings, a minority of 
Regulation Crowdfunding issuers have reported conducting an offering 
under Regulation D in the past--about 14% undertook a Regulation D 
offering prior to the Regulation Crowdfunding offering--suggesting that 
Regulation Crowdfunding, at least based on data as of December 31, 
2018, tends to bring new issuers to the exempt offering market rather 
than encouraging current issuers to switch between offering exemptions. 
We estimate that only 188 Regulation Crowdfunding issuers had filed at 
least one Form D prior to undertaking their first crowdfunding 
offering; however, we are not able to observe if these Regulation 
Crowdfunding issuers used other offering exemptions for which we do not 
have data, such as Section 4(a)(2), Rule 147, or Rule 147A.
5. Request for Comment
    79. Do the requirements of Regulation Crowdfunding appropriately 
address capital formation and investor protection considerations? Do 
the costs associated with conducting a Regulation Crowdfunding offering 
dissuade issuers from relying on the exemption? If so, can we alleviate 
burdens in the rules or reduce costs for issuers while still providing 
adequate investor protection? For example, should we simplify any of 
the disclosure requirements for issuers in small offerings under 
Regulation Crowdfunding? For example, as recommended by the 2017 and 
2018 Small Business Forums, for offerings under $250,000, should we 
limit the ongoing reporting obligations to actual investors (rather 
than the general public) and scale the disclosure requirements to 
reduce costs? Alternatively, as recommended by the 2016 Small Business 
Forum, should we allow issuers to provide reviewed rather than audited 
financial statements in subsequent offerings unless audited financial 
statements are available? How would such changes affect capital 
formation and investor protection? How

[[Page 30506]]

would changes to the requirements affect issuer interest in the 
exemption and investor demand for securities offered under Regulation 
Crowdfunding? Would legislative changes be necessary or beneficial to 
make such changes?
    80. Should we retain Regulation Crowdfunding as it is?
    81. Are there any data available that show fraudulent activity in 
connection with offerings under Regulation Crowdfunding? If so, what 
are the causes or explanations and what should we do to address them?
    82. Should we increase the $1.07 million offering limit? If so, 
what limit is appropriate? For example, should we, as recommended by 
the 2017 Small Business Forum and the 2017 Treasury Report, consider 
increasing the offering limit to $5 million? What are the appropriate 
considerations for a maximum offering size? Should additional investor 
protections and/or disclosure requirements depend on the size of the 
offering? If the individual investment limits are preserved as they 
currently exist, will there be adequate investor demand to justify an 
increase in the offering limit, or would an increase in the individual 
investment limits also be required? Would legislative changes be 
necessary or beneficial to increase the offering limit?
    83. If we were to increase the offering limit, would Regulation 
Crowdfunding overlap with Rule 504 of Regulation D or with Regulation 
A? If there is overlap, should we still retain the overlapping 
exemptions? How could we rationalize and streamline these offering 
exemptions?
    84. Should we modify the eligibility requirements for issuers or 
securities offered under Regulation Crowdfunding? Should we extend the 
eligibility for Regulation Crowdfunding to Canadian issuers or all 
foreign issuers? Should the eligibility requirements for Regulation 
Crowdfunding mirror the Regulation A eligibility requirements? For 
example, should we exclude issuers subject to a Section 12(j) order? 
Should we amend the types of securities eligible under Regulation 
Crowdfunding? Should we extend the eligibility for Regulation 
Crowdfunding to issuers subject to the reporting requirements of 
Section 13 or 15(d) of the Exchange Act? Are there other eligibility 
limitations we should consider? Would legislative changes be necessary 
or beneficial to make such changes?
    85. Should we, as recommended by prior Small Business Forums, 
permit issuers to offer securities through SPVs under Regulation 
Crowdfunding? If so, are there additional requirements that would be 
appropriate to ensure investor protection? Would legislative changes be 
necessary or beneficial to make such changes? Are there other ways we 
should modify our regulations to allow investors to invest in pooled 
crowdfunding vehicles that are advised by a registered investment 
adviser?
    86. Should we revise the rules that require issuers to provide 
reviewed or audited financial statements? If so, how? At what level 
should issuers be required to provide reviewed or audited financial 
statements? For example, if we were to increase the offering limit, 
should reviewed financial statements only be required for offerings 
over $1 million and audited financial statements only be required for 
offerings over another higher limit, such as the Regulation A Tier 1 
limit? Would legislative changes be necessary or beneficial to make 
such changes?
    87. As generally recommended by the 2015, 2017, and 2018 Small 
Business Forums and the 2017 Treasury Report,\465\ should we eliminate, 
increase, or otherwise amend the individual investment limits? If we 
should change the investment limits, what limits are appropriate and 
why? Should we require verification of income or net worth for larger 
investments, such as $25,000 and higher? Should certain investors be 
subject to higher limits or exempt from the limits altogether? For 
example, should accredited investors be exempt from the investment 
limits or should accredited investors be subject to higher limits? If 
accredited investors are subject to higher investment limits or exempt 
from investment limits, should we require verification of accredited 
investor status? Should we make changes to rationalize the investment 
limits for entities by entity type, not income? If investment limits 
are raised to allow an offering to be successful with fewer investors, 
would such a change have an effect on the use of the exemption? Would 
legislative changes be necessary or beneficial to make such changes?
---------------------------------------------------------------------------

    \465\ The 2017 Treasury Report and the 2015 Small Business Forum 
recommended basing investment limits on the greater of an investor's 
annual income or net worth rather than the lesser, to increase the 
amount that individual investors are permitted to invest. See 2017 
Treasury Report; 2015 Forum Report.
---------------------------------------------------------------------------

    88. As generally recommended by the 2016 \466\ and 2017 Small 
Business Forums, should we allow issuers to test the waters or engage 
in general solicitation and advertising prior to filing a Form C? If 
so, should we impose any limitations on such communications to ensure 
adequate investor protection? Would legislative changes be necessary or 
beneficial to make such changes?
---------------------------------------------------------------------------

    \466\ The 2016 Forum Report recommended that we harmonize the 
Regulation Crowdfunding advertising rules to avoid difficulties 
where an issuer advertises or engages in a general solicitation in a 
Regulation A or Rule 506(c) offering and then wishes to convert to a 
Regulation Crowdfunding offering.
---------------------------------------------------------------------------

    89. As recommended by the 2018 Small Business Forum, should we 
allow for more communication about the offering outside of the funding 
portal's platform channels? If so, what would be the benefits of 
allowing more communications? Would there be investor protection 
concerns? Are there limitations we should impose on those 
communications?
    90. Should the Section 12(g) exemption for securities issued in 
reliance on Regulation Crowdfunding be modified? For example, should it 
be revised to follow the Section 12(g) exemption for Regulation A Tier 
2 securities?
    91. Do the costs associated with facilitating offerings under 
Regulation Crowdfunding or operating as a Crowdfunding intermediary 
dissuade intermediaries from facilitating offerings under the 
exemption? If so, should we modify the requirements to alleviate 
burdens or reduce costs for crowdfunding intermediaries while still 
providing adequate investor protection? If so, which ones and how? 
Should we modify any of the requirements regarding crowdfunding 
intermediaries to better meet the needs of issuers and investors? If 
so, which ones and how? For example, as recommended by the 2017 and 
2018 Small Business Forums, should we allow intermediaries:
     To receive as compensation securities of the issuer having 
different terms than the securities of the issuer received by investors 
in the offering; or
     To co-invest in the offerings they facilitate?
    In addition, as recommended by the 2018 Small Business Forum, 
should we clarify the ability of funding portals to participate in 
Regulation A and Rule 506 offerings? Would legislative changes be 
necessary or beneficial to make such changes?
    92. To the extent not already addressed in the questions above, 
would legislative changes be necessary or beneficial to address any 
recommended changes to Regulation Crowdfunding? Alternatively, should 
we consider using our exemptive authority under Section

[[Page 30507]]

28 \467\ of the Securities Act to adopt an alternative exemption for 
crowdfunding offerings to complement Section 4(a)(6)? If so, how should 
we structure the exemption to facilitate capital formation while still 
ensuring adequate investor protection? Is there anything else we should 
do to reduce the accounting, legal, and other inelastic costs 
associated with Regulation Crowdfunding?
---------------------------------------------------------------------------

    \467\ See text accompanying notes 16 and 17 for a discussion of 
our exemptive authority under Section 28.
---------------------------------------------------------------------------

G. Potential Gaps in the Current Exempt Offering Framework

    As discussed in this release, Congress and the SEC have taken a 
number of steps to expand the options that small businesses have to 
raise capital. While the options to raise capital in exempt offerings 
have grown significantly since the JOBS Act, concerns persist that 
smaller issuers continue to face difficulties accessing capital.
1. Micro-Offerings
    One area where staff has heard concerns about accessing capital is 
with respect to issuers that may be too small, or may be seeking too 
small an amount of capital, to realistically or cost-effectively 
conduct an exempt offering under the existing exemptions. For example, 
according to the U.S. Small Business Administration, 25% of startups 
report having no startup capital and 20% of startups cite insufficient 
capital access as a primary constraint to their business health and 
growth.\468\ According to a recent study based on a 2014 survey of 
entrepreneurs, approximately 64% of startup firms used personal or 
family savings of the owner, with business loans from a bank or a 
financial institution being the next most common source of startup 
capital (18% of all firms).\469\ For reference, based on data available 
to us on exempt offerings, in 2018, approximately 3,080 issuers each 
reported raising $250,000 or less in reliance on Regulation D, totaling 
approximately $330 million (averaging approximately $100,000 per 
offering). Since the effective date of the 2015 Regulation A 
amendments, fewer than 10% of Regulation A issuers reporting proceeds 
reported proceeds of $250,000 or less. In contrast, approximately 75% 
of Regulation Crowdfunding issuers reporting proceeds reported proceeds 
of $250,000 or less, consistent with a lower offering limit under 
Regulation Crowdfunding. Most of these were non-debt offerings. 
Alongside securities offerings of this size, various marketplace 
lending alternatives have gained traction.\470\
---------------------------------------------------------------------------

    \468\ Michelle Schimpp, U.S. Small Business Administration, 
discussion at SEC-NYU Dialogue on Securities Crowdfunding, February 
28, 2017, at https://www.sec.gov/files/Highlights%20from%20the%20SEC-NYU%20Dialogue%20on%20Securities-Based%20Crowdfunding.pdf.
    \469\ See Alicia Robb (2018) Financing Patterns and Credit 
Market Experiences: A Comparison by Race and Ethnicity for U.S. 
Employer Firms.
    \470\ See, e.g., David W. Perkins (2018) Marketplace Lending: 
Fintech in Consumer and Small-Business Lending, Congressional 
Research Service; Adair Morse (2015) Peer-to-Peer Crowdfunding: 
Information and the Potential for Disruption in Consumer Lending, 
Annual Review of Finance and Economics 7: 463-482; Rajkamal Iyer, 
Asim Khwaja, Erzo Luttmer, and Kelly Shue (2015) Screening Peers 
Softly: Inferring the Quality of Small Borrowers, Management Science 
62: 1554-1577.
---------------------------------------------------------------------------

    Some market participants have called for a ``micro-offering'' or 
``micro-loan'' exemption to assist small businesses that have 
insufficient capital access. For example, the 2012 Small Business Forum 
recommended that the Commission consider adopting a ``micro-offering'' 
exemption for non-reporting companies with only minimal conditions. For 
example, it recommended an exemption for offerings only to ``friends 
and family'' well below the $1 million crowdfunding offering 
limit.\471\ In addition, as discussed above, the 2017 and 2018 Small 
Business Forums recommended that the Commission rationalize Regulation 
Crowdfunding requirements for debt offerings and small offerings under 
$250,000. For example, they recommended limiting the ongoing reporting 
obligations to actual investors (rather than the general public) and 
scaling Regulation Crowdfunding to reduce accounting, legal, and other 
costs that currently are relatively inelastic, regardless of the size 
of the offering.\472\
---------------------------------------------------------------------------

    \471\ See 2012 Forum Report.
    \472\ See 2017 Forum Report; 2018 Forum Report.
---------------------------------------------------------------------------

2. Request for Comment
    93. Should we add a micro-offering or micro-loan exemption? If so, 
please describe the parameters of such a potential exemption. In 
suggesting parameters, consider how the small offering size should 
affect the potential requirements.
    94. Should there be limits on the types of securities that may be 
offered under such an exemption? For example, should the exemption be 
limited to debt securities? Are there inherent differences in debt 
offerings, such as the general liquidation preference of debt holders, 
which would protect investors in these types of offerings? Does the 
inclusion of equity or other types of securities in this type of 
offering raise concerns for investors or does it expand investor 
options in a way that would benefit them?
    95. What would be the appropriate aggregate offering limit for such 
an exemption? For example, would $250,000 or $500,000 in a 12-month 
period be appropriate? Would another limit be appropriate? What are the 
appropriate considerations for the offering limit?
    96. What type of investor protections should be required? For 
example, should investors be limited on how much they can invest in any 
one offering? If so, what should the limit be? Are there other 
protections we should consider? Should there be investor requirements, 
such as a financial sophistication requirement?
    97. Should the issuer be prohibited from engaging in general 
solicitation or advertising to market the securities?
    98. Should there be disclosure requirements or notice filing 
requirements?
    99. Should we require the offering to take place through a 
registered intermediary, such as broker-dealer or funding portal?
    100. Should the securities issued under the exemption contain 
resale restrictions? If so, what resale restrictions are appropriate? 
Should the securities be deemed ``restricted securities'' under Rule 
144(a)(3) (similar to securities acquired from the issuer that are 
subject to the resale limitations of Rule 502(d)) or have a 12-month 
resale restriction (similar to Regulation Crowdfunding)?
    101. Should the securities sold in the transaction be considered a 
``covered security'' such that the issuer would not be required to 
register or qualify the offering with state securities regulators?
    102. Should there be issuer eligibility requirements, such as bad 
actor disqualification provisions or exclusion of investment companies 
or non-U.S. issuers?
    103. Are there other perceived gaps in the current exempt offering 
framework that we should address? If so, why are the existing 
exemptions from registration inadequate? For example, are the existing 
exemptions unavailable due to the nature of the securities being 
offered or characteristics of the issuer? Or are the existing 
exemptions not feasible or attractive to issuers due to compliance 
costs or similar concerns? Are regulatory changes needed in light of 
the geographic concentration of certain types of offerings?

III. Integration

    The integration doctrine provides an analytical framework for 
determining whether multiple securities transactions

[[Page 30508]]

should be considered part of the same offering. This analysis helps to 
determine whether registration under Section 5 of the Securities Act is 
required or an exemption is available for the entire offering. In other 
words, the integration doctrine seeks to prevent an issuer from 
improperly avoiding Securities Act registration by artificially 
dividing a single offering into separate offerings such that exemptions 
would apply to the separate offerings that would not be available for 
the combined offering. The integration analysis generally is dependent 
on considering the facts and circumstances of each offering. In order 
to simplify the analysis in particular cases, however, the Commission 
has created a number of safe harbors from integration.

A. Facts and Circumstances Analysis

    The integration concept was first articulated in 1933 and was 
further developed in two interpretive releases issued in the 
1960s.\473\ The interpretive releases stated that determining whether a 
particular securities offering should be integrated with another 
offering requires an analysis of the specific facts and circumstances 
of the offerings. The Commission identified five factors to consider in 
making the determination of whether the offerings should be 
integrated.\474\ The five factors are whether: (1) The different 
offerings are part of a single plan of financing, (2) the offerings 
involve issuance of the same class of security, (3) the offerings are 
made at or about the same time, (4) the same type of consideration is 
to be received, and (5) the offerings are made for the same general 
purpose.\475\
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    \473\ See SEC Release No. 33-97 (Dec. 28, 1933); Section 
3(a)(11) Release; Non-Public Offering Exemption Release.
    \474\ See Non-Public Offering Exemption Release. See also 17 CFR 
230.502(a).
    \475\ See Non-Public Offering Exemption Release; 17 CFR 
230.502(a). See also Section 3(a)(11) Release. See also note 497.
---------------------------------------------------------------------------

    More recently, the Commission has provided additional guidance to 
help issuers evaluate whether two offerings should be integrated. In 
2007, the Commission set forth a framework for analyzing how an issuer 
can conduct simultaneous registered and private offerings.\476\ The 
Commission noted that the determination as to whether the filing of a 
registration statement should be considered to be a general 
solicitation or general advertising that would affect the availability 
of the Section 4(a)(2) exemption for a concurrent private placement 
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 not foreclose the availability of 
the Section 4(a)(2) exemption.\477\ Issuers should analyze whether the 
offering is exempt under Section 4(a)(2) on its own, including whether 
securities were offered and sold to the private placement investors 
through the means of a general solicitation in the form of the 
registration statement.\478\ The Commission also noted that this 
guidance did not affect the ability of issuers to continue to rely on 
the views expressed by the staff of the Division of Corporation Finance 
in interpretive letters that, under specified circumstances, issuers 
may continue to conduct concurrent private placements without those 
offerings necessarily being integrated with the ongoing registered 
offering.\479\
---------------------------------------------------------------------------

    \476\ See Revisions of Limited Offering Exemptions in Regulation 
D, Release No. 33-8828 (Aug. 3, 2007) [72 FR 45116 (Aug. 10, 2007)] 
(``2007 Regulation D Proposing Release'').
    \477\ Id.
    \478\ Id. The Commission provided the following examples: If an 
issuer files a registration statement and then seeks to offer and 
sell securities without registration to an investor who became 
interested in the purportedly private placement offering by means of 
the registration statement, then the Section 4(a)(2) exemption would 
not be available for that offering. If the prospective private 
placement investor became interested in the concurrent private 
placement through some means other than the registration statement 
that was consistent with Section 4(a)(2), such as through a 
substantive, pre-existing relationship with the issuer or direct 
contact by the issuer or its agents outside of the public offering 
effort, then the filing of the registration statement generally 
would not impact the potential availability of the Section 4(a)(2) 
exemption for that private placement and the private placement could 
be conducted while the registration statement for the public 
offering was on file with the Commission. Similarly, if the issuer 
is able to solicit interest in a concurrent private placement by 
contacting prospective investors who (1) were not identified or 
contacted through the marketing of the public offering and (2) did 
not independently contact the issuer as a result of the general 
solicitation by means of the registration statement, then the 
private placement could be conducted in accordance with Section 
4(a)(2) while the registration statement for a separate public 
offering was pending.
    \479\ See 2007 Regulation D Proposing Release citing as examples 
Division of Corporation Finance no-action letters to Black Box 
Incorporated (June 26, 1990) and Squadron Ellenoff, Pleasant & 
Lehrer (Feb. 28, 1992).
---------------------------------------------------------------------------

    In 2015 and 2016, the Commission further modernized and expanded 
the facts and circumstances analysis in the context of concurrent 
exempt offerings involving Regulation A, Regulation Crowdfunding, Rule 
147, or Rule 147A, including situations where one offering permits 
general solicitation and the other does not.\480\ Essentially, whether 
concurrent or subsequent offers and sales of securities will be 
integrated with any offering conducted under Regulation A, Regulation 
Crowdfunding, Rule 147, or Rule 147A will depend on the particular 
facts and circumstances, including whether each offering complies with 
the requirements of the exemption that is being relied on for the 
particular offering.\481\ 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 an offering made in reliance on 
Regulation A, Regulation Crowdfunding, Rule 147, or Rule 147A.\482\ 
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, Regulation Crowdfunding, 
or Rule 147A offering, unless that advertisement also included the 
necessary legends for, and otherwise complied with, the respective 
exemption, as well as any additional restrictions on the general 
solicitation required by the other exemption concurrently being relied 
on by the issuer.\483\
---------------------------------------------------------------------------

    \480\ See 2015 Regulation A Release at Section II.B.5, 
Regulation Crowdfunding Adopting Release at Section II.A.1.c and 
Intrastate and Regional Offerings Release at Section II.B.5.
    \481\ See id.
    \482\ For a concurrent offering under Rule 506(b), purchasers in 
the Rule 506(b) offering could not be solicited by means of a 
general solicitation under Regulation A (including any ``testing the 
waters'' communications), Regulation Crowdfunding, or Rule 147 or 
147A. The issuer would need an alternative means of establishing how 
purchasers in the Rule 506(b) offering were solicited. For example, 
the issuer may have had a preexisting substantive relationship with 
such purchasers. Otherwise, the solicitation conducted in connection 
with the Regulation A (including any ``testing the waters'' 
communications), Regulation Crowdfunding, or Rule 147 or 147A 
offering would very likely preclude reliance on Rule 506(b). See 
2015 Regulation A Release at Section II.B.5, Regulation Crowdfunding 
Adopting Release at Section II.A.1.c and Intrastate and Regional 
Offerings Release at Section II.B.5. See also 2007 Regulation D 
Proposing Release.
    \483\ For example, the limitations imposed on advertising the 
terms of the offering pursuant to Rule 204 of Regulation 
Crowdfunding would limit the issuer's general solicitation in a 
concurrent offering made pursuant to Regulation A, Rule 506(c), or 
Rule 147A.
---------------------------------------------------------------------------

    Market participants have requested that the Commission clarify the 
relationship between exempt offerings in which general solicitation is 
not permitted--such as Section 4(a)(2) and Rule 506(b) offerings--and 
exempt offerings in which general solicitation is permitted--such as 
Rule 506(c) offerings. The 2016, 2017, and 2018 Small Business Forums 
each recommended that the Commission clarify that the facts and 
circumstances integration analysis the Commission

[[Page 30509]]

applies to the integration of concurrent private and registered 
offerings \484\ would also apply to concurrent exempt offerings where 
one prohibits general solicitation and the other permits it.\485\ 
Specifically, the Small Business Forums sought clarification that an 
issuer could avoid integration of concurrent offerings under Rule 
506(b) and Rule 506(c) if it could show that the investors in the Rule 
506(b) offering were not solicited by means of the general solicitation 
used in connection with the Rule 506(c) offering, regardless of whether 
the Rule 506(c) offering was completed, abandoned, or ongoing.\486\
---------------------------------------------------------------------------

    \484\ See 2007 Regulation D Proposing Release.
    \485\ 2016 Forum Report; 2017 Forum Report; and 2018 Forum 
Report.
    \486\ 2016 Forum Report; 2017 Forum Report; and 2018 Forum 
Report.
---------------------------------------------------------------------------

B. Safe Harbors

    Commission rules contain several integration safe harbors that 
provide objective standards on which an issuer can rely so that two or 
more offerings will not be integrated into one combined offering. For 
transactions that fall within the scope of the respective safe harbor, 
issuers do not have to conduct any further integration analysis to 
determine whether the two offerings would be treated as one for 
purposes of qualifying for either exemption. The issuer will, however, 
need to comply with the requirements of each exemption on which it is 
relying.\487\
---------------------------------------------------------------------------

    \487\ For example, an offering made pursuant to Rule 506(b) will 
not be integrated with a subsequent offering pursuant to Regulation 
A (see Section III.B.4), but the issuer will need to comply with the 
requirements of each rule, including the limitation on general 
solicitation for offers made pursuant to Rule 506(b).
---------------------------------------------------------------------------

1. Regulation D
    Rule 502(a) of Regulation D provides for a safe harbor from 
integration for all offers and sales that take place at least six 
months before the start of, or six months after the termination of, the 
Regulation D offering, so long as there are no offers and sales of the 
same securities \488\ within either of these six-month periods.
---------------------------------------------------------------------------

    \488\ Rule 502(a) specifically excludes offers or sales of 
securities under an employee benefit plan as defined in Rule 405. In 
addition, generally, transactions otherwise meeting the requirements 
of an exemption will not be integrated with simultaneous offers and 
sales of securities being made outside the United States in 
compliance with Regulation S. 17 CFR 230.901 et seq. See 17 CFR 
230.500(g) (``Rule 500(g)'') and Note to 17 CFR 230.502(a); see also 
Section III.B.5 for a discussion of the Regulation S integration 
safe harbor.
---------------------------------------------------------------------------

    Over the years, market participants have expressed concern that 
such a long delay could inhibit issuers, particularly smaller issuers, 
from meeting their capital needs.\489\ In 2006, the Advisory Committee 
on Smaller Public Companies advised that the six-month safe harbor 
period provided in Rule 502(a) of Regulation D ``represents an 
unnecessary restriction on companies that may very well be subject to 
changing financial circumstances, and weighs too heavily in favor of 
investor protection, at the expense of capital formation.'' \490\ The 
Committee supported ``clearer guidance concerning the circumstances 
under which two or more apparently separate offerings will or will not 
be integrated.'' \491\ The Advisory Committee acknowledged the 
difficulty, however, of modifying the five-factor test contained in 
Rule 502(a) and concluded that the issue could be addressed more 
readily by shortening the six-month period. Based on its analysis of 
the issue, the Advisory Committee recommended that the Commission 
shorten the integration safe harbor from six months to 30 days.\492\
---------------------------------------------------------------------------

    \489\ See 2007 Regulation D Proposing Release; Final Report of 
the Advisory Committee on Smaller Public Companies to the United 
States Securities and Exchange Commission (April 23, 2006) (``2006 
Advisory Committee Report''), available at http://www.sec.gov/info/smallbus/acspc/acspc-finalreport.pdf.
    \490\ 2006 Advisory Committee Report at 96. See also 2007 
Regulation D Proposing Release, at text accompanying n. 116.
    \491\ 2006 Advisory Committee Report at 95.
    \492\ See id at 94.
---------------------------------------------------------------------------

    In 2007, the Commission proposed, but ultimately never adopted, 
amendments to shorten the integration safe harbor in Rule 502(a) from 
six months to 90 days.\493\ In proposing 90 days, the Commission stated 
that it believed 90 days was appropriate, as it would provide 
additional flexibility to issuers, permitting an issuer to rely on the 
safe harbor once every fiscal quarter, while still requiring issuers to 
wait a sufficient period of time before initiating a substantially 
similar offering in reliance on the safe harbor.\494\
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    \493\ See 2007 Regulation D Proposing Release. In that release, 
the Commission declined to propose a period shorter than the 90 days 
because ``an inappropriately short time frame could allow issuers to 
undertake serial Rule 506-exempt offerings each month to up to 35 
non-accredited investors in reliance on the safe harbor, resulting 
in unregistered sales to hundreds of non-accredited investors in a 
year.'' Id. But cf. 2006 Advisory Committee Report (recommending 
shortening the integration safe harbor to 30 days).
    \494\ See 2007 Regulation D Proposing Release (``For issuers 
that provide quarterly reports, the 90-day requirement would provide 
time and transparency for investors and the market to take into 
account the offering and its results.'').
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2. Rule 152
    In 1935, the Commission adopted 17 CFR 230.152 (``Rule 152''),\495\ 
which provides a safe harbor from integration when an issuer conducts a 
private placement offering pursuant to Securities Act Section 4(a)(2) 
and, following the completion of that offering, makes a public offering 
and/or files a registration statement. Rule 152 states that Section 
4(a)(2) shall be deemed to apply to transactions that did not involve 
any public offering at the time of the private placement offering \496\ 
even though the issuer decides subsequently to make a public offering 
\497\ and/or file a registration statement.\498\ In 2007, the 
Commission clarified that an issuer's contemplation of filing a 
Securities Act registration statement at the same time that it is 
conducting an exempt private placement under Section 4(a)(2) would not 
cause the Section 4(a)(2) exemption to be unavailable for that private 
placement.\499\ So long as all of the applicable requirements of the 
private placement exemption were met for offers and sales that occurred 
prior to the general solicitation, those offers and sales would be 
exempt from registration. Once the public offering is commenced or the 
registration statement is filed, the issuer must satisfy all of the 
applicable requirements for that subsequent offering.
---------------------------------------------------------------------------

    \495\ See SEC Release No. 33-305 (Mar. 2, 1935).
    \496\ The private placement offering can include convertible 
securities or warrants, so long as the offering of those securities 
is completed before the filing of the public offering or 
registration statement. See 1998 Proposing Release.
    \497\ A securities transaction that at the time involves a 
private offering will not lose that status even if the issuer 
subsequently decides to make a public offering. Therefore, offers 
and sales of securities made in reliance on Rule 506(b) prior to a 
general solicitation would not be integrated with subsequent offers 
and sales of securities pursuant to Rule 506(c). So long as all of 
the applicable requirements of Rule 506(b) were met for offers and 
sales that occurred prior to the general solicitation, those offers 
and sales would be exempt from registration and the issuer would be 
able to make offers and sales pursuant to Rule 506(c). However, the 
issuer would have to satisfy all of the applicable requirements of 
Rule 506(c) for the subsequent offers and sales, including that it 
take reasonable steps to verify the accredited investor status of 
all subsequent purchasers.
    \498\ 17 CFR 230.152.
    \499\ See 2007 Regulation D Proposing Release.
---------------------------------------------------------------------------

    As noted above, market participants have requested that the 
Commission provide additional clarity about the integration of exempt 
offerings in which general solicitation is permitted--such as Rule 
506(c) offerings. The 2016, 2017, and 2018 Small Business Forums 
recommended that the Commission clarify that Rule 152 applies to a Rule 
506(c) offering so that an issuer using Rule 506(c) may subsequently 
engage in a registered public offering without adversely affecting the 
Rule 506(c)

[[Page 30510]]

offering exemption.\500\ Because the current language of Rule 152 does 
not provide an integration safe harbor for an issuer that conducts a 
Rule 506(c) offering and then subsequently engages in a registered 
offering, the Commission would need to amend Rule 152 to provide the 
recommended integration safe harbor.
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    \500\ 2016 Forum Report; 2017 Forum Report; and 2018 Forum 
Report.
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3. Abandoned Offerings: Rule 155
    In 2001, the Commission adopted 17 CFR 230.155 (``Rule 155'') to 
provide a non-exclusive integration safe harbor for abandoned 
offerings--that is, a registered offering following an abandoned 
private offering \501\ or a private offering following an abandoned 
registered offering \502\--without integrating the registered and 
private offerings in either case.\503\ Rule 155 was intended to enhance 
an issuer's ability to switch from a private offering to a registered 
offering, or vice-versa, in response to changing market 
conditions.\504\ ``Private offerings'' for purposes of Rule 155 is 
defined as offerings exempt under Section 4(a)(2) or 4(a)(5), or Rule 
506.\505\ A preliminary note to the rule provides that the safe harbors 
are not available if they are used as part of a plan or scheme to evade 
registration.\506\ In addition, in adopting Rule 155, the Commission 
specifically noted that the safe harbors address only registration 
requirements under the Securities Act and are not intended to affect 
antifraud provisions.\507\
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    \501\ See 17 CFR 230.155(b).
    \502\ See 17 CFR 230.155(c).
    \503\ See Integration of Abandoned Offerings, Release No. 33-
7943 (Jan. 26, 2001) [66 FR 8887 (Feb. 5, 2001)] (``Rule 155 
Adopting Release'').
    \504\ Id.
    \505\ See 17 CFR 230.155(a).
    \506\ See Preliminary Note to Rule 155. See also Rule 155 
Adopting Release at text accompanying note 55 (``At the time the 
private offering is made, in order to establish the availability of 
a private offering exemption, the issuer or any person acting on its 
behalf must be able to demonstrate that the private offering does 
not involve a general solicitation or advertising. Use of the 
registered offering to generate publicity for the purpose of 
soliciting purchasers for the private offering would be considered a 
plan or scheme to evade the registration requirements of the 
Securities Act.'').
    \507\ See Rule 155 Adopting Release at note 12.
---------------------------------------------------------------------------

    Rule 155(b) states that a private offering of securities will not 
be considered part of an offering for which the issuer later files a 
registration statement if: (1) No securities were sold in the private 
offering; (2) the issuer and any person acting on its behalf terminate 
all offering activity in the private offering before the issuer files 
the registration statement; (3) the preliminary and final prospectuses 
used in the registered offering disclose specified information about 
the abandoned private offering; \508\ and (4) the issuer does not file 
the registration statement until at least 30 calendar days after 
termination of all offering activity in the private offering, unless 
the issuer and any person acting on its behalf offered securities in 
the private offering only to persons who were (or who the issuer 
reasonably believes were) sophisticated or accredited investors.
---------------------------------------------------------------------------

    \508\ This information includes: The size and nature of the 
private offering; the date on which the issuer abandoned the private 
offering; that any offers to buy or indications of interest given in 
the private offering were rejected or otherwise not accepted; and 
that the prospectus delivered in the registered offering supersedes 
any offering materials used in the private offering.
---------------------------------------------------------------------------

    Rule 155(c) states that an offering for which the issuer filed a 
registration statement will not be considered part of a later commenced 
private offering if: (1) No securities were sold in the registered 
offering; (2) the issuer withdraws the registration statement under 17 
CFR 230.477 (``Rule 477''); (3) neither the issuer nor any person 
acting on the issuer's behalf commences the private offering earlier 
than 30 calendar days after the effective date of withdrawal of the 
registration statement under Rule 477; (4) the issuer provides 
specified information about the private offering to each offeree in the 
private offering; \509\ and (5) any disclosure document used in the 
private offering discloses any changes in the issuer's business or 
financial condition that occurred after the issuer filed the 
registration statement that are material to the investment decision in 
the private offering.
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    \509\ This information includes: The fact that the offering is 
not registered under the Securities Act; the securities will be 
``restricted securities'' and may not be resold unless they are 
registered under the Securities Act or an exemption from 
registration is available; purchasers in the private offering do not 
have the protection of Securities Act Section 11 [15 U.S.C. 77k]; 
and a registration statement for the abandoned offering was filed 
and withdrawn, specifying the effective date of the withdrawal.
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4. Regulation A, Rules 147 and 147A, and Regulation Crowdfunding
    In recent rulemakings, the Commission's approach to integration has 
evolved to articulate further the principles underlying the integration 
doctrine in light of current offering practices and developments in 
information and communication technology.\510\ This new approach to 
integration for offerings under Regulation A, Rules 147 and 147A, and 
Regulation Crowdfunding provides issuers with greater certainty as to 
the availability of an exemption for a given offering and increased 
consistency in the application of the integration doctrine among the 
exempt offering rules available to smaller issuers, while preserving 
important investor protections provided in each exemption.\511\
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    \510\ See 2015 Regulation A Release, Intrastate and Regional 
Offerings Release and Regulation Crowdfunding Adopting Release.
    \511\ See Intrastate and Regional Offerings Release. See also 17 
CFR 230.251(c); 17 CFR 230.701; and Regulation Crowdfunding Adopting 
Release. Each exemption is designed based on a particular type of 
offer and investor, with corresponding requirements that must be 
satisfied.
---------------------------------------------------------------------------

    This new integration approach provides that for offerings conducted 
under Regulation A or Rules 147 and 147A, the offering will not be 
integrated with:
     Prior offers or sales of securities; or
     Subsequent offers or sales of securities that are:
    [cir] Registered under the Securities Act, except as provided in 
Rule 255(c);
    [cir] Made pursuant to Rule 701 under the Securities Act; \512\
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    \512\ Rule 701 exempts from Securities Act registration 
requirements certain sales of securities made to compensate 
employees, consultants, and advisors. This exemption is not 
available to issuers that already are required to file reports under 
Exchange Act Section 13(a) or 15(d). An issuer can sell at least $1 
million of securities under this exemption, regardless of its size. 
An issuer can sell a higher amount if it satisfies certain formulas 
based on its assets or on the number of its outstanding securities. 
If an issuer sells more than $10 million in securities in a 12-month 
period, it is required to provide certain financial and other 
disclosure to the persons that received securities in that period. 
Securities issued under Rule 701 are ``restricted securities.'' 
Compensatory Benefit Plans and Contracts, Release No. 33-6768 (Apr. 
14, 1988) [53 FR 12918 (Apr. 20, 1988)] (``Rule 701 Adopting 
Release''). See also Concept Release on Compensatory Securities 
Offerings and Sales, Release No. 33-10521 (Jul. 18, 2018) [83 FR 
34958 (Jul. 24, 2018)] (soliciting comment on possible ways to 
modernize rules related to compensatory arrangements in light of the 
significant evolution in both the types of compensatory offerings 
and the composition of the workforce since the Commission last 
substantively amended these rules in 1999).
---------------------------------------------------------------------------

    [cir] Made pursuant to an employee benefit plan;
    [cir] Made pursuant to Regulation S; \513\
---------------------------------------------------------------------------

    \513\ 17 CFR 230.901 et seq. Regulation S provides a safe harbor 
for offers and sales of securities outside the United States so long 
as the securities are sold in an offshore transaction and there are 
no ``directed selling efforts'' in the United States. See Offshore 
Offers and Sales, Release No. 33-6863 (Apr. 24, 1990) [55 FR 18306 
(May 2, 1990)] (``Regulation S Adopting Release'').
---------------------------------------------------------------------------

    [cir] Made pursuant to Regulation Crowdfunding;
    [cir] Made pursuant to Regulation A;
    [cir] Made pursuant to Rules 147 or 147A; or
    [cir] Made more than six months after completion of the respective 
offering.\514\
---------------------------------------------------------------------------

    \514\ See 17 CFR 230.251(c); 17 CFR 230.147(g); 17 CFR 
230.147A(g).
---------------------------------------------------------------------------

    As discussed above, for transactions that fall within the scope of 
the safe harbor, issuers will not have to conduct

[[Page 30511]]

any further integration analysis to determine whether the two offerings 
would be treated as one for purposes of qualifying for either 
exemption.\515\
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    \515\ The issuer will, however, need to comply with the 
requirements of each exemption on which it is relying. For example, 
an offering made pursuant to Rule 506(b) will not be integrated with 
a subsequent offering pursuant to Rule 147A, but the issuer will 
need to comply with the requirements of each rule, including the 
limitation on general solicitation for offers made pursuant to Rule 
506(b).
---------------------------------------------------------------------------

    Unlike Regulation A and Rules 147 and 147A, Regulation Crowdfunding 
does not include the same enumerated list. However, Securities Act 
Section 4A(g) provides that ``[n]othing in the exemption shall be 
construed as preventing an issuer from raising capital through means 
other than [S]ection 4[(a)](6).'' Given this statutory language, the 
Commission provided guidance in the Regulation Crowdfunding Adopting 
Release that an offering made in reliance on Section 4(a)(6) is not 
required to be integrated with another exempt offering made by the 
issuer to the extent that each offering complies with the requirements 
of the applicable exemption that is being relied on for that particular 
offering.\516\ We believe Section 4A(g) and this guidance is generally 
consistent with, but broader than, the approach to integration in 
Regulation A and Rule 147 and 147A.
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    \516\ See Regulation Crowdfunding Adopting Release at text 
accompanying notes 1343-1344.
---------------------------------------------------------------------------

5. Other Integration Provisions
    Other Commission rules provide clarity with respect to integration 
in specific types of transactions. For example, offshore transactions 
made in compliance with Regulation S will not be integrated with 
registered domestic offerings or domestic offerings that satisfy the 
requirements for an exemption from registration under the Securities 
Act.\517\ In 2013, the Commission clarified that concurrent offshore 
offerings that are conducted in compliance with Regulation S will not 
be integrated with domestic unregistered offerings that are conducted 
in compliance with Rule 506(c) or Rule 144A,\518\ consistent with the 
historical treatment of concurrent Regulation S and Rule 144A/Rule 506 
offerings.\519\ Similarly, offers and sales of securities that comply 
with the Rule 144A non-exclusive safe harbor exemption will not affect 
the availability of any exemption or safe harbor relating to any 
previous or subsequent offer or sale of such securities by the issuer 
or any prior or subsequent holder of the securities.\520\ When the 
Commission adopted Rule 144A, it specifically noted that each 
transaction will be assessed under Rule 144A individually and that the 
availability of the non-exclusive safe harbor exemption for an offer 
and sale complying with Rule 144A will be unaffected by transactions by 
other sellers.\521\
---------------------------------------------------------------------------

    \517\ 17 CFR 230.901 et seq. See Regulation S Adopting Release. 
See also Note to Rule 502(a) (``Generally, transactions otherwise 
meeting the requirements of an exemption will not be integrated with 
simultaneous offerings being made outside the United States in 
compliance with Regulation S.''). See also Rule 500(g) (``Regulation 
S may be relied upon for such offers and sales even if coincident 
offers and sales are made in accordance with Regulation D inside the 
United States.'').
    \518\ See Section V.A.2 for a discussion of Rule 144A.
    \519\ Rule 506(c) Adopting Release. An issuer, however, seeking 
to conduct concurrent offerings using general solicitation under 
Rule 506(c) to U.S. investors and under Regulation S to offshore 
investors could not solicit both U.S. and offshore investors with 
the same offering materials, as the Regulation S materials would 
then include activity undertaken for the purpose of conditioning the 
market in the U.S.
    \520\ See Resale of Restricted Securities; Rule 144A Adopting 
Release. See also Section V.A.2 for a discussion of Rule 144A.
    \521\ See id.
---------------------------------------------------------------------------

    In addition, Rule 701, which provides a limited exemption from 
registration for certain compensatory securities transactions,\522\ 
specifically provides that offers and sales that are exempt under Rule 
701 are deemed to be a part of a single, discrete offering and are not 
subject to integration with any other offers or sales, whether 
registered under the Securities Act or otherwise exempt from the 
registration requirements of the Securities Act.\523\
---------------------------------------------------------------------------

    \522\ See note 512.
    \523\ 17 CFR 230.701(f).
---------------------------------------------------------------------------

C. Request for Comment

    104. Should we articulate one integration doctrine that would apply 
to all exempt offerings? If so, what should that integration doctrine 
be? For example, should we articulate that two or more exemptions, or 
an exemption and a registered offering, will not be deemed to be part 
of the same offering if the issuer is able to satisfy the requirements 
of the exemption(s) at the time of sale? If so, should we still 
aggregate the total number of non-accredited investors for purposes of 
multiple Rule 506(b) offerings that occur less than six months apart? 
Would one consistent integration doctrine make it easier for issuers to 
transition from one exemption to another and, ultimately, to a 
registered offering? Would there be any investor protection concerns if 
we were to articulate one integration doctrine for all exempt 
offerings?
    105. Throughout the Securities Act rules, where a safe harbor does 
not apply, should we replace the five-factor test with the new analysis 
articulated in connection with Regulation A and Rules 147 and 147A 
(i.e., whether each offering complies with the requirements of the 
exemption that is being relied on for the particular offering), 
consistent with the 2016, 2017, and 2018 Small Business Forum 
recommendations? Are there other integration analyses that we should 
consider? Should we consider whether other categories of transactions 
clearly do not need to be integrated into other offerings, similar to 
the treatment of offerings conducted in accordance with Regulation S, 
Rule 144A, and Rule 701?
    106. Should we shorten the six-month integration safe harbor in 
Rule 502(a) of Regulation D? If so, what time period is appropriate? 90 
days? 30 days? What are the appropriate considerations for an alternate 
time period?
    107. Consistent with Regulation A and Rules 147 and 147A, for 
issuers relying on an exemption that permits general solicitation and 
advertising, such as the exemption under Rule 506(c), should we provide 
an integration safe harbor for offers and sales of securities prior to 
the commencement of that offering?
    108. Should we specifically revise Rule 152 to clarify that offers 
and sales that do not involve any form of general solicitation or 
advertising prior to the completion of those transactions would not be 
integrated with subsequent offers and sales of securities that involve 
general solicitation or advertising? Consistent with the 2016, 2017, 
and 2018 Small Business Forum recommendations, should we revise Rule 
152 to provide an integration safe harbor for an issuer that conducts a 
Rule 506(c) offering and then subsequently engages in a registered 
public offering?
    109. Should we revise Rule 155? For example, should we define a 
private offering as an exempt offering that does not involve any form 
of general solicitation or advertising? In addition, should we expand 
Rule 155(c) to include an abandoned offering that involved general 
solicitation followed by a private offering?
    110. Should we consider other integration safe harbors? If so, 
please describe the parameters of such potential safe harbors. For 
example, as recommended by the 2015 Small Business Forum, should we 
provide additional guidance about concurrent offerings under Regulation 
Crowdfunding and Rule 506(c)? If so, should we provide guidance 
regarding issues that may arise when an

[[Page 30512]]

intermediary seeks to host concurrent offerings? Conversely, should we 
eliminate any of the existing integration safe harbors? How would such 
changes affect capital formation and investor protection?

IV. Pooled Investment Funds

A. Background

    For issuers, particularly issuers seeking to raise growth-stage 
capital, pooled investment funds can serve as an important source of 
funding. For purposes of this discussion, pooled investment funds 
include investment companies, such as a mutual fund or exchange-traded 
fund (``ETF''), registered under the Investment Company Act, a BDC, or 
a private fund that operates pursuant to an exemption or exclusion from 
the Investment Company Act. For retail investors seeking exposure to 
growth-stage issuers, there are potential advantages to investing 
through a pooled investment fund, including the ability to have an 
interest in a diversified portfolio that can reduce risk relative to 
the risk of holding a security of a single issuer.\524\ Retail 
investors who seek a broadly diversified investment portfolio could 
benefit from the exposure to issuers making exempt offerings, as these 
securities may have returns that are less correlated to the public 
markets. In addition, investing through a pooled investment vehicle 
would be consistent with retail investor trends over the past several 
decades, which have seen an increasing number of investors investing 
through mutual funds and ETFs.\525\
---------------------------------------------------------------------------

    \524\ See, e.g., Harry Markowitz, Portfolio Selection, 7 J. of 
Finance 77 (1952).
    \525\ Investment Company Institute, 2019 Investment Company Fact 
Book (April 2019), at 142 (``ICI Fact Book'') (showing that the 
percentage of U.S. households owning mutual funds increased to 43.9% 
in 2017 from 14.7% in 1985).
---------------------------------------------------------------------------

    While retail investors can obtain some exposure to exempt offerings 
indirectly through investment companies registered under the Investment 
Company Act and BDCs,\526\ we understand that those opportunities may 
be limited. Open-end funds, which provide investors with the ability to 
redeem their interests in the fund on a daily basis, have liquidity 
restrictions and valuation requirements that present challenges to 
holding significant amounts of securities issued in exempt 
offerings.\527\ The potential limited effects on overall return \528\ 
may also constrain larger registered funds from investing in exempt 
offerings by smaller issuers.\529\ Some types of registered investment 
companies, such as closed-end funds, are better suited to holding less 
liquid securities obtained in exempt offerings because they are not 
redeemable and therefore are not subject to the same rules on liquidity 
risk management as open-end funds.
---------------------------------------------------------------------------

    \526\ BDCs are a category of closed-end investment companies 
that do not register under the Investment Company Act, but rather 
elect to be subject to the provisions of sections 55 through 65 of 
that act. See 15 U.S.C. 80a-2(a)(48). Congress established BDCs for 
the purpose of making capital more readily available to small, 
developing and financially troubled companies that do not have ready 
access to the public capital markets or other forms of conventional 
financing. See H.R. Rep. No. 1341, 96th Cong., 2d Sess 21 (1980). 
The Commission recently proposed rules that would, among other 
things, extend to closed-end funds and BDCs offering reforms 
currently available to operating company issuers by expanding the 
definition of ``well-known seasoned issuer'' to allow these funds 
and BDCs to qualify, streamlining the registration process for these 
funds and BDCs, including the process for shelf registration, 
permitting these funds and BDCs to satisfy their final prospectus 
delivery requirements by filing the prospectus with the Commission, 
and permitting additional communications by and about these funds 
and BDCs during a registered public offering. See Securities 
Offering Reform for Closed-End Investment Companies, Release No. 33-
10619 (Mar. 20, 2019) [84 FR 14448 (Apr. 10, 2019)] (``Closed-End 
and BDC Securities Offering Reform Release'').
    \527\ See, e.g., 17 CFR 270.22e-4 (liquidity risk management 
programs); 15 U.S.C. 80a-2(a)(41) (defining ``value'').
    \528\ See, e.g., Robert P. Bartlett III, Paul Rose, and Steven 
Davidoff Solomon, The Small IPO and the Investing Preferences of 
Mutual Funds, 47 J. of Finance 151 (2017) (providing an example that 
if a $1 billion fund, which in 2014 represented the median fund in 
the fourth size quartile, purchased 10% of a $50 million offering, 
or $5 million, the investment would have to triple in value in order 
to produce a 1% gross return); Jeffrey M. Solomon, Presentation to 
the SEC Investor Advisory Committee (June 22, 2017), available at 
https://www.sec.gov/spotlight/investor-advisory-committee-2012/jeffrey-solomon-presentation.pdf. Although both are in the context 
of smaller initial public offerings, the impact on overall fund 
performance for a comparably-sized exempt offerings would be 
similar.
    \529\ See Katie Rushkewicz, Morningstar, Unicorn Hunting: Large-
Cap Funds That Dabble in Private Companies (June 4, 2018) (finding 
that ``while fund managers have greater inclination in investing in 
private firm equity over the past few years, the impact for most 
fund investors is minimal'').
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1. Interval Funds and Tender Offer Funds
    An interval fund is a type of registered closed-end fund that makes 
periodic repurchase offers pursuant to 17 CFR 270.23c-3 (``Rule 23c-
3'') under the Investment Company Act.\530\ Unlike many traditional 
registered closed-end funds, interval funds generally have not chosen 
to list their shares on an exchange.\531\ Instead, the shares are 
subject to periodic repurchase offers by the interval fund at a price 
based on net asset value. An interval fund is permitted to offer its 
shares continuously at a price based on the fund's net asset 
value.\532\ An interval fund will make periodic repurchase offers to 
its shareholders, generally every three, six, or twelve months, as 
disclosed in its prospectus and annual report.\533\ The repurchase 
offer amount cannot be less than 5% or more than 25% of the common 
stock outstanding on a repurchase request deadline. An interval fund 
must maintain liquid assets equal to at least 100% of the amount of the 
mandatory repurchase offer.\534\ An interval fund also may make a 
discretionary repurchase offer not more than once every two years.\535\ 
Commission rules require that certain aspects of the interval fund's 
repurchases, including the periodic interval between repurchase request 
deadlines, are fundamental policies that can be changed only by a 
majority vote of the outstanding voting securities.\536\
---------------------------------------------------------------------------

    \530\ 17 CFR 270.23c-3. Although BDCs may also use Rule 23c-3, 
in this release our references to interval funds generally refer to 
registered closed-end funds. We are not aware of any BDCs that are 
currently making periodic repurchase offers under Rule 23c-3.
    \531\ Only one interval fund is currently exchange-traded.
    \532\ Interval funds are generally required under the Securities 
Act to pay a registration fee to the Commission at the time of 
filing a registration statement. See 15 U.S.C. 77f(b)(1). This means 
that they pay registration fees at the time they register the 
securities, regardless of when or if they sell them. In March 2019, 
the Commission proposed amendments to its rules that would permit 
interval funds to pay their registration fees to the Commission in 
the same manner as open-end funds (by computing registration fees 
due on an annual net basis) as they routinely repurchase shares at 
net asset value and are required to periodically offer to repurchase 
their shares. See Closed-End and BDC Securities Offering Reform 
Release. Specifically, open-end funds pay fees on a net basis, based 
upon the sales price for securities sold during the fiscal year and 
reduced based on the price of shares redeemed or repurchased that 
year. See 15 U.S.C. 80a-24(f)(2).
    \533\ The Commission also has issued exemptive orders to 
interval funds that permit them to conduct repurchase offers on a 
monthly basis, subject to conditions. See, e.g., In the Matter of 
Weiss Strategic Interval Fund, Release No. IC-33124 (June 18, 2018).
    \534\ 17 CFR 270.23c-3(b)(10).
    \535\ 17 CFR 270.23c-3(c).
    \536\ 17 CFR 270.23c-3(b)(2)(i).
---------------------------------------------------------------------------

    As compared to open-end funds, interval funds can employ strategies 
that involve less liquid assets, such as securities obtained in exempt 
offerings, or strategies where the predictability of potential inflows 
and outflows to the fund is more important. An interval fund differs 
from traditional closed-end funds in that it has a fundamental policy 
to provide investors with some degree of liquidity at net asset value 
on a periodic basis through the repurchase offer. While investors in 
traditional closed-end funds may be able to obtain liquidity for their 
shares through trading on an exchange, such transactions may occur at 
prices that are at a discount to net asset value. Unlike private funds,

[[Page 30513]]

interval funds are registered investment companies, may be open to non-
accredited investors,\537\ are not subject to the ``plan assets'' rule 
under ERISA,\538\ and are eligible for tax treatment under Subchapter M 
of the Internal Revenue Code of 1986, as amended (``Internal Revenue 
Code'') if the conditions of that regulation are satisfied.\539\
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    \537\ Some interval funds limit their distribution to high net 
worth clients, institutional investors, or qualified clients under 
the Advisers Act. Other interval funds may sell to retail investors, 
but may require a minimum investment amount.
    \538\ See 29 CFR 2510.3-101. When a plan subject to ERISA 
invests in an equity interest of an entity that is neither a 
publicly-offered security nor a security issued by a registered 
investment company, the ERISA plan's assets include both the equity 
interest and an undivided interest in each of the underlying assets 
of the entity unless the entity is an operating company or equity 
participation in the entity by benefit plan investors is ``not 
significant.'' Thus, private funds sometimes limit the amount of 
interests purchased by investors subject to ERISA in order to 
prevent the private fund itself from being deemed to be a ``plan 
asset'' subject to ERISA.
    \539\ See 26 U.S.C. 851 et seq. Under Subchapter M, a qualifying 
fund may avoid corporate-level taxation on dividends and capital 
gains passed through to fund investors.
---------------------------------------------------------------------------

    Based on a review of filings with the Commission, the number of new 
interval funds that have been introduced over the past several years 
has increased, from nine in 2016 to 19 in 2018, and over half of all 
active interval funds are less than five years old. However, interval 
funds remain a relatively small component of all registered investment 
companies, consisting of 57 interval funds with about $29.7 billion in 
assets under management as of December 31, 2018.\540\ Current interval 
funds employ a wide variety of investment strategies, including 
insurance-linked securities, real estate and real estate debt, credit, 
and derivatives. The 2017 Treasury Report recommended that the 
Commission review its rules regarding interval funds to determine 
whether more flexible provisions might encourage the creation of 
registered closed-end funds that invest in offerings of smaller public 
companies and private companies whose shares have limited or no 
liquidity.\541\
---------------------------------------------------------------------------

    \540\ By comparison, at the end of 2018, total net assets were 
$250 billion for closed-end funds, $17.7 trillion for mutual funds, 
and $3.4 trillion for exchange traded funds. See ICI Fact Book, at 
32.
    \541\ See 2017 Treasury Report, at 37.
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    Some registered closed-end funds operate as tender offer funds. 
Tender offer funds repurchase securities under Section 23(c)(2) of the 
Investment Company Act,\542\ which permits the fund to repurchase 
tendered shares after providing a reasonable opportunity to all 
shareholders to submit tenders. As a result, tender offer funds have 
greater flexibility with respect to the amount and timing of the 
repurchase offers, relative to interval funds, as there is no 
requirement for a tender offer fund to conduct such offers at specific 
intervals or any minimum or maximum repurchase amount. However, tender 
offers must comply with the tender offer rules under the Exchange Act, 
including 17 CFR 240.13e-4 (``Rule 13e-4'').\543\
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    \542\ 15 U.S.C. 80a-23(c)(2).
    \543\ Rule 13e-4 imposes filing, disclosure, and dissemination 
requirements on the issuer, or an affiliate of the issuer, that is 
making a tender offer, including the filing of Schedule TO [17 CFR 
240.14d-100] with the Commission. Rule 13e-4 also imposes certain 
requirements on the manner of making a tender offer. Rule 13e-4 does 
not apply to repurchase offers by interval funds conducted under 
Rule 23c-3. Repurchase offers conducted under Rule 23c-3 may be less 
costly than under the Commission's tender offer rules.
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2. Private Funds
    Private funds, such as venture capital funds, private equity funds, 
and angel funds,\544\ are pooled investment funds that must comply with 
the terms of an appropriate exemption from the registration 
requirements of the Securities Act as well as an exemption or exclusion 
from registration under the Investment Company Act. When a private fund 
makes an offering, it typically relies on Section 4(a)(2) and Rule 506 
under the Securities Act to offer and sell its interests without 
registration under the Securities Act.\545\ Private funds generally 
rely on one of two exclusions from the definition of ``investment 
company'' under the Investment Company Act--Section 3(c)(1) or Section 
3(c)(7) \546\--which exclude them from substantially all regulatory 
provisions of that act.\547\
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    \544\ Angel investors are usually accredited investors who 
invest their own money in early-stage companies with high growth 
potential. According to the Angel Capital Association, in 2013, the 
median angel round size was $600,000 in funding. See Presentation to 
the SEC Advisory Committee on Small and Emerging Companies, Dec. 17, 
2014, available at https://www.sec.gov/spotlight/acsec/sec-small-biz-committee-aca-12-17-14-final.pdf. Some angel funds are 
structured as pooled investment vehicles, while other angel 
investors may form an ``angel group'' that collectively conducts due 
diligence on a potential investment but allows each angel investor 
to make an individual decision to participate in an exempt offering.
    \545\ See Section II.B for a discussion of these exemptions. See 
also Rule 506(c) Adopting Release at Section II.E.
    \546\ 15 U.S.C. 80a-3(c)(1) and (c)(7).
    \547\ See Rule 506(c) Adopting Release at Section II.E.
---------------------------------------------------------------------------

    Both Sections 3(c)(1) and 3(c)(7) have conditions that the fund 
does not make a public offering of its securities. Notwithstanding 
these conditions, the Commission has previously concluded that Section 
201(b) of the JOBS Act permits private funds to engage in general 
solicitation in compliance with Rule 506(c) of Regulation D without 
losing either of the exclusions under the Investment Company Act.\548\ 
Therefore, a private fund may offer its securities under Rule 506(c) of 
Regulation D without violating the conditions of Section 3(c)(1) or 
Section 3(c)(7) of the Investment Company Act.
---------------------------------------------------------------------------

    \548\ See id.
---------------------------------------------------------------------------

a. Qualifying Venture Capital Funds Under the Investment Company Act
    Section 3(c)(1) excludes any fund that is beneficially owned by not 
more than 100 persons and that is not making and does not presently 
propose to make a public offering of its securities. Section 504 of the 
Economic Growth Act amended Section 3(c)(1) to increase the limit to 
250 persons in the case of a ``qualifying venture capital fund,'' which 
is defined as a venture capital fund \549\ with not more than $10 
million in aggregate capital contributions and uncalled committed 
capital.\550\ Under the Advisers Act,\551\ a ``venture capital fund'' 
includes any private fund that:
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    \549\ The provision references the definition of ``venture 
capital fund'' in 17 CFR 275.203(l)-1.
    \550\ The $10 million amount is required to be indexed for 
inflation once every five years by the Commission, rounded to the 
nearest million. 15 U.S.C. 80a-3(c)(1).
    \551\ 15 U.S.C. 80b-1 et seq.
---------------------------------------------------------------------------

     Represents that it pursues a venture capital strategy;
     Holds no more than 20% of the fund's aggregate capital 
contributions and uncalled committed capital in assets (other than 
short-term holdings) that are not qualifying investments; \552\
---------------------------------------------------------------------------

    \552\ A ``qualifying investment'' generally means an equity 
security issued by a qualifying portfolio company that has been 
acquired directly by the private fund from the qualifying portfolio 
company. See 17 CFR 275.203(l)-1(c)(3). A ``qualifying portfolio 
company'' means any company that: (i) At the time of any investment 
by the private fund, is not reporting or foreign traded and does not 
control, is not controlled by or under common control with another 
company, directly or indirectly, that is reporting or foreign 
traded; (ii) does not borrow or issue debt obligations in connection 
with the private fund's investment in such company and distribute to 
the private fund the proceeds of such borrowing or issuance in 
exchange for the private fund's investment; and (iii) is not an 
investment company, a private fund, an issuer that would be an 
investment company but for the exemption provided by 17 CFR 270.3a-7 
(``Rule 3a-7'') under the Investment Company Act, or a commodity 
pool. See 17 CFR 275.203(l)-1(c)(4).
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     Does not borrow, issue debt obligations, provide 
guarantees, or otherwise incur leverage, in excess of 15% of the 
private fund's aggregate capital contributions and uncalled committed 
capital;
     Only issues securities the terms of which do not provide a 
holder with any right, except in extraordinary circumstances, to 
withdraw, redeem, or

[[Page 30514]]

require the repurchase of such securities but may entitle holders to 
receive distributions made to all holders pro rata; and
     Is not a registered investment company or a BDC.\553\
---------------------------------------------------------------------------

    \553\ 17 CFR 275.203(l)-1.
---------------------------------------------------------------------------

    A venture capital fund also includes SBICs licensed by the U.S. 
Small Business Administration \554\ and rural business investment 
companies.\555\
---------------------------------------------------------------------------

    \554\ 17 CFR 230.501(a)(1) and (2). An SBIC is any company that 
is licensed as a small business investment company under the Small 
Business Investment Act of 1958 or that has received the preliminary 
approval of the U.S. Small Business Administration and has been 
notified by the Administration that it may submit a license 
application. See General Instruction A to Form N-5 [17 CFR 239.24; 
17 CFR 274.5].
    \555\ See Public Law 115-417 (2019). A ``rural business 
investment company'' is defined in Section 384A of the Consolidated 
Farm and Rural Development Act [7 U.S.C. 2009cc] as a company that 
is approved by the Secretary of Agriculture and that has entered 
into a participation agreement with the Secretary. To be eligible to 
participate as an RBIC, the company must be a newly formed for-
profit entity or a newly formed for-profit subsidiary of such an 
entity, have a management team with experience in community 
development financing or relevant venture capital financing, and 
invest in enterprises that will create wealth and job opportunities 
in rural areas, with an emphasis on smaller enterprises. See 7 
U.S.C. 2009cc-3(a).
---------------------------------------------------------------------------

b. Qualified Purchasers Under the Investment Company Act
    Section 3(c)(7) excepts from the definition of investment company 
any fund the outstanding securities of which are owned exclusively by 
persons who, at the time of acquisition of such securities, are 
``qualified purchasers,'' and which is not making and does not at that 
time propose to make a public offering of its securities. The following 
are qualified purchasers:
     Natural persons who own not less than $5 million in 
investments; \556\
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    \556\ For purposes of the qualified purchaser definition, the 
Commission defined ``investments'' to include interests held for 
investment purposes, physical commodities held for investment 
purposes, financial contracts entered into for investment purposes, 
and cash and cash equivalents held for investment purposes. 17 CFR 
270.2a51-1(b).
---------------------------------------------------------------------------

     Family-owned companies that own not less than $5 million 
in investments;
     Certain trusts; and
     Persons, acting for their own accounts or the accounts of 
other qualified purchasers, who in the aggregate own and invest on a 
discretionary basis, not less than $25 million in investments (e.g., 
institutional investors).\557\
---------------------------------------------------------------------------

    \557\ 15 U.S.C. 80a-2(a)(51)(A).
---------------------------------------------------------------------------

c. Qualified Client Under the Advisers Act
    Subject to certain exemptions, Section 205(a) of the Advisers Act 
\558\ prohibits investment advisers registered or required to be 
registered with the Commission from charging performance fees to 
clients, which are commonly used by investment advisers to private 
equity and venture capital funds. Rule 205-3 under the Advisers Act 
\559\ provides an exemption from the prohibition when a client meets 
the definition of ``qualified client.'' A ``qualified client'' is a 
natural person who, or a company that: \560\
---------------------------------------------------------------------------

    \558\ 15 U.S.C. 80b-5(a).
    \559\ 17 CFR 275.205-3.
    \560\ The amounts below reflect the most recent inflation 
adjustments to the assets under management and net worth tests. See 
Order Approving Adjustment for Inflation of the Dollar Amount Tests 
in Rule 205-3 under the Investment Advisers Act of 1940, Release No. 
IA-4421 (June 14, 2016) [81 FR 39985 (June 20, 2016)].
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     Has at least $1 million in assets under management with 
the adviser immediately after entering into an investment advisory 
contract with the adviser;
     The adviser reasonably believes has a net worth (together 
with assets held jointly with a spouse) of more than $2.1 million 
exclusive of the value of a person's primary residence immediately 
prior to entering into an advisory contract;
     The adviser reasonably believes is a ``qualified 
purchaser'' as defined in Section 2(a)(51)(A) of the Investment Company 
Act at the time an advisory contract is entered into;
     Is an executive officer, director, trustee, general 
partner, or person serving in a similar capacity, of the adviser; or
     Is an employee of the adviser who participates in the 
investment activities of the adviser, and has performed investment 
activities for at least 12 months.
    A Section 3(c)(1) fund, a registered investment company, or a BDC, 
may only charge performance fees if each equity owner of such entity is 
a qualified client.\561\ A separate statutory provision provides an 
exemption from Section 205(a) for performance fees charged to Section 
3(c)(7) funds \562\ and, subject to certain conditions, for contracts 
involving BDCs.\563\
---------------------------------------------------------------------------

    \561\ See 17 CFR 275.205-3(b). For registered investment 
companies, the Advisers Act provides an exemption from Section 
205(a) for fulcrum fees. A fulcrum fee generally involves averaging 
the adviser's fee over a specified period and increasing or 
decreasing the fee proportionately with the investment performance 
of the company or fund in relation to the investment record of an 
appropriate index of securities prices. See 15 U.S.C. 80b-5(b)(2).
    \562\ 15 U.S.C. 80b-5(b)(4).
    \563\ 15 U.S.C. 80b-5(b)(3).
---------------------------------------------------------------------------

    Section 203(l) of the Advisers Act \564\ provides that an 
investment adviser that solely advises ``venture capital funds'' is 
exempt from registration under the Advisers Act.\565\ Section 203(m) of 
the Advisers Act \566\ and 17 CFR 275.203(m)-1 (``Rule 203(m)-1'') 
\567\ thereunder provide an exemption from registration for any 
investment adviser that solely advises private funds if the adviser has 
assets under management in the United States of less than $150 million. 
The Commission has previously referred to investment advisers relying 
on either exemption as ``exempt reporting advisers'' because Sections 
203(l) and 203(m) provide that the Commission shall require such 
advisers to maintain such records and to submit such reports as the 
Commission determines necessary or appropriate in the public interest 
or for the protection of investors. Because exempt reporting advisers 
are not registered with the Commission, the prohibition on performance 
fees contained in Section 205(a) of the Advisers Act does not apply.
---------------------------------------------------------------------------

    \564\ 15 U.S.C. 80b-3(l).
    \565\ See note 553 and accompanying text.
    \566\ 15 U.S.C. 80b-3(m).
    \567\ 17 CFR 275.203(m)-1.
---------------------------------------------------------------------------

B. Pooled Investment Funds as Accredited Investors

    Certain pooled investment funds are deemed to be accredited 
investors without being subject to holding a minimum amount of assets 
or other qualifications.\568\ These include registered investment 
companies, BDCs, and SBICs.\569\
---------------------------------------------------------------------------

    \568\ See Section II.A for a discussion of the definition of 
accredited investor.
    \569\ 17 CFR 230.501(a)(1) and (2).
---------------------------------------------------------------------------

    Private funds otherwise are not accredited investors unless they 
qualify under another provision of Rule 501(a). A private fund could 
qualify as an accredited investor if it holds total assets in excess of 
$5 million and is a corporation, Massachusetts or similar business 
trust, or partnership, not formed for the specific purpose of acquiring 
the securities offered.\570\ A private fund may also be able to qualify 
as a trust, with total assets in excess of $5 million, not formed for 
the specific purpose of acquiring the securities offered, whose 
purchase is directed by a sophisticated person.\571\ Alternatively, a 
private fund could be an accredited investor if all of the fund's 
equity owners are accredited investors.\572\ Small private funds with 
assets of $5 million or less may not qualify as

[[Page 30515]]

accredited investors and could be excluded from participating in 
certain exempt offerings under Rule 506 unless each equity owner of the 
fund is an accredited investor. If a ``knowledgeable employee'' \573\ 
of the private fund or the fund's general partner does not otherwise 
satisfy the accredited investor standard, then the private fund will 
not qualify as an accredited investor under Rule 501(a)(8), which 
requires all equity owners of the investor to be accredited investors.
---------------------------------------------------------------------------

    \570\ 17 CFR 230.501(a)(3). Other entities, such as limited 
liability companies, that have assets in excess of $5 million may 
qualify as accredited investors. See note 70.
    \571\ 17 CFR 230.501(a)(7). ``Sophisticated purchaser'' is a 
person described in Rule 506(b)(2)(ii).
    \572\ 17 CFR 230.501(a)(8).
    \573\ See note 141.
---------------------------------------------------------------------------

C. Retail Investor Access to Pooled Investment Funds That Invest in 
Exempt Offerings

    For retail investors who are not currently accredited investors, 
the ability to obtain exposure to exempt offerings through a pooled 
investment fund is limited to exposure through registered investment 
companies and BDCs. Registered investment companies and BDCs are 
subject to extensive disclosure requirements under the Securities Act, 
the Exchange Act, and the Investment Company Act; registered investment 
companies are also subject to substantive regulation under the 
Investment Company Act and BDCs are subject to selected provisions of 
the Investment Company Act. Retail investors can also invest through a 
SBIC \574\ that is publicly offered, but there are currently no SBICs 
with a public offering. However, it may be difficult for retail 
investors in practice to obtain exposure to exempt offerings through 
these vehicles. Liquidity and daily valuation requirements for mutual 
funds and ETFs present challenges to their ability to invest in a 
significant number of exempt offerings.\575\ The need for economies of 
scale regarding portfolio investments by registered investment 
companies may make it impractical for these funds to invest in 
relatively smaller exempt offerings.\576\
---------------------------------------------------------------------------

    \574\ Interests in SBICs may also be offered and sold in exempt 
offerings.
    \575\ See note 528 and accompanying text.
    \576\ See note 529 and accompanying text.
---------------------------------------------------------------------------

    We recognize that certain types of registered investment companies 
primarily intended for persons saving for retirement may be designed 
for investors to hold for a long period of time. For example, target 
date retirement funds are designed to make it easier for investors to 
save for retirement and hold a diversified portfolio of securities that 
is rebalanced automatically among asset classes over time without the 
need for each investor to rebalance his or her portfolio 
repeatedly.\577\ For funds with target dates significantly far into the 
future, the intended holding period may be better aligned with the 
limited liquidity of securities from exempt offerings relative to other 
types of open-end funds where the intended investor holding period may 
be shorter. However, nearly all target date retirement funds are 
registered as open-end funds, which give investors the ability to 
redeem their interests in the fund. As a result, target date retirement 
funds generally invest in other open-end funds, including ETFs, to 
obtain exposures to different types of asset classes while retaining 
appropriate liquidity. By investing only in other open-end funds, 
target date retirement funds may forgo exposure to issuers making 
exempt offerings.
---------------------------------------------------------------------------

    \577\ See Investment Company Advertising: Target Date Retirement 
Fund Names and Marketing, Release No. IC-29301 (June 16, 2010) [75 
FR 35919 (June 23, 2010)].
---------------------------------------------------------------------------

    We also recognize that, in recent years, investment advisory 
services have become more broadly available to retirement investors. 
Such services include digital investment advisory programs, or ``robo-
advisers,'' which provide automated services through algorithmic-based 
programs. Based on information obtained about the client, such as an 
expected retirement date and life expectancy, these advisory services 
provide a recommended portfolio for the client and subsequently manage 
the client's account. In recent years, these advisory services have 
been offered to retail investors with minimal account balances and can 
be appealing to younger persons who have recently entered the 
workforce,\578\ as starting retirement savings early can increase the 
long-term probability of accumulating sufficient financial resources to 
fund retirement. Many of the asset allocation exposures recommended by 
the advisory services are achieved through low-cost funds such as ETFs. 
These solutions may be able to provide a more customized retirement 
solution for investors.\579\ However, the current ability to allocate a 
small portion of a portfolio to investments in exempt offerings through 
an advisory service would be subject to the same purchaser eligibility 
requirements, such as accredited investor status and, if applicable, 
qualified purchaser status.
---------------------------------------------------------------------------

    \578\ See, e.g., Michael Blanding, Harvard Business School, Why 
Millennials Flock to Fintech for Personal Investing (Dec. 7, 2016), 
available at https://hbswk.hbs.edu/item/why-millennials-flock-to-fintech-firms-for-personal-investing?cid=wk-sm-fb-sf51284263&sf51284263=1.
    \579\ But see Office of Investor Education and Advocacy, 
Investor Bulletin: Robo-Advisers (Feb. 23, 2017), available at 
https://www.sec.gov/oiea/investor-alerts-bulletins/ib_robo-advisers.html (discussing considerations for investors in 
determining whether to use a robo-adviser).
---------------------------------------------------------------------------

    Closed-end funds, including BDCs, do not have the liquidity and 
valuation-related constraints on their ability to invest in exempt 
offerings that open-end funds have. However, there can be challenges 
for investors in closed-end funds and BDCs to convert any profits from 
successful growth-stage exempt issuers held in a fund or BDC's 
portfolio. Unlike private venture capital funds that return contributed 
capital and profits directly to fund investors upon a liquidity event 
of a portfolio company, closed-end funds and BDCs generally retain such 
proceeds, which would be reflected in the net asset value of the fund. 
While investors in a closed-end fund or BDC could convert their 
interests in the fund to cash by selling on the secondary market, to 
the extent one exists, such sales could occur at prices that are at a 
discount to net asset value.\580\
---------------------------------------------------------------------------

    \580\ See Section V for a discussion of other potential 
limitations on the secondary market for securities issued in exempt 
offerings.
---------------------------------------------------------------------------

    Interval funds and tender offer funds are types of closed-end funds 
that can provide investors with an ability to participate directly in 
returns based on an increase in the value of their investments. Unlike 
exchange-listed closed-end funds, both of these funds have mechanisms 
that allow them to repurchase fund interests from investors from time 
to time, but we do not believe these funds currently are used 
extensively as a means to provide capital to smaller issuers in exempt 
offerings based on staff review of filings with the Commission.
    For retail investors, the ability to participate directly in 
private fund offerings from a regulatory perspective \581\ will largely 
depend on the investor's status as an accredited investor, qualified 
purchaser, and qualified client. Retail investors who are accredited 
investors, but not qualified purchasers or qualified clients, can 
participate in private funds offered pursuant to Section 3(c)(1) of the 
Investment Company Act. Such a fund would be limited to 100 beneficial 
owners, or 250 beneficial owners for a qualifying venture capital fund.
---------------------------------------------------------------------------

    \581\ In addition, a private fund may have contractual 
provisions and other conditions, such as a minimum investment level, 
that effectively preclude the ability of a typical retail investor 
from investing in the private fund.
---------------------------------------------------------------------------

    Closed-end funds, including BDCs, would be considered qualified 
purchasers for purposes of investment in private funds, including hedge 
funds and private equity funds, offered pursuant to Section 3(c)(7) of 
the

[[Page 30516]]

Investment Company Act. However, the possibility of offering closed-end 
funds that make significant investments in private funds to retail 
investors has historically raised staff concerns under the Investment 
Company Act, insofar as these investors could not invest directly in 
private funds.\582\ Currently, our understanding is that all closed-end 
funds that invest primarily in private funds are offered only to 
investors who meet certain wealth requirements (e.g., the tests for 
accredited investor), and require significant minimum initial 
investments.
---------------------------------------------------------------------------

    \582\ See Staff Report to the United States Securities and 
Exchange Commission, Implications of the Growth of Hedge Funds 
(Sept. 2003), at 80-83 (discussing concerns about the 
``retailization'' of private funds), available at https://www.sec.gov/news/studies/hedgefunds0903.pdf.
---------------------------------------------------------------------------

D. Request for Comment

    For general questions related to the accredited investor definition 
and exempt transactions under Section 4(a)(2) or Rule 506, see Sections 
II.A.5 and II.B.3 for additional requests for comment.
    111. To what extent do issuers view pooled investment funds as an 
important source of capital for exempt offerings? Do certain types of 
pooled investment funds facilitate capital formation more efficiently 
than others? For example, do private equity and venture capital funds 
provide more capital to issuers than registered investment companies 
and BDCs? From an issuer's perspective, are there benefits to raising 
capital from a pooled investment fund rather than from individual 
investors?
    112. For small issuers, particularly those that seek to raise 
capital in micro-offerings, to what extent are angel funds an important 
source of capital?
    113. How have recent market trends affected retail investor access 
to growth-stage issuers that do not seek to raise capital in the public 
markets? To the extent that issuers are more likely to seek capital 
through exempt offerings, do existing regulations make investor access 
to this market through a pooled investment vehicle difficult?
    114. Are there any regulatory provisions or practices, including 
those promulgated or engaged in by the Commission, that discourage or 
have the effect of discouraging participation by registered investment 
companies and BDCs in exempt offerings? For closed-end funds and BDCs, 
are there any existing regulatory provisions or practices that 
discourage the introduction of investment products that focus on 
issuers seeking capital at key stages of their growth cycle? If so, how 
do these regulatory provisions or practices create barriers?
    115. What restrictions should there be, if any, on the ability of 
closed-end funds, including BDCs, to invest in private funds, including 
private equity funds and hedge funds, and to offer their shares to 
retail investors? For example, should there be a maximum percentage of 
assets that closed-end funds and BDCs can invest in private funds? 
Should such closed-end funds be required to diversify their investments 
across a minimum number of private funds, if they are not restricting 
their offerings to accredited investors?
    116. Should we consider making any changes to our rules regarding 
interval funds? If so, what types of changes? Should we modify the 
periodic intervals from the current three, six, or twelve months? 
Should a fund have flexibility to determine the length of its periodic 
interval? If so, should there be a maximum permitted periodic interval? 
Should we create a mechanism for investors to vote to determine the 
periodic interval? Should we amend or eliminate the minimum and/or 
maximum repurchase offer amount?
    117. Should we shorten the minimum time at which an interval fund 
and other eligible funds can make a discretionary repurchase offer from 
the current period of two years after its last discretionary repurchase 
offer? \583\ Should we amend the conditions under which a majority of 
the interval fund's directors, including a majority of the fund's 
directors who are not interested persons of the fund, can suspend or 
postpone a repurchase offer? \584\ Should we allow interval funds to 
have more flexibility before a repurchase offer must commence, such as 
a five-year investment period with periodic repurchase offers 
thereafter? \585\
---------------------------------------------------------------------------

    \583\ See 17 CFR 270.23c-3(c).
    \584\ See 17 CFR 270.23c-3(b)(3). Existing conditions include if 
the suspension or postponement would result in the loss of status as 
a regulated investment company under Subchapter M of the Internal 
Revenue Code, if the suspension or postponement would result in the 
delisting of the fund from a national securities exchange, any 
period during which its principal securities market is closed (other 
than customary week-end and holiday closings) or trading on which is 
suspended, any period during which an emergency exists as a result 
of which disposal by the fund of securities owned by it is not 
reasonably practicable or during which it is not reasonably 
practicable for the fund fairly to determine the value of its net 
assets, or by order of the Commission for the protection of security 
holders of the fund.
    \585\ 17 CFR 270.23c-3(a)(7) allows an interval fund to delay 
its first repurchase request deadline up to an additional interval 
after the effective date of its registration statement (e.g., if its 
periodic interval is six months, it may schedule its first 
repurchase request deadline up to 12 months after the effective 
date).
---------------------------------------------------------------------------

    118. Should we make any modifications as to which elements of an 
interval fund's repurchase policy should be fundamental and changeable 
only by a majority vote of the outstanding voting securities? \586\ 
What elements of a repurchase policy should be determined by a majority 
of the board or a majority of the non-interested directors? If the 
periods between repurchase offers become longer or less predictable, 
what measures, if any, should we take to facilitate sales of interval 
funds shares on the secondary market for investors who may need 
liquidity? If we were to permit interval funds to engage in repurchase 
offers less frequently and/or with less predictability than under our 
current rule, should we limit the purchase of such interval funds to 
sophisticated investors such as accredited investors or qualified 
purchasers?
---------------------------------------------------------------------------

    \586\ See 17 CFR 270.23c-3(b)(2)(i).
---------------------------------------------------------------------------

    119. Are there other measures that can be taken to decrease the 
compliance costs associated with the interval fund structure? Are there 
any changes that we should make to our rules to increase the efficiency 
of the repurchase offer notification and tender process, such as 
facilitating electronic or other notification? Should we have rules 
that permit interval funds to have multiple share classes? \587\ Should 
we have rules that permit interval funds to utilize the series and 
trust structure used by open-end funds to set up new interval funds? 
Would a series and trust structure make it easier to establish follow-
on funds for new investments, rather than for the original fund to 
remain in a continuous offering?
---------------------------------------------------------------------------

    \587\ We have issued exemptive orders to interval funds that 
permit them to have multiple share classes, subject to conditions. 
See, e.g., In the Matter of SharesPost 100 Fund, Release No. IC-
32799 (Aug. 28, 2017).
---------------------------------------------------------------------------

    120. Should we provide a transitory exemption from the 
diversification requirements in Section 5(b)(1) of the Investment 
Company Act during the initial stages of an interval fund so that the 
advisor has sufficient time to identify and invest in appropriate 
portfolio companies? \588\ If so, would two years be a sufficient 
duration?

[[Page 30517]]

Would similar changes need to be implemented to the diversification 
requirements under subchapter M of the Internal Revenue Code in order 
to make any changes under the Investment Company Act meaningful? To the 
extent an interval fund pursues a private equity or venture capital 
strategy that may result in the control of a portfolio company, what 
types of relief under the Investment Company Act, if any, should be 
provided for affiliated transactions and subject to what conditions? 
Would an interval fund need other types of relief and, if so, what 
conditions should apply?
---------------------------------------------------------------------------

    \588\ Section 5(b)(1) of the Investment Company Act [15 U.S.C. 
80a-5(b)(1)] provides that a ``diversified company'' holds at least 
75% of the value of its total assets in cash and cash items, 
Government securities, securities of other investment companies, and 
other securities limited in respect of any one issuer to an amount 
not greater in value than 5% of the value of its total assets and to 
not more than 10% of the outstanding voting securities of such 
issuer. Our staff has engaged in outreach efforts with existing 
sponsors of interval funds, who have indicated that these 
diversification requirements can pose challenges to making 
investments in the start-up phase of the fund.
---------------------------------------------------------------------------

    121. Should we consider making any changes to our rules regarding 
tender offer funds? If so, what type of changes? To what extent would 
any changes to the interval fund rule lessen the need for tender offer 
funds? Should we permit tender offer funds to use the conditions 
described in Rule 23c3-3(c) \589\ in place of the Exchange Act tender 
offer rules, if investors in those tender offer funds are limited to 
accredited investors or qualified purchasers?
---------------------------------------------------------------------------

    \589\ Paragraph (c) of the interval fund rule permits any 
registered closed-end fund or a BDC to repurchase common stock of 
which it is the issuer pursuant to a repurchase offer that is not 
made pursuant to a fundamental policy and that is made to all 
holders of the stock if a similar offer has not been made in the 
prior two years. See 17 CFR 270.23c-3(c).
---------------------------------------------------------------------------

    122. If a target date retirement fund were to seek a limited amount 
of exposure to exempt offerings in its portfolio, what measures, if 
any, should we consider taking to enable this? Similarly, if investment 
advisory services, including robo-advisers, that are focused on 
retirement savings seek to include a limited amount of exposure to 
securities from exempt offerings as part of a diversified retirement 
portfolio that they recommend to retail investors, should we consider 
making any changes to our rules to enable this? If so, what types of 
changes?
    123. How do the restrictions on performance fees under the Advisers 
Act affect the offering of venture strategies by registered investment 
companies and BDCs? Should we make changes to the restrictions on 
performance fees?
    124. What changes, if any, should be made to the regulatory regime 
with respect to SBICs and/or RBICs?
    125. Certain pooled investment funds, such as registered investment 
companies, BDCs, and SBICs, specifically qualify as accredited 
investors without satisfying any quantitative criteria such as a total 
assets or investments threshold. Should other types of pooled 
investment funds be similarly treated? For example, should we include 
Section 3(c)(7) funds? Should we include any venture capital fund as 
defined by Rule 203(l)-1 under the Advisers Act? Should we include any 
qualifying venture capital fund, as recently added by the Economic 
Growth Act? Should we include RBICs?
    126. The definition of ``qualified client'' under the Advisers Act 
specifically includes a ``qualified purchaser'' as defined by the 
Investment Company Act. Should we similarly define an ``accredited 
investor'' under Regulation D to specifically include a ``qualified 
purchaser''? Would that be a less costly approach for regulating 
offerings of Section 3(c)(7) funds?
    127. The rules implementing the accredited investor and qualified 
client definitions have provisions for periodic reassessment of the 
quantitative thresholds, but the qualified purchaser definition does 
not. Should we consider a similar periodic reassessment for the 
qualified purchaser definition? If so, should the periodic reassessment 
for the three definitions occur at the same time?
    128. Does the issue of secondary market liquidity have a 
significant effect on investors' decision-making with respect to 
whether to invest in pooled investment vehicles, particularly with 
respect to closed-end funds and BDCs?
    129. Should we consider any changes to our rules to encourage the 
establishment or improvement of secondary trading opportunities for 
closed-end funds or BDCs? If so, what changes should we consider?

V. Secondary Trading of Certain Securities

    The expansion of our exempt offering framework through the 
implementation of the JOBS Act and other recent Commission initiatives 
has sought to provide additional avenues for small- and medium-sized 
businesses to raise capital.\590\ Section II of this release has 
focused on the framework of exemptions available for primary offerings 
by an issuer. Secondary market liquidity for investors in these issuers 
is integral to capital formation in the primary offering market.\591\ 
While restricted and otherwise illiquid securities can yield a more 
stable shareholder base with less investor turnover, small businesses 
report struggling to attract capital in their primary offerings because 
potential investors are reluctant to invest unless they are confident 
there will be an exit opportunity.\592\ Those issuers that are able to 
attract investors may incur a higher cost of capital or bear an 
illiquidity discount if the securities lack secondary market 
liquidity.\593\ In addition, limited secondary market liquidity and a 
lack of an active trading market may impair investors' ability to 
diversify their portfolios over time because their capital may be 
locked up longer than they would like.\594\ In turn, an investor's 
inability to divest prior investments due to illiquidity may prevent 
the investor from reallocating capital to the next investment 
opportunity, thereby limiting the capital available to the next 
business.\595\
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    \590\ See, e.g., Public Law 112-106, 126 Stat. 306 (2012); 
Crowdfunding Adopting Release; Rule 147 Adopting Release.
    \591\ See, e.g., 2017 Treasury Report (``Robust secondary 
markets are critical to supporting capital formation, and in turn, 
economic growth.'').
    \592\ See ACSEC Secondary Market Liquidity Recommendation.
    \593\ See id.
    \594\ See id.
    \595\ See id.
---------------------------------------------------------------------------

    While factors affecting secondary market liquidity for securities 
are numerous and complex,\596\ we are soliciting comment on possible 
ways to revise our rules governing exemptions for resales of securities 
to facilitate capital formation and to promote investor protection by 
improving secondary market liquidity.
---------------------------------------------------------------------------

    \596\ See, e.g., Report to Congress: Access to Capital and 
Market Liquidity (Aug. 2017) available at https://www.sec.gov/files/access-to-capital-and-market-liquidity-study-dera-2017.pdf.
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A. Resale Exemptions

    As discussed above, several offering exemptions result in the 
issuance of restricted securities or securities that are otherwise 
subject to resale limitations. Even without resale restrictions, an 
investor who wishes to sell securities must either register (or have 
the issuer register) the transaction or have an exemption for the 
transaction. Several exemptions, including the exemptions under Section 
4(a)(2) and Regulation D, are available only for offers and sales by an 
issuer of securities to initial purchasers and are not available to an 
affiliate of the issuer or to another person for resales of the 
securities.\597\
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    \597\ For additional information pertinent to secondary market 
sales and restricted securities, see also the discussion of 
Commission regulation of transfer agents and the removal of 
restrictive legends in Advanced Notice of Proposed Rulemaking, 
Concept Release and Request for Comment on Transfer Agent 
Regulations, Release No. 34-76743 at 127-135 (Dec. 22, 2015) [80 FR 
81947 (Dec. 31, 2015)], available at https://www.sec.gov/rules/concept/2015/34-76743.pdf and Transcript of Equity Market Structure 
Roundtable, Roundtable on Combating Retail Investor Fraud at 142-172 
(Sept. 26, 2018), available at https://www.sec.gov/spotlight/equity-market-structure-roundtables/retail-fraud-round-roundtable-092618-transcript.pdf.

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[[Page 30518]]

1. Section 4(a)(1) and Rule 144
    Investors seeking to resell their securities frequently rely on the 
exemption provided by Section 4(a)(1) of the Securities Act, which is 
available to any person other than an issuer, underwriter, or dealer. A 
dealer is any person who engages, directly or indirectly, in the 
business of offering, buying, selling or otherwise dealing or trading 
in securities issued by another person and includes a person acting for 
his or her own account (i.e., a dealer or principal) or for the 
accounts of others (i.e., a broker or agent).\598\
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    \598\ 15 U.S.C. 77b(a)(12).
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    The term ``underwriter'' is defined broadly in Section 2(a)(11) of 
the Securities Act to mean ``any person who has purchased from an 
issuer with a view to, or offers or sells for an issuer in connection 
with, the distribution of any security, or participates, or has a 
direct or indirect participation in any such undertaking, or 
participates or has a participation in the direct or indirect 
underwriting of any such undertaking.'' \599\ The interpretation of 
this definition traditionally has focused on whether the purchaser 
``purchased from an issuer with a view to . . . distribution.'' \600\ 
While an investment banking firm arranging an issuer's public sale of 
securities is clearly an underwriter, individual investors who are not 
securities professionals also may be underwriters if they ``act as 
links in a chain of transactions through which securities move from an 
issuer to the public.'' \601\
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    \599\ 15 U.S.C. 77b(a)(11). See also Preliminary Note 2 to 17 
CFR 230.144.
    \600\ Preliminary Note 2 to 17 CFR 230.144.
    \601\ Id.
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    Rule 144 is a non-exclusive safe harbor from the Section 2(a)(11) 
definition of underwriter that establishes specific criteria for 
determining whether a person is engaged in a distribution. A person 
satisfying the applicable conditions of Rule 144 is deemed not to be 
engaged in a distribution of the securities and therefore not an 
underwriter when determining whether a sale is eligible for the Section 
4(a)(1) exemption. In addition, the purchaser in the transaction will 
receive securities that are not restricted securities.\602\
---------------------------------------------------------------------------

    \602\ See id.
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    Rule 144 provides a safe harbor for the resale of restricted 
securities if a number of conditions are met, including holding the 
securities for six months or one year, depending on whether the issuer 
has been filing reports under the Exchange Act.\603\ Specified current 
information concerning the issuer must be publicly available.\604\ A 
reporting company satisfies this information requirement if it has been 
subject to the reporting requirements of Section 13 or Section 15(d) of 
the Exchange Act for at least 90 days and has filed all reports 
required during the 12 months prior to the sale.\605\ A non-reporting 
company satisfies the information requirement by making publicly 
available certain information, similar to the information required to 
be included in an annual report to shareholders.\606\ In addition, if a 
selling security holder is an affiliate of the issuer,\607\ additional 
conditions in Rule 144 apply.\608\
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    \603\ See 17 CFR 230.144(d).
    \604\ See 17 CFR 230.144(c).
    \605\ See 17 CFR 230.144(c)(1).
    \606\ See 17 CFR 230.144(c)(2).
    \607\ An affiliate of an issuer is a person who, directly, or 
indirectly through one or more intermediaries controls, or is 
controlled by, or is under common control with, the issuer. 17 CFR 
230.144(a)(1).
    \608\ See 17 CFR 230.144(b)(2).
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    The 2016 Small Business Forum and several of its predecessors have 
recommended that the Commission reduce the holding periods for 
reporting companies under Rule 144(d)(1)(i) from six months to three 
months and for non-reporting companies under Rule 144(d)(1)(ii) from 
one year to six months.\609\
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    \609\ See 2016 Forum Report. See also, e.g., 2014 Forum Report 
and 2012 Forum Report.
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    The Advisory Committee on Small and Emerging Companies stated that 
there are situations under which certain security holders may not be 
able to meet the conditions of Rule 144, and that these security 
holders incur transaction expenses to sell outside of the Rule 144 safe 
harbor that can be significant.\610\ To address these concerns, the 
Advisory Committee recommended that the Commission adopt an additional 
exemption ``to mimic existing . . . practice for resales of privately-
issued securities by shareholders who are not able to rely on 
Securities Act Rule 144.'' \611\ The 2013, 2014, and 2015 Small 
Business Forums recommended that the Commission ``propose a new federal 
exemption governing the private resale of restricted securities under 
Section 4(a)(1)'' based on common market practices.\612\
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    \610\ See Advisory Committee on Small and Emerging Companies: 
Recommendations Regarding the ``4(1\1/2\) Exemption'' (June 11, 
2015) available at https://www.sec.gov/info/smallbus/acsec/acsesc-4a-one-and-a-half-recommendation.pdf.
    \611\ Id.
    \612\ 2013 Forum Report (stating that based on changes resulting 
from the JOBS Act, private companies have much more flexibility to 
remain private longer, and that, as a result, the need for a 
specific federal exemption for private secondary transactions for 
shareholders who cannot satisfy Rule 144 has become critical); 2014 
Forum Report; and 2015 Forum Report.
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2. Rule 144A
    Rule 144A provides a non-exclusive safe harbor for unregistered 
resales of certain restricted securities \613\ to QIBs.\614\ When the 
Commission adopted Rule 144A, it viewed it as a step toward achieving a 
more liquid and efficient institutional resale market for unregistered 
securities.\615\
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    \613\ When issued, the restricted securities cannot be of the 
same class as securities listed on a national securities exchange 
registered under Section 6 of the Exchange Act or quoted in an 
automated inter-dealer quotation system. See 17 CFR 
230.144A(d)(3)(i).
    \614\ See Rule 144A Adopting Release.
    \615\ See id.
---------------------------------------------------------------------------

    The term ``qualified institutional buyer'' is defined in Rule 
144A(a)(1) to include specified institutions that, in the aggregate, 
own and invest on a discretionary basis at least $100 million in 
securities of issuers that are not affiliated with such institution. 
Banks and other specified financial institutions must also have a net 
worth of at least $25 million. A registered broker-dealer qualifies as 
a QIB if it, in the aggregate, owns and invests on a discretionary 
basis at least $10 million in securities of issuers that are not 
affiliated with the broker-dealer.
    In the case of persons other than an issuer or a dealer, any person 
who offers and sells securities in accordance with Rule 144A will be 
deemed not to be engaged in a distribution and therefore not to be an 
underwriter within the meaning of Section 2(a)(11) of the Securities 
Act. Such person therefore may rely on the exemption from registration 
provided by Section 4(a)(1).\616\
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    \616\ As discussed in Section V.A.3, dealers have the benefit of 
an exemption from registration under Section 4(a)(3) of the 
Securities Act [15 U.S.C. 77d(a)(3)], except when they are 
participants in a distribution or within a specified period after 
the securities have been offered to the public. If the conditions of 
Rule 144A are met, a dealer will be deemed not to be a participant 
in a distribution of securities within the meaning of Section 
4(a)(3)(C) or an underwriter of such securities within the meaning 
of Section 2(a)(11), and the securities will be deemed not to have 
been offered to the public within the meaning of Section 4(a)(3)(A). 
Id.
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    In 2013, the Commission amended Rule 144A to permit the use of 
general solicitation under Rule 144A, as long as the purchasers are 
limited to QIBs or to purchasers that the seller and any person acting 
on behalf of the seller reasonably believe are QIBs.\617\ As discussed 
in Section III.B.5, a selling security holder can conduct a Rule 144A 
offering using general solicitation after purchasing the securities in 
a private placement or other exempt

[[Page 30519]]

offering. As a result, while Rule 144A is available solely for resale 
transactions, market participants use it to facilitate 
capital[hyphen]raising by issuers by means of a two-step process, in 
which the first step is a primary offering on an exempt basis, often in 
reliance on Section 4(a)(2), to one or more financial intermediaries, 
and the second step is a resale to QIBs pursuant to Rule 144A.\618\
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    \617\ 17 CFR 230.144A(d). See Rule 506(c) Adopting Release.
    \618\ See Rule 506(c) Adopting Release (``By its terms, Rule 
144A is available solely for resale transactions; however, since its 
adoption by the Commission in 1990, market participants have used 
Rule 144A to facilitate capital-raising by issuers.'').
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3. Section 4(a)(3)
    While Section 4(a)(1) specifically excludes offerings by dealers, 
Section 4(a)(3) of Securities Act generally exempts transactions by 
dealers not acting as underwriters. Section 4(a)(3) is not available to 
a dealer to the extent it is acting as an underwriter, including any 
person who purchased the securities from the issuer with a view to 
distributing them.\619\ Section 4(a)(3) also is not available for 
resales of restricted securities or ``control securities,'' which are 
securities held by an affiliate of the issuer.\620\
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    \619\ 15 U.S.C. 77b(a)(11). In addition, Section 4(a)(3) 
specifically excludes offers and sales of securities within the 40 
days following the first date the securities were offered to the 
public by an underwriter (or 90 days from such date in the event of 
an initial public offering). See Section V.A.2. for a discussion of 
the safe harbor available for dealers under Rule 144A.
    \620\ See Revisions to Rules 144 and 145, Release No. 33-8869 
(Dec. 6, 2007) [72 FR 71546 (Dec. 17, 2007)] (``Although it is not a 
term defined in Rule 144, `control securities' is used commonly to 
refer to securities held by an affiliate of the issuer, regardless 
of how the affiliate acquired the securities.'').
---------------------------------------------------------------------------

    The 2014 Small Business Forum recommended that the Commission 
preempt state registration requirements for offers and sales pursuant 
to Section 4(a)(1) or (3) through a registered broker-dealer.\621\
---------------------------------------------------------------------------

    \621\ See 2014 Forum Report.
---------------------------------------------------------------------------

4. Section 4(a)(4)
    Section 4(a)(4) provides a limited exemption for certain 
transactions not covered by Section 4(a)(3). Specifically, Section 
4(a)(4) exempts brokers' transactions executed on unsolicited 
customers' orders on any exchange or in the over-the-counter market. 
Section 4(a)(4) only exempts the broker's part of a broker's 
transaction. It does not extend to the customer selling the securities, 
who must rely on his or her own exemption or register the 
transaction.\622\ If the customer can comply with the Rule 144 safe 
harbor requirements for its resale, Rule 144(g) provides additional 
guidance on what constitutes a broker's transaction under Section 
4(a)(4), including that in any such transaction, the broker-dealer 
must:
---------------------------------------------------------------------------

    \622\ See SEC Release No. 131 (March 13, 1934).
---------------------------------------------------------------------------

     Function as an agent;
     Receive no more than the usual and customary commission 
for services;
     Not solicit customers' orders; and
     Not have any reason to believe that the customer is 
engaged in an unlawful distribution of the securities.
5. Section 4(a)(7)
    In 2015, the FAST Act introduced a new registration exemption for 
private resales of securities by adding new Section 4(a)(7) to the 
Securities Act. A sale of securities by other than the issuer or its 
subsidiary is exempt under Section 4(a)(7) if the following conditions 
are met:
     The purchaser is an ``accredited investor;''
     Neither the seller, nor any person acting on its behalf, 
uses any form of general solicitation or advertising;
     Neither the seller nor any person who has been or will be 
paid for its participation in the transaction is a ``bad actor'' under 
Rule 506(d);
     The issuer is engaged in business, not in the 
organizational stage or in bankruptcy or receivership, and is not a 
blank check, blind pool, or shell company that has no specific business 
plan or purpose and has not indicated that its primary business plan is 
to engage in a merger with an unidentified person;
     The transaction does not relate to an unsold allotment to, 
or a subscription or participation by, a broker or dealer as an 
underwriter of the securities;
     The securities have been authorized and outstanding for at 
least 90 days; and
     If the issuer of the securities is not subject to the 
reporting requirements of Section 13 or 15(d) of the Exchange Act, a 
variety of specified information must be provided to prospective 
purchasers, including the issuer's most recent balance sheet and 
statement of profit and loss and similar financial statements for the 
two preceding fiscal years, prepared in accordance with U.S. GAAP or, 
in the case of a foreign private issuer, International Financial 
Reporting Standards (``IFRS'').
    Securities acquired under Section 4(a)(7) are ``restricted 
securities'' and cannot be further transferred except pursuant to 
registration or another exemption from registration.\623\
---------------------------------------------------------------------------

    \623\ See Section II.B.1.b for a discussion of restricted 
securities.
---------------------------------------------------------------------------

B. Relationship With State Law

1. Section 18: Federal Preemption for Secondary Offerings
    In addition to having an exemption from federal registration 
requirements, an investor seeking to resell securities must also 
consider whether state securities registration or other requirements 
apply. Federal securities laws currently preempt state securities law 
registration and qualification requirements for secondary offers or 
sales of securities:
     Pursuant to Sections 4(a)(1) and 4(a)(3), if the issuer 
files reports with the Commission pursuant to Exchange Act Section 13 
or 15(d); \624\
---------------------------------------------------------------------------

    \624\ See 15 U.S.C. 77r(b)(4)(A).
---------------------------------------------------------------------------

     Pursuant to Section 4(a)(4) \625\ or Section 4(a)(7); 
\626\ and
---------------------------------------------------------------------------

    \625\ See 15 U.S.C. 77r(b)(4)(B).
    \626\ See 15 U.S.C. 77r(b)(4)(G).
---------------------------------------------------------------------------

     If such security is listed, or authorized for listing, on 
a national securities exchange.\627\
---------------------------------------------------------------------------

    \627\ See 15 U.S.C. 77r(b)(1).
---------------------------------------------------------------------------

    For all other resale transactions, a selling security holder would 
be required either to register the transaction with the state 
securities regulator in each state where an offer or sale occurs or to 
rely on an exemption to state registration requirements under the 
relevant state law in each state in which its offers or sells the 
securities. For example, an investor seeking to sell to a non-
accredited investor securities that such investor purchased in a 
Regulation A offering by a non-reporting issuer whose securities are 
not listed on a national securities exchange must either have the 
issuer register the resale transaction under the Securities Act and 
with the state securities regulator in each state in which it offers or 
sells the securities, or rely on a Securities Act exemption and an 
exemption from state registration requirements under the relevant state 
law in each state in which it offers or sells the securities. 
Similarly, an investor seeking to sell to a non-accredited investor 
restricted securities under Rule 144 that it purchased from a non-
reporting company still would have to register the resale with the 
state securities regulator or rely on an exemption from state 
registration requirements under the relevant state law in each state in 
which it offers or sells those securities.
    The 2017 and 2018 Small Business Forums recommended that the 
Commission provide blue sky preemption for secondary trading of 
securities issued under Tier 2 of Regulation A.\628\ The 2016 Small

[[Page 30520]]

Business Forum recommended that Commission adopt rules that preempt 
state registration requirements for all primary and secondary trading 
of securities sold in offerings registered with the Commission.\629\ 
The 2017 Treasury Report also recommended that state securities 
regulators update their regulations to exempt from state registration 
and qualification requirements secondary trading of securities issued 
under Tier 2 of Regulation A or, alternatively, that the Commission use 
its authority to preempt state registration requirements for such 
transactions.\630\ The Commission's Advisory Committee on Small and 
Emerging Companies and the 2014, 2015, and 2017 Small Business Forums 
all recommended preemption for secondary trading of securities of 
Regulation A Tier 2 issuers that are current in their ongoing 
reports.\631\ The 2015 and 2016 Small Business Forums further 
recommended that Commission adopt rules that preempt state registration 
requirements for all securities sold in offerings registered with the 
Commission.\632\ The 2014 Small Business Forum also recommended that 
the Commission expand the definition of ``qualified purchaser'' under 
Section 18(b)(3) to include any purchaser of a security that has been 
offered and sold pursuant to Section 4(a)(1) or (3) through a 
registered broker-dealer.\633\
---------------------------------------------------------------------------

    \628\ See 2016 Forum Report; 2018 Forum Report.
    \629\ See 2016 Forum Report.
    \630\ See 2017 Treasury Report.
    \631\ See ACSEC Secondary Market Liquidity Recommendation; 2014 
Forum Report (recommending that the Commission define ``qualified 
purchaser'' under Section 18(b)(3) to include any purchaser of a 
class of security that has been offered and sold pursuant to Section 
4(a)(1) or (3), provided that, the issuer files reports pursuant to 
Rule 257(b) in order to preempt state blue sky regulation of after-
market resale trading of securities issued pursuant to Tier 2 
Regulation A offerings); 2015 Forum Report; 2017 Forum Report.
    \632\ See 2016 Forum Report; 2015 Forum Report (recommending 
that exemption from state law, rule, regulation, order, or other 
administrative action should be afforded to all primary and 
secondary registered public offerings of securities on Form S-1 
(including rights offerings) by defining ``qualified purchaser'' to 
mean all original and subsequent purchasers of such security).
    \633\ See 2014 Forum Report.
---------------------------------------------------------------------------

2. State Exemptions for Secondary Sales
    State exemptions vary substantively. Many state exemptions are 
based on the Uniform Securities Act of 2002 or its pre-NSMIA 
predecessor, the Uniform Securities Act of 1956. However, 
notwithstanding states' adoption of one or more model exemptions under 
these acts, state laws are not uniform. Market participants report that 
this lack of uniformity inhibits the development of a national 
secondary trading market.\634\ We describe some state exemptions below 
that market participants have noted are generally applicable to 
secondary transactions.\635\
---------------------------------------------------------------------------

    \634\ See, e.g., ACSEC Secondary Market Liquidity 
Recommendation.
    \635\ See, e.g., comments of Annemarie Tierney, Executive Vice 
President, Legal Affairs and General Counsel SecondMarket, at the 
32nd Securities and Exchange Commission Government[hyphen]Business 
Forum on Small Business Capital Formation, November 21, 2013, 
transcript available at https://www.sec.gov/info/smallbus/sbforumtrans-112113.pdf (``Tierney Comments''); see also ``Secondary 
Trading Developments'' slides as presented by Annemarie Tierney, 
contained as Attachment B to the Minutes of the March 4, 2015 ACSEC 
Meeting available at https://www.sec.gov/info/smallbus/acsec/acsec-minutes-030415.pdf (``Tierney Slides'').
---------------------------------------------------------------------------

a. Isolated Non-Issuer Transaction Exemption
    Most states offer a narrow exemption from registration for isolated 
sales by a seller other than the issuer.\636\ A form of the isolated 
non-issuer transaction exemption is contained in the Uniform Securities 
Acts for ``any isolated non-issuer transaction, whether effected 
through a broker-dealer or not.'' \637\ The model acts do not define 
the term isolated transaction, but the exemption generally is intended 
to cover occasional sales by a person and not multiple, successive, or 
frequent transactions of a similar character by a person or a 
group.\638\ Specific requirements are left to the states to develop. 
Historically, there has been somewhat varied case law development of 
the term ``isolated transaction,'' and states vary on, and frequently 
do not specify, how many such non-issuer offers and sales may be made 
and still considered isolated.\639\ Market participants have indicated 
that this inconsistency creates confusion and makes it difficult to 
create an efficient interstate market for these transactions.\640\
---------------------------------------------------------------------------

    \636\ 1 Blue Sky Regulation Sec.  9.03.
    \637\ 1956 Uniform Securities Act Sec.  [thinsp]402(b)(1); see 
also 2002 Uniform Securities Act Sec.  [thinsp]202(1).
    \638\ See Official Comments, 2002 Uniform Securities Act Section 
202(1) through (8).
    \639\ 1 Blue Sky Regulation Sec.  9.03.
    \640\ See, e.g., Tierney Comments.
---------------------------------------------------------------------------

b. Institutional Investor Exemption
    Most states provide an exemption for offers and sales to certain 
financial or other institutional investors and broker-dealers.\641\ 
While many states' definitions of institutional investor \642\ are 
based on the 2002 Uniform Securities Act definition, which includes 
various categories based on the definition in Rule 501(a) of Regulation 
D, state requirements nonetheless differ. For example, some states 
adopt broader definitions or extend the exemption to sales to other 
sophisticated investors,\643\ while others exclude certain categories 
of purchasers.\644\
---------------------------------------------------------------------------

    \641\ See 1 Blue Sky Regulation Sec.  9.03. Most of these state 
exemptions are modeled after the 2002 Uniform Securities Act Sec.  
[thinsp]202(13) or 1956 Uniform Securities Act Sec.  402(b)(8), 
though some states have adopted a non-standard version.
    \642\ See, e.g., 6 Del. Code Ann. Sec.  [thinsp]7309(b)(8); 
Wash. Rev. Code Sec.  [thinsp]21-20.320(8).
    \643\ See, e.g., Wis. Dept. Fin. Inst. R. Sec.  202(4).
    \644\ See, e.g., Tex. Rev. Civ. Stat. art. 581-5(H) (specifying 
that the exemption is applicable only if the broker-dealer is 
actively engaged in business).
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c. Manual Exemption
    Another common type of state exemption for secondary offers and 
sales is the ``manual exemption,'' which is currently available in 39 
of the 54 U.S. jurisdictions.\645\ These exemptions generally exempt 
secondary offers and sales by non-issuers if certain financial and 
other information about the issuer is published in a designated 
securities manual. Some states further restrict the exemption, for 
example, to sales through a broker-dealer or at a price reasonably 
related to the current market price.\646\ The exemption is based on the 
public availability in a designated securities manual of current 
information about an issuer that enables parties on both sides of the 
trade to make an educated investment decision.\647\ Historically, 
states typically recognized three manuals for purposes of the manual 
exemption: Standard & Poor's Corporation Records; Fitch Investors 
Service; and Mergent's Investor Service (formerly known as 
Moody's).\648\ In 2016, however, Standard & Poor's discontinued the 
publication of its manual. Because many issuers quoted on the OTC 
Markets, Inc. (``OTC Markets'') website had relied on their listing in 
the Standard & Poor's Corporation Records for purposes of the manual 
exemption, OTC Markets began seeking recognition of its website as a 
source of the requisite information for purposes of the manual 
exemption.\649\ As of March 2019, 34 jurisdictions

[[Page 30521]]

recognized the OTCQX market for purposes of the manual exemption, while 
31 jurisdictions recognized the OTCQB market for purposes of the manual 
exemption.\650\ However, there remains no centralized information 
portal accepted by all jurisdictions where investors can find issuer 
information.\651\ In addition, complying with the manual exemption can 
be costly for issuers because they must pay to disseminate their 
information in the various recognized manuals.\652\
---------------------------------------------------------------------------

    \645\ See ACSEC Secondary Market Liquidity Recommendation.
    \646\ See Notice of Request for Public Comments Regarding a 
Proposed Model Rule to Designate Nationally Recognized Securities 
Manuals for Purpose of the Manual Exemption and a Proposed Model 
Rule to Exempt Secondary Trading in Securities Issued by Regulation 
A -Tier 2 Issuers (Jul. 19, 2018) (``NASAA Proposal''), available at 
http://www.nasaa.org/wp-content/uploads/2018/07/NASAA-Secondary-Trading-Proposal-Public-Comment-Request.pdf, citing Uniform 
Securities Act of 1956, Draftsmen's Commentary to Sec.  305(i), 
Sec.  305(j) and Related Sections Referring to Non-Issuer 
Distributions.
    \647\ See ACSEC Secondary Market Liquidity Recommendation.
    \648\ See NASAA Proposal.
    \649\ See id.
    \650\ See https://www.otcmarkets.com/corporate-services/products/blue-sky.
    \651\ See ACSEC Secondary Market Liquidity Recommendation.
    \652\ See id.
---------------------------------------------------------------------------

    In July 2018, the North American Securities Administrators 
Association, Inc. (``NASAA'') requested public comments on two proposed 
model rules that would facilitate secondary trading in securities of 
issuers where certain information about the issuer is publicly 
available.\653\
---------------------------------------------------------------------------

    \653\ See NASAA Proposal.
---------------------------------------------------------------------------

    NASAA's first proposed model rule would eliminate the outdated 
Standard & Poor's Corporation Records manual and designate as 
nationally recognized securities manuals or their electronic equivalent 
for purposes of the manual exemption under state law: Fitch Investors 
Service, Mergent's Investor Service, and the OTC Markets website with 
respect to securities that are included in the OTCQX and OTCQB 
markets.\654\
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    \654\ See id. The proposed model rule would not provide any 
relief with respect to securities of issuers included in the Pink 
Tier of the OTC Markets.
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    Not all states have adopted a manual exemption, and some states' 
manual exemptions do not recognize EDGAR as a source of the required 
publicly available information. In those states, investors who want to 
trade securities of issuers that have sold securities under Tier 2 of 
Regulation A, even where those issuers remain current in their ongoing 
reporting requirements, may not have a readily available state 
exemption from registration to effect such trades.\655\
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    \655\ See id.
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    NASAA's second proposed model rule is designed to facilitate 
secondary trading in certain securities issued under Tier 2 of 
Regulation A and would provide two alternative options for an exemption 
for secondary trading in securities of certain issuers subject to the 
ongoing reporting requirements of Regulation A. The first option would 
exempt from registration secondary sales of securities of issuers that 
at the time of the sale are current in their ongoing reporting 
requirements under Tier 2 of Regulation A, provided that the 
transaction otherwise complies with the terms of the manual exemption. 
The second option is a narrowly tailored version of the manual 
exemption specifically for securities of issuers that are current in 
their ongoing reporting requirements. Comments on the proposed model 
rules were due by August 20, 2018.\656\
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    \656\ See id.
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d. Broker-Dealer Exemptions
    There are a number of types of state exemptions for transactions 
through a broker-dealer that are not within the scope of Securities Act 
Section 4(a)(4).\657\ For example, market participants have indicated 
that most state laws include an exemption for offers and sales if the 
distribution is effected through a registered broker-dealer that does 
not solicit orders or offers to buy.\658\ In an effort to ensure that 
the exemption is narrowly tailored only to unsolicited transactions, 
some states require purchasers to confirm that the order was 
unsolicited.\659\
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    \657\ As discussed in Section V.A.4, Section 18 of the 
Securities Act preempts state registration and qualification 
requirements for transactions under Section 4(a)(4) of the 
Securities Act [15 U.S.C. 77d(a)(4)].
    \658\ See Tierney Slides. See also 1 Blue Sky Regulation Sec.  
9.06.
    \659\ See 1 Blue Sky Regulation Sec.  9.06; Tierney Slides.
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C. Request for Comment

    130. Do concerns about secondary market liquidity have a 
significant effect on issuers' decision-making with respect to primary 
capital-raising options? Does secondary market liquidity affect the 
decision-making of individual investors? In considering which exemption 
may be best suited to a particular offering, do issuers take into 
account whether the securities issued in the transaction will be 
restricted securities and/or subject to other resale restrictions?
    131. Issuers that are not currently subject to Exchange Act 
registration may prefer that their securities have restrictions on 
resale, due to concerns that trading in the securities could lead to a 
high number of record holders, which could trigger Section 12(g) 
registration. What effect would an exemption from Section 12(g) 
registration for certain exempt offerings, if introduced, extended, or 
made permanent, have on issuers' access to capital or secondary market 
liquidity? For example, should we, as recommended by the 2014 Small 
Business Forum, exempt purchasers and transferees of securities issued 
pursuant to Regulation A from the calculation of the number of 
registered holders under Section 12(g)? Would these types of changes 
provide benefits that could outweigh a decline in the rate at which 
issuers may become reporting companies?
    132. Should we revise the Rule 144 non-exclusive safe harbor? If 
so, how should we revise Rule 144? For example, should we, as 
recommended by the 2012 and 2016 Small Business Forums, reduce the Rule 
144 holding period for securities of issuers meeting the current public 
information requirement from six months to three months? Should we, as 
recommended by the 2012 Small Business Forum, reduce the Rule 144 
holding period for securities of issuers not subject to the current 
information requirements from 12 months to six months?
    133. Should we, as recommended by the Advisory Committee on Small 
and Emerging Companies and the 2013, 2014, and 2015 Small Business 
Forums, expand the safe harbors for secondary sales under Section 
4(a)(1) for security holders that are not able to rely on Rule 144? If 
so, please describe the parameters of such potential safe harbors. How 
would the adoption of such additional safe harbors under Section 
4(a)(1) affect capital formation, investor protection, and current 
market practices?
    134. Investors who purchase in secondary transactions may not have 
access to current information about the issuer and its securities. 
Particularly if we expand the population of investors who may qualify 
as accredited investors, should we impose some type of issuer 
disclosure requirement in connection with resales? If so, should we 
consider a requirement similar to that required by Section 4(a)(7) or 
one similar to the manual exemption available in many states? What 
alternatives should we consider?
    135. Are market participants using the Section 4(a)(7) resale 
exemption? We request data with respect to the use of the Section 
4(a)(7) exemption.
    136. In addition to Section 4(a)(7), secondary sales of securities 
may rely on other resale exemptions, such as those contained in Section 
4(a)(1) and the related safe harbors under Rule 144 and Rule 144A, 
Section 4(a)(3), and Section 4(a)(4). Would additional resale 
exemptions or safe harbors be appropriate? If so, what other resale 
transactions should be exempt from the provisions of Section 5?
    137. Should we extend federal preemption to additional offers and 
sales of securities, for example, by

[[Page 30522]]

expanding the definition of ``qualified purchaser''? For example, 
should we preempt state securities registration or other requirements 
applicable to secondary sales of securities:
     Offered or sold pursuant to Section 4(a)(1) or 4(a)(3), if 
the issuer of such security is a Tier 2 Regulation A issuer and remains 
current in its ongoing reporting required under the rules, as 
recommended by the 2014 and 2015 Small Business Forums;
     Initially issued in a Tier 2 Regulation A offering, as 
recommended by the 2014-2018 Small Business Forums and the 2017 
Treasury Report; or
     Initially issued in an offering registered under the 
Securities Act, as recommended by the 2015 Small Business Forum?
    138. What other steps should we consider to improve secondary 
trading liquidity of securities exempt from registration? For example, 
should we consider permitting securities that were exempt from 
registration to trade on venture exchanges? If so, how should we define 
a venture exchange and under what circumstances should we permit 
trading on the venture exchange? Will allowing such securities to trade 
on venture exchanges prior to being fully seasoned have an effect on 
companies issuing such securities through exempt offerings? If so, what 
effect?

VI. Conclusion

    We are interested in the public's views regarding the matters 
discussed in this concept release. We encourage all interested parties 
to submit comments on these topics. In addition, we solicit comment on 
any other aspect of the exempt offering framework that commenters 
believe may be improved.

    By the Commission.

    Dated: June 18, 2019.
Vanessa A. Countryman,
Acting Secretary.
[FR Doc. 2019-13255 Filed 6-25-19; 8:45 am]
 BILLING CODE 8011-01-P